market rallied after a weak start - constant...
TRANSCRIPT
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)
SOURCE: BLOOMBERG, COL ESTIMATES
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
Ballooning budget deficit
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
Ballooning budget deficit
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
SOURCE: BLOOMBERG, COL ESTIMATES
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
+ -
*LIMIT TO ONLY 5% **PICK ONLY 1 OF THE 2
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
+ -
*LIMIT TO ONLY 5% **PICK ONLY 1 OF THE 2
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
+ -
*LIMIT TO ONLY 5% **PICK ONLY 1 OF THE 2
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
+ -
*LIMIT TO ONLY 5% **PICK ONLY 1 OF THE 2
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)
+ -
*LIMIT TO ONLY 5% **PICK ONLY 1 OF THE 2