San Miguel Corporation

Annual Report Analysis

Chin Nieve S. Figura

BSA III
Disclaimer

This analysis is limited only on analyzing the Liabilities and Equity section of the San
Miguel Corporation. It does not include the asset section and it does not reflect the whole
performance of the company.
 Introduction

Company Description

San Miguel Corporation (SMC) was originally founded in 1890 as a single brewery in the
Philippines. The Company has since then transformed itself from a beverage, food and
packaging business into a diversified conglomerate with businesses in fuel and oil, energy,
infrastructure, and real estate industries.

The Company's product portfolio includes beer, spirits, non-alcoholic beverages, poultry,
animal feeds, flour, fresh and processed meats, dairy products, coffee, various packaging
products, and a range of refined petroleum products.

SMC has strategic partnerships with international companies, among them are Kirin
Holdings Company, Limited for beer, Hormel Foods International Corporation for processed
meats, Nihon Yamamura Glass Company, Ltd., Fuso Machine & Mold Mfg. Co. Ltd. and Can-
Pack S.A. for packaging products; and Korea Water Resources Corporation for its power
business.

The Company's subsidiaries include San Miguel Brewery, Inc.; Ginebra San Miguel, Inc.,
San Miguel Food and Beverage, Inc., SMC Global Power Holdings Corp., SEA Refinery
Corporation, San Miguel Holdings Corp., and San Miguel Properties, Inc.

Vision

We are San Miguel. Guided by a strong sense of social, environmental and economic
responsibility, our businesses will lead efforts to deliver on national goals, setting the pace of
progress in the Philippines.

Mission

To provide goods and vital services well within the reach of every Filipino, making
everyday life a celebration.
Core Values

 Do what is right. San Miguel believe in profit with honor. This simply means doing what
the company say company do and acting with honesty, fairness and integrity.
 Believe in doing best. San Miguel will give every single person the best they can offer.
Also, they passionate about our brands, products and services.
 Take accountability for their decisions. San Miguel hold accountable for delivering
results, they keep commitments and take responsibility for their actions.
 Think innovation. San Miguel innovation lends agility and driven by understanding of
what their customers and stakeholders need.
 Help people succeed. San Miguel believe in treating each other with respect. They
cultivate a culture that recognizes the individuality and contributions of each of their
employees, helping them to become productive and responsible members of society.
 Good neighbor. San Miguel are a positive force in the communities. Also believe in
doing what is good for the greatest number of people.
 Advocate sustainable development. San Miguel believe in using only what they need and
integrating sustainability practices into operations. Water stewardship, energy
optimization and reducing waste are their key environmental priorities.

Strategy

San Miguel’s goal is to help people enjoy and make progress in their lives through the
many products and services that our company offers. We want to give every customer and
consumer we touch access to the best we can offer—whether in terms of quality, or affordability
or choice.

The strategy for achieving these goals has five major elements which are common to both
our traditional and new businesses:

1. Enhance value of our established businesses.

Aim to enhance the value of our established businesses, ever striving to achieve even
greater efficiencies and operational excellence. Strengthen brands by improving product
visibility and targeting areas where there is room for growth in market share.
 2. Continue to diversify into industries that underpin the development and growth of
the Philippine economy.
In addition to organic growth, they continue to seek strategic acquisition and greenfield
opportunities, positioning businesses in a way to best contribute to the country’s economic
growth and industrial development.

3. Identify and pursue synergies across businesses through vertical integration,

platform matching and channel management.
Create an even broader distribution network for their products and expand customer base
by identifying synergies across their various businesses. In addition, pursuing plans to
integrate the production and distribution facilities for its both established and newly acquired
businesses to generate additional cost savings and efficiencies.

4. Invest in and develop businesses with market leading positions.

San Miguel intends to further enhance market position in the Philippines by leveraging
the company’s financial resources and experience to allow it to continue to introduce new
products and services. Potential investments to develop existing businesses include building
additional service and micro-filling stations, constructing new power plants, expanding
company’s power generation portfolio and expanding food distribution networks. Also
believe that strong domestic market position provides an effective platform to develop
markets for an expanding product portfolio. Continue to invest in and develop businesses that
have the potential to gain leading positions in their respective markets and industries.

5. Adopt world-leading practices and joint development of businesses.

Develop strategic partnerships with global industry leaders, including Kirin in the
beverages business and Nihon Yamamura Glass in our packaging business. These
partnerships provide marketing and expansion opportunities, and potentially provide liquidity
and opportunities for SMC to divest minority stakes in its businesses as other opportunities
arise.

History
 Best known for its internationally distributed beer, San Miguel Corporation can only be
described in superlatives. It is Southeast Asia's oldest and largest brewer. With nearly 33,000
employees, the company also ranks among the Philippines' largest, most consistently profitable,
and most admired manufacturers. San Miguel's flagship beer utterly dominates both the Filipino
and Hong Kong markets, with 90 percent and 60 percent respective shares. A 1988 brief in The
Economist noted that Filipinos order "beer" at bars and restaurants, knowing that they'll receive a
San Miguel. But San Miguel didn't make it to the top of the regional heap on good beer alone. It
also makes agricultural feeds, processed and fresh meats, ready-to-eat foods, packaging, and
non-alcoholic beverages. By the early 1990s, beer constituted about half of San Miguel's annual
turnover. In fact, the conglomerate has grown over the course of its more than 105 years in
business to generate four percent of its home country's gross national product and six percent of
tax revenues.

San Miguel grew to its commanding position in the Southeast Asian market in spite of
political upheaval, infrastructure glitches, and high taxes. It achieved its status through
aggressive competitive strategies and shrewd long-range planning over the decades. Having
diversified into agribusiness, foods, and packaging in the mid-20th century, the conglomerate
dominated its domestic markets by the early 1980s. At that time, San Miguel undertook an
aggressive program of international expansion that came to fruition in the mid-to-late 1990s.

Don Enrique Ma Barretto de Ycaza established the brewery, Southeast Asia's first, in
1890 as La Fabrica de Cerveza de San Miguel. He named the company after the section of
Manila in which he lived and worked. He was soon joined by Don Pedro Pablo Roxas, who
brought with him a German brewmaster. San Miguel's brew won its first major award at 1895's
Philippines Regional Exposition, and led its imported competitors by a five-to-one margin by the
turn of the 20th century. The company was incorporated in 1913 following the death of Don
Pedro Roxas.

By that time, San Miguel was exporting its namesake brew to Hong Kong, Shanghai, and Guam.
Andrés Soriano y Roxas joined San Miguel in 1918, beginning a multi-generation (albeit
interrupted) reign of Sorianos. In 1990, San Miguel's Beer Bulletin noted that "Beer was the
heart of San Miguel's business, and the soul from which emanated all its other businesses."
Andrés Soriano initiated the company's diversification, which proceeded rather logically via
vertical integration. The experience cultivating barley naturally evolved into other agricultural
businesses, for example. San Miguel gathered steam in the 1920s, when the company expanded
into nonalcoholic beverages with the creation of the Royal Soft Drinks Plant in 1922. San Miguel
entered the frozen foods market in 1925 with the creation of the Magnolia Ice Cream Plant. By
the early 1990s, Magnolia held four-fifths of the frozen dessert market. Soriano created the first
national Coca-Cola bottling and distribution franchise in 1927. The Philippine company owned
70 percent of the joint venture, which grew to become Coke's sixth-largest operation. By the
early 1990s, San Miguel had captured over two-thirds of the domestic soft drink market.

Although World War II interrupted San Miguel's brewing business, the company got
back on the growth track in the postwar era, acquiring production facilities in Hong Kong in
1948. The company also resumed its program of vertical integration, even building its own
power plant so that it would not be dependent on the Philippines' notoriously poor infrastructure.
San Miguel also built a liquid carbon dioxide plant, glass bottle manufacturing facilities, and a
carton plant during the postwar period.

The company shortened its name to San Miguel Corporation in the early 1960s, and
Andrés Soriano, Jr. advanced to the company's presidency upon his father's 1964 death. He has
been credited with instituting modern management theory, including decentralization along
product lines. Soriano Jr. continued to diversify the food business during the early 1980s,
expanding into poultry production in 1982, building an ice cream plant in 1983, adding shrimp
processing and freezing in 1984, and adding beef and pork production in 1988.

Over the decades, San Miguel earned a formidable reputation as a fierce competitor. The
company used all the tools at its disposal. When it could not beat a rival through traditional
means, it acquired and intimidated upstarts into submission. The Filipino government's
complicity didn't hurt, either. Long protected by high tariffs, San Miguel encountered its first
major competitor in the beer market in the late 1970s. That's when Asia Brewery entered the
segment. The rivalry between Asia Brewery and San Miguel came to a head in 1988, when Asia
Brewery cannily introduced a bargain-priced "brand" called, simply, "Beer." The imported
product looked and tasted like its primary competitor, playing upon the fact that in the
Philippines, the San Miguel brand was synonymous with "beer." It was a creative counter to San
Miguel's notoriously aggressive and sometimes cutthroat competitive strategy, which had
reportedly included "attempts to sabotage [Asia Brewery's] sales network and smash its empty
bottles." Asia Brewery, whose owner was reputedly connected to Marcos sympathizers, even
hired away San Miguel's brew master.

Although San Miguel enjoyed virtual monopolies in its markets, that status did not shield
it from the political machinations of the Philippines. The reign of Ferdinand Marcos brought this
element into sharp focus in the 1980s, when an intra-familial proxy fight at San Miguel turned
political. The dispute was instigated in 1983 by Enrique Zobel, a wealthy cousin of the Sorianos
who owned the Ayala banking and real estate group and sided with the Marcos government.
Unable to execute a takeover on his own, Zobel sold his 19.5 percent stake to Eduardo Cojuanco,
Jr. (known in some circles as "the coconut king"). Although Cojuanco was a cousin of Marcos
opponent Corazon Aquino, he too sided with Marcos. Cojuanco's Coconut Industry Investment
Fund (a.k.a. United Coconut Planters Bank) accumulated an additional 31 percent of San Miguel,
giving him effective control of the conglomerate and leaving the Soriano family with a mere
three percent. Cojuanco scooped up the chairmanship in 1984, when Andrés Soriano Jr. died of
cancer. But his reign over San Miguel lasted only two years. When Marcos lost the 1986 election
to Aquino, Cojuanco and many other Marcos backers fled the country.

Andrés Soriano III resumed San Miguel's chairmanship and launched a campaign to
reclaim the family legacy that year. But when the new chairman tried to buy back the abandoned
shares, he was blocked by an unexpected agency; the Aquino administration's Presidential
Commission on Good Government (PCGG) assumed control (but not legal ownership) of the
51.4-percent stake and refused to relinquish it. The controlling interest carried nine of San
Miguel's 15 directors seats with it. The PCGG continued to tend its San Miguel stake into the
early 1990s, but it acceded de facto control of the conglomerate to Andrés Soriano III via a
management contract with his A. Soriano Corp.

Soriano III was characterized by Business Week's Maria Shao as an "introverted, almost
reclusive" leader. Schooled at the University of Pennsylvania's prestigious Wharton School,
Soriano III had dabbled in investment banking in New York City before returning to the
Philippines. Soriano tried everything from legal machinations to joint-venture buyout schemes to
wrest control of San Miguel from the PCGG, but to no avail.
 In 1990, San Miguel threw a five-month party to celebrate its centenary. President
Corazon Aquino called San Miguel "the best showcase of a Filipino company, a shining example
of creative management and commitment to its public."  The Economist contrastingly called San
Miguel "a showcase for much that is wrong with business in the Philippines." The latter assertion
was substantiated that same year, when Cojuanco returned to the Philippines (the Journal of
Commerce noted that he "sneaked back into the country [in 1990] despite a ban on his return") to
lay claim to his holdings. Notwithstanding the circumstances of his repatriation, a November
1992 article in Asian Business noted that "Cojuanco [was] expected to win eventually." All the
same, Soriano III continued to hold the chairmanship through 1995.

Soriano III led the company to a new era of dramatic growth based on
internationalization. This move was motivated by a number of factors. First, San Miguel had
developed its core Philippine and Hong Kong markets to maturity and was faced with relatively
slow growth there. Soriano hoped to expand into other countries and thereby mitigate the effects
of the Philippines' unstable economy. Finally, the leader wanted to head off encroaching
competition from the world's biggest breweries, namely Anheuser-Busch and Miller of the
United States, Kirin of Japan, and BSN of France. In an interview with Asian Business' Michael
Selwyn, San Miguel President Francisco C. Eizmendi Jr. said that "what we are aiming to do is
be a David among the Goliaths of international business, without losing our grip on the local
market."

Having determined that overseas growth was imperative, Soriano allocated US$1 billion
to a five-year strategic internationalization program that focused on shaping up domestic
operations, then progressing to licensing and exporting, overseas production, and finally to
distribution of non-beer products. San Miguel's plant modernization plan involved sweeping
improvements, from computerization to quality circles. These efforts laid the groundwork that
would enable the company to compete with the world's food and beverage multinationals. A
subsequent decentralization created a holding company structure with the 18 non-beer operations
positioned as subsidiaries. This corporate reorganization freed the spun-off businesses from the
bureaucratic shackles of a large conglomerate. In the course of this multifaceted effort to attain
optimum efficiency, San Miguel reduced its work force by more than 16 percent, from a 1989
high of 39,138 to 32,832 by 1993. Asian Business noted that these programs helped increase
profit per employee by 56 percent in 1991 alone.

With its domestic "ducks in a row," San Miguel turned to the next stage in its
internationalization, beer licensing, and exporting initiative. Although the company had exported
beer for most of its history, this effort was intensified dramatically in the late 1980s. San
Miguel's beer exports grew by 150 percent from 1985 to 1989 alone, and the brand was soon
exported to 24 countries, including all of Asia's key markets as well as the United States,
Australia, and the Middle East. Once the core brand was established in a particular market, San
Miguel would begin to create production facilities, sometimes on an independent basis and
sometimes in concert with an indigenous joint-venture partner. By 1995, San Miguel had
manufacturing plants in Hong Kong, China, Indonesia, Vietnam, Taiwan, and Guam.

Thus, in spite of the overarching quarrel regarding San Miguel's ownership (not to
mention other problems endemic to operating in the Philippines), the company's sales quintupled
from P12.23 billion in 1986 to P68.43 billion by 1994. The conglomerate's heavy investment in
the internationalization program paid off handsomely; net income increased twice as fast, from
P1.11 billion to P11.86 billion over the same period. Under the continuing direction of its 44-
year-old leader in 1996, San Miguel was well-positioned to take advantage of the dramatic
growth forecast for the Asia-Pacific region in the 1990s and beyond.

Proud Beginnings

Established in 1890, La Fabrica de Cerveza de San Miguel, Southeast Asia’s first

brewery produced and bottled what would eventually become one of the bestselling beers in the
region. Within the span of a generation, San Miguel Beer would become an icon among beer
drinkers.

By 1914, San Miguel Beer was being exported from its headquarters in Manila to
Shanghai, Hong Kong and Guam. A pioneer in Asia, San Miguel established a brewery in Hong
Kong in 1948, the first local brewer in the crown colony.

Today, San Miguel Beer–the Company’s flagship product–is one of the largest selling
beers and among the top 10 beer brands in the world. While brewing beer is the company’s
heritage, San Miguel subsequently branched out into the food and packaging businesses.
 From the original cerveza that first rolled off the bottling line, San Miguel Corporation
has since expanded its portfolio to produce a wide range of popular beverage, food and
packaging products which have–for over a century–catered to generations of consumers’ ever
changing tastes. It has also diversified into heavy industries including power and other utilities,
mining, energy, tollways and airports.

The Company’s manufacturing operations extend beyond the Philippines to Hong Kong,
China, Indonesia, Vietnam, Thailand and Malaysia. Its products are exported to major markets
around the world. Continuing a tradition of product quality, San Miguel is capitalizing on its
unique strengths in brands and distribution to weave its products more deeply into the fabric of
everyday life. Not just in the Philippines but in the Asia-Pacific region.

World Class Partners

San Miguel’s partnerships with major international companies have given the Company
access to the latest technologies and skills. Our marketplace experience, technical expertise, and
innovation capabilities, while largely homegrown, also reflect our long term partnerships with
world class players.

San Miguel’s joint venture partners include Hormel Foods Corporation, Yamamura Glass
and Fuso Machine and Mold Manufacturing of Japan. A strategic equity investment in San
Miguel by Japan’s leading brewer and global player, Kirin Brewery Company, Ltd. has further
enhanced San Miguel’s competitive position in Asia, a region in which it is already well placed.

This analysis would seek to evaluate the financial performance of San Miguel
Corporation in the section of liability and equity. Specifically, this study probes on the computed
financial instruments based on the available data (audited financial statements) and assess how
did the company performed in handling corporate finance in the years covered by this study.
Thus, the financial statements of the company are presented fairly, in all material respects and
will continue to operate in the near foreseeable future.
 Background of the Analyzes

San Miguel Corporation retained its title as the Philippines largest company in sales.
The Philippines has become a small market for a conglomerate like SMC that has global
ambitions. Over the past year's SMC has acquired companies like NFL, Berri, Del Monte
Pacific, King's Creameries, Guolene Packaging Companies, etc. and formed joint ventures with
companies like NutriAsia Inc. and acquired Del Monte brand rights for the Philippines and the
Indian sub-continent.

Liability

A financial liability is derecognized when the obligation under the liability is

discharged or cancelled, or expires. When an existing financial liability is replaced by another
from the same lender on substantially different terms, or the terms of an existing liability are
substantially modified, such an exchange or modification is treated as a derecognition of the
original liability and the recognition of a new liability. The difference in the respective carrying
amounts is recognized in the consolidated statements of income.

Other Financial Liabilities. This category pertains to financial liabilities that are not
designated or classified as at FVPL. After initial measurement, other financial liabilities are
carried at amortized cost using the effective interest method. Amortized cost is calculated by
taking into account any premium or discount and any directly attributable transaction costs that
are considered an integral part of the effective interest rate of the liability. The effective interest
rate amortization is included in “Interest expense and other financing charges” account in the
consolidated statements of income. Gains and losses are recognized in the consolidated
statements of income when the liabilities are derecognized as well as through the amortization
process.

Debt issue costs are considered as an adjustment to the effective yield of the related
debt and are deferred and amortized using the effective interest method. When a loan is paid, the
related unamortized debt issue costs at the date of repayment are recognized in the consolidated
statements of income.

The Group’s liabilities arising from its trade or borrowings such as loans payable,
accounts payable and accrued expenses, long-term debt, finance lease liabilities and other
noncurrent liabilities are included under this category (Notes 19, 20, 21, 22, 34, 40 and 41).

The Group uses derivative financial instruments, such as forwards, swaps and options
to manage its exposure on foreign currency, interest rate and commodity price risks. Derivative
financial instruments are initially recognized at fair value on the date the derivative contract is
entered into and are subsequently remeasured at fair value. Derivatives are carried as financial
assets when the fair value is positive and as financial liabilities when the fair value is negative.
Changes in the fair value of derivatives that are not designated as hedging instruments are
recognized in the consolidated statements of income.

Equity

Common shares are classified as equity. Incremental costs directly attributable to the
issue of common shares and share options are recognized as a deduction from equity, net of any
tax effects.

Preferred shares are classified as equity if they are non-redeemable or redeemable only
at the option of the Parent Company, and any dividends thereon are discretionary. Dividends
thereon are recognized as distributions within equity upon approval by the BOD of the Parent
Company. Preferred shares are classified as a liability if they are redeemable on a specific date or
at the option of the shareholders, or if dividend payments are not discretionary. Dividends
thereon are recognized as interest expense in the consolidated statements of income as accrued.
 Additional Paid-in Capital. When the shares are sold at premium, the difference
between the proceeds and the par value is credited to the “Additional paid-in capital” account.
When shares are issued for a consideration other than cash, the proceeds are measured by the fair
value of the consideration received. In case the shares are issued to extinguish or settle the
liability of the Parent Company, the shares are measured either at the fair value of the shares
issued or fair value of the liability settled, whichever is more reliably determinable.

Retained Earnings Retained earnings represent the accumulated net income or losses,
net of any dividend distributions and other capital adjustments. Appropriated retained earnings
represent that portion which is restricted and therefore not available for any dividend declaration.

Treasury Shares Own equity instruments which are reacquired are carried at cost and
deducted from equity. No gain or loss is recognized on the purchase, sale, reissuance or
cancellation of the Parent Company’s own equity instruments. When the shares are retired, the
capital stock account is reduced by its par value and the excess of cost over par value upon
retirement is debited to additional paid-in capital to the extent of the specific or average
additional paid-in capital when the shares were issued and to retained earnings for the remaining
balance.

Provisions are recognized when: (a) the Group has a present obligation (legal or
constructive) as a result of past events; (b) it is probable (i.e., more likely than not) that an
outflow of resources embodying economic benefits will be required to settle the obligation; and
(c) a reliable estimate of the amount of the obligation can be made. Where some or all of the
expenditure required to settle a provision is expected to be reimbursed by another party, the
reimbursement is recognized as a separate asset only when it is virtually certain that
reimbursement will be received. The amount recognized for the reimbursement shall not exceed
the amount of the provision. Provisions are reviewed at each reporting date and adjusted to
reflect the current best estimate. If the effect of the time value of money is material, provisions
are determined by discounting the expected future cash flows at a pre-tax rate that reflects
current market assessment of the time value of money and the risks specific to the liability.
Where discounting is used, the increase in the provision due to the passage of time is recognized
as interest expense.
 Basic and Diluted Earnings Per Common Share (EPS) is computed by dividing the net
income for the period attributable to equity holders of the Parent Company, net of dividends on
preferred shares, by the weighted average number of issued and outstanding common shares
during the period, with retroactive adjustment for any stock dividends declared. Diluted EPS is
computed in the same manner, adjusted for the effect of all potential dilutive debt or equity
instruments.

Contingent liabilities are not recognized in the consolidated financial statements. They
are disclosed in the notes to the consolidated financial statements unless the possibility of an
outflow of resources embodying economic benefits is remote.

Major Risk

Interest Rate Risk

The Group’s exposure to changes in interest rates relates primarily to the long-term
borrowings and investment securities. Investment securities acquired or borrowings issued at
fixed rates expose the Group to fair value interest rate risk. On the other hand, investment
securities acquired or borrowings issued at variable rates expose the Group to cash flow interest
rate risk.

Foreign Currency Risk

The exposure to foreign currency risk results from significant movements in foreign
exchange rates that adversely affect the foreign currency- denominated transactions of the
Group.

Liquidity Risk

Liquidity risk pertains to the risk that the Group will encounter difficulty to meet
payment obligations when they fall under normal and stress circumstances.

Credit Risk
 Credit risk is the risk of financial loss to the Group when a customer or counterparty to a
financial instrument fails to meet its contractual obligations, and arises principally from trade and
other receivables and investment securities.

Prudent fund management is employed to manage exposure to changes in earnings as a

result of fluctuations of interest rates, foreign currency rates, and so on. The Group uses a
combination of natural hedges, which involve holding U.S. dollar- denominated assets and
liabilities, and derivative instruments to manage its exchange rate risk exposure.

Liquidity risks are managed to ensure adequate liquidity of the Group through
monitoring of accounts receivables, inventory, loans and payables. A committed stand-by credit
facility from several local banks is also available to ensure availability of funds when necessary

Years Ended December 31

2018 2017 2016
(In Millions)
Sales P1,024,943 P826,086 P685,314
Cost of Sales 825,748 644,221 514,021
Gross Profit 199,195 181,865 171,293
Selling and Administrative Expenses (82,110) (70,823) (71,639)
Operating Income 117,085 111,042 99,654
Financing Charges - net (38,304) (31,189) (31,110)
Gain on Sale of Investments
and 252 879 154
Property and Equipment
Equity in Net Earnings (Losses)
of (289) 297 203
Associates and Joint Ventures
Other (Charges) - net (5,628) 154 (11,426)
Income from Continuing Operations 48,648 54,814 40,422
Income after Income Tax from
Discontinued Operations - - 11,818
Net Income 48,648 54,814 52,240
Net Income Attributable to Equity
Holders of the Parent Company 23,077 28,225 29,289
Net Income Attributable to Non-
controlling interests 25,571 26,589 22,951
 The Group’s consolidated sales revenue reached P1,024,943 million in 2018, 24% higher
than the previous year mainly driven by higher volumes and favorable selling prices across all
major businesses.

Cost of sales increased by 28% to P825,748 million mainly due to the increase in crude
prices and effect of excise tax of Petron Corporation (Petron); higher sales volume of San Miguel
Brewery Inc. (SMB) and the Food Segment; increase in excise tax by 4% per case of the
domestic operations of SMB and operations of the newly acquired Masinloc Power Partners Co.
Ltd. (MPPCL or the Masinloc Group) and the new Greenfield power plants in Bataan and
Davao.

Selling and administrative expenses increased mainly due to higher personnel expenses,
distribution costs, contracted services costs and advertising and promotions. Consolidated
operating income increased by 5% at P117,085 million. This growth was however partly
softened by higher raw material costs that impacted Petron and the Food businesses. The higher
net financing costs was mainly due to the higher level of loans payable and long- term debt in
2018 compared to 2017.

The decrease in equity in net earnings in 2018 primarily represents the share of SMC
Global on the higher net loss of Angat Hydropower Corporation (Angat Hydro) and share of San
Miguel Properties, Inc. (SMPI) on the lower earnings of Bank of Commerce (BOC).

The increase in other charges was primarily due to the higher foreign exchange loss on
the translation of the foreign currency denominated long-term debt and finance lease liabilities,
partly offset by the higher gain on the translation of foreign currency denominated cash and cash
equivalents with the peso depreciating by P2.65 from P49.93 in December 2017 to P52.58 in
December 2018.

Key Performance Indicators

The following are the major performance measures that the Group uses. Analyses are
employed by comparisons and measurements based on the financial data of the current period
against the same period of previous year.

December 31
2018 2017
 Liquidity:
Current 1.37 1.40
Ratio
Solvency:
Debt to Equity Ratio 2.28 1.93
Asset to Equity Ratio 3.28 2.93

Profitability:
Return on Average Equity Attributable to Equity
Holders of the Parent Company 7.23% 9.73%
Interest Rate Coverage Ratio
2.61 3.27
Operating
Efficiency: 8% 4%
Volume Growth
Revenue Growth 24% 21%
Operating Margin 11% 13%

Statement of the Problem

This study aims to analyze the financial performance specifically on the section of liability
and equity of San Miguel Corporation. It aims to answer the following questions:

1. Is the company capable on paying its present obligation?

2. Does the company performed well, in terms of managing corporate finance?
3. Does the company can operate for the long run?
4. What are the aspects that increased in liability and equity occurred?

Objectives in the Analyzing the Case

This analysis aims to attain the following objectives:

1. To know if the company are capable of paying its present obligation.

 2. To know if the company can survive for the next years based on its current
financial position.
3. To determine the aspects that affects the liability and equity section.

Analysis of the Problems

To analyze the problem the researcher, evaluate the financial statement in the section of
liability and equity of San Miguel Corporation. This learning examines the computed financial
measurements based on the available data (audited financial statements) and determine how
Company performed in handling corporate finance in the years covered by this analysis.

The following data were the audited financial statements of the Company. These
financial statements shown how the Company performed well throughout the fiscal year of 2017
and 2018. The equity has increased of 6.64% from 2017 as well as the liabilities increased by
28.19% which means the company to some extent do well in its business. Because despite
there’s negative response on the treasury stock, dividends payable and other liabilities, the
company still has a slightly progressed.
Moreover, the outcome of the liabilities in horizontal analysis may mitigate some risk on
the financial statements because it may affect to the performance of the company in the long run.
As far the researcher analyzed the financial statements, the asset section has a low improvement
due to the accounts or transactions of the liability section, as well as the equity has been affected
on it.
San Miguel Corporation
Consolidated Statements of Financial Position
December 31, 2018 and 2017

Increase/Decrea Percenta
2018 2017
se ge
ASSETS
Current Assets
Cash and Cash Equivalents (Notes 5,
₱243,150 ₱206,073 ₱37,077 17.99
11 and 12)
Trade and other receivables – net ₱129,893 ₱116,040 ₱13,853 11.94
Inventories ₱125,139 ₱102,575 ₱22,564 22.00
Current portion of BA – net ₱4,245 ₱3,422 ₱823 24.05
Prepaid expenses and other CA ₱92,043 ₱78,228 ₱13,815 17.66
TOTAL CURRENT ASSETS ₱594,470 ₱506,338 ₱88,132 17.41
Noncurrent Assets
Investments and advances -net ₱50,519 ₱35,537 ₱14,982 42.16
Investments in equity and debt
₱42,126 ₱42,089 ₱37 0.09
instruments
PPE – net ₱594,372 ₱523,586 ₱70,786 13.52
Investment Property -net ₱31,829 ₱7,162 ₱24,667 344.41
Biological assets -net of current
₱2,844 ₱2,695 ₱149 5.53
portion
Goodwill – net ₱130,852 ₱60,124 ₱70,728 117.64
Other intangible assets – net ₱146,608 ₱134,438 ₱12,170 9.05
Deferred tax assets ₱19,249 ₱18,412 ₱837 4.55
Other noncurrent assets- net ₱63,773 ₱49,282 ₱14,491 29.40
₱1,082,17
Total Noncurrent Assets
2 ₱873,325 ₱208,847 23.91
₱1,676,64 ₱1,379,64
TOTAL ASSETS
2 3 ₱296,999 21.53

LIABILITIES AND EQUITY

Current Liabilities
Loans Payable ₱184,024 ₱149,863 ₱34,161 22.79
Accounts payable and accrued
₱149,764 ₱136,993 ₱12,771 9.32
expenses
Finance lease laibilities - Current
₱19,699 ₱16,889 ₱2,810 16.64
portion
Income and other taxes payable ₱19,901 ₱16,653 ₱3,248 19.50
Dividends payable ₱4,042 ₱4,429 -₱387 -8.74
Current maturities of long-term debt
₱55,697 ₱36,944 ₱18,753 50.76
- net of debt issue costs
Total Current Liabilities ₱433,127 ₱361,771 ₱71,356 19.72
Noncurrent Liabilities
Long-term debt -net of current
₱561,918 ₱362,548 ₱199,370 54.99
maturities
Deferred tax liabilities ₱22,899 ₱20,674 ₱2,225 10.76
Finance lease laibilities - Current ₱122,367 ₱138,008 -₱15,641 -11.33
portion
Other noncurrent liabilities ₱24,384 ₱25,580 -₱1,196 -4.68
Total Noncurrent Liabilities ₱731,568 ₱546,810 ₱184,758 33.79
₱1,164,69
TOTAL LIABILITIES ₱908,581 ₱256,114 28.19
5
EQUITY
Capital stock - common ₱16,443 ₱16,435 ₱8 0.05
Capital stock - preferred ₱10,187 ₱10,187 ₱0 0.00
Additional paid-in capital ₱177,938 ₱177,750 ₱188 0.11
Equity reserves ₱21,513 -₱4,799 ₱16,714 -348.28
Retained Earnings:
Appropriated ₱72,820 ₱66,890 ₱5,930 8.87
Unappropriated ₱148,345 ₱143,335 ₱5,010 3.50
-
Treasury stock -₱109,501 ₱0 0.00
₱109,501
  ₱337,745 ₱300,297 ₱27,850 9.27
Non-controlling interests ₱174,202 ₱170,765 ₱3,437 2.01
Total Equity ₱511,947 ₱471,062 ₱31,287 6.64
₱1,676,64 ₱1,379,64
Total Liabilities and Equity ₱296,999 21.53
2 3
 Alternatives

San Miguel Corporation has a bit progressed on its financial performance. Company's
overall financial health can be assessed by examining three major factors: its liquidity, leverage,
and profitability. All three of these factors are internal measures that are largely within the
control of a company's management. It is important to note, however, that they may also be
affected by other conditions—such as overall trends in the economy—that are beyond
management's control.

Aside from that, San Miguel must apply Growth Strategy for the company be able to
operate for the long run and pay its liabilities and other obligations. Based on the survey
regarding growth strategy, roughly 66% of businesses survive the first two years operation, about
half make it to the five-year mark, and just 33% celebrate the tenth anniversary. These numbers
are remarkably consistent across most industries — but also highlight how important it is to plan
for growth from day one.

Growth strategy allows companies to expand the business. Growth can be achieved by
practices like adding new locations, investing in customer acquisition, or expanding a product
line. A company's industry and target market influences which growth strategies it will choose.
The following are the alternatives for San Miguel Corporation:

 San Miguel Corporation should constitute a more active team of managers in the
planning process, develop new strategies and provide planning manuals to all business
family and element team.

Pros: New strategies may lead to better performance and performance efficiency and
effectiveness will be determined.

Cons: The restructuring of the strategies may time consuming and costly.

 San Miguel Corporation should try to enhance the company’s products development,
techniques, and innovative methods and improve the efficiency of production.

Pros: More revenues will be generated along with better operational profits.

Cons: Cost of Research and Development

Evaluation of the Alternatives

Based on the accumulated information concerning the alternative of the financial analysis
of San Miguel Corporation, growth strategy is most likely used by larger industry to continue to
operates for the long run. The alternatives that were mentioned will probable to help in
mitigating risk and achieving the success of the Company.

Recommendation

Alternative sources of raw materials are used in the Group’s operations to avoid and
manage risks on unstable supply and higher costs. The Group enters into various commodity
derivatives to manage its price risks on strategic commodities. Commodity hedging allows
stability in prices, thus offsetting the risk of volatile market fluctuations. Through hedging, prices
of commodities are fixed at levels acceptable to the Group, thus protecting raw material cost and
preserving margins.

The company are capable to pay its current liabilities and obligations. It only needs new
tactics in marketing and must implement a new research and development design for the
products to continue to operate for the long run.

The researcher would highly recommend the following:

a) Implement a new research and development design for products.

b) Enhance or innovate a new marketing strategy or methods.
c) Management should be responsible not only in preparation of financial
statements but also to find ways to mitigate some risk involve on their liability
and equity.

Reference

https://edge.pse.com.ph/companyInformation/form.do?cmpy_id=154

https://www.sanmiguel.com.ph/page/our-vision-and-mission

https://www.sanmiguel.com.ph/page/our-values

https://www.sanmiguel.com.ph/page/strategy

https://www.referenceforbusiness.com/history2/86/San-Miguel-Corporation.html

https://www.sanmiguel.com.ph/page/our-history.
https://www.google.com/url?
sa=t&source=web&rct=j&url=https://www.sanmiguel.com.ph/files/reports/SMC_17A_04.
12_.2019_pdf.