Metro Retail Stores Group, Inc.
(incorporated in the Republic of the Philippines)
Offer of 905,375,000 Common Shares at an Offer Price
of =
P 3.99 per Share, with an Over-allotment Option
of up to 90,537,500 Common Shares to be listed and traded on
the Main Board of The Philippine Stock Exchange, Inc.
Joint Global Coordinators and Lead Underwriters
Sole Domestic Lead Manager
Sole International Lead Manager
Co-Lead Underwriter
Participating Underwriters
The date of this Prospectus is November 3, 2015
THE SECURITIES AND EXCHANGE COMMISSION HAS NOT
APPROVED THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS
IS
ACCURATE
OR
COMPLETE.
ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE AND SHOULD BE REPORTED IMMEDIATELY TO THE
SECURITIES AND EXCHANGE COMMISSION.
Metro Retail Stores Group, Inc.
Principal Office:
Vicsal Building, corner of C.D. Seno and W.O. Seno Streets
Guizo, North Reclamation Area
Mandaue City, Philippines
Telephone Number: +63-32-236-8390
Fax Number: +63-32-236-9516
Manila Office:
6/F Metro Market! Market! Anchor Store
Bonifacio Global City
Taguig, Philippines
Telephone Number: +63-2-8430032
Corporate Website: www.metroretail.com.ph
This Prospectus relates to the offer and sale of 905,375,000 common shares (the “Firm Offer”, and
such shares, the “Firm Shares”), with a par value of =
P 1.00 per share, of Metro Retail Stores Group,
Inc., a corporation organized under Philippine law (“we”, “us”, “our” or the “Company”) as further
described below. The Firm Shares will comprise 905,375,000 new Shares to be issued and offered by
us by way of a primary offer. The Firm Shares shall be offered at a price of =
P 3.99 per Share (the
“Offer Price”). The determination of the Offer Price is further discussed on page 62 of this Prospectus
and was based on a book-building process and discussion between us, BPI Capital Corporation (“BPI
Capital”) and Deutsche Bank AG, Hong Kong Branch (“DB”, and together with BPI Capital, the “Joint
Global Coordinators”). A total of 3,429,375,000 shares shall be outstanding after the Offer (as defined
below). The Firm Shares will represent approximately 26.4% of the issued and outstanding capital
stock of the Company after completion of the Firm Offer.
The Offer Shares (as defined below) will be listed and traded on the Main Board of the PSE (as defined
below) under the trading symbol “MRSGI”.
Valueshop Stores, Inc. and Vicsal Development Corporation (the “Selling Shareholders”) have
appointed BPI Capital and its relevant affiliates, including BPI Securities Corporation, a duly-licensed
stock brokerage firm in the Philippines, to jointly act as the stabilizing agent (the “Stabilizing
Agent”), with an option exercisable in whole or in part for a period beginning on the date of the initial
listing of the Shares on the PSE (as defined below) (the “Listing Date”) and ending on a date no later
than 30 calendar days from and including the Listing Date, to purchase up to an additional 90,537,500
Shares at the Offer Price (the “Optional Shares,” and together with the Firm Shares, the “Offer
Shares”), on the same terms and conditions as the Firm Shares as set forth in this Prospectus, solely
to cover over-allotments, if any (the “Over-allotment Option”). Assuming the full exercise of the
Over-allotment Option, 48,999,989 of the Optional Shares will be purchased from Valueshop Stores,
Inc., and 41,537,511 of the Optional Shares will be purchased from Vicsal Development Corporation.
The offer of the Offer Shares, including the Optional Shares, is referred to as the “Offer”. If the whole
or part of the Over-allotment Option is exercised, such Optional Shares will be sold as part of the
Institutional Offer (as defined below). See “Plan of Distribution” beginning on page 192 of this
Prospectus. The total proceeds to be raised by us from the sale of the Firm Shares will be
approximately =
P 3,612.4 million. The estimated net proceeds to be raised by us from the sale of the
Firm Shares (after deducting fees and expenses payable by us of approximately =
P 235.7 million) will
be approximately =
P 3,376.7 million. We intend to use the majority of the net proceeds from the Firm
Offer to fund capital expenditures in connection with the establishment of new stores. We intend to
use the remainder of the net proceeds from the Firm Offer to fund the establishment of a consolidated
logistics and distribution center in the Province of Cebu and for working capital requirements. For a
more detailed discussion on the proceeds from the Firm Offer and our proposed use of proceeds, please
see “Use of Proceeds” beginning on page 55 of this Prospectus. The estimated net proceeds to be
raised by the Selling Shareholders from the sale of the Optional Shares (after deducting fees and
i
expenses payable by the Selling Shareholders of approximately =
P 23.2 million) will be approximately
=
P 338.0 million, assuming full exercise of the Over-allotment Option. We will not receive any
proceeds from the sale of the Optional Shares. The Over-allotment Option, to the extent not exercised,
shall be deemed cancelled.
The Joint Global Coordinators will receive a transaction fee from us based on a percentage of the gross
proceeds from the sale of the Offer Shares (as defined below). This is inclusive of the amounts to be
paid to the other participating underwriters and selling agents, where applicable. For a more detailed
discussion on the fees to be received by the Joint Global Coordinators, see “Plan of Distribution”
beginning on page 192 of this Prospectus.
Each holder of the Shares will be entitled to such dividends as may be declared by our Board of
Directors (the “Board”), provided that any stock dividend declaration requires the approval of
shareholders holding at least two-thirds of our total outstanding capital stock, which refers to the total
shares of stock subscribed by, under binding subscription agreement with, subscribers or stockholders,
whether paid in full or not, except treasury shares. On April 13, 2015, our Board of Directors approved
and adopted an annual dividend payment ratio of approximately 20% of our net income after tax for
the preceding fiscal year, payable in cash, property or shares, subject to the requirements of applicable
laws and regulations, and circumstances which restrict the payment of dividends. Please see
“Dividends and Dividend Policy” beginning on page 59 of this Prospectus.
271,613,000 Firm Shares (or 30% of the Firm Shares) (the “Trading Participants and Retail Offer
Shares”) are (subject to re-allocation as described below) being offered to all of the trading
participants of the PSE (the “PSE Trading Participants”) and to local small investors under the Local
Small Investors Program being implemented by the PSE (the “Trading Participants and Retail Offer”).
Any Firm Shares allocated to the PSE Trading Participants and the local small investors but not taken
up by them, will be distributed by BPI Capital to its clients, retail investors or the general public.
Trading Participants and Retail Offer Shares not taken up by the PSE Trading Participants, BPI
Capital’s clients or the general public shall be purchased by BPI Capital, pursuant to the terms and
conditions of the Domestic Underwriting Agreement.
633,762,000 of the Firm Shares (or 70% of the Firm Shares) (the “Institutional Offer Shares”) are
(subject to re-allocation as described below) being offered and sold (i) by DB outside the Philippines
to persons outside the United States in offshore transactions in reliance on Regulation S (“Regulation
S”) under the United States Securities Act of 1933, as amended (the “U.S. Securities Act”) and (ii) by
BPI Capital to qualified institutional buyers and other institutions in the Philippines (the “Institutional
Offer”).
The allocation of the Firm Shares between the Trading Participants and Retail Offer and the
Institutional Offer is subject to adjustment as agreed between the Joint Global Coordinators. In the
event of an under-application in the Institutional Offer and a corresponding over-application in the
Trading Participants and Retail Offer, Firm Shares in the Institutional Offer may be reallocated to the
Trading Participants and Retail Offer. If there is an under-application in the Trading Participants and
Retail Offer and a corresponding over-application in the Institutional Offer, Firm Shares in the Trading
Participants and Retail Offer may be reallocated to the Institutional Offer. The reallocation shall not
apply in the event of over-application or under-application in both the Trading Participants and Retail
Offer and the Institutional Offer.
All of the Shares issued and to be issued or sold pursuant to the Offer have identical rights and
privileges. The Shares may be owned by any person or entity regardless of citizenship or nationality,
subject to the nationality limits under Philippine law. The Philippine Constitution and related statutes
sets forth restrictions on foreign ownership for companies engaged in certain activities. In particular,
to the extent that we acquire land in the Philippines, foreign ownership in our capital stock will be
limited to a maximum of 40% of our issued and outstanding capital stock. See “Risk Factors — The
Shares may be subject to Philippine foreign ownership limitations, if we acquire land in the
Philippines” beginning on page 53 of this Prospectus.
ii
The information contained in this Prospectus relating to us and our operations has been supplied by
us, unless otherwise stated herein. To the best of our knowledge and belief, we, having taken
reasonable care to ensure that such is the case, confirm that the information contained in this
Prospectus relating to us and our operations is correct, and that there is no material misstatement or
omission of fact which would make any statement in this Prospectus misleading in any material
respect and that we hereby accept full and sole responsibility for the accuracy of the information
contained in this Prospectus with respect to the same.
Unless otherwise indicated, all information in this Prospectus is as of the date of this Prospectus.
Neither the delivery of this Prospectus nor any sale of Shares made pursuant to this Prospectus shall,
under any circumstances, create any implication that the information contained herein is correct as of
any date subsequent to the date hereof or that there has been no change in our affairs since such date.
Before making an investment decision, investors should carefully consider the risks associated with
an investment in the Shares. These risks include:
•
Risks relating to our business;
•
Risks relating to the Philippines;
•
Risks relating to the Offer and the Offer Shares; and
•
Risks relating to certain statistical information in this Prospectus.
Please refer to the section entitled “Risk Factors” beginning on page 32 of this Prospectus, which,
while not intended to be an exhaustive enumeration of all risks, must be considered in connection with
a purchase of the Offer Shares.
An application to list the Offer Shares as well as the rest of the Shares was approved by the PSE on
October 14, 2015. The PSE assumes no responsibility for the correctness of any statements made or
opinions expressed in this Prospectus. The PSE makes no representation as to its completeness and
expressly disclaims any liability whatsoever for any loss arising from reliance on the entire or any part
of this Prospectus. Such approval for listing is permissive only and does not constitute a
recommendation or endorsement of the Offer Shares by the PSE or the Securities and Exchange
Commission of the Philippines (the “Philippine SEC”). Prior to the Offer, there has been no public
market for the Shares. Accordingly, there has been no market price for the Shares derived from day
to day trading. An application has been made with the Philippine SEC to register the Offer Shares
under the provisions of the Securities Regulation Code of the Philippines (Republic Act (“R.A.”) No.
8799) (the “SRC”).
ALL REGISTRATION REQUIREMENTS HAVE BEEN MET AND ALL
INFORMATION CONTAINED HEREIN IS TRUE AND CURRENT.
iii
The Offer Shares are offered subject to receipt and acceptance of any order by us and subject to our
right to reject any order in whole or in part. It is expected that the Offer Shares will be delivered in
book-entry form against payment thereof to the Philippine Depository and Trust Corporation (the
“PDTC”) on or about November 20, 2015.
By:
(original signed)
Arthur Emmanuel
President & Chief Operating Officer
iv
No representation or warranty, express or implied, is made by us or the Joint Global Coordinators
regarding the legality of an investment in the Offer Shares under any legal, investment or similar laws
or regulations. No representation or warranty, express or implied, is made by the Joint Global
Coordinators as to the accuracy or completeness of the information herein and nothing contained in
this Prospectus is, or shall be relied upon as, a promise or representation by the Joint Global
Coordinators. The contents of this Prospectus are not investment, legal or tax advice. Prospective
investors should consult their own counsel, accountant and other advisors as to legal, tax, business,
financial and related aspects of a purchase of the Offer Shares. In making any investment decision
regarding the Offer Shares, prospective investors must rely on their own examination of us and the
terms of the Offer, including the merits and risks involved. Any reproduction or distribution of this
Prospectus, in whole or in part, and any disclosure of its contents or use of any information herein for
any purpose other than considering an investment in the Offer Shares is prohibited.
THE OFFER SHARES ARE BEING OFFERED IN THE PHILIPPINES ON THE BASIS OF
THIS PROSPECTUS ONLY. ANY DECISION TO PURCHASE THE OFFER SHARES IN THE
PHILIPPINES MUST BE BASED ONLY ON THE INFORMATION CONTAINED HEREIN.
The Offer Shares have not been and will not be registered under the U.S. Securities Act and are
not being offered or sold in the United States. The Offer Shares may be subject to certain transfer
restrictions as described herein.
No person has been authorized to give any information or to make any representations other than
those contained in this Prospectus and, if given or made, such information or representations must not
be relied upon as having been authorized by us, the Joint Global Coordinators. This Prospectus does
not constitute an offer to sell or the solicitation of an offer to purchase any securities other than the
Offer Shares or an offer to sell or the solicitation of an offer to purchase such securities by any person
in any circumstances in which such offer or solicitation is unlawful. Neither the delivery of this
Prospectus nor any sale of the Offer Shares offered hereby shall, under any circumstances, create any
implication that there has been no change in our affairs since the date hereof or that the information
contained herein is correct as of any time subsequent to the date hereof.
Market data used throughout this Prospectus has been obtained from market research, reports and
studies, publicly available information and industry publications. Industry publications generally state
that the information that they contain has been obtained from sources believed to be reliable but that
the accuracy and completeness of that information is not guaranteed. Similarly, industry forecasts,
market research and the underlying economic assumptions relied upon therein, while believed to be
reliable, have not been independently verified, and none of us nor the Joint Global Coordinators makes
any representation as to the accuracy of that information. The information related to the Philippine
retail market in this Prospectus has been prepared by Euromonitor International Limited
(“Euromonitor”) and reflects estimates of market conditions based on publicly available sources and
trade opinion surveys. Forecasts were made on the assumption that the Philippine economy is expected
to maintain a steady growth and that the social, economic, and political environment is expected to
remain stable. References to Euromonitor should not be considered as the opinion of Euromonitor as
to the value of any security or the advisability of investing in the Company. Euromonitor makes no
representation as to the accuracy of the information prepared by Euromonitor set forth in this
Prospectus and the information should not be relied upon in making, or refraining from making, any
investment decision.
The operating information used throughout this Prospectus has been calculated by us on the basis
of certain assumptions. As a result, this operating information may not be comparable to similar
operating information reported by other companies.
The distribution of this Prospectus and the offer and sale of the Offer Shares in certain
jurisdictions may be restricted by law. We and the Joint Global Coordinators require persons into
whose possession this Prospectus comes to inform themselves about and to observe any such
restrictions. This Prospectus does not constitute an offer of, or an invitation to purchase, any of the
v
Offer Shares in any jurisdiction in which such offer or invitation would be unlawful. Each prospective
purchaser of the Offer Shares must comply with all applicable laws and regulations in force in any
jurisdiction in which it purchases, offers, sells or resells the Offer Shares or possesses and distributes
this Prospectus and must obtain any consents, approvals or permissions required for the purchase,
offer, sale or resale by it of the Offer Shares under the laws, rules and regulations in force in any
jurisdiction to which it is subject or in which it makes such purchases, offers, sales or resales, and
none of the Joint Global Coordinators or we shall have any responsibility therefor.
In connection with the Offer, the Stabilizing Agent or any person acting on its behalf may
over-allot Optional Shares or effect transactions with a view to supporting the market price of the
Offer Shares at a level higher than that which might otherwise prevail for a limited period after the
Listing Date. However, there is no assurance that the Stabilizing Agent (or any person acting on behalf
of the Stabilizing Agent) will undertake stabilization activities. Any stabilization activities may begin
on or after the Listing Date and, if begun, may be ended at any time, but must end no later than 30
calendar days from and including the Listing Date. Any stabilization activities shall be done in
compliance with all applicable laws, regulations and rules. The total number of Offer Shares which
the Stabilizing Agent or any agent of it may buy to undertake any stabilizing activities shall not exceed
10% of the aggregate number of the Firm Shares.
We, together with the Selling Shareholders, reserve the right to withdraw the offer and sale of
Offer Shares at any time, and the Joint Global Coordinators reserve the right to reject any commitment
to subscribe for the Offer Shares in whole or in part and to allot to any prospective purchaser less than
the full amount of the Offer Shares sought by such purchaser. If the Offer is withdrawn or
discontinued, we shall subsequently notify the Philippine SEC and the PSE. The Joint Global
Coordinators and certain related entities may acquire for their own account a portion of the Offer
Shares.
Each offeree of the Offer Shares, by accepting delivery of this Prospectus, agrees to the
foregoing.
Conventions which apply to this Prospectus
In this Prospectus, unless otherwise specified or the context otherwise requires, all references to
“we”, the “Company”, “our” or “us” are to Metro Retail Stores Group, Inc. All references to the
“Philippines” are references to the Republic of the Philippines. All references to the “Government” are
to the national government of the Philippines. All references to the “BSP” are references to Bangko
Sentral ng Pilipinas, the central bank of the Philippines. All references to “United States” are to the
United States of America. All references to “Philippine Peso,” “Php,” “Pesos” and “ =
P ” are to the
lawful currency of the Philippines, and all references to “U.S. dollars” and “U.S.$” are to the lawful
currency of the United States. We publish our financial statements in Pesos.
This Prospectus contains translations of certain Peso amounts into U.S. dollar amounts at
specified rates solely for the convenience of the reader. These translations should not be construed as
representations that the Peso amounts represent such U.S. dollar amounts or could be, or could have
been, converted into U.S. dollars at the rates indicated or at all. Unless otherwise indicated, all
translations from Pesos to U.S. dollars have been made at a rate of =
P 45.200 = U.S.$1.00, the closing
spot rate quoted on the Philippine Dealing System (the “PDS”) on June 30, 2015. On October 16,
2015, the closing spot rate quoted on PDS was =
P 45.796 = U.S.$1.00. See “Exchange Rates” on page
61 of this Prospectus for further information regarding the rates of exchange between the Peso and the
U.S. dollar.
The items expressed in the Glossary of Terms may be defined otherwise by appropriate
government agencies or regulations from time to time, or by conventional or industry usage.
vi
Presentation of Financial Information
Our financial statements are reported in Philippine Pesos and are prepared based on our
accounting policies, which are in accordance with the Philippine Financial Reporting Standards
(“PFRS”).
Unless otherwise stated, all financial information relating to us contained herein is stated in
accordance with PFRS.
Figures in this Prospectus have been subject to rounding adjustments. Accordingly, figures
shown in the same item of information may vary, and figures which are totals may not be an arithmetic
aggregate of their components.
Our fiscal year begins on January 1 and ends on December 31 of each year. SyCip Gorres Velayo
& Co. (“SGV & Co.”), a member firm of Ernst & Young Global Limited, has audited and rendered an
unqualified audit report on our financial statements as of and for the years ended December 31, 2012,
2013 and 2014 and as of June 30, 2015 and for the six months ended June 30, 2014 and 2015, in
accordance with Philippine Standards on Auditing (“PSA”).
Forward-Looking Statements
This Prospectus contains forward-looking statements that are, by their nature, subject to
significant risks and uncertainties. These forward-looking statements include, without limitation,
statements relating to:
•
known and unknown risks;
•
uncertainties and other factors that may cause our actual results, performance or
achievements to be materially different from expected future results; and
•
performance or achievements expressed or implied by forward-looking statements.
Such forward-looking statements are based on numerous assumptions regarding our present and
future business strategies and the environment in which we will operate in the future. Important
factors that could cause some or all of the assumptions not to occur or cause actual results,
performance or achievements to differ materially from those in the forward-looking statements
include, among other things:
•
risks relating to our business;
•
risks relating to our organization and structure;
•
risks relating to the Philippines; and
•
risks relating to the Offer and the Offer Shares.
Additional factors that could cause our actual results, performance or achievements to differ
materially from forward-looking statements include, but are not limited to, those disclosed under
“Risk Factors” and elsewhere in this Prospectus. These forward-looking statements speak only as of
the date of this Prospectus. We and the Joint Global Coordinators expressly disclaim any obligation
or undertaking to release, publicly or otherwise, any updates or revisions to any forward-looking
statement contained herein to reflect any change in our expectations with regard thereto or any change
in events, conditions, assumptions or circumstances on which any statement is based.
vii
This Prospectus includes statements regarding our expectations and projections for future
operating performance and business prospects. The words “believe,” “plan,” “expect,” “anticipate,”
“estimate,” “project,” “intend,” “seek,” “target,” “aim,” “may,” “might,” “will,” “would,” “could,”
and similar words identify forward-looking statements. In addition, all statements other than
statements of historical facts included in this Prospectus are forward-looking statements. Statements
in this Prospectus as to our opinions, beliefs and intentions accurately reflect in all material respects
the opinions, beliefs and intentions of its management as to such matters as of the date of this
Prospectus, although we give no assurance that such opinions or beliefs will prove to be correct or that
such intentions will not change. This Prospectus discloses, under the section “Risk Factors” and
elsewhere, important factors that could cause actual results to differ materially from our expectations.
All subsequent written and oral forward-looking statements attributable to us or persons acting on
behalf of us are expressly qualified in their entirety by the above cautionary statements.
viii
ix
TABLE OF CONTENTS
GLOSSARY OF TERMS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2
SUMMARY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
9
SUMMARY OF THE OFFER . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
19
SUMMARY FINANCIAL AND OPERATING INFORMATION . . . . . . . . . . . . . . . . . . . . . . . .
28
RISK FACTORS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
32
USE OF PROCEEDS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
55
DIVIDENDS AND DIVIDEND POLICY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
59
EXCHANGE RATES
.......................................................
61
DETERMINATION OF THE OFFER PRICE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
62
CAPITALIZATION AND SHORT-TERM DEBT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
63
DILUTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
64
SELECTED FINANCIAL AND OPERATING INFORMATION . . . . . . . . . . . . . . . . . . . . . . . .
65
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
69
BUSINESS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
89
INDUSTRY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 129
REGULATORY AND ENVIRONMENTAL MATTERS
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 147
RELATED PARTY TRANSACTIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 161
BOARD OF DIRECTORS AND SENIOR MANAGEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . 162
PRINCIPAL SHAREHOLDERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 169
SECURITY OWNERSHIP OF CERTAIN RECORD AND BENEFICIAL OWNERS AND
MANAGEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 171
DESCRIPTION OF THE SHARES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 173
THE PHILIPPINE STOCK MARKET . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 181
PHILIPPINE FOREIGN EXCHANGE CONTROLS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 187
PHILIPPINE TAXATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 188
PLAN OF DISTRIBUTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 192
LEGAL MATTERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 196
INDEPENDENT AUDITORS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 197
INDEX TO AUDITED FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-1
1
GLOSSARY OF TERMS
In this Prospectus, unless the context otherwise requires, the following terms shall have the
meanings set forth below.
affiliate ........................................................... A corporation that directly or indirectly, through one
or more intermediaries, controls, is controlled by, or
is under the common control of, another corporation.
average basket size ......................................... The amount of net sales divided by the number of
transactions for a given period.
BIR................................................................. Philippine Bureau of Internal Revenue.
Board .............................................................. The board of directors of the Company.
BSP ................................................................ Bangko Sentral ng Pilipinas, the central bank of the
Philippines.
CAGR ............................................................. Compound annual growth rate.
catchment area ................................................ The area and population from which a city or
individual service attracts visitors or customers.
“the Company”, “our”, “we” and “us”............. Metro Retail Stores Group, Inc., a corporation
organized under Philippine Law.
CNC ............................................................... A Certificate of Non Coverage issued by the EMB.
concessionaire ................................................. Supplier who displays and sells its products in our
stores.
concession sales... ........................................... Sales of products
concessionaires.
owned
by
third
party
Consumer Act ................................................. The Consumer Act of the Philippines, Republic Act
No. 7394.
cross-docking .................................................. The logistical practice of unloading goods or
materials from an incoming transportation system
(for example, freight, rail, air) and loading these
directly onto distribution vehicles (for example,
trucks, trailers, vans, etc.), with little or no storage
time in between unloading and loading.
DA.................................................................. The Philippine Department of Agriculture.
DENR ............................................................. The Philippine Department of Environment and
Natural Resources.
department store ............................................. According to Euromonitor, a retail outlet selling
mainly non-grocery merchandise and at least five
lines in different departments, usually with a sales
area of over 2,500 sqm arranged over several floors.
DOH ............................................................... The Philippine Department of Health.
2
Domestic Underwriting Agreement .................. The underwriting agreement between the Company
and the Sole Domestic Lead Manager.
DTI................................................................. The Philippine Department of Trade and Industry.
ECC ................................................................ Environmental Compliance Certificate, issued by the
DENR/EMB.
EIS ................................................................. Environmental Impact Statement, which must be
submitted to the EMB for environmentally critical
projects.
EIU................................................................. Economist Intelligence Unit.
EMB ............................................................... The Philippine Environmental Management Bureau.
Euromonitor .................................................... Euromonitor International Limited.
FDA................................................................ The Food and Drug Administration.
Firm Offer ...................................................... The sale and offer of the Firm Shares.
Firm Shares .................................................... 905,375,000 new Shares to be issued and offered by
the Company pursuant to the Firm Offer.
First Closing Date ........................................... Delivery of the Firm Shares, which is expected to
occur in Manila on or about November 24, 2015 or
such other date as the Joint Global Coordinators and
the Company shall agree in writing.
Food, Drug and Cosmetics Act ........................ The Food, Drug and Cosmetics Act, Republic Act
No. 3720.
Food Fortification Act..................................... The Philippine Food Fortification Act of 2000,
Republic Act No. 8976.
Food Safety Act .............................................. The Food Safety Act of 2013, Republic Act No.
10611.
Foreign Investments Act.................................. The Foreign Investments Act of 1991, Republic Act
No. 7042 as amended by Republic Act No. 8179.
GDP................................................................ Gross domestic product or the monetary value of all
the finished goods and services produced within a
country’s borders, calculated on an annual basis.
Generics Act ................................................... The Generics Act of the Philippines, Republic Act
No. 6675, as amended by Republic Act No. 9502.
Government .................................................... The Government of the Republic of the Philippines.
Hypermarket ................................................... According to Euromonitor, a retail outlet with a
primary focus on selling food, beverages, tobacco
and other groceries, while also selling a range of
non-grocery merchandise, frequently located in
out-of-town sites or as the anchor store in a shopping
center.
3
Institutional Offer ........................................... The offer for sale of the Institutional Offer Shares
outside the United States in offshore transactions in
reliance on Regulation S.
Institutional Offer Settlement Date .................. The date on which final allocation of the Institutional
Offer Shares is to be made, expected to be on or
about November 17, 2015.
Institutional Offer Shares ................................ 633,762,000 Firm Shares, or 70% of the Firm Shares
being offered for sale pursuant to the International
Offer.
International Underwriting Agreement ............. The underwriting agreement between the Company
and the Sole International Lead Manager.
Joint Global Coordinators ............................... BPI Capital Corporation and Deutsche Bank AG,
Hong Kong Branch.
jumbo certificate ............................................. A certificate covering all the securities lodged with
the PDTC and issued in the name of the PCD
Nominee.
Listing Date .................................................... The date on which trading of the Offer Shares on the
PSE begins, expected to be on or about November
24, 2015.
LLDA ............................................................. The Laguna Lake Development Authority, one of the
attached agencies of the DENR responsible for the
preservation, development and sustainability of the
Laguna de Bay and its major tributaries.
lower- to middle income ................................. Households with nominal disposable income per
annum of U.S.$3,000 to U.S.$35,000.
LSIs ................................................................ Local small investors.
Meat Inspection Code ..................................... The Meat Inspection Code of the Philippines,
Republic Act No. 9296, as amended by Republic Act
10536.
Metro Department Store .................................. The brand name of stores operated under the
Company’s department store retail format.
Metro Gaisano Family..................................... The children of Victor (deceased) and Sally Gaisano,
namely Jack S. Gaisano, Margaret G. Ang, Edward S.
Gaisano and Frank S. Gaisano, and their spouses and
their children. The “Metro Gaisano Family” does not
include the siblings of Victor Gaisano and their
descendants, who continue to be engaged in retail
businesses, some of which also operate using the
“Gaisano” family name.
Metro Manila .................................................. The metropolitan area comprising the city of Manila,
the cities of Caloocan, Las Piñas, Navotas, Makati,
Malabon, Mandaluyong, Marikina, Muntinlupa,
Parañaque, Pasay, Pasig, Quezon, San Juan, Taguig
and Valenzuela and the municipality of Pateros.
4
Metro Rewards Card ....................................... A loyalty card, introduced in 2006, allowing
customers to accrue and redeem points across our
retail formats.
Metro Supermarket.......................................... The brand name of stores operated under the
Company’s supermarket retail format.
Multi-Format Retailer ..................................... Retailer that operates more than a single type of
retail business.
net sales.......................................................... Gross sales, net of discounts and returns.
net selling space ............................................. The area of the store where items are displayed,
excluding the backroom and warehouse.
net selling space growth.................................. The comparisons of net selling space between two
corresponding periods.
NMIS .............................................................. The Philippine National Meat Inspection Service, a
specialized regulatory agency attached to the DA.
Offer ............................................................... The offer and sale of the Offer Shares on, and subject
to, the terms and conditions stated herein.
Offer Price ...................................................... =
P 3.99 per Offer Share.
Offer Shares.................................................... The Firm Shares and the Optional Shares.
OFW ............................................................... Overseas Filipino Workers.
Optional Shares............................................... Up to 90,537,500 common shares to be sold upon the
exercise of the Over-allotment Option.
outright sales .................................................. Sales of products owned by the Company.
Over-allotment Option..................................... An option granted by the Selling Shareholders to the
Stabilizing Agent, exercisable within 30 calendar
days from and including the Listing Date, to
purchase Optional Shares.
PCD Nominee ................................................. PCD Nominee Corporation, a corporation wholly
owned by the PDTC.
PDS ................................................................ The Philippine Dealing System.
PDS Rate ........................................................ The closing spot rate on any particular date for the
purchase of U.S. dollars for Pesos, which is quoted
by the PDS.
PDTC ............................................................. The Philippine Depository and Trust Corporation.
Permit to Sell ................................................. The permit issued by the Philippine SEC granting the
effectivity of the registration statement filed in
relation to the Offer Shares.
Pesos or =
P ...................................................... The legal currency of the Philippines.
5
PFRS .............................................................. Philippine Financial Reporting Standards.
Pharmacy Law ................................................ An Act Regulating the Practice of Pharmacy and
Setting Standards of Pharmaceutical Education in the
Philippines, Republic Act No. 5921, as amended.
Philippine Corporation Code ........................... Batas Pambansa Blg. 68 otherwise known as the
Corporation Code of the Philippines.
Philippine national .......................................... As defined under the Foreign Investments Act, means
a citizen of the Philippines, or a domestic partnership
or association wholly-owned by citizens of the
Philippines, or a corporation organized under the
laws of the Philippines of which at least 60% of the
capital stock outstanding and entitled to vote is
owned and held by citizens of the Philippines, or a
corporation organized abroad and registered to do
business in the Philippines under the Philippine
Corporation Code, of which 100% of the capital
stock outstanding and entitled to vote is
wholly-owned by Filipinos or a trustee of funds for
pension or other employee retirement or separation
benefits, where the trustee is a Philippine national
and at least 60% of the fund will accrue to the benefit
of Philippine nationals.
Philippine SEC ............................................... The
Philippine
Commission.
Securities
and
Exchange
Philippines ...................................................... Republic of the Philippines.
Price Act......................................................... The Price Act, Republic Act No. 7581.
PSE ................................................................ The Philippine Stock Exchange, Inc.
PSE Main Board ............................................. The main board of the PSE that enables companies
that meet higher profit or other financial standards
requirements to raise funds in the market. Generally,
to be listed on the Main Board, a company must have
a minimum authorized capital stock of =
P 500 million,
of which a minimum of twenty-five percent (25%)
must be subscribed and fully paid, and show, among
others:
(i)
cumulative consolidated EBITDA, excluding
non-recurring items, of at least =
P 50 million for
three full fiscal years prior to the filing of the
listing application and minimum EBITDA of
=
P 10 million for each of the three fiscal years;
(ii)
positive stockholders’ equity in the fiscal year
immediately preceding the filing of the listing
application;
(iii) a market capitalization of at least =
P 500 million
at listing; and
6
(iv) operating history of at least three (3) years prior
to the filing of the listing application.
PSE Trading Participants................................. Duly licensed securities brokers who are trading
participants of the PSE.
Regulation S ................................................... Regulation S under the U.S. Securities Act.
Renminbi ........................................................ The lawful currency of the People’s Republic of
China.
Retail Trade Liberalization Act ....................... The Retail Trade Liberalization Act of 2000,
Republic Act No. 8762, enacted into law on March 7,
2000.
same store sales growth .................................. The comparisons of net sales between two periods
generated by the relevant stores. The stores that are
included in comparisons are those that have operated
for at least 12 months preceding the beginning of the
last month of the reporting period. The comparison
for each store takes into account net sales by that
store during the same period it was in operation in
both the reporting period and the period of
comparison. The net sales of all the relevant stores in
the relevant period are then aggregated and
compared. Same store sales growth occurs when net
sales in the second period of comparison exceed
those in the first period. A decline in same store sales
occurs when net sales in the second period of
comparison are less than those in the first period.
SCCP .............................................................. Securities Clearing Corporation of the Philippines.
Shares ............................................................. The common shares of the Company with a par value
=
P 1.00 per share.
Sole Domestic Lead Manager .......................... BPI Capital Corporation.
Sole International Lead Manager ..................... Deutsche Bank AG, Hong Kong Branch.
sqm................................................................. Square meters.
SRC ................................................................ Securities Regulation Code of the Philippines
(Republic Act No. 8799) and its implementing rules,
as amended.
Stabilizing Agent ............................................ BPI Capital and its relevant affiliates, in their role as
stabilizing agent, whereby they may engage in
stabilization activities relating to any over-allotment
of Shares from the Selling Shareholders for a period
beginning on the Listing Date and ending on a date
no later than 30 calendar days from and including the
Listing Date.
Super Metro .................................................... The brand name of stores operated under the
Company’s hypermarket retail format.
7
supermarket .................................................... According to Euromonitor, a retail outlet selling
groceries with a selling space of more than 400 sqm,
excluding discounters, convenience stores and
independent grocery stores.
Trading Participants and Retail Offer .............. The offer for sale of the Trading Participants and
Retail Offer Shares in the Philippines to PSE Trading
Participants and LSIs under the Local Small
Investors Program being implemented by the PSE.
Trading Participants and Retail Offer
Settlement Date............................................... The date on which the Trading Participants and
Retail Offer ends and domestic subscriptions are
paid, expected to be on or about November 13, 2015.
Trading Participants and Retail Offer Shares ... 271,613,000 Firm Shares or 30% of the Offer Shares
being offered pursuant to the Trading Participants
and Retail Offer.
U.S. ................................................................ The United States of America.
U.S. dollars or U.S.$ ...................................... The lawful currency of the United States.
U.S. Securities Act.......................................... The United State Securities Act of 1933, as amended.
VAT ................................................................ Value-added tax.
Vicsal Group ................................................... Vicsal Development Corporation and its subsidiaries.
8
SUMMARY
The following summary is qualified in its entirety by, and is subject to, the more detailed
information presented in this Prospectus, including our audited financial statements and related notes
included elsewhere in this Prospectus. Because it is a summary, it does not contain all of the
information that a prospective purchaser should consider before investing. Prospective investors
should read the entire Prospectus carefully, including the section entitled “Risk Factors” and the
audited financial statements and the related notes to those statements included in this Prospectus.
Capitalized terms not defined in this summary are defined in the “Glossary of Terms,” “Risk Factors,”
“Business” or elsewhere in this Prospectus.
We are one of the leading retail groups in the Philippines and in the Visayas, one of the
fastest-growing geographic regions in the Philippines. We opened our first store in Cebu City in 1982
and have steadily grown to become a market leader in the Visayas. According to Euromonitor in a
study in July 2015, we were the largest department store, the largest hypermarket operator, and the
second-largest supermarket operator in the Visayas in terms of retail value sales in 2014. We were also
the largest retailer in the Province of Cebu across all these three store formats in 2014 in terms of
retail value sales, according to Euromonitor. The Visayas recorded the highest nominal GDP CAGR
among Luzon, Visayas and Mindanao of 8.9% from 2010 to 2013 and is expected to achieve the
highest population CAGR from 2010 to 2015 among Luzon, Visayas and Mindanao, driven primarily
by the growing business process outsourcing (“BPO”) industry and its international recognition as the
most popular tourist and foreign investment destination in the Philippines outside of Manila,
according to Euromonitor. As of June 30, 2015, we have a total of 26 stores in the Visayas, with a total
net selling space of approximately 101,023 sqm.
After focusing on steady growth in the Visayas during the first two decades of our operations,
we started to open stores outside of the Visayas, beginning with the opening of our department store
and supermarket in Legazpi City in 2001, followed by the opening of our department store and
supermarket in Lucena City in 2003 and by the opening of our department store and supermarket at
Metro Market! Market! at the Bonifacio Global City in Taguig in Metro Manila in 2004. As of June
30, 2015, we had a total of nine stores in Metro Manila and 10 stores in other parts of Luzon, bringing
our total store count in the Philippines to 45, with a total net selling space of approximately 197,873
sqm. See “— Business Operations — Overview” on page 98 of this Prospectus for the location of our
stores for each retail format. According to Euromonitor, we were the third largest supermarkets
operator, the third largest department stores operator and the fourth largest hypermarkets operator in
the Philippines in terms of retail sales value in 2014. We believe that we are well-positioned to capture
the significant growth opportunities in the Philippine retail industry.
We have historically operated our business in two retail formats: supermarkets and department
stores. As part of our growth campaign, we ventured into the hypermarket format in 2011. We
currently conduct our operations primarily through the following three retail formats:
•
Supermarkets. Our supermarket retail format is operated under two brand names, “Metro
Supermarket” and “Metro Fresh N Easy,” which we refer to collectively herein as “Metro
Supermarket.” Metro Supermarket offers a broad range of food and non-food products at
competitive prices catered to our target lower- to middle-income consumers. As of June 30,
2015, we operated 24 supermarkets with an average net selling space of 1,762 sqm. For the
years ended December 31, 2012, 2013 and 2014 and for the six months ended June 30,
P 13,589.3 million,
2015, net sales from our supermarket format were =
P 11,870.9 million, =
=
=
P 13,959.6 million and P 7,150.1 million, respectively, accounting for 52.6%, 53.4%,
49.2% and 48.6%, respectively, of net sales of the Company for the same periods.
•
Department Stores. We operate our department store retail format under the “Metro
Department Store” brand name. Metro Department Store offers both well-known local and
international brands and a comprehensive selection of private-label everyday merchandise,
with the product mix of each store tailored to the needs of the local target market. As of
9
June 30, 2015, we operated ten department stores with an average net selling space of
11,052 sqm. For the years ended December 31, 2012, 2013 and 2014 and for the six months
ended June 30, 2015, net sales from our department store format were =
P 9,722.0 million,
=
P 4,849.6 million, respectively, accounting for
P 9,829.9 million and =
P 9,989.8 million, =
43.1%, 39.2%, 34.7% and 32.9%, respectively, of net sales of the Company for the same
periods.
•
Hypermarkets. Our hypermarket retail format is operated under the brand name “Super
Metro.” Hypermarkets are “superstores” as they are a combination of a supermarket and
department store, offering a wide range of products including full grocery lines and general
merchandise. Super Metro seeks to provide consumers with a one-stop shopping experience
by offering a broad assortment of products at competitive prices, including items typically
sold at supermarkets and department stores. As of June 30, 2015, we operated 11
hypermarkets with an average net selling space of 4,096 sqm. For the years ended
December 31, 2012, 2013 and 2014 and for the six months ended June 30, 2015, net sales
P 4,567.4 million
P 1,889.0 million, =
from our hypermarket format were =
P 957.5 million, =
and =
P 2,727.0 million, respectively, accounting for 4.2%, 7.4%, 16.1% and 18.5%,
respectively, of net sales of the Company for the same periods.
As we continue to expand, we are able to draw upon our multi-format approach to establish
suitable formats for each location. This allows us to efficiently and profitably enter new markets and
integrate with new communities.
We take a “clustering” strategy with respect to our retail formats by situating complementary
stores around larger anchor stores. Our large department stores and hypermarkets are typically located
in commercial areas with high foot traffic and close to public transportation. Moving outward from
the main hub areas of our department stores and hypermarkets, we locate our supermarkets in areas
surrounding highly populated areas. As part of our location strategy, we have strong relationships with
the leading property developers in the Philippines.
We generally target consumers within the lower- to middle-income consumer segments. This
income segment is the largest consumer base in the Philippines and includes households with an
annual household disposable income of between U.S.$3,000 and U.S.$35,000. According to EIU in a
report in February 2015, from 2009 to 2014, the lower- to middle-income segment has grown from
70% to 83% of Philippine households and is expected to reach 91% of households by 2019. We also
target the younger segment of the population who have relatively high consumption patterns and
disposable income. According to EIU, approximately 62.2% of the total population belongs to the
working age population bracket of 15 to 64 years old, which is expected to steadily increase over the
coming years. With over 30 years of experience in catering to such consumers, we believe that we are
well positioned to capture this growth by continuing to expand our product and retail offerings to meet
their evolving needs.
For the six months ended June 30, 2015, we had net sales of =
P 14,726.7 million, an increase of
=
14.3% from our net sales of P 12,880.2 million for the six months ended June 30, 2014. For the six
months ended June 30, 2015, we had net income of =
P 211.3 million, an increase of 21.2% from our
net income of =
P 174.4 million for the six months ended June 30, 2014.
Competitive Strengths
Leading retailer in the Visayas, the fastest-growing region in the Philippines, and well positioned
to capture the significant growth opportunities across the country
According to Euromonitor, we were the largest department store operator, the largest
hypermarket operator and the second largest supermarket operator in the Visayas in terms of retail
value sales in 2014. We were also the largest retailer in the Province of Cebu across all three formats
in terms of retail value sales in 2014, according to Euromonitor. We operated a total of 26 stores in
10
the Visayas, including four department stores, 14 supermarkets and eight hypermarkets, as of June 30,
2015. We have deep roots, strong brand recognition and a long operating history in the Visayas and
its regional center, the Province of Cebu. Members of the Gaisano family have been operating retail
stores in the Visayas since 1949 and the “Gaisano” name has become synonymous with retail in the
region.
According to Euromonitor, the Visayas has recorded the highest nominal GDP CAGR of 8.9%
from 2010 to 2013 and the population of the Visayas is expected to reach 21.0 million by 2015,
representing the highest population CAGR from 2010 to 2015 among Luzon, Visayas and Mindanao.
This growth is primarily driven by the Visayas’ growing business process outsourcing (“BPO”)
industry and its international recognition as the most popular tourist and foreign investment
destination in the Philippines outside of Manila, according to Euromonitor. The metro area
surrounding Cebu City, the capital of the Province of Cebu, is the second most populous metropolitan
area in the Philippines and is a major industrial, commercial, shipping and tourism hub.
Relative to Metro Manila and the rest of Luzon, we believe that modern retail remains
under-penetrated in the Visayas in terms of retail value sales and outlets. According to Euromonitor,
the Visayas is expected to achieve the highest retail value sales growth rates for supermarkets and
department stores, and the second-highest retail value sales growth rate for hypermarkets after
Mindanao, from 2015 to 2019, while the growth rate of the Province of Cebu will outpace that of
Visayas. The supermarket, department store and hypermarket industry is expected to grow at a CAGR
of 8.2%, 9.8% and 20.5%, respectively, in the Visayas, and 9.7%, 10.9% and 20.7%, respectively, in
the Province of Cebu, from 2015 to 2019. With our current leading position as a household retail
brand, we believe that we will be able to use our leading position to benefit from the rapid industry
growth in the Visayas.
We have a successful track record of store opening and operation, and have received positive
market acceptance outside the Visayas, beginning with the store opening in Legazpi City in 2001. As
of June 30, 2015, we operated a total of 19 stores in Luzon, including six department stores, 10
supermarkets and three hypermarkets. According to Euromonitor, we were the third largest
supermarket operator, the third largest department store operator and the fourth largest hypermarket
operator in the Philippines in terms of retail value sales in 2014. The entire Philippine department
store, supermarket and hypermarket industry has grown at a CAGR of 7.0%, 8.3%, and 17.2% from
2010 to 2014, and is expected to further expand at a CAGR of 8.6%, 7.3%, and 10.8% from 2015 to
2019, respectively. We believe that we are well positioned to capture the significant growth
opportunities in the Philippine retail industry.
Complementary multi-format offering fulfills the needs of the growing mainstay lower- to
middle-income consumers
Our business is divided into three complementary retail formats, namely a supermarket format
operated under the “Metro Supermarket” and “Metro Fresh N Easy” brand names, a department store
format operated under the “Metro Department Store” brand name and a hypermarket format operated
under the “Super Metro” brand name. Our supermarket format is generally focused on fulfilling
consumers’ grocery needs, and our department store format offers a wide range of general
merchandise, while our hypermarket format is a standalone retail format that combines the offerings
of both grocery and general merchandise and provides consumers with a one-stop shopping
experience. Therefore, we believe that our retail formats are complementary to each other.
With our strength in scale and brand recognition, this multi-format business model also provides
us with the flexibility to adopt the most suitable retail format for new stores depending on the size and
the needs of the target market, available location space, future prospects and the offerings of other
retailers operating in the same locality. We take a prudent and systemic approach to store network
11
expansion and only open stores in strategic locations with a strong catchment area close to our target
customers. Prior to the establishment of each new store, we study the demographics of the residents
and other market conditions, including vehicular and pedestrian traffic, to decide the retail format for
the site.
In addition, we offer convenient shopping options and introduce new retail concepts to
consumers. Ten of our supermarkets are located on the same sites as our department stores to offer
one-stop shopping solutions. The same-site location arrangement drives customer traffic to both retail
formats. Our “Metro Fresh N Easy” supermarket brand is a line of neighborhood stores, which are
located closer to residents and therefore offer more convenience and accessibility compared to typical
supermarkets and offer a more comprehensive and diversified product offering compared to traditional
sari-sari stores. Finally, we operate several ancillary businesses that are located within our stores, such
as pharmacies, delicatessens, food courts and bakeries to further fill the gaps in our target consumers’
needs and offer them a lifestyle shopping experience. These ancillary offerings complement our core
formats, help maximize the use of our selling space, increase customer traffic and drive operating
synergies.
Our product assortment is specifically tailored to consumers within the lower- to middle-income
segments. This income segment forms the largest consumer base in the Philippines and, according to
EIU, has increased from 70% to 83% of Philippine households from 2009 to 2014 and is expected to
further increase to 91% by 2019. With over 30 years of experience in catering to such consumers, we
believe that we are well positioned to expand and upgrade our product and retail offerings to meet
their evolving needs.
Strong growth momentum across stores and formats driven by deep understanding of the local
markets
We started as a family business and opened our first store in Cebu City in 1982. After
maintaining steady growth in our early years, we launched an expansion campaign that increased our
total number of stores from 16 in 2010 to 45 as of June 30, 2015. The majority of new stores were
opened in 2012 and 2013 and have reached operational maturity. These stores are included in the same
store sales comparison report for the six month period ended June 30, 2015.
Leveraging our well-recognized brand and deep understanding of the Philippine retail industry
and our target consumers, we have achieved strong growth momentum across stores and retail formats.
For the six months ended June 30, 2015, we achieved a same store sales growth rate of 6.3%, 7.3%,
26.1% and 9.3% for supermarkets, department stores, hypermarkets, and our Company, respectively.
For the six months ended June 30, 2015, our sales growth rates, including new stores, were 10.8%,
7.3%, 43.2% and 14.3% for supermarkets, department stores and hypermarkets and our Company,
respectively, as compared to the same period in 2014.
Our successful expansion has been largely driven by our extensive experience in the local
markets in the Philippines. Our stores have access to a variety of regional products, such as
housewares, furniture and exportable handicraft from the Visayas, that help distinguish our product
offerings from those of our competitors. We have also consistently sought to understand and meet the
needs of our target consumers segments. For example, in 2006, we introduced the Metro Rewards Card
as a means of generating relevant customer information to enable us to understand customer
preferences and achieve a higher level of customer satisfaction. The program has been popular among
our customers, with 43.7% of our sales generated by cardholders in 2014. The Metro Rewards Card
program has also allowed us to collect additional data regarding our customers and has helped us
better understand the needs of lower- to middle-income consumers. We believe that we will be able
to deploy this knowledge as we continue to expand throughout the Philippines.
12
Unique focus on outright sales that leads to better control over product assortment, quality and
pricing
Outright sales accounted for over 70% of our net sales for the years ended December 31, 2012,
2013 and 2014 and for the six months ended June 30, 2015. As compared to concession arrangements,
we believe that our focus on outright sales gives us greater control of the products sold through our
stores in terms of assortment, quality and pricing. This model has also allowed us to develop deep
relationships with a wide range of suppliers, some of which have continued for more than 20 years.
We are able to leverage this control over our products and our relationships with suppliers to flexibly
and efficiently respond to changes in consumer demand without being locked into a relationship with
any particular concessionaire.
Our focus on outright sales is supported by our strong merchandising team, which harnesses our
in-depth understanding of our target consumer segment to conduct careful and rigorous sourcing and
determine an appropriate product assortment on a store-by-store basis. Our product assortment
includes comprehensive choices of packaged food and fresh foods, sourced domestically or through
direct suppliers from the U.S., China, Europe and other Asian countries. See “Business —
Supermarkets — Suppliers,” “Business — Department Stores — Suppliers” and “Business —
Hypermarkets — Suppliers” on pages 104, 109 and 114 of this Prospectus. We also stock a wide range
of non-food products, including daily necessities, apparel, housewares, equipment, toys, sporting
goods and appliances from well-known domestic and international brands. With access to and support
from many long-term direct suppliers, we are also able to offer value-for-money products for our
cost-conscious customers. Our strong ability to determine and source the proper product mix for each
store allows us to successfully operate our outright sales model.
Current asset light model and scalable operations provides flexibility for future expansion
We believe that our current asset-light business model provides us with flexibility for future
expansion. We do not currently own the land on which our stores are located, which allows us to use
funds that otherwise would have been used to purchase real property to improve our store operations.
This also provides us with the flexibility to purchase land in the future if attractive opportunities arise.
Approximately 75% of our sites are leased from other companies within the Vicsal Group on an
arms-length basis. These leases are generally structured as six year building leases under which we
have the sole option to terminate or renew the lease, giving us flexibility to conveniently move our
stores to more strategic locations that emerge in the locality. Our remaining sites are leased from third
parties, with whom we generally enter into long-term leases ranging from 25 to 30 years. We believe
that this approach provides stability and limits our short-term exposure to rising rental costs. We have
long-standing relationships with major property developers that have invited us to be anchor tenants
in their property developments from time to time.
Our highly standardized and scalable operations also contribute to our prospects for future
growth. We take a “plug and play” approach to store design and product assortment, with each retail
format beginning with a standard assortment of products and services and then “plugging” in
additional offerings tailored to the needs of the target market. This reduces the costs associated with
store expansion and product selection and allows us to take advantage of economies of scale as we
grow our business. Additionally, we have recently completed the standardization of our store design
and layout, construction and operations at the store level, leading to greater uniformity in management
across our operations. We believe that this will further enhance operational efficiency and reduce store
opening costs and timelines as our business continues to expand.
Due to our asset-light business model, we operate with low amounts of debt. As of June 30, 2015,
we have approximately =
P 9.6 billion available under short-term credit facilities from various
Philippine banks. Our borrowing capacity and strong relationships with our lenders provide us with
access to a wide range of financing needed to take advantage of other expansion opportunities that
may come up in the course of our operations.
13
Highly efficient supply chain and inventory management with well-established information systems
We believe that our highly-efficient supply chain management makes it possible for us to
successfully operate our outright sales model. We are migrating from an outsourced supply chain
process to a Company-controlled supply chain management system to increase the efficiency and
reliability of our supply operations. Commencing in February 2015, we managed and operated our first
distribution center in Luzon at Silangan, Canlubang in the Province of Laguna, and we continue to
operate six warehouse facilities that are managed by an independent third party provider located in
Cebu City and Mandaue City, both in the Province of Cebu. We believe that operating our own
distribution center in Luzon helps us manage costs and ensures timely delivery of products to our
stores. We are exploring the consolidation of our warehouses in the Province of Cebu, especially after
the success of our Luzon distribution center.
The strength of our in-house logistical operations has been recognized by both concessionaires
and outright suppliers, some of which use our distribution center to transport their own merchandise.
Bringing portions of our supply chain management in-house supports inventory control for our
outright sales business model by giving us greater flexibility in merchandising and shortening delivery
times to our stores. Our highly efficient supply chain infrastructure provides for automated daily
replenishment of products for each of our stores, where strict inventory controls and weekly purchase
monitoring ensure timely supply and a good rate of inventory turnover. We believe our in-house supply
chain management expertise is a key competitive advantage relative to our competitors.
Our supply chain and inventory management are further bolstered by a fully integrated suite of
Oracle software that supports the automation of retail operations and financial management. Our
information systems give us access to real-time store and inventory updates that enable us to timely
adjust purchasing and supply to increase efficiency. The Oracle suite also allows us to quickly execute
merchandising and pricing decisions throughout our entire supply chain. We believe that our advanced
and integrated information systems increase the scalability of our outright sales model, providing
support for our continued expansion across the country.
Retailing is a technology-intensive industry and investment in technology has helped us to work
closer with our suppliers and vendors. This leads to better prediction of consumer demand, shortened
lead-times and reduced inventory holding, all of which contribute to reductions in cost. Our
information systems and supply chain management allow us to source products directly from
manufacturers, increasing our levels of outright sales and giving us access to manufacturers’ discounts
and favorable credit terms.
Experienced and stable management team supported by the Vicsal Group and strategic relationships
Our management team has an over 30-year track record of success, with senior management
having an average of over 20 years of industry experience and having spent an average of over 10
years with the Company. Frank S. Gaisano, our chairman and chief executive officer, has worked with
us and the Vicsal Group for over 30 years and has a deep understanding of the retail industry in the
Philippines. Our President and Chief Operating Officer, Arthur Emmanuel, has strong experience in
retail operations, merchandising and procurement, having served in senior international roles at
Wal-Mart for almost 40 years, including as Chief Operating Officer of Wal-mart Argentina and Brazil
and as Chief Merchandising Officer of Wal-mart Mexico.
We also benefit from the commitment and support of the Vicsal Group. The Vicsal Group, which
is controlled by members of the Metro Gaisano Family, is engaged in a diverse range of businesses
located primarily in the Visayas, including retailing, financial services, and real estate. The group
develops retail outlets and residential communities and provides us support in terms of provision of
talent and property leasing. As of June 30, 2015, approximately 75% of our stores were located on
properties leased from the Vicsal Group, six of which had anchor status at malls operated by the Vicsal
Group. These malls include the Pacific Mall Mandaue in the Province of Cebu, Pacific Mall Lucena
in the Province of Quezon and Pacific Mall Legazpi in the Province of Albay. We are the largest
14
business segment of the Vicsal Group and receive the highest level of commitment from the group as
we continue to grow our business. In addition, the Vicsal Group is in various stages of development
of various residential and mixed-use projects, by itself or through joint venture arrangements with
third parties, such as Hongkong Land, in the Provinces of Cebu and Laguna. We believe that these
Vicsal Group developments will provide us with favorable locations for new stores in the future.
Additionally, we have a number of other strong relationships, including those with Ayala Land
and Megaworld. Our relationship with Ayala Land began more than 20 years ago and has allowed us
to secure anchor status at six of their locations, such as Ayala Center Cebu and Market! Market! due
to our multi-format retail offerings and continue to be invited to operate in their planned
developments. We also establish stores at attractive terms in some of the residential areas developed
by Megaworld, such as our Metro Fresh N Easy store in Megaworld’s Newport City, Manila.
Moreover, we have frequently been invited by various real estate developers to join as an anchor
tenant in new commercial projects. We intend to continue to leverage our existing relationships with
property developers and seek out opportunities to establish relationships with new partners as we
continue to expand our operations and build an established presence across the Philippines.
Strategies
Continue to expand our store network across the Philippines and increase our market share
We will continue to expand our multi-format store network to enhance our leading position in the
Visayas region and to increase our market share nationwide. Our diversified retail formats provide us
with flexibility to meet the needs of consumers in our targeted expansion locations and to tailor our
offerings to specific market conditions. Within the Visayas region, where we are a market leader, we
plan to leverage our strong brand recognition with consumers as we continue to open stores in each
of our retail formats in underpenetrated locations throughout the region, particularly in rapidly
developing cities. For example, Iloilo and Bacolod are promising areas for future retailing business
expansion due to the economic advancements of these areas. Pursuant to this strategy, in 2016 we plan
to open a department store and supermarket in Bacolod under an arrangement with Ayala Land and a
department store and a supermarket near the old Iloilo airport under an arrangement with Megaworld.
Nationwide, we intend to continue to roll-out new stores in other regions, including Luzon, to
increase our market share and brand recognition at a national level. We take a “clustering” approach
to network expansion. When entering a new area, we generally begin by building a larger retail store
such as a department store or hypermarket, typically located in commercial areas with high foot traffic
and close to public transportation, to create maximum consumer attraction and establish a local
presence. Then we cluster additional stores, including supermarkets and hypermarkets, around our
anchor stores and central areas to fully capture the consumer demand of the local market. After
analysis of, among other factors, local population and average income and the presence of
competitors, we generally pursue opportunities to open new stores in locations with competitive rents.
We are invited by major property developers as anchor tenants in their new projects from time to time.
We plan to open at least seven new stores by the end of 2016 with total gross floor area of 36,000 to
63,000 sqm. See “Use of Proceeds — Expansion of Store Network” on page 55 of this Prospectus.
In addition to our planned new stores, we have identified 30 sites for our expansion in the next
three years in the Visayas and Luzon regions, and are preparing commercial plans to open stores on
these sites, including retail format, store design, property development and operational set-ups.
As part of our expansion strategy, we plan to seek out opportunities to acquire existing retail
stores and consolidate them under the Metro brand name. For example, in 2011 we acquired and
successfully integrated Tita Gwapa (now rebranded as “Metro Fresh N Easy”) supermarkets into our
store network. Tita Gwapa was a chain of small scale supermarkets operating in various locations in
the Province of Cebu. We intend to continue to explore additional opportunities to acquire retail stores
that further our expansion plans and complement our current store network.
15
Increase store productivity and improve the shopping experience for our customers
We plan to continue to increase our store productivity by increasing current customers’ average
basket size, attracting new customers and identifying new revenue streams. To increase the average
basket size of existing customers, we plan to focus on improving our in-stock percentage and
enhancing our product assortment. We also intend to encourage suppliers to enroll in our
auto-replenishment program, an automated way of restocking inventories that provides a convenient
way for us to maintain appropriate inventory levels.
We intend to intensify mailing distribution within a five kilometer radius around our stores, and
enhance our in-store promotion displays along shelves and at checkout points. We believe that
enhanced marketing efforts will help us attract a larger proportion of customers living within our
catchment areas.
We also plan to continue to take steps to improve the shopping experience for our customers. We
plan to renovate existing stores, which we do for each store at least once every five years, and improve
the training of our sales and merchandising staff to ensure that we provide our customers with a
best-in-class shopping experience. Furthermore, we intend to grow the Metro Rewards Card program
and capitalize on information gathered from members of the program. Using this information coupled
with our point-of-sales data and market research, we will continue to improve and optimize our
product assortment to meet the evolving needs of consumers.
Intensify our focus on institutional and wholesale customers
We currently offer bulk discounts to institutional and wholesale customers, including schools,
businesses, non-governmental organizations, and sari-sari stores. We have maintained long-term
relationships with our institutional and wholesale customers, many of whom purchase large amounts
and volumes of products from us on a regular basis. The wholesale business generates an important
and stable revenue stream and similar profit margins to those of our retail business. We plan to
strengthen our institutional sales team by hiring dedicated personnel to concentrate specifically on
managing the institutional customer program and training the team intensively. Building on our
existing relationships and infrastructure, we also plan to expand the scope of our institutional sales
nationwide. We intend to engage in increased telemarketing targeted at institutional and wholesale
customers and to improve in-store customer service for such customers. We believe that increased
focus on sales to institutional customers will lead to customer loyalty and increased repeat business,
which in turn will increase our sales volume.
Improve operational efficiency and increase profitability
As we continue to grow, we intend to enhance operational efficiencies across our business. We
expect to realize scale-driven margin improvement from increased negotiating power with our
suppliers and other service providers. We plan to leverage these economies of scale to improve the
terms of our supply and marketing arrangements.
We will also continue to optimize our supply chain by continuing our clustering approach to
expansion, consolidating warehouses in the Province of Cebu into one distribution center and by
opening new distribution centers in strategic locations throughout our retail network. We intend to
gradually bring more of our supply chain in-house to further manage costs. Additionally, where
possible we will increase our reliance on in-house repair teams rather than third-party contactors for
repair and maintenance.
16
At the store level, we plan to increase our profitability by exercising disciplined inventory
management, implementing energy and cost savings initiatives and by optimizing our headcount. For
example, we plan to implement “queue-busting” by using handheld devices to scan customer
purchases while customers are still in queue, thereby reducing wait times and the need for additional
cashiers. Finally, we will strive to optimize our workforce by setting specific manpower to direct hire
ratios for different seasons of the year.
Expand complementary ancillary businesses
We continue to look for opportunities to use our ancillary businesses to increase synergies and
provide a one-stop shopping experience for our customers. We plan to enhance our existing ancillary
formats where we already have expertise, including baked goods, gourmet food and pharmacy, and
expand into new formats to fill the gaps left by our standard retail offerings. We also plan to further
develop our corporate leasing business to complement our existing products and utilize extra space in
our supermarkets and hypermarkets. By providing a comprehensive offering of products to our
customers within our existing facilities, we can increase customer traffic and better compete with
other retailers operating in the same markets.
Risks of Investing
Before making an investment decision, prospective investors should carefully consider the risks
associated with an investment in the Offer Shares. Certain of these risks are discussed in the section
entitled “Risk Factors” and include risks relating to the Company’s business, risks relating to the
Philippines, risks relating to the Offer and the Offer Shares and risks relating to certain statistical
information in this Prospectus.
Company Information
The Company is a Philippine corporation with its registered office located at Vicsal Building,
corner of C.D. Seno and W.O. Seno Streets, Guizo, North Reclamation Area, Mandaue City,
Philippines. The Company’s telephone number is: +63-32-236-8390. The Company’s website is:
www.metroretail.com.ph. The information on the Company’s website is not incorporated by reference
into, and does not form a part of, this Prospectus.
Investor Relations Office
The Investor Relations Office will be tasked with (a) the creation and implementation of an
investor relations program that reaches out to all shareholders and informs them of corporate activities
and (b) the formulation of a clear policy for accurately, effectively and sufficiently communicating
and relating relevant information to the Company’s stakeholders as well as to the broader investor
community.
Joseph Conrad Balatbat will head the Company’s Investor Relations Office and serve as the
Company’s designated Investor Relations Officer (“IRO”).
The IRO will also be responsible for ensuring that Company’s shareholders have timely and
uniform access to official announcements, disclosures and market-sensitive information relating to the
Company. As the Company’s officially designated spokesperson, the IRO will be responsible for
receiving and responding to investor and shareholder queries. In addition, the IRO will oversee most
aspects of the Company’s shareholder meetings, press conferences, investor briefings, management of
the investor relations portion of the Company’s website and the preparation of its annual reports. The
IRO will also be responsible for conveying information such as the Company’s policy on corporate
governance and corporate social responsibility, as well as other qualitative aspects of the Company’s
operations and performance.
17
Karen H. Gaviola-Climaco, the Company’s Assistant Corporate Secretary, serves as the
Compliance Officer to ensure that the Company complies with, and files on a timely basis, all required
disclosures and continuing requirements of the Philippine SEC and the PSE.
The Company’s Investor Relations Office will be located at 6/F Metro Market! Market!
Bonifacio Global City, Taguig, Philippines. The Company’s investor relations e-mail address is
investor.relations@metrogaisano.com. The Company’s investor relations website can be accessed at
www.metroretail.com.ph/index.php/investor-relations/investor-contact.
18
SUMMARY OF THE OFFER
The following does not purport to be a complete listing of all the rights, obligations, and
privileges attaching to or arising from the Offer Shares. Some rights, obligations, or privileges may
be further limited or restricted by other documents and subject to final documentation. Prospective
investors are enjoined to perform their own independent investigation and analysis of the Company
and the Offer Shares. Each prospective investor must rely on its own appraisal of the Company and
the Offer Shares and its own independent verification of the information contained herein and any
other investigation it may deem appropriate for the purpose of determining whether to invest in the
Shares and must not rely solely on any statement or the significance, adequacy, or accuracy of any
information contained herein. The information and data contained herein are not a substitute for the
prospective investor’s independent evaluation and analysis.
Issuer ............................................................. Metro Retail Stores Group, Inc., a corporation
organized under Philippine law.
Selling Shareholders ...................................... Valueshop Stores, Inc. and Vicsal Development
Corporation.
Joint Global Coordinators and
BPI Capital Corporation and Deutsche Bank AG,
Lead Underwriters ........................................ Hong Kong Branch.
Selling Agents ................................................ PSE Trading Participants.
The Offer ....................................................... Offer of 905,375,000 Firm Shares, consisting of
Common Shares to be issued and offered by the
Company, and an offer of up to 90,537,500 Optional
Shares by the Selling Shareholders pursuant to the
Over-allotment Option (as described below).
Institutional Offer ......................................... 633,762,000 Firm Shares (or 70% of the Firm
Shares) are (subject to re-allocation as described
below) being offered and sold (i) outside the
Philippines to persons outside the United States, and
(ii) to certain qualified buyers in the Philippines,
each in reliance on Regulation S. The Optional
Shares will form part of the Institutional Offer.
Trading Participants and Retail Offer.......... 271,613,000 Firm Shares (or 30% of the Firm
Shares) are (subject to re-allocation as described
below) being offered in the Trading Participants and
Retail Offer in the Philippines at the Offer Price. Out
of the 271,613,000 Trading Participants and Retail
Offer Shares, 181,075,000 Firm Shares (or 20% of
the Firm Shares) are (subject to re-allocation as
described below) being allocated to all of the PSE
Trading Participants at the Offer Price. Each PSE
Trading Participant shall initially be allocated
1,371,000 Firm Shares and subject to reallocation as
may be determined by the Sole Domestic Lead
Manager. Based on the initial allocation for each
Trading Participant, there will be a total of 103,000
residual Firm Shares to be allocated as may be
determined by the Sole Domestic Lead Manager.
Each LSI applicant may subscribe up to a maximum
19
of 6,000 Firm Shares at the Offer Price. Any Firm
Shares allocated to the PSE Trading Participants but
not taken up by them, will be distributed by BPI
Capital to its clients, retail investors or the general
public. Trading Participants and Retail Offer Shares
not taken up by the Selling Agents, BPI Capital’s
clients, retail investors or the general public shall be
purchased by BPI Capital pursuant to the terms and
conditions of the Domestic Underwriting Agreement
and subject to agreement between BPI Capital and
DB on any clawback, clawforward or other such
mechanism relating to reallocation of the shares
between the Institutional Offer and the Trading
Participants and Retail Offer.
Offer Shares .................................................. the Firm Shares and the Optional Shares
Offer Price..................................................... =
P 3.99 per Offer Share
Over-allotment Option .................................. The Selling Shareholders have granted BPI Capital
and its relevant affiliates, in their role as stabilizing
agent, an option, exercisable in whole or in part, to
purchase up to 90,537,500 Optional Shares at the
Offer Price, on the same terms and conditions as the
Firm Shares as set out in this Prospectus, solely to
cover over-allotments, if any, and effect price
stabilization transactions. The Over-allotment
Option is exercisable from time to time for a period
which shall not exceed 30 calendar days from and
including the Listing Date. See “Plan of Distribution
— The Over-allotment Option” beginning on page
194 of this Prospectus.
Trading Participants and Retail
The Trading Participants and Retail Offer Period
Offer Period .................................................. shall commence at 9:00 a.m., Manila time, on
November 9, 2015 and end at 12:00 p.m., Manila
time, on November 13, 2015. The Company and the
Joint Global Coordinators reserve the right to extend
or terminate the Trading Participants and Retail
Offer Period with the approval of the Philippine SEC
and the PSE.
Applications must be received by the domestic
receiving and paying agent, Unionbank of the
Philippines - Trust and Investment Services Group
(the “Domestic Receiving and Paying Agent”), by
12:00 p.m., Manila time on November 13, 2015,
whether filed through a participating Selling Agent
or filed directly with BPI Capital. Applications
received thereafter or without the required
documents will be rejected. Applications shall be
considered irrevocable upon submission to a
participating Selling Agent, and shall be subject to
the terms and conditions of the Offer as stated in this
Prospectus and in the application. The actual
purchase of the Offer Shares shall become effective
20
only upon the actual listing of the Offer Shares on
the PSE and upon the obligations of BPI Capital
under the Domestic Underwriting Agreement
becoming unconditional and not being suspended,
terminated or cancelled on or before the Listing Date
in accordance with the provisions of such agreement.
Eligible Investors .......................................... The Trading Participants and Retail Offer Shares
may be purchased by any natural person of legal age
residing in the Philippines, regardless of nationality,
or any corporation, association, partnership, trust
account, fund or entity residing in and organized
under the laws of the Philippines and/or licensed to
do business in the Philippines, regardless of
nationality, subject to the Company’s right to reject
an application or reduce the number of Offer Shares
applied for subscription or purchase if the same will
cause the Company to be in breach of the Philippine
ownership requirements under relevant Philippine
laws.
The Institutional Offer Shares are initially being
offered and sold (i) outside the Philippines to persons
outside the United States, and (ii) to certain qualified
buyers in the Philippines, each in reliance on
Regulation S. Subscription to, and purchase of, the
Offer Shares in certain jurisdictions may be
restricted by law. Foreign investors interested in
subscribing or purchasing the Offer Shares should
inform themselves of the applicable legal
requirements under the laws and regulations of the
countries of their nationality, residence or domicile,
and as to any relevant tax or foreign exchange
control laws and regulations affecting them
personally. Foreign investors, both corporate and
individual, warrant that their purchase of the Offer
Shares will not violate the laws of their jurisdiction
and that they are allowed to acquire, purchase and
hold the Offer Shares.
Restrictions on Ownership ............................ The Philippine Constitution and related statutes set
forth restrictions on foreign ownership of companies
engaged in certain activities. Because the Company
may own real property in the future, its foreign
shareholdings may not exceed 40% of its issued and
outstanding capital stock entitled to vote, and 40% of
its total issued and outstanding capital stock, whether
or not entitled to vote.
Transfer Restrictions ..................................... The Institutional Offer Shares are initially being
offered and sold (i) outside the Philippines to persons
outside the United States, and (ii) to certain qualified
buyers in the Philippines, each in reliance on
Regulation S. The Offer Shares have not and will not
be registered under the U.S. Securities Act and,
subject to certain exceptions, may not be offered or
21
sold within the United States. See “Plan of
Distribution — The Institutional Offer” beginning on
page 193 of this Prospectus.
Use of Proceeds ............................................. See “Use of Proceeds” beginning on page 55 of this
Prospectus for details of how the total net proceeds
are expected to be applied.
Minimum Subscription .................................. Each application must be for a minimum of 2,000
Firm Shares, and thereafter, in multiples of 1,000
Firm Shares. Applications for multiples of any other
number of Common Shares may be rejected or
adjusted to conform to the required multiple, at the
Company’s discretion.
Reallocation ................................................... The allocation of the Firm Shares between the
Trading Participants and Retail Offer and the
Institutional Offer is subject to adjustment. In the
event of an under-application in the Institutional
Offer and a corresponding over-application in the
Trading Participants and Retail Offer, Firm Shares in
the Institutional Offer may be reallocated to the
Trading Participants and Retail Offer (with the
consent of the Joint Global Coordinators). If there is
an under-application in the Trading Participants and
Retail Offer and a corresponding over-application in
the Institutional Offer, Firm Shares in the Trading
Participants and Retail Offer may be reallocated to
the Institutional Offer (with the consent of the Joint
Global Coordinators). The reallocation shall not
apply in the event of over-application in both the
Trading Participants and Retail Offer and the
Institutional Offer.
Lock-up ......................................................... The PSE rules require an applicant company to cause
its existing shareholders owning at least 10% of the
outstanding shares of the company not to sell, assign,
or in any manner dispose of their shares for a period
of 180 days after the listing of the shares. Assuming
full exercise of the Over-allotment Option,
2,433,462,489 Common Shares or 70.96% held by
Vicsal Development Corporation are subject to such
180-day lock-up.
In addition, if there is any issuance or transfer of
shares (i.e., private placements, asset for share swaps
or similar transactions) or instruments which lead to
issuance of shares (i.e., convertible bonds, warrants
or similar instruments) done and fully paid for within
180 days prior to the start of the Offer Period, and
the transaction price is lower than that of the listing
price, all shares availed of shall be subject to a
lock-up period of at least 365 days from full payment
of the aforesaid shares. A total of 2 Common Shares
or 0% held by Messrs. Guillermo L. Parayno, Jr. and
Ricardo Nicanor N. Jacinto are subject to such
365-day lock-up.
22
See “Principal Shareholders” and “Plan of
Distribution — Lock-Up” beginning on page 169 and
195 of this Prospectus.
In addition to the lock-up obligations required by the
PSE, the Company and the Selling Shareholders have
agreed with the Joint Global Coordinators that they
will not, without the prior written consent of the
Joint Global Coordinators, issue, offer, pledge, sell,
contract to sell, pledge or otherwise dispose of (or
publicly announce any such issuance, offer, sale or
disposal of) any Common Shares or securities
convertible or exchangeable into or exercisable for
any Common Shares or warrants or other rights to
purchase Common Shares or any security or financial
product whose value is determined directly or
indirectly by reference to the price of the underlying
securities, including equity swaps, forward sales and
options for a period of 180 days after the listing of
the Offer Shares.
Listing and Trading....................................... The Company’s applications for the listing of the
Offer Shares were approved by the PSE on October
14, 2015. All of the Offer Shares in issue or to be
issued are expected to be listed on the PSE under the
symbol MRSGI. See “Description of the Shares”
beginning on page 173 of this Prospectus. All of the
Offer Shares are expected to be listed on the PSE on
or about November 24, 2015. Trading of the Offer
Shares that are not subject to lock up is expected to
commence on November 24, 2015.
Dividends ....................................................... Each holder of the Common Shares will be entitled to
such dividends as may be declared by the Board of
Directors, provided that any stock dividend
declaration requires the approval of shareholders
holding at least two-thirds of the Company’s total
outstanding capital stock, which refers to the total
shares of stock subscribed by, under binding
subscription agreements with, subscribers or
stockholders. The Company’s current dividend
policy provides for an annual dividend payment ratio
of approximately 20% of our net income after tax for
the preceding fiscal year, payable in cash, property
or shares, subject to the requirements of applicable
laws and regulations, and circumstances which
restrict the payment of dividends. Please see
“Dividends and Dividend Policy” beginning on page
59 of this Prospectus.
23
Refunds for the Trading Participants
In the event that the number of Offer Shares to be
and Retail Offer ............................................ received by an applicant is less than the number
covered by its application, or if an application is
rejected by the Company, then the applicant is
entitled to a refund, without interest, within five
banking days from the end of the offer period,
of all or a portion of the applicant’s payment
corresponding to the number of Offer Shares wholly
or partially rejected. All refunds shall be made
through the Domestic Receiving and Paying Agent at
the applicant’s risk.
Registration and Lodgment of Shares
The Offer Shares are required to be lodged with the
with PDTC ..................................................... PDTC. The applicant must provide the information
required for the PDTC lodgment of the Offer Shares.
The Offer Shares will be lodged with the PDTC at
least two trading days prior to the Listing Date. The
applicant may request to receive share certificates
evidencing such applicant’s investment in the Offer
Shares through his/her broker after the Listing Date.
Any expense to be incurred by such issuance of
certificates shall be borne by the applicant.
Registration of Foreign Investments ............. The BSP requires that investments in shares of stock
funded by inward remittance of foreign currency be
registered with the BSP only if the foreign exchange
needed to service capital repatriation or dividend
remittance will be sourced from the Philippine
banking system. The registration with the BSP of all
foreign investments in the Offer Shares shall be the
responsibility of the foreign investor. See
“Philippine Foreign Exchange Controls” on page 187
of this Prospectus.
Restriction on Issuance and Disposal of
Existing shareholders who own an equivalent of at
Shares ............................................................ least 10% of the Company’s issued and outstanding
common shares after the Offer are required under the
revised listing rules of the PSE applicable to
companies applying for listing on the PSE Main
Board, not to sell, assign or otherwise dispose of
their Common Shares for a minimum of 180 days
after the Listing Date.
See “Principal Shareholders” beginning on page 169
of this Prospectus.
These restrictions are in addition to the contractual
lock-up described above.
Tax Considerations ........................................ See “Philippine Taxation” beginning on page 188 of
this Prospectus for further information on the
Philippine tax consequences of the purchase,
ownership and disposal of the Offer Shares.
24
Procedure for Application for the Trading
Application forms and signature cards may be
Participants and Retail Offer ....................... obtained from the Domestic Receiving and Paying
Agent or from any participating Selling Agent.
Applicants shall complete the application form,
indicating all pertinent information such as the
applicant’s name, address, taxpayer’s identification
number, citizenship and all other information as may
be required in the application form. Applicants shall
undertake to sign all documents and to do all
necessary acts to enable them to be registered as
holders of Offer Shares. Failure to complete the
application form may result in the rejection of the
application.
If the applicant is a corporation, partnership or trust
account, the application must be accompanied by the
following documents:
(i)
a certified true copy of the applicant’s latest
articles of incorporation and by-laws (or
articles of partnership in the case of a
partnership) and other constitutive documents
(each as amended to date) duly certified by its
corporate secretary (or managing partner in the
case of a partnership);
(ii)
a certified true copy of the applicant’s
Philippine SEC certificate of registration or
certificate of filing amended articles of
incorporation or by-laws, as the case may be,
duly certified by its corporate secretary (or
managing partner in the case of a partnership);
and
(iii) a duly notarized corporate secretary’s
certificate (or certificate of the managing
partner in the case of a partnership) setting
forth the resolution of the applicant’s board of
directors or equivalent body authorizing the
purchase of the Offer Shares indicated in the
application,
identifying
the
designated
signatories authorized for the purpose,
including his or her specimen signature, and
certifying the percentage of the applicant’s
capital or capital stock held by Philippine
Nationals. Foreign corporate and institutional
applicants who qualify as Eligible Investors, in
addition to the documents listed above, are
required to submit in quadruplicate, a
representation and warranty stating that their
purchase of the Offer Shares to which their
application relates will not violate the laws of
their jurisdictions of incorporation or
organization, and that they are allowed, under
such laws, to acquire, purchase and hold the
Offer Shares.
25
Payment Terms for the Trading
The purchase price must be paid in full in Pesos upon
Participants and Retail Offer ....................... the submission of the duly completed and signed
application form and signature card together with the
requisite attachments. Payment for the Offer Shares
shall be made either by: (i) a personal or corporate
check drawn against an account with a BSP
authorized bank at any of its branches located within
Metro Manila or the Province of Cebu; (ii) a
manager’s or cashier’s check issued by an authorized
bank; or (iii) a debit-credit instruction via Real Time
Gross Settlement (“RTGS”) or direct bank fund
transfer in favour of the relevant underwriter
accepting the Application. For Trading Participants
and LSI Applicants, only Cashier’s/Manager’s,
personal or corporate checks will be acceptable as
valid mode of payment. Checks subject to clearing
periods of over three (3) banking days shall not be
accepted. All checks should be made payable to
“MRSGI-IPO”, crossed “Payee’s Account Only,” and
dated the same date as the application. The
applications and the related payments will be
received at the designated locations as specified in
the Implementing Guidelines for the Reservation and
Allocation of MRSGI’s Firm Shares through the
PSE, to be published by the PSE prior to the start of
the Offer Period.
“Application to Subscribe” forms are subject to
Acceptance or Rejection of Applications
confirmation by BPI Capital and the final approval of
for the Trading Participants and
Retail Offer ................................................... the Company. The Company and BPI Capital reserve
the right to accept, reject or scale down the number
and amount of Offer Shares covered by any
application. The Company and BPI Capital have the
right to reallocate available Offer Shares in the event
that the Offer Shares are insufficient to satisfy the
total applications received. The Offer Shares will be
allotted in such a manner as the Company and BPI
Capital may, in their sole discretion, deem
appropriate, subject to distribution guidelines of the
PSE. Applications with checks dishonored upon first
presentation and “Application to Subscribe” forms
which do not comply with terms of the Offer will be
automatically
rejected.
Notwithstanding
the
acceptance of any “Application to Subscribe” forms,
the actual subscription of the Offer Shares by the
applicant will be effective only upon the listing of
the Offer Shares at the PSE.
Expected Timetable ....................................... The timetable of the Offer is expected to be as
follows:
Pricing and allocation of the
Institutional Offer Shares . . . . November 3, 2015
Notice of final Offer Price to
the Philippine SEC and PSE . . . . November 4, 2015
26
Submission of Firm Order
and Commitments by PSE
Trading Participants . . . . . . . . November 11, 2015
Trading Participants and
Retail Offer Period . . . . . . . November 9-13, 2015
Trading Participants and
Retail Offer Settlement Date . . . November 13, 2015
Institutional Offer Settlement
Date . . . . . . . . . . . . . . . . . . . . November 17, 2015
Listing Date . . . . . . . . . . . . . . November 24, 2015
The dates included above are subject to the approval
of the PSE and the Philippine SEC, market and other
conditions, and may be changed.
Risks of Investing ........................................... Before making an investment decision, prospective
investors should carefully consider the risks
associated with an investment in the Offer Shares.
Certain of these risks are discussed in the section
entitled “Risk Factors” and include: risks relating to
the Company’s business, risks relating to the
Philippines, risks relating to the Offer and the Offer
Shares and risks relating to certain statistical
information in this Prospectus.
27
SUMMARY FINANCIAL AND OPERATING INFORMATION
The following tables set forth summary financial information for our company and should be
read in conjunction with the independent auditors’ reports and our company’s audited financial
statements, including the notes thereto, included elsewhere in this Prospectus, and the section entitled
“Management’s Discussion and Analysis of Financial Condition and Results of Operations.” The
summary financial information as of and for the years ended December 31, 2012, 2013 and 2014 and
as of June 30, 2015 and for the six months ended June 30, 2014 and 2015 were derived from our
company’s audited financial statements, which were prepared in accordance with PFRS and were
audited by SGV & Co. in accordance with the PSA. The summary financial information below is not
necessarily indicative of the results of future operations. Furthermore, the translation of Peso
amounts into U.S. dollars as of and for the year ended December 31, 2014 and as of June 30, 2015
and for the six months ended June 30, 2015 is provided for convenience only and is unaudited. For
readers’ convenience only, amounts in Pesos were converted to U.S. dollars using the BSP Rate as of
June 30, 2015 of =
P 45.200 = U.S.$1.00.
Statement of Comprehensive Income
For the six months ended
June 30,
For the years ended December 31,
(Audited)
2012
2013
(Unaudited)
2014
2014
(U.S.$
million) (1)
(=
P million) (1)
(Audited)
2014
(Unaudited)
2015
2015
(U.S.$
million) (1)
(=
P million) (1)
REVENUE
Net sales ........................................................
22,550.4
25,468.0
28,356.9
627.4
12,880.2
14,726.7
Rental ............................................................
70.7
74.5
89.1
2.0
42.9
67.4
325.8
1.5
Interest and other income ...............................
39.5
39.0
95.6
2.1
37.1
29.6
0.7
22,660.6
25,581.5
28,541.7
631.5
12,960.2
14,823.7
328.0
Cost of sales ..................................................
18,001.6
19,965.9
22,336.6
494.2
10,245.0
11,755.7
260.1
General and administrative .............................
3,598.9
4,471.9
4,931.1
109.1
2,335.7
2,621.9
58.0
Selling and marketing.....................................
218.6
243.4
338.8
7.5
111.5
127.2
2.8
Finance costs..................................................
12.6
24.4
40.0
0.9
19.1
17.1
0.4
21,831.8
24,705.5
27,646.6
611.7
12,711.3
14,521.9
321.3
828.8
875.9
895.1
19.8
248.9
301.8
6.7
Current ...........................................................
293.6
275.2
286.3
6.3
83.5
87.5
1.9
Deferred .........................................................
(46.0)
(12.7)
(20.1)
(0.4)
(8.9)
3.0
0.1
247.6
262.5
266.2
5.9
74.6
90.4
2.0
581.2
613.5
628.9
13.9
174.4
211.3
4.7
COSTS AND EXPENSES
INCOME BEFORE INCOME TAX ..............
PROVISION FOR (BENEFIT FROM)
INCOME TAX
NET INCOME...............................................
OTHER COMPREHENSIVE INCOME
(LOSS) - Not to be reclassified to profit
or loss in subsequent periods
Remeasurement gains (losses) on defined
benefit obligation.......................................
(61.7)
54.0
(5.5)
(0.1)
(2.7)
5.9
0.1
Income tax effect............................................
18.5
(16.2)
1.6
0.0
0.8
(1.8)
(0.0)
(43.2)
37.8
(3.8)
(0.1)
(1.9)
4.2
0.1
TOTAL COMPREHENSIVE INCOME.........
538.0
651.3
625.1
Basic/Diluted Earnings Per Share ................
= 0.23
= 0.24
= 0.25
P
P
Note:
(1)
Except for Basic/Diluted Earnings Per Share.
28
P
13.8
172.5
215.5
4.8
U.S.$0.01
= 0.07
= 0.08
U.S.$0.00
P
P
Statement of Financial Position
As of December 31,
As of June 30,
(Audited)
2012
2013
2014
(=
P million)
(Unaudited)
(Audited)
(Unaudited)
2014
2015
2015
(U.S.$
million)
(=
P million)
(U.S.$
million)
Current Assets
Cash ..............................................................................
876.5
1,030.9
1,625.7
36.0
732.8
16.2
Receivables ...................................................................
792.3
861.9
869.4
19.2
704.0
15.6
Merchandise inventories ................................................
2,242.3
3,189.8
3,168.2
70.1
3,442.8
76.2
Other current assets .......................................................
538.3
681.8
624.7
13.8
594.8
13.2
Total Current Assets ....................................................
4,449.3
5,764.3
6,288.0
139.1
5,474.5
121.1
Property and equipment .................................................
938.9
1,270.1
1,351.0
29.9
1,482.2
32.8
Deferred tax assets ........................................................
119.2
115.7
137.4
3.0
132.7
2.9
Other noncurrent assets..................................................
98.8
226.0
307.6
6.8
314.3
7.0
Total Noncurrent Assets ...............................................
1,157.0
1,611.9
1,796.0
39.7
1,929.1
42.7
TOTAL ASSETS ...........................................................
5,606.2
7,376.2
8,084.0
178.8
7,403.7
163.8
Trade and other payables ...............................................
3,034.8
2,968.4
3,355.7
74.2
2,597.5
57.5
Loans payable................................................................
—
1,200.0
1,100.0
24.3
950.0
21.0
Total Current Liabilities ..............................................
3,034.8
4,168.4
4,455.7
98.6
3,547.5
78.5
Retirement benefit obligation .........................................
265.9
252.0
297.3
6.6
312.2
6.9
Other noncurrent liabilities ............................................
294.6
330.7
344.3
7.6
341.8
7.6
Total Noncurrent Liabilities ........................................
560.5
582.7
641.6
14.2
654.0
14.5
Total Liabilities ............................................................
3,595.3
4,751.1
5,097.3
112.8
4,201.5
93.0
Capital stock .................................................................
49.0
49.0
2,524.0
55.8
2,524.0
55.8
Retained earnings ..........................................................
816.9
1,430.4
466.6
10.3
Other comprehensive income (loss)................................
(44.9)
Noncurrent Assets
LIABILITIES AND EQUITY
Current Liabilities
Noncurrent Liability
Equity
(7.1)
678.0
15.0
(3.9)
(0.1)
0.2
0.0
Equity reserve ...............................................................
1,189.9
1,152.8
—
—
—
—
Total Equity .................................................................
2,011.0
2,625.1
2,986.7
66.1
3,202.2
70.8
TOTAL LIABILITIES AND EQUITY .........................
5,606.2
7,376.2
8,084.0
178.8
7,403.7
163.8
29
Statement of Cash Flows
For the years ended December 31,
(Audited)
2012
2013
For the six months ended June 30,
(Unaudited)
2014
2014
2014
(U.S.$
million)
(=
P million)
(Audited)
(Unaudited)
2015
2015
(U.S.$
million)
(=
P million)
CASH FLOWS FROM OPERATING
ACTIVITIES
Income before income tax ..............................
828.8
875.9
895.1
19.8
248.9
301.8
6.7
171.2
251.4
344.4
7.6
142.5
187.3
4.1
Adjustments for:
Depreciation and amortization ...................
Finance costs .............................................
12.6
24.4
40.0
0.9
19.1
17.1
0.4
Retirement benefits cost ............................
26.5
40.0
39.9
0.9
20.4
20.8
0.5
Interest income ..........................................
(6.4)
(6.0)
(15.6)
(0.3)
(2.4)
(1.2)
(0.0)
Provision for (reversal of) impairment
loss .......................................................
6.2
0.2
—
—
0.1
(1.4)
(0.0)
Loss on retirement of property and
equipment .............................................
—
—
—
—
—
0.1
0.0
Operating income before working capital
changes .....................................................
1,038.9
1,185.9
1,303.7
28.8
428.5
524.5
11.6
Decrease (increase) in:
Receivables ...............................................
(35.5)
(69.7)
(6.8)
(0.1)
217.3
166.8
3.7
Merchandise inventories ............................
(445.6)
(947.5)
21.6
0.5
(223.9)
(274.6)
(6.1)
Other current assets ...................................
158.1
(143.5)
57.1
1.3
28.1
29.8
0.7
Trade and other payables ...........................
320.9
(150.9)
323.3
7.2
396.0
(752.8)
(16.7)
Other noncurrent liabilities ........................
24.6
36.1
13.6
0.3
(2.5)
(0.1)
Net cash flows generated from (used in)
operations ..................................................
1,061.4
1,712.5
37.9
838.5
(308.8)
(6.8)
Interest received .............................................
6.4
14.9
0.3
2.4
1.1
0.0
—
(98.3)
(2.2)
Increase (decrease) in:
(89.6)
5.9
(7.5)
Income tax paid..............................................
(147.1)
(231.8)
(214.6)
(4.7)
Interest paid ...................................................
(12.3)
(20.4)
(50.6)
(1.1)
(13.9)
(11.6)
(0.3)
Net cash flows from (used in) operating
activities ....................................................
908.4
(335.8)
1,462.3
32.4
827.0
(417.6)
(9.2)
CASH FLOWS FROM INVESTING
ACTIVITIES
Acquisition of retail business enterprise .........
(2,735.6)
(60.5)
Additions to property and equipment ..............
(462.7)
—
(582.6)
—
(425.2)
(9.4)
—
Decrease (increase) in other noncurrent
assets.........................................................
(54.1)
(127.2)
(81.6)
(1.8)
Net cash flows used in investing activities .....
(516.7)
(709.8)
(3,242.4)
(71.7)
(141.0)
(147.8)
6.8
—
—
(318.6)
(7.0)
(6.7)
(0.1)
(325.3)
(7.2)
CASH FLOWS FROM FINANCING
ACTIVITIES
Proceeds from:
Issuance of shares......................................
—
—
2,475.0
54.8
618.8
—
—
Loans payable............................................
—
1,200.0
1,400.0
31.0
—
350.0
7.7
Payment of loans ............................................
—
—
(1,200.0)
(500.0)
(11.1)
Net cash flows from (used in) financing
activities ....................................................
—
1,200.0
2,375.0
52.5
(581.3)
(150.0)
(3.3)
NET INCREASE (DECREASE) IN CASH ..
391.7
154.4
594.9
13.2
104.7
(892.9)
(19.8)
CASH AT BEGINNING OF YEAR/
PERIOD ...................................................
484.8
876.5
1,030.9
22.8
1,030.9
1,625.7
36.0
CASH AT END OF YEAR/PERIOD .............
876.5
1,030.9
1,625.7
36.0
1,135.6
732.8
16.2
30
(1,500)
(33.2)
Operating Information
For the six months
For the years ended December 31,
ended June 30,
2012
2013
2014
2014
2015
11,870.9
13,589.3
13,959.6
6,455.5
7,150.1
Supermarkets
Net sales ( =
P million) ................................................
(=
P)
............................................
449.7
497.8
498.6
492.8
503.5
Number of transactions (millions) ..............................
26.4
27.3
28.0
13.1
14.2
Same store sales growth (%)......................................
2.9
3.2
(0.8)
(2.5)
6.3
Number of stores .......................................................
19
21
23
22
24
Net selling space (sqm) .............................................
33,568
36,781
40,980
39,319
42,298
Average net selling space (sqm).................................
1,767
1,751
1,782
1,787
1,762
9,722.0
9,989.8
9,829.9
4,520.9
4,849.6
............................................
476.6
551.9
558.5
565.1
584.3
Number of transactions (millions) ..............................
20.4
18.1
17.6
8.0
8.3
Same store sales growth (%)......................................
8.9
(1.4)
(2.4)
(8.4)
7.3
Number of stores .......................................................
9
10
10
10
10
Net selling space (sqm) .............................................
115,310
118,589
110,521
110,521
110,521
Average net selling space (sqm).................................
12,812
11,859
11,052
11,052
11,052
957.5
1,889.0
4,567.4
1,903.9
2,727.0
............................................
383.0
460.7
466.1
453.3
514.5
Number of transactions (millions) ..............................
2.5
4.1
9.8
4.2
5.3
Same store sales growth (%)......................................
—
15.7
4.2
9.1
26.1
Number of stores .......................................................
2
7
10
8
11
Net selling space (sqm) .............................................
4,891
28,144
40,995
33,558
45,054
Average net selling space (sqm).................................
2,446
4,021
4,099
4,195
4,096
Average basket size
Department Stores
Net sales ( =
P million) ................................................
Average basket size
(=
P)
Hypermarkets
Net sales ( =
P million) ................................................
Average basket size
(=
P)
31
RISK FACTORS
An investment in the Offer Shares involves a number of risks. The price of securities can and does
fluctuate, and any individual security is likely to experience upward or downward movements and may
even become valueless. There is an inherent risk that losses may be incurred rather than profit made
as a result of buying and selling securities. Our past performance is not a guide to our future
performance. There may be a large difference between the buying price and the selling price of the
Offer Shares. For investors that deal in a range of investments, each investment carries a different
level of risk.
Investors should carefully consider all the information contained in this Prospectus, including
the risk factors described below, before deciding to invest in the Offer Shares. The occurrence of any
of the following events, or other events not currently anticipated, could have an adverse effect on our
business prospects, financial condition, results of operation, the market price of the Offer Shares and
our ability to make dividend distributions to our shareholders. All or part of an investment in the Offer
Shares could be lost.
The means by which we intend to address the risk factors discussed herein are principally
presented under“Business — Competitive Strengths” beginning on page 90, “Business — Strategies”
beginning on page 95,“Management’s Discussion and Analysis of Financial Condition and Results of
Operations” beginning on page 69, “Industry” beginning on page 129 and“Board of Directors and
Senior Management — Corporate Governance” on page 165 of this Prospectus. We believe that our
efforts to manage the risks relating to our business will help to alleviate the risks relating to the
Philippines that we have not specifically addressed.
This risk factors discussion does not purport to disclose all of the risks and other significant
aspects of investing in the Offer Shares. Investors should undertake independent research and study
the trading of securities before commencing any trading activity. Investors may request publicly
available information on us from the Philippine SEC. An investor should seek professional advice if
he or she is uncertain of, or has not understood, any aspect of this Offer or the nature of risks involved
in purchasing, holding and trading the Shares. Each investor should consult his or her own counsel,
accountant and other advisors as to the legal, tax, business, financial and related aspects of an
investment in the Shares.
The risk factors discussed in this section are of equal importance and are separated into
categories for ease of reference only.
Risks Relating to Our Business
We may face increased competition from other retail companies in the Philippines.
The retail industry in the Philippines is highly competitive. The intensity of the competition in
the Philippine retail industry varies from region to region, but Metro Manila is generally considered
to be the most competitive market in the Philippines. The Province of Cebu and Metro Manila are two
of our largest markets in terms of net sales. We compete principally with national and international
retail chains in the Philippines, such as Robinson’s Supermarket and Robinson’s Department Store,
SM Department Store and SM Supermarket, Puregold, Rustan’s and Mercury Drug, among others. We
also compete with retail stores operated by members of the broader Gaisano family. See “— We
compete with and could be affected by the retail businesses of relatives that carry the “Gaisano” name
but are not part of the Vicsal Group” on page 33 of this Prospectus. Each of these competitors
competes with us on the basis of product selection, product quality, acquisition or development of new
brands, customer service, price, store location or a combination of these factors. We anticipate
competition from new market entrants and joint partnerships between national and international
operators. We expect that an increasing number of international retailers may enter the Philippine
32
market in the event that the geographical and shareholding restrictions on foreign enterprises engaging
in the Philippine retail business are further liberalized. See “Regulatory and Environmental Matters
— Retail and Investment Laws — The Retail Trade Liberalization Act” on page 149 of this Prospectus.
In addition, some of our competitors are also aggressively expanding their number of stores or
their product offerings. Some of these competitors may have been in business longer or may have
greater financial, distribution or marketing resources than us and may be able to devote greater
resources to sourcing, promoting and selling their products. There can be no assurance that we will
be able to compete successfully against current competitors or new entrants. Additionally, while we
have a location advantage in certain underpenetrated regions of the Philippines, this advantage may
decrease as our competitors expand or new entrants enter such regions. As competition in certain areas
intensifies or competitors open stores within close proximity to our stores, our results of operations
may be negatively impacted through a loss of sales, reductions in margins from competitive price
changes or greater operating costs.
We also face the risk of market saturation due to this increased competition. Our retail stores in
certain geographical areas may have reached or may be close to reaching a point of saturation where
the number of such types of stores exceeds demand from consumers. In such cases, it may not be
commercially viable to open new stores in those geographical areas, as any such new stores may not
be able to operate on a profitable basis.
Competitive pressures, including those arising in connection with our expansion strategy, may
have an adverse effect on our business, financial condition and results of operations.
We compete with and could be affected by the retail businesses of relatives that carry the “Gaisano”
name but are not part of the Vicsal Group.
In 1949, Doña Modesta Gaisano, together with her five sons, established White Gold Department
Store, widely considered the premiere retailer of post-war Cebu City. After Doña Modesta’s death in
1981, the Gaisano siblings began to pursue their respective business interests. In 1982, the youngest
son Victor Gaisano, together with his wife Sally, started the retail business of the Vicsal Group with
the opening of the first Metro Gaisano Department Store and Supermarket in Colon, Cebu City. The
siblings of Victor Gaisano, together with their descendants, continue to be engaged in retail businesses
that compete with our own retail operations, with a number of these businesses also using the
“Gaisano” family name, such as “Gaisano Grand” and “Gaisano Capital.” These businesses directly
compete with our supermarkets, department stores and hypermarkets. See “ — We may face increased
competition from other retail companies in the Philippines” on page 32 of this Prospectus. In addition,
our brand image, reputation and operations could be adversely affected by any adverse publicity,
product liability or product recall that affect the businesses of other members of the broader Gaisano
family that are not part of the Vicsal Group, particularly in instances where the consuming public
inadvertently perceives the business of the broader Gaisano family to be the same as that of the Vicsal
Group. Any loss of market share and any adverse effect on our brand image resulting from the
competitive businesses of the other members of the broader Gaisano family that are not part of the
Vicsal Group may have an adverse effect on our business, financial condition and results of
operations.
Our future store openings may not be successful, and our existing stores may not be able to continue
to benefit from the current favorable retail environment.
A significant part of our expansion strategy entails the opening of new stores in suitable
locations in various areas of the Philippines, including in areas where we do not currently have a
presence. There can be no assurance that we will be able to identify and procure suitable sites for our
new stores. As of June 30, 2015, we had seven stores in third-party malls. There can be no assurance
that these companies will continue to grow at a rate that is consistent with our planned rate of growth.
In addition, there can be no assurance that we will continue to be able to obtain “anchor tenant” status
33
or spaces in new malls or township projects, on terms acceptable to us or at all. Generally, because
of its ability to draw more customers to a particular shopping center, an anchor tenant has more
flexibility in negotiating the terms of its lease contract. Due to the increased competition for desirable
store sites, we may not be able to lease appropriate real estate for our new store locations, on terms
and conditions acceptable to us or at all.
There is also no assurance that our new stores will be successful or profitable. While we initially
focused our business in the Visayas, we have gradually expanded into other regions. Expansion into
new geographical areas will also expose us to additional operational, logistical and other risks. We
may find it difficult to obtain regulatory or local government approvals for our new stores in these
areas due to differences in local requirements and processes. We may also experience difficulty in
building our “Metro Supermarket” and other brand names in these new areas. Our proposed expansion
will also place increased demands on our managerial, operational, financial and administrative
resources. We may, for example, experience supply, distribution, transportation or inventory
management difficulties due to our lack of familiarity with the suppliers, distribution network,
third-party vendors and transportation systems in these new geographical areas. Any difficulties we
experience with respect to developing our business operations in new geographical areas may
materially and adversely affect our business, financial condition and results of operations.
In addition, there can be no assurance that our existing stores will be able to operate on a
profitable basis if the current retail environment becomes less favorable to us. The surrounding
environment of our existing stores may also change in terms of consumer demographics, or in terms
of store mix, as different businesses move in or out of the surrounding areas. There can be no
assurance that we will have the flexibility to move our existing store locations or to modify our
existing stores in response to changes in the surrounding environment and to changes in market and
consumer preferences. If we fail to predict and respond to changes in the retail environment, our
business, financial condition and results of operation may be materially and adversely affected.
Our retail business depends on our ability to source and sell the appropriate mix of products to suit
changing consumer preferences.
Our success depends in part on our ability to source and sell products that both meet our
standards for quality and appeal to changing customers’ preferences. Failure to source and effectively
market such products, or to accurately forecast changes in customer preferences, could lead to a
decrease in the number of customer transactions at our stores and a decrease in the amount customers
spend when they visit our stores. Our focus on outright sales, which accounted for more than 70% of
our net sales for the year ended December 31, 2014 and the six months ended June 30, 2015, increases
the risks related to sourcing and selling the appropriate mix of products across our retail formats.
Consumer demand for our products is directly affected by consumer preferences. Consumer
preferences in the markets in which we operate or intend to operate may cease to favor our store
formats or our products as a result of changes in lifestyle and dietary preferences or as a result of
national or regional economic conditions. Similarly, local conditions may cause customer preferences
to vary from region to region. We may be affected negatively by changes in the consumer preferences
relating to the method of shopping, for example by increases in the levels of Internet or home
shopping. Moreover, the rapid availability of new products and changes in consumer preferences have
made it more difficult to reliably predict sales demand. We rely on our significant experience and
established processes to accurately forecast and manage fluctuations in demand. However, there can
be no assurance that we will continue to be successful in this respect. The risk that our product
assortment will not meet customer expectations is heightened due to our focus on outright sales. The
future growth of our business depends on the attractiveness of our brands to our customers. In the
event that the brands which we currently carry are superseded by merchandise carried by our
competitors, our business, financial condition, results of operations and prospects may be materially
and adversely affected. If we are unable to identify and adapt to such changes in consumer preferences
quickly, consumer demand for our products may decline, which could have an adverse effect on our
business, financial condition and results of operations.
34
We are exposed to inventory risks.
Outright sales accounted for over 70% of our net sales for the year ended December 31, 2014 and
the six months ended June 30, 2015. Our focus on outright sales exposes us to increased inventory
risk, which includes inventory losses due to obsolescence, theft, pilferage, spoilage, and other
damage. For products sourced for outright sales, we bear all risks and costs of inventory management,
including shrinkage losses due to a discrepancy between our inventory based on a physical count and
the amounts generated by our inventory system. If we fail to properly manage our inventory in relation
to outright sales, we may suffer lower inventory turnover, which could have an adverse effect on our
business, financial condition and results of operations.
We are and may continue to be exposed to risks relating to the subleasing of a portion of our retail
space.
We currently sublease portions of our supermarket, department store and hypermarket retail
space to various third parties and affiliates, including operators of food kiosks and food stalls. Certain
factors concerning our current and future sub-tenants could affect our financial condition, including:
•
untimely expiration of subleases and vacancies of sub-tenants;
•
delays in the payment of rent due to a sub-tenant’s declining sales or slow turnover;
•
sub-tenants seeking the protection of bankruptcy laws that could result in delays in our
receipt of rental payments;
•
our inability to collect rental payments or the early termination of a sub-tenant’s sublease;
•
sub-tenants that do not comply with the general terms of the sublease; and
•
changes in laws and government regulations relating to real estate, including those
governing usage, zoning, taxes and government charges, that could lead to an increase in
management expenses or unforeseen capital expenditure to ensure compliance.
Any unfavorable developments with respect to our sub-tenants could have an adverse effect on
our business, financial condition and results of operations.
We rely on third-party and affiliate suppliers for provision of products and merchandise.
We rely on third-party and affiliate suppliers for provision of products and merchandise. See
“Business — Business Operations — Outright Suppliers and Concessionaries” on page 100 of this
Prospectus for a general discussion on the arrangements of the Company with suppliers and “Business
— Supermarkets — Suppliers,” “Business — Department Stores — Suppliers” and “Business —
Hypermarkets — Suppliers” on pages 104, 109 and 114 of this Prospectus for a discussion on major
suppliers of the Company. We may experience material disruptions in the supply of products and
merchandise due to prolonged interruptions in the operations of these suppliers, which may in turn be
caused by a number of factors, including equipment failures or property damage experienced by these
suppliers, changes in laws and regulations that affect their manufacturing processes, or financial
difficulties, and labor disputes faced by these suppliers. For example, in 2014, the Port of Manila
experienced prolonged congestion, resulting in significant disruptions to our supply chain. There can
be no assurance that our third-party suppliers will have sufficient resources to continue to meet our
demands. In the event that these suppliers cannot fulfill their obligations to supply sufficient qualities
of products and merchandise to us, we may not be able to find suitable alternative third-party suppliers
on a timely basis to supply the same or similar types and quantities of merchandise, which may
materially and adversely affect our business, financial condition and results of operations.
35
The success of our business depends in part on our ability to develop and maintain good
relationships with our current and future outright sales suppliers and concessionaires.
We derive approximately 99.5% of our revenue from outright sales and sales of concession
products, and our success depends on our ability to retain existing suppliers and concessionaires, and
attract new suppliers and concessionaires on terms and conditions favorable to us. The sourcing of our
products is dependent, in part, on our relationships with our suppliers. We have long-standing working
relationships with a broad range of national and multinational suppliers across all of our retail formats.
If we are unable to maintain these relationships, or if we lose suppliers for any reason, we may not
be able to continue to source products at competitive prices that both meet our standards and appeal
to customers. Our five largest suppliers accounted for approximately 15% of our net sales in 2014 and
for the six months ended June 30, 2015. The loss of any one of these major suppliers would have an
adverse effect on our sales.
We obtain deals, discounts, and rebates from suppliers, which allow us to maintain our
competitive pricing. Should changes occur in market conditions or our competitive position, we may
not be able to maintain or negotiate adequate support, which could have an adverse effect on our
business, financial condition and results of operations.
If we are unable to maintain good relationships with our existing suppliers and concessionaires,
or if we are unable to develop and maintain new supplier and concessionaire relationships, we will be
unable to carry merchandise and products that are in demand and can generate profit for us.
Furthermore, if any of our outright sales suppliers or concessionaires changes its distribution methods,
we may experience a disruption in our product supply. As a result, our market positioning, image and
reputation may be adversely affected, and our revenue and profitability may be impaired.
We rely significantly on distributors, service providers and the distribution networks of our
multinational suppliers for our logistics requirements.
We rely significantly on distributors, third-party service providers and the distribution networks
of our multinational suppliers for transportation, warehousing and delivery of products to our stores.
The majority of our merchandise is delivered to our distribution centers from our suppliers by
third-party service providers. Any deterioration in the relationships between distributors and
third-party service providers or other changes relating to these parties, including changes in supply
and distribution chains, could have an adverse effect on our business, financial condition and results
of operations.
In addition, there can be no assurance that we will be able to effectively coordinate our logistics
strategy to the degree necessary for the realization of our growth plans. As we continue to expand, we
will need to ensure that we are able to secure efficient distributors and service providers for our stores
to be opened in new locations. Any failure to establish such a network could have an adverse effect
on our expansion plans, operating costs and our results of operations. See “Business — Retail
Management Policies and Infrastructure — Inventory and Logistics” on page 119 of this Prospectus.
We rely on services rendered by third-party providers that may not always meet our requirements
for quality or be available or completed within our budget.
We rely on third-party providers and related-party providers to provide various services,
including construction, piling and foundation and building and property fitting-out works for the
development and renovation of new and existing stores. Our major third-party providers include,
among others, DHL Exel Supply Chain Phil, Inc. and Oracle (Philippines) Corporation. We generally
select third-party providers by conducting tenders and taking into consideration factors such as
experience, reputation for quality, track record and the contractor’s relationship with us. Although we
supervise the construction and fit-out progress of our third-party providers, there can be no assurance
that the services rendered by any of our third-party providers will always be satisfactory or match our
requirements for quality. In addition, we may be required to provide additional capital in excess of the
36
contractor’s bid to complete construction of a new store or refurbishment of an existing store. Further,
the completion of certain construction or renovation projects has been delayed from time to time in
the past and may be delayed again in the future. As a result, we may incur additional costs, scheduled
store openings may be delayed and our sales performance may be negatively affected. Moreover, there
can be no assurance that we will be able to find or engage a third-party provider for any particular
project within our budget which could result in costs increases or project delays. Any of these factors
could have an adverse effect on our business, financial condition and results of operations.
We may experience difficulty in implementing our growth strategy.
Our growth depends on the execution of our strategy to continue establishing and successfully
operating stores in new locations in the Philippines. There are a number of factors affecting our ability
to implement our growth strategy, including, among others:
•
favorable economic conditions and regulatory environment;
•
our ability to identify suitable sites for store locations;
•
our ability to lease appropriate real estate for store locations;
•
our ability to bear the increase in logistics costs when regional expansion occurs;
•
our ability to open new stores in a timely manner;
•
our ability to introduce new brands to the market;
•
our ability to continue to attract customers to our stores;
•
our ability to maintain the scale and stability of our information technology systems to
support our current operations and continuous business growth;
•
the hiring, training and retention of skilled store personnel;
•
the identification and relocation of experienced store management personnel;
•
the effective management of inventory to meet the needs of our stores on a timely basis;
•
the availability of sufficient levels of cash flow or necessary financing to support our
expansion; and
•
our ability to successfully address competitive merchandising, distribution and other
challenges encountered in connection with expansion into new geographic areas and
markets.
If we fail to successfully implement our growth strategy due to the absence of, or our inability
to carry out, any of the above mentioned factors, or otherwise, our business, financial condition and
results of operations may be materially and adversely affected.
In addition, if we are unable to successfully manage the potential difficulties associated with
store growth, we may not be able to capture the scale efficiencies that we expect from expansion. If
we are unable to continue to capture scale efficiencies, improve our systems, continue our cost
discipline and enhance our merchandise offerings, we may not be able to achieve our goals with
respect to operating margins. Furthermore, if we do not adequately refine and improve our various
ordering, tracking and allocation systems, we may not be able to increase sales or reduce inventory
shrinkage, which may also cause our operating margins to stagnate or decline.
37
We may not be able to successfully expand through acquisitions.
We intend to grow through opportunistic acquisitions and this will result in substantial demands
on our management, operational and other resources. There can be no assurance that we will be able
to identify suitable acquisition targets and implement our acquisition plans successfully. In addition,
we may be unable to successfully integrate our new operations and the companies or business we
acquire into our existing operational financial and management systems, procedures and controls.
Such acquisitions involve numerous risks and uncertainties, including but not limited to:
•
our inability to identify suitable acquisition targets or complete acquisitions at acceptable
terms or prices;
•
the availability, terms and costs of any financing required to make an acquisition;
•
potential ongoing financial obligations and unforeseen or hidden liabilities of our
acquisition targets;
•
our failure to achieve the intended objectives or benefits, or to generate sufficient revenue
to recover the costs and expenses, of an acquisition;
•
the diversion of resources and management attention from our existing businesses;
•
the costs of and difficulties in integrating acquired businesses and managing a larger
business; and
•
delays in or inability to secure necessary governmental approvals, third-party consents and
land use rights.
If we fail to address or deal with any of the abovementioned risks and uncertainties successfully,
our financial condition and results of operations may be materially and adversely affected.
Our business, financial performance and results of operations are subject to seasonality.
We experience seasonal fluctuations in our supermarket, department store and hypermarket
operations. Historically, our sales peak in December of each year. Sales thereafter slowdown in the
first quarter of the year and begin to increase in the second quarter, driven by the summer season, the
school break in April and May and particularly the beginning of the school year in the month of June.
This is followed by a slowdown in sales in the third quarter due to the rainy season. In preparation
for our peak selling periods, we incur additional expenses for the acquisition of additional inventory
and to carry out marketing and advertising activities. If sales during our peak selling periods are
significantly lower than we expect for any reason, or if there is any prolonged disruption in our
operations during our peak selling periods, we may be unable to adjust our expenses in a timely
manner and may be left with a substantial amount of unsold inventory, especially seasonal
merchandise that is difficult to liquidate after the applicable season. This may materially and
adversely affect our business, financial condition and results of operations.
We are exposed to certain risks in connection with the substantial use of cash in our operations.
Due to the nature of our retail business and the demographics of the majority of our customers,
we process a large volume of cash transactions in the course of our operations. Our customers usually
pay for their purchases in cash. Therefore, we are exposed to the risk of cash shortages, petty theft
and robbery, which, if substantial in the aggregate, could have an adverse effect on our business,
financial condition and results of operations.
38
Our operations may require significant capital expenditure and financing which we may not be able
to secure.
Our growth depends largely on significant capital expenditures for the refurbishment of existing
stores and the development and acquisition of new stores. We may not be able to fund capital
improvements or acquisitions solely from cash from our operating activities or existing cash or
proceeds from the Offer, and we may not be able to obtain additional debt or equity financing. We may
also require additional financing to fund day-to-day operational needs and debt service payments.
Additional financing may not be available as and when required. If we incur additional debt, it will
result in increased debt service obligations and could result in additional operating and financing
covenants, or liens on our assets, that would restrict our operations. Without required financing, we
may not be able to continue our operations, hire, train and retain employees or respond to competitive
pressures. In addition, if we fail to obtain financing for capital expenditure, our financial condition
and results of operations may be materially and adversely affected. There can be no assurance that
necessary financing will be available in amounts or on terms acceptable to us, or at all.
Our margins may be affected by increases in our operating and other expenses.
Our operations may be subject to increases in operating and other expenses due to a number of
factors including, but not limited to, any of the following:
•
increases in rent;
•
increases in construction, repair and maintenance costs for new and existing stores;
•
a change in laws, regulations or government policies which increases the cost of
compliance with such laws, regulations or policies;
•
increases in subcontracted service costs;
•
increases in labor costs;
•
increases in the rate of inflation;
•
adverse changes in the cost of existing and future debt financing;
•
increases in insurance premiums;
•
increases in the cost of utilities; and
•
increases in property taxes and other statutory charges.
Any increase in our operating and other expenses will have an impact on our cash flow. Due to
the nature of our retail business and our relationship with suppliers, our margins may be affected by
increases in our operating and other expenses. The resulting buffer available to account for changes
to costs is consequently small. If our stores do not generate revenue sufficient to meet our operating
expenses and debt service and capital expenditure requirements, our business, results of operations
and financial condition could be materially and adversely affected.
Our business is sensitive to changes in purchase and selling prices.
Our margins are sensitive to price increases in the merchandise sold in our stores. There can be
no assurance that we will be able to successfully contain the growth of our purchase prices if prices
for our merchandise or of agricultural commodities rise in the future. If these prices do rise, we may
need to pass all or a portion of these additional costs on to our customers to maintain our gross profit
margins. However, it may not be possible for us to significantly increase our retail prices to offset
price increases by suppliers, particularly if our main competitors choose not to implement such price
39
increases. As competition in the Philippine retail market intensifies, any unilateral price increases may
lead to declines in sales, loss of customer traffic, loss of market share and other adverse consequences.
Consequently, we may be significantly constrained in our pricing policy. In the event that we are
unable to pass increases in prices charged by our suppliers on to our customers, our financial condition
and results of operations may be materially and adversely affected.
In addition, our retail business, by nature, involves high volume and is therefore sensitive to
changes in selling prices. The retail sector is very competitive, and one of the principal bases of
competition is price. If most or all of our competitors decide to engage in a price war, we may be
forced to decrease the selling prices of our products substantially, in order to compete effectively with
our competitors. In addition, certain of our products may be subject to price regulations imposed by
the government. Under the Price Act, a price ceiling on basic necessities (including rice, corn, bread,
fish and milk) and prime commodities (including flour, pork, beef, poultry meat and other dairy
products) may be imposed, in the event of calamities, emergencies, price manipulation or when the
prevailing prices have risen to unreasonable levels. In the event any such price restrictions are
imposed on any of our products, we may be unable to sell such products at prices sufficient to generate
a profit or to enable us to break even, and this would have an adverse effect on our business, financial
condition and results of operations.
A deterioration of the value of our brand names and trademarks may have an adverse effect on our
business.
The brand names and trademarks under which we operate are owned by an affiliate, Metro Value
Ventures Inc., and exclusively licensed to us on a perpetual basis. See “Business — Retail
Management Policies and Infrastructure — Intellectual Property” on page 121 of this Prospectus.
Maintaining the reputation of such brand names and trademarks is critical to our success. We rely on
the strength of these brand names and trademarks to, among other things, attract customers to our
stores and attract international brands to partner with us. Substantial erosion in the value of these
brand names and trademarks due to product recalls, customer complaints, health issues, adverse
publicity, legal action or other factors may have an adverse effect on our business, financial condition
and results of operations. In addition, the trademarks that we use have been registered in the
Philippines only. We cannot be certain that any steps that have been taken to secure these trademarks
or other intellectual property will be sufficient or that third parties will not infringe or challenge such
rights. If we are unable to protect our intellectual property rights from infringement, it may have an
adverse effect on our business, financial conditions and results of operations.
Additionally, as our brands enjoy consumer recognition, we may encounter counterfeiting of our
products, such as unauthorized imitation or replication of our designs, trademarks, or labeling by third
parties. There can be no assurance that our actions taken to combat against counterfeiting of our
products will be successful. A significant presence of counterfeit products in the market could have
a negative impact on the value and image of our brands, result in a loss of consumer confidence in
our brands, and as a consequence, adversely affect our business and results of operations.
Systems failures and delays in our information technology systems could adversely affect our
business operations.
Our business operations are heavily dependent on the integrity of the information technology
systems supporting them, many of which have only recently been implemented. Our information
technology systems are vulnerable to damage or interruption from human error, data inconsistency,
natural disasters, power loss, computer viruses, intentional acts of vandalism, breach of security and
similar events. We have contingency plans in place to deal with such events that, however, may not
be able to prevent our systems from suffering failures or delays that might cause significant losses to
our business. Delays in the implementation of upgrades, equipment breakdowns and delays in the
integration of information technology systems in new stores may result in productivity losses and
40
potential inoperability of store trading software for significant periods of time. Significant systems
failures and delays could also cause unanticipated disruptions in service, loss of inventory, decreased
customer service and customer satisfaction and harm to our reputation, which could have an adverse
effect on our business, financial condition and results of operations.
We lease all of our store premises and we may not be able to continue to renew these leases or to
enter into new leases in favorable locations on acceptable terms and conditions.
As of June 30, 2015, we leased all of our net selling space and all of our distribution centers.
Approximately 75% of our sites are leased from related parties and 25% are leased from third parties.
There is no assurance that we will be able to renew our leases on acceptable terms and conditions or
at all upon their expiry. Leases of store premises in large shopping centers may not be available for
extension because landlords may decide to change tenants for better commercial arrangements. In
addition, rental rates for certain of our leases with related parties are more favorable than market rates.
If we are unable to renew leases with related parties, we may have to enter into new agreements with
third parties. There is no assurance that we will be able to enter into such new agreements with third
parties on terms and conditions that are acceptable to us or at all, and our failure to do so may
materially and adversely affect our business, financial condition and results of operations.
Moreover, if rent prices increase significantly throughout the Philippines, or in a particular
region, it may cease to be economical to lease stores and we may have to discontinue operations at
some of our stores. Any inability to renew leases as they expire or acquire new leases in other
favorable locations and sites on acceptable terms and conditions, termination of the existing leases,
or revision of the terms and conditions of leases to our detriment may have an adverse effect on our
business, financial condition and results of operations. Further, a number of our landlords are normally
granted the right to terminate the leases for cause prior to their expiration. In the event that any of
our leases are terminated for any reason prior to their expiration, we will need to either close our
operations at such locations or relocate to alternative premises. Relocation of any of our operations
may cause disruptions to our business and may require significant expenditure, and we cannot assure
that we will be able to find suitable premises on acceptable terms and conditions or at all in a timely
manner.
Product liability claims in respect of defective goods sold in our stores and food safety and
food-borne illness concerns could adversely affect our reputation and our financial prospects.
Our business involves an inherent risk of product liability, product recall, adverse publicity and
exposure to public liability claims. We do not currently have any product liability insurance and will
therefore be subject to the full amount of any product liability we may incur. Although each of our
concessionaires and suppliers provides us with a written indemnity covering the full extent of any
third-party liability we incur through their operations and sales in our stores, there is no assurance that
we will be successful in obtaining such indemnity payments or that the indemnity payments will fully
cover all of our costs associated with the original liability. Furthermore, under the Consumer Act, we,
as a seller, distributor or importer, may be subject to sanctions for goods not in conformity with
applicable consumer product quality or safety standards. If we are found responsible for damage
caused by defective goods sold in our stores, the reputation of our stores may be adversely affected.
This could lead to erosion of consumer confidence in our brands and a subsequent reduction in sales.
Such an event would be likely to have an adverse effect upon our business, financial condition, results
of operations and prospects.
Preparation, packaging, transportation, storage and sale of fresh and freshly prepared food
products and non-food products entail the inherent risk of product contamination, deterioration or
defect, which could potentially lead to product recalls, liability claims and adverse publicity. Food and
non-food products may contain contaminants that could, in certain cases, cause illness, injury or death.
Any shipment or sale of contaminated, deteriorated or defective products may be grounds for a product
liability claim or product recall. The risks of product liability claims or product recall obligations are
41
particularly relevant in the context of our sales of freshly prepared food products. Although our
suppliers bear the risk of product liability claims, we could incur adverse publicity through our
association with such claims, which could have an adverse effect on our business, financial condition
and results of operations.
We may incur liability for goods sold in our stores that violate the intellectual property rights of
third parties.
We and our concessionaires source merchandise worldwide. Our measures implemented to
minimize potential infringement of intellectual property rights of third parties may not always be
successful. In the event that goods sold in our stores violate the intellectual property rights of third
parties, we, in our capacity as retailer, may be found liable for intellectual property violation and may
be compelled to pay damages, which, in turn, could materially and adversely affect our business,
financial condition and results of operations. Moreover, we cannot assure that we can successfully
obtain indemnity payments from our concessionaires or that such indemnity payments will fully cover
all of our loss associated with our liability. If any claims alleging infringement of intellectual property
rights are brought against us or our concessionaires, our reputation may also be damaged.
We operate in a regulated industry and our business is affected by the development and application
of regulations in the Philippines.
We operate our businesses in a regulated environment. Retail establishments are subject to a
variety of government ordinances, which vary from one locality to another but typically include
zoning considerations as well as the requirement to procure a variety of environmental and
construction-related permits. We must also comply with food safety, consumer quality and pricing
regulations.
The primary regulations applicable to our operations include standards regarding:
•
the suitability of the store site;
•
air pollution;
•
price controls;
•
food inspection;
•
promotional activities;
•
packaging safety;
•
electricity supply;
•
construction;
•
business permits;
•
fire safety;
•
waste discharge and sanitation; and
•
sale of liquor, meat, grains and pharmaceutical products.
For more details, see “Regulatory and Environmental Matters” beginning on page 147 of this
Prospectus.
42
All construction and development plans are required to be filed with and approved by the local
government unit concerned. The requirements of each local government unit may vary but in general,
approval of such plans is conditional upon, among other things, the developer’s financial, technical
and administrative capabilities and, where the project site is leased, presentation of the lease contract
or authority from the registered owner of the land authorizing the construction. Alterations of
approved plans that affect significant areas of the project, such as infrastructure and public facilities,
also require the prior approval of the relevant government unit. There can be no assurance that we or
our associates or partners will be able to obtain governmental approvals for our projects or that when
given, such approvals will not be revoked. There can also be no assurance that we will continue to pass
ongoing consumer safety and quality inspections in all of our store locations. Any failure to comply
with applicable regulations and to obtain and retain governmental approvals could materially and
adversely affect our business, financial condition and results of operations.
We may fail to fulfill the terms and conditions of licenses, permits and other authorizations, or fail
to renew them on expiration.
We are required to maintain licenses, permits and other authorizations, including licenses
relating to the sale of liquor, pharmaceutical and certain construction activities. We are also required
to obtain and renew various permits, including business permits and permits concerning, for example,
health and safety, environmental standards and distribution standards. Our licenses, permits and other
authorizations contain various requirements that must be complied with to keep such licenses, permits
and other authorizations valid. If we fail to meet the terms and conditions of any of our licenses,
permits or other authorizations necessary for our operations, these may be suspended or terminated,
leading to temporary or potentially permanent closing of stores, suspension of construction activities
or other adverse consequences. In addition, we cannot be certain that any given license, permit or
authorization will be deemed sufficient by the relevant governmental authorities to fully cover
activities conducted in reliance on such license, permit or authorization.
There can be no assurance that we will continue to be able to renew the necessary licenses,
permits and other authorizations for our stores as necessary or that such licenses, permits and other
authorizations will not be revoked. If we are unable to obtain or renew them or are only able to do
so on unfavorable terms, this could have an adverse effect on our business, financial condition and
results of operations.
Continued compliance with, and any changes in, environmental laws and regulations may adversely
affect our results of operations and financial condition.
We are subject to various laws relating to environmental matters. Such laws provide that we
could be liable for the costs of removal of certain hazardous substances and clean-up of certain
hazardous locations. The failure to remove or clean-up such substances or locations, if any, could
adversely affect our operations on such sites and could potentially also result in claims against the
owner by private plaintiffs. Additionally, we could be held liable if environmental claims arising in
respect of real estate acquired with undisclosed or unknown environmental problems, which are
located on contaminated properties or as to which inadequate reserves had been established, are
successfully brought against us.
In general, entities engaged in the construction, development and operation of commercial
buildings, such as supermarkets or food stalls, with total area (including parking space, open space and
other areas) of more than 10,000 sqm are required to obtain an ECC prior to construction and operation
to certify that the project will not have an unacceptable environmental impact from DENR. Where the
total floor area is less than 10,000 sqm an ECC is not required but the developer must secure a CNC
for the project. Currently, we do not hold any ECCs or CNCs because we do not own the land or the
buildings on which our stores stand. However, there can be no assurance that there will be no changes
43
in the requirements and exemptions relating to obtaining ECCs or CNCs. There can also be no
assurance that we will be able to obtain the necessary licenses, permits and other authorizations or that
when obtained, such licenses, permits and other authorization will not be revoked. Penalties may be
incurred if the ECCs or CNCs for our stores are not secured or if any of these are revoked.
In addition, we cannot predict what environmental legislation or regulations will be amended or
enacted in the future, how existing or future laws or regulations will be enforced, administered or
interpreted, or the amount of future expenditures that may be required to comply with these
environmental laws or regulations or to respond to environmental claims. The introduction or
inconsistent application of, or changes in, laws and regulations applicable to our business could have
an adverse effect on our business, financial condition and results of operations. See “Regulatory and
Environmental Matters — Environmental Laws” beginning on page 147 of this Prospectus.
Damage to, or other potential losses involving, our assets may not be covered by insurance.
We maintain comprehensive property and liability insurance policies with coverage features and
insured limits that we believe are consistent with market practices in the retail industries in the
Philippines. Nonetheless, the scope of insurance coverage that we can obtain or our ability to obtain
such coverage at reasonable rates may be limited. For example, we do not currently carry fidelity
insurance, director and officer insurance or full business interruption insurance. Design, construction
or other latent property or equipment defects or deficiencies in our properties may require additional
capital expenditure, special repair or maintenance expenses or the payment of damages or other
obligations to third parties, that may not be covered by insurance. In addition, certain types of losses
such as terrorist acts, the outbreak of infectious disease or any resulting losses, may be uninsurable
or the required insurance premiums may be too expensive to justify obtaining insurance. In addition,
in the event of a substantial loss, the insurance coverage we carry may not be sufficient to pay the full
market value or replacement cost of our lost investment or that of our tenants or in some cases could
result in certain losses being uninsured. Accordingly, we could lose some or all of the capital we have
invested in a property, as well as the anticipated future revenue from that property, and we could
remain obligated for guarantees, debt, or other financial obligations related to such property. We do
not maintain product liability or full business interruption insurance.
Moreover, our insurance policies and terms of coverage will be subject to renewals and
negotiations on a periodic basis and there is no assurance that adequate insurance coverage will be
available on commercially reasonable terms in the future. Any material increase in insurance rates,
decrease in available coverage or any failure to maintain adequate insurance in the future could
adversely affect our business, financial condition and results of operations. See “Business — Retail
Management Policies and Infrastructure — Insurance” on page 122 of this Prospectus.
We may be subject to labor disputes, work stoppages, slowdowns, increased labor costs or liabilities
under the Labor Code.
Although we have not experienced any strikes, pickets or organizational conflicts that could have
affected our operations, there can be no assurance that we will not experience future disruptions to our
operations due to pickets, work stoppages, slowdowns or other concerted action by our workforce,
whether represented by labor unions or individually. In addition, we are subject to a variety of national
and local laws and regulations, including those relating to labor. Any actions that may be taken by
labor unions or federations having our employees as members could adversely affect our operations,
costs, or both. Any changes in labor laws and regulations could result in us having to incur substantial
additional costs to comply with increased minimum wage and other labor laws. The occurrence of any
of these events could be disruptive to our operations and materially and adversely affect our business,
financial condition and results of operations. See “Business — Retail Management Policies and
Infrastructure — Human Resources” beginning on page 123 of this Prospectus.
44
As a means of fulfilling some of our labor requirements, a significant portion of our workforce
is outsourced through third-party manpower agencies. Outsourcing carries with it certain inherent
risks including potential litigation from the employees of our third-party manpower service providers
who may claim an employer-employee relationship with us; and the risk that the current arrangements
we currently have in place are later on found by the Department of Labor and Employment to be
“labor-only contracting” which would have the consequence of effectively making us the employer of
the relevant employees and thus, obliging us to extend to the relevant employees the same salaries and
benefits we extend to our regular employees, which could have a significant impact on our labor costs.
As the principal in the outsourcing arrangement, we can also be held jointly and severally liable with
our third-party manpower service providers to the latter’s employees for unpaid wages for work
performed under their respective contracts, or for any violation by our manpower service providers of
the provisions of the Labor Code.
We are party to a number of related party transactions.
Certain companies controlled by the Vicsal Group have significant commercial transactions with
us, including leases for store spaces and purchases of goods, services and concession activities. Our
related party transactions are described in greater detail under “Related Party Transactions” and the
notes to our financial statements appearing elsewhere in this Prospectus.
Such interdependence may mean that any material adverse changes in the operations or financial
condition of the companies which are controlled by or under common control of the Metro Gaisano
Family could adversely affect our results of operations.
We expect that we will continue to enter into transactions with companies directly or indirectly
controlled by or associated with the Metro Gaisano Family. These transactions may involve potential
conflicts of interest which could be detrimental to us or our shareholders. Conflicts of interest may
also arise between the Metro Gaisano Family and us in a number of other areas relating to our
businesses, including:
•
major business combinations involving us;
•
plans to develop our respective businesses; and
•
business opportunities that may be attractive to both the Metro Gaisano Family and us.
Under Section 50 of the National Internal Revenue Code, in the case of two or more businesses
owned or controlled directly or indirectly by the same interests, the BIR Commissioner is authorized
to distribute, apportion, or allocate gross income or deductions between or among such businesses
upon determination of the necessity to prevent evasion of taxes or to clearly reflect the income of any
such business.
On January 23, 2013, the BIR issued Regulation No. 2-2013 on Transfer Pricing Regulations (the
“Transfer Pricing Regulations”) which adheres to the arm’s length methodologies set out under the
Organization for Economic Cooperation and Development Transfer Pricing Guidelines. The Transfer
Pricing Regulations are applicable to cross-border and domestic transactions between related parties
and associated enterprises. The BIR Transfer Pricing Regulations defines related parties as two or
more enterprises where one enterprise participates directly or indirectly in the management, control,
or capital of the other; or if the same persons participate directly or indirectly in the management,
control, or capital of the enterprises.
45
The arm’s length principle requires the transaction with a related party to be made under
comparable conditions and circumstances as a transaction with an independent party such that if two
related parties derive profits at levels above or below comparable market levels solely by reason of
the special relationship between them, the profits will be deemed as non-arm’s length. In such a case,
the BIR can make the necessary adjustments to the taxable profits of the related parties so as to reflect
the true value that would otherwise be derived on an arm’s length basis.
The Company has a number of related party transactions that have been entered into on an arm’s
length basis. However, we have no assurance if the BIR will view these transactions as arm’s length
on the basis of the Transfer Pricing Regulations.
We can provide no assurance that our level of related party transactions will not have an adverse
effect on our business or results of operations.
We are controlled by the Vicsal Group and our interests may differ significantly from the interests
of other shareholders.
We are controlled by the Vicsal Group. Directors and officers of the Vicsal Group also serve as
our directors and executive officers. There is nothing to prevent other companies that are controlled
by the Vicsal Group from engaging in activities that compete directly with our retail businesses or
activities, which could have a negative impact on our business. The interests of the Vicsal Group as
our controlling shareholders may differ significantly from or compete with our interests or the
interests of our other shareholders, and there can be no assurance that the Vicsal Group will exercise
influence over us in a manner that is in the best interests of our other shareholders. See “— We are
party to a number of related party transactions” on page 45 of this Prospectus.
Our business and operations are dependent upon key executives.
Our key executives and members of management have greatly contributed to our success with
their experience, knowledge, business relationships and expertise. If we are unable to fill any vacant
key executive or management positions with qualified candidates, our business, operating efficiency
and financial performance may be adversely affected.
For more information on our key personnel, see the profiles in the “Board of Directors and Senior
Management” section beginning on page 162 of this Prospectus.
Risks Relating to the Philippines
Our operations are concentrated in the Philippines, and therefore any downturn in general
economic conditions in the Philippines could have a material adverse impact on our business
operations.
As all of our business operations are conducted in the Philippines and our entire revenue is
sourced from the Philippines, the results of operations, financial condition and prospects are subject
to a significant degree to the general state of the Philippine economy. In the past, the Philippines has
experienced periods of slow or negative growth, high inflation, significant devaluation of the Peso and
the imposition of exchange controls. In addition, the global financial, credit and currency markets
have, since the second half of 2007, experienced, and may continue to experience, significant
dislocations and liquidity disruptions. These and other related events have had a significant impact on
the global capital markets and the global credit and financial markets as a whole. The related
slowdown in the economies of the United States, the European Union and certain Asian countries has
affected, and such slowdowns may adversely affect in the future, economic growth in the Philippines.
Our financial performance and results of operations are closely tied to the performance of OFW
remittances and the increase in BPO business in the Philippines, both of which depend to a significant
degree on the performance of the global economy.
46
Any deterioration in the Philippine economy as a result of these or other factors, including a
significant depreciation of the Peso or increase in interest rates, may adversely affect consumer
sentiment and lead to a reduction in demand for retail and consumer goods. This, in turn, could
materially and adversely affect our financial condition and results of operations, and our ability to
implement our business strategy and expansion plans.
The occurrence of natural disasters or other catastrophes, severe weather conditions, or outbreaks
of contagious diseases may materially adversely affect the Philippine economy and disrupt our
operations.
The Philippines has experienced a number of major natural catastrophes over the years, including
typhoons, droughts, floods, volcanic eruptions and earthquakes. In the past, these events have affected
our operating results. For example, in November 2013 Typhoon Haiyan caused significant damage to
one of our stores and disrupted operations at four other stores, causing a negative effect on our results
of operations. There can be no assurance that the occurrence of such catastrophes will not materially
disrupt our operations in the future. We could experience substantial inventory or property loss as a
result of any such catastrophes and might not be able to rebuild or restore operations in a timely
fashion. We maintain third-party insurance covering natural disasters such as fires, floods, typhoons
and earthquakes, but we do not maintain business interruption insurance. Therefore, the occurrence of
natural or other catastrophes or severe weather conditions could have an adverse effect on our
business, financial condition and results of operations.
In 2003, Taiwan, the People’s Republic of China, Singapore and other countries experienced an
outbreak of Severe Acute Respiratory Syndrome (“SARS”), which adversely affected the economies
of many countries in Asia, including the Philippines. In addition, since late 2003, a number of
countries in Asia, including the Philippines, as well as countries in other parts of the world, have had
confirmed cases of the highly pathogenic H5N1 strain of the avian influenza virus in birds. These
cases severely affected the poultry and related industries and resulted in the death or culling of large
stocks of poultry. In addition, certain countries in Southeast Asia have reported cases of bird to human
transmission of avian influenza resulting in numerous human deaths. In 2009, a new strain of the
H5N1 influenza virus, known as swine flu, was found to have been transmitted to humans. Following
an initial outbreak in Mexico, swine flu has been contracted by humans around the world, including
Southeast Asia, causing death in some instances. The contagious nature and global reach of this
disease led the World Health Organization to describe the outbreak as a pandemic.
Avian influenza, swine flu and SARS outbreaks have adversely affected, and any future
outbreaks of these diseases or other contagious diseases could adversely affect, the Philippine
economy and economic activity in the region and could have an adverse effect on our business,
prospects, financial condition and results of operations.
Continued terrorist activities and high-profile violent crime in the Philippines could destabilize the
country, adversely affecting our business environment.
The Philippines has been subject to a number of terrorist attacks in the past several years. The
Philippine army has been in conflict with the Abu Sayyaf organization which has been identified as
being responsible for kidnapping and terrorist activities in the Philippines, and is also alleged to have
ties to the Al-Qaeda terrorist network. There have been sporadic bombings and prominent kidnappings
and slayings of foreigners in the Philippines. In 2010, the hijacking of a tourist bus carrying Hong
Kong tourists that resulted in the deaths of several passengers took place. The Government, through
the Armed Forces of the Philippines (“AFP”), has clashed with members of several separatist groups
seeking greater autonomy, including the Moro Islamic Liberation Front (“MILF”), the Moro National
Liberation Front (“MNLF”) and the New People’s Army. On October 19, 2011, 19 AFP troops were
killed in a firefight with MILF members in the southern region of the Philippines. On December 16,
2011, five AFP soldiers were killed in a clash with New People’s Army members. In August, 2013, a
series of bombings occurred in the cities of Cagayan de Oro and Cotabato City, as well as other areas
in Maguindanao and North Cotabato provinces, all located in Mindanao, and in September, 2013,
47
armed clashes took place between the MNLF and the AFP in Zamboanga City in Mindanao, with a
number of civilians held hostage. On January 25, 2015, 44 members of the Special Action Force
(“SAF”) of the Philippine National Police were killed in a clash between the SAF and the MILF and
Bangsamoro Islamic Freedom Fighters. These could have a negative impact on our business since
department stores, supermarkets and retail stores may be particularly vulnerable to and adversely
affected by terrorist attacks and high-profile violent crime because of the pedestrian flow and general
public access. The occurrence of a terrorist attack or high-profile violent crime at any one of our
department stores, supermarkets or retail stores, in particular, could have a significant adverse effect
on our business. There can be no assurance that the Philippines will not be subject to further acts of
terrorism in the future, and violent acts arising from, and leading to, instability and unrest may have
an adverse effect on us and our financial condition, results of operations and prospects.
Territorial and other disputes with China and a number of Southeast Asian countries may disrupt
the Philippine economy and business environment.
The Philippines, China and several Southeast Asian nations have been engaged in a series of
longstanding territorial disputes over certain islands in the West Philippine Sea, also known as the
South China Sea. Despite efforts to reach a compromise, a dispute arose between the Philippines and
China over a group of small islands and reefs known as the Scarborough Shoal. In April and May 2012,
the Philippines and China accused one another of deploying vessels to the shoal in an attempt to take
control of the area, and both sides unilaterally imposed fishing bans at the shoal during the late spring
and summer of 2012. These actions threatened to disrupt trade and other ties between the two
countries, including a temporary ban by China on Philippine banana imports, as well as a temporary
suspension of tours to the Philippines by Chinese travel agencies. Since July 2012, Chinese vessels
have reportedly turned away Philippine fishing boats attempting to enter the shoal, and the Philippines
has continued to protest China’s presence there. In January 2013, the Philippines sent notice to the
Chinese embassy in Manila that it intended to seek international arbitration to resolve the dispute
under the United Nations Convention on the Law of the Sea. China has rejected and returned the notice
sent by the Philippines requesting arbitral proceedings. Despite China’s rejection, in July 2015, the
arbitral tribunal proceeded to hold a hearing on the jurisdiction and admissibility of the dispute.
China, however, refused to participate in the hearing. Chinese vessels have also recently confronted
Philippine vessels in the area, and the Chinese government has warned the Philippines against what
it calls provocative actions. Recent talks between the Government of the Philippines and the United
States of America about increased American military presence in the country, particularly through
possible American forays into and use of Philippine military installations, may further increase
tensions.
In early March 2013, several hundred armed Filipino-Muslim followers of Sultan Jamalul Kiram
III, the self-proclaimed Sultan of Sulu from the south of the Philippines, illegally entered Lahad Datu,
Sabah, Malaysia in a bid to enforce the Sultan of Sulu’s historical claim on the territory. As a result
of the illegal entry, these followers engaged in a three-week standoff with the Malaysian armed forces,
resulting in casualties on both sides. Clashes between the Malaysian authorities and followers of the
Sultan of Sulu have killed at least 98 Filipino-Muslims and 10 Malaysian policemen army since March
1, 2013. In addition, about 4,000 Filipino-Muslims working in Sabah have reportedly returned to the
southern Philippines.
On May 9, 2013, a Philippine Coast Guard ship opened fire on a Taiwanese fisherman’s vessel
in a disputed exclusive economic zone between Taiwan and the Philippines, killing a 65-year old
Taiwanese fisherman. Although the Philippine government maintained that the loss of life was
unintended, Taiwan imposed economic sanctions on the Philippines in the aftermath of the incident.
Taiwan eventually lifted the sanctions in August 2013 after a formal apology was issued by the
Government of the Philippines. However, the incident has raised tensions between the two countries.
Should territorial disputes between the Philippines and other countries in the region continue or
further escalate, the Philippines and its economy may be disrupted and the Company’s operations
could be adversely affected as a result. In particular, further disputes between the Philippines and
48
other countries may lead to reciprocal trade restrictions on the other’s imports or suspension of
visa-free access and/or OFW permits. Any impact from these disputes in countries in which the
Company has operations could materially and adversely affect the Company’s business, financial
condition and results of operations.
Any political instability in the Philippines may adversely affect our business operations.
The Philippines has from time to time experienced political and military instability. The
Philippine Constitution provides that in times of national emergency, when the public interest so
requires, the Government may take over and direct the operation of any privately owned public utility
or business. In the last few years, there has been political instability in the Philippines, including
public and military protests arising from alleged misconduct by the previous administration. In
December 2011, the House of Representatives initiated impeachment proceedings against Renato
Corona, Chief Justice of the Supreme Court of the Philippines for improperly issuing decisions that
favored former President Arroyo, as well as for the failure to disclose certain properties, in violation
of rules applicable to public employees and officials. In July 2013, a major Philippine newspaper
reported the diversion and misuse of the Priority Development Assistance Fund by some members of
Congress through pseudo-development organizations headed by Janet Lim Napoles, which prompted
a number of investigations, including one in the Senate, on certain individuals. In September 2013,
cases of plunder and malversation of public funds were filed with the Office of the Ombudsman
against Janet Lim Napoles, three Senators, a few members of the House of Representatives and other
Government personnel. In July 2014, a valid impeachment complaint, endorsed by three
representatives from the House of Representatives, against President Aquino over his controversial
budget spending program, the Disbursement Acceleration Program, was filed, and the House
Committee on Justice has been mandated to handle the complaint. No assurance can be given that the
political environment in the Philippines will stabilize and any political instability in the future could
reduce consumer demand for retail and consumer goods to our disadvantage, or result in inconsistent
or sudden changes in regulations and policies that affect our business operations, which could have
an adverse effect on our results of operations and financial condition.
The sovereign credit ratings of the Philippines may adversely affect the Company’s business.
Historically, the Philippines’ sovereign debt has been rated relatively low by international credit
rating agencies. Although the Philippines’ long-term foreign currency-denominated debt was recently
upgraded by each of Standard & Poor’s, Fitch Ratings and Moody’s to investment-grade, no assurance
can be given that Standard & Poor’s, Fitch Ratings or Moody’s or any other international credit rating
agency will not downgrade the credit ratings of the Government in the future and, therefore, Philippine
companies. Any such downgrade could have an adverse impact on the liquidity in the Philippine
financial markets, the ability of the Government and Philippine companies, including the Company,
to raise additional financing and the interest rates and other commercial terms at which such additional
financing is available.
Future changes in the value of the Peso against the U.S. dollar, Renminbi and other currencies may
adversely affect our results of operations
We purchase imported products from the U.S., China, Europe and other Asian countries through
our local distributors and imported raw materials are used in some of the locally produced
merchandise we purchase from our suppliers. Additionally, we operate foreign exchange businesses in
our retail stores and use foreign currency obtained in connection with this business to purchase
imported products. Fluctuations in the exchange rate between the Peso and foreign currencies,
particularly the U.S. dollar and Renminbi, will therefore affect our net profit margins and may result
in net foreign currency gains or losses. There is no assurance that the exchange rate of the Peso will
remain stable against the U.S. dollar, Renminbi or any other foreign currency in the future. Any
significant changes in the exchange rate between the Peso against the U.S. dollar, Renminbi or any
other foreign currencies may adversely affect our results of operations. At present, the country’s
49
exchange rate policy supports a freely floating exchange rate system whereby the BSP leaves the
determination of the exchange rate to market forces. Under a market-determined exchange rate
framework, the BSP does not set the foreign exchange rate but instead allows the value of the Peso
to be determined by the supply and demand of foreign exchange.
Investors may face difficulties enforcing judgments against the Company.
It may be difficult for investors to enforce judgments against the Company obtained outside of
the Philippines. In addition, all of the directors and officers of the Company are residents of the
Philippines, and all or a substantial portion of the assets of such persons are located in the Philippines.
As a result, it may be difficult for investors to effect service of process upon such persons, or to
enforce against them judgments obtained in courts or arbitral tribunals outside the Philippines
predicated upon the laws of jurisdictions other than the Philippines.
The Philippines is party to the United Nations Convention on the Enforcement and Recognition
of Arbitral Awards, but it is not party to any international treaty relating to the recognition or
enforcement of foreign judgments. Nevertheless, the Philippine Rules of Civil Procedure provide that
a judgment or final order of a foreign court is, through the institution of an independent action,
enforceable in the Philippines as a general matter, unless there is evidence that: (i) the foreign court
rendering judgment did not have jurisdiction; (ii) the judgment is contrary to the laws, public policy,
customs or public order of the Philippines; (iii) the party against whom enforcement is sought did not
receive notice; or (iv) the rendering of the judgment entailed collusion, fraud, or a clear mistake of
law or fact.
Risks Relating to the Offer Shares
There has been no prior market for the Shares, so there may be no liquidity in the market for the
Offer Shares and the price of the Offer Shares may fall.
The Metro Gaisano Family beneficially owned 100% of the Shares as of June 30, 2015 and,
following the Offer, will beneficially own at least 70.96% of the outstanding Shares on a fully diluted
basis (assuming Shares are sold pursuant to the full exercise of the Over-allotment Option). As there
has been no prior trading in the Shares, there can be no assurance that an active market for the Offer
Shares will develop following the Offer or, if developed, that such market will be sustained.
The Offer Price has been determined after taking into consideration a number of factors
including, but not limited to, our prospects, the market prices for shares of companies engaged in
related businesses similar to that of our business and prevailing market conditions. The price at which
the Shares will trade on the PSE at any point in time after the Offer may vary significantly from the
Offer Price.
The market price of the Shares may be volatile, which could cause the value of investors’
investments in the Shares to decline.
The market price of Shares could be affected by several factors, including:
•
general market, political and economic conditions;
•
changes in earnings estimates and recommendations by financial analysts;
•
changes in market valuations of listed stocks in general and other retail stocks in particular;
•
the market value of our assets;
50
•
changes to Government policy, legislation or regulations; and
•
general operational and business risks.
In addition, many of the risks described elsewhere in this Prospectus could materially and
adversely affect the market price of the Shares.
In part as a result of the global economic downturn, the global equity markets have experienced
price and volume volatility that has affected the share prices of many companies. Share prices for
many companies have experienced wide fluctuations that have often been unrelated to the operating
performance of those companies. Fluctuations such as these may adversely affect the market price of
the Shares.
There can be no guarantee that the Offer Shares will be listed on the PSE.
Purchasers of Offer Shares will be required to pay for such Offer Shares on the Trading
Participants and Retail Offer Settlement Date, which is expected to be on or about November 13, 2015
and on the Institutional Offer Settlement Date, which is expected to be on or about November 17,
2015. There can be no guarantee that listing will occur on the anticipated Listing Date or at all. Delays
in the admission and the commencement of trading in shares on the PSE have occurred in the past. If
the PSE does not admit the Offer Shares onto the PSE, the market for the Offer Shares will be illiquid
and shareholders may not be able to trade the Offer Shares. This may materially and adversely affect
the value of the Offer Shares.
Future sales of Shares in the public market could adversely affect the prevailing market price of the
Shares and shareholders may experience dilution in their holdings.
In order to finance the expansion of our business and operations, the Board will consider the
funding options available to them at the time, which may include the issue of new Shares. If additional
funds are raised by us through the issuance of new equity or equity-linked securities other than on a
pro rata basis to existing shareholders, the percentage ownership of existing shareholders may be
reduced, shareholders may experience subsequent dilution or such securities may have rights,
preferences and privileges senior to those of the Offer Shares.
Further, the market price of the Shares could decline as a result of future sales of substantial
amounts of the Shares in the public market or the issuance of new Shares, or the perception that such
sales, transfers or issuances may occur. This could also materially and adversely affect the prevailing
market price of the Shares or our ability to raise capital in the future at a time and at a price we deem
appropriate.
The PSE rules require existing shareholders owning at least 10% of the outstanding shares of a
company not to sell, assign or in any manner dispose of their shares for a period of 180 days after the
listing of the shares. In addition, all shares issued or transferred within 180 days prior to the
commencement of the Offer at an issue price less than the price per Offer Share shall be subject to
a lock-up period of at least 365 days from the date that full payment is made on such Shares, as
required by the PSE. To implement this lock-up requirement, the PSE requires the applicant company
to lodge the shares with the PDTC through a PCD participant for the electronic lock-up of the shares
or to enter into an escrow agreement with the trust department or custodian unit of an independent and
reputable financial institution.
51
In addition to the lock-up obligations required by the PSE, we and each of the Selling
Shareholders have agreed with the Joint Global Coordinators that, other than in connection with the
Over-allotment Option, and the issuance of stock dividends, for a period of 180 days after the First
Closing Date, neither we nor any person acting on our behalf will, without the prior written consent
of the Joint Global Coordinators, issue, offer, sell, contract to sell, pledge or otherwise dispose of (or
publicly announce any such issuance, offer, sale or disposal of) any Shares or securities convertible
or exchangeable into or exercisable for Shares or warrants or other rights to purchase Shares or any
security or financial product whose value is determined directly or indirectly by reference to the price
of the underlying securities, including equity swaps, forward sales and options.
Moreover, a listed company on the PSE shall be prohibited from offering additional securities,
except offerings for stock dividends and employees stock option plan, within 180 calendar days from
the date of initial listing.
Except for such restrictions, there is no restriction on our ability to issue Shares or the ability
of any of our shareholders to dispose of, encumber or pledge, their Shares, and there can be no
assurance that we will not issue Shares or that such shareholders will not dispose of, encumber or
pledge, their Shares.
Investors may incur immediate and substantial dilution as a result of purchasing Shares in the
Offer.
The issue price of the Shares in the Offer may be substantially higher than the net tangible book
value of net assets per share of the outstanding Shares. Therefore, purchasers of Shares in the Offer
may experience immediate and substantial dilution and our existing shareholders may experience a
material increase in the net tangible book value of net assets per share of the Shares they own. See
“Dilution” on page 64 of this Prospectus.
Shareholders may be subject to limitations on minority shareholders’ rights and regulations may
differ from those in more developed countries.
Our corporate affairs are governed by our Articles of Incorporation and By-Laws and the
Philippine Corporation Code. The laws of the Philippines relating to the protection of interests of
minority shareholders differ in some respects from those established under the laws of more developed
countries. Such differences may mean that our minority shareholders may have less protection than
they would have under the laws of more developed countries. The obligation under Philippine law of
majority shareholders and directors with respect to minority shareholders may be more limited than
those in certain other countries such as the United States or the United Kingdom. Consequently,
minority shareholders may not be able to protect their interests under current Philippine law to the
same extent as in certain other countries.
The Philippine Corporation Code, however, provides for minimum minority shareholders
protection in certain instances wherein a vote by the shareholders representing at least two-thirds of
the Company’s outstanding capital stock is required. See “Description of the Shares — Fundamental
Matters” on page 179 of this Prospectus. The Philippine Corporation Code also grants shareholders an
appraisal right allowing a dissenting shareholder to require the corporation to purchase his shares in
certain instances. See “Description of the Shares — Appraisal Rights” on page 175 of this Prospectus.
Derivative actions are rarely brought on behalf of companies in the Philippines. Accordingly, there can
be no assurance that legal rights or remedies of minority shareholders will be the same, or as
extensive, as those available in other jurisdictions or sufficient to protect the interests of minority
shareholders.
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There can be no assurance that we will be able to pay dividends or maintain any given level of
dividends.
If our retail investments and any of our other assets held by us from time to time do not generate
sufficient net operating profit, our income and resulting ability to pay dividends will be adversely
affected. Dividends shall be declared and paid out of our unrestricted retained earnings, which shall
be payable in cash, property or stock to all shareholders on the basis of outstanding stock held by
them. On April 13, 2015, our Board of Directors approved and adopted an annual dividend payment
ratio of approximately 20% of our net income after tax for the preceding fiscal year, payable in cash,
property or shares, subject to the requirements of applicable laws and regulations, and circumstances
which restrict the payment of dividends. The Board may, at any time, modify such dividend payout
ratio taking into consideration various factors including: the level of our cash earnings, return on
equity and retained earnings; our results for, and our financial condition at the end of, the year in
respect of which the dividend is to be paid and its expected financial performance; the projected levels
of capital expenditure and other investment plans; restrictions of payment of dividends that may be
imposed on us by any of our financing arrangements and current and prospective debt service
requirements; and such other factors as the Board deems appropriate. See “Dividends and Dividend
Policy” beginning on page 59 of this Prospectus.
No assurance can be given as to our ability to make or maintain dividends. Nor is there any
assurance that the level of dividends will increase over time, or that acquisition of additional retail
properties or increases in revenues from wholesale and retail investments will increase our income
available for dividends to shareholders.
The Shares may be subject to Philippine foreign ownership limitations, if we acquire land in the
Philippines.
The Philippine Constitution and related statutes restrict land ownership to Philippine Nationals.
The term “Philippine National” as defined under the Foreign Investments Act, means a citizen of the
Philippines, or a domestic partnership or association wholly-owned by citizens of the Philippines, or
a corporation organized under the laws of the Philippines of which at least 60% of the capital stock
outstanding and entitled to vote is owned and held by citizens of the Philippines, or a corporation
organized abroad and registered to do business in the Philippines under the Philippine Corporation
Code, of which 100% of the capital stock outstanding and entitled to vote is wholly-owned by
Filipinos or a trustee of funds for pension or other employee retirement or separation benefits, where
the trustee is a Philippine national and at least 60% of the fund will accrue to the benefit of Philippine
nationals. As of the date of this Prospectus, we do not own land in the Philippines. However, this does
not preclude us from acquiring land in the Philippines in the future should the demand of our
operations so requires.
Considering the foregoing, in the event that we acquire land in the Philippines and for so long
as we continue to own land in the Philippines, foreign ownership in our capital stock is limited to a
maximum of 40% of our issued and outstanding capital stock. We cannot allow the issuance or the
transfer of shares to persons other than Philippine Nationals and cannot record transfers in our books
if such issuance or transfer would result in us ceasing to be a Philippine National for purposes of
complying with the restrictions on foreign land ownership discussed above. These restrictions may
adversely affect the liquidity and market price of the Shares to the extent international investors are
not permitted to purchase Shares in normal secondary transactions.
Future changes in the value of the Peso against the U.S. dollar and other currencies will affect the
foreign currency equivalent of the value of the Shares and any dividends.
Fluctuations in the exchange rate between the Peso and other currencies will affect the foreign
currency equivalent of the Peso price of the Shares on the PSE. Such fluctuations will also affect the
amount in foreign currency received upon conversion of cash dividends or other distributions paid in
Pesos by us on, and the Peso proceeds received from any sales of, the Shares.
53
Risks Relating to the Presentation of Information in this Prospectus
Certain information contained herein is derived from unofficial publications.
Certain information in this Prospectus relating to the Philippines, the industries in which we
compete and the markets in which we operate, including statistics relating to market size, is derived
from various Government and private publications. This Prospectus also contains industry information
which was prepared from available public sources and independent market research conducted by
Euromonitor to provide an overview of the retail industries in which the Company’s businesses
operate. The information contained in that section may not be consistent with other information
regarding the Philippine retail industry. Similarly, industry forecasts and other market research data,
including those contained or extracted herein, have not been independently verified by us nor the Joint
Global Coordinators, nor any of their respective affiliates or advisors, and may not be accurate,
complete, up to date or consistent with other information compiled within or outside the Philippines.
Prospective investors are cautioned accordingly.
54
USE OF PROCEEDS
We estimate that the net proceeds from the Firm Offer will be approximately =
P 3,376.7 million
(U.S.$74.7 million) after deducting the applicable underwriting fees, costs and expenses for the Offer
payable by us. We will not receive any proceeds from the sale of the Optional Shares by the Selling
Shareholders. Taxes, issue management, underwriting and selling fees and certain other fees and
expenses pertaining to the sale of Optional Shares will be paid by the Selling Shareholders.
We intend to use the majority of the net proceeds from the Firm Offer to fund capital
expenditures in connection with the establishment of new stores. We intend to use the remainder of
the net proceeds from the Firm Offer to fund the establishment of a consolidated logistics and
distribution center in the Province of Cebu and for working capital requirements. Further details of
our proposed use of proceeds, which is budgeted at =
P 3,376.7 million are as follows:
Proposed use
Budgeted amount
Proposed timing
(=
P in millions)
of disbursement
Expansion of store network .................................................................................
2,397.5
2016-2017
Logistics and distribution center ..........................................................................
776.6
2016-2017
Working capital requirements ...............................................................................
202.6
2016-2017
Total ...................................................................................................................
3,376.7
Expansion of Store Network
We intend to expand our current store network by opening new stores and acquiring existing
retail chains. To this end, we intend to use approximately 71% of the net proceeds from the Firm Offer
to fund the capital requirements required for the new stores such as, but not limited to, land, building
and leasehold improvements; store fit-outs and fixtures; and equipment.
We plan to open at least seven stores in 2016. We have secured 10 sites for stores that are
expected to open between 2016 and 2017. Particularly, there are two stores planned in Central Visayas,
one store in Eastern Visayas, five stores in Western Visayas, and two stores in Metro Manila. In
addition to the foregoing, we have 30 new sites under evaluation, located both in the Visayas and
Luzon regions. For Luzon, we are evaluating four potential sites in Metro Manila, five potential sites
in Southern Luzon, and five potential sites in Central Luzon. For Visayas, we are evaluating five
potential sites in Central Visayas, five potential sites in Eastern Visayas, and six potential sites in
Western Visayas.
Land, building, and leasehold improvements
Expenses for land, buildings and leasehold improvements include, but are not limited to, the
following: land acquisition cost (if purchased); mechanical, electrical, plumbing, fire protection, civil
structural and architectural works; project management, quantitative surveyor and other external
consultant fees, as well as all expenses relating to securing necessary operating permits and licenses.
Store fit-outs and fixtures
Expenses for store fit-outs and fixtures are expected to include, among other items, the
following: all equipment and fixtures found in the selling, services, back office, and ancillary areas
of the store; selling area and display fixtures including gondolas, modules, and display racks; and
checkout counters, table counters, shopping baskets and pushcarts, warehouse and office fixtures
(including pallet storage racks, steel lockers and office furnishings).
55
Equipment
Expenses for equipment are expected to include, among others, the following items: conveying
system, vertical transport equipment, cold room and refrigeration system for storage and transport of
goods, meat processors, cutleries, stainless fabrications for food and fresh preparations; generator set;
bill counters; safe vaults; desktop computers; systems for security purposes; data cablings; and
information systems on merchandising, supplier management, warehouse management and human
resource management.
We are actively seeking out opportunities to acquire existing retail stores to add to our current
store network.
Logistics and Distribution Center
We are migrating from an outsourced supply chain process to a Company-controlled supply chain
management system in order to increase the efficiency and reliability of our supply operations. As
such, we intend to use approximately 23% of the net proceeds from the Firm Offer to fund the capital
requirements required to establish a consolidated distribution center in Cebu and to build an in-house
trucking operation.
We intend to incur expenses relating to land, building, and leasehold improvements for our
warehouse; handling; and storage.
Land, building, and leasehold improvements for our warehouse
Expenses for land, buildings and leasehold improvements include, but are not limited to: land
acquisition cost (if purchased); mechanical, electrical, plumbing, fire and safety protection, civil,
structural and architectural works; project management, quantitative surveyor and other external
consultant fees, as well as expenses relating to operating permits and licenses.
The warehouse is expected to be used for products that require ambient, frozen, chilled and
air-conditioned facilities.
Handling
Expenses for handling include all costs associated with equipment used to handle products stored
in the warehouse, such as material handling equipment and its attachments, conveyors, ladders, and
pallets.
Handling also includes all expenses associated with moving the product in and out of the
warehouse, and expenses for put-away, picking, loading and shipment.
Storage
Expenses for storage includes all costs associated with the equipment for storing inventory such
as racks, shelves and storage cages.
The capital requirements to build an in-house trucking capability would be allocated and used
for, but not limited to, expenses associated with the purchase of prime mover, container vans, chassis,
trucks and all associated tools, operating and maintenance equipment. The transport fleet will transfer
various products from the supplier-warehouse to store, and to the customer. These products include,
but are not limited to, general merchandise, supermarket, and fresh items.
56
Working Capital Requirements
The balance of the net proceeds from the Firm Offer shall be used to fund our working capital
requirements. Approximately 6% of the net proceeds from the Firm Offer will be allocated to partially
finance the Company’s receivables and inventory.
The foregoing discussion represents an estimate of our net proceeds from the Firm Offer based
on current plans and anticipated expenditures. Actual allocation of net proceeds by us may vary from
the foregoing discussion as management may find it necessary or advisable to reallocate the net
proceeds within the categories described above or to use such net proceeds for working capital
purposes.
We estimate that the total expenses for the Firm Offer will be approximately =
P 235.7 million,
consisting of:
Estimated Amounts
(=
P millions)
Total proceeds from the Offer ..........................................................................................................
3,612.4
Expenses:
Underwriting and selling fees for the Firm Shares (including fees to be paid to the
Joint Global Coordinators) ..............................................................................................................
83.1
Taxes to be paid .................................................................................................................................
76.8
Philippine SEC registration, filing and research fee ............................................................................
2.6
PSE listing and processing fee ............................................................................................................
15.4
Estimated professional fees (including legal, accounting and financial advisory fees) .........................
47.3
Estimated other expenses ....................................................................................................................
10.5
Total estimated expenses ...................................................................................................................
235.7
Estimated net proceeds from the Offer (excluding the Over-allotment Option)..............................
3,376.7
We estimate that in the event that the Over-Allotment Option is exercised, the Selling
Shareholders will incur underwriting expenses and taxes in an aggregate amount of =
P 23.2 million.
The Selling Shareholders will not be responsible for any of the expenses enumerated in the table
above.
The proposed use of proceeds described above represents best estimates of the use of net
proceeds of the Firm Offer based on our current plans and expenditures. Other than as described
above, no part of the net proceeds from the Firm Offer shall be used to acquire assets or finance the
acquisition of other businesses, or to reimburse any officer, director, employee or shareholder of the
Company for services rendered, assets previously transferred, money loaned or advanced, or
otherwise. The actual amount and timing of disbursement of the net proceeds from the Firm Offer for
the uses stated above will depend on various factors which include, among others, changing market
conditions or new information regarding the cost or feasibility of our expansion projects. Our cost
estimates may change as we develop our plans, and actual costs may be different from our budgeted
costs. To the extent that the net proceeds from the Firm Offer are not immediately applied to the above
purposes, we will invest the net proceeds in interest-bearing short term demand deposits and/or money
market instruments, and/or repay existing debt. None of the proceeds from the Firm Offer will be used
to repay any debts of the Company with the Joint Global Coordinators. In the event of any deviation,
adjustment or reallocation in the planned use of proceeds, we shall inform the PSE in writing at least
30 days before such deviation, adjustment or reallocation is implemented. Any material or substantial
57
adjustments to the use of proceeds, as indicated above, should be approved by the Board and disclosed
to the PSE. In addition, we shall submit via the PSE’s Electronic Disclosure Generation Technology
(“PSE EDGE”) the following disclosure to ensure transparency in the use of proceeds:
(i)
any disbursements made in connection with the planned use of proceeds from the Firm
Offer;
(ii)
quarterly progress report on the application of the proceeds from the Firm Offer on or
before the first 15 days of the following quarter; the quarterly progress reports should be
certified by the Company’s Chief Financial Officer or Treasurer and external auditor;
(iii) annual summary of the application of the proceeds on or before January 31 of the following
year; the annual summary report should be certified by the Company’s Chief Financial
Officer or Treasurer and external auditor; and
(iv) approval by the Board of any reallocation on the planned use of proceeds, or any change
in the Work Program. The actual disbursement or implementation of such reallocation must
be disclosed by the Company at least 30 days prior to the said actual disbursement or
implementation.
The quarterly and annual reports required in items (ii) and (iii) above must include a detailed
explanation for any material variances between the actual disbursements and the planned use of
proceeds in the Prospectus, if any. The detailed explanation must state the approval of the Board as
required in item (iv) above.
58
DIVIDENDS AND DIVIDEND POLICY
The Company is authorized to declare dividends. A cash dividend declaration does not require
any further approval from shareholders. Each holder of Shares will be entitled to such dividends as
may be declared by the Board, provided that any stock dividends declaration requires the further
approval of shareholders holding at least two thirds of the Company’s total outstanding capital stock,
which refers to the total shares of stock subscribed, whether paid in full or not, except treasury shares.
The Company may declare dividends only from its unrestricted retained earnings, representing the net
accumulated earnings of the Company with its unimpaired capital, which are not appropriated for any
other purpose.
In relation to foreign shareholders, dividends payable may not be remitted using foreign
exchange sourced from the Philippine banking system unless the investment was first registered with
the BSP. See “Philippine Foreign Exchange Controls” on page 187 of this Prospectus.
The Company is allowed under Philippine laws to declare property and stock dividends, subject
to certain requirements. See “Description of the Shares — Dividend Rights” on page 174 of this
Prospectus.
Limitations and Requirements
Under Philippine law, a corporation can only declare dividends to the extent that it has
unrestricted retained earnings that represent the undistributed earnings of the corporation which have
not been allocated for any managerial, contractual or legal purpose and which are free for distribution
to the shareholders as dividends. A corporation may pay dividends in cash, by the distribution of
property or by the issuance of shares. Stock dividends may only be declared and paid with the approval
of shareholders representing at least two-thirds of the outstanding capital stock of the corporation
voting at a shareholders’ meeting duly called for the purpose.
The Philippine Corporation Code generally requires a Philippine corporation with retained
earnings in excess of 100% of its paid-in capital to declare and distribute as dividends the amount of
such surplus. Notwithstanding this general requirement, a Philippine corporation may retain all or any
portion of such surplus in the following cases: (i) when justified by definite expansion plans approved
by the board of directors of the corporation; (ii) when prohibited under any loan agreement with any
financing institution or credit, and the consent of such financing institution or creditor’s consent has
not been secured; (iii) when retention is necessary under special circumstances, such as when there
is a need for special reserves for probable contingencies; or (iv) when the non-distribution of
dividends is consistent with the policy or requirement of a Government office.
Record Date
Pursuant to existing Philippine SEC rules, cash dividends declared by corporations whose
securities are registered or whose shares are listed in the stock exchange must have a record date not
less than 10 nor more than 30 days from the date of declaration. For stock dividends, the record date
should not be less than 10 nor more than 30 days from the date of the shareholders’ approval, provided
however, that the set record date is not to be less than 10 trading days from receipt by the PSE of the
notice of declaration of stock dividend. In the event that a stock dividend is declared in connection
with an increase in authorized capital stock, the corresponding record date is to be fixed by the
Philippine SEC. In case no record date is specified for the cash and stock dividend declaration, then
the same shall be deemed fixed at fifteen (15) days from such declaration.
59
Dividend History
The tables below set out the dividends we declared in the last three years.
Cash Dividend
Year
Price per Share
2015 .................................................... =
P 0.2575 per share
Record Date
Payment Date
Amount Paid
July 10, 2015
Sept. 18, 2015
=
P 325
million
Dec. 18, 2015
=
P 325
million
Stock Dividend
Year
Record Date
Rate
No. of Shares
Payment Date
2010 ....................................................
June 15, 2010
96%
24,000,000
July 5, 2010
Dividend Policy
Under Section 3 Article VIII of the Amended By-Laws, dividends shall be declared and paid out
of the unrestricted retained earnings, which shall be payable in cash, property or stock to all
stockholders on the basis of outstanding stock held by them, as often and at such times as the Board
of Directors may determine and in accordance with law.
On April 13, 2015, our Board of Directors approved and adopted an annual dividend payment
ratio of approximately 20% of our net income after tax for the preceding fiscal year, payable in cash,
property or shares, subject to the requirements of applicable laws and regulations, and circumstances
which restrict the payment of dividends, including but not limited to undertaking major projects and
developments which require substantial cash expenditures, or restrictions due to loan covenants.
The Board may, at any time, modify such dividend payout ratio taking into consideration various
factors including: the level of our cash earnings, return on equity and retained earnings; our results
for, and our financial condition at the end of, the year in respect of which the dividend is to be paid
and its expected financial performance; the projected levels of capital expenditure and other
investment plans; restrictions of payment of dividends that may be imposed on us by any of our
financing arrangements and current and prospective debt service requirements; and such other factors
as the Board deems appropriate.
60
EXCHANGE RATES
Fluctuations in the exchange rates between the Peso and the US dollar and other foreign
currencies will affect the equivalent in US dollars and such other foreign currencies of the Peso price
of the Shares on the PSE, of dividends distributed in Pesos by the Company, if any, and of the Peso
proceeds received by investors on a sale of the Shares on the PSE, if any. Fluctuations in such
exchange rates will also affect the Peso value of the Company’s assets and liabilities which are
denominated in currencies other than Pesos, if any.
The PDS, a computer network supervised by the BSP, through which the members of the Bankers
Association of the Philippines effect spot and forward currency exchange transactions, was introduced
in 1992. The PDS was adopted by the BSP as a means to monitor foreign exchange rates. The BSP Rate
is the closing spot rate for the purchase of U.S. dollars with Pesos, which is quoted on the PDS and
published in the BSP’s Reference Exchange Rate Bulletin and major Philippine financial press on the
following business day. On October 16, 2015, the closing spot rate quoted on PDS was =
P 45.796 =
U.S.$1.00.
The following table sets forth certain information concerning the BSP Rate between the Peso and
the U.S. dollar for the periods and dates indicated, expressed in Pesos per U.S.$1.00:
Peso/U.S. dollar exchange rate
Year
Period end
Average (1)
High (2)
Low (3)
2010 ........................................................................
43.885
45.110
46.983
42.516
2011 ........................................................................
43.928
43.313
44.585
41.955
2012 ........................................................................
41.192
42.229
44.246
40.862
2013 ........................................................................
44.414
42.446
44.660
40.569
2014 ........................................................................
44.617
44.395
45.406
43.280
44.132
44.604
45.064
44.082
2015
January ................................................................
February ..............................................................
44.087
44.221
44.396
44.053
March ..................................................................
44.796
44.446
44.831
44.082
April....................................................................
44.250
44.414
44.725
44.213
May .....................................................................
44.650
44.611
44.796
44.512
June .....................................................................
45.200
44.983
45.261
45.549
July .....................................................................
45.618
45.265
45.618
45.074
August ................................................................
46.705
46.142
46.797
45.674
September ............................................................
46.926
46.750
46.988
46.493
October (through October 16, 2015) ....................
45.796
46.281
46.831
45.796
(1)
Weighted average rate under the Philippine Dealing System (“PDS”) starting August 4, 1992.
(2)
Highest closing exchange rate for the period.
(3)
Lowest closing exchange rate for the period.
Source: Reference Exchange Rate Bulletin, Treasury Department of the BSP.
61
DETERMINATION OF THE OFFER PRICE
The Offer Price has been set at =
P 3.99 per Offer Share. The Offer Price was determined through
a book-building process and discussions among the Company and the Joint Global Coordinators. Since
the Shares have not been listed on any stock exchange, there has been no market price for Shares
derived from day-to-day trading.
The factors considered in determining the Offer Price were, among others, our ability to generate
earnings and cash flow, our short and long term prospects, the level of demand from institutional
investors, overall market conditions at the time of launch of the Offer and the market price of
comparable listed companies. The Offer Price does not have any correlation to the actual book value
of the Offer Shares.
62
CAPITALIZATION AND SHORT-TERM DEBT
The following table sets out our short-term debt, long-term debt, equity and capitalization as of
June 30, 2015, and as adjusted to reflect the sale of Firm Shares at the Offer Price of =
P 3.99 per Offer
=
Share and the cash dividends declared on July 27, 2015 amounting to P 650.0 million. The table should
be read in conjunction with our audited financial statements and the notes thereto, included in this
Prospectus beginning on page F-1. Other than as described below, there has been no material change
in our capitalization since June 30, 2015.
As Adjusted After
Actual
Giving Effect to the Offer and
as of June 30, 2015
the Dividends Declaration (1)
(=
P in
(U.S.$ in
millions)
millions)
(2)
(Audited)
Short-term debt
(3)
(=
P in
(U.S.$ in
millions)
millions) (2)
(Unaudited)
...................................................
950.0
21.0
950.0
21.0
Long-term debt.......................................................
—
—
—
—
2,524.0
55.8
3,429.4
75.9
Additional paid-in capital.........................................
—
—
2,471.4
54.7
Other comprehensive loss ........................................
0.2
—
0.2
0.0
Retained earnings.....................................................
678.0
15.0
28.0
0.6
Total equity ............................................................
3,202.2
70.8
5,929.0
131.2
Total capitalization .................................................
3,202.2
70.8
5,929.0
131.2
Equity:
Capital stock ............................................................
Notes:
(1)
On July 27, 2015, the Board approved the declaration of cash dividends in the amount of =
P 650.0 million.
(2)
The translations from Pesos to U.S. dollars have been made on the basis of the BSP Rate on June 30, 2015 of =
P 45.200
= U.S.$1.00.
(3)
Comprised of loans payable.
63
DILUTION
As of June 30, 2015, our net tangible book value per Share was =
P 1.27. Net tangible book value
per Share represents total assets minus total liabilities and goodwill divided by the total number of
Shares outstanding.
After giving effect to the cash dividends declared on July 27, 2015 amounting to =
P 650.0 million
and the sale of the Firm Shares (at an Offer Price of =
P 3.99 per Offer Share), and deducting estimated
discounts, commissions, estimated fees and expenses of the Offer, the net tangible book value per
P 3.99, the Shares will be
Share would increase to =
P 1.73 per Offer Share. At the Offer Price of =
=
purchased at a premium of P 2.26 to net tangible book value per Share.
The following table illustrates dilution on a per Share basis based on an Offer Price of =
P 3.99
per Offer Share assuming full exercise of the Over-allotment Option:
Offer Price per Offer Share ................................................................................................................
=
P 3.99
Net tangible book value per Share as of June 30, 2015 .........................................................................
=
P 1.27
...............................................................
=
P 1.73
.......................................................................................................
=
P 2.26
Pro forma net tangible book value per share after the Offer
Dilution to investors in the Offer
(2)
(1)
Notes:
(1)
Total equity after giving effect to the cash dividends declared and the Offer divided by Shares issued and fully paid after
the Offer.
(2)
Calculated as Offer Price of =
P 3.99 per Offer Share less pro forma net tangible book value per Share after the Offer.
The following table sets forth the shareholdings, and percentage of Shares outstanding, of
existing and new shareholders of the Company immediately after completion of the Offer assuming
full exercise of the Over-allotment Option:
Number of Shares
%
Existing shareholders ...........................................................................................
2,433,462,500
71.0
New investors ......................................................................................................
995,912,500
29.0
Total ................................................................................................................
3,429,375,000
100.0
See also “Risk Factors — Risks Relating to the Offer Shares — Future sales of Shares in the
public market could adversely affect the prevailing market price of the Shares and shareholders may
experience dilution in their holdings” on page 51 of this Prospectus. The issuance of Shares under the
stock option plan established by the Company may result in dilution of the Company’s shareholders
at the time such shares are issued. The current stock option plan would allow issuances of up to 3%
of the Company’s outstanding Shares after completion of the Offer. See “Business — Retail
Management Policies and Infrastructure — Human Resources — Stock Option Plan” on page 124 of
this Prospectus.
64
SELECTED FINANCIAL AND OPERATING INFORMATION
The following tables set forth selected financial information for our company and should be read
in conjunction with the independent auditors’ reports and our company’s audited financial statements,
including the notes thereto, included elsewhere in this Prospectus, and the section entitled
“Management’s Discussion and Analysis of Financial Condition and Results of Operations.” The
selected financial information as of and for the years ended December 31, 2012, 2013 and 2014 and
as of June 30, 2015 and for the six months ended June 30, 2014 and 2015 were derived from our
company’s audited financial statements, which were prepared in accordance with PFRS and were
audited by SGV & Co. in accordance with the PSA. The selected financial information below is not
necessarily indicative of the results of future operations. Furthermore, the translation of Peso
amounts into U.S. dollars as of and for the year ended December 31, 2014 and as of June 30, 2015
and for the six months ended June 30, 2015 is provided for convenience only and is unaudited. For
readers’ convenience only, amounts in Pesos were converted to U.S. dollars using the BSP Rate as of
June 30, 2015 of =
P 45.200 = U.S.$1.00.
Statement of Comprehensive Income
For the six months ended
June 30,
For the years ended December 31,
(Audited)
2012
2013
(Unaudited)
2014
2014
(U.S.$
million) (1)
(=
P million) (1)
(Audited)
2014
(Unaudited)
2015
2015
(U.S.$
million) (1)
(=
P million) (1)
REVENUE
Net sales ........................................................
22,550.4
25,468.0
28,356.9
627.4
12,880.2
14,726.7
Rental ............................................................
70.7
74.5
89.1
2.0
42.9
67.4
325.8
1.5
Interest and other income ...............................
39.5
39.0
95.6
2.1
37.1
29.6
0.7
22,660.6
25,581.5
28,541.7
631.5
12,960.2
14,823.7
328.0
Cost of sales ..................................................
18,001.6
19,965.9
22,336.6
494.2
10,245.0
11,755.7
260.1
General and administrative .............................
3,598.9
4,471.9
4,931.1
109.1
2,335.7
2,621.9
58.0
Selling and marketing.....................................
218.6
243.4
338.8
7.5
111.5
127.2
2.8
Finance costs..................................................
12.6
24.4
40.0
0.9
19.1
17.1
0.4
21,831.8
24,705.5
27,646.6
611.7
12,711.3
14,521.9
321.3
828.8
875.9
895.1
19.8
248.9
301.8
6.7
Current ...........................................................
293.6
275.2
286.3
6.3
83.5
87.5
1.9
Deferred .........................................................
(46.0)
(12.7)
(20.1)
(0.4)
(8.9)
3.0
0.1
247.6
262.5
266.2
5.9
74.6
90.4
2.0
581.2
613.5
628.9
13.9
174.4
211.3
4.7
COSTS AND EXPENSES
INCOME BEFORE INCOME TAX ..............
PROVISION FOR (BENEFIT FROM)
INCOME TAX
NET INCOME...............................................
OTHER COMPREHENSIVE INCOME
(LOSS) - Not to be reclassified to profit
or loss in subsequent periods
Remeasurement gains (losses) on defined
benefit obligation.......................................
(61.7)
54.0
(5.5)
(0.1)
(2.7)
5.9
0.1
Income tax effect............................................
18.5
(16.2)
1.6
0.0
0.8
(1.8)
(0.0)
(43.2)
37.8
(3.8)
(0.1)
(1.9)
4.2
0.1
TOTAL COMPREHENSIVE INCOME.........
538.0
651.3
625.1
13.8
172.5
215.5
4.8
Basic/Diluted Earnings Per Share ................
= 0.23
= 0.24
= 0.25
U.S.$0.01
= 0.07
= 0.08
U.S.$0.00
P
P
Note:
(1)
Except for Basic/Diluted Earnings Per Share.
65
P
P
P
Statement of Financial Position
As of December 31,
As of June 30,
(Audited)
2012
2013
2014
(=
P million)
(Unaudited)
(Audited)
(Unaudited)
2014
2015
2015
(U.S.$
million)
(=
P million)
(U.S.$
million)
Current Assets
Cash ..............................................................................
876.5
1,030.9
1,625.7
36.0
732.8
16.2
Receivables ...................................................................
792.3
861.9
869.4
19.2
704.0
15.6
Merchandise inventories ................................................
2,242.3
3,189.8
3,168.2
70.1
3,442.8
76.2
Other current assets .......................................................
538.3
681.8
624.7
13.8
594.8
13.2
Total Current Assets ....................................................
4,449.3
5,764.3
6,288.0
139.1
5,474.5
121.1
Property and equipment .................................................
938.9
1,270.1
1,351.0
29.9
1,482.2
32.8
Deferred tax assets ........................................................
119.2
115.7
137.4
3.0
132.7
2.9
Other noncurrent assets..................................................
98.8
226.0
307.6
6.8
314.3
7.0
Total Noncurrent Assets ...............................................
1,157.0
1,611.9
1,796.0
39.7
1,929.1
42.7
TOTAL ASSETS ...........................................................
5,606.2
7,376.2
8,084.0
178.8
7,403.7
163.8
Trade and other payables ...............................................
3,034.8
2,968.4
3,355.7
74.2
2,597.5
57.5
Loans payable................................................................
—
1,200.0
1,100.0
24.3
950.0
21.0
Total Current Liabilities ..............................................
3,034.8
4,168.4
4,455.7
98.6
3,547.5
78.5
Retirement benefit obligation .........................................
265.9
252.0
297.3
6.6
312.2
6.9
Other noncurrent liabilities ............................................
294.6
330.7
344.3
7.6
341.8
7.6
Total Noncurrent Liabilities ........................................
560.5
582.7
641.6
14.2
654.0
14.5
Total Liabilities ............................................................
3,595.3
4,751.1
5,097.3
112.8
4,201.5
93.0
Capital stock .................................................................
49.0
49.0
2,524.0
55.8
2,524.0
55.8
Retained earnings ..........................................................
816.9
1,430.4
466.6
10.3
Other comprehensive income (loss)................................
(44.9)
Noncurrent Assets
LIABILITIES AND EQUITY
Current Liabilities
Noncurrent Liability
Equity
(7.1)
678.0
15.0
(3.9)
(0.1)
0.2
0.0
Equity reserve ...............................................................
1,189.9
1,152.8
—
—
—
—
Total Equity .................................................................
2,011.0
2,625.1
2,986.7
66.1
3,202.2
70.8
TOTAL LIABILITIES AND EQUITY .........................
5,606.2
7,376.2
8,084.0
178.8
7,403.7
163.8
66
Statement of Cash Flows
For the years ended December 31,
(Audited)
2012
2013
For the six months ended June 30,
(Unaudited)
2014
2014
2014
(U.S.$
million)
(=
P million)
(Audited)
(Unaudited)
2015
2015
(U.S.$
million)
(=
P million)
CASH FLOWS FROM OPERATING
ACTIVITIES
Income before income tax ..............................
828.8
875.9
895.1
19.8
248.9
301.8
6.7
Depreciation and amortization ...................
171.2
251.4
344.4
7.6
142.5
187.3
4.1
Finance costs .............................................
12.6
24.4
40.0
0.9
19.1
17.1
0.4
Retirement benefits cost ............................
26.5
40.0
39.9
0.9
20.4
20.8
0.5
Interest income ..........................................
(6.4)
(6.0)
(15.6)
(0.3)
(2.4)
(1.2)
(0.0)
Provision for (reversal of) impairment
loss .......................................................
6.2
0.2
—
—
0.1
(1.4)
(0.0)
Loss on retirement of property and
equipment .............................................
—
—
—
—
—
0.1
0.0
Operating income before working capital
changes .....................................................
1,038.9
1,185.9
1,303.7
28.8
428.5
524.5
11.6
Adjustments for:
Decrease (increase) in:
Receivables ...............................................
(35.5)
(69.7)
(6.8)
(0.1)
217.3
166.8
3.7
Merchandise inventories ............................
(445.6)
(947.5)
21.6
0.5
(223.9)
(274.6)
(6.1)
Other current assets ...................................
158.1
(143.5)
57.1
1.3
28.1
29.8
0.7
Trade and other payables ...........................
320.9
(150.9)
323.3
7.2
396.0
(752.8)
(16.7)
Other noncurrent liabilities ........................
24.6
36.1
13.6
0.3
(2.5)
(0.1)
Net cash flows generated from (used in)
operations ..................................................
1,061.4
1,712.5
37.9
838.5
(308.8)
(6.8)
Interest received .............................................
6.4
14.9
0.3
2.4
1.1
0.0
—
(98.3)
(2.2)
Increase (decrease) in:
(89.6)
5.9
(7.5)
Income tax paid..............................................
(147.1)
(231.8)
(214.6)
(4.7)
Interest paid ...................................................
(12.3)
(20.4)
(50.6)
(1.1)
(13.9)
(11.6)
(0.3)
Net cash flows from (used in) operating
activities ....................................................
908.4
(335.8)
1,462.3
32.4
827.0
(417.6)
(9.2)
CASH FLOWS FROM INVESTING
ACTIVITIES
Acquisition of retail business enterprise .........
(2,735.6)
(60.5)
Additions to property and equipment ..............
(462.7)
—
(582.6)
—
(425.2)
(9.4)
—
Decrease (increase) in other noncurrent
assets.........................................................
(54.1)
(127.2)
(81.6)
(1.8)
Net cash flows used in investing activities .....
(516.7)
(709.8)
(3,242.4)
(71.7)
(141.0)
(147.8)
6.8
—
—
(318.6)
(7.0)
(6.7)
(0.1)
(325.3)
(7.2)
CASH FLOWS FROM FINANCING
ACTIVITIES
Proceeds from:
Issuance of shares......................................
—
—
2,475.0
54.8
618.8
—
—
Loans payable............................................
—
1,200.0
1,400.0
31.0
—
350.0
7.7
Payment of loans ............................................
—
—
(1,200.0)
(500.0)
(11.1)
Net cash flows from (used in) financing
activities ....................................................
—
1,200.0
2,375.0
52.5
(581.3)
(150.0)
(3.3)
NET INCREASE (DECREASE) IN CASH ..
391.7
154.4
594.9
13.2
104.7
(892.9)
(19.8)
CASH AT BEGINNING OF YEAR/
PERIOD ...................................................
484.8
876.5
1,030.9
22.8
1,030.9
1,625.7
36.0
CASH AT END OF YEAR/PERIOD .............
876.5
1,030.9
1,625.7
36.0
1,135.6
732.8
16.2
67
(1,500)
(33.2)
Operating Information
For the six months
For the years ended December 31,
ended June 30,
2012
2013
2014
2014
2015
Net sales ( =
P million) ............................................
11,870.9
13,589.3
13,959.6
6,455.5
7,150.1
(=
P ) ........................................
449.7
497.8
498.6
492.8
503.5
Number of transactions (millions)..........................
26.4
27.3
28.0
13.1
14.2
Same store sales growth (%) .................................
2.9
3.2
(0.8)
(2.5)
6.3
Number of stores ...................................................
19
21
23
22
24
Net selling space (sqm) .........................................
33,568
36,781
40,980
39,319
42,298
Average net selling space (sqm) ............................
1,767
1,751
1,782
1,787
1,762
Net sales ( =
P million) ............................................
9,722.0
9,989.8
9,829.9
4,520.9
4,849.6
(=
P ) ........................................
476.6
551.9
558.5
565.1
584.3
Number of transactions (millions)..........................
20.4
18.1
17.6
8.0
8.3
Same store sales growth (%) .................................
8.9
(1.4)
(2.4)
(8.4)
7.3
Number of stores ...................................................
9
10
10
10
10
Net selling space (sqm) .........................................
115,310
118,589
110,521
110,521
110,521
Average net selling space (sqm) ............................
12,812
11,859
11,052
11,052
11,052
Net sales ( =
P million) ............................................
957.5
1,889.0
4,567.4
1,903.9
2,727.0
(=
P ) ........................................
383.0
460.7
466.1
453.3
514.5
Number of transactions (millions)..........................
2.5
4.1
9.8
4.2
5.3
Same store sales growth (%) .................................
—
15.7
4.2
9.1
26.1
Number of stores ...................................................
2
7
10
8
11
Net selling space (sqm) .........................................
4,891
28,144
40,995
33,558
45,054
Average net selling space (sqm) ............................
2,446
4,021
4,099
4,195
4,096
Supermarkets
Average basket size
Department Stores
Average basket size
Hypermarkets
Average basket size
68
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Prospective investors should read this discussion and analysis of our financial condition and
results of operations in conjunction with the audited financial statements and the notes thereto and
the unaudited interim financial statements set forth elsewhere in this Prospectus.
Our audited financial statements as of and for the years ended December 31, 2012, 2013 and
2014, and the audited interim financial statements as of June 30, 2015 and for the six months ended
June 30, 2014 and 2015 included in this Prospectus were prepared in compliance with PFRS.
This discussion contains forward-looking statements and reflects our current views with respect
to future events and financial performance. Actual results may differ materially from those anticipated
in these forward-looking statements as a result of certain factors such as those set forth in the section
entitled “Risk Factors” and elsewhere in this Prospectus. See “Forward-Looking Statements” on page
vii of this Prospectus.
Overview
We are one of the leading retail groups in the Philippines and in the Visayas, one of the
fastest-growing geographic regions in the Philippines. We opened our first store in Cebu City in 1982
and have steadily grown to become a market leader in the Visayas. According to Euromonitor, we were
the largest department store, the largest hypermarket operator, and the second-largest supermarket
operator in the Visayas in terms of retail value sales in 2014. We were also the largest retailer in the
Province of Cebu across all three formats in 2014 in terms of retail value sales, according to
Euromonitor. The Visayas recorded the highest nominal GDP CAGR among Luzon, Visayas and
Mindanao of 8.9% from 2010 to 2013 and is expected to achieve the highest population CAGR from
2010 to 2015 among Luzon, Visayas and Mindanao, driven primarily by the growing business process
outsourcing (“BPO”) industry and its international recognition as the most popular tourist and foreign
investment destination in the Philippines outside of Manila, according to Euromonitor. As of June 30,
2015, we have a total of 26 stores in the Visayas, with a total net selling space of approximately
101,023 sqm.
After focusing on steady growth in the Visayas during the first two decades of our operations,
we started to open stores outside of the Visayas, beginning with the opening of our department store
and supermarket in Legazpi City in 2001, followed by the opening of our department store and
supermarket in Lucena City in 2003 and by the opening of our department store and supermarket at
Metro Market! Market! at the Bonifacio Global City in Taguig in Metro Manila in 2004. As of June
30, 2015, we had a total of nine stores in Metro Manila and 10 stores in other parts of Luzon, bringing
our total store count in the Philippines to 45, with a total net selling space of approximately 197,873
sqm. According to Euromonitor, we were the third largest supermarkets operator, the third largest
department stores operator and the fourth largest hypermarkets operator in the Philippines in terms of
retail sales value in 2014. We believe that we are well-positioned to capture the significant growth
opportunities in the Philippine retail industry.
We have historically operated our business in two retail formats: supermarkets and department
stores. As part of our growth campaign, we ventured into the hypermarket format in 2011. We
currently conduct our operations primarily through the following three retail formats:
•
Supermarkets. Our supermarket retail format is operated under two brand names, “Metro
Supermarket” and “Metro Fresh N Easy,” which we refer to collectively herein as “Metro
Supermarket.” Metro Supermarket offers a broad range of food and non-food products at
competitive prices catered to our target lower- to middle-income consumers. As of June 30,
2015, we operated 24 supermarkets with an average net selling space of 1,762 sqm. For the
69
years ended December 31, 2012, 2013 and 2014 and for the six months ended June 30,
P 13,589.3 million,
2015, net sales from our supermarket format were =
P 11,870.9 million, =
=
P 7,150.1 million, respectively, accounting for 52.6%, 53.4%,
P 13,959.6 million and =
49.2% and 48.6%, respectively, of net sales of the Company for the same periods.
•
Department Stores. We operate our department store retail format under the “Metro
Department Store” brand name. Metro Department Store offers both well-known local and
international brands and a comprehensive selection of private-label everyday merchandise,
with the product mix of each store tailored to the needs of the local target market. As of
June 30, 2015, we operated ten department stores with an average net selling space of
11,052 sqm. For the years ended December 31, 2012, 2013 and 2014 and for the six months
ended June 30, 2015, net sales from our department store format were =
P 9,722.0 million,
=
=
=
4,849.6
million,
respectively,
accounting for
P 9,989.8 million, P 9,829.9 million and P
43.1%, 39.2%, 34.7% and 32.9%, respectively, of net sales of the Company for the same
periods.
•
Hypermarkets. Our hypermarket retail format is operated under the brand name “Super
Metro.” Super Metro seeks to provide consumers with a one-stop shopping experience by
offering a broad assortment of products at competitive prices, including items typically sold
at supermarkets and department stores. As of June 30, 2015, we operated 11 hypermarkets
with an average net selling space of 4,096 sqm. For the years ended December 31, 2012,
2013 and 2014 and for the six months ended June 30, 2015, net sales from our hypermarket
P 2,727.0 million,
P 4,567.4 million and =
P 1,889.0 million, =
format were =
P 957.5 million, =
respectively, accounting for 4.2%, 7.4%, 16.1% and 18.5%, respectively, of net sales of the
Company for the same periods.
As we continue to expand, we are able to draw upon our multi-format approach to establish
suitable formats for each location. This allows us to efficiently and profitably enter new markets and
integrate with new communities.
We take a “clustering” strategy with respect to our retail formats by situating complementary
stores around larger anchor stores. Our large department stores and hypermarkets are typically located
in commercial areas with high foot traffic and close to public transportation. Moving outward from
the main hub areas of our department stores and hypermarkets, we locate our supermarkets in areas
surrounding highly populated areas. As part of our location strategy, we have strong partnerships with
the leading property developers in the Philippines.
We generally target consumers within the lower- to middle-income consumer segments. This
income segment is the largest consumer base in the Philippines and includes households with an
annual household disposable income of between U.S.$3,000 and U.S.$35,000. According to EIU, from
2009 to 2014, the lower- to middle-income segment has grown from 70% to 83% of Philippine
households and is expected to reach 91% of households by 2019. We also target the younger segment
of the population who have relatively high consumption patterns and disposable income. According to
EIU, approximately 62.2% of the total population belongs to the working age population bracket of
15 to 64 years old, which is expected to steadily increase over the coming years. With over 30 years
of experience in catering to such consumers, we believe that we are well positioned to capture this
growth by continuing to expand our product and retail offerings to meet their evolving needs.
For the six months ended June 30, 2015, we had net sales of =
P 14,726.7 million, an increase of
14.3% from our net sales of =
P 12,880.2 million for the six months ended June 30, 2014. For the six
months ended June 30, 2015, we had net income of =
P 211.3 million, an increase of 21.2% from our
net income of =
P 174.4 million for the six months ended June 30, 2014.
70
Presentation of Financial Information
On June 30, 2014, the Company entered into an agreement with retail entities commonly
controlled by the Metro Gaisano Family and the Vicsal Group to acquire and consolidate all their retail
business activities. The agreement became effective on August 1, 2014. The retail businesses acquired
consists of selected assets and liabilities of the retail stores necessary to retail operations. The
Company accounted for the transaction as a combination under the pooling of interest method.
Accordingly, the comparative prior periods as of and for the years ended December 31, 2012 and 2013
reflect the effects of the business combination as if it had occurred from the beginning of the earliest
period presented in the financial statements. See Note 2 to our audited financial statements for the year
ended December 31, 2014.
Factors Affecting Our Results of Operations
Our results of operations are affected by a variety of factors. Set out below is a discussion of the
most significant factors that have affected our financial results in the past and that we expect to affect
our results in the foreseeable future. Factors other than those set forth below could also have a
significant impact on our results of operations and financial condition.
Philippine macroeconomic conditions and trends
All of our stores are located in the Philippines and, as a result, our operations are significantly
affected, and will continue to be significantly affected, by macroeconomic conditions in the
Philippines. Demand for, and prevailing prices of, our products in all retail formats are directly related
to the strength of the Philippine economy and consumer confidence, including overall growth levels
and the amount of business activity in the Philippines. Over the past several years, economic growth
in the Philippines has led to an increase in personal disposable income, resulting in increased
purchasing power and greater demand for consumer products. As of June 30, 2015, 57.8% of our stores
were located in the Visayas region of the Philippines and, as a result, our operations are also affected
by economic conditions in the Visayas. According to Euromonitor, the Visayas recorded the highest
nominal GDP CAGR among Luzon, Visayas and Mindanao of 8.9% from 2010 to 2013 and is expected
to achieve the highest population CAGR from 2010 to 2015 among Luzon, Visayas and Mindanao. We
believe that this GDP and population growth in the Visayas has contributed to increased demand for
the products sold at our supermarkets, department stores and hypermarkets in the region.
We generally target consumers within the lower- to middle-income consumer segments. This
income segment is the largest consumer base in the Philippines and includes households with an
annual household disposable income of between U.S.$3,000 and U.S.$35,000. According to EIU, from
2009 to 2014, the lower- to middle-income segment has grown from 70% to 83% of Philippine
households and is expected to reach 91% of the households by 2019. The growth in household
disposable income and the emergence of the lower- to middle-income consumer segment is expected
to continue to provide a strong basis for consumption growth in the Philippines.
Some of the products sold in our retail formats are discretionary consumer products and demand
for these products tends to decline during economic downturns when consumer disposable income
declines. Some of our other products, particularly those sold in our supermarkets and hypermarkets,
have a more constant demand and are less affected by periods of economic downturn. Overall,
however, any deterioration in the Philippine economy may adversely affect consumer sentiment and
lead to a contraction in demand for our products.
Growth of our operations
We believe that the expansion of our multi-format business model is an important factor driving
our revenue growth and profitability. During the years ended December 31, 2012, 2013 and 2014 and
the six months ended June 30, 2015, we continued to expand our network of supermarkets, department
stores and hypermarkets by opening stores in both existing markets and new markets. New stores are
71
accretive to revenues and help us to increase our market share by expanding our ability to reach
additional consumers. As we have expanded from 30 stores as of December 31, 2012 to 43 stores as
of December 31, 2014, our net sales have increased from =
P 22,550.4 million for the year ended
=
December 31, 2012 to P 28,356.9 million for the year ended December 31, 2014, representing a CAGR
of 12.1% ([(2014 sales/2012 sales) ^ (1/2 years)] -1). Set out below is a table summarizing our store
expansion since 2012.
As of December 31,
2012
2013
As of June 30,
2014
2014
2015
Total number of stores..................................................................
30
38
43
40
45
Supermarkets..............................................................................
19
21
23
22
24
Department Stores ......................................................................
9
10
10
10
10
Hypermarkets .............................................................................
2
7
10
8
11
Total net selling space (sqm) ........................................................
153,769
183,514
192,496
183,398
197,873
Supermarkets..............................................................................
33,568
36,781
40,980
39,319
42,298
Department Stores (1) ...................................................................
115,310
118,589
110,521
110,521
110,521
Hypermarkets .............................................................................
4,891
28,144
40,995
33,558
45,054
Note:
(1)
In 2014, the net selling space of our department stores decreased due to the reallocation of selling space for
concessionaire backroom and commercial leasing.
The increase in the scale of our operations has provided us with greater purchasing power with
suppliers which, in turn, has increased our product offerings for our customers and improved our
profitability. We believe that we will develop even greater purchasing power from increased store
density in certain localities that will enable us to continue to obtain favorable purchasing terms from
our suppliers. Such purchasing terms will enable us to improve our gross margins while continuing to
offer customers a wide assortment of products at competitive prices.
Our revenue and profitability are also driven by our ability to successfully grow sales at our
existing stores. We calculate same store sales growth based on the period-on-period change in net sales
for our stores in operation throughout the relevant periods. Our same store sales growth is affected by
a number of factors, including store size and location, competition, weather conditions, product mix
and the expansion of our operations in formats with higher rates of growth. We experienced a decline
in same store sales in 2014 as a result of business and supply disruptions caused by natural disasters,
including Typhoon Haiyan in November 2013 and an earthquake in the Province of Cebu in October
2013, each of which continued to affect us through 2014, and the implementation of our new Oracle
retail merchandising systems in September 2013, which caused inventory management disruptions that
led to lower on-shelf availability of merchandise stock in stores through the first half of 2014. We
experienced a 4.3% decline in same store sales for the six months ended June 30, 2014 and achieved
a same store sales growth of 9.3% for the six months ended June 30, 2015.
Our ability to secure retail locations will also affect our business, financial conditions and results
of operations. Our expansion is affected by the business plan and investments of the Vicsal Group and
other property developers, as we rely on them to provide suitable sites for our stores. The growth of
our department stores, in particular, depends on the growth of shopping malls built by property
developers. We intend to leverage our multi-format business model to secure favorable locations and
rental terms, enhance same store sales growth and improve cost efficiency.
72
Our ability to effectively manage costs and expenses
We operate in a volume-driven industry and must carefully control our costs. We believe that our
outright sales business model helps improve our gross margins relative to competitors that are more
focused on concession sales. However, margins on our products are still relatively low and we must
continually sell high volumes of these items to generate significant profits. The cost of purchasing
products for our stores is the largest component of our cost of sales and we have established various
measures to reduce the cost of products sold and operating expenses. We seek to control these costs
by, among other things, leveraging our scale and long-term relationships with suppliers, consolidating
our warehouses and operating our own distribution center and clustering our stores around such
distributions centers. By coordinating our efforts across retail formats and negotiating directly with
suppliers, we are able to purchase in larger volumes and secure better supplier discounts and payment
terms, which help us to increase our sales margins. As such, our overall gross profit margin grew from
20.2% in 2012 when we only had 30 stores as of December 31, 2012 to 21.2% in 2014 when we had
expanded to 43 stores as of December 31, 2014. In the future, we will encourage greater coordination
across our retail formats to further improve purchasing synergies.
Additionally, we have taken measures to control and manage operating expenses, particularly
labor costs and rental expenses. We take measures to control our labor costs with improved worker
productivity through cross-training of personnel to enable them to handle multiple areas of operation,
with precise staff scheduling that takes into consideration variances in store traffic during hours of
operation and monitoring of attendance and timeliness of staff reporting, and with management of
headcount to avoid overstaffing. We seek to manage our rental expenses by leveraging our relationship
with the Vicsal Group and other relationships to negotiate, on an arm’s length basis, favorable rental
rates and leasing terms, which frequently include both fixed rent and variable rent components. We
also seek to maximize our effective rental cost per square meter of selling space by adopting a
well-planned and efficient store design and optimizing the allocation of selling space among
concessionaires, tenants and ourselves. As a result of our cost control measures, our general and
administrative expenses, as a percentage of total net sales, has remained relatively stable at 16.0%,
17.6% and 17.4% in 2012, 2013 and 2014, respectively.
Competition from other retailers
Our results of operations are affected by competition from other retailers in the Philippine retail
market. This market is highly competitive and we face competition from both domestic and
international retailers. Growth in the Philippine economy has led some of these competitors to
undertake aggressive expansion strategies. Many of our competitors use similar strategies and sell
similar products as we do. We compete with such retailers for both locations and for customers.
Historically, the opening of certain of our competitors’ stores in the vicinity of our stores has resulted
in negative effects on our sales. Furthermore, as per capita income and consumption levels rise in the
Philippines, some of our target consumers may decide to purchase more expensive goods from our
competitors, which could give rise to additional competitive pressure.
Seasonality and Weather
We experience seasonal fluctuations in our supermarket, department store and hypermarket
operations. Historically, our sales peak in December of each year. Sales thereafter slowdown in the
first quarter of the year and begin to increase in the second quarter, driven by the summer season, the
school break in April and May and particularly the beginning of the school year in the month of June.
This is followed by a slowdown in sales in the third quarter due to the rainy season. In preparation
for our peak selling periods, we incur additional expenses for the acquisition of additional inventory
and to carry out marketing and advertising activities. For the year ended December 31, 2014, 54.6%
of our net sales were attributable to the latter six months of the year.
73
In addition, weather conditions in the Philippines have historically impacted our operating
results. We generally experience a slowdown during the monsoon season from July to September.
Furthermore, extreme weather, such as typhoons, could cause damage to our stores resulting in
decreased sales and additional expenses. For example, in November 2013, Typhoon Haiyan caused
significant damage to one of our stores and disrupted operations at four other stores, leading to
decreased sales during the relevant period and succeeding months.
Critical Accounting Policies
Critical accounting policies are those that are both (i) relevant to the presentation of our financial
condition and results of operations and (ii) require management’s most difficult, subjective or complex
judgments, often as a result of the need to make estimates about the effect of matters that are
inherently uncertain. As the number of variables and assumptions affecting the possible future
resolution of the uncertainties increase, those judgments become even more subjective and complex.
To provide an understanding of how our management forms its judgments about future events,
including the variables and assumptions underlying its estimates, and the sensitivity of those
judgments to different circumstances, we have identified the critical accounting policies discussed
below. While we believe that all aspects of our financial statements should be studied and understood
in assessing our current and expected financial condition and results of operations, we believe that the
following critical accounting policies warrant particular attention. For more information, see Note 2
and Note 3 to our audited financial statements for the year ended December 31, 2014.
Merchandise Inventories
Merchandise inventories are stated at the lower of cost and net realizable value (“NRV”). Cost,
which includes all costs directly attributable to acquisition such as purchase price and transportation
costs, is determined using the weighted average cost method. NRV is the estimated selling price in the
ordinary course of business, less estimated costs necessary to make the sale.
Property and Equipment
Items of property and equipment are carried at cost less accumulated depreciation, amortization
and any impairment in value.
The initial cost of property and equipment comprises its purchase price, including import duties,
taxes and any directly attributable costs of bringing the property and equipment to its working
condition and location for its intended use. Expenditures incurred after the property and equipment
have been placed into operation, such as repairs and maintenance costs, are normally recognized in
profit or loss in the period in which they are incurred. In situations where it can be clearly
demonstrated that the expenditures would result in an increase in future economic benefits expected
to be obtained from the use of an item of property and equipment beyond its originally assessed
standard of performance, expenditures are capitalized as additional costs of such property and
equipment.
Construction-in-progress is carried at cost and transferred to the related property plant and
equipment account when the construction and related activities to prepare the property for its intended
use are complete and the property is ready for occupation.
When assets are sold or retired, the cost and related accumulated depreciation and accumulated
impairment in value are removed from the accounts and any resulting gain or loss is reflected in profit
or loss.
74
Depreciation and amortization is calculated on a straight-line method over the following
estimated useful lives of the property or equipment:
Years
Machinery and equipment .........................................................................
10 to 25
Store and office equipment .......................................................................
3 to 10
Computer equipment.................................................................................
3 to 5
Transportation equipment ........................................................................
3 to 10
Leasehold improvements...........................................................................
3 to 25
Depreciation and amortization of an item of property or equipment begins when it becomes
available for use, meaning when it is in the location and condition necessary for it to be capable of
operating in the manner intended by management.
An item of property or equipment is derecognized upon disposal or when no future economic
benefits are expected from its use or disposal. Any gain or loss arising on derecognition of such asset
(calculated as the difference between the net disposal proceeds and the carrying amount of the asset)
is included in profit or loss in the year the asset is derecognized.
An asset’s useful life and method of depreciation and amortization is reviewed and adjusted, if
appropriate, at each reporting date.
Impairment of Assets
Financial Assets
At each reporting date, the Company assesses whether there is objective evidence that a financial
asset or group of financial assets is impaired. A financial asset or a group of financial assets is deemed
to be impaired only if there is objective evidence of impairment as a result of one or more events that
occurred after the initial recognition of the asset (an incurred “loss event”) and that loss event (or
events) has an impact on the estimated future cash flows of the financial asset or the group of financial
assets that can be reliably estimated. Evidence of impairment may include indications that the
contracted parties or a group of contracted parties is experiencing significant financial difficulty,
default or delinquency in interest or principal payments, the probability that they will enter
bankruptcy or other financial reorganization, and where observable data indicate that there is
measurable decrease in the estimated future cash flows such as changes in arrears or economic
conditions that correlate with defaults.
Non-financial Assets
The Company assesses at each reporting date whether there is an indication that non-financial
assets may be impaired. If any such indication exists, or when annual impairment testing for an asset
is required, the Company makes an estimate of such asset’s recoverable amount. An asset’s
recoverable amount is the higher of such asset’s or cash-generating unit’s fair value less costs to sell
and its value-in-use and is determined for an individual asset, unless such asset does not generate cash
inflows that are largely independent of those from other assets or groups of assets.
Where the carrying amount of an asset exceeds its recoverable amount, the asset is considered
impaired and is written down to its recoverable amount. In assessing value-in-use, the estimated future
cash flows are discounted to their present value using a pre-tax discount rate that reflects current
market assessments of the time value of money and the risks specific to the asset. Impairment losses
of continuing operations are recognized in profit or loss in those expense categories consistent with
the function of the impaired asset.
75
An assessment is made at each reporting date as to whether there is any indication that previously
recognized impairment losses may no longer exist or may have decreased. If such indication exists,
the recoverable amount is estimated. A previously recognized impairment loss is reversed only if there
has been a change in the estimates used to determine the asset’s recoverable amount since the last
impairment loss was recognized. If such a change has occurred, the carrying amount of the asset is
increased to its recoverable amount, which cannot exceed the carrying amount that would have been
determined, net of depreciation, had no impairment loss been recognized for the asset in prior years.
Such reversal is recognized in profit or loss unless the asset is carried at revalued amount, in which
case the reversal is treated as a revaluation increase. After such a reversal, the depreciation charge is
adjusted in future periods to allocate the asset’s revised carrying amount less any residual value on
a systematic basis over its remaining useful life.
Description of Selected Income Statement Items
Revenue
We generate our revenue from sales of products at our stores, rental income and other income.
Net Sales
Net sales are gross sales, net of discounts and returns, derived from sales of products at our
supermarkets, department stores, hypermarkets and through our ancillary formats. Product sales
include both outright sales of products for which we bear the full inventory risk and sales of
merchandise supplied to us by concessionaires for which we bear no inventory risk.
Rental
We derive rental income from our tenants. Rental income is recognized in the statements of
comprehensive income on a straight line basis over the lease term or based on the terms of the lease,
as applicable.
Interest and Other Income
We derive other income from scrap sales, interest income and other sources. Scrap sales refer to
sales of materials that are not part of the merchandise sold in our stores, including non-reusable
cartons, sacks, containers, equipment, lighting fixtures and other scrap items. We derive interest
income from cash deposits held in banks. We derive other income from various sources, such as
foreign exchange gains and parking income.
Cost of sales
Cost of sales consists of inventory costs related to goods that we have sold. Inventory costs
include all costs of purchase, costs of conversion and other freight and handling costs incurred in
bringing the inventories to their present location and condition.
General and administrative expenses
General and administrative expenses are those expenses incurred in the direction and general
administration of day-to-day operations of our business. These include salaries and other personnel
costs, rental expenses, utilities, contracted services for security and janitorial services, depreciation
and amortization, taxes and licenses, supplies, repair and maintenance, transportation and travel,
professional fees, insurance and subscriptions.
Selling and marketing expenses
Selling and marketing expenses consist of costs associated with the development and execution
of marketing promotion activities. These include advertising costs and credit card transaction fees.
76
Finance costs
We incur finance costs on our outstanding loans and on cash held against credit extended to
customers. As part of our regular course of business operations, we extend credit to customers secured
by cash. We incur finance costs from the interest that we pay at a fixed rate to customers on such cash.
Results of Operations
The six months ended June 30, 2015 compared with the six months ended June 30, 2014
Revenue
Net sales
The following table sets out certain key operating performance indicators relevant to net sales
in the six months ended June 30, 2014 and 2015, and the percentage change in these key operating
performance indicators between the two periods.
As of or for the six months
Percentage
ended June 30,
change
2014
2015
Supermarkets
Number of Stores ............................................................................
22
24
9.1%
millions) ....................................................................
6,455.5
7,150.1
10.8%
(=
P ) .................................................................
492.8
503.5
2.2%
Number of transactions (millions) ...................................................
13.1
14.2
8.4%
Same store sales growth (%) ..........................................................
(2.5)
6.3
10
10
0.0%
Net Sales
(=
P
Average Basket Size
Department Stores
Number of Stores ............................................................................
(=
P
millions) ....................................................................
4,520.9
4,849.6
7.3%
Average Basket Size ( =
P ) .................................................................
565.1
584.3
3.4%
Number of transactions (millions) ...................................................
8.0
8.3
3.8%
Same store sales growth (%) ..........................................................
(8.4)
7.3
Net Sales
Hypermarkets
Number of Stores ............................................................................
(=
P
8
11
37.5%
millions) ....................................................................
1,903.9
2,727.0
43.2%
Average Basket Size ( =
P ) .................................................................
453.3
514.5
13.5%
Number of transactions (millions) ...................................................
4.2
5.3
26.2%
Same store sales growth (%) ..........................................................
9.1
26.1
Net Sales
For the six months ended June 30, 2015, our net sales were =
P 14,726.7 million, an increase of
14.3% compared to =
P 12,880.2 million for the six months ended June 30, 2014. The increase in net
sales was primarily due to the opening of five new stores and overall same store sales growth of 9.3%.
Supermarkets. Our supermarket net sales increased by 10.8% from =
P 6,455.5 million for the six
=
months ended June 30, 2014 to P 7,150.1 million for the six months ended June 30, 2015. This increase
in net sales was primarily due to new store openings and same store sales growth. We opened two new
supermarkets (one in Luzon (outside Metro Manila) and one in the Central Visayas region) after June
30, 2014. Our same store sales growth for supermarkets was 6.3%.
77
Department Stores. Our department store net sales increased by 7.3% from =
P 4,520.9 million for
=
the six months ended June 30, 2014 to P 4,849.6 million for the six months ended June 30, 2015. This
increase in net sales was primarily due to same store sales growth of 7.3%.
Hypermarkets. Our hypermarket net sales increased by 43.2% from =
P 1,903.9 million for the six
=
months ended June 30, 2014 to P 2,727.0 million for the six months ended June 30, 2015. This increase
in net sales was largely due to new store openings and same store sales growth. We opened three more
hypermarkets in South Luzon after June 30, 2014. Our same store sales growth for hypermarkets was
26.1%.
Rental Income
For the six months ended June 30, 2015, our rental income was =
P 67.4 million, an increase of
57.1% compared to =
P 42.9 million for the six months ended June 30, 2014. The increase in rental
income was primarily due to the opening of five new stores, which led to an increase in net leasable
space. In addition, there was an increase in rental fees due to escalation clauses in our existing lease
agreements and the renegotiation of certain fixed rent leases.
Interest and other income
For the six months ended June 30, 2015, our interest and other income was =
P 29.6 million, a
decrease of 20.2% compared to =
P 37.1 million for the six months ended June 30, 2014. The decrease
in interest and other income was primarily due to a decrease in cash balances of bank accounts
maintained by the Company for our working capital requirements. In addition, scrap sales for the six
P 13.3
months ended June 30, 2015 were =
P 7.9 million, representing a decrease of 40.6% compared to =
million for the six months ended June 30, 2014.
Cost of sales
For the six months ended June 30, 2015, our cost of sales was =
P 11,755.7 million, an increase
of 14.7% compared to =
P 10,245.0 million for the six months ended June 30, 2014, which was generally
in line with the growth of net sales of 14.3%. Cost of sales grew slightly faster than net sales due to
changes in our sales mix resulting from the faster rate of growth of our hypermarket format, which
typically has a higher cost of sales as a percentage of net sales as compared to our other retail formats.
General and administrative expenses
For the six months ended June 30, 2015, our general and administrative expenses were =
P 2,621.9
million, an increase of 12.3% compared to =
P 2,335.7 million for the six months ended June 30, 2014.
The increase in general and administrative expenses was primarily due to an increase in salaries and
wages, rent expenses, overhead expenses and depreciation expenses resulting from the operation of
new stores.
Selling and marketing expenses
For the six months ended June 30, 2015, our selling and marketing expenses were =
P 127.2
million, an increase of 14.1% compared to =
P 111.5 million for the six months ended June 30, 2014.
The increase in selling and marketing expenses was primarily due to an increase in credit card
transaction fees resulting from an increase in transactions made using credit cards, and extensive
promotional activities, which increase when we open new stores.
Finance costs
For the six months ended June 30, 2015, our finance costs were =
P 17.1 million, a decrease of
10.5% compared to =
P 19.1 million for the six months ended June 30, 2014. The decrease in finance
costs was primarily due to a significant decrease in our average loans outstanding.
78
Provision for income tax
For the six months ended June 30, 2015, our provision for income tax was =
P 90.4 million, an
increase of 21.2% compared to =
P 74.6 million for the six months ended June 30, 2014. The increase
in provision for income tax was primarily due to the increase in income before tax and related
adjustments of deferred tax assets.
Net income
As a result of the foregoing, for the six months ended June 30, 2015, our net income was =
P 211.3
million, an increase of 21.2% compared to =
P 174.4 million for the six months ended June 30, 2014.
The year ended December 31, 2014 compared with the year ended December 31, 2013
Revenue
Net sales
The following table sets out certain key operating performance indicators relevant to net sales
for the years ended December 31, 2013 and 2014 and the percentage change in these key operating
performance indicators between the two periods.
As of or for the years
Percentage
ended December 31,
change
2013
2014
Supermarkets
Number of Stores ............................................................................
(=
P
21
23
9.5%
millions) ....................................................................
13,589.3
13,959.6
2.7%
Average Basket Size ( =
P ) .................................................................
497.8
498.6
0.1%
Number of transactions (millions) ...................................................
27.3
28.0
2.6%
Same store sales growth (%) ..........................................................
3.2
(0.8)
Net Sales
Department Stores
Number of Stores ............................................................................
10
10
0.0%
Net Sales ( =
P millions) ....................................................................
9,989.8
9,829.9
(1.6)%
Average Basket Size ( =
P ) .................................................................
551.9
558.5
1.2%
Number of transactions (millions) ...................................................
18.1
17.6
(2.8)%
Same store sales growth (%) ..........................................................
(1.4)
(2.4)
Hypermarkets
Number of Stores ............................................................................
7
10
42.9%
Net Sales ( =
P millions) ....................................................................
1,889.0
4,567.4
141.8%
(=
P ) .................................................................
460.7
466.1
1.1%
139%
Average Basket Size
Number of transactions (millions) ...................................................
4.1
9.8
Same store sales growth (%) ..........................................................
15.7
4.2
For the year ended December 31, 2014, our net sales were =
P 28,356.9 million, an increase of
11.3% compared to =
P 25,468.0 million for the year ended December 31, 2013. The increase in net sales
was primarily due to the opening of three new hypermarkets and two new supermarkets, but was partly
offset by a decline in overall same store sales of 1.2%. The decline in same store sales was attributed
to business disruptions caused by natural disasters and information technology system integration in
the fourth quarter of 2013, which continued to affect us through early 2014.
79
Supermarkets. Our supermarket net sales increased by 2.7% from =
P 13,589.3 million for the year
=
ended December 31, 2013 to P 13,959.6 million for the year ended December 31, 2014. This increase
in net sales was largely due to new store openings, but was partly offset by a decline in same store
sales. We opened two new supermarkets (one in Luzon (outside Metro Manila) and one in the Central
Visayas region) in 2014. Our supermarkets experienced a decline in same store sales of 0.8%.
Department Stores. Our department store net sales decreased by 1.6% from =
P 9,989.8 million for
the year ended December 31, 2013 to =
P 9,829.9 million for the year ended December 31, 2014. This
decrease in net sales was primarily due to a decline in same store sales of 2.4%.
Hypermarkets. Our hypermarket net sales increased by 141.8% from =
P 1,889.0 million for the
year ended December 31, 2013 to =
P 4,567.4 million for the year ended December 31, 2014. This
increase in net sales was primarily due to new store openings and same store sales growth. We opened
three new hypermarkets (two in Central Visayas and one in South Luzon) in 2014. Our same store sales
growth for hypermarkets was 4.2%.
Rental income
For the year ended December 31, 2014, our rental income was =
P 89.1 million, an increase of
=
19.6% compared to P 74.5 million for the year ended December 31, 2013. The increase in rental
income was primarily due to the opening of five new stores, which led to an increase in net leasable
space. In addition, there was an increase in rental fees due to escalation clauses in our existing lease
agreements and the renegotiation of certain fixed rent leases.
Interest and other income
For the year ended December 31, 2014, our interest and other income was =
P 95.6 million, an
increase of 145.1% compared to =
P 39.0 million for the year ended December 31, 2013. The increase
in interest and other income was primarily due to increases in scrap sales, increased interest income
P 40.6 million because of the
and other income. Our scrap sales increased from =
P 17.8 million to =
disposal of accumulated scrap materials and of scrap items from store renovations. Our interest
P 15.6 million because of an increase in cash balances
income increased from =
P 6.0 million to =
maintained for working capital requirements.
Cost of sales
For the year ended December 31, 2014, our cost of sales was =
P 22,336.6 million, an increase of
=
11.9% compared to P 19,965.9 million for the year ended December 31, 2013, which was generally in
line with the growth of net sales of 11.3%. Cost of sales grew slightly faster than net sales due to
changes in our retail format mix resulting from the faster rate of growth of our supermarket and
hypermarket formats, which typically have a higher cost of sales as a percentage of net sales as
compared to our department store format.
General and administrative expenses
For the year ended December 31, 2014, our general and administrative expenses were =
P 4,931.1
=
million, an increase of 10.3% compared to P 4,471.9 million for the year ended December 31, 2013.
The increase in general and administrative expenses was primarily due to an increase in salaries and
wages, rental expenses, overhead expenses and depreciation expenses resulting from the opening of
new stores.
80
Selling and marketing expenses
For the year ended December 31, 2014, our selling and marketing expenses were =
P 338.8 million,
an increase of 39.2% compared to =
P 243.4 million for the year ended December 31, 2013. The increase
in selling and marketing expenses was primarily due to an increase in credit card transaction fees
resulting from an increase in transactions made using credit cards, and extensive promotional
activities, which increase when we open new stores.
Finance costs
For the year ended December 31, 2014, our finance costs were =
P 40.0 million, an increase of
63.9% compared to =
P 24.4 million for the year ended December 31, 2013. The increase in finance costs
was primarily due to an increase in bank loans of =
P 1,400.0 million that we used to finance the
acquisition of inventory and for the fit-out of our new stores. We made loan payments of a total of
=
P 1,500.0 million before the end of the year.
Provision for income tax
For the year ended December 31, 2014, our provision for income tax was =
P 266.2 million, an
=
increase of 1.4% compared to P 262.5 million for the year ended December 31, 2013. The increase in
provision for income tax was primarily due to the increase in income before tax and related
adjustments of deferred tax assets.
Net income
As a result of the foregoing, for the year ended December 31, 2014, our net income was =
P 628.9
=
million, an increase of 2.5% compared to P 613.5 million for the year ended December 31, 2013.
The year ended December 31, 2013 compared with the year ended December 31, 2012
Revenue
Net sales
The following table sets out certain key operating performance indicators relevant to net sales
for the years ended December 31, 2012 and 2013 and the percentage change in these key operating
performance indicators between the two periods.
As of or for the years
Percentage
ended December 31,
change
2012
2013
Supermarkets
Number of Stores ............................................................................
Net Sales (millions) ........................................................................
Average Basket Size ( =
P ) .................................................................
Number of transactions (millions) ...................................................
Same store sales growth (%) ..........................................................
19
11,870.9
449.7
26.4
2.9
Department Stores
Number of Stores ............................................................................
Net Sales (millions) ........................................................................
Average Basket Size ( =
P ) .................................................................
Number of transactions (millions) ...................................................
Same store sales growth (%) ..........................................................
9
9,722.0
476.6
20.4
8.9
Hypermarkets
Number of Stores ............................................................................
Net Sales (millions) ........................................................................
Average Basket Size ( =
P ) .................................................................
Number of transactions (millions) ...................................................
Same store sales growth (%) ..........................................................
2
957.5
383.0
2.5
—
81
21
13,589.3
497.8
27.3
3.2
10.5%
14.5%
10.7%
3.4%
10
9,989.8
551.9
18.1
(1.4)
11.1%
2.8%
15.8%
(11.3)%
7
1,889.0
460.7
4.1
15.7
250.0%
97.3%
20.3%
64.0%
For the year ended December 31, 2013, our net sales were =
P 25,468.0 million, an increase of
=
12.9% compared to P 22,550.4 million for the year ended December 31, 2012. The increase in net sales
was primarily due to the opening of eight new stores and overall same store sales growth of 1.8%.
Supermarkets. Our supermarket net sales increased by 14.5% from =
P 11,870.9 million for the
year ended December 31, 2012 to =
P 13,589.3 million for the year ended December 31, 2013. This
increase in net sales was primarily due to new store openings and same store sales growth. We opened
two new supermarkets (one in Metro Manila and one in Central Visayas) in 2013. Our same store sales
growth for supermarkets was 3.2%.
Department Stores. Our department store net sales increased by 2.8% from =
P 9,722.0 million for
the year ended December 31, 2012 to =
P 9,989.8 million for the year ended December 31, 2013. This
increase in sales was primarily due to new store openings and partly offset by a decline in same store
sales growth. We opened one new department store in Metro Manila in 2013. Our department stores
experienced a decline in same store sales of 1.4%.
Hypermarkets. Our hypermarket net sales increased by 97.3% from =
P 957.5 million for the year
=
1,889.0
million
for
the
year
ended
December
31, 2013. This increase
ended December 31, 2012 to P
in net sales was primarily due to new store openings and same store sales growth. We opened five new
hypermarkets (one in Metro Manila, three in Central Visayas and one in Western Visayas) in 2013. Our
same store sales growth for hypermarkets was 15.7%.
Rental income
For the year ended December 31, 2013, our rental income was =
P 74.5 million, an increase of
=
5.4% compared to P 70.7 million for the year ended December 31, 2012. The increase in rental income
was primarily due to the opening of eight new stores, which led to an increase in net leasable space.
In addition, there was an increase in rental fees due to escalation clauses in our existing lease
agreements and the renegotiation of certain fixed rent leases.
Interest and other income
For the year ended December 31, 2013, our interest and other income was =
P 39.0 million, a
decrease of 1.3% compared to =
P 39.5 million for the year ended December 31, 2012. The decrease in
interest and other income was primarily due to a decrease in cash balances of bank accounts
maintained by the Company for our working capital requirements.
Cost of sales
For the year ended December 31, 2013, our cost of sales was =
P 19,965.9 million, an increase of
10.9% compared to =
P 18,001.6 million for the year ended December 31, 2012, which was slower than
the growth of net sales of 12.9%. Cost of sales grew slower than net sales due to new store opening
support from suppliers that effectively reduced the cost of sales.
General and administrative expenses
For the year ended December 31, 2013, our general and administrative expenses were =
P 4,471.9
million, an increase of 24.3% compared to =
P 3,598.9 million for the year ended December 31, 2012.
The increase in general and administrative expenses was primarily due to increased salaries and
wages, rent expenses, overhead expenses and depreciation expenses resulting from the opening of new
stores.
82
Selling and marketing expenses
For the year ended December 31, 2013, our selling and marketing expenses were =
P 243.4 million,
=
an increase of 11.3% compared to P 218.6 million for the year ended December 31, 2012. The increase
in selling and marketing expenses was primarily due to an increase in credit card transaction fees
resulting from an increase in transactions made using credit cards, and extensive promotional
activities, which increase when we open new stores.
Finance costs
For the year ended December 31, 2013, our finance costs were =
P 24.4 million, an increase of
=
93.7% compared to P 12.6 million for the year ended December 31, 2012. The increase in finance costs
was primarily due to an increase in bank loans, which we used to finance the acquisition of inventory
for new stores and fit-outs for new stores.
Provision for income tax
For the year ended December 31, 2013, our provision for income tax was =
P 262.5 million, an
increase of 6.0% compared to =
P 247.6 million for the year ended December 31, 2012. The increase in
provision for income tax was primarily due to the increase in income before tax and related
adjustments of deferred tax assets.
Net income
As a result of the foregoing, for the year ended December 31, 2013, our net income was =
P 613.5
million, an increase of 5.6% compared to =
P 581.2 million for the year ended December 31, 2012.
Liquidity and Capital Resources
We have historically met our liquidity requirements principally through a combination of cash
flow from operating activities, comprised mainly of sales of merchandise, bank borrowings,
short-term credit from our suppliers, investing activities and the issuance of capital stock. Our
principal uses of cash have been, and are expected to continue to be, operating costs, including
purchases of merchandise and payroll costs and capital expenditures for property and equipment. See
“Use of Proceeds” beginning on page 55 of this Prospectus. In the future, we expect to fund our
working capital requirements primarily from sales derived from existing and new stores.
Net cash from operating and financing activities were sufficient to cover our working capital and
additions to property and equipment for the years ended December 31, 2012, 2013 and 2014 and the
six months ended June 30, 2015. We drew down credit facilities to support our working capital
requirements that mainly include the procurement of inventory for new stores. On June 16, 2014, the
P 10,000 million and
Board approved an increase in our authorized capital stock from =
P 100 million to =
such increase was approved by the Philippine SEC on July 3, 2014. Of the net increase in authorized
capital stock, 25% was subscribed by Vicsal Development Corporation (“VDC”) for =
P 2,475 million.
The subscription resulted in our being 98% owned by VDC. The proceeds were used to fund the
acquisition of retail businesses under common control with us.
Working Capital
As of December 31, 2012, 2013 and 2014 and June 30, 2015, our net current assets, or the
P 1,595.9
difference between total current assets and total current liabilities, were =
P 1,414.5 million, =
=
=
million, P 1,832.3 million and P 1,927.0 million, respectively, representing a positive net working
capital position.
83
Current Assets
Our current assets consist of cash, trade and other receivables, merchandise inventories and other
current assets. Total current assets as of December 31, 2012, December 31, 2013, December 31, 2014
P 5,474.5 million,
P 6,288.0 million and =
P 5,764.3 million, =
and June 30, 2015 were =
P 4,449.3 million, =
respectively. As of December 31, 2014, merchandise inventories comprised the bulk of our current
P 1,625.7 million. As of June 30, 2015,
assets, totaling =
P 3,168.2 million, followed by cash, totaling =
P 732.8 million.
merchandise inventories totaled =
P 3,442.8 million and cash totaled =
Current Liabilities
Our current liabilities consist of trade and other payables and loans payable and income tax
payable. As of December 31, 2012, December 31, 2013, December 31, 2014 and June 30, 2015, current
P 3,547.5 million,
P 4,455.7 million and =
P 4,168.4 million, =
liabilities were =
P 3,034.8 million, =
respectively. As of December 31, 2014 and June 30, 2015, trade and other payables totaled =
P 3,355.7
=
million and P 2,597.5 million, respectively, and consisted primarily of trade payables to our suppliers
for purchases of inventory.
Cash Flows
The following table sets out information from our statements of cash flows for the periods
indicated. The translation of Peso amounts into U.S. dollars for the year ended December 31, 2014 and
for the six months ended June 30, 2015 are provided for convenience only and are unaudited.
For the years ended December 31,
(Audited)
2012
For the six months ended June 30,
(Unaudited)
2013
2014
2014
(U.S.$
million)
(=
P million)
(Audited)
2014
(Unaudited)
2015
(=
P million)
2015
(U.S.$
million)
Net cash flows from (used in)
operating activities ....................
908.4
(335.8)
1,462.3
32.4
827.0
(417.6)
(9.2)
Net cash flows from (used in)
investing activities ......................
(516.7)
(709.8)
(3,242.4)
(71.7)
(141.0)
(325.3)
(7.2)
Net cash flows from (used in)
financing activities ....................
—
1,200.0
2,375.0
52.5
(581.3)
(150.0)
(3.3)
Net increase (decrease) in cash .......
391.7
154.4
594.9
13.2
104.7
(892.9)
(19.7)
Net cash flows from (used in) operating activities
Our net cash flows used in operating activities for the six months ended June 30, 2015 was
million, which comprised operating income before working capital changes of =
P 524.5
million, adjusted for changes in working capital and income tax paid, partially offset by interest
received. The changes in working capital were mainly attributable to a decrease in trade and other
payables of =
P 752.8 million arising from improved payment processing time.
=
P 417.6
In 2014, net cash flows from operating activities was =
P 1,462.3 million, which comprised
=
operating income before working capital changes of P 1,303.7 million adjusted for changes in working
capital and interest received partially offset by income tax paid. The changes in working capital were
primarily attributable to an increase in trade and other payables of =
P 323.3 million arising from an
increase in purchases to support additional store openings.
84
In 2013, net cash flows used in operating activities was =
P 335.8 million, which comprised
=
operating income before working capital changes of P 1,185.9 adjusted for changes in working capital
and interest received partially offset by income tax paid. The changes in working capital were
primarily attributable to an increase in merchandise inventories of =
P 947.5 million arising from
additional merchandise purchased for new stores.
In 2012, net cash flows from operating activities was =
P 908.4 million, which comprised operating
income before working capital changes of =
P 1,038.9 million, adjusted primarily for changes working
capital and interest received partially offset by income tax paid. Changes in working capital were
primarily attributable to an increase in merchandise inventories of =
P 445.6 million which was partially
=
offset by an increase in trade and other payables of P 320.9 million.
Net cash flows used in investing activities
For the six months ended June 30, 2015, net cash flows used in investing activities was =
P 325.3
million, which resulted from additions to property and equipment for fit outs of new stores. Net cash
flows used in investing activities were =
P 3,242.4 in 2014. The acquisition of certain retail business
enterprises under common control with us comprised the majority of our investing activities in 2014.
P 516.7 million in 2012,
Net cash flows used in investing activities were =
P 709.8 million in 2013 and =
primarily due to additions to property and equipment.
Net cash flows from (used in) financing activities
Net cash flows used in financing activities was =
P 150.0 million for the six months ended June
P 350.0 million loan
30, 2015, primarily as a result of bank loan payments of =
P 500.0 million net of =
proceeds.
In 2014, the increase in net cash flows from financing activities was =
P 2,375.0 million, primarily
=
due to proceeds of P 2,475.0 million from the issuance of capital stock subscribed by VDC.
P 1,200.0 million
In 2013, net cash flows from financing activities was =
P 1,200.0 million due to =
of outstanding loans of VDC allocated to the retail segment. This was used to finance working capital
requirements for the procurement of inventory for new stores.
In 2012, there were no net cash flows from financing activities.
Indebtedness
P 950.0
P 1,100.0 million and =
We had outstanding loan payables of nil, =
P 1,200.0 million, =
million as of December 31, 2012, 2013 and 2014, and June 30, 2015, respectively. As of June 30, 2015,
we had short-term debt with interest rates ranging from 2.7% to 3.3% per annum. The short-term notes
payable were obtained to support working capital requirements.
Capital Expenditures
We make substantial capital expenditures annually to support our business goals and objectives.
As part of our strategy, we invest capital in developing and constructing new stores in each of our
retail formats. We also invest in on-going maintenance of existing stores. In general, we renovate our
stores every 5 to 10 years. In addition, we invest in installing new information technology systems and
upgrading our existing systems.
85
The following table sets out our capital expenditures in 2012, 2013 and 2014, and our budgeted
capital expenditures for 2015.
For the six
months ended
For the years ended December 31,
2012
2013
June 30,
2014
2015
(=
P million)
Machinery and Equipment ........................................
26.3
18.4
37.7
13.3
Store and Office Equipment .....................................
Computer Equipment................................................
196.9
192.6
163.5
106.5
74.8
290.0
59.8
81.6
Transportation Equipment ........................................
2.4
0.2
0.3
3.0
Leasehold Improvements ..........................................
162.2
80.0
56.1
33.7
Construction in Progress ..........................................
—
1.5
107.7
80.6
Total........................................................................
462.6
582.7
425.1
318.7
We have historically funded our capital expenditures primarily through internally generated
funds derived from operating income. From time-to-time we have also funded our capital expenditure
with the proceeds of working capital facilities and internally generated funds. Our capital expenditures
for the above periods were related to the development and construction of new stores and ongoing
maintenance across all retail formats. As of June 30, 2015, =
P 318.7 million of the budgeted 2015
=
capital expenditures of P 1,834.6 million had been spent.
Although these are our current plans with respect to our capital expenditures, such plans may
change as a result of a change in circumstances and the actual amount of expenditures may vary from
the planned amount of expenditures for a variety of reasons, including changes in market conditions,
competition and other factors. As we continue to expand, we may incur additional capital
expenditures.
Contractual obligations and commitments
Set out below is a summary of our contractual commitments by maturity:
Contractual Obligations and Commitments
as of June 30, 2015
Payments Due by Period
Total
2015
2016-2020
(=
P million)
Loans payable - current ......................................................................
950.0
950.0
—
Trade and other payables .....................................................................
2,597.5
2,597.5
—
Total ...................................................................................................
3,547.5
3,547.5
—
86
Key Performance Indicators
For the years ended December 31,
2012
2013
2014
For the six months ended June 30,
2014
2015
Supermarkets
Net sales (1) ( =
P million) ......................
11,870.9
13,589.3
13,959.6
6,455.5
7,150.1
(=
P )..................
449.7
497.8
498.6
492.8
503.5
Same store sales growth (3) (%) ...........
2.9
3.2
(0.8)
(2.5)
6.3
Number of stores................................
19
21
23
22
24
(sqm)...................
33,568
36,781
40,980
39,319
42,298
Net sales ( =
P million) .........................
9,722.0
9,989.8
9,829.9
4,520.9
4,849.6
Average basket size ( =
P ) .....................
476.6
551.9
558.5
565.1
584.3
Same store sales growth (%) ..............
8.9
Average basket size
Net selling space
(4)
(2)
Department Stores
(1.4)
(2.4)
(8.4)
7.3
Number of stores................................
9
10
10
10
10
Net selling space (sqm) ......................
115,310
118,589
110,521
110,521
110,521
Net sales ( =
P million) .........................
957.5
1,889.0
4,567.4
1,903.9
2,727.0
(=
P ) .....................
383.0
460.7
466.1
453.3
514.5
Same store sales growth (%) ..............
0.0
15.7
4.2
9.1
26.1
Number of stores................................
2
7
10
8
11
Net selling space (sqm) ......................
4,891
28,144
40,995
33,558
45,054
Hypermarkets
Average basket size
Notes:
(1)
Net sales are gross sales, net of discounts and returns.
(2)
Average basket size is the amount of net sales divided by the number of transactions for a given period.
(3)
Same store sales growth is the comparisons of net sales between two periods generated by the relevant stores. The stores
that are included in comparisons are those that have operated for at least 12 months preceding the beginning of the last
month of the reporting period. The comparison for each store takes into account net sales by that store during the same
period it was in operation in both the reporting period and the period of comparison. The net sales of all the relevant
stores in the relevant period are then aggregated and compared.
(4)
Net selling space is the area of the store where items are displayed, excluding the backroom and warehouse.
Off-balance sheet arrangements
As of June 30, 2015, we were not a financial guarantor of the obligations of any unconsolidated
entity, and we were not a party to any off-balance sheet obligations or arrangement.
Quantitative and qualitative disclosure of market risk
Our principal financial instruments consist of cash and receivables. The main purpose of our
financial instruments is to fund our operations and capital expenditures. We do not actively engage in
the trading of financial assets for speculative purposes nor do we write options. The main risks arising
from our financial instruments are liquidity risk and credit risk. See Note 25 of the notes to our audited
financial statements.
87
Liquidity risk
Liquidity or funding risk is the risk that an entity will encounter difficulty in raising funds to
meet commitments associated with financial instruments. Our exposure to liquidity risk relates
primarily to our short-term credit obligations. We seek to manage our liquidity profile by maintaining
cash at a certain level and ensuring the availability of ample unused revolving credit facilities from
banks as back-up liquidity that will enable us to finance our general and administrative expenses and
operations. We maintain a level of cash deemed sufficient to finance operations. As part of our
liquidity risk management, we regularly evaluate our projected and actual cash flows.
Credit Risk
Credit risk is the risk that one party to a financial instrument will fail to discharge an obligation
and cause the other party to incur a financial loss. Our receivables are actively monitored by our
collection department to avoid significant concentrations of credit risk. We manage the level of credit
risk we accept through comprehensive credit risk policies setting out the assessment and determination
of what constitutes appropriate credit risk for us. Our policies include setting up of exposure limits
by each counterparty or company of counterparties; right of offset where counterparties are both
debtors and creditors; reporting of credit risk exposures; monitoring of compliance with credit risk
policy; and review of credit risk policy for pertinence and the changing environment.
88
BUSINESS
Overview
We are one of the leading retail groups in the Philippines and in the Visayas, one of the
fastest-growing geographic regions in the Philippines. We opened our first store in Cebu City in 1982
and have steadily grown to become a market leader in the Visayas. According to Euromonitor in a
study in July 2015, we were the largest department store, the largest hypermarket operator, and the
second-largest supermarket operator in the Visayas in terms of retail value sales in 2014. We were also
the largest retailer in the Province of Cebu across all these three store formats in 2014 in terms of
retail value sales, according to Euromonitor. The Visayas recorded the highest nominal GDP CAGR
among Luzon, Visayas and Mindanao of 8.9% from 2010 to 2013 and is expected to achieve the
highest population CAGR from 2010 to 2015 among Luzon, Visayas and Mindanao, driven primarily
by the growing business process outsourcing (“BPO”) industry and its international recognition as the
most popular tourist and foreign investment destination in the Philippines outside of Manila,
according to Euromonitor. As of June 30, 2015, we have a total of 26 stores in the Visayas, with a total
net selling space of approximately 101,023 sqm.
After focusing on steady growth in the Visayas during the first two decades of our operations,
we started to open stores outside of the Visayas, beginning with the opening of our department store
and supermarket in Legazpi City in 2001, followed by the opening of our department store and
supermarket in Lucena City in 2003 and by the opening of our department store and supermarket at
Metro Market! Market! at the Bonifacio Global City in Taguig in Metro Manila in 2004. As of June
30, 2015, we had a total of nine stores in Metro Manila and 10 stores in other parts of Luzon, bringing
our total store count in the Philippines to 45, with a total net selling space of approximately 197,873
sqm. See “— Business Operations — Overview” on page 98 of this Prospectus for the location of our
stores for each retail format. According to Euromonitor, we were the third largest supermarkets
operator, the third largest department stores operator and the fourth largest hypermarkets operator in
the Philippines in terms of retail sales value in 2014. We believe that we are well-positioned to capture
the significant growth opportunities in the Philippine retail industry.
We have historically operated our business in two retail formats: supermarkets and department
stores. As part of our growth campaign, we ventured into the hypermarket format in 2011. We
currently conduct our operations primarily through the following three retail formats:
•
Supermarkets. Our supermarket retail format is operated under two brand names, “Metro
Supermarket” and “Metro Fresh N Easy,” which we refer to collectively herein as “Metro
Supermarket.” Metro Supermarket offers a broad range of food and non-food products at
competitive prices catered to our target lower- to middle-income consumers. As of June 30,
2015, we operated 24 supermarkets with an average net selling space of 1,762 sqm. For the
years ended December 31, 2012, 2013 and 2014 and for the six months ended June 30,
P 13,589.3 million,
2015, net sales from our supermarket format were =
P 11,870.9 million, =
=
=
P 13,959.6 million and P 7,150.1 million, respectively, accounting for 52.6%, 53.4%,
49.2% and 48.6%, respectively, of net sales of the Company for the same periods.
•
Department Stores. We operate our department store retail format under the “Metro
Department Store” brand name. Metro Department Store offers both well-known local and
international brands and a comprehensive selection of private-label everyday merchandise,
with the product mix of each store tailored to the needs of the local target market. As of
June 30, 2015, we operated ten department stores with an average net selling space of
11,052 sqm. For the years ended December 31, 2012, 2013 and 2014 and for the six months
ended June 30, 2015, net sales from our department store format were =
P 9,722.0 million,
=
P 4,849.6 million, respectively, accounting for
P 9,829.9 million and =
P 9,989.8 million, =
43.1%, 39.2%, 34.7% and 32.9%, respectively, of net sales of the Company for the same
periods.
89
•
Hypermarkets. Our hypermarket retail format is operated under the brand name “Super
Metro.” Hypermarkets are “superstores” as they are a combination of a supermarket and
department store, offering a wide range of products including full grocery lines and general
merchandise. Super Metro seeks to provide consumers with a one-stop shopping experience
by offering a broad assortment of products at competitive prices, including items typically
sold at supermarkets and department stores. As of June 30, 2015, we operated 11
hypermarkets with an average net selling space of 4,096 sqm. For the years ended
December 31, 2012, 2013 and 2014 and for the six months ended June 30, 2015, net sales
P 4,567.4 million
P 1,889.0 million, =
from our hypermarket format were =
P 957.5 million, =
=
and P 2,727.0 million, respectively, accounting for 4.2%, 7.4%, 16.1% and 18.5%,
respectively, of net sales of the Company for the same periods.
As we continue to expand, we are able to draw upon our multi-format approach to establish
suitable formats for each location. This allows us to efficiently and profitably enter new markets and
integrate with new communities.
We take a “clustering” strategy with respect to our retail formats by situating complementary
stores around larger anchor stores. Our large department stores and hypermarkets are typically located
in commercial areas with high foot traffic and close to public transportation. Moving outward from
the main hub areas of our department stores and hypermarkets, we locate our supermarkets in areas
surrounding highly populated areas. As part of our location strategy, we have strong relationships with
the leading property developers in the Philippines.
We generally target consumers within the lower- to middle-income consumer segments. This
income segment is the largest consumer base in the Philippines and includes households with an
annual household disposable income of between U.S.$3,000 and U.S.$35,000. According to EIU, from
2009 to 2014, the lower- to middle-income segment has grown from 70% to 83% of Philippine
households and is expected to reach 91% of households by 2019. We also target the younger segment
of the population who have relatively high consumption patterns and disposable income. According to
EIU, approximately 62.2% of the total population belongs to the working age population bracket of
15 to 64 years old, which is expected to steadily increase over the coming years. With over 30 years
of experience in catering to such consumers, we believe that we are well positioned to capture this
growth by continuing to expand our product and retail offerings to meet their evolving needs.
For the six months ended June 30, 2015, we had net sales of =
P 14,726.7 million, an increase of
=
14.3% from our net sales of P 12,880.2 million for the six months ended June 30, 2014. For the six
months ended June 30, 2015, we had net income of =
P 211.3 million, an increase of 21.2% from our
net income of =
P 174.4 million for the six months ended June 30, 2014.
Competitive Strengths
Leading retailer in the Visayas, the fastest-growing region in the Philippines, and well positioned
to capture the significant growth opportunities across the country
According to Euromonitor, we were the largest department store operator, the largest
hypermarket operator and the second largest supermarket operator in the Visayas in terms of retail
value sales in 2014. We were also the largest retailer in the Province of Cebu across all three formats
in terms of retail value sales in 2014, according to Euromonitor. We operated a total of 26 stores in
the Visayas, including four department stores, 14 supermarkets and eight hypermarkets, as of June 30,
2015. We have deep roots, strong brand recognition and a long operating history in the Visayas and
its regional center, the Province of Cebu. Members of the Gaisano family have been operating retail
stores in the Visayas since 1949 and the “Gaisano” name has become synonymous with retail in the
region.
According to Euromonitor, the Visayas has recorded the highest nominal GDP CAGR of 8.9%
from 2010 to 2013 and the population of the Visayas is expected to reach 21.0 million by 2015,
90
representing the highest population CAGR from 2010 to 2015 among Luzon, Visayas and Mindanao.
This growth is primarily driven by the Visayas’ growing business process outsourcing (“BPO”)
industry and its international recognition as the most popular tourist and foreign investment
destination in the Philippines outside of Manila, according to Euromonitor. The metro area
surrounding Cebu City, the capital of the Province of Cebu, is the second most populous metropolitan
area in the Philippines and is a major industrial, commercial, shipping and tourism hub.
Relative to Metro Manila and the rest of Luzon, we believe that modern retail remains
under-penetrated in the Visayas in terms of retail value sales and outlets. According to Euromonitor,
the Visayas is expected to achieve the highest retail value sales growth rates for supermarkets and
department stores, and the second-highest retail value sales growth rate for hypermarkets after
Mindanao, from 2015 to 2019, while the growth rate of the Province of Cebu will outpace that of
Visayas. The supermarket, department store and hypermarket industry is expected to grow at a CAGR
of 8.2%, 9.8% and 20.5%, respectively, in the Visayas, and 9.7%, 10.9% and 20.7%, respectively, in
the Province of Cebu, from 2015 to 2019. With our current leading position as a household retail
brand, we believe that we will be able to use our leading position to benefit from the rapid industry
growth in the Visayas.
We have a successful track record of store opening and operation, and have received positive
market acceptance outside the Visayas, beginning with the store opening in Legazpi City in 2001. As
of June 30, 2015, we operated a total of 19 stores in Luzon, including six department stores, 10
supermarkets and three hypermarkets. According to Euromonitor, we were the third largest
supermarket operator, the third largest department store operator and the fourth largest hypermarket
operator in the Philippines in terms of retail value sales in 2014. The entire Philippine department
store, supermarket and hypermarket industry has grown at a CAGR of 7.0%, 8.3%, and 17.2% from
2010 to 2014, and is expected to further expand at a CAGR of 8.6%, 7.3%, and 10.8% from 2015 to
2019, respectively. We believe that we are well positioned to capture the significant growth
opportunities in the Philippine retail industry.
Complementary multi-format offering fulfills the needs of the growing mainstay lower- to
middle-income consumers
Our business is divided into three complementary retail formats, namely a supermarket format
operated under the “Metro Supermarket” and “Metro Fresh N Easy” brand names, a department store
format operated under the “Metro Department Store” brand name and a hypermarket format operated
under the “Super Metro” brand name. Our supermarket format is generally focused on fulfilling
consumers’ grocery needs, and our department store format offers a wide range of general
merchandise, while our hypermarket format is a standalone retail format that combines the offerings
of both grocery and general merchandise and provides consumers with a one-stop shopping
experience. Therefore, we believe that our retail formats are complementary to each other.
With our strength in scale and brand recognition, this multi-format business model also provides
us with the flexibility to adopt the most suitable retail format for new stores depending on the size and
the needs of the target market, available location space, future prospects and the offerings of other
retailers operating in the same locality. We take a prudent and systemic approach to store network
expansion and only open stores in strategic locations with a strong catchment area close to our target
customers. Prior to the establishment of each new store, we study the demographics of the residents
and other market conditions, including vehicular and pedestrian traffic, to decide the retail format for
the site.
In addition, we offer convenient shopping options and introduce new retail concepts to
consumers. Ten of our supermarkets are located on the same sites as our department stores to offer
one-stop shopping solutions. The same-site location arrangement drives customer traffic to both retail
formats. Our “Metro Fresh N Easy” supermarket brand is a line of neighborhood stores, which are
located closer to residents and therefore offer more convenience and accessibility compared to typical
supermarkets and offer a more comprehensive and diversified product offering compared to traditional
91
sari-sari stores. Finally, we operate several ancillary businesses that are located within our stores, such
as pharmacies, delicatessens, food courts and bakeries to further fill the gaps in our target consumers’
needs and offer them a lifestyle shopping experience. These ancillary offerings complement our core
formats, help maximize the use of our selling space, increase customer traffic and drive operating
synergies.
Our product assortment is specifically tailored to consumers within the lower- to middle-income
segments. This income segment forms the largest consumer base in the Philippines and, according to
EIU, has increased from 70% to 83% of Philippine households from 2009 to 2014 and is expected to
further increase to 91% by 2019. With over 30 years of experience in catering to such consumers, we
believe that we are well positioned to expand and upgrade our product and retail offerings to meet
their evolving needs.
Strong growth momentum across stores and formats driven by deep understanding of the local
markets
We started as a family business and opened our first store in Cebu City in 1982. After
maintaining steady growth in our early years, we launched an expansion campaign that increased our
total number of stores from 16 in 2010 to 45 as of June 30, 2015. The majority of new stores were
opened in 2012 and 2013 and have reached operational maturity. These stores are included in the same
store sales comparison report for the six month period ended June 30, 2015.
Leveraging our well-recognized brand and deep understanding of the Philippine retail industry
and our target consumers, we have achieved strong growth momentum across stores and retail formats.
For the six months ended June 30, 2015, we achieved a same store sales growth rate of 6.3%, 7.3%,
26.1% and 9.3% for supermarkets, department stores, hypermarkets, and our Company, respectively.
For the six months ended June 30, 2015, our sales growth rates, including new stores, were 10.8%,
7.3%, 43.2% and 14.3% for supermarkets, department stores and hypermarkets and our Company,
respectively, as compared to the same period in 2014.
Our successful expansion has been largely driven by our extensive experience in the local
markets in the Philippines. Our stores have access to a variety of regional products, such as
housewares, furniture and exportable handicraft from the Visayas, that help distinguish our product
offerings from those of our competitors. We have also consistently sought to understand and meet the
needs of our target consumers segments. For example, in 2006, we introduced the Metro Rewards Card
as a means of generating relevant customer information to enable us to understand customer
preferences and achieve a higher level of customer satisfaction. The program has been popular among
our customers, with 43.7% of our sales generated by cardholders in 2014. The Metro Rewards Card
program has also allowed us to collect additional data regarding our customers and has helped us
better understand the needs of lower- to middle-income consumers. We believe that we will be able
to deploy this knowledge as we continue to expand throughout the Philippines.
Unique focus on outright sales that leads to better control over product assortment, quality and
pricing
Outright sales accounted for over 70% of our net sales for the years ended December 31, 2012,
2013 and 2014 and for the six months ended June 30, 2015. As compared to concession arrangements,
we believe that our focus on outright sales gives us greater control of the products sold through our
stores in terms of assortment, quality and pricing. This model has also allowed us to develop deep
relationships with a wide range of suppliers, some of which have continued for more than 20 years.
We are able to leverage this control over our products and our relationships with suppliers to flexibly
and efficiently respond to changes in consumer demand without being locked into a relationship with
any particular concessionaire.
Our focus on outright sales is supported by our strong merchandising team, which harnesses our
in-depth understanding of our target consumer segment to conduct careful and rigorous sourcing and
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determine an appropriate product assortment on a store-by-store basis. Our product assortment
includes comprehensive choices of packaged food and fresh foods, sourced domestically or through
direct suppliers from the U.S., China, Europe and other Asian countries. See “— Supermarkets —
Suppliers,” “— Department Stores — Suppliers” and “— Hypermarkets — Suppliers” on pages 104,
109 and 114 of this Prospectus. We also stock a wide range of non-food products, including daily
necessities, apparel, housewares, equipment, toys, sporting goods and appliances from well-known
domestic and international brands. With access to and support from many long-term direct suppliers,
we are also able to offer value-for-money products for our cost-conscious customers. Our strong
ability to determine and source the proper product mix for each store allows us to successfully operate
our outright sales model.
Current asset light model and scalable operations provides flexibility for future expansion
We believe that our current asset-light business model provides us with flexibility for future
expansion. We do not currently own the land on which our stores are located, which allows us to use
funds that otherwise would have been used to purchase real property to improve our store operations.
This also provides us with the flexibility to purchase land in the future if attractive opportunities arise.
Approximately 75% of our sites are leased from other companies within the Vicsal Group on an
arms-length basis. These leases are generally structured as six year building leases under which we
have the sole option to terminate or renew the lease, giving us flexibility to conveniently move our
stores to more strategic locations that emerge in the locality. Our remaining sites are leased from third
parties, with whom we generally enter into long-term leases ranging from 25 to 30 years. We believe
that this approach provides stability and limits our short-term exposure to rising rental costs. We have
long-standing relationships with major property developers that have invited us to be anchor tenants
in their property developments from time to time.
Our highly standardized and scalable operations also contribute to our prospects for future
growth. We take a “plug and play” approach to store design and product assortment, with each retail
format beginning with a standard assortment of products and services and then “plugging” in
additional offerings tailored to the needs of the target market. This reduces the costs associated with
store expansion and product selection and allows us to take advantage of economies of scale as we
grow our business. Additionally, we have recently completed the standardization of our store design
and layout, construction and operations at the store level, leading to greater uniformity in management
across our operations. We believe that this will further enhance operational efficiency and reduce store
opening costs and timelines as our business continues to expand.
Due to our asset-light business model, we operate with low amounts of debt. As of June 30, 2015,
we have approximately =
P 9.6 billion available under short-term credit facilities from various
Philippine banks. Our borrowing capacity and strong relationships with our lenders provide us with
access to a wide range of financing needed to take advantage of other expansion opportunities that
may come up in the course of our operations.
Highly efficient supply chain and inventory management with well-established information systems
We believe that our highly-efficient supply chain management makes it possible for us to
successfully operate our outright sales model. We are migrating from an outsourced supply chain
process to a Company-controlled supply chain management system to increase the efficiency and
reliability of our supply operations. Commencing in February 2015, we managed and operated our first
distribution center in Luzon at Silangan, Canlubang in the Province of Laguna, and we continue to
operate six warehouse facilities that are managed by an independent third party provider located in
Cebu City and Mandaue City, both in the Province of Cebu. We believe that operating our own
distribution center in Luzon helps us manage costs and ensures timely delivery of products to our
stores. We are exploring the consolidation of our warehouses in the Province of Cebu, especially after
the success of our Luzon distribution center.
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The strength of our in-house logistical operations has been recognized by both concessionaires
and outright suppliers, some of which use our distribution center to transport their own merchandise.
Bringing portions of our supply chain management in-house supports inventory control for our
outright sales business model by giving us greater flexibility in merchandising and shortening delivery
times to our stores. Our highly efficient supply chain infrastructure provides for automated daily
replenishment of products for each of our stores, where strict inventory controls and weekly purchase
monitoring ensure timely supply and a good rate of inventory turnover. We believe our in-house supply
chain management expertise is a key competitive advantage relative to our competitors.
Our supply chain and inventory management are further bolstered by a fully integrated suite of
Oracle software that supports the automation of retail operations and financial management. Our
information systems give us access to real-time store and inventory updates that enable us to timely
adjust purchasing and supply to increase efficiency. The Oracle suite also allows us to quickly execute
merchandising and pricing decisions throughout our entire supply chain. We believe that our advanced
and integrated information systems increase the scalability of our outright sales model, providing
support for our continued expansion across the country.
Retailing is a technology-intensive industry and investment in technology has helped us to work
closer with our suppliers and vendors. This leads to better prediction of consumer demand, shortened
lead-times and reduced inventory holding, all of which contribute to reductions in cost. Our
information systems and supply chain management allow us to source products directly from
manufacturers, increasing our levels of outright sales and giving us access to manufacturers’ discounts
and favorable credit terms.
Experienced and stable management team supported by the Vicsal Group and strategic relationships
Our management team has an over 30-year track record of success, with senior management
having an average of over 20 years of industry experience and having spent an average of over 10
years with the Company. Frank S. Gaisano, our chairman and chief executive officer, has worked with
us and the Vicsal Group for over 30 years and has a deep understanding of the retail industry in the
Philippines. Our President and Chief Operating Officer, Arthur Emmanuel, has strong experience in
retail operations, merchandising and procurement, having served in senior international roles at
Wal-Mart for almost 40 years, including as Chief Operating Officer of Wal-mart Argentina and Brazil
and as Chief Merchandising Officer of Wal-mart Mexico.
We also benefit from the commitment and support of the Vicsal Group. The Vicsal Group, which
is controlled by members of the Metro Gaisano Family, is engaged in a diverse range of businesses
located primarily in the Visayas, including retailing, financial services, and real estate. The group
develops retail outlets and residential communities and provides us support in terms of provision of
talent and property leasing. As of June 30, 2015, approximately 75% of our stores were located on
properties leased from the Vicsal Group, six of which had anchor status at malls operated by the Vicsal
Group. These malls include the Pacific Mall Mandaue in the Province of Cebu, Pacific Mall Lucena
in the Province of Quezon and Pacific Mall Legazpi in the Province of Albay. We are the largest
business segment of the Vicsal Group and receive the highest level of commitment from the group as
we continue to grow our business. In addition, the Vicsal Group is in various stages of development
of various residential and mixed-use projects, by itself or through joint venture arrangements with
third parties, such as Hongkong Land, in the Provinces of Cebu and Laguna. We believe that these
Vicsal Group developments will provide us with favorable locations for new stores in the future.
Additionally, we have a number of other strong relationships, including those with Ayala Land
and Megaworld. Our relationship with Ayala Land began more than 20 years ago and has allowed us
to secure anchor status at six of their locations, such as Ayala Center Cebu and Market! Market! due
to our multi-format retail offerings and continue to be invited to operate in their planned
developments. We also establish stores at attractive terms in some of the residential areas developed
by Megaworld, such as our Metro Fresh N Easy store in Megaworld’s Newport City, Manila.
94
Moreover, we have frequently been invited by various real estate developers to join as an anchor
tenant in new commercial projects. We intend to continue to leverage our existing relationships with
property developers and seek out opportunities to establish relationships with new partners as we
continue to expand our operations and build an established presence across the Philippines.
Strategies
Continue to expand our store network across the Philippines and increase our market share
We will continue to expand our multi-format store network to enhance our leading position in the
Visayas region and to increase our market share nationwide. Our diversified retail formats provide us
with flexibility to meet the needs of consumers in our targeted expansion locations and to tailor our
offerings to specific market conditions. Within the Visayas region, where we are a market leader, we
plan to leverage our strong brand recognition with consumers as we continue to open stores in each
of our retail formats in underpenetrated locations throughout the region, particularly in rapidly
developing cities. For example, Iloilo and Bacolod are promising areas for future retailing business
expansion due to the economic advancements of these areas. Pursuant to this strategy, in 2016 we plan
to open a department store and supermarket in Bacolod under an arrangement with Ayala Land and a
department store and a supermarket near the old Iloilo airport under an arrangement with Megaworld.
Nationwide, we intend to continue to roll-out new stores in other regions, including Luzon, to
increase our market share and brand recognition at a national level. We take a “clustering” approach
to network expansion. When entering a new area, we generally begin by building a larger retail store
such as a department store or hypermarket, typically located in commercial areas with high foot traffic
and close to public transportation, to create maximum consumer attraction and establish a local
presence. Then we cluster additional stores, including supermarkets and hypermarkets, around our
anchor stores and central areas to fully capture the consumer demand of the local market. After
analysis of, among other factors, local population and average income and the presence of
competitors, we generally pursue opportunities to open new stores in locations with competitive rents.
We are invited by major property developers as anchor tenants in their new projects from time to time.
We plan to open at least seven new stores by the end of 2016 with total gross floor area of 36,000 to
63,000 sqm. See “Use of Proceeds — Expansion of Store Network” on page 55 of this Prospectus.
In addition to our planned new stores, we have identified 30 sites for our expansion in the next
three years in the Visayas and Luzon regions, and are preparing commercial plans to open stores on
these sites, including retail format, store design, property development and operational set-ups.
As part of our expansion strategy, we plan to seek out opportunities to acquire existing retail
stores and consolidate them under the Metro brand name. For example, in 2011 we acquired and
successfully integrated Tita Gwapa (now rebranded as “Metro Fresh N Easy”) supermarkets into our
store network. Tita Gwapa was a chain of small scale supermarkets operating in various locations in
the Province of Cebu. We intend to continue to explore additional opportunities to acquire retail stores
that further our expansion plans and complement our current store network.
Increase store productivity and improve the shopping experience for our customers
We plan to continue to increase our store productivity by increasing current customers’ average
basket size, attracting new customers and identifying new revenue streams. To increase the average
basket size of existing customers, we plan to focus on improving our in-stock percentage and
enhancing our product assortment. We also intend to encourage suppliers to enroll in our
auto-replenishment program, an automated way of restocking inventories that provides a convenient
way for us to maintain appropriate inventory levels.
95
We intend to intensify mailing distribution within a five kilometer radius around our stores, and
enhance our in-store promotion displays along shelves and at checkout points. We believe that
enhanced marketing efforts will help us attract a larger proportion of customers living within our
catchment areas.
We also plan to continue to take steps to improve the shopping experience for our customers. We
plan to renovate existing stores, which we do for each store at least once every five years, and improve
the training of our sales and merchandising staff to ensure that we provide our customers with a
best-in-class shopping experience. Furthermore, we intend to grow the Metro Rewards Card program
and capitalize on information gathered from members of the program. Using this information coupled
with our point-of-sales data and market research, we will continue to improve and optimize our
product assortment to meet the evolving needs of consumers.
Intensify our focus on institutional and wholesale customers
We currently offer bulk discounts to institutional and wholesale customers, including schools,
businesses, non-governmental organizations, and sari-sari stores. We have maintained long-term
relationships with our institutional and wholesale customers, many of whom purchase large amounts
and volumes of products from us on a regular basis. The wholesale business generates an important
and stable revenue stream and similar profit margins to those of our retail business. We plan to
strengthen our institutional sales team by hiring dedicated personnel to concentrate specifically on
managing the institutional customer program and training the team intensively. Building on our
existing relationships and infrastructure, we also plan to expand the scope of our institutional sales
nationwide. We intend to engage in increased telemarketing targeted at institutional and wholesale
customers and to improve in-store customer service for such customers. We believe that increased
focus on sales to institutional customers will lead to customer loyalty and increased repeat business,
which in turn will increase our sales volume.
Improve operational efficiency and increase profitability
As we continue to grow, we intend to enhance operational efficiencies across our business. We
expect to realize scale-driven margin improvement from increased negotiating power with our
suppliers and other service providers. We plan to leverage these economies of scale to improve the
terms of our supply and marketing arrangements.
We will also continue to optimize our supply chain by continuing our clustering approach to
expansion, consolidating warehouses in the Province of Cebu into one distribution center and by
opening new distribution centers in strategic locations throughout our retail network. We intend to
gradually bring more of our supply chain in-house to further manage costs. Additionally, where
possible we will increase our reliance on in-house repair teams rather than third-party contactors for
repair and maintenance.
At the store level, we plan to increase our profitability by exercising disciplined inventory
management, implementing energy and cost savings initiatives and by optimizing our headcount. For
example, we plan to implement “queue-busting” by using handheld devices to scan customer
purchases while customers are still in queue, thereby reducing wait times and the need for additional
cashiers. Finally, we will strive to optimize our workforce by setting specific manpower to direct hire
ratios for different seasons of the year.
Expand complementary ancillary businesses
We continue to look for opportunities to use our ancillary businesses to increase synergies and
provide a one-stop shopping experience for our customers. We plan to enhance our existing ancillary
formats where we already have expertise, including baked goods, gourmet food and pharmacy, and
expand into new formats to fill the gaps left by our standard retail offerings. We also plan to further
96
develop our corporate leasing business to complement our existing products and utilize extra space in
our supermarkets and hypermarkets. By providing a comprehensive offering of products to our
customers within our existing facilities, we can increase customer traffic and better compete with
other retailers operating in the same markets.
History
We began our operations in 1982 with a single store in Colon, Cebu City operated by the Metro
Gaisano Family. Over the years, we have steadily grown and now operate 45 supermarkets, department
stores and hypermarkets as of June 30, 2015. We have also continually refined our management and
operational capabilities to keep up with industry trends and the evolving needs of our national retail
business. Set out below are key events in our history:
•
First store: In 1982, we opened our first store, Gaisano Metro Department Store and
Supermarket, in Colon, Cebu City. Our first store’s name was subsequently changed to
Metro Gaisano Department Store on October 15, 1990.
•
Visayas Expansion: In 1994, we opened our second store, Super Metro Mandaue, in
Mandaue City Cebu.
•
Anchor with Ayala Malls: In 1994, we opened our third store in Ayala Center Cebu in Cebu
City, which marked the start of our relationship with the Ayala group. The Company has
subsequently opened Metro Market! Market!, Metro Marquee Mall, Metro Alabang Town
Center and Super Metro Talisay as an anchor of Ayala Mall developments.
•
Luzon Expansion: In 2001, we opened Metro Legazpi Department Store and Supermarket
in Legazpi City, our first store outside the Visayas region. In July 2003, we opened our
Metro Lucena Department Store and Supermarket in Lucena City, Quezon.
•
Metro Manila Expansion: In 2004, we opened Metro Market! Market! Department Store
and Supermarket, our first store in Metro Manila at Market! Market!, Bonifacio Global
City, Taguig, through another venture with the Ayala group.
•
Loyalty Program: In 2006, we launched our loyalty program, the Metro Rewards Card
program.
•
Information Technology System. In 2008, we acquired a suite of end to end Oracle
software licenses for our financial, retail merchandising and store systems. All software
licenses acquired from Oracle have been fully implemented, with the latest, our retail
merchandising system, being implemented in 2013. Under the terms of our agreement, the
contract for technical support services for the purchased program licenses is renewable
annually.
•
Acquisition: In 2011, we acquired from Tita Gwapa Supertinda, Inc., a Philippine
corporation, the Tita Gwapa supermarket chain (now rebranded as “Metro Fresh N Easy”),
our first business acquisition, which is a chain of smaller scale supermarkets serving as
neighborhood stores.
•
Introduction of Hypermarket Format: In 2011, we ventured into the hypermarket retail
format with the opening of our first hypermarket store in Maasin City in the Province of
Leyte.
•
Relationship with Megaworld: In 2011, we opened Metro Market Binondo, which marked
the start of our relationship with the Megaworld group. We subsequently opened Metro
Supermarket at Resorts World in 2013, our second outlet in a Megaworld development.
97
•
Business Combination: On June 30, 2014, the Company entered into an agreement with
certain subsidiaries of the Vicsal Group to acquire and consolidate all of their retail
business activities. The agreement became effective on August 1, 2014. The retail business
acquired by the Company consists of selected assets and liabilities of the retail stores
necessary to operate the Company’s retail operations. The transaction was a business
combination of entities under common control and accounted for using the pooling of
interest method. See Note 2 to our audited financial statements for the year ended December
31, 2014.
•
Luzon Distribution Center: In February 2015, we opened a company-operated distribution
center located in Silangan, Canlubang in the Province of Laguna.
Business Operations
Overview
We are one of the leading retail groups in the Philippines and in the Visayas. According to
Euromonitor, we were the largest department store, the largest hypermarket operator, and the
second-largest supermarket operator in the Visayas in terms of retail value sales in 2014. We were also
the largest retailer in the Province of Cebu across all three formats in 2014 in terms of retail value
sales in 2014, according to Euromonitor. With over 30 years of retail experience, we have a deep
understanding of Philippine consumers, particularly those within our target lower- to middle-income
consumer segment. We currently do not have any sales or operations outside the Philippines nor have
we franchised our stores.
We opened our first store, Gaisano Metro Department Store and Supermarket, in 1982 in Colon,
Cebu City and in our early years focused on projected and steady growth in the Visayas, opening a
total of 16 stores by the end of 2010. In 2011, in an effort to take advantage of untapped potential in
the Philippine modern retail market, we launched an expansion campaign in Luzon and the Visayas
that brought our total number of stores up to 45 as of June 30, 2015. We believe that our Metro brand,
with a heritage of more than 30 years, is a well-recognized and trusted retailing brand within the
Philippines, and in the Visayas in particular, that will support our further expansion into underserved
regions of Western and Eastern Visayas as well as South Luzon, Metro Manila and Mindanao.
We have historically operated our business in two retail formats: supermarkets and department
stores. As part of our growth campaign, we have also ventured into the hypermarket format, which we
launched in 2011.
As we expand, we are able to draw upon our multi-format approach to select suitable formats for
each location. This allows us to efficiently and profitably enter new markets and integrate with new
communities. We take a “clustering” strategy with respect to our retail formats by situating
complementary stores around and surrounding larger anchor stores and within the delivery range of
our distribution centers. Our large department stores and hypermarkets are typically located in
commercial areas with high foot traffic proximate to public transportation. Moving outward from the
main hub areas of our department stores and hypermarkets, we locate our supermarkets in areas
surrounding the centralized location. These areas, which tend to be residential, are more ideal for the
smaller “Metro Fresh N Easy” supermarket store formats, which carry a smaller range of items as
compared with the hypermarkets and focus on selling essential household items at reasonable prices.
As of June 30, 2015, we had a portfolio of 45 stores, with nine stores in Metro Manila, 10 stores
in Luzon and 26 stores in Visayas, with a total net selling space of approximately 197,873 sqm.
98
The following map shows the location of our stores as of June 30, 2015.
Legend:
Department
Hypermarket
Supermarket
1.
Metro Supermarket Banilad (44th Store) opened on March 18, 2015.
2.
Super Metro Naga (45th store) opened on June 19, 2015.
99
Outright Suppliers and Concessionaires
Merchandise sales in our supermarkets, department stores and hypermarkets consist of both
outright sales and concession sales. Outright sales accounted for over 70% of our net sales for the
years ended December 31, 2012, 2013 and 2014 and for the six months ended June 30, 2015. We
directly source and sell our outright sale items. Concessionaires are permitted to occupy designated
areas in our stores and to establish, operate and manage their own product displays at their own cost
and in accordance with our policy guidelines.
As of December 31, 2014, our outright sale items and concession sale items were sourced from
over 3,600 outright suppliers and concessionaires. For the year ended December 31, 2014, our top 10
outright suppliers and top 10 concessionaires accounted for 21% and 3%, respectively, of our total net
sales.
Approximately 90% of our merchandise is sourced locally, allowing us to avoid delays associated
with the import of goods, respond quickly to changing inventory needs and consumer trends, as well
as limit our exposure to foreign exchange risks and import taxes. The remaining 10% is sourced
through local import agents.
Most of our outright suppliers and concessionaires have longstanding relationships with us. We
have developed stable and close working relationships with our suppliers and have had no material
disputes with any of them in recent years. We conduct formal meetings with our major suppliers at
least four times a year. We also conduct meetings periodically to discuss certain items, including
delivery issues, new innovation, new systems and stores. Other measures to maintain close
relationships with our suppliers include organizing social events such as an annual dinner gathering,
where we give awards to our top suppliers based on certain criteria.
Our policy is to promptly settle payments when due. We typically pay outright suppliers within
60 days of invoice, and pays concessionaires the amounts due in respect of the previous month’s sales
on the fifteenth of each month. This has enhanced our reputation with our suppliers and helped us to
establish strong relationships.
We believe that our longstanding relationships with suppliers often leads to more favorable
pricing, and priority to us in terms of timing and volume of merchandise supplied. This enables us to
react quickly to inventory demand and changing consumer trends.
In selecting outright suppliers or concessionaires, our principal criteria include: (i) type and
price of the merchandise; (ii) stock replenishment efficiency; (iii) reputation and reliability; (iv)
quality control; and (v) market penetration. Negotiations with outright suppliers and concessionaires
are carried out centrally by the team at our headquarters.
Supermarkets
Overview
Our supermarket business is operated under two brand names — “Metro Supermarket” and
“Metro Fresh N Easy,” which we refer to collectively herein as “Metro Supermarket.” The Metro Fresh
N Easy brand name is used for our smaller scale supermarkets serving as neighborhood stores.
According to Euromonitor, we were one of the largest supermarket operators in the country and in the
Visayas in terms of retail sales value in 2014.
Metro Supermarket opened its first supermarket, Gaisano Metro Department Store and
Supermarket, in Cebu City in 1982 and currently operates 24 supermarkets in the Visayas, Metro
100
Manila, and the rest of Luzon. As of June 30, 2015, Metro Supermarket had a total net selling space
of approximately 42,298 sqm and an average net selling space of 1,762 sqm, as compared to a total
net selling space and average net selling space of 39,319 sqm and 1,787 sqm, respectively, as of June
30, 2014.
Our supermarket business is our largest retail format in terms of net sales and contributed 48.6%
of our net sales for the first six months of 2015. The following table sets out the net sales, average
basket size, same store sales growth and number of transactions of Metro Supermarket for the years
ended December 31, 2012, 2013 and 2014 and for the six months ended June 30, 2015.
For the six months ended
For the years ended December 31,
2012
2013
June 30,
2014
2014
2015
Net sales ( =
P million) .................................
11,870.9
13,589.3
13,959.6
6,455.5
7,150.1
Average basket size ( =
P )............................
449.7
497.8
498.6
492.8
503.5
Same store sales growth (%) .....................
2.9
3.2
(0.8)
(2.5)
6.3
Number of transactions (millions) .............
26.4
27.3
28.0
13.1
14.2
We believe that Metro Supermarket provides customers in our target markets with easy access
to a one-stop shopping experience and a large assortment of quality products at an affordable price.
We actively seek to consistently provide the goods our customers need at prices that are competitive
with those of our competitors. We are also committed to providing a variety of high quality fresh
goods to satisfy the ever-changing demands of our customers. To accomplish this, we place an
emphasis on ensuring that our stores are highly integrated with the communities in which they are
located, allowing us to better understand our customers and provide them with a best-in-class
shopping experience. In addition to our broad assortment of local products we also offer imported
products sourced directly from the U.S., Europe, China and other Asian countries. We believe that our
focus on providing high quality goods and services at affordable prices will allow us to benefit from
the growing spending needs of the lower- to middle-income consumer segment.
Metro Supermarket Stores
Store Network and Size
As of June 30, 2015, Metro Supermarket had 24 stores in 14 cities across the country, with a total
net selling space of 42,298 sqm and an average net selling space per store of 1,762 sqm.
The following table sets out the number of Metro Supermarket stores, net selling space, average
net selling space and net selling space growth of our supermarkets as of December 31, 2012, 2013 and
2014 and June 30, 2015.
As of December 31,
2012
2013
As of June 30,
2014
2015
Number of stores .....................................................
19
21
23
24
Net selling space (sqm)............................................
33,568
36,781
40,980
42,298
Average net selling space (sqm) ...............................
1,767
1,751
1,782
1,762
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Metro Supermarket Store Locations and Premises
The following table sets out the store name, year opened, region, format and net selling space
of our supermarkets as of June 30, 2015.
Net Selling
Year
Region
In Mall/
Space
Standalone
(in sqm)
Store Name
Opened
1. Metro Supermarket Colon ..............................................................
1982
Central Visayas Standalone
2,627
2. Metro Supermarket Mandaue ..........................................................
1994
Central Visayas In Mall
3,886
3. Metro Supermarket Ayala Center Cebu ...........................................
1994
Central Visayas In Mall
4,058
4. Metro Supermarket Legazpi ...........................................................
2001
South Luzon
In Mall
1,923
5. Metro Supermarket Lucena.............................................................
2003
South Luzon
In Mall
2,305
6. Metro Supermarket Market! Market! ..............................................
2004
NCR
In Mall
4,110
7. Metro Supermarket Marquee Mall Angeles .....................................
2009
Central Luzon
In Mall
4,232
8. Metro Supermarket Toledo .............................................................
2010
Central Visayas Standalone
1,367
9. Metro Fresh N Easy Punta (Formerly Tita Gwapa — Punta)...........
2011
Central Visayas Standalone
454
10. Metro Fresh N Easy Basak (Formerly Tita Gwapa — Basak) .........
2011
Central Visayas Standalone
364
11. Metro Fresh N Easy Minglanilla ....................................................
2011
Central Visayas Standalone
474
12. Metro Fresh N Easy Tabunok (Formerly Tita Gwapa — Tabunok) ..
2011
Central Visayas Standalone
318
13. Metro Fresh N Easy Tabok (Formerly Tita Gwapa — Tabok) .........
2011
Central Visayas Standalone
351
14. Metro Fresh N Easy Umapad .........................................................
2011
Central Visayas Standalone
15. Metro Supermarket Binondo Lucky Chinatown...............................
2011
NCR
In Mall
1,684
16. Metro Supermarket Alabang Town Center ......................................
2012
NCR
In Mall
3,455
17. Metro Fresh N Easy Lawton...........................................................
2012
NCR
Standalone
510
18. Metro Wholesale Mart Colon .........................................................
2012
Central Visayas Standalone
913
19. Metro Fresh N Easy Mactan ...........................................................
2012
Central Visayas Standalone
981
20. Metro Supermarket The District Imus.............................................
2013
South Luzon
In Mall
1,424
21. Metro Supermarket Plaza 66 Newport City.....................................
2013
NCR
Standalone
1,789
22. Metro Supermarket Carmen ............................................................
2014
Central Visayas Standalone
1,549
23. Metro Supermarket Mandaluyong ...................................................
2014
NCR
1,661
24. Metro Fresh N Easy Banilad ..........................................................
2015
Central Visayas Standalone
In Mall
Total:
546
1,318
42,298
We typically target locations with easy access and a high concentration of lower- to
middle-income consumers. In selecting potential stores locations for new supermarkets, we look for
convenient locations near roads with highly populated residential areas and access to public transport,
targeting customers living within a two to five kilometer radius of our stores. As of June 30, 2015,
14 of our supermarkets were standalone, while 10 supermarkets shared locations with our department
stores.
Store Layout and Operation
For new supermarkets opened after 2011, we have employed uniform standards for store layout
and design, equipment, quality of construction and the composition of building and finishing
materials. We believe that employing uniform standards across stores helps limit construction and
refurbishment costs, as well as improve customer satisfaction and loyalty, since customers are able to
experience a similar environment with a familiar shopping experience regardless of location,
including a familiar product assortment. Other key features of store design include (i) refreshing
colors with clean aisles and organized displays; (ii) grid design for the sales area; and (iii) uniform
location of products for quicker navigation and ease of shopping across stores.
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We are committed to offering shoppers an attractive and modern store environment by ensuring
we provide clean and well-lit shopping areas with modern ventilation and air-conditioning systems in
our stores as well as convenient layouts with a broad range of well-presented and easily accessible
products. We also endeavor to ensure that polite and friendly employees are available to assist the
customers with locating and selecting products. In addition, we provide a large number of cash
registers with quick-scan systems to shorten transaction times and minimize long queues.
The following picture shows the typical appearance of Metro Supermarkets:
Products
Metro Supermarket divides its products into food, fresh, nonfood and ancillary (including Metro
Pharmacy, Suisse Cottage, Metro Gourmet and Food Avenue). As of June 30, 2015, Metro Supermarket
had over 50,000 SKUs (of which approximately 75% are food and fresh, 20% are nonfood and 5% are
ancillary).
Metro Supermarket offers a broad range of products, including butchery, fresh and frozen
seafood products, grocery products and imported goods. It also sells pharmacy, bakery, food court and
deli products through our ancillary formats. For a detailed description see “ — Ancillary Business
Formats” on page 114 of this Prospectus. Metro Supermarket takes a “plug and play” approach to
product assortment, with each store starting with a basic assortment of standard products and then
“plugging in” additional products based on the needs of the local target market. For example, our
mall-based supermarkets frequently include a broader selection of imports and other products targeted
at higher-income consumers. This approach helps ensure that consumers have access to a
comprehensive low price selection of their specific everyday needs while reducing our costs
associated with selecting and supplying products. This helps further Metro Supermarket’s strategy of
providing an economical and convenient shopping experience for its customers, with products being
sold at competitive prices.
Private label brands
Metro Supermarket also sells a broad variety of products under private label brands. Metro
Supermarket’s private label brands include Suisse Cottage, West Coast, Mei Wei, South Sea, Tropical
Delights, Pure Soft, Savers Select, Pure Max, Q Meat and Metro Gourmet.
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Metro Supermarket’s margins on private label products are, on average, higher than those
achieved for third-party branded products in a similar category because manufacturers of our private
label products do not incur marketing or advertising expenses. This allows Metro Supermarket to order
large quantities at significantly lower prices. As a result, our private label products are also generally
priced lower than similar brand-name products.
For the six months ended June 30, 2015, Metro Supermarket’s sales of private label products
accounted for approximately 6% of its net sales. Metro Supermarket conducts detailed market research
to evaluate its competitive advantage in developing its private label products and brands. We typically
do not develop private labels for products where there is significant brand awareness and customer
loyalty, such as those products produced by the leading multinational or national companies.
Pricing
Metro Supermarket’s pricing strategy is to be competitive in pricing in all product categories.
Metro Supermarket actively monitors the prices of goods sold at other Philippine supermarket stores
and seeks to offer its products sold through outright sales at competitive prices which customers.
To further strengthen customers’ perception of receiving value for money, Metro Supermarket
regularly holds promotions and offers sales and markets products at discounts from the usual retail
price. Due to our large store network, long-standing relationships with suppliers and corresponding
purchasing power to purchase merchandise at attractive prices, Metro Supermarket is generally able
to price its outright sales items competitively with products of similar quality, while still achieving
attractive profit margins. Although Metro Supermarket cannot unilaterally discount the prices of
concession items, concessionaires often choose to apply discounts to the prices of their goods in
conjunction with Metro Supermarket promotions. For private label products, Metro Supermarket uses
the prices of other branded products in a similar category as a benchmark for pricing and Metro
Supermarket has discretion to set the prices within a range pre-agreed with the manufacturers.
Merchandising mix, including the split between products sold through outright sales and those
sold through concessionaires, is a key driver of average price points at each store. Metro Supermarket
focuses on achieving the right merchandise mix and resulting price points for each store, which is a
critical factor for our business.
Customers
Metro Supermarket primarily targets low- to middle-income consumers who live within walking
distance of its stores and those who use personal or public transport to shop. Metro Supermarket offers
suitable car parking facilities to accommodate customers who travel to stores by car and also locates
its stores in areas close to main transportation hubs. Its customers include individuals, institutional
customers and resellers. Metro Supermarket offers negotiated discount prices to institutional
customers, such as schools and businesses, that make bulk purchases for special occasions. Metro
Supermarket supermarkets also sells to resellers, including small to medium sari-sari stores,
restaurants, bakeries, convenience and drug stores. We are not dependent on any single customer in
our supermarket business.
Suppliers
With over 1,000 regular suppliers as of June 30, 2015, Metro Supermarket’s supplier base is
diversified between local suppliers such as Universal Robina Corporation and San Miguel Pure Foods
Company, Inc. and multinational corporations such as Nestle Philippines Inc., and Proctor and
Gamble. Metro Supermarket’s top five suppliers together accounted for 35% of its net sales for the six
months ended June 30, 2015. For smaller local suppliers, Metro Supermarket seeks to partner with the
best suppliers in each region in which it operates. We believe that our supermarket business as a whole
is not dependent on any single supplier.
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Metro Supermarket believes that it receives higher margins and has more control over its product
assortment by focusing its efforts on outright sales, particularly due to its strength in sourcing.
Competition
The Philippine food retail market has become increasingly competitive in recent years. We
compete with both traditional stores and modern retail operators, including hypermarkets,
supermarkets, convenience stores and local grocery stores, on the basis of location, shopping
experience, presentation, price, supply chain and additional benefits such as loyalty programs.
According to Euromonitor, the top five operators of supermarkets in terms of 2014 retail sales value
were SM Retail, Robinsons Retail Group, the Company, Puregold Price Club and Rustan’s Group of
Companies. Each of these retail chains has an established presence in the Philippines and continues
to open supermarkets in the same cities, and often in the same neighborhoods, where we have opened
or intend to open our supermarkets. See “Industry — Overview of the Philippine Supermarket Industry
— Competitive Landscape” on page 142 of this Prospectus for a general discussion on competition
among supermarkets. International brands with local partners operating stores in larger metro areas
have recently begun to present a new source of competition.
We believe that Metro Supermarket’s differentiators are our prices and our product assortment.
We believe that we are able to provide all of the basic goods that our consumers expect while
continuing to be competitive in pricing in every region that we operate in. Additionally, our strength
in product assortment, particularly in nonfood products with higher margins, help us compete with
other retailers of food products. We believe that our prices and assortment, coupled with a
best-in-class customer shopping experience, set us apart from our competitors.
Department Store
Overview
We started our retail business with the opening of Gaisano Metro Department Store and
Supermarket in Colon, Cebu City in 1982. Our department stores are now operated under the “Metro
Department Store” brand name. We were the third largest department store retailer in the Philippines
based on retail sales value in 2014 according to Euromonitor. Metro Department Store targets end user
consumers in the lower- to middle-income market group.
As of June 30, 2015, we had 10 department stores in 9 cities throughout the country, with a total
net selling space of 110,521 sqm and an average net selling space per store of 11,052 sqm.
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Metro Department Store is our second largest retail format and contributed 32.9% of our net sales
for the first six months of 2015. The following table sets out the net sales, average basket size, same
store sales growth and number of transactions per store per day of Metro Department Store for the
years ended December 31, 2012, 2013 and 2014 and for the six months ended June 30, 2014 and 2015.
For the six months ended
For the years ended December 31,
2012
2013
June 30,
2014
2014
2015
Net sales ( =
P million) .................................
9,722.0
9,989.8
9,829.9
4,520.9
4,849.6
(=
P )............................
476.6
551.9
558.5
565.1
584.3
Same store sales growth (%) .....................
8.9
(1.4)
(2.4)
(8.4)
7.3
Number of transactions (millions) .............
20.4
18.1
17.6
8.0
8.3
Average basket size
Metro Department Store aims to offer a relevant and diverse shopping experience that reflects
the needs of its target consumer group by offering a broad range of products and services across
multiple segments. Our department store product offerings include men’s lines, ladies’ lines and
children’s lines, shoes and accessories, home furnishings and others. We believe that this approach
positions our department stores as a one-stop solution. This is especially beneficial for our stores
outside of major metro areas where there is less competition from stand-alone chain stores.
Metro Department Stores
Store Network and Size
As of June 30, 2015, we had 10 department stores in 9 cities and municipalities throughout the
country, with a total net selling space of 110,521 sqm and an average net selling space per store of
11,052 sqm.
The following table sets forth the number of stores, net selling space, average net selling space
and net selling space growth of our department stores as of December 31, 2012, 2013 and 2014 and
June 30, 2015.
As of December 31,
2012
2013
As of June 30,
2014
2015
Number of stores .....................................................
9
10
10
10
Net selling space (sqm)............................................
115,310
118,589
110,521
110,521
Average net selling space (sqm) ...............................
12,812
11,859
11,052
11,052
In 2014, we remodeled two stores to provide more backroom space for concessionaires and to
increase selling space for corporate leasing, resulting in a 7% decrease in net selling space.
Metro Department Store determines its store size by the available real estate and consumer needs
in its targeted expansion areas. For Metro Department Store’s new developments, it targets store sizes
with a net selling space in the range of 3,000 sqm to 21,000 sqm.
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Metro Department Store Locations and Premises
The following table sets out the store name, year opened, region, format and net selling space
of our department stores as of June 30, 2015.
Region
In Mall/
Net Selling
Standalone
Space (in sqm)
Store Name
Year Opened
1. Metro Colon ..................................................
1982
Central Visayas
Standalone
11,189
2. Metro Mandaue ..............................................
1994
Central Visayas
In Mall
15,698
3. Metro Ayala Center Cebu ...............................
1994
Central Visayas
In Mall
18,893
4. Metro Legazpi ...............................................
2001
South Luzon
In Mall
8,488
5. Metro Lucena.................................................
2003
South Luzon
In Mall
5,289
6. Metro Market! Market! ..................................
2003
NCR
In Mall
20,812
7. Metro Marquee Mall Angeles .........................
2009
Central Luzon
In Mall
10,861
8. Metro Plaza Toledo ........................................
2010
Central Visayas
Standalone
2,531
9. Metro Alabang Town Center...........................
2012
NCR
In Mall
13,481
10. Metro The District Imus.................................
2013
NCR
In Mall
3,279
Total:
110,521
As of June 30, 2015, two of our department stores were operated as standalone stores and eight
were located within shopping malls, with anchor status in eight malls. As of June 30, 2015, all of our
department stores were located in properties owned or developed directly or indirectly by the Vicsal
Group.
Store Layout and Operation
We believe that the format and look of each Metro Department Store, along with its merchandise
presentations, are key to the success of the Metro Department Store brand. We believe that store
merchandise presentations and the associated visual merchandising are effective in communicating
information on price, current trends and value, while also encouraging impulse purchases. For
example, Metro Department Store may use deliberate displays of selected merchandise to create and
encourage consumer interest in a particular seasonal color of merchandise.
Important principles of the Metro Department Store presentation include maintaining an open
layout to permit easy circulation of customers throughout the store; creating eye-catching displays;
providing good lighting; service centers; fitting rooms and mirrors; maintaining appropriate signage;
matching internal communications with external advertising; maintaining proper assortment and
grouping of products; and maintaining a clean and tidy environment for its customers. Metro
Department Store also utilizes a large number of mannequins to add vibrancy to its stores.
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The following picture shows the typical appearance of our department stores:
Merchandise
Metro Department Store offers an extensive range of products across multiple categories
including home furnishings, shoes and accessories, men’s, ladies’ and children’s lines, appliances and
home improvement, jewelry and others. Like our supermarkets, our department stores focus on serving
the lower- to middle-income consumer segment. Therefore, our product mix is focused more on
meeting consumer demand for everyday lifestyle merchandise than on fashion. Product and brand
mixes vary from store to store and our merchandising strategies are determined in particular by local
consumer preferences and spending power. As of June 30, 2015, Metro Department Store had over
500,000 SKUs.
Metro Department Stores feature a mix of international and local brands, including:
Fashion
Jag
Lees
Levi’s
Dockers
Wrangler
Hanes
Bench
Penshoppe
Sahara
Dickies
Burlington
Speedo
Essenxa
Attitudes
Paper Dolls
Vans
Shoes
Adidas
Nike
Converse
Merrell
Ipanema
Gibi
Rusty Lopez
Janylin
Uratex
Corelle
Chief Classic
Lock in Lock
Lifestyle
Sanyang
Luminarc
Zebra
Home Gallery
Ultima
Home Furnishings
Metro Department Store offers both basic brands as well as well-known international brands for
the lower- to middle-income consumers in its target market. We continuously strive to optimize our
assortment of brands in each product category by replacing poorly performing brands with new brands,
which also helps keep our product assortment fresh and relevant. On an ongoing basis, we assess the
performance of brands based on sales performance, including sales performance of concessionaires,
and replace brands that have performed poorly. This, coupled with regular evaluation of lifestyle
preferences and shopping capabilities of our target market enables us to offer relevant and diverse
shopping solutions to our customers.
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Metro Department Store maintains close relationships with its concessionaires and suppliers for
its outright sales to ensure that it is able to continuously offer a broad range of merchandise. The
concessionaires that carry competitive brands with a complete assortment of merchandise are
generally placed in areas visually supported by graphics and unique fixtures, while suppliers of
direct-sale merchandise are used to complete our product assortment and provide product
differentiation.
Private label brands
Metro Department Store offers a comprehensive selection of private label apparel focused on
meeting the basic everyday lifestyle needs of our target consumer segment. Metro Department Store’s
private label brands include, among others, Maco, Blue Camp, Christian Ferre, Red Bears, Young
Teens, Kiddies and Nicole. We also sell a broad range of private label products in categories with
lower levels of brand recall, such as batteries, light bulbs, household consumables, writing
instruments and cooking utensils under brand names including Metro Ware, Metro Living, Main
Course and Regal Comfort.
For the six months ended June 30, 2015, Metro Department Store’s sales of private label products
accounted for approximately 5% of its net sales. Metro Department Store keeps track of the latest
trend forecasts and predictions in the most important international fashion markets including New
York, London, Paris and Tokyo through subscriptions to trend forecasting reports. Based on its
assessment of fashion trends, our fashion coordinators decide on a range of key looks and colors to
carry that season, which in turn guides the merchandise that we procure.
Pricing
Metro Department Store’s pricing strategy is to be competitive in pricing in all product
categories. For outright sales of branded merchandise, prices are generally set in line with suggested
retail prices from suppliers. However, each department has a list of key value items with prices set
based on a bi-monthly price check against competitors. For private label products, we conduct
rigorous market research to determine appropriate prices based on product quality and in line with our
strategy of offering competitive prices. Certain private label products are designated as “nominated
items,” which are priced between 15% to 30% cheaper than branded products.
For concession sales, product assortment is controlled by our merchandizing team to ensure we
offer a complete assortment of products to customers. Prices are set universally for each brand by
concessionaires across all retail channels, including discounts and promotions, with price adjustments
made simultaneously with a 15 day lead time.
Customers
Metro Department Store targets customers who live within walking distance of its stores and
those who use personal or public transport to shop. Metro Department Stores offers suitable car
parking facilities to accommodate customers who travel to stores by car and also locates its stores in
areas close to main transportation hubs. Metro Department Store primarily targets lower- to
middle-income consumers and strategically adjusts its product mix within different stores to account
for variances in local income levels and customer demographics. We are not dependent on any single
customer in our department store business.
Suppliers
With over 2,300 regular suppliers as of June 30, 2015, Metro Department Store’s supplier base
includes suppliers such as Fil-Pacific Apparel Corporation, Authentic American Apparel Inc., Camel
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Appliances Manufacturing Corp. and Electrolux Philippines Inc.. Metro Department Store’s top five
suppliers together accounted for approximately 8.0% of its net sales for the six months ended June 30,
2015. We believe that our department store business as a whole is not dependent on any single
supplier.
Competition
The Philippine department store industry is dominated by a few top operators. According to
Euromonitor, SM Retail, Robinsons Retail Group, the Company, Gaisano Grand and Gaisano Capital
were the top five market participants in the department store market in 2014 in terms of retail sales
value. See “Industry — Overview of the Philippine Department Store Industry — Competitive
Landscape” on page 138 of this Prospectus for a general discussion on competition among department
stores. Metro Department Store competes with major department store operators on the basis of
location, product assortment, brand recognition, store image, presentation, price, understanding of
market demand and value-added customer services. Each of the competing department store chains has
an established presence in the Philippines and is continuing to open department stores in the same
cities, and often the same neighborhoods, where Metro Department Store has opened or intends to
open its department stores.
We believe that Metro Department Store’s key differentiators within its target market are its
prices and product assortment, which help enhance our customers’ shopping experience. The ability
of our customers to shop at one location for all of their basic lifestyle needs at reasonable price points
helps us drive repeat purchases by customers and improve store traffic. Additionally, our selection of
products based on actual consumer needs helps ensure that we remain competitive at all of our
locations.
Hypermarkets
Overview
Our hypermarket retail format is operated under the name “Super Metro.” Our hypermarkets are
a hybrid between our supermarkets and department stores, providing a broad assortment of basic
everyday products at value prices. A cornerstone of our plans for future expansion, we opened our first
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hypermarket in 2011 and we currently operate 11 hypermarkets in 10 cities throughout the country
with a total net selling space of 45,054 sqm and an average net selling space of 4,096 sqm. Our
hypermarkets are supported by the same distribution centers as our supermarkets and department
stores.
Our hypermarket business contributed 18.5% of our net sales for the first six months of 2015.
The following table sets out the net sales, average basket size, same store sales growth and number
of transactions of Super Metro for the years ended December 31, 2012, 2013 and 2014 and for the six
months ended June 30, 2015.
For the six months ended
For the years ended December 31,
2012
2013
June 30,
2014
2014
2015
Net sales ( =
P million) .................................
957.5
1,889.0
4,567.4
1,903.9
2,727.0
Average basket size ( =
P )............................
383.0
460.7
466.1
453.3
514.5
Same store sales growth (%) .....................
0.0
15.7
4.2
9.1
26.1
Number of transactions (millions) .............
2.5
4.1
9.8
4.2
5.3
We believe that the hypermarket format will allow us to bring more basic grocery and general
merchandise products to consumers without access to traditional supermarkets and department stores.
Super Metro locations are intended to become one-stop-shop community stores that offer customers
a wide variety of basic needs at low prices. We seek to couple our experience in focusing on the lowerand middle-income consumer group with the hypermarket format to achieve market penetration in less
developed regions of the country.
Hypermarket Stores
Store Network and Size
As of June 30, 2015, Super Metro had 11 stores in 10 cities and municipalities throughout the
country with a total net selling space of 45,054 sqm and an average net selling space per store of 4,096
sqm.
The following table sets out the number of stores, net selling space, average net selling space and
net selling space growth of our hypermarkets as of December 31, 2012, 2013 and 2014 and for the six
months ended June 30, 2015.
As of December 31,
2012
2013
As of June 30,
2014
2015
Number of stores .....................................................
2
7
10
11
Net selling space (sqm)............................................
4,891
28,144
40,995
45,054
2,446
4,021
4,099
4,096
1
Average net selling space (sqm) .............................
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Store Locations and Premises
The following table sets out the store name, year opened, region, format and net selling space
of our hypermarkets as of June 30, 2015.
Region
In Mall/
Net Selling
Standalone
Space (in sqm)
Store Name
Year Opened
1. Super Metro Maasin .......................................
2011
Eastern Visayas
Standalone
3,416
2. Super Metro Naga ..........................................
2011
Central Visayas
Standalone
1,475
3. Super Metro Lapu-lapu ..................................
2013
Central Visayas
Standalone
6,533
4. Super Metro Bogo..........................................
2013
Central Visayas
Standalone
3,630
5. Super Metro Talisay .......................................
2013
Western Visayas
Standalone
3,703
6. Super Metro Mambaling.................................
2013
Central Visayas
Standalone
5,701
7. Super Metro Anonas.......................................
2013
NCR
Standalone
3,729
8. Super Metro Colon.........................................
2014
Central Visayas
Standalone
5,371
9. Super Metro Carcar........................................
2014
Central Visayas
Standalone
3,679
10. Super Metro Antipolo.....................................
2014
South Luzon
Standalone
3,758
11. Super Metro Panganiban ................................
2015
South Luzon
Standalone
4,059
Total:
45,054
Our hypermarkets are strategically situated in convenient locations not currently served by
modern supermarkets and department stores. In selecting stores for new hypermarkets, we look for
convenient locations near roads with highly populated residential areas and access to public transport,
targeting customers living within a two to five kilometer radius around our stores.
Store Layout and Operation
Our hypermarkets employ uniform standards for store layout and design, equipment, quality of
construction and the composition of building and finishing materials. We believe that employing
uniform standards across our stores helps limit construction and refurbishment costs, as well as
improve customer satisfaction and loyalty, since customers are able to experience a similar
environment with a familiar shopping experience regardless of location, including a familiar product
assortment, and know where to find the products they normally purchase for a quicker and more
efficient shopping experience.
We are committed to offering shoppers an attractive and modern store environment by ensuring
we provide clean and well-lit shopping areas with modern ventilation and air-conditioning systems in
our stores as well as convenient layouts with a broad range of well-presented and easily accessible
products. We also endeavor to ensure that polite and friendly employees are available to assist the
customers with locating and selecting products. In addition, we provide a large number of cash
registers with quick-scan systems to shorten transaction times and minimize long queues.
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The following picture shows the typical appearance of our hypermarkets:
Products
Super Metro divides its products into four categories: food, including fresh and grocery,
nonfood, including health and beauty, general merchandise and ancillary. As of June 30, 2015, Super
Metro had over 100,000 SKUs, of which 55% were food products, 15% were nonfood, 25% were
general merchandise and 5% were ancillary products.
Super Metro offers a broad assortment of products at its hypermarkets, including items typically
sold at supermarkets or at department stores. Super Metro’s product assortment aims to meet a wider
variety of basic consumer needs than typical supermarkets or department store. Super Metro adjusts
its product assortment based on the demographics of each store’s customers as well as the size of the
store to ensure that it is able to meet such needs.
Private Label Brands
Super Metro also offers a broad range of private label brands. For more details, see “Business
— Supermarkets — Products — Private Label Brands” on page 103 and “Business — Department
Stores — Merchandise — Private Label Brands” on page 109 of this Prospectus. For the six months
ended June 30, 2015, Super Metro’s sales of private label products accounted for approximately 10%
of its net sales.
Pricing
Super Metro actively monitors the prices of goods sold at other Philippine hypermarkets and
seeks to offer its products sold as outright sales at competitive prices.
To further strengthen customers’ perception of receiving value for money, Super Metro regularly
holds promotions and offers sales and markets products at discounts from the usual retail price. Due
to our large store network and scale, long-standing relationships with suppliers and corresponding
purchasing power to purchase merchandise at attractive prices, Super Metro is generally able to price
its outright sales items competitively with products of similar quality, while still achieving attractive
profit margins. Although Super Metro cannot unilaterally discount the prices of concession items,
concessionaires often choose to apply discounts to the prices of their goods in conjunction with Super
Metro promotions. For private label products, Super Metro uses the prices of other branded products
in a similar category as a benchmark for pricing, and Super Metro has the discretion to set the prices
within a range pre-agreed with the manufacturers.
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Merchandising mix, including the split between products sold as outright and concession sales,
is a key driver of average price points at each store. Super Metro focuses on achieving the right
merchandise mix and resulting price points for each store, which is a critical factor for the business.
Customers
Due to the nature of its operations, Super Metro hypermarkets target end consumers, including
retail customers and wholesalers, in locations beyond the reach of typical modern supermarkets and
department stores. Therefore, Super Metro seeks to ensure that its stores are centrally located in its
target regions. Super Metro targets primarily middle-income and upper lower-income retail customers.
Super Metro hypermarkets also sells to resellers, including small to medium sari-sari stores,
restaurants, bakeries, convenience and drug stores. We are not dependent on any single customer in
our hypermarket business.
Suppliers
Super Metro’s supplier base is the same as that of our supermarkets and department stores. Nestle
Philippines, Inc., Dranix Distributors, Inc., Ever Consumer Sales, Inc., Universal Robina Corporation
and Monde Nissin Corporation are among the biggest suppliers of our hypermarket retail format.
Super Metro’s top five suppliers together accounted for approximately 30% of its net sales for the six
months ended June 30, 2015. We believe that our hypermarket business as a whole is not dependent
on any single supplier.
Competition
Super Metro competes primarily with traditional stores and other modern retail operators,
including other hypermarkets, supermarkets, convenience stores and local grocery stores. According
to Euromonitor, the top five operators of hypermarkets in terms of 2014 retail sales value were
Puregold Price Club, SM Retail, Rustan’s Group of Companies, the Company and Prince Warehouse
Club. These competitors, like Super Metro, are associated with larger brands that have an established
presence in the Philippines. See “Industry — Overview of the Philippine Hypermarket Industry —
Competitive Landscape” on page 145 of this Prospectus for a general discussion on competition
among hypermarkets.
We believe that Super Metro’s key competitive strength is its ability to rely on our group’s deep
experience in providing retail services to the lower- to middle-income consumers. Cost saving
measures implemented in our existing operations are easily transplanted to the Super Metro platform,
enabling us to maintain our status as a price leader in the hypermarket market. Additionally, our focus
on basic everyday necessities further reduces our costs by allowing us to source more products from
fewer suppliers.
Ancillary Business Formats
In addition to our core retail formats, we operate ancillary businesses complementary to our core
operations, including corporate leasing, pharmacy and food and beverage businesses. These businesses
are not currently operated as standalone stores, but are generally located outside our main selling area
and provide our customers with a more complete shopping experience.
Corporate Leasing
In order to maximize our use of retail space and to provide our customers with a more complete
shopping experience, we sublease a portion of our retail space to third parties that operate businesses
complementary to our retail business. This subleased retail space is located outside of the main selling
space in our hypermarkets and supermarkets. Our current portfolio of more than 6,000 sqm. of leased
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selling space includes tenants such as Jollibee, Starbucks and Department of Foreign Affairs (DFA)
satellite offices. We intend to continue developing our corporate leasing business as we expand our
hypermarket operations. The following table sets out the rental income derived from our corporate
leasing business for the years ended December 31, 2012, 2013 and 2014 and for the six months ended
June 30, 2015.
For the six
months ended
For the years ended December 31,
2012
2013
June 30,
2014
2015
Rent ( =
P million) .......................................................
70.7
74.5
89.1
67.4
Net leasable area (sqm)............................................
4,045.2
5,849.6
7,056.4
7,060.4
Metro Pharmacy
Under the “Metro Pharmacy” brand, we sell competitively priced generic and branded medicines
from top pharmaceutical companies. In certain markets, we also offer nutritional supplements sold in
partnership with GNC. As of June 30, 2015, we operated 20 Metro Pharmacies within our store
premises. The following table sets out the net sales of our Metro Pharmacies for the years ended
December 31, 2012, 2013 and 2014 and for the six months ended June 30, 2015.
For the six
months ended
For the years ended December 31,
2012
P million) ............................................
Net Sales (1) ( =
2013
497.4
June 30,
2014
519.4
2015
459.9
254.8
Note:
(1)
Included in net sales of either hypermarket or supermarket formats.
Food and Beverage
Suisse Cottage
Under the “Suisse Cottage” brand, we sell a wide assortment of local and international breads
and pastries. We currently operate two production centers located in Pacific Mall Mandaue and in
Metro Market! Market! that supply each of our supermarkets with fresh products. At the store level,
bakery products are baked three times per day to ensure freshness and quality. The Suisse Cottage
brand is a long time staple of Metro Supermarket and can be found in each of our supermarkets and
hypermarkets. As of June 30, 2015, we operated 22 branches of Suisse Cottage. The following table
sets out the net sales of our Suisse Cottage business for the years ended December 31, 2012, 2013 and
2014 and for the six months ended June 30, 2015.
For the six
months ended
For the years ended December 31,
2012
Net Sales (1) ( =
P million) ............................................
2013
141.4
Note:
(1)
Included in net sales of either hypermarket or supermarket formats.
115
June 30,
2014
181.2
2015
198.6
95.8
Food Avenue and Hot Food
Under the “Food Avenue” and “Hot Food” brands, we operate food courts to provide convenient
and affordable dine-in and take-out meals to our customers. Within our food courts, we sell food under
a number of brand names, including “Fiesta Sa Sugbo”, which features Cebuano dishes, and “Roaster
Chef”, which offers “inihaw” (grilled) foods such as roasted chicken and pork lechon belly. Our food
courts targets busy individuals living or working within a two kilometer radius of our stores, including
housewives, students and employees. As of June 30, 2015, we operated 24 branches of Food Avenue
and 3 branches of Hot Food. The following table sets out the net sales of Food Avenue and Hot Food
for the years ended December 31, 2012, 2013 and 2014 and for the six months ended June 30, 2015.
For the six
months ended
For the years ended December 31,
2012
P million) ...........................................
Net Sales (1) ( =
2013
229.7
June 30,
2014
237.0
2015
285.0
148.5
Note:
(1)
Included in net sales of either hypermarket or supermarket formats.
Metro Gourmet
Under the “Metro Gourmet” brand we operate delicatessen outlets (or “delis”) that offer
customers a wide variety of international products with both take-out and cafe-style eat-in options.
Metro Gourmet features a wide range of international meats and cheeses imported from around the
world as well as made-to-order sandwiches and a variety of pastas and soups. As of June 30, 2015,
we operated 9 delis under the Metro Gourmet name. The following table sets out the net sales of our
Metro Gourmet for the years ended December 31, 2012, 2013 and 2014 and for the six months ended
June 30, 2015.
For the six
months ended
For the years ended December 31,
2012
P million) ...........................................
Net Sales (1) ( =
2013
35.2
June 30,
2014
53.1
2015
56.9
26.2
Note:
(1)
Included in net sales of either hypermarket or supermarket formats.
Other Ancillary Businesses
We also operate other ancillary businesses complementary to our retail formats. For example,
under the brand “Metro Gift Registry”, we operate an electronic gift registry for weddings and other
personal and corporate events. Our gift registry consultants also help customers select gifts for a
variety of occasions. Additionally, through a tie-up with Globe Telecom, we provide customers with
the option to pay for pre-paid mobile phone service at our checkout counters. These and other ancillary
businesses and services help complete the one-stop shopping experience for our customers.
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Retail Management Policies and Infrastructure
Network Expansion and Site Acquisition
One of our growth strategies is to increase our number of stores by saturating our presence in
the Visayas region, expanding and filling in the gaps left by competition in Luzon and expanding
nationwide where there are opportunities with a goal of clustering our stores. Our Network Expansion
Team determines the network expansion strategy, selects the regions and target cities and
municipalities that are underserved in terms of retail offerings.
We consider the following factors to evaluate potential locations for our supermarkets,
department stores and hypermarkets:
•
Population density. The catchment area for potential stores should have a population of at
least 100,000 people.
•
Accessibility. The proposed store location must be conveniently accessible by both public
and private transportation.
•
Existing commercial activity. There should be sufficient trading and commercial activities
present.
•
Utilities. Utilities must be available at a reasonable cost.
•
Real estate. Land and buildings must be available at a reasonable cost.
•
Labor force. There should be a sufficient labor force present to construct, operate and
maintain the store.
•
Local governmental support. The local government’s outlook on the proposed development
should be supportive.
•
Security. The city or town must be stable and secure.
Once these criteria are met, the decision of whether to open a new store as a department store,
hypermarket or supermarket is based on the specific demand (target market needs) and supply
(competition) in the locations under consideration.
We have a dedicated network expansion team, consisting of 15 full time employees who are
specifically responsible for identifying potential new sites and maintaining relationships with
developers and intermediaries. We also have a network expansion committee, consisting of six
members of senior management including our Chief Executive Officer and Chief Financial Officer.
This committee is responsible for reviewing and evaluating major development projects and potential
new sites. Once a new potential store location is approved by the network expansion committee, the
network expansion team will proceed to negotiate the term of the lease, seek final approval from the
committee, and then proceed with signing a memorandum of understanding and/or a lease with the
relevant developer or intermediary.
New stores typically begin generating operating profit within the first year, and repay their
capital investments within four to seven years. We also place strong emphasis on actively developing
staff with leadership potential to support our store opening plans and ensures that new stores are
staffed with experienced store managers.
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The table below shows our target areas for growth across the Philippines through 2016, as of
June, 2015.
Locations
2H2015 planned
Pipeline of potential
openings
sites for 2016
Total
3
3
Central Visayas .....................................................
Western Visayas ....................................................
3
3
Eastern Visayas .....................................................
1
1
Metro Manila ........................................................
1
1
2
Luzon (outside of Metro Manila) ...........................
1
3
4
Total .....................................................................
2
11
13
Note: These figures reflect potential stores that we plan to open and sites that we are considering. Depending on any number
of factors, potential sites may not lead to store openings, and such store opening plans may change and may or may
not materialize either in terms of numbers or locations indicated.
Customer Service
We aim to provide a best-in-class shopping experience for all of our customers. This shopping
experience includes conveniently situated and well-organized stores and is further enhanced by store
personnel trained to serve as brand ambassadors to our customers. We use a combination of mystery
shoppers and monthly customer surveys at all of our stores to track customer satisfaction levels and
to identify areas for improvement.
Quality Control
We have established strict quality control procedures in all of our stores and along our supply
chain. Quality control is enforced at distribution centers as well as at each individual store. At the
store level, we have specific policies for different areas of the stores, including fresh and bakeshop
stations. These policies include guidelines for disease control, personnel grooming, personnel hygiene
and good housekeeping.
We place a particular focus on food safety. For example, Metro Alabang is the only supermarket
in the country to be certified with HACCP standards. HACCP, or Hazard Analysis and Critical Control
Points, is a systematic preventive approach to food safety and establishes guidelines and procedures
to reduce safety risks to a safe level. The certification, awarded by Societe Generale de Surveillance
Philippines, covers the supermarket’s fresh produce handling process, from receiving, storage, to the
dispatch of goods to our customers. We plan to obtain HACCP certification for other selected stores.
We uphold high food safety standards and ensure all products sold in our stores are certified by
the FDA. Our policy is to source its products only from reputable manufacturers.
With respect to merchandise sold at our stores, the relevant Chief Merchandising Officer and
Merchandise Managers at each store are responsible for quality control. In relation to the concession
and outright sales merchandise, the concessionaires and suppliers conduct independent quality control
according to their internal procedures. However, in accordance with our strict selection process for
concessionaires, we also conduct our own quality control procedures by visiting supplier showrooms
and factories, sampling new styles and inspecting merchandise on delivery. In relation to private label
merchandise, we conduct quality control procedures such as confirming products meet certification
requirements and wash testing on samples provided to us by the manufacturers prior to mass
production. In addition, staff at each department store inspect the merchandise upon delivery at the
stores and again prior to display.
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Supplier Selection and Relationships
Our supplier selection begins with in-depth discussions between our merchandising team and
potential suppliers and the inspection of samples provided by such suppliers. We also conduct site
visits to verify production capability and ensure adherence to production, quality and manpower
standards. In selecting suppliers, we consider a number of factors, including market capitalization and
market reputation, product portfolio, adherence to standards of quality and innovation and ability to
engage with us in promotional planning. Once selected, suppliers are required to enroll in our vendor
portal, which provides them with a monthly liquidation summary and other timely updates.
We frequently engage and communicate with our suppliers in order to foster strong relationships.
We have regular business reviews with suppliers to discuss the sales performance and quality of
products provided. We also recognize high-performing suppliers at an awards ceremony that we hold
annually. Our strong relationships with our suppliers have resulted in business relationships of at least
20 years or more, particularly with our major suppliers.
Inventory and Logistics
We follow an inventory policy that seeks to ensure that each of our stores maintains a sufficient
level of products in order to attract and adequately serve consumers’ demand without carrying
excessive levels of inventory in stores.
Order and Inventory
For concession arrangements, we do not bear any inventory risk. The costs of and the risks
associated with holding inventory provided by concessionaires are borne by them until the product is
sold. This helps us minimize our inventory costs and risks. For our outright sales, which account for
93% and 38% of our net sales from our supermarket retail format and our department store retail
format, respectively, for the six months ended June 30, 2015, we have adopted an inventory policy that
assures we maintain an appropriate level of inventory at all stores through automated daily
replenishment. We have implemented an open-to-buy (“OTB”) system of controlling inventory with
weekly monitoring of purchases and quarterly adjustment of to OTB.
As a result of our advanced inventory management system, we have a high inventory turnover
rate, with only 12 weeks’ of supply for our department stores and three weeks’ of supply for our
supermarkets.
In addition, we manage inventory losses due to obsolescence, theft, pilferage, spoilage and other
damage in numerous ways. These include conducting regular inventory counts and monthly sampling
for perishable items, an annual wall-to-wall inventory count, quality audit and controls at our
receiving areas for items received from suppliers, security checks through both physical and electronic
means, regular audits and on-hand checks of inventory through various system reports, and quality and
audit control at our checkout counters.
Supply Chain Management
As part of our expansion plan, we have sought to bring more of the supply chain in-house,
reducing our reliance on third-party providers. While our national transport and shipping operations
remain 100% sub-contracted to third parties, we have started bringing our local warehouse and
transportation in house, with performance benchmarked against that of third-party providers.
We currently use distribution centers in Luzon and in the Province of Cebu that support up to 36
stores each. Our Company-operated Luzon distribution center, which opened in February 2015,
services our Luzon stores. Operating our own distribution center in Luzon has helped reduce costs. We
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also have six warehouses in the Province of Cebu operated by a third-party warehouse manager to
service our Visayas stores. Our distribution centers serve as storage and cross-docking facilities for
stores in their respective regions. As of June 30, 2015, our Luzon and the Province of Cebu
distribution centers were 70% and 75% utilized, respectively.
Service Providers
We engage providers of trucking and shipping services for the timely delivery of products to our
distribution centers. We also engage a third-party warehouse manager to manage our warehouses in
the Province of Cebu.
All of these service providers are carefully selected and screened based on their competence and
track record in their respective industries, ownership structure and financial condition.
Information Technology Systems
In late 2013, we implemented the Oracle retail merchandising systems, which enabled the
automation of our core retail operations. Coupled with the implementation of the Oracle financial
systems and Oracle store system in earlier years, we have now deployed an end to end system covering
merchandising, supply chain, logistics, warehouse management, stores operations, operational
analytics, financial control and reporting.
Retail Merchandising System. Our newly implemented retail management system is used to
manage, control and perform merchandising activities ranging from new product introduction to
automated replenishment of items. The system integrates items, locations and suppliers, tracks
purchase orders, monitors deal income, manages replenishment settings, executes pricing decisions
and aggregates transaction information into stock ledger reporting. This system provides us with an
accurate view of perpetual inventory and financial performance across our entire retail operation.
Retail Price Management System. Our retail price management system enables us to streamline
pricing decisions across all selling channels. It provides a rules-based pricing strategy and execution
to ensure that the target margin or a competitive position is achieved in line with corporate objectives.
The system also provides management with the ability to control the entire pricing process.
Store Inventory Management System. Our store inventory management system enables store
managers and other personnel to perform various in-store operations, including merchandise
receiving, inventory management, stock counts, ordering merchandise and transferring stock.
Point of Sale System. Our point of sale system can handle high-volume transaction processing,
ensuring accurate pricing at the point-of-sale. The system also includes promotional pricing
capabilities and direct inventory updates to the Store Inventory Management System.
Retail Sales Audit System. The retail sales audit system provides for the evaluation of all sales
transactions, ensuring consistent sales information. The system identifies missing, duplicate or
erroneous data, highlights suspicious transactions and ensures that errors are resolved so that
downstream systems receive accurate and complete sales information.
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Warehouse Management System. The warehouse management system covers all of the processes
involved in physically distributing and handling goods. The functions managed within the distribution
center include replenishment, loading and shipping. The system uses radio frequency systems for
general inventory function, directed put-away, movement of inventory, inventory adjustments, returns
processing and cycle counting.
Financial Suite. The Oracle Financials suite of applications is used to manage the financial
aspects of our operations in key areas such as compliance, financial control, regulatory reporting, cost
management and risk management. The coverage of the system includes financial control and
reporting, corporate performance management, corporate governance, lease management and a variety
of other items related to business flow.
We are fully compliant with the licensing agreement with Oracle for the authorized use of the
software enumerated in this section. The most recent update to our licensing agreement with Oracle
was completed in February 2015.
Intellectual Property
Effective August 1, 2014, we had perpetually licensed from Metro Value Ventures, Inc., a related
party, the use of the following registered trade names or trademarks and devices used to identify our
stores, including “Metro and Device”, “Metro Gaisano”, “Metro Ayala”, “Metro Market Market”,
“Super Metro Gaisano”, “Metro Fresh ‘n Easy”, “Metro Pharmacy”, “Metro Legazpi”, “Metro
Lucena”, “Express Mart by Metro”, “Metro Wholesale Mart”, “Metro Gourmet”, “Metro Tropical
Delights”, “Metro Market”, “Tita Gwapa Metro Supertinda” and “Metro Hi-Per.” Effective August 1,
2014, we also perpetually licensed from Metro Value Ventures, Inc. the use of the following trade
names or trademarks and devices, which are registered or covered by pending applications for
registration, for: “Blue Camp”, “Red Bears”, “Nicole”, “Junior Shop”, “Young Teens”, “Kiddies”,
“Blue Camp & Device”, “Young Teens Collection & Device”, “Cozy”, “McKenzie & Jones”, “Soft
Impressions”, “Firenze”, “Metro Living”, “Regal Comfort”, “Main Course”, “Metropolitan”,
“Ms’tique”, “Swiss Precision”, “Stylized Casadei”, “MA.CO”, “Follie”, “Mei Wei”, “South Sea”,
“Pure Soft”, “Pure Max”, “Pure Joy”, “Lakas”, “West Coast”, “Best Harvest”, “Q Premium Cebu’s
Best Lechon & Device”, “Q Premium”, “Q Premium Carcar’s Best Chicharon”, “West Coast Ice”,
“Savers Select”, “M Copies”, “Chum Girls”, “Mirabella”, “Cover Girl”, “Natural Clothing”, “Le
Chateau”, “Eddy & Emmy”, “Metro Café”, “Nautilus”, “Christian Ferre”, “Nina Botticelli”,
“Marquise”, “Vicenza Silver Collection” and “Metro Ware.” We pay Metro Value Ventures, Inc. an
P 700,000.00 as
annual fee of =
P 10,000.00 per trade name or trademark per year or a total of =
consideration for the full and complete use of the foregoing trade names and trademarks, which fee
may be adjusted upon the mutual consent of both parties.
As of August 1, 2014, we had also perpetually licensed the use of the registered trade names or
trademarks and their devices for “Suisse Cottage”, “Karen Kay”, “Street Code”, “Roaster Chef Grill”
and “Fiesta sa Sugbo Restaurant” from Vicsal Development Corporation. We pay Vicsal Development
Corporation an annual fee of =
P 10,000.00 per trade name or trademark per year or a total of
=
P 50,000.00 as consideration for the full and complete use of the foregoing trade names and
trademarks, which fee may be adjusted upon the mutual consent of both parties.
Marketing and Advertising
Our marketing and promotion objective is to attract local consumers to our wide assortment of
products offered at our stores at affordable prices. We employed a total of 27 marketing-related staff
as of June 30, 2015 across all retail formats. On a consolidated basis, our advertising expense as a
percentage of net sales was 0.67%, 0.70% and 0.87% in 2012, 2013 and 2014, respectively. Each of
our retail formats develops its own marketing strategy, with supermarkets and hypermarkets focusing
on the role of a price leader and department stores focusing on competitive pricing for local and
imported merchandise. In more densely populated areas, our marketing campaigns focus on a two to
121
five kilometer radius around our stores. For areas served by only one store, marketing campaigns may
cover the entire city and neighboring areas. To maximize visibility of our products, we advertise
through a variety of channels, including print advertisements, outdoor advertising, in-store posters and
signs, cataloging, email, social media and TV & radio.
Cash Management and Internal Control
Due to the nature of our retail business, we deal with a large amount of cash transactions on a
daily basis. As a result, we have developed and implemented a strict uniform cash management system
across all of our retail formats. Each store has a head cashier responsible for counting all cash and
checks on a daily basis and then depositing all funds in a vault for bank pickup. Head cashiers
reconcile daily cash and check collections with store controllers. After reconciliation, head cashiers
send a report to the corporate treasury for inclusion in daily deposits reports.
Internal controls have been established to prevent any mishandling of cash and to protect our
assets. Our General Loss and Prevention Group is responsible for documenting all processes,
including financial and operational matters, and ensuring the proper internal controls are in place. We
also have an Internal Audit Group that regularly examines our internal control policies and provides
us with recommendations for improvement of processes. Our Treasury Group is responsible for
monitoring cash flow to ensure proper funding of daily disbursements and investing free cash under
the best available yield and terms in the market.
Insurance
We obtain and maintain appropriate insurance coverage on our properties, assets and operations
in such amounts and covering such risks as are usually carried by companies engaged in similar
businesses and using similar properties in the same geographical areas as those in which we operate.
We maintain insurance policies, including policies with BPI/MS Insurance Corporation covering the
following risks: fire and lightning, bush fire and spontaneous combustion; windstorm, storm, typhoon,
flood, tidal wave and tsunami; water damage caused by overflowing or bursting of water tanks, pipes
or other apparatus, sprinkler and related firefighting apparatus leakage; explosion, falling aircraft and
article therefrom, impact by road vehicles and smoke; earthquake shock and earthquake fire; volcanic
eruption; subsidence, collapse and landslide; riot and strike, civil commotion and malicious acts;
electrical injury; sparkler and related firefighting apparatus leakage; robbery and burglary; mechanical
or electrical derangement failure or breakdown or boiler explosion; extra expense/standard charges;
and third-party bodily injury and property damage. Our insurance providers include both large
domestic and international insurers.
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Human Resources
As of June 30, 2015, we had 7,142 employees. The following table sets out the number of our
store employees by retail format, excluding corporate employees, as of June 30, 2015.
As of December 31,
2012
2013
As of June 30,
2014
2015
Supermarket
Full-time employees .................................................
561
503
654
672
Part-time employees .................................................
—
—
41
15
Total........................................................................
561
503
695
687
4,074
4,042
3,560
3,272
Department Store
Full-time employees .................................................
Part-time employees .................................................
121
45
216
37
Total........................................................................
4,195
4,087
3,776
3,309
1,163
2,373
2,461
2,210
Hypermarket
Full-time employees .................................................
Part-time employees .................................................
—
—
—
—
Total........................................................................
1,163
2,373
2,461
2,210
The following table sets forth our employees by function as of June 30, 2015:
Number of
Function
Employees
Executive ...................................................................................................................................................
25
Managerial .................................................................................................................................................
180
Supervisory ...............................................................................................................................................
1,160
General Staff — Regular ...........................................................................................................................
2,256
General Staff — Casual ............................................................................................................................
3,521
Total ..........................................................................................................................................................
7,142
We anticipate increasing our employee head count by 12% to 15% within the next 12 months,
subject to the changing needs of our business. We believe that we have a good relationship with our
employees. We have always placed a high value on training and retention, as demonstrated by the fact
that about one-third of our regular employees have been with the company for at least 15 years and
53% of our employees have been with us for more than five years.
As of June 30, 2015, the Company has two existing collective bargaining agreements (“CBAs”)
under its name covering approximately 400 employees of the Company. These CBAs are with Metro
Legazpi Employees and Workers Union PSSLU with approximately 110 members expiring on April 5,
2020, and with Market Market Employees Independent Union with approximately 298 union members
expiring on January 29, 2017. We consider our relationship with our employees to be good and we
have not experienced any strikes or work stoppages since we commenced commercial operations.
Manpower Service Providers
In addition to our regular employees, we engage third-party manpower service providers to
address personnel requirements of each retail format.
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As of June 30, 2015, we had contracted a total of 1,645 trained personnel from different
third-party service providers and made them available to each of our retail formats.
Recruitment and Promotion Policy
We have implemented a recruitment policy with the aim of selecting the most qualified and
suitable candidates to fill vacancies on an equal opportunity basis. We have detailed guidelines on
both our external and internal recruitment processes. Short-listed candidates undergo interviews and,
where appropriate, testing to ensure they possess the requisite qualifications. Full-time employees are
initially hired on a six-month probationary period, and following completion of the probationary
period they become regular employees entitled to employee benefits.
Personnel Training
We believe that our emphasis on training our employees improves our operational efficiency and
helps build a strong corporate culture within the Company. All new employees are required to
participate in an appropriate induction program that provides them with the information and support
necessary for them to begin their new roles within the Company. Supervisors are required to ensure
that each new employee participates in mandatory induction activities during their probationary
period. This training is supplemented from time to time with skills trainings focused on our four
pillars: store excellence, professional excellence, leadership excellence and merchandising
excellence. In addition, we have a store management training program and a management training
program designed to help develop a pool of future store managers and other leaders within our
organization.
Employee Benefits
All of our regular employees receive government mandated benefits. Our employees also enjoy
a number of additional benefits, including for specific milestones in employees’ lives, including
birthdays, weddings, childbirth and for dependents’ education. We also provide annual leave credits
for vacation and sick leave, hospitalization, accident and life insurance, annual physical examinations,
calamity aid and bereavement financial assistance. We believe that our comprehensive package of
employee benefits ensures our employees’ welfare and helps us remain competitive in the industry.
Stock Option Plan
The Board of Directors and Stockholders of the Company have adopted resolutions on July 27,
2015 approving the establishment of a stock option plan to offer up to 103,320,000 Shares out of its
unissued capital stock to key personnel to compensate, retain, and attract them. The issuance of Shares
under such a stock option plan would be exempt from pre-emptive rights of shareholders at the time
of issuance but would be subject to specific terms and conditions to be determined by the Company’s
Nomination and Compensation Committee, including the specific persons that would be covered by
the stock option plan upon its implementation. The issuance of Shares under the stock option plan is
also subject to the Philippine SEC’s confirmation of such transaction being exempt from the
registration requirements of the SRC.
If all of these shares were to be issued, this would constitute up to 3% of the outstanding Shares
after the completion of the Offer. The Company intends to begin the grant of options or purchase rights
in respect of the Shares under the stock option plan over time and in tranches (as opposed to granting
options against all the underlying Shares at one time) to commence after the Listing Date. The
Company also intends to subject all Shares issued pursuant to the stock option plan to a mandatory
lock-up of at least 180 days from the date of issuance. Once established, these options will constitute
contracts between the Company and those covered personnel that give such persons the right to buy
a specific number of the Company’s Shares at a fixed price within a certain period of time, subject
to the terms and conditions described above, as well as those that may be set by the Company’s
Nomination and Compensation Committee for the grant of such options, from time to time.
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Regulatory Compliance and Legal Proceedings
Our legal department is responsible for ensuring continued compliance with applicable laws and
regulations that may adversely affect our operations. We have secured, applied for, or are in the
process of applying or renewing all material permits and licenses required to conduct our business. We
expect to obtain these permits and licenses in the ordinary course.
A table summarizing our key permits and licenses necessary for the conduct of our business as
of September 7, 2015 is provided below.
Issuing Agency
Permits/Clearances
Date of
Issuance/Registration
Status/Remarks
Securities and Exchange
Commission (SEC)
Certificate of Incorporation August 28, 2003
Securities and Exchange
Commission (SEC)
Certificate of Filing of
Latest Amended Articles of
Incorporation
July 3, 2014
Securities and Exchange
Commission (SEC)
Registration of Stock and
Transfer Book
August 29, 2003
Bureau of Internal Revenue (BIR)
Certificate of Registration
September 18, 2003
Philippine Health Insurance
Corporation (PhilHealth)
Certificate of Registration
August 13, 2014
Social Security System (SSS)
Certification that
January 6, 2015
contribution payments have
been remitted
Pag-Ibig
Clearance (Actively
Remitting Contribution)
February 9, 2015
Office of the Mayor
(Cebu City)
Business Permit (Metro
Colon)
May 11, 2015
Valid until December 31, 2015
Office of the Mayor
(Mandaue City)
Business Permit (Metro
Mandaue)
April 20, 2015
Valid until December 31, 2015
Office of the Mayor
(Cebu City)
Business Permit (Metro
Ayala)
April 25, 2015
Valid until December 31, 2015
Office of the Mayor
(Legazpi City)
Business Permit (Metro
Legazpi)
January 26, 2015
Valid until December 31, 2015
Office of the Mayor
(Lucena City)
Business Permit (Metro
Lucena)
May 19, 2015
Valid until December 31, 2015
Office of the Mayor
(Taguig City)
Business Permit (Market
Market)
January 22, 2015
Valid until December 31, 2015
Office of the Mayor
(Angeles City)
Business Permit (Metro
Angeles)
February 5, 2015
Valid until December 31, 2015
Office of the Mayor
(Toledo City)
Business Permit (Metro
Toledo)
Application filed on
July 15, 2015
Pending approval
Office of the Mayor
(Muntinlupa City)
Business Permit (Metro
Alabang)
July 9, 2015
Valid until October 20, 2015
Office of the Mayor
(Maasin City)
Business Permit (Metro
Maasin)
Application filed on
July 16, 2015
Pending approval
Office of the Mayor
(Naga City, Cebu)
Business Permit (Metro
Naga)
July 13, 2015
Valid until 3rd Quarter 2015
Office of the Mayor
(Manila)
Business Permit (Metro
Binondo)
February 5, 2015
Valid until December 31, 2015
Office of the Mayor
(Imus City)
Business Permit
(SuperMetro Imus)
January 20, 2015
Valid until 4th Quarter 2015
Office of the Mayor
(Talisa City, Negros Occ.)
Business Permit
(SuperMetro Talisay)
January 20, 2015
Valid until December 31, 2015
Office of the Mayor
(Quezon City)
Business Permit
(SuperMetro Anonas)
March 28, 2015
Valid until December 31, 2015
Office of the Mayor
(Lapu-Lapu City)
Business Permit
(SuperMetro Lapu-Lapu)
Application filed on
July 10, 2015
Pending Approval
125
Issuing Agency
Permits/Clearances
Date of
Issuance/Registration
Status/Remarks
Office of the Mayor
(Cebu City)
Business Permit
(SuperMetro Colon)
July 8, 2015
Valid until December 31, 2015
Office of the Mayor
(Cebu City)
Business Permit
(SuperMetro-Mambaling)
June 30, 2015
Valid until December 31, 2015
Office of the Mayor
(Antipolo City)
Business Permit
(SuperMetro Antipolo)
January 21, 2015
Valid until December 31, 2015
Office of the Mayor
(Carcar City)
Business Permit
(SuperMetro Carcar)
May 6, 2015
Valid until December 31, 2015
Office of the Mayor
(Bogo City)
Business Permit
(SuperMetro Bogo)
March 12, 2015
Valid until December 31, 2015
Office of the Mayor
(Calamba City)
Business Permit
(SuperMetro Calamba)
May 21, 2015
Valid until December 31, 2015
Office of the Mayor
(Naga City, Camarines Sur)
Business Permit
(SuperMetro Naga)
April 13, 2015
Valid until December 31, 2015
Office of the Mayor
(Taguig City)
Business Permit (Metro
Fresh N’ Easy-Taguig)
January 21, 2015
Valid until December 31, 2015
Office of the Mayor
(Cebu City)
Business Permit (Metro
Wholesale Mart)
Application filed on
July 14, 2015
Pending approval
Office of the Mayor
(Lapu-Lapu City)
Business Permit (Metro
Fresh N’ Easy-Mactan)
May 12, 2015
Valid until December 31, 2015
Office of the Mayor
(Pasay City)
Business Permit (Metro
Fresh N’ Easy-Newport)
May 5, 2015
Valid until December 31, 2015
Office of the Mayor
(Carmen)
Business Permit (Metro
Carmen)
January 20, 2015
Valid until December 31, 2015
Office of the Mayor
(Mandaue City)
Business Permit (Metro
Fresh N’ Easy-Umapad)
January 21, 2015
Valid until December 31, 2015
Office of the Mayor
(Minglanilla)
Business Permit (Metro
Fresh N’ Easy-Minglanilla)
January 22, 2015
Valid until December 31, 2015
Office of the Mayor
(Cebu City)
Business Permit (Metro
Fresh N’ Easy-Punta)
June 9, 2015
Valid until December 31, 2015
Office of the Mayor
(Lapu-Lapu City)
Business Permit (Metro
Fresh N’ Easy-Basak)
June 25, 2015
Valid until December 31, 2015
Office of the Mayor
(Talisay City, Cebu)
Business Permit (Metro
Fresh N’ Easy-Tabunok)
May 7, 2015
Valid until December 31, 2015
Office of the Mayor
(Mandaue City)
Business Permit (Metro
Fresh N’ Easy-Tabok)
January 21, 2015
Valid until December 31, 2015
Office of the Mayor
(Cebu City)
Business Permit (Metro
Banilad)
March 3, 2015
Valid until December 31, 2015
Office of the Mayor
(Mandaluyong City)
Business Permit (Metro
Mandaluyong)
January 22, 2015
Pending approval
Food and Drug Administration
(FDA)
License to Operate as
November 4, 2014
Drugstore (Metro Pharmacy
Colon)
Valid until November 4, 2015
Food and Drug Administration
(FDA)
License to Operate as
November 4, 2014
Drugstore (Metro Pharmacy
Mandaue)
Valid until November 4, 2015
Food and Drug Administration
(FDA)
License to Operate as
January 29, 2015
Drugstore (Metro Pharmacy
Ayala)
Valid until January 29, 2016
Food and Drug Administration
(FDA)
License to Operate as
November 28, 2014
Drugstore (Metro Pharmacy
Lucena)
Valid until October 28, 2016
Food and Drug Administration
(FDA)
License to Operate as
December 17, 2014
Drugstore (Metro Pharmacy
Market Market)
Valid until November 19, 2016
126
Issuing Agency
Permits/Clearances
Date of
Issuance/Registration
Status/Remarks
Food and Drug Administration
(FDA)
License to Operate as
February 12, 2015
Drugstore (Metro Pharmacy
Angeles)
Valid until February 12, 2016
Food and Drug Administration
(FDA)
License to Operate as
November 5, 2014
Drugstore (Metro Pharmacy
Toledo)
Valid until November 5, 2015
Food and Drug Administration
(FDA)
License to Operate as
August 18, 2015
Drugstore (Metro Pharmacy
Alabang)
Renewal fee paid; Pending
Release of LTO
Food and Drug Administration
(FDA)
License to Operate as
November 5, 2014
Drugstore (Metro Pharmacy
Maasin)
Valid until November 5, 2015
Food and Drug Administration
(FDA)
License to Operate as
November 4, 2014
Drugstore (Metro Pharmacy
Naga)
Valid until November 4, 2015
Food and Drug Administration
(FDA)
License to Operate as
November 4, 2014
Drugstore (Metro Pharmacy
Talisay)
Valid until November 4, 2015
Food and Drug Administration
(FDA)
License to Operate as
July 15, 2015
Drugstore (Metro Pharmacy
Anonas)
Renewal fee paid; Pending
Release of LTO
Food and Drug Administration
(FDA)
License to Operate as
Drugstore (Metro
Pharmacy-SuperMetro
Colon)
November 4, 2014
Valid until November 4, 2015
Food and Drug Administration
(FDA)
License to Operate as
November 4, 2014
Drugstore (Metro Pharmacy
Mambaling)
Valid until November 4, 2015
Food and Drug Administration
(FDA)
License to Operate as
July 15, 2015
Drugstore (Metro Pharmacy
Antipolo)
Renewal fee paid; Pending
Release of LTO
Food and Drug Administration
(FDA)
License to Operate as
June 11, 2015
Drugstore (Metro Pharmacy
Carmen)
Valid until June 11, 2016
Food and Drug Administration
(FDA)
License to Operate as
November 4, 2014
Drugstore (Metro Pharmacy
Punta)
Valid until November 4, 2015
As of the date of this Prospectus, neither the Company nor any of its properties is engaged in
or a subject of any material litigation, claims or arbitration, including bankruptcy, receivership or
similar proceedings, either as plaintiff or defendant, which could be expected to have a material effect
on our financial position and we are not aware of any facts likely to give rise to any proceedings which
would materially and adversely affect our business or operations.
Properties
As of the date of the Prospectus, we do not own any land. We lease spaces for all of our retail
establishments from our related parties and from various entities across the Philippines. These leased
premises include those described under “Related Party Transactions” beginning on page 161 of this
Prospectus.
127
Leased Properties
As of the date of this Prospectus, we leased 35 properties in the Philippines for our store
operations. The lease rates and terms for these properties follow standard market rates and practices
for similar businesses. The following table is illustrative of the rates paid per region.
Region
Rental Scheme
Metro Manila .......................................
Fixed and /or
=
P 100/sq.m.
Percentage
to 1.50% of Total Monthly Gross Sales
Fixed and /or
=
P 100/sq.m.
Percentage
to 1.50% of Total Monthly Gross Sales
Fixed and /or
=
P 100/sq.m.
Percentage
to 1.50% of Total Monthly Gross Sales
Luzon (outside Metro Manila) ..............
Visayas ................................................
Monthly Lease Rate
to =
P 600/sq.m. and 1.00%
to =
P 275/sq.m. and 1.00%
to =
P 433/sq.m. and 1.00%
Term (years)
6 years to 25 years
3 years to 19 years
1 year to 24 years
As discussed in page 117 of this Prospectus, and as part of our ongoing network expansion
activities, we are considering 13 potential sites for new store locations for the years 2016 and 2017.
Out of these 13 potential sites, we have entered into agreements with prospective lessors for the terms
of the lease of space for ten new store sites located in Iloilo City, Cebu City, Calbayog City and Metro
Manila. For the other potential sites, we are still under discussion with potential lessors and
conducting studies on the feasibility of each site. The lease payments for each store will be made using
funds from operating activities.
128
INDUSTRY
Overview of the Philippine Economy
Strong economic growth and outlook
The Philippine economy has experienced steady growth with real GDP expanding at a CAGR of
6.2% from 2009 to 2014, outpacing its Southeast Asian neighbors including Singapore, Malaysia,
Thailand, Indonesia and Vietnam, according to the Economist Intelligence Unit (“EIU”). In 2014, real
GDP grew by 6.1%, which marked the first time that growth exceeding 6% had been recorded for three
consecutive years since the 1960s. Going forward, real GDP is expected to continue to grow at a
CAGR of 6.3% from 2014 to 2019E, driven by robust domestic consumption, strong foreign direct
investments, sustained strength in exports, favorable demographic structure, continued growth in
overseas remittance, and a resilient macro environment.
The chart below sets out the actual and expected real GDP development in the Philippines from
2009 to 2019E.
Philippines Real GDP (U.S.$ bn)
2014 - 2019E
2009 - 2014 CA
CAGR: 6.3%
GR: 6.2%
176
122
136
156
131
145
165
188
2009
2010
2011
2012
2013
2014
2015E
2016E
199
211
2017E
2018E
224
2019E
Source: EIU
The country’s strong economic performance and positive outlook have been recognized by
international credit rating agencies, including Standard & Poor’s and Moody’s. In May 2014, Standard
& Poor’s upgraded its Philippines long-term sovereign rating from BBB- to BBB with a stable
outlook. Standard & Poor’s noted the country’s ongoing reforms will likely result in gains in
government revenue generation and spending efficiency together with improvements in the public debt
profile and investment environment. In December 2014, Moody’s also lifted its Philippines long-term
sovereign rating from Baa3 to Baa2 with a stable outlook. Moody’s cited the country’s improving debt
profile and fiscal management, continued favorable prospects for strong economic growth, and limited
vulnerability to the common risks currently affecting other emerging markets, as the key reasons for
the upgrade.
Visayas has become the spotlight of the Philippine economy
The Visayas has become the spotlight of the Philippine economy in recent years, primarily driven
by a growing business process outsourcing (“BPO”) industry and international recognition as the most
popular tourist and foreign investment destination in the Philippines outside of Manila. According to
P 1,438
Euromonitor, nominal GDP of the Visayas has expanded from =
P 1,115 billion in 2010 to =
billion in 2013, representing the highest CAGR of 8.9%, compared to 8.7% for Luzon and 8.3% for
Mindanao during the period. The Visayas’ population is expected to grow from 18.0 million in 2010
to 21.0 million by 2015E, representing the highest CAGR of 3.1%, compared to 1.8% for Luzon and
129
2.3% for Mindanao during the period. Aside from economic growth in second-tier cities such as Iloilo
and Bacolod, the robust growth of Visayas is also underpinned by Cebu City, which is the capital city
of the Province of Cebu, and the center of Metro Cebu, the second most populous metropolitan area
in the Philippines after Metro Manila.
The charts below set out the Philippine nominal GDP by region from 2010 to 2013 and Philippine
population by region from 2010 to 2015E.
Philippine nominal GDP by region ( =
P billions)
9,003
10,567
9,708
1,696
1,439
1,566
1,317
1,334
1,115
1,454
1,219
6,555
7,035
7,684
2010
2011
2012
Luzon
11,548
2010 - 2013
CAGR
Philippine population by region (millions)
103.0
2010 - 2015E
CAGR
24.6
2.3%
21.0
3.1%
52.4
57.4
1.8%
2010
2015E
92.3
8.3%
22.0
8.9%
18.0
Visayas
8,413
8.7%
2013
Mindanao
Luzon
Visayas
Mindanao
Source: Euromonitor
Future growth drivers
The Philippine economy is largely driven by domestic private consumption. According to the
EIU, real domestic private consumption accounted for approximately 68.9% of real GDP in 2014. Key
drivers of the Philippines’ economic growth and increased domestic consumption have been rising
personal disposable income, a growing lower- to middle-income class, an expanding economically
active demographic, growing overseas remittance and increasing urbanization.
Rising personal disposal income and a growing lower- to middle-income class
Rising personal disposable income and the emergence of a burgeoning lower- to middle-income
class are expected to provide a strong foundation for the future consumption growth in the Philippines.
According to the EIU, per capita personal disposable income in the Philippines has shown consistent
growth in recent years, increasing at a CAGR of 8.7% from U.S.$1,460 in 2009 to U.S.$2,220 in 2014,
and is expected to further increase at a CAGR of 8.6% to U.S.$3,350 by 2019E. Such growth in
spending power has led to the expansion of the lower- to middle-income class, which is defined as
households with annual income of between U.S.$3,000 and U.S.$35,000. The lower- to middle-income
class is the predominant consumer segment in the Philippines, and have increased from 70% of the
Philippine households in 2009 to 83% in 2014 and are expected to further increase to 91% by 2019E.
130
The charts below set forth the per capita personal disposable income and the household income
split in the Philippines from 2009 to 2019E, respectively.
Personal disposable income per capita (U.S.$)
Household
income (U.S.$)
.6%
R: 8
CAG
3,350
.7%
R: 8
CAG
Household income split
< 3,000
2%
3,000 - 35,000
4%
> 35,000
9%
2,220
70%
83%
1,460
91%
29%
2009
2014
13%
2009
2019E
0%
2019E
2014
Source: EIU
Expanding and economically active demographic
According to the EIU, the Philippines had a total population of approximately 100 million at the
end of 2014 with a healthy and competitive demographic structure, ensuring sustainable economic and
consumption growth in the medium term. As of 2014, approximately 62.2% of the total population
belongs to the working age population bracket of 15 to 64 years old and this proportion is expected
to steadily increase over the coming years, reaching approximately 63.5% by 2019E. In absolute
terms, the working age population in the country is expected to increase at a CAGR of 2.0% from
approximately 62.3 million in 2014 to approximately 68.8 million by 2019E.
The charts below set forth the population split by age in 2014 and the growth of working age
population in the Philippines from 2009 to 2019E, respectively.
Population split by age (2014)
Working age population (millions)
65+ years
4.1%
CAGR: 2.0%
CAGR: 2.2%
0 -14 years
33.7%
55.8
62.3
68.8
15 - 64 years
62.2%
2009
2014
2019E
Source: EIU
Growing remittances from overseas Filipino workers
According to the World Bank, the Philippines ranked third in terms of inflow of overseas
remittances in 2013. According to the BMI, there were approximately 8 million overseas Filipino
workers (“OFWs”) as of 2014. According to EIU, OFWs sent U.S.$28.6 billion back to the Philippines
in 2014, representing 8.6% of nominal GDP and providing a strong pillar for domestic consumption.
The inflow of remittances grew at a CAGR of 7.4% from 2009 to 2014, and is expected to grow at
a CAGR of 7.0% from 2014 to 2019 according to the Euromonitor.
131
The following chart sets out the OFW remittance from 2009 to 2019E.
OFW remittance (U.S.$ billions)
2014 - 2019E
2009 - 2014
CAGR: 7.4%
22
23
25
20
2009
2010
2011
2012
27
29
2013
2014
31
2015E
CAGR: 7.0%
35
33
2016E
2017E
37
2018E
40
2019E
Source: EIU
Increasing urbanization
The Philippine economy is also expected to benefit from a rapidly growing urban population due
to increasing urbanization. The increasing urbanization also results in a more concentrated population
pattern, requiring and benefiting from more convenient modern retail channels in the developed urban
areas, which drives the rapid development of modern retail industry. According to EIU, the urban
population accounted for 48.5% of total population in the Philippines in 2009, and increased to 49.3%
in 2014. The proportion is expected to further increase to the 50.0% by 2019E. In absolute terms, the
urban population is expected to grow at a CAGR of 1.9%, outpacing that of rural population at 1.4%,
between 2014 and 2019E.
The chart below set forth the population split by urbanization in the Philippines and the
percentage of urban population from 2009 to 2019E, respectively.
Total population split (millions)
Urban as a
% of total
48.5%
49.3%
50.7
47.3
44.6
2009
Urban
50.0%
54.2
49.4
54.2
2014
2019E
Rural
Source: EIU
Overview of the Philippine Retail Industry
According to Euromonitor, the retail industry in the Philippines has been reaping the benefits of
growing disposable income, a growing lower- to middle-income class, increasing penetration of
modern retail formats and continuous urbanization. The market size of the retail industry by retail
value sales in the Philippines reached U.S.$69.6 billion in 2014, having grown at a CAGR of 5.5%
from 2010, and is expected to further expand to U.S.$98.1 billion by 2019E, with CAGR accelerating
to 7.1% from 2014 to 2019E, according to the Euromonitor.
132
The chart below sets out the Philippine retail industry market size by retail value sales from 2010
to 2019E.
Philippine retail industry market size by retail value sales (U.S.$ billions)
2014 - 201
: 5.5%
2010 - 2014 CAGR
59
67
56
63
70
2010
2011
2012
2013
2014
: 7.1%
86
80
75
2015E
9E CAGR
2016E
2017E
92
2018E
98
2019E
Source: Euromonitor
Low per capita retail value sales signals significant growth prospects
According to Euromonitor, despite the growth of the retail industry over the last five years, the
Philippines still falls behind most of its neighboring Asian countries in terms of per capita retail value
sales. In 2014, Philippine per capita retail value sales was approximately U.S.$696, which is lower
than that of many developing countries in the region, including Vietnam and Thailand, as well as other
developed countries, and is only less than 10% of that of Japan. According to the Euromonitor, the
lower per capita retail value sales resulted from lower per capita selling space and under-penetration
of modern trade. This also signals substantial growth prospects for the retail industry in the
Philippines.
The chart below sets forth per capita retail value sales of the retail industry in Philippines and
its neighboring Asian countries in 2014.
Per capita retail value sales (U.S.$) (2014)
8,688
4,576
4,535
1,814
Japan
South Korea
Singapore
Malaysia
1,419
China
1,314
Thailand
907
696
603
Vietnam
Philippines
Indonesia
Source: Euromonitor
Increasing penetration of modern trade will drive retail value sales
According to Euromonitor, with the rapid expansion of convenience stores, supermarkets and
hypermarkets across the country, the modern grocery retail segment posted a faster growth rate at
10.8% CAGR from 2010 to 2014, while the growth of traditional trade lagged behind overall retail
133
value sales growth at only 3.6% CAGR. Modern grocery retailers such as supermarkets and
hypermarkets also hold an advantage over traditional grocers in the retailing of fresh produce, as these
chained modern grocers are likely to have sophisticated procurement and logistic systems that seek to
maintain diversity and year-round supply of high quality fresh produce.
Further penetration of modern trade is expected to continue in the Philippines. By 2014, the
modern trade channel accounted for only 28.5% of the total grocery retail value sales in the
Philippines according to the Euromonitor, a much lower level compared to Japan, Singapore, South
Korea and China. The expected growing penetration of modern trade will significantly drive retail
value sales.
The chart below sets out the modern grocery retail’s share of total grocery retail value sales in
the Philippines and its neighboring Asian countries in 2014.
Modern grocery retail value sales as a % of total grocery retail value sales (2014)
79.9%
70.8%
68.8%
65.0%
44.6%
42.6%
28.5%
16.2%
4.3%
Japan
Singapore
South Korea
China
Thailand
Malaysia
Philippines
Indonesia
Vietnam
Source: Euromonitor
Consumers’ preferences polarized between grocery and non-grocery products
According to Euromonitor, with more spending power, Filipinos are able to allocate their money
based on the type of products they consume. For grocery items, a majority of consumers still keep to
the lower-priced options for most necessities. However, the growing income also translates into a
greater propensity to spend on better quality products. The increasing spending power of Filipinos has
greatly contributed to the rapid growth in modern grocery channels, including hypermarkets,
supermarkets and convenience stores.
For non-grocery goods, consumers have grown to become increasingly aware of and interested
in branded non-grocery goods, particularly apparel and other leisure goods, where branding is
paramount in the purchase. This has benefited and will continue to benefit non-grocery retailers.
Growth focus shifting from Luzon to Visayas and Mindanao
According to Euromonitor, Metro Manila and the surrounding provinces continue to present the
best opportunities and a significant consumption base in the Philippines, as households in many of
these provinces have very high total expenditure levels. With the capital city located in this region,
Luzon will remain the most attractive location for retailers to lock in their presence and move on to
further penetrate the market.
At the same time, regions within the Visayas and Mindanao are seeing very high growth in terms
of disposable income and consumer expenditures in recent years. Population in the Visayas and
Mindanao is projected to grow at 3.1% and 2.3% CAGR from 2010 to 2015E, respectively, higher than
the growth of Luzon at 1.8% CAGR during the same period. With more urbanization expected to take
134
place in these areas over the next five years, the Visayas and Mindanao are primed to embrace further
development in the retail industry. Cities such as the Province of Cebu, Iloilo and Bacolod in the
Visayas, as well as Davao in Mindanao, are promising areas for future retail business expansion due
to the economic advancements of these areas.
Choice between outright sales and concessionaire model
According to Euromonitor, retailers may opt to employ outright sales or concessionaires or a mix
of both methods for their merchandise supplies. Under an outright sales model, retailers source and
sell merchandise that they purchased directly as well as their own private labels or proprietary brands.
Under a concessionaire arrangement, retailers enter into agreements to allow concessionaires to
display their products in certain areas of the retailers’ selling space and charge only a portion of the
gross sales as its commission revenue.
While an outright sales model enhances core competencies, reaps higher profit margins,
improves customer loyalty, and offers differentiated products, it is also relatively riskier than
concessionaire arrangements because of the large capital outlay required. Furthermore retailers must
mark down and take losses on unsold inventory. On the other hand, although a concessionaire model
is protected from the abovementioned risk, it yields lower margins compared as to an outright sales
model.
Given the advantages of and drawbacks to each model, retailers must conduct their own risk
reward analysis to choose which model is best for their businesses. Focus on outrights sales will lead
to higher requirements on the retailers’ inventory management capability, understanding of target
customers and pricing strategies. Retailers in the Philippines typically employ a mix of outright sales
and concessionaries for their merchandise supplies, and the percentage of revenue contribution of each
model depends on each retailer’s unique strengths and situation.
Overview of the Philippine Department Store Industry
The largest non-grocery retail format excluding specialist retailers in the Philippines
According to Euromonitor, the department store has emerged to be the largest non-grocery retail
format excluding specialist retailers in the Philippines. The market size of the department store
industry by retail value sales was =
P 178.1 billion in 2014, having grown at a CAGR of 7.0% from
2010.
Department stores satisfy the increasing need for convenient non-grocery shopping as the
channel has a wide variety of different brands and products across varying price points, thereby
serving a varying degree of consumer segments. Merchandise offered in department stores have also
undergone a selection process based on merits of reliability, authenticity and quality, so that
consumers can be assured that they are purchasing good quality authentic products. Filipinos are
increasingly favoring shopping malls to shop, eat, watch a movie, or simply spend time together. As
department stores are typically located in malls, this ‘malling’ lifestyle benefits department stores due
to increased foot traffic in these locations. Growing purchasing power also contributes to the
increasing appreciation of upscale goods, particularly of items such as apparel and personal
accessories as Filipinos are trading-up to premium products.
135
Driven by increasing demand for convenience, variety and quality, popular “malling” lifestyle
and growing purchasing power and consumption upgrade, the market size of department store industry
by retail value sales is expected to reach =
P 267.4 billion by 2019E, growing at a CAGR of 8.5% from
2014 to 2019E, according to Euromonitor.
The chart below sets forth the market size of the department store industry in the Philippines by
retail value sales from 2010 to 2019E.
Philippine department store industry market size ( =
P billions)
2014 - 201
2010 - 2014 CAGR
9E CAGR
: 8.5%
: 7.0%
136
145
159
169
2010
2011
2012
2013
178
192
2014
2015E
208
2016E
226
2017E
246
2018E
267
2019E
Source: Euromonitor
Growth of the Visayas continues to outpace other regions with the Province of Cebu taking the lead
According to Euromonitor, Luzon contributed the majority of retail value sales for department
stores in the Philippines in 2014 at =
P 129.5 billion. In Luzon, Metro Manila drove the growth of Luzon
at a CAGR of 8.1% from 2010 to 2014 and reached =
P 66.4 billion in 2014, driven by higher purchasing
power amongst urbanized consumers in Metro Manila. The Visayas led retail value growth of
department stores amongst the three island groups at a CAGR of 7.4% from 2010 to 2014 and reached
retail value sales of =
P 22.4 billion in 2014, half of which was contributed by the Province of Cebu.
Increased income levels in the Province of Cebu especially for middle class households driven by
availability of jobs particularly in the business process outsourcing sector fueled consumers shopping
behavior and hence drove retail value growth of department stores in the Province of Cebu at 9.1%
CAGR from 2010 to 2014.
The growth of the department store industry is expected to accelerate in the Visayas from 2014
to 2019E, which is expected to grow at a CAGR of 9.7% led by the Province of Cebu with a CAGR
of 10.9%, due to the developments of department stores in the region as well as continuing
urbanization and increasing income levels in the Province of Cebu, Iloilo, Tacloban and surrounding
cities. The Visayas and Mindanao are underserved regions with per capita retail value sales of
P 1,150 respectively in 2015E. These are lower than
department stores estimated at only =
P 1,170 and =
P 2,434.
national average per capita retail value sales of department stores =
P 1,870 and below Luzon’s =
136
The below charts set forth the market size of the department store industry in Luzon, Metro
Manila, the Visayas, the Province of Cebu and Mindanao by retail value sales from 2010 to 2019E,
as well as the market size growth of department stores in these regions from 2010 to 2014 and 2014
to 2019E.
Department store market size by region
(=
P billions)
Department store market size growth by region
192
10.9%
9.7%
8.2%
129
8.1% 8.1%
6.9%
99
9.1%
7.4%
8.5%
6.8%
98
66
49
17 8 20
2010
Luzon
22
12
36
26
2014
Metro Manila
Visayas
39
19
Luzon
2019E
Cebu
Metro Manila
Visayas
2010 - 2014 CAGR
Mindanao
Cebu
Mindanao
2014 - 2019E CAGR
Source: Euromonitor
Key success factors
Wide variety and up-to-trend offering
According to Euromonitor, it is crucial for department stores to serve as a one-stop shop for all
consumer segments to shop for non-grocery products, and thus having a wide assortment of products
that cater to various consumer segments is a key success factor for department stores in Philippines.
Department store operators also have to keep up with consumer trends, be aware of consumer
preferences and employ attentive and well-trained staff to introduce products to consumers. Having
a good merchandising team with the expertise to source products that suit consumer preferences is
another key success factor in the competition amongst department store operators in the Philippines.
Exclusively distributed brands
According to Euromonitor, department store operators need to differentiate their product
offerings with others as consumers are becoming increasingly sophisticated and demanding of unique
products. As such, having exclusive distribution rights for certain brands presents a competitive edge
for a department store operator to stand out amongst rivals. Pushed by intense competition in securing
exclusive distribution rights, department store operators are increasingly eyeing overseas brands to
differentiate their product portfolio. This trend is supported by increasing exposure to Western
consumer culture and trends that have boosted Filipinos’ appetite for global fashion and retail brands.
Different product assortment strategy in urban and rural areas
According to Euromonitor, the key success factors in the urban areas differ slightly from those
for department stores in rural areas. Urban consumers are more demanding, more up-to-date with the
latest trends and have more selection of stores to patronize. Thus keeping up with the latest trend is
a relatively more important key success factor for department stores in urban cities. On the other hand,
having good value-for-money product offerings is a relatively more important success factor for
department stores in rural areas where consumers are less demanding and have less selection of stores
at which to shop.
137
Economies of scale
According to Euromonitor, another key success factor that differentiates department stores
operating nationwide from department stores operating regionally is the fact that the former are able
to leverage on economies of scale, especially in terms of bulk purchasing discounts of inventory
purchases due to stronger bargaining power, full use of reliable and efficient delivery systems and
logistics, and reduced administrative overheads as a proportion of total costs. The prestigious brand
name and strong financial power of nationwide department store operators are also key success factors
that enable smoother expansion plans.
Natural market entry barriers
According to Euromonitor, department stores are typically not standalone and are located at
malls due to the local culture of “malling”. While this culture benefits department store growth, it also
acts as an entry barrier due to the fact that most shopping malls already have their own department
stores. In order to enter into the department store retail segment, a new player has to either seek a mall
that does not have a department store yet, which is rare in the country, build a new shopping mall, or
partner with a shopping mall developer.
Another entry barrier for a new player to foray into the department stores segment is human
resource availability, as there is tight competition for credible talents to be employed at the
management level In addition, there are supplier exclusivity issues because some department store
brands have exclusivity agreements with certain suppliers, causing a new entrant to have to source for
inventory with other suppliers.
Strong brand recognition of established nationwide department stores brand also act as an entry
barrier for new entrants, given the fact that these established players already have good networks with
suppliers, loyal consumers, efficient economies of scale, and good reputation to attract high-quality
employees.
Competitive Landscape
Domestic players dominate the market
Leveraging on strength in understanding local consumers, domestic players continued to
dominate the competitive landscape of department stores in the Philippines, especially since
consumers are largely unfamiliar with foreign department store brands. According to Euromonitor,
international brands generally entered the Philippine department store market through partnerships
with local retail players, such as Debenhams and Marks & Spencer, which entered the Philippines
through franchise partnerships with Stores Specialists, Inc.
The competitive landscape of department stores in the country is gradually moving towards
fragmentation as regional players such as Metro Retail Stores Group Inc., Gaisano Capital and
Expressions Stationery Shop Inc. are strengthening their outlet presence outside their home markets,
further intensifying the competition among department store operators nationwide.
138
The table below sets forth the department store market share by company and by region in 2014
in terms of retail value sales.
Philippine department store company ranking by region in 2014 (by retail sales value)
Ranking
1
2
Philippines
SM Retail
Luzon
SM Retail
Metro Manila
Visayas
Cebu
Mindanao
SM Retail
Metro Retail
Stores Group
Metro Retail
Stores Group
SM Retail
SM Retail
Gaisano Grand
Group of
Companies
Gaisano Grand
Group of
Companies
Robinsons Retail Robinsons Retail Robinsons Retail
Group
Group
Group
3
Metro Retail
Stores Group
Metro Retail
Stores Group
Rustan’s Group
of Companies
Gaisano Grand
Group of
Companies
SM Retail
DSG Sons Group
4
Gaisano Grand
Group of
Companies
Rustan’s Group
of Companies
Metro Retail
Stores Group
Gaisano Capital
Gaisano Capital
New City
Commercial
Corporation
5
Gaisano Capital
Stores
Specialists, Inc
Stores
Specialists, Inc
Robinsons Retail
Group
Rustan’s Group
of Companies
Gaisano
(Northern
Mindanao)
Source:
Euromonitor
Overview of the Philippine Supermarket Industry
The primary modern grocery retail format in the Philippines
According to Euromonitor, the supermarket has emerged as the primary modern grocery retail
format in the Philippines. The market size of the supermarket industry by retail value sales was
=
P 379.2 billion in 2014, having grown at a CAGR of 8.3% from 2010.
Filipino consumers, especially urbanites, have been increasingly gravitating towards
supermarkets as their preferred grocery shopping place due to the wider product selection available,
the better perceived quality of the groceries and other products, and the clean and comfortable
shopping environment as compared with the traditional sari-sari stores. In addition, a wide array of
ancillary services and other shops such as foreign exchange, bills payment, restaurants and eateries,
bakeries and pharmacies can often be found in close proximity, which further boosts the image of
supermarkets as a one-stop-shop destination.
Supermarkets in the Philippines are usually conveniently located either within a shopping mall
or as a standalone within a neighborhood. As such, supermarket operators will likely ride on the
aggressive expansion of shopping malls by developers such as Ayala Land and Robinsons Land
Corporation over the next few years to post a strong performance. Standalone supermarkets have also
been springing up in neighborhoods in the Philippines in recent years. Neighborhood stores are
increasingly being opened closer to residences to enhance consumers’ accessibility to the
supermarkets, thereby encouraging them to bypass the sari-sari stores, which have relatively limited
offerings. Examples include SaveMore introduced by SM Retail and Metro Fresh N Easy acquired by
the Metro Retail Stores Group Inc.
Philippine consumers also have growing demand for contemporary consumer goods products.
Increasing occurrences of Filipinos taking overseas trip for both work and pleasure also expose them
to foreign food and non-food items. This trend benefits supermarkets as the modern grocery retail
channel has superior procurement and logistic systems over traditional grocery retailers, which
enables supermarkets to have a much diverse array of products both local and foreign.
139
Driven by wider acceptance of supermarkets as the primary choice of grocery shopping, strong
pipeline of new store openings, and growing demand for imported goods, the market size of the
supermarket industry by retail value sales is expected to expand from =
P 379.2 billion in 2014 to
=
P 542.8 billion by 2019E, a CAGR of 7.4%, according to Euromonitor.
The chart below sets forth the market size of the supermarket industry in the Philippines by retail
value sales from 2010 to 2019E.
Philippine supermarket industry market size ( =
P billions)
2014 - 2019E
2010 - 2014 CA
276
296
2010
2011
CAGR: 7.4%
GR: 8.0%
333
356
379
2012
2013
2014
409
2015E
441
2016E
474
2017E
508
2018E
543
2019E
Source: Euromonitor
Luzon has led the growth historically but the Visayas and Mindanao regions are expected to
outperform in the next five years
According to Euromonitor, Luzon had the strongest growth performance with a CAGR of 9.0%
from 2010 to 2014, followed by the Visayas at 6.6% and Mindanao at 6.3%. Luzon’s performance was
largely driven by Metro Manila, which was in turn fuelled by the relatively higher disposable incomes
and population sizes as compared with other regions of the Philippines, coupled with the increasing
shift of urban consumers from traditional retail formats to modern retail formats. In addition, Luzon’s
growth was also propelled by aggressive efforts by major players to expand in Luzon in the last five
years.
In contrast, the Visayas and Mindanao only entered the spotlight recently, when players were
looking beyond Luzon for opportunities to continue their growth momentum. However, their physical
infrastructure is under-developed in these regions and may run into issues with supply, distribution,
transportation and inventory management. According to Euromonitor, the supermarket industry in the
Visayas and Mindanao is relatively under-penetrated with per capita retail value sales in each region
P 2,451 respectively in 2015E, much lower than that of Luzon at
estimated at only =
P 2,488 and =
=
P 5,169. Therefore, the Visayas and Mindanao are expected to lead the national supermarket industry
growth with regional CAGR of 8.4% and 8.1% from 2014 to 2019E respectively.
140
The chart below sets forth the market size of the supermarket industry in Luzon, Metro Manila,
the Visayas, the Province of Cebu and Mindanao by retail value sales from 2010 to 2019E, as well as
the market size growth of these regions from 2010 to 2014 and 2014 to 2019E.
Supermarket market size by region ( =
P billions)
Supermarket market size growth by region
389
8.4%
7.1%
195
9.8%
9.4%
9.0%
276
7.0%
188
8.7%
6.6%
8.1%
6.3%
134
93
37
18
2010
Luzon
48
44
39
2014
Metro Manila
Visayas
82
71
56
25
Luzon
2019E
Cebu
Metro Manila
Visayas
2010 - 2014 CAGR
Mindanao
Cebu
Mindanao
2014 - 2019E CAGR
Source: Euromonitor
Key success factors
Convenience and affordability
According to Euromonitor, the provision of convenience to consumers is the defining feature of
supermarket operators’ success. Filipinos largely seek convenience when it comes to the purchase of
groceries and dominant incumbents have responded to these needs by shaping supermarkets to become
a one-stop-shop destinations where consumers are able to quickly access a multitude of products and
brands, as well as ancillary services. Beyond this, these players have also recently ramped up efforts
to open new standalone stores close to where the consumers live so that they can be more conveniently
accessed.
In addition, with intense competition in the supermarket sector, operators must also ensure that
their products are priced competitively and are seen as value for money. To this end, it is common to
see promotions being rolled out in supermarkets on a regular basis, including loyalty programs that
offer consumers enticing discounts and rewards.
Unique product offerings
According to Euromonitor, the product selection in stores helps a supermarket brand stand out
from competitors and is one of the key success factors in attracting consumers to its stores. As such,
existing supermarket operators have sought to differentiate their product offerings through various
ways, such as the building of its own private label brand, or offering exclusive foreign brands.
Sites with good locality
According to Euromonitor, with the success of a supermarket hinging so greatly on the level of
accessibility of the supermarket, the need to secure a site with a good location for a new supermarket
has become all the more critical. This is especially so for areas which are already saturated as well
as areas in which existing players are rapidly expanding. This poses a high entry barrier for new
entrants who wish to enter as they would be relegated to sites that are less accessible and with lower
foot traffic. For mall-based supermarkets, this means that the supermarket operators need to forge
good relationships with mall operators, while on the other hand standalone supermarkets need to be
able to secure residential areas with good traffic. Other entry barriers include limited pool of credible
talents to be employed at management level, similar to the entry barrier in department stores.
141
Competitive Landscape
Consolidated industry at national level but regional market leaders vary
According to Euromonitor, the supermarket sector is largely consolidated on the national level,
with a few players enjoying dominance in the market. Domestic players have a strong competitive
edge due to their knowledge of market nuances as well as a good grasp of consumers’ preferences. The
top 5 players nationally by outlet count consist of domestic players, with SM Retail in the lead,
followed by Robinsons Retail Group, Puregold Price Club, Liberty Commercial Center and Rustan’s
Group of Companies.
Some national players operate various supermarket brands in order to effectively target different
market segments, thus helping to consolidate their market share. For instance, under the Rustan’s
Group of Companies, Rustan’s Supermarkets and Marketplace target the affluent and Wellcome
supermarkets cater to the masses. This differentiation strategy is also adopted by Robinsons Retail
Group that operates Robinsons Selections to target the affluent, and Robinsons Supermarket and
Robinsons Easymart to target the middle class and the masses.
On a regional level, some players, due to their strong focus and expertise in that particular
region, enjoy a dominant position regionally. For instance, although Puregold Price Club is the 3rd
leading player nationally, its outlets are more heavily concentrated in Luzon. This is also the case for
Metro Retail Stores Group. Although Metro Retail Stores Group is not ranked among top 5 by outlets
nationally, it is ranked 2nd and 1st by retail value sales in the Visayas and the Province of Cebu due
to its deep roots and strong brand recognition in the region.
The table below sets forth the supermarket market share by company and by region in 2014 in
terms of retail value sales.
Philippine supermarket company ranking by region in 2014 (by retail sales value)
Ranking
Philippines
Luzon
Metro Manila
Visayas
Cebu
Mindanao
1
SM Retail
SM Retail
SM Retail
SM Retail
Metro Retail
Stores Group
New City
Commercial
Corporation
Metro Retail
Stores Group
SM Retail
SM Retail
2
Robinsons Retail Robinsons Retail Robinsons Retail
Group
Group
Group
3
Metro Retail
Stores Group
Puregold Price
Club
Rustan’s Group
of Companies
Robinsons Retail
Group
Gaisano Grand
Group of
Companies
Robinsons Retail
Group
4
Puregold Price
Club
Rustan’s Group
of Companies
Puregold Price
Club
Gaisano Grand
Group of
Companies
Gaisano Capital
Gaisano Grand
Group of
Companies
5
Rustan’s Group
of Companies
Metro Retail
Stores Group
Metro Retail
Stores Group
Gaisano Capital
Robinsons Retail
Group
Gaisano
(Northern
Mindanao)
Source: Euromonitor
142
Overview of the Philippine Hypermarket Industry
Fastest-growing and relatively under-penetrated modern retail format mainly targeting the mass
market
Hypermarkets combine the retailing of grocery and non-grocery merchandise under one roof,
providing consumers with a convenient modern retail channel that addresses all kinds of consumer
product needs. According to Euromonitor, the market size of the Philippines hypermarket industry by
retail value sales reached =
P 102.7 billion in 2014, having grown at a CAGR of 17.2% from 2010, the
highest growth rate among various modern retail formats discussed in this section.
Apart from the products on offer, hypermarkets also typically feature ancillary stores and
services such as bakeries, cafe/food service outlets, pharmacies/drugstores, bill payment centers and
foreign exchange facilities within a single premise, further emphasizing customer convenience.
Furthermore, hypermarket outlets in the Philippines are typically located closer to residential areas as
compared to department stores, and provide ample parking and/or direct connections with public
transport hubs, such as jeepney terminals.
Unlike supermarkets which might target a wide range of consumers through outlet and brand
differentiation, hypermarkets largely sell basic necessities targeted towards the mass market consumer
segment. It is therefore, essential for hypermarket operators to focus on providing affordable and mass
market merchandise to attract price sensitive consumers. Hypermarkets typically use an aggressive,
promotion-oriented low-price strategy through advertising or distribution of flyers that promote
product discounts. Hypermarkets rely on their large size and high number of footfalls that lead to high
transaction volume. Grocery and food items generally still represent the majority 70% - 80% of
hypermarkets total sales in the Philippines. Low margins for these items are complemented by the
sales of relatively higher-margin general merchandise.
According to Euromonitor, due to the restricted entrance of foreign players into the Philippine
retail industry before 2000, hypermarkets have been a relatively new and under-developed retail
format in the Philippines, compared to most of neighboring Southeast Asia emerging markets such as
Thailand and Indonesia, especially at the beginning of 2010. Therefore, the market size of the
hypermarket industry by retail value sales is expected to expand rapidly from =
P 102.7 billion in 2014
to =
P 179.8 billion by 2019E, representing a CAGR of 11.9%.
The chart below sets forth the market size of the hypermarket industry in the Philippines by retail
value sales from 2010 to 2019E.
Philippine hypermarket industry market size ( =
P billions)
2
2014 -
2
2010 -
55
2010
64
2011
014 CA
GR: 17
75
2012
.2%
88
2013
103
2014
Source: Euromonitor
143
119
2015E
019E C
135
2016E
AGR: 1
1.9%
148
2017E
165
2018E
180
2019E
Metro Manila has become over-saturated while significant growth opportunities are expected in the
Visayas and Mindanao
According to Euromonitor, Luzon contributed almost 90% of hypermarket retail value sales in
2014, with the highest concentration of outlets compared to other regions in the country. The market
size of hypermarkets by retail value sales in Luzon recorded a 13.5% CAGR from 2010 to 2014 and
reached =
P 89.3 billion in 2014. Almost half of the retail value sales in Luzon were contributed by
Metro Manila, which recorded the slowest CAGR at 4.3% compared to other regions. Metro Manila
has become an over-saturated region for hypermarkets, and companies are beginning to shift their
expansion focus to the Visayas and Mindanao. From 2010 to 2014, Visayas grew the fastest at 100.5%
CAGR in retail value terms due to exponential growth in hypermarket outlets, while the Province of
Cebu and Mindanao started to contribute to retail value sales of hypermarkets in 2011 and 2013,
respectively.
Going forward, the Visayas and the Province of Cebu are expected to post robust retail value
sales growth at CAGR of 24.0% and 20.7% from 2014 to 2019E, respectively, while Mindanao’s
forecast growth is expected to be the highest at 47.2% owing to its small base and due to the fact that
players such as Metro Retail Stores Group Inc. and SM Hypermarkets, who are not yet operating
hypermarkets in Mindanao, will likely enter the region to tap into the under-served markets. Per capita
P 716
retail value sales of hypermarkets in Mindanao and the Visayas are estimated at only =
P 219 and =
respectively in 2015E, much lower compared to that of Luzon at =
P 1,721.
The below chart set forth the market size of the hypermarket industry in Luzon, Metro Manila,
the Visayas, The Province of Cebu and Mindanao by retail value sales from 2010 to 2019E, as well
as the market size growth of these regions from 2010 to 2014 and 2014 to 2019E.
Hypermarket market size by region ( =
P billions)
Hypermarket market size growth by region
130
47.2%
89
24.0%
60
54
45
38
32
1
0
0
2010
Luzon
11 7
Metro Manila
Visayas
7.9%
17 18
3
4.3% 6.0%
nm
2014
2019E
Cebu
20.7%
13.5%
Luzon
Mindanao
Metro Manila
na
Visayas
2010 - 2014 CAGR
Cebu
na
Mindanao
2014 - 2019E CAGR
Source: Euromonitor
Key success factors
Convenience, affordability, accessibility and good merchandise mix
According to Euromonitor, in fulfilling the concept of retailing based on increasing demand for
convenience, it is crucial for hypermarket operators to offer a wide variety of product selections in
order to truly provide a one-stop shop grocery and non-grocery retail experience. To successfully cater
to the target mass market segment, hypermarket operators also need to ensure that products are
reasonably-priced, while still maintaining good standards for both product quality and customer
service. Accessibility is also an important element for the success of hypermarkets. Access to the
public by ensuring close proximity to residences, public transport terminals and having ample parking
space are important considerations.
144
Hypermarkets also need to attain a good mix between general merchandise and grocery items in
order to succeed, due to the fact that the former yields relatively higher margins but the latter still
dominates demand by consumers in hypermarkets.
It is also important for hypermarket operators to possess expertise in keeping up with consumer
trends and preferences in order to succeed in the competition amongst the hypermarket operators in
the Philippines. Reliable and efficient logistics to ensure availability and timely delivery of products
from manufacturers to retail shelves, as well as good and long-standing relationships with suppliers
are important factors to enable hypermarket operators to keep up with consumer trends and
preferences.
Expertise, location, and existing large-scale hypermarket players are entry barriers
According to Euromonitor, the hypermarket is a complex business that combines the necessary
proficiency in operating grocery and non-grocery retailing in a large scale. This acts as a natural
market entry barrier because new entrants not only have to possess the expertise, they also need to
achieve internal economies of scale to effectively operate a hypermarket business. As such new
entrants in the hypermarket segment are typically limited to businesses which are already operating
supermarkets, discounters and department stores.
Being a relatively new type of retail channel in the country, many Filipinos are not yet familiar
with the concept of hypermarkets. Existing hypermarket operators are therefore continually raising
awareness among consumers through marketing. This creates a gradually loyal consumer following to
existing hypermarket brands. Coupled with strong brand recognition of existing hypermarket operators
such as Metro Retail Stores Group Inc. and Puregold Price Club, it acts as an entry barrier for new
entrants to challenge the few large-scale players in this rather consolidated market.
Similar to the situation in department stores and hypermarkets, availability of good location in
saturated areas and new areas in which existing players are expanding also acts as an entry barrier for
new entrants in hypermarket segment. This is especially true for hypermarkets where convenience is
a top-of-mind concept for consumers. Funding capability and relationship with property developers
are thus key to store expansion and to ensure competitiveness amongst operators. Another entry barrier
is the limited pool of credible talent to be employed at the management level.
Competitive Landscape
Highly consolidated market with only five players, and all of whom are domestic
According to Euromonitor, the hypermarket segment is a consolidated retail sector with only five
players competing as of 2014. Only domestic companies currently compete in the hypermarket
segment, giving them a significant foothold in the budding hypermarket segment. Given the strong
brand equity of these existing players, competition from foreign hypermarkets in the future is not very
likely as the Philippine market may not be large enough for new foreign entrants to achieve economies
of scale.
All companies competing in the hypermarket segment are present in other retail segment,
particularly supermarkets and department stores. Leading players in the hypermarket segment are
largely targeting the Class C consumers (annual disposable income of U.S.$5,000 — U.S.$35,000).
Hypermarket brands generally compete on the basis of location, price, service and product quality.
145
The table below sets forth the hypermarket market share by company and by region in 2014 in
terms of retail value sales, according to Euromonitor.
Philippine hypermarket company ranking by region in 2014 (by retail sales value)
Ranking
Philippines
Luzon
Metro Manila
Visayas
Cebu
Mindanao
1
Puregold Price
Club
Puregold Price
Club
Puregold Price
Club
Metro Retail
Stores Group
Metro Retail
Stores Group
Puregold Price
Club
2
SM Retail
SM Retail
SM Retail
Prince
Warehouse Club
SM Retail
Prince
Warehouse Club
3
Rustan’s Group
of Companies
Rustan’s Group
of Companies
Rustan’s Group
of Companies
SM Retail
Prince
Warehouse Club
Rustan’s Group
of Companies
4
Metro Retail
Stores Group
Metro Retail
Stores Group
Metro Retail
Stores Group
Puregold Price
Club
Rustan’s Group
of Companies
—
5
Prince
Warehouse Club
—
—
Rustan’s Group
of Companies
—
—
Source: Euromonitor
Overview of Other Retailing Formats in the Philippines
According to Euromonitor, department stores, supermarket, and hypermarkets are aided by
ancillary services and shops such as bakery shops, food/drink specialist shops and pharmacies, which
can often be found in close proximity to enhance the level of convenience of consumers. The bakery
and food/drink specialist segment has reached maturity in the Philippines, and is a largely fragmented
market due to the high number of players. Nonetheless, these segments will continue to be bolstered
by the culture of eating out in the Philippines, as well as Filipinos’ tendency to trade up for better
quality products as a result of higher incomes. For instance, Goldilocks Bake Shop, despite being a
mid- to higher-priced source of baked goods, is the largest Filipino-owned bake shop chain with a
wide network of stores and loyal customer following.
Pharmacies are also important to the one-stop shop concept that many retailing operators have
been emphasizing. Major players in the segment, such as Mercury Drug Corp, have also been
aggressive in their expansion, through service innovation, such as drive-thru facilities in their outlets
and the introduction of online ordering and pickup systems. The provision of convenience to
consumers will likely help boost the entire segment going forward. Furthermore, with untapped
opportunities across the country, especially in the rural areas, pharmacies will likely see strong growth
over the next few years. This trend is likely to be boosted as new shopping malls, supermarkets and
hypermarkets get increasingly rolled out in the same areas.
146
REGULATORY AND ENVIRONMENTAL MATTERS
Environmental Laws
Environmental Impact Statement System
Presidential Decree No. 1586 established the Environmental Impact Statement (“EIS”) System
which is concerned primarily with assessing the direct and indirect impact of a project or undertaking
to the quality of the environment and ensures that such impact is addressed by appropriate
environmental protection and enhancement measures. The EIS system successfully culminates in the
issuance of an Environmental Compliance Certificate (“ECC”).
The ECC serves as a government certification based on the representations of the proponent that:
(i) the proposed project or undertaking will not cause a significant negative environmental impact; (ii)
that the proponent has complied with all the requirements of the EIS system and; (iii) that the
proponent is committed to implement its approved environmental management plan in the EIS or,
Initial Environmental Examination (“IEE”). The ECC also contains specific measures and conditions
that a project proponent must undertake before, during, and in some cases, at the abandonment of a
project.
Development projects that are classified by law as environmentally critical or projects located
within statutorily defined environmentally critical areas are required to obtain an Environmental
Compliance Certificate (“ECC”) from the Department of Environment and Natural Resource
(“DENR”) prior to its commencement. The DENR determines, through its regional offices or through
the Environment Management Bureau (“EMB”), whether a project is environmentally critical or
located in an environmentally critical area.
As a prerequisite for the issuance of an ECC, an environmentally critical project is required to
submit an EIS to the EMB, while a project located within an environmentally critical area is required
to submit an “IEE” to the proper DENR regional office, without prejudice to the power of the DENR
to require a more detailed EIS.
The EIS is a comprehensive study of the significant impact of a project on the environment. It
includes an Environmental Management Plan/Program that the proponent will fund and implement to
protect the environment. Project proponents that prepare an EIS are required to establish an
Environmental Guarantee Fund (“EGF”) when the ECC is issued to projects determined by the DENR
to pose significant public risks to life, health, property and the environment. The EGF is intended to
answer for damages caused by such a project as well as any rehabilitation and restoration measures.
Project proponents that prepare an EIS are also mandated to include a commitment to establish an
Environmental Monitoring Fund (“EMF”) when an ECC is eventually issued. The EMF shall be used
to support activities of a multi-partite monitoring team which will be organized to monitor compliance
with the ECC and applicable laws, rules and regulations.
The IEE is a report similar to an EIS, but with reduced details and depth of assessment and
discussion. While the terms and conditions of an EIS or an IEE may vary from project to project, at
a minimum, they contain all relevant information regarding the environmental effects of a project.
Project proponents for development projects classified as unlikely to cause any adverse
environmental impact may secure a Certificate of Non-Coverage (“CNC”). A CNC is a certification
from the EMB that based on the project description submitted, the project is not covered by the EIS
system and is not required to secure an ECC. The EMB, however, may require such projects or
undertakings to provide additional environmental safeguards as it may deem necessary.
147
The construction and development of commercial establishments such as malls, supermarkets
and public markets, fast food and restaurants, are required to secure an ECC when the total store area
(including parking) exceeds 10,000 sqm. Where the total store area is equal to or less than 10,000 sqm,
the operators of commercial establishments may secure a CNC from the requirements of Presidential
Decree No. 1586.
The issuance of ECC or CNC for a project under the EIS System does not exempt the proponent
from securing other government permits and clearances as required by other laws. Moreover, a
modification in the project may require the proponent to secure an amendment of its ECC.
See discussion in “Risk Factors — Risks Relating to Our Business — Continued compliance
with, and any changes in, environmental laws and regulations may adversely affect our results of
operations and financial condition.” for a discussion on our present and outstanding CNCs.
Toxic Substances, Hazardous and Nuclear Waste Control Act Republic Act No. 6969, or the Toxic
Substances and Hazardous Wastes Control Act of 1990, regulates and controls the importation,
manufacture, processing, handling, storage, transportation, sale, distribution, use and disposal of all
unregulated chemical substances and mixtures in the Philippines.
Hazardous wastes are generally defined as: a) substances that are without any safe commercial,
industrial, agricultural or economic usage and are shipped, transported or brought from the country of
origin for dumping or disposal into or in transit through any part of the territory of the Philippines,
b) by-products, side-products, process residues, spent reaction media, contaminated plant or
equipment or other substances from manufacturing operations and as consumer discards of
manufactured products which present unreasonable risk and/or injury to health and safety and to the
environment.
A hazardous waste generator, or a person (natural or juridical) who generates or produces
hazardous waste through any commercial, industrial or trade activities is required to register itself
with the DENR, report the type and quantity of the waste generated in accordance with the approved
form and manner, and pay the prescribed fees. A DENR identification number shall be issued upon
registration by the waste generator with the EMB Regional Office where it is located.
This is a one-time permit secured by a waste generator, unless there is a change in the hazardous
wastes produced.
Ecological Solid Waste Management
Republic Act No. 9003 or the Ecological Solid Waste Management Act of 2000 provides the legal
framework for a systematic, comprehensive and ecological solid waste management program that
ensures protection of public health and the environment.
“Solid waste” is defined as all discarded household, commercial waste, non-hazardous
institutional, ports/harbor and industrial waste, street sweepings, construction debris, agriculture
waste, and other non-hazardous/non-toxic solid waste. The Ecological Solid Waste Management Act
promotes solid waste segregation at source. It establishes the minimum requirements for segregation
and volume reduction of waste as well as the minimum standards for the collection, transportation and
handling of solid waste.
The Clean Air Act
Republic Act No. 8749, or the Philippine Clean Air Act of 1999 (“Clean Air Act”) focuses
primarily on air pollution prevention rather than on control and provide for a comprehensive
management program for air pollution.
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Under the Implementing Rules and Regulations, all sources of air pollution must have a valid
Permit to Operate issued by the DENR. All proposed or planned construction or modification of
sources that have the potential to emit 100 tons per year or more of any of the regulated pollutants,
or when required under the ECC, are required also to obtain an Authority to Construct before
construction or modification activities can take place. Once new source construction or modification
is completed the source owner shall convert the Authority to Construct to a Permit to Operate.
The Authority to Construct is a one-time permit while the Permit to Operate must be renewed
yearly.
Water Discharge Permit
Republic Act No. 9275, or the Philippine Clean Water Act of 2004 (“Clean Water Act”), was
enacted to protect the country’s water bodies from pollution from land-based sources (industries and
commercial establishments, agriculture and community/household activities). The Clean Water Act
provides for a comprehensive and integrated strategy to prevent and minimize pollution through a
multi-sectoral and participatory approach involving all the stakeholders.
Owners or operators of facilities that discharge regulated effluents are required to secure a permit
to discharge wastewater, which specifies, among others, the quantity and quality of effluent that said
facilities are allowed to discharge into a particular water body, the compliance schedule and
monitoring requirement.
For development projects, installations and activities that discharge liquid waste into and pose
a threat to the environment of the Laguna de Bay Region, the discharge permit is obtained from the
Laguna Lake Development Authority (“LLDA”) pursuant to LLDA Board Resolution No. 33, series of
1996. The discharge permit serves as clearance or legal authorization granted by the LLDA to
discharge liquid waste or wastewater of specified concentration and volume into any sewer system or
any water body that directly or eventually drains into the Laguna de Bay for a specified period of time.
Retail and Investment Laws
The Retail Trade Liberalization Act
Republic Act No. 1180 or the Retail Trade Nationalization Law, requires that corporation must
be 100% owned by Philippine nationals in order to engage in the retail business. Any person who is
not a citizen of the Philippines, and associations, partnerships, or corporations the capital of which is
not wholly owned by citizens of the Philippines, is prohibited from engaging directly or indirectly in
the retail business.
Republic Act No. 1180, was subsequently superseded by Republic Act No. 8762, or the Retail
Trade Liberalization Act, which allowed for foreign equity participation and non-Philippine nationals
to engage in retail trade on a limited basis. The Retail Trade Liberalization Act defines “retail trade”
as any act, occupation, or calling of habitually selling direct to the general public any merchandise,
commodities or goods for consumption.
Under the Retail Trade Liberalization Act, foreign-owned partnerships, associations and
corporations formed and organized under the laws of the Philippines may, upon their registration with
the Philippine SEC and the Department of Trade and Industry (“DTI”), or foreign-owned single
proprietorships upon their registration with the DTI, invest in the retail trade business, subject to the
following categories:
•
Category A - Enterprises with paid-up capital of the equivalent in Philippine Pesos of less
than U.S.$2,500,000 shall be reserved exclusively for Filipino citizens and corporations
wholly owned by Filipino citizens.
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•
Category B - Enterprises with a minimum paid-up capital of the equivalent in Philippine
Pesos of U.S.$2,500,000 but less than U.S.$7,500,000 may be wholly owned by foreigners.
•
Category C - Enterprises with a paid-up capital of the equivalent in Philippine Pesos of
U.S.$7,500,000 or more may be wholly owned by foreigners: provided, however, that in no
case shall the investments for establishing a store in Categories B and C be less than the
equivalent in Philippine Pesos of U.S.$830,000.
•
Category D - Enterprises specializing in high-end or luxury products with a paid-up capital
of the equivalent in Philippine Pesos of U.S.$250,000 per store may be wholly owned by
foreigners.
Foreign investors may also acquire shares in existing retail enterprises, whether or not publicly
listed, whose net worth is in the excess of the Philippine Peso equivalent of U.S.$2,500,000. However,
whenever a foreign investor is also engaged in retail trade (a “foreign retailer”) and such foreign
retailer acquires 51% or more of the outstanding capital stock of an existing retail enterprise, such
foreign retailer must comply with the following pre-qualification requirements:
(a)
A minimum of U.S.$200,000,000 net worth in its parent corporation for Categories B and
C, and U.S.$50,000,000) net worth in its parent corporation for Category D;
(b)
5 retailing branches or franchises in operation anywhere around the word, unless such
retailer has at least 1 store capitalized at a minimum of U.S.$25,000,000;
(c)
5-year track record in retailing; and
(d)
Only nationals from, or juridical entities formed or incorporated in countries which allow
the entry of Filipino retailers shall be allowed to engage in retail trade in the Philippines.
The DTI shall pre-qualify all foreign retailers before they are allowed to conduct business in the
Philippines.
Foreign Investments Act
Republic Act No. 7042, as amended by Republic Act No.8179, or the Foreign Investments Act
was enacted to encourage the entry of foreign investments into the Philippines. As a general rule, there
are no restrictions on the extent of foreign ownership of export enterprises.
Under the Foreign Investments Act, foreigners can own as much as 100% of domestic market
enterprises, except in areas specified in the Negative List. This Negative List enumerates industries
and activities which have foreign ownership limitations under the Foreign Investments Act and other
existing laws. For the purpose of complying with nationality laws, the term “Philippine National” is
defined under the Foreign Investments Act as any of the following: (i) a citizen of the Philippines; (ii)
a domestic partnership or association wholly owned by citizens of the Philippines; (iii) a trustee of
funds for pension or other employee retirement or separation benefits where the trustee is a Philippine
National and at least 60% of the fund will accrue to the benefit of the Philippine Nationals; (iv) a
corporation organized under the laws of the Philippines of which at least 60% of the outstanding
capital stock entitled to vote is owned and held by citizens of the Philippines; and (v) a corporation
organized abroad and registered as doing business in the Philippines under the Corporation Code of
which 100% of the outstanding capital stock entitled to vote is owned by Filipinos. For as long as the
percentage of Filipino ownership of the capital stock of the corporation is at least 60% of the total
shares outstanding and voting, the corporation shall be considered a 100% Filipino-owned
corporation.
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The Foreign Investments Act, however, states that where a corporation (and its non-Filipino
stockholders) own stock in an enterprise registered with the Philippine SEC, (i) at least 60% of the
outstanding capital stock entitled to vote of both investing corporation and the investee corporation
must be owned and held by citizens of the Philippines; and (ii) at least 60% of the members of the
board of directors of both investing corporation and investee corporation must be citizens of the
Philippines, in order for the investee corporation to be considered a Philippine National.
Non-Philippine nationals may own up to one hundred percent (100%) of domestic market
enterprises, unless foreign ownership is prohibited or limited by the Constitution and existing laws or
the Foreign Investment Negative List.
Small and medium-sized domestic market enterprises with paid-in equity capital less than the
equivalent of U.S.$200,000, are reserved to Philippine nationals. However, if the said enterprises (1)
involve advanced technology as determined by the Department of Science and Technology, or (2)
employ at least fifty direct employees, then a minimum paid-in capital of U.S.$100,000 shall be
allowed to non-Philippine nationals.
Foreign owned firms catering mainly to the domestic market shall be encouraged to undertake
measures that will gradually increase Filipino participation in their businesses by taking in Filipino
partners, electing Filipinos to the board of directors, implementing transfer of technology to Filipinos,
generating more employment for the economy and enhancing skills of Filipino workers.
The Philippine Competition Act
Republic Act No. 10667, or the Philippine Competition Act was signed into law on July 21, 2015,
to take effect on August 8, 2015. This is the first antitrust statute in the Philippines and will provide
the competition framework in the Philippines. The Philippine Competition Act was enacted to provide
free and fair competition in trade, industry and all commercial economic activities. To implement its
objectives, the Philippine Competition Act provides for the creation of a Philippine Competition
Commission (the “Commission”), an independent quasi-judicial agency with five commissioners.
Among its powers are: to conduct investigations, issue subpoenas, conduct administrative
proceedings, and impose administrative fines and penalties. To conduct a search and seizure, the
Commission must apply for a warrant with the relevant court.
The Philippine Competition Act prohibits anti-competitive agreements between or among
competitions, and mergers and acquisitions which have the object or effect of substantially preventing,
restricting or lessening competition. This law also prohibits practices which involve abuse of
dominant position, such as selling goods or services below cost to drive out competition, imposing
barriers to entry or prevent competitors from growing, and setting prices or terms that discriminate
unreasonably between customers or sellers or the same goods, subject to exceptions. Violations of the
Philippine Competition Act have severe consequences. The Commission may impose administrative
P 250 million for the
P 100 million and =
fines of up to =
P 100 million for the first offense and between =
second offense, on entities that are found to have entered into prohibited anti-competitive agreements
P 250 million may be
or committed abuses of dominant position. Fines of between =
P 50 million and =
imposed by the courts on entities that enter into these defined anti-competitive agreements between
competitors that are either prohibited per se or that have the object of substantially preventing,
restricting or lessening competition by setting, limiting or controlling production, markets, technical
development or investment or by dividing or sharing the market. Directors and management personnel
of such entities, who knowingly and willfully participate in such criminal offenses, may also be
sentenced to imprisonment for two to seven years.
Treble damages may be imposed by the Commission or the courts, as the case may be, where the
violation involves the trade or movement of basic necessities and prime commodities.
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Health Regulations
The Food and Drug Administration (“FDA”), under the Department of Health (“DOH”)
administers and enforces the law on safety and good quality supply of food, consumer drugs and
cosmetics and regulates the production, sale, and traffic of the same to protect the health of the people.
The Food, Drug and Cosmetics Act
The Food, Drug and Cosmetics Act, was passed into law on June 22, 1963. This was later
amended by Executive Order 175 and Republic Act No. 9711 or “The Food and Drug Administration
Act of 2009”. The Food, Drug and Cosmetics Act, as amended, was enacted as part of the
government’s policy of ensuring that safe and quality food is available to the people of the Philippines
and to regulate the production, sale and trade of food to protect the health of the citizens. “Food” is
defined as any processed substance which is intended for human consumption and includes drinks,
beverages, chewing gum and any substances which have been used as an ingredient in the
manufacture, preparation or treatment of food. “Cosmetics”, on the other hand, is defined as any
substance or preparation intended to be placed in contact with the various external parts of the human
body or with the teeth and the mucous membranes of the oral cavity, with a view exclusively or mainly
to cleaning them, perfuming them, changing their appearance and/or correcting body odor, and/or
protecting the body or keeping them in good condition.
The Food, Drug and Cosmetics Act covers both locally manufactured and imported products and
establishes standards as well as quality measures for food. A comprehensive enforcement framework
was set up, which is deemed as necessary to ensure a pure and safe supply of food in the country.
Under The Food, Drug and Cosmetics Act, the following scenarios, among others, are considered
prohibited and are punishable:
•
the manufacture, import, export, sale, offer for sale, distribution, transfer, non-consumer
use, promotion, advertising or sponsorship of any health products (defined as food,
cosmetics, devices, biologicals, vaccines, in-vitro diagnostic reagents, and household/urban
hazardous substances) that are adulterated, unregistered or misbranded;
•
the adulteration or misbranding of any health product;
•
the refusal to permit entry or inspection as authorized by section 27 of The Food, Drug and
Cosmetics Act or to follow samples to be collected;
•
the alteration, mutilation, destruction, obliteration, or removal of the whole or any part of
the labeling of, or the doing of any other act with respect to health products if such act is
done while the article is held for sale (whether or not the first sale) and results in the article
being adulterated or misbranded; and
•
the sale, offering for sale, importation, exportation, distribution or transfer of any health
product beyond its expiration or expiry date, if applicable.
The commission of any of the prohibited acts stated above can result in imprisonment and/or a
fine, in the sole discretion of the courts. Furthermore, any article of food, drug, device or cosmetic
that is adulterated or misbranded when introduced into the domestic commerce may be seized and held
in custody pending proceedings, without a hearing or court order, when the director general of the
FDA has reasonable cause to believe from facts found by him or any officer or employee of the FDA
that such health products may cause harm or prejudice to the consuming public.
Food shall be deemed to be adulterated if it carries or contains any poisonous or deleterious
substance which may render it injurious to health, except if the quantity of such substance in such food
does not ordinarily render it injurious to health. Food shall be deemed adulterated if it carries or
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contains any added poisonous or added deleterious substance other than one which is a pesticide
chemical in or on a raw agricultural commodity for which tolerances have been established and it
conforms to such tolerances. Food is adulterated if it consists in whole or in part of any filthy, putrid,
or in part decomposed substance, or if it is otherwise unfit for human consumption; likewise if it is,
in whole or in part, the product of a diseased animal or of an animal which has died otherwise than
by slaughter. Lastly, if the container is composed, in whole or in part, of any poisonous or deleterious
substance that may render the contents injurious to health, the food is considered adulterated.
Food shall be deemed to be misbranded if its labeling is false or misleading in any particular;
if it is offered for sale under the name of another food; if it is an imitation of another food, unless its
label bears in type of uniform size and prominence, the word “imitation” and immediately thereafter,
the name of the food imitated; if its container is made, formed, or filled as to be misleading; if in
package form unless it bears a label containing (i) the name and place of business of the manufacturer,
packer, distributor; and (ii) an accurate statement of the quantity of the contents in terms of weight,
measure, numerical count; (iii) subject to reasonable variations and exemptions as to small packages
as may be established by regulations, if any word, statement, or other information required by or under
authority of the secretary of the FDA.
The Food, Drug and Cosmetics Act to appear on the label or labeling is not prominently placed
thereon with such conspicuousness and in such terms as to render it likely to be read and understood
by the ordinary individual under customary conditions of purchase and use; (iv) if it purports to be
or is represented as food for which a definition and standard of identity has been prescribed unless (i)
it conforms to such definition and standard, and (ii) its label bears the name of the food specified in
the definition and standard, and insofar as may be required by such regulations, the common names
of optional ingredients (other than spices, flavoring, and coloring) present in such food; if it purports
to be or is represented as (i) food for which a standard of quality has been prescribed by regulations,
and its quality falls below such standard, unless its label bears, in such manner and form as such
regulations specify, a statement that it falls below such standard; or (ii) food for which a standard or
standards of fill of container have been prescribed by regulations and it falls below the standard of
fill of container applicable thereto, unless its label bears, in such manner and form as such regulations
specify, statement that if falls below such standard; if its label does not bear (i) the common or usual
name of the food, if there be any, and (ii) in case it is fabricated from two or more ingredients, the
common or usual name of each such ingredient; except the spices, flavorings and colorings without
naming each; and to the extent that compliance becomes impracticable or results in deception or unfair
competition, exemptions shall be established by regulations promulgated by the Secretary of the FDA;
if it purports to be or is presented for special dietary uses, unless its label bears such information
concerning its vitamin, mineral and other dietary properties as the Secretary determines to be, and by
regulations prescribes as necessary to fully inform purchasers as to its value for such uses; if it bears
or contains any artificial flavoring, artificial coloring, or chemical preservative, unless it bears
labeling stating that fact however, to the extent that compliance with this requirements is
impracticable, exemptions shall be established by regulations promulgated by the Secretary of the
FDA.
For the purposes of enforcement of the Food, Drug and Cosmetics Act, officers or employees
duly designated by the Secretary, upon presenting appropriate credentials to the owner, operator, or
agent in charge, are authorized (i) to enter, at reasonable hours, any factory, warehouse, or
establishment in which food, drugs, devices or cosmetics are manufactured, processed, packed, or
held, for introduction into domestic commerce; and (ii) to inspect, in a reasonable manner, such
factory, warehouse, establishment, or vehicle and all pertinent equipment, finished or unfinished
materials, containers, and labeling therein.
The Secretary of the FDA may cause to be disseminated information regarding food, drugs,
devices, or cosmetics in situations involving, in the opinion of the Secretary, imminent danger to
health, or gross deception of the consumer. The Secretary of the FDA shall not be prohibited from
collecting, reporting and illustrating the results of investigations of the DOH.
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The Consumer Act
Republic Act No. 7394, or the Consumer Act of the Philippines (“The Consumer Act”)
establishes quality and safety standards with respect to the composition, contents, packaging and
advertisement of food products. The Consumer Act prohibits the manufacture, importation,
exportation, sale, offering for sale, distribution and transfer of food products that do not conform to
applicable consumer product quality or safety standards and imposes a penalty of imprisonment of not
less than one year but not more than five years, or a fine of not less than =
P 5,000 but not more than
=
P 10,000 or both, at the discretion of the court. Should the offense be committed by a juridical person,
the chairman of the board of directors, the president, general manager, or the partners and/or the
persons directly responsible therefor shall be penalized.
The Consumer Act requires that consumer products for retail sale to the public shall be offered
with an appropriate price tag, label, or marking publicly displayed to indicate the price of the
consumer product per unit in Philippine Pesos and centavos. The products shall not be sold at a price
higher than that stated in the price tag, label or marking, and shall be sold without discrimination to
all buyers. However, where the consumer products for sale are too small or the nature of the products
make it impractical to place a price tag on each article, a price list placed at the nearest point where
the products are displayed indicating the retail price of the same shall suffice. First time violation of
this requirement warrants the imposition of imprisonment of not less than one month but not more than
P 5,000, or both, at the discretion of
six months, or a fine of not less than =
P 200 but not more than =
the court. A second conviction shall also carry with it the penalty of revocation of business permit and
license.
The Consumer Act is primarily enforced by the DOH, the Department of Agriculture (“DA”) and
the DTI.
The Meat Inspection Code
Republic Act No. 9296 or the Meat Inspection Code establishes safety and quality standards for
meats, including pork, beef and chicken meat products. It has been further amended by Republic Act
No. 10536. The National Meat Inspection Service (“NMIS”), a specialized regulatory service attached
to the DA, serves as the national controlling authority tasked with implementing policies, programs,
guidelines and rules and regulations pertaining to meat inspection and meat hygiene to ensure meat
safety and quality from farm to table. On the other hand, the local government units, in accordance
with existing laws, policies, rules and regulations and quality and safety standards of the DA, have
the authority to regulate the construction, management and operation of slaughterhouses and meat
inspection and meat transport within their respective jurisdictions, and to collect fees and charges in
connection therewith.
The Meat Inspection Code requires the inspection of food animals and the carcasses and parts
thereof that are capable of use as human food. Only meat or meat products that have passed inspection
and have been marked may be sold, offered for sale or transported. The Meat Inspection Code also
provides for the inspection of slaughterhouses, poultry dressing plants and meat shops to ensure
compliance with existing laws, policies and safety standards. Slaughterhouses and poultry dressing
plants are required to comply with the Animal Welfare Act of 1998 for the adequate protection of food
animals to be slaughtered. All meat establishments are required to adopt good manufacturing practices
and sanitation standard operating procedures programs for the production, storage and distribution of
meat products and to comply with all pollution control and environmental laws and regulations
relating to the disposal of carcasses and parts thereof.
A cease and desist order may be issued by the secretary of the DA to any person, firm, or
corporation engaged, in the business of slaughtering food animals, or preparing, freezing, packaging,
storing or labeling any carcasses or parts or products of carcasses for use as human food, found to be
in violation of any of the provisions of the said law, should the continued operation of the said entity,
pose risks to public health and endanger the animal population.
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The Price Act
Republic Act No. 7581 or the Price Act provides for price controls for basic necessities and prime
commodities in certain situations. Basic necessities include rice, corn, bread, fish, dried and canned
fish and other marine products, fresh vegetables, pork, beef, poultry, milk, coffee and cooking oil, salt,
laundry soap, detergents while prime commodities include flour, dried, processed and canned pork,
beef and poultry meat, other dairy products, toilet soap, paper, school supplies, electrical supplies,
batteries, among others. Under the Price Act, the prices of basic commodities are automatically frozen
in areas declared as disaster areas, under emergency or martial law or in a state or rebellion or war.
Unless lifted by the President of the Philippines, prices shall remain the same for a maximum of 60
days. The President of the Philippines may likewise impose a price ceiling on basic necessities and
prime commodities in cases of calamities, emergencies, price manipulation or when the prevailing
prices have risen to unreasonable levels. However, the Price Act as amended by Republic Act 10623,
provides that, in the case of basic necessities that are wholly imported and deregulated under existing
laws such as, but not limited to, household LPG and kerosene, price control thereon shall remain
effective for a period of not more than 15 days, taking into consideration the current inventory or
supply levels thereof.
The Price Act considers it unlawful for any person habitually engaged in the production,
manufacture, importation, storage, transport, distribution, sale or other methods of disposition of
goods to engage in price manipulation of any basic necessity or prime commodity through cartels,
hoarding or profiteering.
The DA, DTI, DENR and DOH are the implementing agencies responsible for the enforcement
of the provisions of the Price Act. The implementing government agencies of the Price Act are granted
the authority thereunder to issue suggested retail prices, whenever necessary, for certain basic
necessities and/or prime commodities for the information and guidance of concerned trade, industry
and consumer sectors.
The Food Safety Act
Republic Act No. 10611 otherwise known as the Food Safety Act of 2013 (“Food Safety Act”)
aims to protect the public from food-borne and water-borne illnesses and unsanitary, unwholesome,
misbranded or adulterated foods; enhance industry and consumer confidence in the food regulatory
system; and achieve economic growth and development by promoting fair trade practices and sound
regulatory foundation for domestic and international trade. The same law created the Food Safety
Regulation Coordinating Board responsible for monitoring and coordinating the performance and
implementation of the mandates of the DA, the DOH, the DILG and the local government units in food
safety regulation.
Under the Food Safety Act, the DOH and DA set the mandatory food safety standards. Foods
imported into the country must come from countries with an equivalent food safety regulatory system
and shall comply with international agreements to which the Philippines is a party.
Food business operators are primarily responsible in ensuring that the food satisfies the
requirements of food laws relevant to their activities in the food supply chain and that control systems
are in place to prevent, eliminate or reduce risks to consumers. Non-compliance with the provisions
of the Food Safety Act may result in the imposition of fine and a suspension of the appropriate
authorization, as warranted.
The Philippine Food Fortification Act
Republic Act No. 8976 or the Food Fortification Act provides for the mandatory fortification of
wheat flour, cooking oil and such other staple foods as required by the National Nutrition Council and
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the voluntary fortification of processed foods or food products other than the foregoing. The
fortification of food products shall be undertaken by the manufacturers thereof, which as defined
under the Food Fortification Act, includes the importer of processed foods or food products imported
for its own use as well as wholesale or retail distribution to other food establishments or outlets.
The DOH through the FDA is the government agency responsible for the implementation the
Food Fortification Act with the assistance of the different local government units, which are tasked
under the said law to monitor foods mandated to be fortified which are available in public markets,
retail stores and food service establishments and to check if the labels of fortified products contain
nutrition facts stating the nutrient added and its quantity. Any person in violation of the Food
Fortification Act shall be subject to administrative penalties. Furthermore, the FDA may refuse or
cancel the registration or order the recall of food products in violation of said law.
The Comprehensive Dangerous Drugs Act
Republic Act No. 9165 or the Comprehensive Dangerous Drugs Act, as amended by Republic Act
No. 10640, seeks to address the trafficking and use of dangerous drugs and other similar substances
through an integrated system of planning, implementation and enforcement of anti-drug abuse
policies, programs, and projects. The Government aims to achieve a balance in the national drug
control program so that people with legitimate medical needs are not prevented from being treated
with adequate amounts of appropriate medications, which include the use of dangerous drugs.
The Dangerous Drugs Board formulates the guidelines for the importation, distribution,
production, manufacture, compounding, prescription, dispensing and sale of, and other lawful acts in
connection with any dangerous drug, controlled precursor and essential chemical and other similar or
analogous substances of such kind and in such quantity as the said board may deem necessary
according to the medical and research needs or requirements of the country and determines the
quantity and/or quality of dangerous drugs and precursors and essential chemicals to be imported,
manufactured and held in stock at any given time by the authorized importer, manufacturer or
distributor of such drugs. The corresponding license for this purpose is issued by the Philippine Drug
Enforcement Agency (“PDEA”), which is the implementing arm of the Dangerous Drugs Board. The
PDEA is responsible for the efficient and effective law enforcement of all the provisions of the said
law with respect to any dangerous drug and/or controlled precursor and essential chemical.
All manufacturers, wholesalers, distributors, importers, dealers and retailers of dangerous drugs
and/or controlled precursors and essential chemicals (issued with the appropriate license by the
PDEA) is required to keep a record of all inventories, sales, purchases, acquisitions and deliveries of
the same as well as the names, addresses and licenses of the persons from whom such items were
purchased or acquired or to whom such items were sold or delivered, the name and quantity of the
same and the date of the transactions. Such records may be reviewed at any time by the Dangerous
Drugs Board.
The Pharmacy Law
Republic Act No. 5921 or the Pharmacy Law, as amended by Republic Act No. 9502 or the
Universally Accessible Cheaper and Quality Medicines Act of 2008, regulates the sale of medicine,
pharmaceuticals, drugs and devices.
Under the law, medicine, pharmaceutical, or drugs, of whatever nature and kind or device may
be compounded, dispensed, sold, or made available to the consuming public only through a duly
established prescription drugstore or hospital pharmacy.
Every pharmacy, drug store or hospital pharmacy either owned by the government or a private
person or firm shall at all times be under the personal and immediate supervision of a registered
pharmacist. No pharmacist is allowed to have personal supervision of more than one such
establishment. In cases where a drug establishment operates in more than one shift, each shift must
be under the supervision and control of a registered pharmacist.
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An exception under the law are non-prescription or over-the-counter drugs, which may be sold
in their original packages, bottles, containers or in small quantities, not in their original containers to
the consuming public through supermarkets, convenience stores and other retail establishments.
The law also allows pharmaceutical, drug or biological manufacturing establishments, importers
and wholesalers of drugs, medicines, or biologic products, to sell their products for re-sale only to
retail drug outlets, hospital pharmacies or to other drug wholesalers under the supervision of a
registered pharmacist, or in the case of over-the counter drugs, they may be sold for resale only to
supermarkets, convenience stores duly licensed by the FDA.
The Generics Act
Republic Act No. 6675, or the Generics Act of 1998, as amended by Republic Act No. 9502 or
the Universally Accessible Cheaper and Quality Medicines Act of 2008 (“Generics Act”), encourages
and requires the use of generic terminology in the importation, manufacture, distribution, marketing,
advertising and promotion, prescription and dispensing of drugs.
Pursuant to the Generics Act, any organization or company involved in the manufacture,
importation, repacking, marketing and/or distribution of drugs and medicines are required to indicate
prominently the generic name of the product. In the case of brand name products, the generic name
should appear prominently and immediately above the brand name in all product labels, as well as in
advertising and other promotional materials.
Drug outlets, including drug stores, hospital and non-hospital drug stores and non-traditional
outlets such as supermarkets and stores, are also required to inform a purchaser of any and all other
drug products having the same generic name, together with their corresponding prices so that the
purchaser may adequately exercise his option.
The Intellectual Property Code
To encourage the transfer and dissemination of technology, prevent or control practices and
conditions that may in particular cases constitute an abuse of intellectual property rights having an
adverse effect on competition and trade, all technology transfer arrangements shall comply with the
provisions of Republic Act No. 8293, or the Intellectual Property Code of the Philippines. Technology
transfer arrangements refer to contracts or agreements involving the transfer of systematic knowledge
for the manufacture of a product, the application of a process, or rendering of a service including
management contracts; and the transfer, assignment or licensing of all forms of intellectual property
rights.
The law provides for several prohibited clauses in the technology transfer agreement which, on
its face, may be considered to have an adverse effect on competition and trade. These include, among
others, provisions such as: a) those which impose upon the licensee the obligation to acquire from a
specific source capital goods, intermediate products, raw materials, and other technologies, or of
permanently employing personnel indicated by the licensor; b) those pursuant to which the licensor
reserves the right to fix the sale or resale prices of the products manufactured on the basis of the
license; c) those that contain restrictions regarding the volume and structure of production; and d)
those which prevent the licensee from adapting the imported technology to local conditions, or
introducing innovation to it, as long as it does not impair the quality standards prescribed by the
licensor.
The law also provides for several mandatory provisions, to wit:
(1)
That the laws of the Philippines shall govern the interpretation of the same and in the event
of litigation, the venue shall be the proper court in the place where the licensee has its
principal office;
157
(2)
Continued access to improvements in techniques and processes related to the technology
shall be made available during the period of the technology transfer arrangement;
(3)
In the event the technology transfer arrangement shall provide for arbitration, the Procedure
of Arbitration of the Arbitration Law of the Philippines or the Arbitration Rules of the
United Nations Commission on International Trade Law or the Rules of Conciliation and
Arbitration of the International Chamber of Commerce shall apply and the venue of
arbitration shall be the Philippines or any neutral country; and
(4)
The Philippine taxes on all payments relating to the technology transfer arrangement shall
be borne by the licensor.
Technology transfer arrangements that conform to the foregoing need not be registered with the
Documentation, Information and Technology Transfer Bureau. Non-conformance, however, shall
automatically render the technology transfer arrangement unenforceable, unless said technology
transfer arrangement is approved and registered with the Documentation, Information and Technology
Transfer Bureau in exceptional or meritorious cases where substantial benefits will accrue to the
economy, such as high technology content, increase in foreign exchange earnings, employment
generation, regional dispersal of industries and/or substitution with or use of local raw materials, or
in the case of Board of Investments, registered companies with pioneer status.
The Philippine Labor Laws
Presidential Decree 442, as amended, or the Philippine Labor Code (“The Labor Code”), is
Philippines’ principal labor law. Along with other statutory enactments, The Labor Code provides for
the minimum conditions of work, benefits that employers must grant to their employees, and includes
rules on illegal recruitment, wages of workers, rights of union members, collective bargaining and
employment termination. The Labor Code also deals with employers’ rights, which include the right
to make and enforce reasonable regulations, to reorganize and streamline commercial processes, and
to terminate employees.
The Philippine Labor Code provides that, in the absence of a retirement plan provided by their
employers, private-sector employees who have reached 60 years of age or more, but not beyond 65
years of age, the compulsory retirement age for private-sector employees without a retirement plan,
and who have rendered at least five years of service in an establishment, may retire and receive a
minimum retirement pay equivalent to one-half month’s salary for every year of service, with a
fraction of at least six months being considered as one whole year. For the purpose of computing the
retirement pay, “one-half month’s salary” shall include all of the following: fifteen days salary based
on the latest salary rate; in addition, one-twelfth of the thirteenth month pay and the cash equivalent
of five days of service incentive leave pay. Other benefits may be included in the computation of the
retirement pay upon agreement of the employer and the employee or if provided in a collective
bargaining agreement.
Other social security laws are Republic Act No. 1161, or the Social Security Law as amended
(“SSS”), Republic Act No. 7875 or the National Health Insurance Act, as amended and Republic Act
No. 9679 or the Home Development Mutual Fund Law (“PAG-IBIG Fund”).
Under the Social Security Law, SSS coverage is compulsory for all employees under 60 years of
age and their employers. Pursuant thereto, an employer is obligated to deduct and withhold from each
employee’s monthly salary, wage, compensation or earnings, the employee’s contribution in an amount
corresponding to his salary, wage, compensation or earnings, and the employer, for its part, makes a
counterpart contribution for the employee, and remits both amounts to the SSS. This enables the
employees to claim their pension, death benefits, permanent disability benefits, funeral benefits,
sickness benefits and maternity-leave benefits. The Social Security Law imposes penal sanctions if an
employer fails to remit the contributions to the SSS. For corporate employers, the penalty is imposed
on its president and members of the board of directors.
158
The National Health Insurance Act, created the National Health Insurance Program (“NHIP”) to
provide health insurance coverage and ensure affordable and accessible health care services to all
Filipino citizens. All members of the SSS are automatically members of the NHIP. The Philippine
Health Insurance Corporation (“PhilHealth”) administers the NHIP, and an employer is required to
deduct and withhold the contributions from the employee’s salary, wage or earnings, make a
counterpart contribution for the employee, and remit both amounts to PhilHealth. The NHIP will then
subsidize personal health services required by the employee subject to certain terms and conditions
under the law. The National Health Insurance Act likewise imposes penal sanctions if an employer
does not remit the contributions to PhilHealth. For corporate employers, the penalty is imposed on its
president and members of the board of directors.
The Pag-IBIG Fund Law, created the Home Development Mutual Fund (“HDMF”), a national
savings program as well as a fund to provide for affordable shelter financing to Filipino workers.
Coverage under the HDMF is compulsory for all SSS members and their employers. Under the law,
an employer must deduct and withhold 2% of the employee’s monthly compensation, up to a maximum
of =
P 5,000, and likewise make a counterpart contribution of 2% of the employee’s monthly
compensation, and remit the contributions to the HDMF. The Pag-IBIG Fund Law also imposes penal
sanctions if the employer does not remit the contributions to the HDMF.
Pending Legislation
The following is a description of pending bills in the Senate and House of Representatives
relating to the Philippine retail industry, which may have a material impact on the business, prospects
or results of operations of the Company if formally enacted:
House Bill No. 2672, aims to penalize unfair trade and anti-competitive practices in restraint of
trade, unfair competition, abuse of dominant power, and to strengthen the powers of regulatory
authorities. The bill is pending before the House Committee.
Senate Bill No. 2349 (also House Bill No. 5479) aims to require retail stores that provide plastic
bags to consumers to implement a plastic bag collection and recycling program. The bill remains
pending before the Senate’s Committee. A similar bill is pending before the House of Representatives’
Committee as House Bill No. 5479.
Senate Bill No. 1823 (also House Bill No. 3708) proposes to require retail food stores to post
consciously notices of packaging dates for fresh or processed meat, seafood and poultry, and impose
penalties for non-compliance. The bill remains pending before the Senate’s Committee. A similar bill
is pending before the House of Representatives’ Committee as House Bill No. 3708
Senate Bill No. 2121 (also House Bill No. 4403) proposes to amend Sections 5, 8 and 9 of the
Retail Trade Liberalization Law. The Senate’s version proposes to do away with these barriers to
foreign investment by removing the equity and capitalization requirements in the Retail Trade
Liberalization law in the country. The bill remains pending before the Senate Committee. A similar bill
is pending before the House of Representatives’ Committee as House Bill No. 4403. The House’s
version, however, still reserves certain enterprises exclusively for Filipino citizens and corporations
wholly owned by Filipino citizens, to an extent.
Senate Bill No. 1083 (also House Bill No. 101), aims to prohibit merchandising stores and service
establishments from charging more than the cash retail price of goods and services and prescribe
penalties for its violation. This bill aims to address the practice of some merchandising stores and
service establishments to charge a different, albeit higher price, for items bought using credit cards;
or to limit bargain sale items and services to those made with cash purchases. The bill is pending
before the Senate’s Committee. A similar bill is pending before the House of Representatives’
Committee as House Bill No. 101.
159
Senate Bill No. 229 (also House Bill No. 5258), seeks to amend Section 132(A) of the Labor
Code by mandating owners and/or operators of malls, department stores, stalls and similar
establishments to grant and allow their women employees assigned in sales 15 minutes rest every 2
hours of continuous and uninterrupted sales and store assignments. The bill is pending before the
Senate’s Committee. A similar bill is pending before the House of Representatives’ Committee as
House Bill No. 5258.
Senate Bill No. 2337 aims to ban the use of single-use, throw-away bags, regardless of
composition in all retail establishments and provides penalties thereof. The bill remains pending
before the Senate’s Committee.
Senate Bill No. 2349, proposes to provide for a proactive approach in recycling used plastic bags
by stores and other retail outlets, by requiring retailers to establish a recycling mechanism for plastic
bags and reuse recycled plastic bags in future purchases. The bill remains pending before the Senate
Committee.
160
RELATED PARTY TRANSACTIONS
In the ordinary course of our business, we engage in transactions with related parties and
affiliates. It is our policy to ensure that these transactions are entered into on terms comparable to
those available from unrelated third parties.
We have the following major transactions with related parties:
•
We entered into lease agreements with Vicsal Development Corporation (“VDC”) for the
Company’s store space and warehouses. Rent expenses paid from these leases for the years
ended December 31, 2012, 2013, 2014 and the six months ended June 30, 2015, amounted
P 330.9 million, respectively.
P 623.9 million and =
P 569.4 million, =
to =
P 363.8 million, =
•
We provide to or receive from VDC short term, non-interest bearing advances, the amounts
of which do not exceed =
P 1.0 million, for working capital requirements.
•
In the normal course of business, we ordinarily purchase goods and services from our
related parties with the following nature of transactions:
䡩
Purchases of imported goods, services and store and office equipment from
Cornerstone Diversified Goods Trading, Inc.
䡩
Concession purchases from Beneluxe Trading Corporation, which engages in the
watch and jewelry business.
䡩
The use of logistical services provided by Cargo Bayan Inc. and Bayan Movers
Logistics, Inc.
䡩
Travel ticketing and booking services from Grand Holidays, Inc.
䡩
Supply of goods and services to malls operated by Pacific Malls Corp.
The amount of goods and services purchased under these arrangements amounted to =
P 138.4
P 499.7 million for the years ended December
P 858.1 million and =
million, =
P 534.4 million, =
31, 2012, 2013, 2014 and the six months ended June 30, 2015, respectively
•
We have entered into lease arrangements for store space with our related parties, including
Beneluxe Trading Corporation, and Wealth Development Bank Corp. We derived rental
P 21.6
P 6.3 million and =
P 2.1 million, =
income from these arrangements of =
P 2.0 million, =
million for the years ended December 31, 2012, 2013, 2014 and the six months ended June
30, 2015, respectively.
•
We are parties to perpetual trademark licensing agreements with our affiliates, Metro Value
Ventures, Inc. and Vicsal Development Corporation. Our agreement covers several
trademarks for various products, the details of which are further set out under the
discussion on “Intellectual Property” elsewhere in this prospectus.
For more information on volume and amounts outstanding, see Note 20 to our audited financial
statements as of and for the years ended December 31, 2012, 2013 and 2014 and as of and for the six
months ended June 30, 2015.
161
BOARD OF DIRECTORS AND SENIOR MANAGEMENT
The overall governance and supervision of the Company is undertaken by our Board of Directors.
Our Board of Directors establishes our strategy direction, sets our policies, monitors the
implementation of these and ensures accountability. The Company’s executive officers and
management team are in charge of overseeing the day-to-day business operations, implementing
strategy and delivering the financial and operating results.
Pursuant to the Company’s articles of incorporation, as amended on July 3, 2014, the Board
consists of seven members, of whom two are independent directors. The five non-independent
directors of the Board were elected at the Company’s annual shareholders meeting on May 1, 2015 and
will hold office until their successors have been duly elected and qualified. To fill the vacancy of the
directorship of the Company, Guillermo L. Parayno, Jr. and Ricardo Nicanor N. Jacinto were elected
as independent directors on July 16 and 27, 2015, respectively, to serve as such until their successor
shall have been duly elected and qualified.
The table below sets forth each member of the Company’s Board as of the date of this Prospectus.
Name
Age
Nationality
Position
1. Frank S. Gaisano ...........................
57
Philippines
Chairman
2. Jack S. Gaisano .............................
62
Philippines
Director
3. Edward S. Gaisano ........................
60
Philippines
Director
4. Margaret G. Ang ...........................
63
Philippines
Director
5. Arthur Emmanuel ..........................
61
United States
Director
6. Guillermo L. Parayno, Jr. ..............
67
Philippines
Independent Director
7. Ricardo Nicanor N. Jacinto ...........
53
Philippines
Independent Director
The table below sets forth the Company’s key executive and corporate officers as of the date of
this Prospectus.
Name
Age
Nationality
Position
Frank S. Gaisano ...............................
57
Philippines
Chairman & Chief Executive Officer
Arthur Emmanuel ..............................
61
United States
President & Chief Operating Officer
Aljim C. Jamandre ............................
56
Philippines
Treasurer & Chief Financial Officer
Vincent E. Tomaneng.........................
47
Philippines
Corporate Secretary and Chief Legal Counsel
Karen H. Gaviola-Climaco.................
36
Philippines
Assistant Corporate Secretary & Compliance Officer
Luz A. Bitang....................................
61
Philippines
Vice President & Head for Store Operations
Jonathan Juan DC. Moreno ................
44
Philippines
Chief Strategy & Governance Officer
The table below sets forth other key positions created by the Board as of the date of this
Prospectus.
Name
Age
Nationality
Sherisa P. Nuesa ................................
60
Philippines
Senior Advisor to the Board
Christopher Beshouri .........................
52
United States
Senior Advisor to the Board
162
Position
The business experience for the last five years of members of the Board, the key executive and
corporate officers of the Company are set forth below.
Significant Employees
Frank S. Gaisano, 57, has been the Company’s Chairman and Chief Executive Officer since 2012
and has served on the board of directors since 2003. He holds a bachelor of science degree in civil
engineering, which he received from the Cebu Institute of Technology in 1978, and is a board-certified
civil engineer. Presently, Mr. Gaisano also serves as Chairman of AB Capital & Investment
Corporation, Pacific Mall Corporation and Vicsal Investment Inc. He is also a Director of Vicsal
Development Corporation, Filipino Fund, Inc., Taft Property Venture Development Corporation, Taft
Punta Engaño Property Inc. and HTLand, Inc. Additionally, he is a Trustee of Vicsal Foundation,
Incorporated.
Jack S. Gaisano, 62, has been a Director of the Company since 2003. He received a bachelor of
science degree from the University of San Carlos, Cebu City in 1976 and is a board-certified chemical
engineer. He currently also serves as Chairman and President of Taft Property Venture Development
Corporation and Midland Development Corporation and Chairman of Vsec.com. He is the President
and Vice-Chairman of HTLand, Inc. He is also a Director of Vicsal Development Corporation, Pacific
Mall Corporation and Vicsal Investment, Inc.
Edward S. Gaisano, 60, has served as a Director of the Company since 2003. He has been a
board-certified doctor of medicine since 1980. Mr. Gaisano is currently Chairman and President of
Vicsal Development Corporation and Vicsal Foundation, Incorporated. He is also Chairman of Wealth
Development Bank Corporation, Hyundai Alabang, Inc. and Hyundai Southern Mindanao. He is a
Director of Taft Property Venture Development Corporation and is the President of Pacific Mall
Corporation and former President of the Cebu Chamber of Commerce & Industry. Additionally, Mr.
Gaisano is a Trustee of Habitat for Humanity Philippines and a member of the Society of Fellows of
the Institute of Corporate Directors.
Margaret G. Ang, 63, has served as Director of the Company since 2003 and its Corporate
Secretary until July 26, 2015. Ms. Ang received a bachelor of science degree, major in accounting
(1974, Cum Laude), from the University of San Carlos, Cebu City and is a certified public accountant.
She currently serves as Director and Corporate Secretary of Vicsal Development Corporation, Taft
Property Venture Development Corporation and Vicsal Securities & Stock Brokerage, Inc. Ms. Ang is
also the President of Filipino Fund, Inc. and of Grand Holidays, Inc. Additionally, she serves as a
director of Manila Water Consortium, Inc. and as a Trustee of Vicsal Foundation, Incorporated.
Arthur Emmanuel, 61, serves as Director and current President and Chief Operating Officer of
the Company. He served as a Consultant for Merchandising and Operations of Vicsal Development
Corporation from 2010 to 2012. He has accumulated 38 years of experience in retail operations,
merchandising, global procurement, product development and logistics. Mr. Emmanuel previously
served in a number of senior management positions with Wal-Mart Stores, Inc., having most recently
served as Senior Vice-President, Sourcing/Retail Import Development Organization in China.
Guillermo L. Parayno, Jr., 67, was elected as an independent Director of the Company on July
16, 2015. Mr. Parayno is also the Chairman and President of E-Konek Pilipinas, Inc. and the Director
and Vice Chairman of Philippine Veterans Bank. He is also President of the Parayno Consultancy
Services on logistic and distribution, customs, information, technology and taxation, the Project
Management Consultant for the Revenue Administration Reform Program, Millennium Challenge
Account Philippines, and the Chairman & President of Bagong Silang Farms, Inc. Previously, Mr.
Parayno led several Asian Development Bank Missions relating to Trade Facilitation and served as
Commissioner of the Bureau of Internal Revenue.
Ricardo Nicanor N. Jacinto, 53, was elected as an independent Director of the Company on July
27, 2015. He obtained his Master’s Degree in Business Administration from Harvard University in
163
1986. Mr. Jacinto is President & CEO of the Institute of Corporate Directors and the Nicanor P Jacinto
Jr Foundation. He is also a Director of LLL Holdings, Inc. and former Director of the Manila Water
Company. Mr. Jacinto previously served as Chief Executive Officer and President of Habitat for
Humanity Philippines, a foundation supported by Ayala Corp.
Aljim C. Jamandre, 56, was appointed as Treasurer and reappointed as Chief Financial Officer
on July 27, 2015. He is a certified public accountant. He earned his Bachelor of Science in
Accountancy (Cum Laude) from the University of San Carlos in Cebu City and completed his
Management Development Program from the Asian Institute of Management in 1988. He has
previously worked with Sycip Gorres Velayo & Co., CPA’s as an Audit Manager from 1979 to 1991.
He is currently a Director of Pacific Mall Corporation, Filipino Fund, Inc., Wealth Development Bank
Corporation, AB Capital & Investment Corporation, and Hyundai Alabang, Inc. He also serves as the
Group Chief Financial Officer of Vicsal Development Corporation.
Vincent E. Tomaneng, 47, was appointed as the Corporate Secretary on July 27, 2015. He earned
his Bachelor of Laws (1994) and Bachelor of Science in Accountancy (1988, Magna Cum Laude)
degrees from the University of San Carlos in Cebu City. He is presently the Group General Counsel
of Vicsal Development Corporation and the Metro Gaisano Group of Companies. Prior to joining
Vicsal and the Metro Gaisano Group in May 2003, he has worked with Sycip Salazar Hernandez &
Gatmaitan Law Offices as a Senior Associate (1997 to 2003) and with Sycip Gorres Velayo & Co.,
CPA’s as a Tax Supervisor (1988 to 1996). He is presently the Director and Corporate Secretary of
Filipino Fund, Inc. from 2014, and a Director of Pacific Mall Corporation from 2010.
Karen H. Gaviola-Climaco, 36, was appointed as the Assistant Corporate Secretary and
Compliance Officer on July 27, 2015, and assumed the position on August 3, 2015. She is a certified
public accountant and obtained her Bachelor of Science in Accountancy (2000, Summa Cum Laude)
and her Bachelor of Laws (2006, Cum Laude) degree from the University of San Carlos. She is also
a Professor in the University of San Carlos School of Law and Governance teaching special
commercial law subjects. Prior to joining the Company, she was a Senior Associate of the Angara
Abello Concepcion Regala & Cruz Law Offices.
Luz A. Bitang, 61, has served as Vice-President and Head of Store Operations since 2014. She
obtained her Bachelor of Arts in Psychology in 1986. She was formerly the Vice President - General
Loss Prevention for Vicsal Development Corporation.
Jonathan Juan DC. Moreno, 44, has served as the Chief Strategy and Governance Office since
November 2014. He obtained his Master of Business Management from the Asian Institute of
Management/Melbourne Business School in 2000. He is also currently an Independent Director and
Audit Committee Chair of Marsh Philippines.
Sherisa P. Nuesa, 60, is Senior Adviser to the Board of Directors of the Company. She is a
member of the Boards of Directors of Manila Water Company, the ALFM Mutual Funds Group, Far
Eastern University, and FERN Realty Corporation. She is also a Trustee of the Institute of Corporate
Directors (ICD). Ms. Nuesa was a former Managing Director of Ayala Corporation, and served in
various senior management positions within the Ayala Group: Ayala Land Inc., Manila Water
Company, and Integrated Microelectronics, Inc.
Christopher P. Beshouri, 52, is Senior Adviser to the Board of Directors of the Company. He has
worked with McKinsey for 15 years, and was President of McKinsey’s Philippines practice. A
financial markets specialist, Mr. Beshouri has held various positions with the U.S. Treasury, World
Bank, Catholic Relief Services, and Federal Reserve, and was an Adjunct Professor at Georgetown in
Financial Markets. He also sits on the Board of GT Capital Holdings, Inc.
The Company has no significant employee or personnel who was not an executive officer but is
expected to make a significant contribution to the business.
164
INVOLVEMENT IN CERTAIN LEGAL PROCEEDINGS OF DIRECTORS AND EXECUTIVE
OFFICERS
To the best of the Company’s knowledge and belief and after due inquiry, none of the Company’s
directors, nominees for election as director, or executive officers have in the five-year period prior to
the date of this Prospectus: (1) had any petition filed by or against any business of which such person
was a general partner or executive officer either at the time of the bankruptcy or within a two-year
period of that time; (2) have been convicted by final judgment in a criminal proceeding, domestic or
foreign, or have been subjected to a pending judicial proceeding of a criminal nature, domestic or
foreign, excluding traffic violations and other minor offenses; (3) have been the subject of any order,
judgment, or decree, not subsequently reversed, suspended or vacated, of any court of competent
jurisdiction, domestic or foreign, permanently or temporarily enjoining, barring, suspending or
otherwise limiting their involvement in any type of business, securities, commodities or banking
activities; or (4) have been found by a domestic or foreign court of competent jurisdiction (in a civil
action), the Philippine SEC or comparable foreign body, or a domestic or foreign exchange or other
organized trading market or self-regulatory organization, to have violated a securities or commodities
law or regulation, such judgment having not been reversed, suspended, or vacated.
However, one of our Independent Directors, Mr. Guillermo L. Parayno, Jr., has disclosed that
there are two complaints under preliminary investigation before the Office of the Ombudsman where
he has been named as a respondent in his capacity as the former Commissioner of Customs and
Internal Revenue. As of the date of this Prospectus, none of these complaints (all of which were filed
before his election as an independent director of the Company) has progressed into a case or been
given due course.
CORPORATE GOVERNANCE
The Company submitted its Manual on Corporate Governance (the “Manual”) to the Philippine
SEC on August 10, 2015 in compliance with Philippine SEC Memorandum Circular No. 6, series of
2009. The Company and its respective directors, officers and employees have complied with the best
practices and principles on good corporate governance as embodied in its Manual. In addition to
establishing specialized committees to assist in complying with principles of good corporate
governance, the Manual also outlines specific investor’s rights and protections and enumerates
particular duties expected from members of the Board of Directors and top level management. It also
features a disclosure system which requests adherence to principles of transparency, accountability
and fairness. A compliance officer is responsible for the formulation of specific measures to determine
the level of compliance with the Manual by members of the Board of Directors, officers and
employees. Any violation of the Manual subjects the responsible officer or employee to certain
penalties as provided in the Manual.
Independent Directors
The Manual requires the Company to have at least two (2) independent directors in the Board of
Directors, at least one of whom serves on each of the Governance Committee, Nomination and
Committee, the Audit and Risk Committee and Investment Committee. An independent director is
defined as a person who has not been an officer or employee of the Company, its subsidiaries or
affiliates or related interests during the past three (3) years counted from date of his election, or any
other individual having a relationship with the institution, its parent, subsidiaries or related interest,
or to any of the Company’s director, officer or stockholder holding shares of stock sufficient to elect
one seat in the board of directors or any of its related companies within the fourth degree of
consanguinity or affinity, legitimate or common-law, which would interfere with the exercise of
independent judgment in carrying out the responsibilities of a director.
165
COMMITTEES OF THE BOARD
The Board created and appointed Board members to each of the committees set forth below. Each
member of the respective committees named below holds office as of the date of this Prospectus and
will serve until his successor is elected and qualified.
Audit and Risk Committee
The Audit and Risk Committee consist of three (3) directors, one (1) of whom shall be an
independent director and another with audit experience. Among the Audit and Risk Committee’s
functions is to assist the Board in the performance of its oversight responsibility for the financial
reporting process, system of internal control, audit process, and monitoring of compliance with
applicable laws, rules and regulations.
The Audit and Risk Committee also provides oversight over management’s activities in managing
credit, market, liquidity, operational, legal and other risks of the Company, and over the Company’s
internal and external auditors. It is responsible for organization the Internal Audit Department, and
reviewing financial statements before submission to the Board of Directors.
The Audit and Risk Committee chairman is Guillermo L. Parayno, Jr., who serves with Margaret
G. Ang and Ricardo Nicanor N. Jacinto.
Nomination and Compensation Committee
The Nomination and Compensation Committee is composed of at least three (3) members of the
Board, one (1) of whom is an independent director. The Nomination and Compensation Committee
reviews and evaluates the qualifications of all persons nominated to the Board and other appointments
that require Board approval. The Committee is responsible for adopting the procedure for developing
a policy on remuneration of directors and officers to ensure that their compensation is consistent with
the Company’s culture, strategy and the business strategy in which it operates.
The Nomination and Compensation Committee chairman is Frank S. Gaisano, who serves with
Margaret G. Ang and Ricardo Nicanor N. Jacinto.
Governance Committee
The Governance Committee is composed of at least three (3) members of the Board, one (1) of
whom is an independent director. The Governance Committee reviews and evaluates the compliance
of the Company with the Manual and the Philippine SEC Code of Corporate Governance.
The Governance Committee chairman is Edward S. Gaisano, who serves with Margaret G. Ang,
Guillermo L. Parayno, Jr. and Arthur Emmanuel.
Investment Committee
The Investment Committee is composed of at least three members of the Board, one (1) of whom
shall be an independent director. The Investment Committee reviews and recommends to the Board the
policies and strategies to be adopted by the Company regarding the investment activities and
portfolios necessary to achieve its goals and objectives, and recommends the hiring and termination
of investment managers.
The Investment Committee chairman is Jack S. Gaisano, who serves with Frank S. Gaisano and
Ricardo Nicanor N. Jacinto.
166
EXECUTIVE COMPENSATION
Compensation
The following are the Company’s Chief Executive Officer and President and four most highly
compensated executive officers for the year ended December 31, 2014:
Name
Position
Frank S. Gaisano ................................................................... Chief Executive Officer and President
Aljim C. Jamandre ................................................................. Chief Financial Officer
Vincent E. Tomaneng ............................................................. Chief Legal Counsel
Luz A. Bitang ........................................................................ Vice President & Head for Store Operations
Jonathan Juan DC. Moreno .................................................... Chief Strategy & Governance Officer
The following table identifies and summarizes the aggregate compensation (actual and expected)
of the Company’s Chief Executive Officer and President and the four most highly compensated
executive officers of the Company in 2013, 2014 and 2015:
Year
Total
(=
P)
Chief Executive Officer and President and the four most highly
compensated executive officers named above ............................................. 2013
11,617,500.00
2014
22,038,157.80
2015 (expected)
43,400,217.25
Aggregate compensation paid to all other officers as a group unnamed ...... 2013
30,977,953.97
2014
66,567,145.17
2015 (expected)
88,106,240.30
Standard Arrangements
The by-laws of the Company provide that the Board is authorized to fix and determine the
compensation of the Directors and Officers in accordance with law..
By resolution of the Board, other than a per diem allowance of =
P 150,000.00 for attendance at
=
each Board meeting and P 45,000.00 for attendance in Committee meetings where a Director is a
Committee chairman or =
P 40,000.00 where a Director is a Committee member, there are currently no
standard arrangements pursuant to which Directors of the Company are compensated, or are to be
compensated, directly or indirectly, for any services provided as a Director. Directors who are also
Executive Officers are entitled to a per diem allowance of =
P 10,000.00 for every attendance in Board
and Committee meetings. The beneficial owners of Vicsal Development Corporation, Ms. Margaret G.
Ang, Mr. Edward S. Gaisano, and Mr. Jack Gaisano, have also opted to receive =
P 10,000.00 for every
attendance in Board and Committee meetings. .
Other Arrangements
Except for Mr. Frank S. Gaisano and Mr. Arthur Emmanuel, who receive salaries as Chief
Executive Officer and President & Chief Operating Officer, respectively, there are no other
arrangements for which the directors are compensated by the Company for services other than those
provided as a director.
167
Family Relationship
As of the date of this prospectus, family relationships (by consanguinity or affinity within the
fourth civil degree) between Directors and members of the Company’s senior management are as
follows:
Frank S. Gaisano, Chairman of the Board of Directors, Jack S. Gaisano, Edward S. Gaisano and
Margaret G. Ang, Directors of the Company, are siblings.
Apart from the foregoing, there are no other family relationships up to the fourth civil degree
either by consanguinity or affinity among directors or executive officers of the Company.
Certain relationships and related transactions
The Company, in the ordinary course of its business, engages in transactions with companies
controlled by the Metro Gaisano Family. For a more detailed discussion on related party transactions,
see “Related Party Transactions” beginning on page 161 of this Prospectus.
EMPLOYMENT CONTRACTS
The Company has existing employment contracts with its executive officers. These contracts
basically specify the scope of services expected from these individuals and the compensation that they
shall receive.
There are no arrangements for compensation to be received by these named executive officers
from the Company in the event of a change in control.
WARRANTS AND OPTIONS OUTSTANDING
As of the date of this Prospectus, there are no outstanding warrants or options held by the
president, and the named key executive and managerial officers, and all officers and directors as a
group. However, the Board of Directors and Stockholders of the Company have adopted resolutions
on July 27, 2015 approving the establishment of a stock option plan to offer up to 103,320,000 Shares
out of its unissued capital stock to key personnel. The specific terms of such stock option plan have
not yet been established and the Company expects to operationalize its stock option plan after the
Listing Date. The Company intends to subject all Shares issued pursuant to the stock option plan to
a mandatory lock-up of 180 days from the date of issuance, among other terms that may be set by the
Company’s Nomination and Compensation Committee for the grant of such options, from time to time.
168
PRINCIPAL SHAREHOLDERS
Principal Shareholders
The following table sets forth the holders of our shares as of July 31, 2015.
Shareholder
No. of Shares
Paid-Up
% of
Subscribed
Capital ( =
P)
Ownership
Jack S. Gaisano ............................................................
2
2.00
0.00%
Margaret G. Ang ...........................................................
2
2.00
0.00%
Edward S. Gaisano........................................................
2
2.00
0.00%
Frank S. Gaisano ..........................................................
2
2.00
0.00%
Arthur Emmanuel ..........................................................
1
1.00
0.00%
Valueshop Stores, Inc....................................................
48,999,989
48,999,989.00
1.94%
Vicsal Development Corporation ...................................
2,475,000,000
2,475,000,000.00
98.06%
Guillermo L. Parayno, Jr. ..............................................
1
1.00
0.00%
Ricardo Nicanor N. Jacinto ...........................................
1
1.00
0.00%
TOTAL ........................................................................
2,524,000,000
2,524,000,000.00
100.00%
Selling Shareholders
Assuming the full exercise of the Over-allotment Option, the Optional Shares will be drawn from
the Selling Shareholders in the following order, first, from the shares of Valueshop Stores, Inc. and
second, from the shares of Vicsal Development Corporation. Vicsal Development Corporation and
Valueshop Stores, Inc. are the principal shareholders of the Company. The table below sets forth, for
the Selling Shareholders, the number of Shares held by it before the Offer, the number of Shares to
be sold by it in the Offer and the number of Shares to be owned by it immediately after the Offer.
Selling Shareholder
Comm on
Shares held
before the
Offer
% of Comm on
Shares
outstanding
before the
Offer
Comm on
Shares to be
sold in the
Firm Offer
Comm on
Shares to be
sold pursuant
to the Overallotment
Option
No exercise of
Over-allotment Option
Full exercise of
Over-allotment Option
Comm on
Shares held
after the Offer
Comm on
Shares held
after the Offer
%
Valueshop Stores, Inc. .......................
48,999,989
1.94%
None
48,999,989
48,999,989
1.43
None
Vicsal Development Corporation ........
2,475,000,000
98.06%
None
41,537,511
2,475,000,000
72.17
2,433,462,489
%
Nil
70.96
The PSE rules require a company’s existing stockholders who own an equivalent of at least 10%
of the issued and outstanding shares of stock of the company to refrain from selling, assigning or any
manner disposing of their shares for a period of 180 days after the listing of said shares, if the
company meets the track record requirements of the PSE, or for a period of 365 days, if the company
is exempt from track record and operating requirements of the PSE.
If there is any issuance or transfer of shares (i.e., private placements, asset for shares swap or
similar transaction) or instruments which lead to issuance of shares (i.e., convertible bonds, warrants
or similar instrument) done or fully paid for within 180 days prior to start of the offering period, and
the transaction price is lower than the offer price in the Initial Public Offering, all shares availed of
shall be subject to a lock-up period of at least 365 days from full payment of such shares.
169
To implement this lock-up requirement, the PSE requires the applicant company to lodge the
shares with the PDTC through a PCD participant for the electronic lock-up of the shares or to enter
into an escrow agreement with the trust department or custodian unit of an independent and reputable
financial institution that is acceptable to PSE.
The following shareholders are covered by the 180-day PSE lock-up requirement:
Percentage Total
of Shareholding
Name of Shareholders
Vicsal Development Corporation .......
Percentage Total
Percentage Total
Assuming Full
Number of
of Shareholding
of Shareholding
Exercise of the
Common Shares
before
after the
Over-allotment
Held
the Offer
Firm Offer
Option
2,475,000,000
98.06%
72.17%
70.96%
The following shareholders are covered by the 365-day PSE lock-up requirement:
Percentage Total
of Shareholding
Number of
Percentage Total
Percentage Total
Assuming Full
of Shareholding
of Shareholding
Exercise of the
Common Shares
before
after the
Over-allotment
Held
the Offer
Firm Offer
Option
Guillermo L. Parayno, Jr. .................
1
0%
0%
0%
Ricardo Nicanor N. Jacinto ...............
1
0%
0%
0%
Name of Shareholders
In addition, we and the Selling Shareholders have agreed with the Joint Global Coordinators that,
except in connection with the Over-allotment Option, they will not, without the prior written consent
of the Joint Global Coordinators, issue, offer, pledge, sell, contract to sell, pledge or otherwise dispose
of (or publicly announce any such issuance, offer, sale or disposal of) any Shares or securities
convertible or exchangeable into or exercisable for any Shares or warrants or other rights to purchase
Shares or any security or financial product whose value is determined directly or indirectly by
reference to the price of the underlying securities, including equity swaps, forward sales and options
for a period of 180 days or 365 days after the listing of the Offer Shares, as applicable.
170
SECURITY OWNERSHIP OF CERTAIN RECORD AND BENEFICIAL OWNERS AND
MANAGEMENT
Security Ownership of Certain Record and Beneficial Owners of more than 5% of our voting
securities as of August 10, 2015
Name of Beneficial
Owner and
Title of Class
Name and Address of Record
Relationship with
Owner and Relationship with Issuer
Record Owner
Common .......... Vicsal Development Corporation
% of Total
Citizenship
See Note 1 below
Filipino
No. of
Outstanding
Shares Held
Shares
2,475,000,000
98.06
Vicsal Building,
corner of C.D. Seno & W.O. Seno Sts.,
Guizon, North Reclamation Area,
Mandaue City, Cebu
Note:
(1)
Vicsal Development Corporation is beneficially owned by Frank S. Gaisano, Mary Irish D. Gaisano, Edward S. Gaisano,
Christine G. Gaisano, Jack S. Gaisano, Vivian A. Gaisano, Margaret G. Ang, and Enrico de Leon Ang.
As of the date of this Prospectus, there is no foreign ownership of our equity, with the exception
of one director, Mr. Arthur Emmanuel, identified in the table below.
Security Ownership of Directors and Officers as of the date of this Prospectus
Nature of
% of Total
Beneficial
Outstanding
Name of Beneficial
Number of
Owner
Shares
Amount ( =
P)
Common ........... Jack S. Gaisano
2
2.00
Direct
Filipino
0%
Common ........... Frank S. Gaisano
2
2.00
Direct
Filipino
0%
Title of Class
Ownership
Citizenship
Shares
Common ........... Margaret G. Ang
2
2.00
Direct
Filipino
0%
Common ........... Edward S. Gaisano
2
2.00
Direct
Filipino
0%
Common .......... Arthur Emmanuel
1
1.00
Nominee
United States
0%
Common ........... Guillermo L. Parayno, Jr.
1
1.00
Direct
Filipino
0%
Common ........... Ricardo Nicanor N. Jacinto
1
1.00
Direct
Filipino
0%
Dilution of Principal Shareholders
The chart below shows the dilution of our principal shareholder as a result of the Offer.
Percentage Total
of Shareholding
Name of Shareholder
Vicsal Development Corporation .......
Percentage Total
Percentage Total
Assuming Full
of Shareholding
of Shareholding
Exercise of the
Number of
before
after the
Over-allotment
Subscribed Shares
the Offer
Firm Offer
Option
2,475,000,000
98.06%
72.17%
70.96%
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Voting Trust Holders of 5% or more
There were no persons holding more than 5% of a class of Shares under a voting trust or similar
agreement as of the date of this Prospectus.
Recent Issuances of Securities Constituting Exempt Transactions by the Company
On June 16, 2014, the Board of Directors and the stockholders of the Company approved an
P 10,000,000,000.00,
increase in the Company’s authorized capital stock from =
P 100,000,000.00 to =
=
divided into 10,000,000,000 common shares with a par value of P 1.00 per share or an increase of
=
P 1.00 per share.
P 9,900,000,000.00 divided into 9,900,000,000 common shares with a par value of =
Out of this increase, 25% or a total of 2,475,000,000 common shares were subscribed by Vicsal
Development Corporation for cash. The subscription price is at the par value of =
P 1.00 per share or
=
a total subscription price of P 2,475,000,000.00. The subscription by Vicsal Development Corporation
is an exempt transaction under Section 10.1(l) of the SRC, such subscription being made pursuant to
an increase in the Company’s authorized capital stock and to comply with the requirements under the
Philippine Corporation Code as to the percentage of the increase in capital stock of a corporation
which should be subscribed before its authorized capital is increased. There was no expense incurred,
no underwriting discounts given, and no commission, compensation or remuneration was paid or
given, in connection with the said subscription.
Changes in Control
As of the date of this Prospectus, there are no arrangements that may result in a change of control
in the Company.
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DESCRIPTION OF THE SHARES
The Shares to be offered shall be 905,375,000 common shares of the Company, with a par value
of =
P 1.00 per Share, to be issued and offered by the Company by way of a primary offer.
The Offer Shares shall be offered at a price of =
P 3.99 per Offer Share (the “Offer Price”). The
determination of the Offer Price is further discussed on page 62 of this Prospectus.
A total of 3,429,375,000 Shares will be outstanding after the Offer. The Firm Shares will
comprise 26.4% of the outstanding Shares after the Offer. Assuming full exercise of the
Over-allotment Option, the Firm Shares together with the Optional Shares will comprise 29.0% of the
outstanding Shares after the Offer. Please see page 64 of this Prospectus on “Dilution”.
Objects and Purposes
We have been organized primarily to buy, sell, trade, deal in and deal with goods, wares and
merchandise of every kind and description, and to carry on such business as wholesalers, retailers,
importers and exporters; to acquire all such merchandise, supplies, materials and other articles as shall
be necessary or expedient in conducting the business of the corporation; and in general, to carry on
the business of a supermarket and department store operator; and to have any and all powers set forth
as fully as natural persons, whether as principals, agents, trustees or otherwise.
Under Philippine law, a corporation may invest its funds in any other corporation or business or
for any purpose other than the purpose for which it was organized when approved by a majority of the
board of directors and ratified by the stockholders representing at least two-thirds of the outstanding
capital stock, at a stockholders’ meeting duly called for the purpose; provided, however, that where
the investment by the corporation is reasonably necessary to accomplish its purposes, the approval of
the stockholders shall not be necessary. Per our By-laws, our stock, property and affairs shall be
exclusively managed and controlled by the Board.
Share Capital
A Philippine corporation may issue common or preferred shares, or such other classes of shares
with such rights, privileges or restrictions as may be provided for in the articles of incorporation and
By-laws of the corporation.
Under Philippine law, the shares of a corporation may either be with or without a par value. Our
authorized capital stock is composed of common shares. All of the Shares currently issued have a par
value of =
P 1.00 per share. In the case of par value shares, where a corporation issues shares at a price
above par, whether for cash or otherwise, the amount by which the subscription price exceeds the par
value is credited to an account designated as additional paid-in capital or paid-in surplus.
Subject to approval by the Philippine SEC, a corporation may increase or decrease its authorized
capital stock, provided that the change is approved by a majority of the board of directors of such
corporation and shareholders representing at least two-thirds of the issued and outstanding capital
stock of the corporation voting at a shareholders’ meeting duly called for the purpose.
A corporation is empowered to acquire its own shares for a legitimate corporate purpose,
provided that the corporation has unrestricted retained earnings or surplus profits sufficient to pay for
the shares to be acquired. Examples of instances in which the corporation is empowered to purchase
its own shares are: when the elimination of fractional shares arising out of share dividends is necessary
or desirable, the purchase of shares of dissenting shareholders exercising their appraisal right (as
discussed below) and the collection or compromise of an indebtedness arising out of an unpaid
subscription. When a corporation repurchases its own shares, the shares become treasury shares, which
may, subject to the Articles of Incorporation, be resold at a reasonable price fixed by the board of
directors of such corporation.
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The Board is authorized to issue shares from treasury from time to time. Treasury shares may be
issued to any person, corporation or association, whether or not our shareholder, including its officers
or employees for such consideration in money as the Board may determine.
Limitations on Foreign Ownership
In the event that the Company acquires land as part of its expansion plans, the Company will be
subject to nationality restrictions stipulated under the Philippine Constitution and other laws, limiting
ownership of companies who own land to citizens of the Philippines, or Philippine Nationals who are
corporations or associations organized under the laws of the Philippines of which at least 60% of the
capital stock outstanding is owned and held by citizens of the Philippines. The Company is thus
constrained to keep the foreign equity interest in it below the 40% threshold and any sale or transfer
of Shares in excess of this threshold shall not be recorded in the Company’s stock and transfer book.
If all the Offer Shares are sold to person or entities that are not Philippine Nationals, the
Company will still be considered a Philippine National.
Voting Rights
Our Shares have full voting rights. However, the Philippine Corporation Code provides that
voting rights cannot be exercised with respect to shares declared by the board of directors as
delinquent, treasury shares as long as such shares remain in treasury, or if the shareholder has elected
to exercise his right of appraisal referred to below.
Dividend Rights
Under our By-laws, dividends may be paid out of our unrestricted retained earnings as and when
the Board of Directors may elect, subject to legal requirements. Dividends are payable to all
shareholders on the basis of our outstanding shares held by them, each share being entitled to the same
unit of dividend as any other share. Dividends are payable to shareholders whose name are recorded
in the stock and transfer book as of the record date fixed by the Board of Directors. The PSE has an
established mechanism for distribution of dividends to beneficial owners of shares which are traded
through the PSE which are lodged with the PCD Nominee as required for scripless trading.
See “Dividends and Dividend Policy” beginning on page 59 of this Prospectus.
Pre-Emptive Rights
The Philippine Corporation Code confers pre-emptive rights on the existing shareholders of a
Philippine corporation which entitle such shareholders to subscribe to all issues or other dispositions
of shares of any class by the corporation in proportion to their respective shareholdings, regardless of
whether the shares proposed to be issued or otherwise disposed of are identical to the shares held. The
Philippine Corporation Code, however, provides that exercise of pre-emptive rights shall not extend
to shares to be issued in compliance with laws requiring stock offerings or minimum stock ownership
by the public; or to shares to be issued in good faith with the approval of the stockholders representing
two-thirds of the outstanding capital stock, in exchange for property needed for corporate purposes or
in payment of a previously contracted debt. Further, a Philippine corporation may, however, provide
for the denial of these pre-emptive rights in its articles of incorporation. Likewise, shareholders who
are entitled to such pre-emptive rights may waive the same through a written instrument to that effect.
Subject to the provisions of the Philippine Corporation Code denying the exercise of pre-emptive
rights in certain instances, our articles of incorporation grant pre-emptive rights of our shareholders
to subscribe to any or all dispositions of any class of shares whether such issuance is made out of the
unissued capital stock or in or from any increase in authorized capital stock except for (i) issuance in
connection with any public offering (initial or subsequent), (ii) issuance, sale or disposition of
treasury shares, (iii) issuance of shares for the purpose of exchanging shares for properties or assets
174
to acquire properties or assets needed for the business of the Corporation, (iv) the issuance of shares
for the purpose of raising funds for or financing the acquisition of properties or assets needed for the
business of the Corporation, (v) the issuance of shares to shareholders in payment of shareholders’
advances made for the purpose of financing the acquisition of properties or assets needed for the
business of the Corporation (vi) the issuance of shares in payment of a previously contracted debt and
(vii) issues covered by the Corporation’s stock option plans for its employees and officers.
Derivative Rights
Philippine law recognizes the right of a shareholder to institute proceedings on behalf of the
corporation in a derivative action in circumstances where the corporation itself is unable or unwilling
to institute the necessary proceedings to redress wrongs committed against the corporation or to
vindicate corporate rights as, for example, where the directors of the corporation themselves are the
malefactors.
Appraisal Rights
The Philippine Corporation Code grants a shareholder a right of appraisal and demand payment
of the fair value of his shares in certain circumstances where he has dissented and voted against a
proposed corporate action, including:
•
an amendment of the articles of incorporation which has the effect of adversely affecting
the rights attached to his shares or of authorizing preferences in any respect superior to
those of outstanding shares of any class;
•
the extension of the term of corporate existence;
•
the sale, lease, exchange, transfer, mortgage, pledge or other disposal of all or substantially
all the assets of the corporation;
•
a merger or consolidation; and
•
investment by the corporation of funds in any other corporation or business or for any
purpose other than the primary purpose for which it was organized.
In any of these circumstances, the dissenting shareholder who voted against the proposed
corporate action may exercise his pre-emptive rights by making a written demand on the corporation
within 30 days after the vote was taken for the payment of the fair value of his share. If the
withholding stockholder and the corporation cannot agree on the fair value of the shares within 60
days from the date the corporation action was approved by the stockholders, the fair value shall be
determined and appraised by three disinterested persons, one of whom shall be named by the
shareholder, one by the corporation, and the third by the two thus chosen. Regional Trial Courts will,
in the event of a dispute, determine any question about whether a dissenting shareholder is entitled
to this right of appraisal. From the time the shareholder makes a demand for payment until the
corporation purchases such shares, all rights accruing on the shares, including voting and dividend
rights, shall be suspended, except the right of the shareholder to receive the fair value of such shares.
No payment shall be made to any dissenting shareholder unless the corporation has Unrestricted
Retained Earnings sufficient to support the purchase of the shares of the dissenting shareholders.
Right of Inspection
A shareholder has the right to inspect the records of all business transactions of the corporation
and the minutes of any meeting of the board of directors and shareholders at reasonable hours on
175
business days and may demand a copy of excerpts from such records or minutes at his or her expense.
However, the corporation may refuse such inspection if the shareholder demanding to examine or copy
the corporation’s records has improperly used any information secured through any prior examination,
or was not acting in good faith or for a legitimate purpose in making his demand.
Right to Financial Statements
Within 10 days from the corporation’s receipt of a shareholder’s written request, a shareholder
has a right to be furnished with the most recent financial statement of a Philippine corporation, which
shall include a balance sheet as of the end of the last taxable year and a profit or loss statement for
said taxable year, showing in reasonable detail its assets and liabilities and the results of its
operations. At the regular meeting of shareholders, the board of directors is required to present to the
shareholders a financial report of the operations of the corporation for the preceding year, which shall
include financial statements duly signed and certificate by an independent certified public accountant.
Board of Directors
Unless otherwise provided by law or in the articles of incorporation, our corporate powers are
exercised, our business conducted, and our property controlled by the Board. Pursuant to our articles
of incorporation, as amended, we shall have seven Directors, at least two of whom are Independent
Directors within the meaning set forth in Section 38 of the SRC. The Board shall be elected during
each regular meeting of shareholders, at which shareholders representing at least a majority of the
issued and our outstanding capital shares are present, either in person or by proxy. Each Director shall
serve for a term of one (1) year and until their successors are elected or qualified.
Under Philippine law, representation of foreign ownership on the Board is limited to the
proportion of the foreign shareholding. Directors may only act collectively; individual directors have
no power as such. Four directors, which is a majority of the Board, constitute a quorum for the
transaction of corporate business. Except for certain corporate actions such as the election of officers,
which shall require the vote of a majority of all the members of the Board, every decision of a majority
of the quorum duly assembled as a board is valid as a corporate act.
Any vacancy occurring in the Board of Directors other than by removal by the stockholders or
by expiration of term may be filled by the vote of at least a majority of the remaining directors, if still
constituting a quorum. Otherwise, the vacancy must be filled by the shareholders at a meeting duly
called for the purpose. Any director elected in this manner by the Board shall serve only for the
unexpired term of the director whom such director replaces and until his successor is duly elected and
qualified.
Shareholders’ Meetings
Annual or Regular Shareholders’ Meetings
The Philippine Corporation Code requires all Philippine corporations to hold an annual meeting
of shareholders for corporate purposes including the election of directors. Our By-laws provide for
annual meetings on the first Friday of May of each year to be held at our principal office and at such
hour as specified in the notice.
Special Shareholders’ Meeting
Special meetings of shareholders, for any purpose or purposes, may at any time be called by
either the Board of Directors, at its own instance, or at the written request of stockholders representing
a majority of the outstanding capital stock, or by the President.
176
Notice of Shareholders’ Meeting
Whenever shareholders are required or permitted to take any action at a meeting, a written notice
of the meeting shall be given which shall state the place, date and hour of the meeting, and the purpose
or purposes for which the meeting is called. Our By-laws provide that notices of the time and place
of the regular and special meetings of the shareholders shall be given either by personal delivery, by
mail, or by electronic means, addressed to each shareholder of record at his last known address, or,
at least two weeks before the date set for such meeting. Any shareholder may, by written consent,
expressly or impliedly waive notice of the time, place and purpose of any meeting of shareholders and
any action taken at such meeting pursuant to such waiver shall be valid and binding. When the meeting
of the shareholders is adjourned to another time or place, notice of the adjourned meeting need not
be provided so long as the time and place to which the meeting is adjourned are announced at the
meeting at which the adjournment is taken. At the reconvened meeting, any business may be transacted
that might have been transacted on the original date of the meeting.
Quorum
Unless otherwise provided by law, in all regular or special meeting of shareholders, a majority
of the outstanding capital shares must be present or represented in order to constitute a quorum. If no
quorum is constituted, the meeting shall be adjourned until the requisite amount of shares shall be
present or represented.
Pursuant to our By-laws, the Chairman of the Board, or in his absence, the President/Chief
Operating Officer, or in case both are absent, a chairman to be chosen by the stockholders may then
call to order any meeting of the stockholders, and proceed to the transaction of business, provided a
majority of the outstanding be must present, either in person or by proxy to constitute a quorum. If
no quorum is constituted, the meeting may be adjourned by the stockholders present from time to time
until the requisite amount of stock shall be present.
Voting
At all meetings of shareholders, a holder of Shares may vote in person or by proxy, for each share
held by such shareholder.
Fixing Record Dates
Under existing Philippine SEC rules, cash dividends declared by corporations whose securities
are registered or whose shares are listed on the PSE shall have a record date which shall not be less
than 10 or more than 30 days from the date of declaration. With respect to share dividends, the record
date shall not be less than 10 or more than 30 days from the date of shareholder approval; provided,
however, that the record date set shall not be less than 10 trading days from receipt by the PSE of the
notice of declaration of share dividends. In the event that share dividends are declared in connection
with an increase in the authorized capital shares, the corresponding record date shall be fixed by the
Philippine SEC. In case no record date is specified for the cash and stock dividend declaration, then
the same shall be deemed fixed at fifteen days from such declaration.
Matters Pertaining to Proxies
Shareholders may vote at all meetings the number of shares registered in their respective names,
either in person or by proxy duly given in writing and duly presented to the Corporate Secretary not
later than seven business days before the date of the meeting. Unless otherwise provided in the proxy,
it shall be valid only for the meeting at which it has been presented to the Corporate Secretary. Proxies
should comply with the relevant provisions of the Philippine Corporation Code, the SRC, its IRRs, and
regulations issued by the Philippine SEC.
177
Proxies filed with the Corporate Secretary may be revoked by the shareholders either by an
instrument in writing duly presented and recorded with the Corporate Secretary prior to a scheduled
meeting or by the shareholder’s personal presence at the meeting.
Dividends
The Shares have full dividend rights. Dividends on our Shares, if any, are paid in accordance
with Philippine law. Dividends are payable to all shareholders on the basis of outstanding Shares held
by them, each Common Share being entitled to the same unit of dividend as any other Common Share.
Dividends are payable to shareholders whose names are recorded in the stock and transfer book as of
the record date fixed by our Board of Directors. The PSE has an established mechanism for
distribution of dividends to beneficial owners of Shares which are traded through the PSE which are
lodged with the PCD Nominee as required for scripless trading.
Our current dividend policy provides that approximately 20% of our net income after tax for the
preceding fiscal year will be declared and paid as annual dividends, payable in cash, property or
shares, subject to the requirements of applicable laws and regulations, and circumstances which
restrict the payment of dividends, including but not limited to undertaking major projects and
developments which require substantial cash expenditures, or restrictions due to loan covenants. Our
Board of Directors may amend such dividend policy, at any time, depending on the results of our
operations and our future plans and projects.
Transfer of Shares and Share Register
All transfers of shares on the PSE shall be effected by means of a book-entry system. Under the
book-entry system of trading and settlement, a registered shareholder shall transfer legal title over the
shares to a nominee, but retains beneficial ownership over the shares. The transfer of legal title is done
by surrendering the stock certificate representing the shares to participants of the PDTC System (i.e.,
brokers and custodian banks) that, in turn, lodge the same with the PCD Nominee Corporation, a
corporation wholly-owned by the PDTC (the “PCD Nominee”). A shareholder may request upliftment
of the shares from the PDTC, in which case a stock certificate will be issued to the shareholder and
the shares registered in the shareholder’s name in our books. See “The Philippine Stock Market”
beginning on page 181 of this Prospectus.
Philippine law does not require transfers of the Shares to be effected on the PSE, but any
off-exchange transfers will subject the transferor to a capital gains tax that may be significantly
greater than the share transfer tax applicable to transfers effected on the PSE. See “Philippine
Taxation” beginning on page 188 of this Prospectus. All transfers of shares on the PSE must be
effected through a licensed stockbroker in the Philippines.
Issues of Shares
Subject to otherwise applicable limitations and exercise of pre-emptive rights, when applicable,
we may issue additional Shares to any person for consideration deemed fair by the Board, provided
that such consideration shall not be less than the par value of the issued Shares. No share certificates
shall be issued to a subscriber until the full amount of the subscription together with interest and
expenses (in case of delinquent Shares) has been paid and proof of payment of the applicable taxes
shall have been submitted to our Corporate Secretary. Under the PSE Rules, only fully-paid shares
may be listed on the PSE.
Share Certificates
Certificates representing the Common Shares fully paid will be issued to shareholders, except
that certificates will not be issued for fractional shares. Shareholders wishing to split their certificates
178
may do so upon application to our share transfer agent, Rizal Commercial Banking Corporation, which
will maintain the share register. Shares may also be lodged and maintained under the book-entry
system of the PDTC. See “The Philippine Stock Market” beginning on page 181 of this Prospectus.
Mandatory Tender Offers
In general, under the SRC and the IRRs, any person or group of persons acting in concert and
intending to acquire at least (1) 35% of any class of any equity security of a public or listed
corporation in a single transaction; or (2) 35% of such equity over a period of 12 months; or (3) even
if less than 35% of such equity, if such acquisition would result in ownership by the acquiring party
of over 51% of the total outstanding equity, is required to make a tender offer to all the shareholders
of the target corporation on the same terms. Generally, in the event that the securities tendered
pursuant to such an offer exceed that which the acquiring person or group of persons is willing to take
up, the securities shall be purchased from each tendering shareholder on a pro rata basis, disregarding
fractions, according to the number of securities tendered by each security holder. Where a mandatory
tender offer is required, the acquirer is compelled to offer the highest price paid by him for such shares
during the past six months. Where the offer involves payment by transfer or allotment of securities,
such securities must be valued on an equitable basis. However, if any acquisition of even less than
35% would result in ownership of over 51% of the total outstanding equity, the acquirer shall be
required to make a tender offer for all the outstanding equity securities to all remaining shareholders
of the said corporation at a price supported by a fairness opinion provided by an independent financial
adviser or equivalent third-party. The acquirer in such a tender offer shall be required to accept any
and all securities thus tendered.
No Mandatory Tender Offer is required in: (i) purchases of shares from unissued capital shares
unless it will result to a 50% or more ownership of shares by the purchaser; (ii) purchases from an
increase in the authorized capital shares of the target company; (iii) purchases in connection with a
foreclosure proceedings involving a pledge or security where the acquisition is made by the debtor or
creditor; (iv) purchases in connection with privatization undertaken by the government of the
Philippines; (v) purchases in connection with corporate rehabilitation under court supervision; (vi)
purchases through an open market at the prevailing market price; or (vii) purchases resulting from a
merger or consolidation.
Fundamental Matters
The Philippine Corporation Code provides that certain significant acts may only be implemented
with shareholders’ approval. The following require the approval of shareholders representing at least
two-thirds of the issued and outstanding capital shares of the corporation in a meeting duly called for
the purpose:
•
amendment of the articles of incorporation;
•
removal of directors;
•
sale, lease, exchange, mortgage, pledge or other disposition of all or a substantial part of
the assets of the corporation;
•
investment of corporate funds in any other corporation or business or for any purpose other
than the primary purpose for which the corporation was organized;
•
declaration or issuance of share/stock dividends;
•
delegation to the board of directors of the power to amend or repeal by-laws or adopt new
by-laws;
•
merger or consolidation;
179
•
dissolution;
•
an increase or decrease in capital shares;
•
ratification of a contract of a directors or officer with the corporation;
•
extension or shortening of the corporate term;
•
creation or increase of bonded indebtedness; and
•
management contracts with related parties;
The approval of shareholders holding a majority of the outstanding capital stock of a Philippine
corporation is required to enter into a management contract with a corporation that is not a related
party. The approval of shareholders holding a majority of the outstanding capital stock of a Philippine
corporation, including non-voting preferred shares, is required for the adoption or amendment of the
by-laws of such corporation.
Accounting and Auditing Requirements
Philippine stock corporations are required to file copies of their annual financial statements with
the Philippine SEC. In addition, public corporations are required to file quarterly financial statements
(for the first three quarters) with the Philippine SEC. Those corporations whose shares are listed on
the PSE are additionally required to file said quarterly and annual financial statements with the PSE.
Shareholders are entitled to request copies of the most recent financial statements of the corporation
which include a statement of financial position as of the end of the most recent tax year and a profit
and loss statement for that year. Shareholders are also entitled to inspect and examine the books and
records that the corporation is required by law to maintain.
The Board is required to present to shareholders at every annual meeting a financial report of our
operations for the preceding year. This report is required to include audited financial statements.
180
THE PHILIPPINE STOCK MARKET
The information presented in this section has been extracted from publicly available documents
which have not been prepared or independently verified by us, the Joint Global Coordinators, or any
of their respective subsidiaries, affiliates or advisors in connection with the offer and sale of the Offer
Shares.
Brief History
The Philippines initially had two stock exchanges, the Manila Stock Exchange, which was
organized in 1927, and the Makati Stock Exchange, which began operations in 1963. Each exchange
was self-regulating, governed by its respective Board of Governors elected annually by its members.
Several steps initiated by the Philippine government have resulted in the unification of the two
bourses into the PSE. The PSE was incorporated in 1992 by officers of both the Makati and the Manila
Stock Exchanges. In March 1994, the licenses of the two exchanges were revoked. While the PSE
maintains two trading floors, one in Makati City and the other in Pasig City, these floors are linked
by an automated trading system, which integrates all bids, and ask quotations from the bourses.
In June 1998, the Philippine SEC granted the Self-Regulatory Organization status to the PSE,
allowing it to impose rules as well as implement penalties on erring trading participants and listed
companies. On August 8, 2001, the PSE completed its demutualization, converting from a non-stock
member-governed institution into a stock corporation in compliance with the requirements of the SRC.
The PSE had an authorized capital stock of =
P 120,000,000.00, of which 61,258,733 shares were
subscribed and fully paid-up as of June 30, 2013. Each of the 184 member-brokers was granted 50,000
common shares of the new PSE at a par value of =
P 1.00 per share. In addition, a trading right
evidenced by a “Trading Participant Certificate” was immediately conferred on each member broker
allowing the use of the PSE’s trading facilities. As a result of the demutualization, the composition
of the PSE Board of Governors was changed, requiring the inclusion of seven brokers and eight
non-brokers, one of whom is the President.
On December 15, 2003, the PSE listed its shares by way of introduction at its own bourse as part
of a series of reforms aimed at strengthening the Philippine securities industry.
Classified into financial, industrial, holding firms, property, services, and mining and oil sectors,
companies are listed either on the PSE’s Main Board or the Small, Medium and Emerging Board.
Recently, the PSE issued Rules on Exchange Traded Funds (“ETF”) which provides for the listing of
ETFs on an ETF Board separate from the PSE’s existing boards. Previously, the PSE allowed listing
on the First Board, Second Board or the Small, Medium and Enterprises Board. With the issuance by
the PSE of Memorandum No. CN-No. 2013-0023 dated June 6, 2013, revisions to the PSE Listing
Rules were made, among which changes are the removal of the Second Board listing and the
requirement that lock-up rules be embodied in the articles of the incorporation of the issuer. Each
index represents the numerical average of the prices of component shares. The PSE has an index,
referred to as the PHISIX, which as at the date thereof reflects the price movements of selected shares
listed on the PSE, based on traded prices of shares from the various sectors. The PSE shifted from full
market capitalization to free float market capitalization effective April 3, 2006, simultaneous with the
migration to the free float index and the renaming of the PHISIX to PSEi. The PSEi is composed of
shares of 30 selected companies listed on the PSE. On July 26, 2010, the PSE launched its current
trading system, PSE Trade.
With the increasing calls for good corporate governance, the PSE has adopted an online daily
disclosure system to improve the transparency of listed companies and to protect the investing public.
181
The table below sets out movements in the composite index as of the last business day of each
calendar year from 1995 to 2014, and the most recent month end in 2015, and shows the number of
listed companies, market capitalization, and value of shares traded for the same period:
Year
Composite
Number of
Aggregate
Combined
Index at
Listed
Market
Value of
Closing
Companies
Capitalization
Turnover
(in =
P billions)
(in =
P billions)
1995 ........................................................................
2,594.2
205
1,545.7
379.0
1996 ........................................................................
3,170.6
216
2,121.1
668.8
1997 ........................................................................
1,869.2
221
1,251.3
586.2
1998 ........................................................................
1,968.8
222
1,373.7
408.7
1999 ........................................................................
2,142.9
225
1,936.5
781.0
2000 ........................................................................
1,494.5
229
2,576.5
357.7
2001 ........................................................................
1,168.1
231
2,141.4
159.6
2002 ........................................................................
1,018.4
234
2,083.2
159.7
2003 ........................................................................
1,442.4
236
2,973.8
145.4
2004 ........................................................................
1,822.8
235
4,766.3
206.6
2005 ........................................................................
2,096.0
237
5,948.4
383.5
2006 ........................................................................
2,982.5
239
7,173.2
572.6
2007 ........................................................................
3,621.6
244
7,977.6
1,338.3
2008 ........................................................................
1,872.9
246
4,069.2
763.9
2009 ........................................................................
3,052.7
248
6,029.1
994.2
2010 ........................................................................
4,201.1
253
8,866.1
1,207.4
2011 ........................................................................
4,372.0
245
8,697.0
1,422.6
2012 ........................................................................
5,812.7
254
10,952.7
1,771.7
2013 ........................................................................
5,889.8
257
11,931.3
2,546.2
2014 ........................................................................
7,230.6
263
14,251.7
2,130.1
2015 ........................................................................
7,098.8
263
13,650.0
1,510.0
Source: PSE
Trading
The PSE is a double auction market. Buyers and sellers are each represented by stockbrokers. To
trade, bid or ask prices are posted on the PSE’s electronic trading system. A buy (or sell) order that
matches the lowest asked (or highest bid) price is automatically executed. Buy and sell orders received
by one broker at the same price are crossed at the PSE at the indicated price. Payment of purchases
of listed securities must be made by the buyer on or before the third trading day (the settlement date)
after the trade.
Trading on the PSE pre-opens at 9:00 am and opens from 9:30 am to 12:00 pm, then recesses
until 1:29 pm. The market re-opens at 1:30 pm. At 3:15 pm the market pre-closes then enters a run-off
period at 3:20 pm, finally closing at 3:30 pm. Trading days are Monday to Friday, except legal and
special holidays.
Minimum trading lots range from 5 to 1,000,000 shares depending on the price range and nature
of the security traded. Odd-sized lots are traded by brokers on a board specifically designed for
odd-lot trading.
To maintain stability in the stock market, daily price swings are monitored and regulated. Under
current PSE regulations, when the price of a listed security moves up by 50% or down by 50% in one
182
day (based on the previous closing price or last posted bid price, whichever is higher), the price of
that security is automatically frozen by the PSE, unless there is an official statement from the company
or a government agency justifying such price fluctuation, in which case the affected security can still
be traded but only at the frozen price. If the issuer fails to submit such explanation, a trading halt is
imposed by the PSE on the listed security the following day. Resumption of trading shall be allowed
only when the disclosure of the company is disseminated, subject again to the trading ban.
Non-Resident Transactions
When the purchase/sale of Philippine shares involves a non-resident, whether the transaction is
effected in the domestic or foreign market, it will be the responsibility of the securities dealer/broker
to register the transaction with the BSP. The local securities dealer/broker shall file with the BSP,
within three business days from the transaction date, an application in the prescribed registration form.
After compliance with other required undertakings, the BSP shall issue a Certificate of Registration.
Under BSP rules, all registered foreign investments in Philippine securities including profits and
dividends, net of taxes and charges, may be repatriated.
Settlement
The Securities Clearing Corporation of the Philippines (“SCCP”) is a wholly-owned subsidiary
of the PSE, and was organized primarily as a clearance and settlement agency for SCCP-eligible trades
executed through the facilities of the PSE. SCCP received its permanent license to operate on January
17, 2002. It is responsible for:
•
synchronizing the settlement of funds and the transfer of securities through Delivery versus
Payment clearing and settlement of transactions of Clearing Members, who are also Trading
Participants of the PSE;
•
guaranteeing the settlement of trades in the event of a Trading Participant’s default through
the implementation of its Fails Management System and administration of the Clearing and
Trade Guaranty Fund; and
•
performance of Risk Management and Monitoring to ensure final and irrevocable
settlement.
SCCP settles PSE trades on a three-day rolling settlement environment, which means that
settlement of trades takes place three trading days after transaction date (“T+3”). The deadline for
settlement of trades is 12:00 noon of T+3. Securities sold should be in scripless form and lodged under
the book-entry system of the PDTC. Each PSE Broker maintains a Cash Settlement Account with one
of the seven existing Settlement Banks of SCCP, which are Banco de Oro Unibank, Inc., Rizal
Commercial Banking Corporation, Metropolitan Bank and Trust Company, DB, The Hong Kong
Shanghai Banking Corporation Limited, Unionbank of the Philippines and Maybank Philippines Inc.
Payment for securities bought should be in good, cleared funds and should be final and irrevocable.
Settlement is presently on a broker level.
SCCP implemented its Central Clearing and Central Settlement (“CCCS”) system on May 29,
2006. CCCS employs multilateral netting, whereby the system automatically offsets “buy” and “sell”
transactions on a per issue and a per flag basis to arrive at a net receipt or a net delivery security
position for each Clearing Member. All cash debits and credits are also netted into a single net cash
position for each Clearing Member. Novation of the original PSE trade contracts occurs, and SCCP
stands between the original trading parties and becomes the Central Counterparty to each PSE-eligible
trade cleared through it.
183
Scripless Trading
In 1995, the PDTC (formerly the Philippine Central Depository, Inc.), was organized to establish
a central depository in the Philippines and introduce scripless or book-entry trading in the Philippines.
On December 16, 1996, the PDTC was granted a provisional license by the Philippine SEC to act as
a central securities depository.
All listed securities at the PSE have been converted into book-entry settlement in the PDTC. The
depository service of the PDTC provides the infrastructure for lodgment (deposit) and upliftment
(withdrawal) of securities, pledge of securities, securities lending and borrowing and corporate actions
including shareholders’ meetings, dividend declarations and rights offerings. The PDTC also provides
depository and settlement services for non-PSE trades of listed equity securities. For transactions on
the PSE, the security element of the trade will be settled through the book-entry system, while the cash
element will be settled through the current settlement banks, Banco de Oro Unibank, Inc., Rizal
Commercial Banking Corporation, Metropolitan Bank and Trust Company, DB, The Hong Kong
Shanghai Banking Corporation Limited, Unionbank of the Philippines and Maybank Philippines Inc.
In order to benefit from the book-entry system, securities must be immobilized into the PDTC
system through a process called lodgment. Lodgment is the process by which shareholders transfer
legal title (but not beneficial title) over their shares in favor of the PCD Nominee Corporation (“PCD
Nominee”), a corporation wholly-owned by the PDTC, whose sole purpose is to act as nominee and
legal title holder of all shares lodged in the PDTC. “Immobilization” is the process by which the
warrant or share certificates of lodging holders are cancelled by the transfer agent and the
corresponding transfer of beneficial ownership of the immobilized shares in the account of the PCD
Nominee through the PDTC participant will be recorded in the issuing corporation’s registry. This
trust arrangement between the participants and PDTC through the PCD Nominee is established by and
explained in the PDTC Rules and Operating Procedures approved by the Philippine SEC. No
consideration is paid for the transfer of legal title to the PCD Nominee. Once lodged, transfers of
beneficial title of the securities are accomplished via book-entry settlement.
Under the current PDTC system, only participants (e.g. brokers and custodians) will be
recognized by the PDTC as the beneficial owners of the lodged equity securities. Thus, each beneficial
owner of shares, through his participant, will be the beneficial owner to the extent of the number of
shares held by such participant in the records of the PCD Nominee. All lodgments, trades and uplifts
on these shares will have to be coursed through a participant. Ownership and transfers of beneficial
interests in the shares will be reflected, with respect to the participant’s aggregate holdings, in the
PDTC system, and with respect to each beneficial owner’s holdings, in the records of the participants.
Beneficial owners are thus advised that in order to exercise their rights as beneficial owners of the
lodged shares, they must rely on their participant-brokers and/or participant-custodians.
Any beneficial owner of shares who wishes to trade his interests in the shares must course the
trade through a participant. The participant can execute PSE trades and non-PSE trades of lodged
equity securities through the PDTC system. All matched transactions in the PSE trading system will
be fed through the SCCP, and into the PDTC system. Once it is determined on the settlement date
(T+3) that there are adequate securities in the securities settlement account of the participant-seller
and adequate cleared funds in the settlement bank account of the participant-buyer, the PSE trades are
automatically settled in the SCCP Central Clearing and Central Settlement system, in accordance with
the SCCP and PDTC Rules and Operating Procedures. Once settled, the beneficial ownership of the
securities is transferred from the participant-seller to the participant-buyer without the physical
transfer of stock certificates covering the traded securities.
184
If a shareholder wishes to withdraw his shareholdings from the PDTC system, the PDTC has a
procedure of upliftment under which PCD Nominee will transfer back to the shareholder the legal title
to the shares lodged. The uplifting shareholder shall follow the Rules and Operating Procedures of the
PDTC for the upliftment of the shares lodged under the name of the PCD Nominee. The transfer agent
shall prepare and send a Registry Confirmation Advice to the PDTC covering the new number of
shares lodged under the PCD Nominee. The expenses for upliftment are for the account of the uplifting
shareholder.
The difference between the depository and the registry would be on the recording of ownership
of the shares in the issuing corporations’ books. In the depository set-up, shares are simply
immobilized, wherein customers’ certificates are cancelled and a confirmation advice is issued in the
name of PCD Nominee to confirm new balances of the shares lodged with the PDTC. Transfers
among/between broker and/or custodian accounts, as the case may be, will only be made within the
book-entry system of the PDTC. However, as far as the issuing corporation is concerned, the
underlying certificates are in the PCD Nominee’s name. In the registry set-up, settlement and
recording of ownership of traded securities will already be directly made in the corresponding issuing
company’s transfer agents’ books or system. Likewise, recording will already be at the beneficiary
level (whether it be a client or a registered custodian holding securities for its clients), thereby
removing from the broker its current “de facto” custodianship role.
Amended Rule on Lodgment of Securities
On June 24, 2009, the PSE apprised all listed companies and market participants through
Memorandum No. 2009-0320 that commencing on July 1, 2009, as a condition for the listing and
trading of the securities of an applicant company, the applicant company shall electronically lodge its
registered securities with the PDTC or any other entity duly authorized by the Philippine SEC, without
any jumbo or mother certificate in compliance with the requirements of Section 43 of the SRC. In
compliance with the foregoing requirement, actual listing and trading of securities on the scheduled
listing date shall take effect only after submission by the applicant company of the documentary
requirements stated in Article III Part A of the Revised Listing Rules.
Pursuant to the said amendment, the PDTC issued an implementing procedure in support thereof
to wit:
•
For a new company to be listed at the PSE as of July 1, 2009, the usual procedure will be
observed but the transfer agent of the company shall no longer issue a certificate to PCD
Nominee but shall issue a Registry Confirmation Advice, which shall be the basis for the
PDTC to credit the holdings of the depository participants on the listing date.
•
On the other hand, for an existing listed company, the PDTC shall wait for the advice of
the transfer agent that it is ready to accept surrender of PCD Nominee jumbo certificates
and upon such advice the PDTC shall surrender all PCD Nominee jumbo certificates to the
transfer agent for cancellation. The transfer agent shall issue a Registry Confirmation
Advice to PDTC evidencing the total number of shares registered in the name of PCD
Nominee in the listed company’s registry as of confirmation date.
185
Further, the PSE apprised all listed companies and market participants on May 21, 2010 through
Memorandum No. 2010-0246 that the Amended Rule on Lodgement of Securities under Section 16 of
Article III, Part A of the Revised Listing Rules of the PSE shall apply to all securities that are lodged
with the PDTC or any other entity duly authorized by the PSE.
For listing applications, the amended rule on lodgment of securities is applicable to:
•
The offer shares/securities of the applicant company in the case of an initial public offering;
•
The shares/securities that are lodged with the PDTC, or any other entity duly authorized by
the PSE in the case of a listing by way of introduction;
•
New securities to be offered and applied for listing by an existing listed company; and
•
Additional listing of securities of an existing listed company.
Issuance of Stock Certificates for Certificated Shares
On or after the listing of the shares on the PSE, any beneficial owner of the shares may apply
with PDTC through his broker or custodian-participant for a withdrawal from the book-entry system
and return to the conventional paper-based settlement. If a shareholder wishes to withdraw his
stockholdings from the PDTC system, the PDTC has a procedure of upliftment under which PCD
Nominee will transfer back to the shareholder the legal title to the shares lodged. The uplifting
shareholder shall follow the Rules and Operating Procedures of the PDTC for the uplifting of the
shares lodged under the name of the PCD Nominee. The transfer agent shall prepare and send a
Registry Confirmation Advice to the PDTC covering the new number of shares lodged under PCD
Nominee. The expenses for upliftment are on the account of the uplifting shareholder.
Upon the issuance of stock certificates for the shares in the name of the person applying for
upliftment, such shares shall be deemed to be withdrawn from the PDTC book-entry settlement
system, and trading on such shares will follow the normal process for settlement of certificated
securities. The expenses for upliftment of the shares into certificated securities will be charged to the
person applying for upliftment. Pending completion of the upliftment process, the beneficial interest
in the shares covered by the application for upliftment is frozen and no trading and book-entry
settlement will be permitted until the relevant stock certificates in the name of the person applying for
upliftment shall have been issued by the relevant company’s transfer agent.
186
PHILIPPINE FOREIGN EXCHANGE CONTROLS
Under current BSP regulations, an investment in listed Philippine securities (such as the Shares)
must be registered with the BSP if the foreign exchange needed to service the repatriation of capital
and the remittance of dividends, profits and earnings derived from such Shares is to be sourced from
the Philippine banking system. If the foreign exchange required to service capital repatriation or
dividend remittance is sourced outside the Philippine banking system, registration is not required. BSP
Circular No. 471 (Series of 2005), as amended, however, subjects foreign exchange dealers and money
changers to Republic Act No. 9160, or the Anti-Money Laundering Act of 2001, as amended, and
requires these nonbank sources of foreign exchange to require foreign exchange buyers to submit
supporting documents in connection with their application to purchase foreign exchange for purposes
of capital repatriation and remittance of dividends.
Registration of Philippine securities listed in the PSE may be done directly with the BSP or
through an investor’s designated custodian bank on behalf of the BSP. A custodian bank may be any
authorized agent bank (as defined below) of the BSP or an offshore banking unit registered with the
BSP to act as such and appointed by the investor to register the investment, hold shares for the
investor, and represent the investor in all necessary actions in connection with his investments in the
Philippines. The term “authorized agent bank” refers to all categories of banks, except offshore
banking units, duly licensed by the BSP. Applications for registration must be accompanied by: (i) a
purchase invoice, subscription agreement and proof of listing on the PSE (either or both) and (ii) the
original Certificate of Inward Remittance of foreign exchange and its conversion to Pesos through an
authorized agent bank of the BSP in the format prescribed by the BSP.
Upon registration of the investment, proceeds of divestments, or dividends of registered
investments are repatriable or remittable immediately and in full through the Philippine banking
system, net of applicable tax, without need of BSP approval. Capital repatriation of investments in
listed securities is permitted upon presentation of the BSP registration document from the registering
custodian bank and the broker’s sales invoice, at the exchange rate prevailing at the time of purchase
of the foreign exchange from the banking system. Remittance of dividends is permitted upon
presentation of: (i) the BSP registration document from the registering custodian bank; (ii) the cash
dividends notice from the PSE and the PCD printout of cash dividend payment or computation of
interest earned; (iii) copy of the secretary’s sworn statement on the Board Resolution covering the
dividend declaration and (iv) detailed computation of the amount applied for in the format prescribed
by the BSP. Pending reinvestment or repatriation, divestment proceeds, as well as dividends of
registered investments, may be lodged temporarily in interest-bearing deposit accounts. Interest
earned thereon, net of taxes, may also be remitted in full. Remittance of divestment proceeds or
dividends of registered investments may be reinvested in the Philippines if the investments are
registered with the BSP or the investor’s custodian bank.
The foregoing is subject to the power of BSP, with the approval of the President of the
Philippines, to restrict the availability of foreign exchange during an exchange crisis, when an
exchange crisis is imminent, or in times of national emergency.
The registration with the BSP of all foreign investments in the Offer Shares shall be the
responsibility of the foreign investor.
187
PHILIPPINE TAXATION
The statements made regarding taxation in the Philippines are based on the laws in force at the
date of this Prospectus and are subject to any changes in law occurring after such date. The following
summary does not purport to be a comprehensive description of all of the tax considerations that may
be relevant to a decision to invest in the Shares and does not purport to deal with the tax consequences
applicable to all categories of investors, some of which (such as dealers in securities) may be subject
to special rates. Prospective purchasers of the Shares are advised to consult their own tax advisers
concerning the tax consequences of their investment in the Shares.
As used in this section, the term “resident alien” refers to an individual whose residence is within
the Philippines and who is not a citizen thereof; a “non-resident alien” is an individual whose
residence is not within the Philippines and who is not a citizen of the Philippines; a non-resident alien
who is actually within the Philippines for an aggregate period of more than 180 days during any
calendar year is considered a “non-resident alien engaged in trade or business in the Philippines;”
otherwise, such non-resident alien who is actually within the Philippines for an aggregate period of
180 days or less during any calendar year is considered a “non-resident alien not engaged in trade or
business in the Philippines”. A “resident foreign corporation” is a foreign corporation engaged in trade
or business within the Philippines; and a “non-resident foreign corporation” is a non-Philippine
corporation not engaged in trade or business within the Philippines.
Corporate income tax
Republic Act No. 8424, as amended, or the National Internal Revenue Code, generally subjects
a domestic corporation to a tax of 30% of its taxable income from all sources within and outside the
Philippines except, among others, (i) gross interest income from currency bank deposits and yield
from deposit substitutes, trust funds and similar arrangements as well as royalties from sources within
the Philippines which are generally taxed at the lower final withholding tax rate of 20% of the gross
amount of such income; (ii) interest income from a depository bank under the expanded foreign
currency deposit system which is subject to a final tax rate of 7.5% of such income, (iii) capital gains
tax from sales of shares of stock not traded in the stock exchange which are taxed at a rate of 5% on
P 100,000, and (iv) capital gains realized
gains up to =
P 100,000 and 10% on gains in excess of the first =
from the sale, exchange or disposition of lands and buildings, which is subject to a final tax of 6%.
A minimum corporate income tax of 2% of the gross income as of the end of the taxable year
is imposed on a domestic corporation beginning on the fourth taxable year immediately following the
year in which such corporation commenced its business operations, when the minimum corporate
income tax is greater than the ordinary income tax for the taxable year.
Nevertheless, any excess of the minimum corporate income tax over the ordinary corporate
income tax shall be carried forward and credited against the latter for the three (3) immediately
succeeding taxable years. Further, subject to certain conditions, the minimum corporate income tax
may be suspended with respect to a corporation which suffers losses on account of a prolonged labor
dispute, force majeure or legitimate business reasons.
Tax on Dividends
Cash and property dividends received from a domestic corporation by individual shareholders
who are either citizens or residents of the Philippines are subject to a final withholding tax at the rate
of 10%. Cash and property dividends received by non-resident alien individuals engaged in trade or
business in the Philippines are subject to a 20% final withholding tax on the gross amount thereof,
while cash and property dividends received by non-resident alien individuals not engaged in trade or
business in the Philippines are subject to a final withholding tax at 25% of the gross amount, subject,
however, to the applicable preferential tax rates under tax treaties executed between the Philippines
and the country of residence or domicile of such non-resident foreign individuals.
188
Cash and property dividends received from a domestic corporation by another domestic
corporation or by resident foreign corporations are not subject to tax while those received by
non-resident foreign corporations are generally subject to a final withholding tax at the rate of 30%.
The 30% rate for dividends paid to a non-resident foreign corporation may be reduced to a lower rate
of 15% if (i) the country in which the non-resident foreign corporation is domiciled imposes no tax
on foreign sourced dividends or (ii) if the country of domicile of the non-resident foreign corporation
allows a 15% or greater credit equivalent for taxes deemed to have been paid in the Philippines. The
withholding tax rate may likewise be reduced under an applicable tax treaty executed between the
Philippines and the country of residence or domicile of such non-resident foreign corporation.
The Bureau of Internal Revenue (“BIR”) has prescribed, through administrative issuances,
certain procedures for the availment of preferential tax rates or tax treaty relief. The application for
tax treaty relief has to be filed with the BIR by the non-resident shareholder (or its duly authorized
representative) prior to the first taxable event, or prior to the first and only time the income tax payer
is required to withhold the tax thereon, or should have withheld taxes thereon had the transaction been
subject to tax. The “first taxable event” has been construed by the BIR as “payment of the dividend”.
Subject to the approval by the BIR of a non-resident shareholder’s application for tax treaty relief, the
company shall withhold taxes at a reduced rate on dividends to be paid to a non-resident holder.
Failure to file with the BIR an application for tax treaty relief before the first table event may
disqualify the said application. However, the Philippine Supreme Court in Deutsche Bank AG Manila
Branch v. CIR, G.R. No. 188550, ruled that the period of application for the availment of tax treaty
relief should not operate to divest the taxpayer the entitlement to the tax relief as it would constitute
a violation of the duty required by good faith to comply with the treaty. At most, the application for
a tax treaty relief to be filed with the BIR should merely operate to confirm the entitlement of the
taxpayer to such relief.
The current requirements for a tax treaty relief application in respect of dividends are set out in
the applicable tax treaty and in BIR Form No. 1901-D. These include proof of tax residence in the
country that is a party to the tax treaty. Proof of tax residence consists of a consularized certification
from the tax authority of the country of residence of the non-resident shareholder which states that the
non-resident stockholder is a tax resident of such country under the applicable tax treaty. If the
non-resident shareholder is a juridical entity, an authenticated certificated true copy of its articles of
incorporation or articles of association issued by the proper government authority should also be
submitted to the BIR in addition to the foregoing.
If the regular tax rate is withheld by the company instead of the reduced rates applicable under
a treaty, the non-resident holder of the shares may file a claim for refund from the BIR. However,
because the refund process in the Philippines requires the filing of an administrative claim and the
submission of supporting information, and may also involve the filing of a judicial appeal, it may be
impractical to pursue such a refund.
Stock dividends distributed pro rata to any holder of shares of stock are generally not subject to
Philippine income tax. However, the sale, exchange or disposition of shares received as stock
dividends by the shareholder is subject to capital gains or stock transaction tax, and documentary
stamp tax. The capital gains tax is based on gross selling price or fair market value, whichever is
higher, less the adjusted basis (taking into account the stock dividends). The stock transaction tax of
0.5% is based on the gross selling price.
The current requirements for a tax treaty relief application in respect of capital gains tax on the
sale of shares are set out in the applicable tax treaty and in BIR Form No. 0901-C. These include proof
of tax residence in the country that is a party to the tax treaty. Proof of tax residence consists of a
consularized certification from the tax authority of the country of residence of the non-resident
stockholder which states that the non-resident shareholder is a tax resident of such country under the
applicable tax treaty. If the non-resident shareholder is a juridical entity, an authenticated certificated
true copy of its articles of incorporation or articles of association issued by the proper government
authority should also be submitted to the BIR in addition to the foregoing.
189
Sale, Exchange or Disposition of Shares through an Initial Public Offering (IPO)
The sale, barter, exchange or other disposition through an IPO of shares of stock in closely held
corporations is subject to an IPO Tax at the rates below based on the gross selling price or gross value
in money of the shares of stock sold, bartered, exchanged or otherwise disposed in accordance with
the proportion of shares of stock sold, bartered, exchanged or otherwise disposed to the total
outstanding shares of stock after the listing in the local stock exchange:
Up to 25%...........................................................................................
4%
Over 25% but not over 33 1 ⁄ 3 % ............................................................
2%
Over 33 ⁄ %.........................................................................................
1%
1 3
A “closely held corporation” means any corporation at least 50% in value of outstanding capital
stock or at least 50% of the total combined voting power of all classes of stock entitled to vote is
owned directly or indirectly by or for not more than 20 individuals.
The IPO Tax for the Firm Offer Shares shall be paid by the Company.
Sale, Exchange or Disposition of Shares after the IPO
Capital Gains Tax, If Sale Was Made outside the PSE
Unless an applicable treaty exempts such gains from tax or provides for preferential rates, the
net capital gains realized by a resident or non-resident (other than a dealer in securities) during each
taxable year from the sale, exchange or disposition of shares of stock outside the facilities of the PSE,
are subject to capital gains tax of 5% on gains up to =
P 100,000 and 10% on gains in excess of
=
P 100,000. An application for tax treaty relief must be filed (and approved) by the Philippine tax
authorities to obtain an exemption or preferential tax rate under a tax treaty.
The transfer of shares shall not be recorded in the books of a company, unless the BIR certifies
that the capital gains and documentary stamp taxes relating to the sale or transfer have been paid, or
where applicable, a tax treaty relief has been confirmed by the International Tax Affairs Division of
the BIR or other conditions have been met.
Taxes on Transfer of Shares Listed and Traded at the PSE
Unless an applicable treaty exempts the sale from income and/or percentage tax, a sale or other
disposition of shares of stock through the facilities of the PSE by a resident or a non-resident
shareholder (other than a dealer in securities) is subject to a stock transaction tax at the rate of 0.5%
of the gross selling price or gross value in money of the shares of stock sold or otherwise disposed.
This tax is required to be collected by and paid to the Government by the selling stockbroker on behalf
of his client. The stock transaction tax is classified as a percentage tax in lieu of a capital gains tax.
Under certain tax treaties, the exemptions from capital gains tax discussed herein may not be
applicable to stock transaction tax.
In addition, Value Added Tax (VAT) of 12% is imposed on the commission earned by the
PSE-registered broker, and is generally passed on to the client.
The PSE issued Memorandum CN-No. 2012-0046 dated August 22, 2012, which provides that
immediately after December 31, 2012, the Philippine SEC shall impose a trading suspension for a
period of not more than six (6) months, on shares of a listed company who has not complied with the
Rule on Minimum Public Ownership (“MPO”) which requires listed companies to maintain a minimum
percentage of listed securities held by the public at ten percent (10%) of the listed companies issued
and outstanding shares at all times. Consequently, the sale of such listed company’ shares during the
trading suspension may be effected only outside the trading system of the Exchange and shall be
subject to capital gains tax and documentary stamp tax. Furthermore, if the fair market value of the
shares of stock sold is greater than the consideration or the selling price, the amount by which the fair
market value of the shares exceeds the selling price shall be deemed a gift that is subject to donor’s
tax at the under Section 100 of the National Internal Revenue Code.
190
On November 7, 2012, the BIR issued Revenue Regulations No. 16-2012 (“R.R. 16-12”), which
provides that the sale, barter, transfer, and/or assignment of shares of listed companies that fail to meet
the MPO requirement after December 31, 2012 will be subject to capital gains tax and documentary
stamp tax. R.R. 16-12 also requires publicly listed companies to submit public ownership reports to
the BIR within 15 days after the end of each quarter.
Documentary Stamp Tax
P 200
The original issue of shares of stock is subject to documentary stamp tax of =
P 1.00 for each =
par value, or fraction thereof, of the shares of stock issued. The transfer of shares of stock is subject
P 200 par value or a fractional part thereof of the share
to a documentary stamp tax of =
P 0.75 for each =
of stock transferred.
The sale, barter or exchange of shares of stock listed and traded at the PSE is exempt from
documentary stamp tax.
Estate and Gift Taxes
The transfer of shares of stock upon the death of an individual shareholder (whether such holder
was a citizen of the Philippines or an alien, regardless of residence) to his heirs by way of succession,
is subject to Philippine taxes at progressive rates ranging from 5% to 20%, if the net estate is over
=
P 200,000.
Individual shareholders (whether or not citizens or residents of the Philippines), who transfer
shares of stock by way of gift or donation are liable to pay Philippine donors’ tax on such transfer of
shares ranging from 2% to 15% of the net gifts during the year exceeding =
P 100,000 The rate of tax
with respect to net gifts made by individual shareholder to a stranger (i.e., one who is not a brother,
sister, spouse, ancestor, lineal descendant or relative by consanguinity within the fourth degree of
relationship) or by a corporate shareholder is a flat rate of 30%.
Estate and donors’ taxes, however, shall not be collected in respect of intangible personal
property, such as shares of stock: (a) if the decedent at the time of his death or the donor at the time
of the donation was a citizen and resident of a foreign country which at the time of his death or
donation did not impose a transfer tax of any character, in respect of intangible personal property of
citizens of the Philippines not residing in that foreign country, or (b) if the laws of the foreign country
of which the decedent or donor was a citizen and resident at the time of his death or donation allows
a similar exemption from transfer or death taxes of every character or description in respect of
intangible personal property owned by citizens of the Philippines not residing in that foreign country.
Taxation outside the Philippines
Shares of stock in a domestic corporation are considered under Philippine law as situated in the
Philippines and the gain derived from their sale is entirely from Philippine sources; hence, such gain
is subject to Philippine income tax and the transfer of such shares by gift (donation) or succession is
subject to the donors’ or estate taxes stated above.
The tax treatment of a non-resident shareholder in jurisdictions outside the Philippines may vary
depending on the tax laws applicable to such holder by reason of domicile or business activities and
such holder’s particular situation. This Prospectus does not discuss the tax considerations of
non-resident holders of shares of stock under laws other than those of the Philippines.
EACH PROSPECTIVE HOLDER SHOULD CONSULT WITH HIS OWN TAX ADVISER AS TO
THE PARTICULAR TAX CONSEQUENCES TO SUCH HOLDER OF PURCHASING, OWNING
AND DISPOSING OF THE OFFER SHARES, INCLUDING THE APPLICABILITY AND EFFECT OF
ANY STATE, LOCAL AND NATIONAL TAX LAWS.
191
PLAN OF DISTRIBUTION
633,762,000 Firm Shares (or 70% of the Firm Shares) (the “Institutional Offer Shares”) are being
offered for subscription at the Offer Price (i) outside the Philippines to persons outside the United
States by Deutsche Bank AG, Hong Kong Branch (“DB” or the “Sole International Lead Manager”)
and (ii) to domestic qualified institutional buyers, as defined by the Philippine SEC, and other
institutions in the Philippines (“Domestic QIBs”) by BPI Capital Corporation (“BPI Capital” or the
“Sole Domestic Lead Manager”) (the “Institutional Offer”). 271,613,000 Firm Shares (or 30% of the
Firm Shares) (the “Trading Participants and Retail Offer Shares”) are being offered by the Sole
Domestic Lead Manager at the Offer Price to all of the PSE Trading Participants and local small
investors (“LSIs”) in the Philippines (the “Trading Participants and Retail Offer”). The allocation of
the Offer Shares between the Trading Participants and Retail Offer and the Institutional Offer is
subject to adjustment as agreed between the Joint Global Coordinators. The Sole Domestic Lead
Manager will underwrite, on a firm commitment basis, the Trading Participants and Retail Offer
Shares and the Joint Global Coordinators will underwrite, on a firm commitment basis, the
Institutional Offer Shares. There is no arrangement for the Joint Global Coordinators to return any of
the Offer Shares relating to the Trading Participants and Retail Offer or the Institutional Offer to the
Company.
THE TRADING PARTICIPANTS AND RETAIL OFFER
The Trading Participants and Retail Offer Shares shall initially be offered by the Sole Domestic
Lead Manager to all of the PSE Trading Participants and LSIs in the Philippines. Out of the
271,613,000 Trading Participants and Retail Offer Shares, 181,075,000 Firm Shares, or 20% of the
Firm Shares, shall be allocated to the PSE Trading Participants. Each PSE Trading Participant shall
initially be allocated 1,371,000 Firm Shares (computed by dividing the Trading Participants and Retail
Offer Shares allocated to the PSE Trading Participants between 132 PSE Trading Participants) and
subject to reallocation as may be determined by the Sole Domestic Lead Manager. The balance of
103,000 Firm Shares shall be allocated by the Sole Domestic Lead Manager to the PSE Trading
Participants. In addition, 90,538,000 Firm Shares, or 10% of the Firm Shares, shall be allocated to the
LSIs. Any allocation of Trading Participants and Retail Offer Shares not taken up by the PSE Trading
Participants and the LSIs shall be distributed by the Sole Domestic Lead Manager to its clients or the
general public in the Philippines or as otherwise agreed with the Sole International Lead Manager.
Trading Participants and Retail Offer Shares not taken up by the PSE Trading Participants, the clients
of the Sole Domestic Lead Manager, or the general public shall be purchased by the Sole Domestic
Lead Manager pursuant to the terms and conditions of the Domestic Underwriting Agreement (as
defined below).
To facilitate the Trading Participants and Retail Offer, the Company has appointed BPI Capital
to act as the Sole Domestic Lead Manager. The Company and the Sole Domestic Lead Manager entered
into a Domestic Underwriting Agreement on November 3, 2015 (the “Domestic Underwriting
Agreement”), whereby the Sole Domestic Lead Manager agrees to underwrite, on a firm commitment
basis, any Firm Shares allocated in the Trading Participants and Retail Offer, subject to agreement
between the Joint Global Coordinators on any clawback, clawforward or other such mechanism, on a
firm commitment basis.
BPI Capital is a Philippine corporation organized in the Philippines as a wholly owned subsidiary
of Bank of the Philippine Islands. It obtained its license to operate as an investment house in 1994 and
is licensed by the Philippine SEC to engage in underwriting and distribution of securities to the public.
As of December 30, 2014, its total assets amounted to =
P 5.36 billion and its capital base amounted to
=
P 506.00
P 2.00 billion, of which approximately =
P 5.17 billion. It has an authorized capital stock of =
million represents its paid-up capital.
On or before November 11, 2015, the PSE Trading Participants shall submit to the designated
representative of the Sole Domestic Lead Manager their respective firm orders and commitments to
purchase Offer Shares.
192
With respect to the LSIs, all applications to purchase or subscribe for the Trading Participants
and Retail Offer Shares must be evidenced by a duly accomplished and completed application form.
An application to purchase Trading Participants and Retail Offer Shares shall not be deemed as a duly
accomplished and completed application unless submitted with all required relevant information and
applicable supporting documents to the Sole Domestic Lead Manager or such other institutions that
may be invited to manage the LSI program. Payment for the Trading Participants and Retail Offer
Shares must be made upon submission of the duly completed application form.
The Sole Domestic Lead Manager shall receive from the Company a fee equivalent to 2.3% of
the gross proceeds of the Trading Participants and Retail Offer, inclusive of the amounts to be paid
to the PSE Trading Participants. The underwriting fees shall be withheld by the Sole Domestic Lead
Manager from the proceeds of the Trading Participants and Retail Offer. PSE Trading Participants who
take up Trading Participants and Retail Offer Shares shall be entitled to a selling fee of 1.0% of the
Trading Participants and Retail Offer Shares taken up and purchased by the relevant PSE Trading
Participant; any such selling fees will be shared among the Joint Global Coordinators pro rata to their
respective underwriting commitments. The selling fee, less a withholding tax of 10%, will be paid by
the Sole Domestic Lead Manager to the PSE Trading Participants within ten banking days of the
Listing Date.
All of the Trading Participants and Retail Offer Shares are or shall be lodged with the PDTC and
shall be issued to the PSE Trading Participants and LSIs in scripless form. They may maintain the
Trading Participants and Retail Offer Shares in scripless form or opt to have the stock certificates
issued to them by requesting an upliftment of the relevant Trading Participants and Retail Offer Shares
from the PDTC’s electronic system after the Listing Date.
The Sole Domestic Lead Manager and its affiliates have engaged in transactions with, and have
performed various investment banking, commercial banking and other services for, the Company in
the past, and may do so for the Company, the Selling Shareholders and their respective subsidiaries
and affiliates from time to time in the future. However, all services provided by the Sole Domestic
Lead Manager, including in connection with the Offer, have been provided as an independent
contractor and not as a fiduciary to the Company or the Selling Shareholders. The Sole Domestic Lead
Manager does not have any right to designate or nominate a member of the Board. The Sole Domestic
Lead Manager has no direct relationship with the Company in terms of share ownership and, other than
as Sole Domestic Lead Manager for the Offer, does not have any material relationship with the
Company.
THE INSTITUTIONAL OFFER
The Institutional Offer Shares will be offered for subscription (i) outside the Philippines to
persons outside the United States by the Sole International Lead Manager, and (ii) to certain Domestic
QIBs in the Philippines by the Sole Domestic Lead Manager, in each case, in offshore transactions in
reliance on Regulation S under the U.S. Securities Act.
The allocation of the Firm Shares between the Trading Participants and Retail Offer and the
Institutional Offer is subject to further adjustment as may be agreed between the Joint Global
Coordinators. In the event of an under-application in the Institutional Offer and a corresponding
over-application in the Trading Participants and Retail Offer, Firm Shares in the Institutional Offer
may be reallocated to the Trading Participants and Retail Offer. If there is an under-application in the
Trading Participants and Retail Offer and if there is a corresponding over-application in the
Institutional Offer, Firm Shares in the Trading Participants and Retail Offer may be reallocated to the
Institutional Offer. The reallocation shall not apply in the event of over-application or
under-application in both the Trading Participants and Retail Offer and the Institutional Offer.
The International Underwriting Agreement dated November 3, 2015 and entered into among the
Company and the Sole International Lead Manager, is subject to certain conditions and may be subject
to termination by the Sole International Lead Manager if certain
193
circumstances, including force majeure, occur on or before the Offer Shares are listed on the PSE.
Under the terms and conditions of the International Underwriting Agreement, the Sole International
Lead Manager has agreed to procure purchasers for or failing which to purchase 452,687,500
Institutional Offer Shares.
In addition, pursuant to the Domestic Underwriting Agreement, the Sole Domestic Lead Manager
has agreed to underwrite, on a firm commitment basis, 181,074,500 Institutional Offer Shares, subject
to agreement between the Joint Global Coordinators on any clawback, clawforward or other such
mechanism, on a firm commitment basis.
The immediately preceding two paragraphs do not reflect the exercise of the Over-allotment
Option that may or may not be exercised by BPI Capital or its relevant affiliates, as Stabilizing Agent,
to purchase up to 90,537,500 additional Shares from the Selling Shareholders.
The Sole International Lead Manager and its affiliates have engaged in transactions with, and
have performed various investment banking, commercial banking and other services for, the Company
in the past, and may do so for the Company, the Selling Shareholders and their respective subsidiaries
and affiliates from time to time in the future. However, all services provided by the Sole International
Lead Manager, including in connection with the Offer, have been provided as an independent
contractor and not as a fiduciary to the Company or the Selling Shareholders. The Sole International
Lead Manager does not have any right to designate or nominate a member of the Board. The Sole
International Lead Manager has no direct relationship with the Company in terms of share ownership
and, other than as Sole International Lead Manager for the Offer, does not have any material
relationship with the Company. The Sole International Lead Manager has agreed to underwrite, on a
firm commitment basis, 452,687,500 Institutional Offer Shares, or 50.0% of the Firm Shares.
Investors in the Institutional Offer (but not the Trading Participants and Retail Offer) will be
required to pay, in addition to the Offer Price, a brokerage fee of 1.0% of the Offer Price.
THE OVER-ALLOTMENT OPTION
In connection with the Offer, subject to the approval of the Philippine SEC, the Selling
Shareholders have granted the Stabilizing Agent an Over-allotment Option, exercisable in whole or in
part to purchase up to 10% of the total number of Firm Shares on the same terms and conditions as
the Firm Shares, as set forth herein, from time to time for a period which shall not exceed 30 calendar
days from and including the Listing Date. In connection therewith, the Selling Shareholders have
entered into a greenshoe agreement with the Stabilizing Agent to utilize up to an additional 90,537,500
Shares (the “Optional Shares”), among others, to cover over-allocations under the Institutional Offer.
If the whole or part of the Over-allotment Option is exercised, the Optional Shares will be drawn from
the Selling Shareholders in the following order: first, from the shares of Valueshop Stores, Inc. and
second, from the shares of Vicsal Development Corporation. Any Shares that may be delivered to the
Stabilizing Agent under the greenshoe agreement will be re-delivered to the Selling Shareholders
either through the purchase of Shares in the open market by the Stabilizing Agent in the conduct of
stabilization activities or through the exercise of the Over-allotment Option by the Stabilizing Agent.
The Optional Shares may be over-allotted and the Stabilizing Agent may effect price stabilization
transactions for a period beginning on or after the Listing Date, but extending no later than 30 days
from the Listing Date. The Stabilizing Agent may purchase Shares in the open market only if the
market price of the Shares falls below the Offer Price. Such activities may stabilize, maintain or
otherwise affect the market price of the Shares, which may have the effect of preventing a decline in
the market price of the Shares and may also cause the price of the Shares to be higher than the price
that otherwise would exist in the open market in the absence of these transactions. If the Stabilizing
Agent commences any of these transactions, it may discontinue them at any time. Once the
Over-allotment Option has been exercised by the Stabilizing Agent, it will no longer be allowed to
purchase Shares in the open market for the conduct of stabilization activities. The Over-allotment
Option, to the extent not fully exercised by the Stabilizing Agent, shall be deemed cancelled and the
relevant Optional Shares shall be re-delivered to the Selling Shareholders.
THE PARTICIPATING UNDERWRITERS
Vicsal Investment, Inc., Abacus Capital & Investment Corporation (“Abacus”) and RCBC Capital
Corporation (“RCBC Capital”) have been appointed as sub-underwriters (collectively, the
“Sub-Underwriters”) to the Offer and have agreed to be named as Co-Lead Underwriter in the case of
Vicsal Investment, Inc. and Participating Underwriters in the case of Abacus and RCBC Capital. As
such, each of them shall participate in the Offer under the terms and conditions as agreed upon with
the Domestic Lead Manager pursuant to a sub-underwriting agreement. Of the total of 217,289,850
Offer Shares allocated to them for sale and distribution in the Offer in the Philippines under such
194
sub-underwriting agreement, Vicsal Investment, Inc. has been allocated 187,970,000 Offer Shares;
Abacus has been allocated 19,208,950 Offer Shares; and RCBC Capital has been allocated 10,110,900
Offer Shares. The appointment of the Sub-Underwriters is in accordance with the agreement by the
Domestic Lead Manager in the Domestic Underwriting Agreement to underwrite all the Domestic
Offer Shares and to form a syndicate of participating underwriters. The Domestic Lead Manager’s
obligations under such agreement is not affected by the appointment of the Sub-Underwriters.
Vicsal Investment, Inc. is licensed in the Philippines as an investment house and deals with fixed
income investments, equities trading and corporate finance. Vicsal Investment, Inc. is part of the
Vicsal Group, and together with the Company, is commonly controlled by the Metro Gaisano Family.
Viscal Investment, Inc. operates as a subsidiary of Vicsal Development Corporation and engages in
transactions with members of the Vicsal Group, as clients or counterparties as part of its regular
business transactions unrelated to Vicsal Investment, Inc.’s participation in the Offer.
Abacus is licensed in the Philippines to engage in the business of investment banking,
management services and treasury and other financial services. Abacus is a wholly owned subsidiary
of First Abacus Financial Holdings Corporation, which is a public company listed on the PSE. From
time to time, Abacus may engage in transactions with members of the Vicsal Group, as clients or
counterparties, that are part of its regular business.
RCBC Capital is licensed in the Philippines as an investment house that provides a complete
range of investment banking and financial services. It is a subsidiary of the Rizal Commercial Banking
Corporation (“RCBC”). RCBC Capital was originally organized in 1973 as the Philippine Pacific
Capital Corporation, which was acquired by RCBC in 1993. From time to time, RCBC Capital may
engage in transactions with members of the Vicsal Group, as clients or counterparties, that are part of
its regular business.
LOCK-UP
The PSE rules require existing shareholders owning at least 10% of the outstanding shares of a
company not to sell, assign or in any manner dispose of their shares for a period of 180 days after the
listing of the shares subscribed in the transaction. Assuming full exercise of the Over-allotment
option, 2,433,462,489 Common Shares held by Vicsal Development Corporation are subject to such
180-day lock-up.
In addition, if there is any issuance or transfer of Shares (i.e., private placements, asset for shares
swap or a similar transaction) or instruments which lead to issuance of Shares (i.e., convertible bonds,
warrants or a similar instrument) done and fully paid for within 180 days prior to the start of the Offer,
and the transaction price is lower than that of the Offer Price, all such Shares issued or transferred
shall be subject to a lock-up period of at least 365 days from full payment of such Shares.
Further, the Company and the Selling Shareholders have agreed with the Joint Global
Coordinators that, except in connection with the Over-allotment Option, neither they nor any of the
Company’s affiliates nor any person acting on their behalf will, without the prior written consent of
the Joint Global Coordinators, issue, offer, pledge, sell, contract to sell or otherwise dispose of (or
publicly announce any such issuance, offer, sale or disposal of) any Shares or securities convertible
or exchangeable into or exercisable for any Shares or warrants or other rights to purchase Shares or
any security or financial product whose value is determined directly or indirectly by reference to the
price of the underlying securities, including equity swaps, forward sales and options for a period of
180 days after the First Closing Date.
SELLING RESTRICTIONS
Philippines
No securities, except of a class exempt under Section 9 of the SRC or unless sold in any
transaction exempt under Section 10 thereof, shall be sold or distributed by any person within the
Philippines, unless such securities shall have been registered with the Philippine SEC on Form 12-1
and the registration statement has been declared effective by the Philippine SEC.
195
LEGAL MATTERS
Certain legal matters as to Philippine law relating to the Offer will be passed upon by Angara
Abello Concepcion Regala & Cruz, our legal counsel, and Romulo Mabanta Buenaventura Sayoc & de
los Angeles, legal counsel to the Joint Global Coordinators. Certain legal matters as to United States
federal law will be passed upon by Latham & Watkins, our legal counsel, and Milbank, Tweed, Hadley
& McCloy LLP, legal counsel to the Joint Global Coordinators.
Each of the foregoing legal counsel has neither our shareholdings nor any right, whether legally
enforceable or not, to nominate persons or to subscribe for our securities. None of the legal counsel
will receive any direct or our indirect interest or in any securities thereof (including options, warrants
or rights thereto) pursuant to or in connection with the Offer.
196
INDEPENDENT AUDITORS
Our financial statements as of and for the years ended December 31, 2012, 2013 and 2014 and
as of June 30, 2015 and for the six months ended June 30, 2014 and 2015 were audited by SGV & Co,
independent auditors, in accordance with PSA, as stated in their report appearing herein.
SGV & Co. has acted as our external auditor since 2012. Jessie D. Cabaluna is our current audit
partner and has served as such since 2012. We have not had any material disagreements on accounting
and financial disclosures with our current external auditor for the same periods or any subsequent
interim period. SGV & Co. has neither our shareholdings nor any right, whether legally enforceable
or not, to nominate persons or to subscribe for our securities. SGV & Co. will not receive any direct
or our indirect interest or our securities (including options, warrants or rights thereto) pursuant to or
in connection with the Offer. The foregoing is in accordance with the Code of Ethics for Professional
Accountants in the Philippines set by the Board of Accountancy and approved by the Professional
Regulation Commission.
The following table sets out the aggregate fees billed for each of the last two years for
professional services rendered by SGV & Co., excluding fees directly related to the Offer.
2013
2014
(=
P)
Audit and Audit-Related Fees
(1)
......................................................................................
4,250,000
5,950,033
.............................................................................................................
—
1,100,000
Total ...............................................................................................................................
4,250,000
7,050,033
All Other Fees
(1)
(2)
Audit and Audit-Related Fees. This category includes the audit of annual financial statements and services that are
normally provided by the independent auditor in connection with statutory and regulatory filings or engagements for
those calendar years.
(2)
Non-audit Fees include one-time, non-recurring special projects.
The fees presented above include out-of-pocket expenses incidental to the Independent Auditor’s
services.
Except for the above-mentioned services, SGV provided no other assurance and related services.
In relation to the audit of our annual financial statements, our Corporate Governance Manual,
which was approved by the Board of Directors on April 13, 2015, provides that the Audit and Risk
Committee shall, among other activities (i) evaluate significant issues reported by the external
auditors in relation to the adequacy, efficiency and effectiveness of policies, controls, processes and
our activities; (ii) ensure that other non-audit work provided by the external auditors are not in conflict
with their functions as external auditors; and (iii) ensure our compliance with acceptable auditing and
accounting standards and regulations.
197
INDEX TO AUDITED FINANCIAL STATEMENTS
Page
Interim Financial Statements of the Company as at June 30, 2015 and for the
six m onths ended June 30, 2015 and 2014
Independent Auditors’ Report . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
F-2
Statement of Management’s Responsibility for Financial Statements as at June 30, 2015
and for the six months ended June 30, 2015 and 2014 . . . . . . . . . . . . . . . . . . . . . . . . . . .
F-4
Interim Statements of Financial Position as at June 30, 2015 . . . . . . . . . . . . . . . . . . . . . . . .
F-6
Interim Statements of Comprehensive Income for the six months ended
June 30, 2015 and 2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
F-7
Interim Statements of Changes in Equity for the six months ended
June 30, 2015 and 2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
F-8
Interim Statements of Cash Flows for the six months ended
June 30, 2015 and 2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
F-9
Interim Notes to Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
F-10
Independent Auditors’ Report on Supplementary Schedule as of June 30, 2015 . . . . . . . . . .
F-51
Financial Statements of the Company as at and for the years ended
December 31, 2014, 2013 and 2012
Independent Auditors’ Report . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
F-72
Statement of Management’s Responsibility for Financial Statements for the years ended
December 31, 2014, 2013 and 2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
F-74
Statements of Financial Position as at December 31, 2014, 2013 and 2012 . . . . . . . . . . . . .
F-76
Statements of Comprehensive Income for the years ended
December 31, 2014, 2013 and 2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
F-77
Statements of Changes in Equity for the years ended
December 31, 2014, 2013 and 2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
F-78
Statements of Cash Flows for the years ended
December 31, 2014, 2013 and 2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
F-79
Notes to Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
F-80
Independent Auditors’ Report on Supplementary Schedule as at and for the period ended
December 31, 2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
F-124
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F-50
F-51
INDEX TO THE FINANCIAL STATEMENTS AND SUPPLEMENTARY
SCHEDULES
Schedule
Contents
A
Financial Assets
B
Amounts Receivable from Directors, Officers, Employees, Related
Parties, and Principal Stockholders (Other than Related Parties)
C
Amounts Receivable from Related Parties which are Eliminated
during the Consolidation of Financial Statements
D
Intangible Assets - Other Assets
E
Long-Term Debt
F
Indebtedness to Related Parties
G
Guarantees of Securities of Other Issuers
H
Capital Stock
I
Reconciliation of Retained Earnings Available for Dividend Declaration
J
Map Showing the Relationships Between and Among the Companies in the
Group, its Ultimate Parent Company and Co-subsidiaries
K
Schedule of All Effective Standards and Interpretations Under Philippine Financial
Reporting Standards
L
Financial Ratios
F-52
SCHEDULE A
METRO RETAIL STORES GROUP, INC.
(Formerly Valueshop Market Market, Inc.)
SUPPLEMENTARY SCHEDULE OF FINANCIAL ASSETS
JUNE 30, 2015
Name of Issuing entity and association
of each issue
Cash
Receivables
Trade
Rentals
Number of shares or
principal amount of
bonds and notes
–
Amount shown in
the balance sheet
=732,833,255
P
Income
received
or accrued
=1,183,575
P
–
–
−
612,211,569
50,960,160
=1,396,004,984
P
–
–
=1,183,575
P
F-53
SCHEDULE B
METRO RETAIL STORES GROUP, INC.
(Formerly Valueshop Market Market, Inc.)
SUPPLEMENTARY SCHEDULE OF AMOUNTS RECEIVABLE FROM
DIRECTORS, OFFICERS, EMPLOYEES, RELATED PARTIES, AND
PRINCIPAL STOCKHOLDERS (OTHER THAN RELATED PARTIES)
JUNE 30, 2015
Balance at
Name and Designation beginning of
of debtor
period
N/A
N/A
Additions
N/A
F-54
Amounts
collected
N/A
Current
N/A
Balance
at the end of
Not Current the period
N/A
N/A
SCHEDULE C
METRO RETAIL STORES GROUP, INC.
(Formerly Valueshop Market Market, Inc.)
SUPPLEMENTARY SCHEDULE OF AMOUNTS RECEIVABLE FROM
RELATED PARTIES WHICH ARE ELIMINATED DURING THE
CONSOLIDATION OF FINANCIAL STATEMENTS
JUNE 30, 2015
Total Eliminated Receivables/Payables
Receivable
Balance
N/A
F-55
Payable Balance
N/A
Current Portion
N/A
SCHEDULE D
METRO RETAIL STORES GROUP, INC.
(Formerly Valueshop Market Market, Inc.)
SUPPLEMENTARY SCHEDULE OF INTANGIBLE ASSETS - OTHER
ASSETS
JUNE 30, 2015
Description
Beginning
Balance
Additions at
cost
Charged to
cost and
expenses
N/A
N/A
N/A
N/A
F-56
Charged to
other
accounts
Other
changes
additions
(deductions)
Ending
Balance
N/A
N/A
N/A
SCHEDULE E
METRO RETAIL STORES GROUP, INC.
(Formerly Valueshop Market Market, Inc.)
SUPPLEMENTARY SCHEDULE OF LONG-TERM DEBT
JUNE 30, 2015
Long-term Debt
Amount shown under Amount shown under
caption "current
caption “long-term
Amount authorized portion of long-term”
debt” in related
Title of Issue and type of obligation
by indenture
in related balance sheet
balance sheet
N/A
N/A
N/A
N/A
F-57
SCHEDULE F
METRO RETAIL STORES GROUP, INC.
(Formerly Valueshop Market Market, Inc.)
SUPPLEMENTARY SCHEDULE OF INDEBTEDNESS TO RELATED
PARTIES (LONG-TERM LOANS FROM RELATED COMPANIES)
JUNE 30, 2015
Indebtedness to related parties (Long-term loans from Related Companies)
Name of related party
Balance at beginning of period
Balance at end of period
N/A
N/A
N/A
F-58
SCHEDULE G
METRO RETAIL STORES GROUP, INC.
(Formerly Valueshop Market Market, Inc.)
SUPPLEMENTARY SCHEDULE OF GUARANTEES OF SECURITIES OF
OTHER ISSUERS
JUNE 30, 2015
Name of issuing entity of
securities guaranteed by the
company for which this
statement is filed
N/A
Guarantees of Securities of Other Issuers
Title of issue of
Amount owned
Total amount
each class of
by person for
securities
guaranteed and
which statement
guaranteed
outstanding
is file
N/A
N/A
N/A
F-59
Nature of
guarantee
N/A
SCHEDULE H
METRO RETAIL STORES GROUP, INC.
(Formerly Valueshop Market Market, Inc.)
SUPPLEMENTARY SCHEDULE OF CAPITAL STOCK
JUNE 30, 2015
Title of Issue
Common Shares
Preferred Shares
Capital Stock
Number of shares
issued and
Number of shares
outstanding as
reserved for
shown under
options warrants, Number of shares
conversion and
held by related Directors, officers
Number of shares related balance
sheet caption
other rights
parties
authorized
and employees
10,000,000,000
2,524,000,000
–
–
10,000,000,000
2,524,000,000
–
–
–
F-60
2,523,999,990
–
2,523,999,990
10
–
10
Others
–
–
–
SCHEDULE I
METRO RETAIL STORES GROUP, INC.
(Formerly Valueshop Market Market, Inc.)
SUPPLEMENTARY SCHEDULE OF RETAINED EARNINGS AVAILABLE
FOR DIVIDEND DECLARATION
JUNE 30, 2015
Unappropriated Retained Earnings, beginning
=466,640,635
P
Add (Less): adjustments
Gain on fair value adjustment of investment property - net of tax
Treasury shares
–
–
Unappropriated Retained Earnings as adjusted, beginning
466,640,635
Net income based on the face of AFS
211,327,655
Less: Non-actual/unrealized income net of tax
Equity in net income of associate/joint venture
Unrealized foreign exchange gain – net (except those
attributable to Cash and Cash Equivalents) Unrealized
gain
Fair value adjustment (M2M gains)
Fair value adjustment of Investment Property resulting to gain
adjustment due to deviation from PFRS/GAAP – gain
Other unrealized gains or adjustments to the retained earnings as a
result of certain transactions accounted for under the PFRS
Add: Non-actual losses
Depreciation on revaluation increment (after tax)
Adjustment due to deviation from PFRS/GAAP – loss
Loss on fair value adjustment of investment property
(after tax)
Net Income Actual/Realized
–
–
–
–
–
–
–
–
–
211,327,655
Less: Other adjustments
Dividend declarations during the period
−
Unappropriated Retained Earnings, as adjusted, ending
F-61
=677,968,290
P
F-62
100%
Newport
City Plaza
Store,Inc.
Market
Savers
Tacloban
Wealthbank
Development
Corporation
Metro Value
Ventures,
Inc.
100%
Vicsal
Investments,
Inc.
100%
Vicsal (PSCAMC), Inc.
Metro
Superstores
Group, Inc.
Southeast
Asian Mining
Power
100%
97%
100%
100%
100%
Vicsal
Development Corp.
Mamerto
Escano
100%
Iprocess
Solutions,
Inc.
100%
Filipino
Fund, Inc.
100%
Beverly Hills
Corporation
89%
2%
Metro Retail
Stores
Group Inc.
98%
Value Shop Stores,
Inc.
METRO RETAIL STORES GROUP, INC.(Formerly Valueshop Market Market, Inc.)
MAP SHOWING THE RELATIONSHIPS BETWEEN AND AMONG THE COMPANIES IN THE GROUP, ITS
ULTIMATE PARENT COMPANY AND CO-SUBSIDIARIES
JUNE 30, 2015
SCHEDULE J
SCHEDULE K
METRO RETAIL STORES GROUP, INC.
(Formerly Valueshop Market Market, Inc.)
SCHEDULE OF EFFECTIVE STANDARDS AND INTERPRETATIONS
JUNE 30, 2015
PHILIPPINE FINANCIAL REPORTING STANDARDS AND
INTERPRETATIONS
Effective as of June 30, 2015
Adopted
Framework for the Preparation and Presentation of Financial
Statements
Conceptual Framework Phase A: Objectives and qualitative
characteristics
9
PFRSs Practice Statement Management Commentary
9
Not
Adopted
Not
Applicable
Philippine Financial Reporting Standards
PFRS 1
(Revised)
PFRS 2
PFRS 3
(Revised)
PFRS 4
First-time Adoption of Philippine Financial Reporting
Standards
9
Amendments to PFRS 1 and PAS 27: Cost of an
Investment in a Subsidiary, Jointly Controlled Entity or
Associate
9
Amendments to PFRS 1: Additional Exemptions for Firsttime Adopters
9
Amendment to PFRS 1: Limited Exemption from
Comparative PFRS 7 Disclosures for First-time Adopters
9
Amendments to PFRS 1: Severe Hyperinflation and
Removal of Fixed Date for First-time Adopters
9
Amendments to PFRS 1: Government Loans
9
Amendments to PFRS 1: Borrowing costs
9
Amendments to PFRS 1: Meaning of “Effective PFRSs”
9
Share-based Payment
9
Amendments to PFRS 2: Vesting Conditions and
Cancellations
9
Amendments to PFRS 2: Group Cash-settled Share-based
Payment Transactions
9
Amendments to PFRS 2: Definition of Vesting Condition
9
9
Business Combinations
Amendments to PFRS 3: Accounting for Contingent
Consideration in a Business Combination
9
Amendments to PFRS 3: Scope Exceptions for Joint
Arrangements
9
Insurance Contracts
9
Amendments to PAS 39 and PFRS 4: Financial Guarantee
Contracts
9
F-63
-2-
PHILIPPINE FINANCIAL REPORTING STANDARDS AND
INTERPRETATIONS
Effective as of June 30, 2015
PFRS 5
Adopted
Not
Adopted
Not
Applicable
Non-current Assets Held for Sale and Discontinued
Operations
9
Amendments to PFRS 5: Changes in Methods of Disposal
Not early adopted
9
PFRS 6
Exploration for and Evaluation of Mineral Resources
PFRS 7
Financial Instruments: Disclosures
9
Amendments to PAS 39 and PFRS 7: Reclassification of
Financial Assets
9
Amendments to PAS 39 and PFRS 7: Reclassification of
Financial Assets - Effective Date and Transition
9
Amendments to PFRS 7: Improving Disclosures about
Financial Instruments
9
Amendments to PFRS 7: Disclosures - Transfers of
Financial Assets
Amendments to PFRS 7: Disclosures - Offsetting Financial
Assets and Financial Liabilities
PFRS 8
9
9
Amendments to PFRS 7: Mandatory Effective Date of
PFRS 9 and Transition Disclosures
Not early adopted
Amendments to PFRS 7: Disclosures - Servicing Contracts
Not early adopted
Amendments to PFRS 7: Applicability of the Amendments
to PFRS 7 to Condensed Interim Financial Statements
Not early adopted
9
Operating Segments
Amendments to PFRS 8: Aggregation of Operating
Segments and Reconciliation of the Total of the Reportable
Segments’ Assets to the Entity’s Assets
PFRS 9
PFRS 10
Financial Instruments (2010 version)
Not early adopted
Financial Instruments - Hedge Accounting and
amendments to PFRS 9, PFRS 7 and PAS 39 (2013
version)
Not early adopted
Financial Instruments (2014 or final version)
Not early adopted
Amendments to PFRS 9: Mandatory Effective Date of
PFRS 9 and Transition Disclosures
Not early adopted
Consolidated Financial Statements
9
Amendments to PFRS 10, PFRS 12 and PAS 27:
Investment Entities
9
Amendment to PFRS 10: Sale or Contribution of Assets
between an Investor and its Associate or Joint Venture
PFRS 11
Not early adopted
9
Joint Arrangements
Amendment to PFRS 11: Accounting for Acquisitions of
Interests in Joint Operations
PFRS 12
9
Not early adopted
Disclosure of Interests in Other Entities
9
Amendments to PFRS 10, PFRS 12 and PAS 27:
9
F-64
-3-
PHILIPPINE FINANCIAL REPORTING STANDARDS AND
INTERPRETATIONS
Effective as of June 30, 2015
Adopted
Not
Adopted
Not
Applicable
Investment Entities
PFRS 13
Fair Value Measurement
9
Amendments to PFRS 13: Short-term receivable and
payables
9
Amendments to PFRS 13: Portfolio Exception
9
PFRS 14
Regulatory Deferral Accounts
Not early adopted
PFRS 15
Revenue from Contracts with Customers
Not early adopted
Philippine Accounting Standards
PAS 1
(Revised)
Presentation of Financial Statements
9
Amendment to PAS 1: Capital Disclosures
9
Amendments to PAS 32 and PAS 1: Puttable Financial
Instruments and Obligations Arising on Liquidation
9
Amendments to PAS 1: Presentation of Items of Other
Comprehensive Income
9
Amendments to PAS 1: Clarification of the requirements
for comparative information
9
PAS 2
Inventories
9
PAS 7
Statement of Cash Flows
9
PAS 8
Accounting Policies, Changes in Accounting Estimates and
Errors
9
PAS 10
Events after the Balance Sheet Date
9
PAS 11
Construction Contracts
PAS 12
Income Taxes
9
Amendment to PAS 12 - Deferred Tax: Recovery of
Underlying Assets
9
Property, Plant and Equipment
9
Amendment to PAS 16: Classification of servicing
equipment
9
PAS 16
9
Amendment to PAS 16: Revaluation Method Proportionate Restatement of Accumulated Depreciation
9
Amendment to PAS 16 and PAS 38: Clarification of
Acceptable Methods of Depreciation and Amortization
Not early adopted
9
Amendments to PAS 16: Bearer Plants
PAS 17
Leases
9
PAS 18
Revenue
9
F-65
-4-
PHILIPPINE FINANCIAL REPORTING STANDARDS AND
INTERPRETATIONS
Effective as of June 30, 2015
PAS 19
PAS 19
(Amended)
Adopted
Employee Benefits
9
Amendments to PAS 19: Actuarial Gains and Losses,
Group Plans and Disclosures
9
Employee Benefits
9
Not
Adopted
Not
Applicable
Amendments to PAS 19: Defined Benefit Plans Employee Contributions
9
Amendments to PAS 19: Regional Market Issue regarding
Discount Rate
PAS 20
Accounting for Government Grants and Disclosure of
Government Assistance
PAS 21
The Effects of Changes in Foreign Exchange Rates
Not early adopted
9
9
Amendment: Net Investment in a Foreign Operation
9
PAS 23
(Revised)
Borrowing Costs
9
PAS 24
(Revised)
Related Party Disclosures
9
Amendments to PAS 24: Key Management Personnel
9
PAS 26
Accounting and Reporting by Retirement Benefit Plans
9
PAS 27
(Amended)
Separate Financial Statements
9
Amendments to PFRS 10, PFRS 12 and PAS 27:
Investment Entities
9
Amendment to PAS 27: Equity Method in Separate
Financial Statements
PAS 28
(Amended)
Not early adopted
9
Investments in Associates and Joint Ventures
Amendment to PAS 28: Sale or Contribution of Assets
between an Investor and its Associate or Joint Venture
Not early adopted
PAS 29
Financial Reporting in Hyperinflationary Economies
9
PAS 31
Interests in Joint Ventures
9
PAS 32
Financial Instruments: Disclosure and Presentation
PAS 33
9
Amendments to PAS 32 and PAS 1: Puttable Financial
Instruments and Obligations Arising on Liquidation
9
Amendment to PAS 32: Classification of Rights Issues
9
Amendment to PAS 32: Presentation - Tax effect of
distribution to holders of equity instrument
9
Amendments to PAS 32: Offsetting Financial Assets and
Financial Liabilities
9
Earnings per Share
9
F-66
-5-
PHILIPPINE FINANCIAL REPORTING STANDARDS AND
INTERPRETATIONS
Effective as of June 30, 2015
PAS 34
Adopted
Not
Adopted
Not
Applicable
9
Interim Financial Reporting
Amendments to PAS 34: Interim financial reporting and
segment information for total assets and liabilities
Not early adopted
Amendments to PAS 34: Disclosure of Information
‘elsewhere in the interim financial report’
Not early adopted
Impairment of Assets
9
Amendments to PAS 36: Recoverable Amount Disclosures
for Non-Financial Assets
9
PAS 37
Provisions, Contingent Liabilities and Contingent Assets
9
PAS 38
Intangible Assets
9
Amendments to PAS 38: Revaluation Method Proportionate Restatement of Accumulated Amortization
9
PAS 36
Amendments to PAS 16 and PAS 38: Clarification of
Acceptable Methods of Depreciation and Amortization
PAS 39
PAS 40
PAS 41
Not early adopted
Financial Instruments: Recognition and Measurement
9
Amendments to PAS 39: Transition and Initial Recognition
of Financial Assets and Financial Liabilities
9
Amendments to PAS 39: Cash Flow Hedge Accounting of
Forecast Intragroup Transactions
9
Amendments to PAS 39: The Fair Value Option
9
Amendments to PAS 39 and PFRS 4: Financial Guarantee
Contracts
9
Amendments to PAS 39 and PFRS 7: Reclassification of
Financial Assets
9
Amendments to PAS 39 and PFRS 7: Reclassification of
Financial Assets - Effective Date and Transition
9
Amendments to Philippine Interpretation IFRIC-9 and PAS
39: Embedded Derivatives
9
Amendment to PAS 39: Eligible Hedged Items
9
Amendment to PAS 39: Novation of Derivatives and
Continuation of Hedge Accounting
9
Investment Property
9
Amendment to PAS 40: Interrelationship between
PFRS 3 and PAS 40
9
Agriculture
9
Amendment to PAS 41: Bearer Plants
F-67
Not early adopted
-6-
PHILIPPINE FINANCIAL REPORTING STANDARDS AND
INTERPRETATIONS
Effective as of June 30, 2015
Adopted
Not
Adopted
Not
Applicable
Philippine Interpretations
IFRIC 1
Changes in Existing Decommissioning, Restoration and
Similar Liabilities
9
IFRIC 2
Members' Share in Co-operative Entities and Similar
Instruments
9
IFRIC 4
Determining Whether an Arrangement Contains a Lease
IFRIC 5
Rights to Interests arising from Decommissioning,
Restoration and Environmental Rehabilitation Funds
9
IFRIC 6
Liabilities arising from Participating in a Specific Market Waste Electrical and Electronic Equipment
9
IFRIC 7
Applying the Restatement Approach under PAS 29 Financial
Reporting in Hyperinflationary Economies
9
IFRIC 8
Scope of PFRS 2
9
IFRIC 9
Reassessment of Embedded Derivatives
9
Amendments to Philippine Interpretation IFRIC-9 and
PAS 39: Embedded Derivatives
9
IFRIC 10
Interim Financial Reporting and Impairment
9
IFRIC 11
PFRS 2- Group and Treasury Share Transactions
9
IFRIC 12
Service Concession Arrangements
9
IFRIC 13
Customer Loyalty Programmes
IFRIC 14
The Limit on a Defined Benefit Asset, Minimum Funding
Requirements and their Interaction
9
Amendments to Philippine Interpretations IFRIC-14,
Prepayments of a Minimum Funding Requirement
9
9
9
IFRIC 15
Agreements for the Construction of Real Estate
IFRIC 16
Hedges of a Net Investment in a Foreign Operation
9
IFRIC 17
Distributions of Non-cash Assets to Owners
9
IFRIC 18
Transfers of Assets from Customers
9
IFRIC 19
Extinguishing Financial Liabilities with Equity Instruments
9
IFRIC 20
Stripping Costs in the Production Phase of a Surface Mine
9
IFRIC 21
Levies
9
SIC-7
Introduction of the Euro
9
SIC-10
Government Assistance - No Specific Relation to Operating
Activities
9
SIC-12
Consolidation - Special Purpose Entities
9
Amendment to SIC - 12: Scope of SIC 12
9
SIC-13
Jointly Controlled Entities - Non-Monetary Contributions
by Venturers
9
SIC-15
Operating Leases - Incentives
Not early adopted
9
F-68
-7-
PHILIPPINE FINANCIAL REPORTING STANDARDS AND
INTERPRETATIONS
Effective as of June 30, 2015
Adopted
Not
Adopted
Not
Applicable
SIC-21
Income Taxes - Recovery of Revalued Non-Depreciable
Assets
9
SIC-25
Income Taxes - Changes in the Tax Status of an Entity or its
Shareholders
9
SIC-27
Evaluating the Substance of Transactions Involving the
Legal Form of a Lease
SIC-29
Service Concession Arrangements: Disclosures
9
SIC-31
Revenue - Barter Transactions Involving Advertising
Services
9
SIC-32
Intangible Assets - Web Site Costs
9
F-69
9
SCHEDULE L
METRO RETAIL STORES GROUP, INC.
(Formerly Valueshop Market Market, Inc.)
FINANCIAL RATIOS
JUNE 30, 2015
CURRENT / LIQUIDITY RATIOS
Current assets
Current liabilities
Current Ratios
Current assets
Merchandise inventory
Other current assets
Quick assets
Current liabilities
Quick Ratios
SOLVENCY / DEBT-TO-EQUITY RATIOS
Current portion of loans payable
Loans payable
Debt
Equity
Less: Non-controlling interests
Equity
Add/Less: Unrealized gain (loss) - AFS
Equity
Debt to Equity Ratio
Debt
Less: Cash
Net debt
Equity
Net Debt to Equity Ratio
ASSET TO EQUITY RATIOS
Total assets
Total equity
Asset to Equity Ratios
F-70
June 30,
2015
December 31,
2014
=5,474,535,723
P
3,547,466,921
1.54
=6,287,996,229
P
4,455,695,770
1.41
=5,474,535,723
P
3,442,835,754
594,843,030
1,436,856,939
3,547,466,921
0.41
=6,287,996,229
P
3,168,232,389
624,679,213
2,495,084,627
4,455,695,770
0.56
June 30,
2015
December 31,
2014
=−
P
950,000,000
950,000,000
3,202,185,269
−
3,202,185,269
−
3,202,185,269
0.30
=−
P
1,100,000,000
1,100,000,000
2,986,702,360
−
2,986,702,360
−
2,986,702,360
0.37
=950,000,000
P
732,833,255
217,166,745
3,202,185,269
0.07
=1,100,000,000
P
1,625,731,425
(525,731,425)
2,986,702,360
(0.18)
June 30,
2015
December 31,
2014
=7,403,683,225
P
3,202,185,269
2.31
=8,084,008,438
P
2,986,702,360
2.71
June 30
2015
INTEREST RATE COVERAGE RATIO
NET INCOME
Add:
Provision for income tax
Finance cost
Less:
Interest income
EBIT
Depreciation and amortization
EBITDA
Finance cost
Finance Cost Coverage Ratio
2014
=211,327,655
P
=174,372,270
P
90,441,508
17,056,244
107,497,752
74,551,079
19,061,117
93,612,196
1,183,575
317,641,832
187,322,519
504,964,351
17,056,244
29.61
2,447,332
265,537,134
142,473,683
408,010,817
19,061,117
21.41
June 30
2015
2014
PROFITABILITY RATIOS
Net income
Revenue
Net Income Margin
=211,327,655
P
14,823,696,954
1.43%
=174,372,270
P
12,960,218,323
1.35%
Net income
Total assets CY
Total assets PY
Average total assets
Return on Total Assets
P211,327,655
=
7,403,683,225
7,467,633,116
7,435,658,171
2.84%
P174,372,270
=
7,467,633,116
5,866,114,195
6,666,873,656
2.62%
Net income
Total equity CY
Total equity PY
Average total equity
Return on Equity
=211,327,655
P
3,202,185,269
3,418,157,429
3,310,171,349
6.38%
=174,372,270
P
3,418,157,429
2,290,908,594
2,854,533,012
6.11%
F-71
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F-123
F-124
INDEX TO THE FINANCIAL STATEMENTS AND SUPPLEMENTARY
SCHEDULES
Schedule
Contents
A
Financial Assets
B
Amounts Receivable from Directors, Officers, Employees, Related
Parties, and Principal Stockholders (Other than Related Parties)
C
Amounts Receivable from Related Parties which are Eliminated
during the Consolidation of Financial Statements
D
Intangible Assets - Other Assets
E
Long-Term Debt
F
Indebtedness to Related Parties
G
Guarantees of Securities of Other Issuers
H
Capital Stock
I
Reconciliation of Retained Earnings Available for Dividend Declaration
J
Map Showing the Relationships Between and Among the Companies in the
Group, its Ultimate Parent Company and Co-subsidiaries
K
Schedule of All Effective Standards and Interpretations Under Philippine Financial
Reporting Standards
L
Financial Ratios
F-125
SCHEDULE A
METRO RETAIL STORES GROUP, INC.
(Formerly Valueshop Market Market, Inc.)
SUPPLEMENTARY SCHEDULE OF FINANCIAL ASSETS
DECEMBER 31, 2014
Name of Issuing entity and association
of each issue
Cash
Receivables
Trade
Rentals
Number of shares or
principal amount of Amount shown in
the balance sheet
bonds and notes
–
=1,625,731,425
P
–
–
−
F-126
803,449,997
27,864,316
=2,457,045,738
P
Income
received
or accrued
=15,633,815
P
–
–
=15,633,815
P
SCHEDULE B
METRO RETAIL STORES GROUP, INC.
(Formerly Valueshop Market Market, Inc.)
SUPPLEMENTARY SCHEDULE OF AMOUNTS RECEIVABLE FROM
DIRECTORS, OFFICERS, EMPLOYEES, RELATED PARTIES, AND
PRINCIPAL STOCKHOLDERS (OTHER THAN RELATED PARTIES)
DECEMBER 31, 2014
Balance at
Name and Designation beginning of
of debtor
period
N/A
N/A
Additions
N/A
F-127
Amounts
collected
N/A
Current
N/A
Balance
at the end of
Not Current the period
N/A
N/A
SCHEDULE C
METRO RETAIL STORES GROUP, INC.
(Formerly Valueshop Market Market, Inc.)
SUPPLEMENTARY SCHEDULE OF AMOUNTS RECEIVABLE FROM
RELATED PARTIES WHICH ARE ELIMINATED DURING THE
CONSOLIDATION OF FINANCIAL STATEMENTS
DECEMBER 31, 2014
Total Eliminated Receivables/Payables
Receivable
Balance
N/A
F-128
Payable Balance
N/A
Current Portion
N/A
SCHEDULE D
METRO RETAIL STORES GROUP, INC.
(Formerly Valueshop Market Market, Inc.)
SUPPLEMENTARY SCHEDULE OF INTANGIBLE ASSETS - OTHER
ASSETS
DECEMBER 31, 2014
Description
Beginning
Balance
Additions at
cost
Charged to
cost and
expenses
N/A
N/A
N/A
N/A
F-129
Charged to
other
accounts
Other
changes
additions
(deductions)
Ending
Balance
N/A
N/A
N/A
SCHEDULE E
METRO RETAIL STORES GROUP, INC.
(Formerly Valueshop Market Market, Inc.)
SUPPLEMENTARY SCHEDULE OF LONG-TERM DEBT
DECEMBER 31, 2014
Title of Issue and type of obligation
N/A
Long-term Debt
Amount shown under Amount shown under
caption "current portion caption “long-term
Amount authorized of long-term” in related debt” in related balance
by indenture
balance sheet
sheet
N/A
N/A
N/A
F-130
SCHEDULE F
METRO RETAIL STORES GROUP, INC.
(Formerly Valueshop Market Market, Inc.)
SUPPLEMENTARY SCHEDULE OF INDEBTEDNESS TO RELATED
PARTIES (LONG-TERM LOANS FROM RELATED COMPANIES)
DECEMBER 31, 2014
Indebtedness to related parties (Long-term loans from Related Companies)
Name of related party
Balance at beginning of period
Balance at end of period
N/A
N/A
N/A
F-131
SCHEDULE G
METRO RETAIL STORES GROUP, INC.
(Formerly Valueshop Market Market, Inc.)
SUPPLEMENTARY SCHEDULE OF GUARANTEES OF SECURITIES OF
OTHER ISSUERS
DECEMBER 31, 2014
Name of issuing entity of
securities guaranteed by the
company for which this
statement is filed
N/A
Guarantees of Securities of Other Issuers
Title of issue of
Amount owned
Total amount
each class of
by person for
securities
guaranteed and
which statement
guaranteed
outstanding
is file
N/A
N/A
N/A
F-132
Nature of
guarantee
N/A
SCHEDULE H
METRO RETAIL STORES GROUP, INC.
(Formerly Valueshop Market Market, Inc.)
SUPPLEMENTARY SCHEDULE OF CAPITAL STOCK
DECEMBER 31, 2014
Title of Issue
Common Shares
Preferred Shares
Number of
shares
authorized
Number of
shares issued
and outstanding
as shown under
related balance
sheet caption
10,000,000,000
2,524,000,000
–
–
10,000,000,000
2,524,000,000
Capital Stock
Number of
shares reserved
for options
warrants,
conversion and
other rights
Number of
shares held by
related parties
Directors,
officers and
employees
–
–
–
2,523,999,990
–
2,523,999,990
10
F-133
–
10
Others
–
–
–
SCHEDULE I
METRO RETAIL STORES GROUP, INC.
(Formerly Valueshop Market Market, Inc.)
SUPPLEMENTARY SCHEDULE OF RETAINED EARNINGS AVAILABLE
FOR DIVIDEND DECLARATION
DECEMBER 31, 2014
Unappropriated Retained Earnings, beginning
=1,430,400,283
P
Add (Less): adjustments
Gain on fair value adjustment of investment property - net of tax
Treasury shares
Unappropriated Retained Earnings as adjusted, beginning
Net income based on the face of AFS
–
–
1,430,400,283
628,870,419
Less: Non-actual/unrealized income net of tax
Equity in net income of associate/joint venture
Unrealized foreign exchange gain – net (except those
attributable to Cash and Cash Equivalents) Unrealized
gain
Fair value adjustment (M2M gains)
Fair value adjustment of Investment Property resulting to gain
adjustment due to deviation from PFRS/GAAP – gain
Other unrealized gains or adjustments to the retained earnings as a
result of certain transactions accounted for under the PFRS
Add: Non-actual losses
Depreciation on revaluation increment (after tax)
Adjustment due to deviation from PFRS/GAAP – loss
Loss on fair value adjustment of investment property
(after tax)
Net Income Actual/Realized
–
–
–
–
–
–
–
–
–
628,870,419
Less: Other adjustments
Acquisition of retail business enterprise
Dividend declarations during the period
1,592,630,067
−
Unappropriated Retained Earnings, as adjusted, ending
F-134
=466,640,635
P
F-135
Southeast
Asian Mining
Power
100%
Metro
Superstores
Group, Inc.
100%
100%
100%
Newport
City Plaza
Store,Inc.
Market
Savers
Tacloban
Wealthbank
Development
Corporation
Metro Value
Ventures,
Inc.
100%
Vicsal
Investments,
Inc.
100%
97%
Vicsal (PSCAMC), Inc.
100%
Vicsal
Development Corp.
Mamerto
Escano
100%
Iprocess
Solutions,
Inc.
100%
Filipino
Fund, Inc.
100%
Beverly Hills
Corporation
89%
2%
Metro Retail
Stores
Group Inc.
98%
Value Shop Stores,
Inc.
METRO RETAIL STORES GROUP, INC.(Formerly Valueshop Market Market, Inc.)
MAP SHOWING THE RELATIONSHIPS BETWEEN AND AMONG THE COMPANIES IN THE GROUP, ITS
ULTIMATE PARENT COMPANY AND CO-SUBSIDIARIES
DECEMBER 31, 2014
SCHEDULE J
SCHEDULE K
METRO RETAIL STORES GROUP, INC.
(Formerly Valueshop Market Market, Inc.)
LIST OF EFFECTIVE STANDARDS AND INTERPRETATIONS
DECEMBER 31, 2014
PHILIPPINE FINANCIAL REPORTING STANDARDS AND
INTERPRETATIONS
Effective as of December 31, 2014
Adopted
Framework for the Preparation and Presentation of Financial
Statements
Conceptual Framework Phase A: Objectives and qualitative
characteristics
9
PFRSs Practice Statement Management Commentary
9
Not Adopted
Not
Applicable
Philippine Financial Reporting Standards
PFRS 1
(Revised)
First-time Adoption of Philippine Financial Reporting
Standards
9
Amendments to PFRS 1 and PAS 27: Cost of an
Investment in a Subsidiary, Jointly Controlled Entity or
Associate
9
Amendments to PFRS 1: Additional Exemptions for
First-time Adopters
9
Amendment to PFRS 1: Limited Exemption from
Comparative PFRS 7 Disclosures for First-time
Adopters
9
Amendments to PFRS 1: Severe Hyperinflation and
Removal of Fixed Date for First-time Adopters
9
Amendments to PFRS 1: Government Loans
9
Amendments to PFRS 1: Borrowing costs
9
Amendments to PFRS 1: Meaning of “Effective PFRSs”
PFRS 2
Not early adopted
Share-based Payment
9
Amendments to PFRS 2: Vesting Conditions and
Cancellations
9
Amendments to PFRS 2: Group Cash-settled Sharebased Payment Transactions
9
Amendments to PFRS 2: Definition of Vesting
Condition
PFRS 3
(Revised)
PFRS 4
Not early adopted
9
Business Combinations
Amendments to PFRS 3: Accounting for Contingent
Consideration in a Business Combination
Not early adopted
Amendments to PFRS 3: Scope Exceptions for Joint
Arrangements
Not early adopted
Insurance Contracts
9
Amendments to PAS 39 and PFRS 4: Financial
Guarantee Contracts
9
F-136
-2-
PHILIPPINE FINANCIAL REPORTING STANDARDS AND
INTERPRETATIONS
Effective as of December 31, 2014
PFRS 5
Adopted
Not early adopted
9
PFRS 6
Exploration for and Evaluation of Mineral Resources
PFRS 7
Financial Instruments: Disclosures
9
Amendments to PFRS 7: Transition
9
Amendments to PAS 39 and PFRS 7: Reclassification of
Financial Assets
9
Amendments to PAS 39 and PFRS 7: Reclassification of
Financial Assets - Effective Date and Transition
9
Amendments to PFRS 7: Improving Disclosures about
Financial Instruments
9
Amendments to PFRS 7: Disclosures - Transfers of
Financial Assets
9
Amendments to PFRS 7: Disclosures - Offsetting
Financial Assets and Financial Liabilities
9
PFRS 9
PFRS 10
Amendments to PFRS 7: Mandatory Effective Date of
PFRS 9 and Transition Disclosures
Not early adopted
Amendments to PFRS 7: Amendments to PFRS 7:
Servicing Contracts
Not early adopted
Applicability of the Amendments to PFRS 7 to
Condensed Interim Financial Statements
Not early adopted
9
Operating Segments
Amendments to PFRS 8: Aggregation of Operating
Segments and Reconciliation of the Total of the
Reportable Segments’ Assets to the Entity’s Assets
Not early adopted
Financial Instruments (2010 version)
Not early adopted
Financial Instruments - Hedge Accounting and
amendments to PFRS 9, PFRS 7 and PAS 39 (2013
version)
Not early adopted
Financial Instruments (2014 or final version)
Not early adopted
Amendments to PFRS 9: Mandatory Effective Date of
PFRS 9 and Transition Disclosures
Not early adopted
Consolidated Financial Statements
9
Amendments to PFRS 10, PFRS 12 and PAS 27:
Investment Entities
9
Amendment to PFRS 10: Sale or Contribution of Assets
between an Investor and its Associate or Joint Venture
PFRS 11
Not
Applicable
9
Non-current Assets Held for Sale and Discontinued
Operations
Amendments to PFRS 5: Changes in Methods of
Disposal
PFRS 8
Not Adopted
Not early adopted
9
Joint Arrangements
Amendment to PFRS 11: Accounting for Acquisitions
F-137
Not early adopted
-3-
PHILIPPINE FINANCIAL REPORTING STANDARDS AND
INTERPRETATIONS
Effective as of December 31, 2014
Adopted
Not Adopted
Not
Applicable
of Interests in Joint Operations
PFRS 12
PFRS 13
Disclosure of Interests in Other Entities
9
Amendments to PFRS 10, PFRS 12 and PAS 27:
Investment Entities
9
9
Fair Value Measurement
Amendments to PFRS 13: Short-term receivable and
payables
Not early adopted
Amendments to PFRS 13: Portfolio Exception
Not early adopted
PFRS 14
Regulatory Deferral Accounts
Not early adopted
PFRS 15
Revenue from Contracts with Customers
Not early adopted
Philippine Accounting Standards
PAS 1
(Revised)
Presentation of Financial Statements
9
Amendment to PAS 1: Capital Disclosures
9
9
Amendments to PAS 32 and PAS 1: Puttable Financial
Instruments and Obligations Arising on Liquidation
Amendments to PAS 1: Presentation of Items of Other
Comprehensive Income
9
Amendments to PAS 1: Clarification of the
requirements for comparative information
9
PAS 2
Inventories
9
PAS 7
Statement of Cash Flows
9
PAS 8
Accounting Policies, Changes in Accounting Estimates
and Errors
9
PAS 10
Events after the Balance Sheet Date
9
PAS 11
Construction Contracts
PAS 12
Income Taxes
9
Amendment to PAS 12 - Deferred Tax: Recovery of
Underlying Assets
9
Property, Plant and Equipment
9
Amendment to PAS 16: Classification of servicing
equipment
9
PAS 16
9
Amendment to PAS 16: Revaluation Method Proportionate Restatement of Accumulated
Depreciation
Not early adopted
Amendment to PAS 16 and PAS 38: Clarification of
Acceptable Methods of Depreciation and Amortization
Not early adopted
Amendments to PAS 16: Bearer Plants
Not early adopted
PAS 17
Leases
9
PAS 18
Revenue
9
F-138
-4-
PHILIPPINE FINANCIAL REPORTING STANDARDS AND
INTERPRETATIONS
Effective as of December 31, 2014
PAS 19
PAS 19
(Amended)
Adopted
Employee Benefits
9
Amendments to PAS 19: Actuarial Gains and Losses,
Group Plans and Disclosures
9
Employee Benefits
9
Not Adopted
Amendments to PAS 19: Defined Benefit Plans Employee Contributions
Not early adopted
Amendments to PAS 19: Regional Market Issue
regarding Discount Rate
Not early adopted
PAS 20
Accounting for Government Grants and Disclosure of
Government Assistance
PAS 21
The Effects of Changes in Foreign Exchange Rates
Not
Applicable
9
9
Amendment: Net Investment in a Foreign Operation
9
PAS 23
(Revised)
Borrowing Costs
9
PAS 24
(Revised)
Related Party Disclosures
9
Amendments to PAS 24: Key Management Personnel
9
PAS 26
Accounting and Reporting by Retirement Benefit Plans
9
PAS 27
(Amended)
Separate Financial Statements
9
Amendments to PFRS 10, PFRS 12 and PAS 27:
Investment Entities
9
Amendment to PAS 27: Equity Method in Separate
Financial Statements
PAS 28
(Amended)
Not early adopted
9
Investments in Associates and Joint Ventures
Amendment to PAS 28: Sale or Contribution of Assets
between an Investor and its Associate or Joint Venture
Not early adopted
PAS 29
Financial Reporting in Hyperinflationary Economies
9
PAS 31
Interests in Joint Ventures
9
PAS 32
Financial Instruments: Disclosure and Presentation
PAS 33
9
Amendments to PAS 32 and PAS 1: Puttable Financial
Instruments and Obligations Arising on Liquidation
9
Amendment to PAS 32: Classification of Rights Issues
9
Amendment to PAS 32: Presentation - Tax effect of
distribution to holders of equity instrument
9
Amendments to PAS 32: Offsetting Financial Assets and
Financial Liabilities
9
Earnings per Share
9
F-139
-5-
PHILIPPINE FINANCIAL REPORTING STANDARDS AND
INTERPRETATIONS
Effective as of December 31, 2014
PAS 34
Adopted
Amendments to PAS 34: Interim financial reporting and
segment information for total assets and liabilities
Not early adopted
Amendments to PAS 34: Disclosure of Information
‘elsewhere in the interim financial report’
Not early adopted
9
Amendments to PAS 36: Recoverable Amount
Disclosures for Non-Financial Assets
9
PAS 37
Provisions, Contingent Liabilities and Contingent
Assets
9
PAS 38
Intangible Assets
PAS 39
PAS 40
9
Amendments to PAS 38: Revaluation Method Proportionate Restatement of Accumulated
Amortization
Not early adopted
Amendments to PAS 16 and PAS 38: Clarification of
Acceptable Methods of Depreciation and Amortization
Not early adopted
Financial Instruments: Recognition and Measurement
9
Amendments to PAS 39: Transition and Initial
Recognition of Financial Assets and Financial
Liabilities
9
Amendments to PAS 39: Cash Flow Hedge Accounting
of Forecast Intragroup Transactions
9
Amendments to PAS 39: The Fair Value Option
9
Amendments to PAS 39 and PFRS 4: Financial
Guarantee Contracts
9
Amendments to PAS 39 and PFRS 7: Reclassification of
Financial Assets
9
Amendments to PAS 39 and PFRS 7: Reclassification of
Financial Assets - Effective Date and Transition
9
Amendments to Philippine Interpretation IFRIC-9 and
PAS 39: Embedded Derivatives
9
Amendment to PAS 39: Eligible Hedged Items
9
Amendment to PAS 39: Novation of Derivatives and
Continuation of Hedge Accounting
9
Investment Property
9
Amendment to PAS 40: Interrelationship between PFRS
3 and PAS 40
PAS 41
Not
Applicable
9
Interim Financial Reporting
Impairment of Assets
PAS 36
Not Adopted
Not early adopted
9
Agriculture
Amendment to PAS 41: Bearer Plants
F-140
Not early adopted
-6-
PHILIPPINE FINANCIAL REPORTING STANDARDS AND
INTERPRETATIONS
Effective as of December 31, 2014
Adopted
Not Adopted
Not
Applicable
Philippine Interpretations
IFRIC 1
Changes in Existing Decommissioning, Restoration and
Similar Liabilities
9
IFRIC 2
Members' Share in Co-operative Entities and Similar
Instruments
9
IFRIC 4
Determining Whether an Arrangement Contains a Lease
IFRIC 5
Rights to Interests arising from Decommissioning,
Restoration and Environmental Rehabilitation Funds
9
IFRIC 6
Liabilities arising from Participating in a Specific Market
- Waste Electrical and Electronic Equipment
9
IFRIC 7
Applying the Restatement Approach under PAS 29
Financial Reporting in Hyperinflationary Economies
9
IFRIC 8
Scope of PFRS 2
9
IFRIC 9
Reassessment of Embedded Derivatives
9
Amendments to Philippine Interpretation IFRIC–9 and
PAS 39: Embedded Derivatives
9
IFRIC 10
Interim Financial Reporting and Impairment
9
IFRIC 11
PFRS 2- Group and Treasury Share Transactions
9
IFRIC 12
Service Concession Arrangements
9
IFRIC 13
Customer Loyalty Programmes
IFRIC 14
The Limit on a Defined Benefit Asset, Minimum Funding
Requirements and their Interaction
9
Amendments to Philippine Interpretations IFRIC- 14,
Prepayments of a Minimum Funding Requirement
9
IFRIC 15
Agreements for the Construction of Real Estate
9
IFRIC 16
Hedges of a Net Investment in a Foreign Operation
9
IFRIC 17
Distributions of Non-cash Assets to Owners
9
IFRIC 18
Transfers of Assets from Customers
9
IFRIC 19
Extinguishing Financial Liabilities with Equity
Instruments
9
IFRIC 20
Stripping Costs in the Production Phase of a Surface
Mine
IFRIC 21
Levies
9
SIC-7
Introduction of the Euro
9
SIC-10
Government Assistance - No Specific Relation to
Operating Activities
9
SIC-12
Consolidation - Special Purpose Entities
9
Amendment to SIC - 12: Scope of SIC 12
9
Jointly Controlled Entities - Non-Monetary Contributions
9
SIC-13
9
9
F-141
Not early adopted
-7-
PHILIPPINE FINANCIAL REPORTING STANDARDS AND
INTERPRETATIONS
Effective as of December 31, 2014
Adopted
Not Adopted
Not
Applicable
by Venturers
9
SIC-15
Operating Leases - Incentives
SIC-21
Income Taxes - Recovery of Revalued Non-Depreciable
Assets
9
SIC-25
Income Taxes - Changes in the Tax Status of an Entity or
its Shareholders
9
SIC-27
Evaluating the Substance of Transactions Involving the
Legal Form of a Lease
SIC-29
Service Concession Arrangements: Disclosures.
9
SIC-31
Revenue - Barter Transactions Involving Advertising
Services
9
SIC-32
Intangible Assets - Web Site Costs
9
F-142
9
SCHEDULE L
METRO RETAIL STORES GROUP, INC.
(Formerly Valueshop Market Market, Inc.)
FINANCIAL RATIOS
DECEMBER 31, 2014
CURRENT / LIQUIDITY RATIOS
Current assets
Current liabilities
Current Ratios
Current assets
Merchandise inventory
Other current assets
Quick assets
Current liabilities
Quick Ratios
2014
December 31
2013
2012
=6,287,996,229
P
4,455,695,770
1.41
=5,764,314,419
P
4,168,395,145
1.38
=4,449,295,405
P
3,034,792,130
1.47
=6,287,996,229
P
3,168,232,389
624,679,213
2,495,084,627
4,455,695,770
0.56
5,764,314,419
3,189,818,672
681,780,578
1,892,715,169
4,168,395,145
0.45
=4,449,295,405
P
2,242,328,961
538,250,170
1,668,716,274
3,034,792,130
0.55
2014
SOLVENCY / DEBT-TO-EQUITY RATIOS
Current portion of loans payable
Loans payable
Debt
Equity
Less: Non-controlling interests
Equity
Add/Less: Unrealized gain (loss) - AFS
Equity
Debt to Equity Ratio
Debt
Less: Cash
Net debt
Equity
Net Debt to Equity Ratio
ASSET TO EQUITY RATIOS
Total assets
Total equity
Asset to Equity Ratios
December 31
2013
2012
=−
P
1,100,000,000
1,100,000,000
2,986,702,360
−
2,986,702,360
−
2,986,702,360
0.37
=−
P
1,200,000,000
1,200,000,000
2,625,098,117
−
2,625,098,117
−
2,625,098,117
0.46
=−
P
−
−
2,010,955,005
−
2,010,955,005
−
2,010,955,005
−
=1,100,000,000
P
1,625,731,425
(525,731,425)
2,986,702,360
(0.18)
P1,200,000,000
=
1,030,854,832
169,145,168
2,625,098,117
0.06
=−
P
876,465,817
−
2,010,955,005
−
2014
December 31
2013
2012
=8,084,008,438
P
2,986,702,360
2.71
=7,376,173,985
P
2,625,098,117
2.81
=5,606,249,294
P
2,010,955,005
2.79
F-143
INTEREST RATE COVERAGE RATIO
NET INCOME
Add:
Provision for income tax
Interest and other financing charges
Less:
Interest income
EBIT
Depreciation and amortization
EBITDA
Finance costs
Finance Costs Coverage Ratio
2014
December 31
2013
2012
=628,870,419
P
=613,479,441
P
=581,187,962
P
266,224,955
40,046,868
306,271,823
262,460,057
24,365,222
286,825,279
247,597,001
12,590,846
260,187,847
15,633,815
919,508,427
344,354,264
1,263,862,691
40,046,868
31.56
5,967,382
894,337,338
251,400,388
1,145,737,726
24,365,222
47.02
6,398,999
834,976,810
171,233,538
1,006,210,348
12,590,846
79.92
2012
2014
December 31
2013
PROFITABILITY RATIOS
Net income
Revenue
Net Income Margin
=628,870,419
P
28,541,691,392
2.20%
=613,479,441
P
25,581,484,798
2.40%
=581,187,962
P
22,660,566,237
2.56%
Net income
Total assets CY
Total assets PY
Average total assets
Return on Total Assets
=628,870,419
P
8,084,008,438
7,376,173,985
7,730,091,212
8.14%
=613,479,441
P
7,376,173,985
5,606,249,294
6,491,211,640
9.45%
=581,187,962
P
5,606,249,294
4,790,360,916
5,198,305,105
11.18%
Net income
Total equity CY
Total equity PY
Average total equity
Return on Equity
P628,870,419
=
2,986,702,360
2,625,098,117
2,805,900,239
22.41%
P613,479,441
=
2,625,098,117
2,010,955,005
2,318,026,561
26.47%
P581,187,962
=
2,010,955,005
1,426,066,850
1,718,510,928
33.82%
F-144
Metro Retail Stores Group, Inc.
Vicsal Building, corner of C.D.
Seno and W.O. Seno Streets
Guizo, North Reclamation Area
Mandaue City, Philippines
JOINT GLOBAL COORDINATORS AND LEAD UNDERWRITERS
BPI Capital Corporation
8 th Floor BPI Building
Ayala Avenue Corner Paseo de Roxas
Makati City, 1226
Philippines
Deutsche Bank AG, Hong Kong Branch
Floor 52, International Commerce Centre
1 Austin Road West, Kowloon
Hong Kong
LEGAL COUNSELS TO THE ISSUER AND THE SELLING SHAREHOLDERS
as to United States Federal and New York Law
as to Philippine Law
Latham & Watkins
18/F, One Exchange Square
8 Connaught Place
Central, Hong Kong
Angara Abello Concepcion Regala & Cruz
22/F ACCRALAW Tower
Second Avenue corner 30th Street, Crescent Park
West Bonifacio Global City
0399 Taguig City, Philippines
LEGAL COUNSELS TO JOINT GLOBAL COORDINATORS AND LEAD UNDERWRITERS
as to United States Federal and New York Law
as to Philippine Law
Milbank, Tweed, Hadley & McCloy LLP
30/F Alexandra House
18 Chater Road
Central
Hong Kong
Romulo Mabanta Buenaventura
Sayoc & de los Angeles
21/F Philamlife Tower
8767 Paseo de Roxas
Makati City, 1226
Philippines
INDEPENDENT AUDITOR
SyCip Gorres Velayo & Co.
6760 Ayala Avenue
1226 Makati City
Philippines