| Which of these is correct?
Is it: “The drop in share prices on the Philippine Stock Exchange [PSE] last week was an appropriate reaction to the threat of a slow down in the US economy, reducing earnings of locally listed firms”; or “The drop in share prices on the [PSE] last week was driven by investor mentality that the Philippines is a financial colony of the US”?
Answer? Both.
PLDT dropping P35, property firms Megaworld and Vista shedding 5 percent, along with Metrobank (-5 percent) and BPI (-4 percent) could be reasonable as these firms generate profits connected to the US economy.
But Manila Water (-4 percent), Geograce Resources (-5 percent), Aboitiz (-4 percent) and Atlas Mining (-6 percent) share virtually nothing with American consumer spending and US economic trends.
Granted that a significant amount of investment in local stocks is held by foreigners who do worry about the US, there is a larger reason for this perhaps unjustifiable selloff.
Believe it or not, the Philippines is an Asian country, economically tied to Asia. More than 70 percent of our bilateral trade and direct investment comes from Asia, not the West.
Yet looking at stock prices on Friday, you would have thought that the Philippines is still a US colony. Of all the Asian exchanges, only South Korea and Taiwan (both -4.2 percent) did worse than the Philippines (-3.85 percent).
Last week’s price drop also highlights another major problem for the PSE investors. There are many very good companies listed on the exchange that most investors are not aware of and stock prices suffer because local investors ignore their profitability and potential stock-price appreciation.
From time to time, I will highlight some of these companies. I have no direct or indirect beneficial ownership in these firms nor will I benefit if prices appreciate; unless you make a profit and decide to send me a Christmas basket.
One company I have looked at over the years is Diversified Financial Network Inc. (DFNN). In this case, the company pleases me now on two fronts; a growing industry that is Asian-based.
When DFNN listed in 2000, I was not impressed. That is not the company’s fault. It is mine, because I am not a high-tech kind of person and DFNN is a high-tech company. But I do understand business and DFNN spent years building and positioning itself for profitable growth.
DFNN began as a pioneer in Internet-based stock-market trading systems, which, of course, I did not believe would ever be important in the Philippines. They were right; I was wrong.
In fact, if you trade PSE stocks on-line, you are probably using DFNN software to execute your order. If you trade by calling your broker, you may soon be using a DFNN system.
Last week the company disclosed to the exchange its entering into an agreement with PLDT and with Diversified Technology Solutions in a joint effort to bid a contract for a new trading system for the PSE. In light of last Friday’s “trading glitch” delay, let us hope the PSE approves a contract soon.
There are many other things DFNN has going for it. It provides IT solutions to the banking as well as the cell-phone industry, but there is one sector of its business that I particularly like.
The thrust of DFNN that impresses me most is its Asia-based online gambling. The numbers for this industry are staggering. Industry growth during the last five years averaged a compounded 40-percent increase annually. This industry is fairly new and the potential over the next five years is remarkable.
DFNN positioned itself to provide the IT solutions for online-gaming companies. The company holds major contracts with Japanese firms for software development. In effect, it is becoming a type of outsourcing company for Asian online-gaming companies, particularly from Japan.
Over the last few years, DFNN formed strategic partnerships (read: investments) with both European and Japanese online-gaming companies. It obtained both expertise and customers because of the buy-ins.
DFNN is a leading provider in this area but faces risks, since over time more competitors will arise and income is project-based, leading to swings in generated revenue. However, the reputation the company built may overcome this risk. So far, it has always been able to secure new contracts once a project is completed.
It also developed the software capability for a person to make a wager on lotto through a cell phone, Internet and basically any wireless device, and to have the charge for the ticket taken from various payment systems, which even includes a cell load.
From a stock-market view, shares are trading at a price earnings ratio (PER), based on 2006 earnings, of 12; 15-18 PER at the end of 2007 is more reasonable. The current PER is low for a company with the growth potential that this firm holds.
Earnings for 2007 should reach at least P1 to P1.50 per share. The low target price is P12 to P15 through the end of the year. Closed Friday at P10.25.
Invest at your own risk. However, remember this: There is more to the PSE than the blue-chip companies and more to the world than the US.
E-mail comments to mangun@email.com. | 
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