Philippine Manufacturing: Navigating Moderation to Find Hidden Gems

The Philippine manufacturing sector's recovery narrative faces a crossroads. While the May 2024 Value of Production Index (VaPI) showed a year-on-year growth of 2.2%, marking a sharp slowdown from April's 5.7% expansion, the sector's trajectory remains uneven. This deceleration, alongside a -0.1% average growth rate for VaPI from January to May 2024, signals moderation in an industry still navigating inflation risks and policy headwinds. Yet, within this slowdown lie opportunities for investors: firms with export diversification or cost-control advantages could outperform peers, especially if sales trends align with their operational resilience.

The Slowing Production Pulse

The May 2024 VaPI slowdown reflects a broader cooling in manufacturing activity. Key drivers include sector-specific headwinds: the chemicals and chemical products segment saw a staggering 26.2% annual decline in April 2025, while basic metals—a critical growth pillar—experienced a 14.7% contraction in 2024. These declines contrast with pockets of resilience in transport equipment (7.2% growth in December 2024) and computer/electronic products (8.6% growth), underscoring the uneven recovery.

The deceleration is also tied to policy tightening. The Philippine central bank's hawkish stance—keeping rates at 6.75% since May 2024—has constrained borrowing costs for manufacturers reliant on debt financing. Meanwhile, lingering inflation, though easing to 2.3% in May 2024, continues to pressure input costs, particularly for energy-intensive sectors like petroleum refining.

Sales Trends: A Mixed Picture

While VaPI data points to moderation, the Net Sales Index (NSI) offers a more nuanced view. Though exact May 2024 NSI figures are elusive, historical trends and forward-looking indicators suggest sales growth held up better than production. For instance, the December 2024 NSI accelerated to 6.5% YoY, outpacing the VaPI's 0.4% rise, signaling stronger demand resilience. This divergence hints at manufacturers' ability to manage inventory and pricing, which could favor companies with robust order backlogs or pricing power.

Investors should prioritize firms where sales growth outpaces production declines, indicating healthier demand dynamics. Sectors like transport equipment and electronics, which drove late-2024 VaPI recoveries, are prime candidates.

Where to Look for Value

The sector's bifurcated performance creates opportunities for selective investing:

1. Export Diversifiers: Companies exposed to global demand via diversified export markets—such as semiconductor assemblers or automotive parts manufacturers—are less vulnerable to domestic demand shocks. For example, SMIC Electronics (SMIC.PS) or Universal Robina Corp (URC.PS), which benefit from ASEAN trade agreements, could capitalize on resilient global tech and FMCG demand.

2. Cost-Effective Operators: Firms with lean supply chains or access to cheaper inputs—like steel producers using local raw materials—can weather inflation. Alaska Industrial Park (ALASKA.PS), which sources raw materials domestically, or Transcosmos Philippines (TCOM.PS), leveraging automation to cut costs, may outperform peers.

3. High-Capacity Utilization Sectors: Industries operating near or above 80% capacity—such as textiles (e.g., Puregold Purefoods (PGPC.PS)) or machinery (e.g., Pilipinas Shell (PSHI.PS))—signal strong demand and pricing leverage.

Risks to Monitor

• Policy Tightening: Further rate hikes could squeeze margins for highly leveraged firms.
• Global Demand Volatility: A slowdown in U.S. or Chinese imports could hit electronics and machinery exporters.
• Input Cost Pressures: Rising energy prices, particularly for petroleum and aluminum, may erode profit margins.

Conclusion: A Selective Play

The Philippine manufacturing sector's moderation in 2024 presents a “buy the dip” scenario for investors willing to navigate volatility. Firms with export diversification, cost discipline, or strong sectoral tailwinds—like transport equipment or electronics—offer the best risk-reward profiles. While inflation and policy risks linger, the NSI's resilience relative to VaPI hints at an underlying demand story worth exploring.

For now, bet on the survivors of this moderation phase—they may lead the next leg of the recovery.