Market rallied after a weak start - Constant...

Market rallied after a weak start

5500

6000

6500

7000

7500

8000

8500

12/29/2015 1/29/2016 2/29/2016 3/31/2016 4/30/2016 5/31/2016 6/30/2016 7/31/2016

7,946.19

PSEI UP 14.3% YTD

SOURCE: BLOOMBERG, COL ESTIMATES

7,946.19 PSEI UP 14.3% YTD

Better than expected economic performance

PHIL GDP GROWTH

SOURCE: PSA

SOURCE: PSA

BY EXPENDITURE GROWTH

CONSUMER SPENDING 7.3%

GOVERNMENT SPENDING 13.5%

CAPITAL FORMATION 27.6%

EXPORTS 6.6%

GDP 7.0%

5.60%

6.40%

5.30%

6.60%

5.00%

5.80% 6.00% 6.50%

6.90% 7.00%

Better than expected economic performance OFW Remittances

MONTH 2015 2016

JANUARY 4.4% 2.1%

FEBRUARY 7.7% 8.4%

MARCH 15.5% -1.2%

APRIL 6.2% 4.1%

MAY 9.3% 1.9%

JUNE 10.5% 4.8%

JULY 5.9%

AUGUST -0.8%

SEPTEMBER 1.3%

OCTOBER -4.1%

NOVEMBER -6.2%

DECEMBER 4.9%

YTD 4.4% 3.2%

SOURCE: BSP

Peacefully Concluded Presidential Elections

Market should continue to do well Stock Market Drivers

Strong foundation of the government Government’s strong finances

10

30%

40%

50%

60%

70%

80%

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

-1%

0%

1%

2%

3%

4%

5%

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

GOVERNMENT DEBT/GDP PRIMARY BALANCE

SOURCE: BLOOMBERG, COL ESTIMATES SOURCE: BLOOMBERG, COL ESTIMATES

44.8% 1.4%

Strong foundation of the government Low cost borrowing

0%

4%

8%

12%

16%

20%

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

11

SOURCE: BLOOMBERG

10-YR T-BOND RATE

3.9%

DATE AGENCY CREDIT RATING

OLD NEW

NOV-10 S&P BB- BB

JUN-11 MOODY'S BA3 BA2

FITCH BB BB+

JUL-12 S&P BB BB+

OCT-12 MOODY'S BA2 BA1

MAR-13 FITCH BB+ BBB-

MAY-13 S&P BB+ BBB-

OCT-13 MOODY'S BA1 BAA3

MAY-14 S&P BBB- BBB

DEC-14 MOODY'S BAA3 BAA2

CREDIT RATINGS UPGRADES

SOURCE: IRO, BLOOMBERG

An action oriented socio-economic agenda

1. Continue and maintain the macroeconomic policies of the Aquino government;

2. Improve the income tax system to make it progressive;

3. Ensure attractiveness of the Philippines to FDI by addressing the restrictive economic provision in the constitution and our laws in enhancing competitiveness and ease of doing business in our economy;

4. Accelerate infrastructure spending to account for 5% of GDP, with Public-Private Partnerships (PPP) playing a key role;

5. Promote rural and value chain development toward increasing agricultural and rural enterprise productivity and rural tourism;

6. Ensure security of land tenure to encourage investments, and address bottlenecks in land management and titling agencies;

Ten point socio-economic agenda

Accelerate infrastructure spending

Spending on infrastructure will significantly boost the Philippines’ competitiveness as an investment

destination

WEF GLOBAL COMPETITIVENESS INDEX

RANK CHANGE

2009-2010 2015-2016

BASIC REQUIREMENTS 95 66 +29

INFRASTRUCTURE 98 90 +8

EFFICIENCY ENHANCERS 78 51 +27

INNOVATION FACTORS 74 47 +27

OVERALL RANK 87 47 +40

Accelerate infrastructure spending: PPPs

From 12 projects in 6 years to 17 projects in 18 months

Minimal execution risk:

• 14 projects (Php459 Bil or 3.4% of GDP) in the bidding stages;

• 5 projects (Php101.9 Bil or 0.8% of GDP) for NEDA board approval;

• Government to reduce approval time (from project proposal to award of contract) to 18-20 months from an average of 29 months under previous administration

BIDDING STAGE INDICATIVE PROJECT COST (PHPBIL)

New Bohol Airport 4.6 Laguindingan Airport 14.6 Davao Airport 40.6 Bacolod Airport 20.3 Iloilo Airport 30.4 O&M of LRT Line 2 0.0 Davao Sasa Port 19.0 Road Transport IT Infra Proj. 0.3 Civil Registry System IT Proj. 1.6 Kaliwa Dam Proj. 18.7 Regional Prison Facilities 50.2 NLEx-SLEx Connector Road 23.2 LRT Line 6 Proj. 65.1 North-South Railway Proj. 170.7 Total 459.2 For NEDA Board Approval NAIA Dev't Proj. 74.6 Plaridel Bypass Toll Road 9.3 Philippine Travel Center Complex Proj. 1.8

BatMan 1 NatGas Pipeline Proj. 14.7 New Nayong Pilipino Proj. 1.6 Total 101.9

LIST OF PPPS

An action oriented socio-economic agenda Ten point socio-economic agenda

7. Invest in human capital development, including health and education systems, and match skills and training to meet the demand of businesses and the private sector;

8. Promote science, technology, and the creative arts to enhance innovation and creative capacity towards self-sustaining, inclusive development;

9. Improve social protection programs, including the government’s Conditional Cash Transfer (CCT) program, to protect the poor against instability and economic shocks;

10.Strengthen implementation of the Responsible Parenthood and Reproductive Health Law to enable especially poor couples to make informed choices on financial and family planning.

Maximizing the demographic window

SIZE OF POPULATION (2015) 101.6 MIL

POPULATION GROWTH (2015-20) 1.6%

MEDIAN AGE 23.2

PERIOD OF DEMOGRAPHIC WINDOW

2015-55

GROWTH IN PRODUCTIVE POPULATION

48%

PHILIPPINE POPULATION FACTS

SOURCE: UN, PSA, CIA WORLD FACT BOOK

DEMOGRAPHIC WINDOWS IN ASIA

Resilient domestic economy Economy is domestically dependent

2Q16 GDP BREAKDOWN

SOURCE: PSA

66.7%

12.3%

24.7%

-3.6%

Consumer Gov't Spending

Investments Net Export

0%

2%

4%

6%

8%

Mar

-99

Mar

-00

Mar

-01

Mar

-02

Mar

-03

Mar

-04

Mar

-05

Mar

-06

Mar

-07

Mar

-08

Mar

-09

Mar

-10

Mar

-11

Mar

-12

Mar

-13

Mar

-14

Mar

-15

Mar

-16

CONSUMER SPENDING GROWTH

SOURCE: PSA

7.3%

Resilient domestic economy

FIXED CAPITAL FORMATION (% GDP)


17%

18%

19%

20%

21%

22%

23%

24%

25%

Dec

-98

Dec

-99

Dec

-00

Dec

-01

Dec

-02

Dec

-03

Dec

-04

Dec

-05

Dec

-06

Dec

-07

Dec

-08

Dec

-09

Dec

-10

Dec

-11

Dec

-12

Dec

-13

Dec

-14

Dec

-15

22.1% Fixed capital formation rising, but still lower than Indonesia (33%) and Thailand (25%)

Short term risks

Possibly disappointing ST economic results

Ballooning budget deficit

Positives already priced in


Plans to cut taxes & increase spending could lead to a ballooning deficit Could negatively affect country’s credit rating and lead to higher interest rates

-3.8

0%

-5.0

0% -4

.40%

-3.7

0%

-2.6

0%

-1.0

0% -0

.20%

-0.9

0%

-3.7

0%

-3.5

0%

-2.0

0%

-2.3

0%

-1.4

0% -0

.60%

-0.9

0%

-6.00%

-5.00%

-4.00%

-3.00%

-2.00%

-1.00%

0.00%

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

SOURCE: BTR, DBM, COL ESTIMATES


A 3% deficit/GDP ratio is acceptable Gov’t will increase tax collection efficiency before implementing tax cuts

-3.8

0%

-5.0

0% -4

.40%

-3.7

0%

-2.6

0%

-1.0

0% -0

.20%

-0.9

0%

-3.7

0%

-3.5

0%

-2.0

0%

-2.3

0%

-1.4

0% -0

.60%

-0.9

0%

-6.00%

-5.00%

-4.00%

-3.00%

-2.00%

-1.00%

0.00%

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

SOURCE: BTR, DBM, COL ESTIMATES

Positives already priced in


Ave - 15.7x

-2 std - 9.7x

-1 std - 12.7x

+1 std - 18.7x

+2 std - 21.8x

5

7

9

11

13

15

17

19

21

23

25

Dec

-05

Aug-

06

Apr-

07

Dec

-07

Aug-

08

Apr-

09

Dec

-09

Aug-

10

Apr-

11

Dec

-11

Aug-

12

Apr-

13

Dec

-13

Aug-

14

Apr-

15

Dec

-15

5,500

6,000

6,500

7,000

7,500

8,000

8,500

9,000

Jan-

16

Mar

-16

May

-16

Jul-1

6

Sep-

16

Nov

-16

Jan-

17

Mar

-17

May

-17

Jul-1

7

Sep-

17

Nov

-17

8,400

PSEI (END 2017 TARGET)

PSEI P/E BAND (10-YEARS) 8,400

Risks to high valuations

JGS 8.8B CNPF 2.6B AEV 4.7B

GTCAP 8.2B TOTAL 24.3B

Further upside largely dependent on earnings growth Companies which disappoint are vulnerable to steep sell-offs (ex. TEL, URC) Increasing likelihood of share placements

SHARE PLACEMENTS (PHP BIL, PAST 4 MONTHS)

SOURCE: PSE, COL ESTIMATES

Possibly disappointing ST economic results Government spending typically weakens after presidential elections

GOVERNMENT SPENDING GROWTH

PRESIDENT 1ST 6 MOS TERM AVE.

CORY AQUINO 2.0% 3.5%

FVR -1.8% 2.8%

ERAP/GMA 0.6% -0.3%

GMA 0.3% 6.4%

PNOY -6.5% 4.2%

SOURCE: PSA, COL ESTIMATES

-40

-30

-20

-10

0

10

20

30

Apr2015

May2015

Jun2015

Jul2015

Aug2015

Sep2015

Oct2015

Nov2015

Dec2015

Jan2016

Feb2016

Mar2016

Apr2016

May2016

Jun2016

Jul2016

Net Buying Php57 Bil

Net Selling Php112 Bil

Not expecting significant declines

PSEI NET FOREIGN BUYING/SELLING

Corrections are opportunities to buy

PSEI CHART (2010 TO TODAY)

0

1000

2000

3000

4000

5000

6000

7000

8000

9000

1/1/2010 1/1/2011 1/1/2012 1/1/2013 1/1/2014 1/1/2015 1/1/2016

End of PNoy “Honey Moon” Period

US “Taper Tantrums”

Contagion from EM Sell-

off

7,930.75

3,052.68

Sectors/Themes & Stock Picks

SECTOR/THEME STOCK PICKS FV BUY

BELOW

INFRASTRUCTURE

Acceleration of infrastructure spending; More FDIs

MPI 7.57 6.60

MBT 113.00 98.30

BDO 128.00 111.30

TOURISM

Five out of the next 17 PPPs are airports; Gov’t focus on rural development & inclusive growth

CEB 162.00 140.90

ALI 47.10 41.00

RLC 33.50 29.10

CONSUMER Favorable demographics; Tax cuts; Improvement of social protection programs

SM 616.00 535.70

DNL 10.20 8.90

CNPF 17.00 14.80

CIC* 58.00 50.40

Sectors/Themes & Stock Picks

SECTOR/THEME STOCK PICKS FV BUY

BELOW

ROTATION TO SMALLER CAP

Expensive valuation of blue chip issues will prompt investors to rotate to smaller cap stocks still trading at cheap valuations

EW* 30.00 24.00

EEI* 12.70 10.20

BOTTOM UP

To benefit from recovering coal prices globally, stricter environmental regulations locally

FGEN** 35.00 30.40

EDC** 9.21 8.00

*LIMIT TO ONLY 5% **PICK ONLY 1 OF THE 2

Stock picks: MPI FV:Php7.57, BUY Below: Php6.60

Major beneficiary of PPP initiatives w/ its focus on infrastructure and strong financing capability

Maynilad: benefit from underserved population in concession area and favorable concession agreement

Meralco: benefit from rising power demand resulting from strong economic growth

Subject to regulatory risk

Capital raising risk

Fair valuations

+ -

Stock picks: MBT FV:Php113.00, BUY Below: Php98.30

Position as one of the big three banks makes it a major beneficiary of growing demand for loans that will arise from PPPs Trading gains and NIMs already at a low base in 2015 High CAR levels after Php32Bil rights offering in Mar 2015 (15% CET1; 18.3% total CAR)

Attractive valuation (1.2X 17E P/BV)

Below expected 1H16 profits Potential margin squeeze due to excess liquidity Tightening regulations from the central bank - DSIB; real estate stress test; cap on REM collateral value

+ -

Stock picks: BDO FV:Php128.00, BUY Below: Php111.30

Being the largest bank makes it a major beneficiary of growing demand for loans that will arise from PPPs

Strong core operations, 86% of revenues recurring in nature

Enjoys largest economies of scale (high CASA deposit % of total)

Capital raising risk due to relatively low CAR

Potential margin squeeze due to excess liquidity

Tightening regulations from the central bank

- DSIB; real estate stress test; cap on REM collateral value

+ -

Stock picks: CEB FV:Php162.00, BUY Below: Php140.90

Market leadership (59%) leading to scale efficiencies and pricing power Expansion of ex-Manila hubs starting 2018 to drive growth over the medium term Persistently low oil prices boost profitability Attractive valuation

Sensitive to FX rates • Mismatch of revenues and

expenses • Php800-900Mil/Php1.0 change Sensitive to jet fuel prices • Php250Mil/US$1.0 change Low fuel price to encourage competition

+ -

Stock picks: ALI FV:Php47.10, BUY Below: Php41.00

Strong brand; good track record in delivering growth Targeting 5-yr profit CAGR of 17.8%

• Mall portfolio :1.4Mil-2.1Mil sqm

• Office portfolio: 0.7Mil-1.5Mil sqm

To benefit from growth in tourism Potential beneficiary of REIT law (35.4% of NAV in leasing) Huge landbank of 8,948 ha. in 55 growth areas nationwide

Valued at a premium relative to other property companies

Above average leverage

Capital raising risk

+ -

Stock picks: RLC FV:Php33.50, BUY Below: Php29.10

Defensive given focus on leasing businesses

- 67% of revenues - 75% of operating income

Potential beneficiary of REIT law (~73% of NAV in leasing)

To benefit from tourism growth w/ plans to expand its hotel portfolio

- 13.7% CAGR from 2015-17

Fair valuations

Peaking residential take-up sales

+ -

Stock picks: SM FV:Php616.00, BUY Below: Php535.70

Subsidiaries are market leaders in industries where they operate

Highly geared towards the consumer sector

- ~49% of income from retail & mall businesses

Merger of SM Retail to significantly expand exposure to non-food related retail brands (to 1,374 outlets)

Intensifying competition

Fair valuations

+ -

Stock picks: DNL FV:Php10.20, BUY Below: Php8.90

Strong track record of growth as company focuses on growing share of high margin specialized products

- Recurring EPS 3-yr CAGR of 25.6%

- High margin products from 58% to 61% of revs (2010 to 1H16)

Partnership with Ventura to improve ability to service Asian food market

- To potentially account for 50% of revenues

Growth of smuggling activities

Volatile commodity prices

Fair valuations

+ -

Stock picks: CNPF FV:Php17.00, BUY Below: Php14.80

Market leader in the canned fish (87%) and canned meat (37%) industries Favorable outlook for milk and canned meat businesses w/ growing affluence + underpenetrated market Acquisition of coconut business (CPAVI) to add 9.8% and 11.2% to EPS in 2016 and 2017 Secondary share offering to boost free float from 16% to 21%

Rising raw material prices

Not vertically integrated

+ -

Stock picks: CIC FV:Php62.00, BUY Below: Php53.90

Market leader in AC (38%) and refrigeration (27%) industries

Favorable growth outlook for AC and refrigeration businesses w/ growing affluence + underpenetrated market

Profits forecast to grow by a 3-year CAGR of 26.1%

Relatively cheap valuation

Intensifying competition in the commercial AC segment

Volatile forex rates

La Nina weather phenomenon

+ -


Stock picks: EW* FV:Php30.00, BUY Below: Php24.00

Strong exposure to the consumer segment Low expectation after aggressive branch expansion failed to translate to higher income

• ↓ trading gains; ↑ opex/provisions; one time accounting reclassification

Earnings growth to resume in 2016 Attractive valuations (0.8X 17E P/BV)

Higher than average NPLs and provisioning

Execution risk remains high

+ -


Stock picks: EEI* FV:Php12.70, BUY Below: Php10.20

All-time high domestic construction backlog of Php55.7Bil (vs Php16Bil average) Beneficiary of government’s focus to prioritize infrastructure spending Has capacity to participate in more projects Attractive valuations (9.8X 16E P/E)

Below expected 1H16 earnings

Saudi Arabia JV could continue to disappoint

- Down to 12% of income from 48%

Delays in PPP projects

+ -


Stock picks: FGEN** FV:Php35.00, BUY Below: Php30.40

Focus on clean energy minimizes regulatory risk Stable core operations (bulk of capacity have LT take-or-pay contracts) Improving coal prices to improve ability to lock in new contracts at higher prices Attractive valuations (12.6X 17E P/E)

Falling fuel prices (coal, oil)

Gas plant expansion projects facing delays and have no supply contracts

+ -


Stock picks: EDC** FV:Php9.21, BUY Below: Php8.00

Focus on renewable energy minimizes regulatory risk Stable core operations (80% of capacity have LT take-or-pay contracts) Improving coal prices to improve ability to lock in new contracts at higher prices Attractive valuations (11.1X 17E P/E)

Falling fuel prices (coal, oil)

+ -


Market rallied after a weak start - Constant...

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