64.90 15.5% 56.20 initiation: building a firm buy 1...

See important disclosures, including any required research certifications, beginning on page 20

■ Investment case

We forecast a 2013 ROAE of 30.6% for DMCI Holdings (DMC), the highest among its peers in the Philippines conglomerate space. We believe the company has robust earnings-growth prospects given strong synergies in its core businesses. In our view, the current share price has yet to factor in the strong earnings visibility. We forecast EPS growth of 19.6% YoY for 2012 and 19.8% YoY for 2013. ■ Catalysts

Improving earnings quality. We forecast a healthy 16.4% net income CAGR for 2012-14 as we expect stable sales growth at DMC‟s mining, power, real-estate, and construction operating units. For 2013, we forecast sales growth for the respective units of 5.4% YoY, 4.0% YoY, 7.0% YoY, and 6.0% YoY. We forecast the company‟s operating margin to rise to 34.7% for 2014 (from 27.9% for 2011), on improved operating-unit performances,

particularly for the power division, which can now deliver 3,061gWh of energy generation annually compared with 2,025gWh for 2011. We forecast DMC‟s coal sales volume to expand by 9.27% from 6,520 tonne in 2011 to 7,125 tonnes in 2014. Given the timely execution of its investment plans, we believe DMC is on track to increase its revenue and raise underlying profitability. PPP projects mobilisation. In our view, DMC is the best positioned company to benefit directly from the government‟s priority infrastructure projects (public-private partnership [PPP] initiative) that are regarded as the flagship programmes of the current administration. We believe that after a considerable delay, the PPP initiative will finally get under way, as 2013 marks the second half of the current administration‟s six-year term. ■ Valuation

We initiate coverage of DMC with an Outperform (2) rating and SOTP-based six-month target price of PHP64.90, implying a 2013E PER of 11.0x, which looks far more attractive than the PERs of its peers at their current share prices (the industry average PER is 13.5x based on the Bloomberg consensus forward EPS forecasts).

■ Risks

Risks to our positive investment case include coal-price fluctuations for the mining division, and the continuous operation of the plants in the company‟s power business.

Industrials / Philippines DMC PM

26 October 2012

DMCI Holdings

Initiation: building a firm foundation

Our 2013E ROAE of 30.6% for conglomerate DMC is the highest

among its peers yet it trades at a below-sector-average PER

Strong earnings visibility for 2013E on improving operating

efficiency and higher contribution from non-core assets

We believe the market has yet to factor in the upside potential

from PPP projects

Source: FactSet, Daiwa forecasts

Industrials / Philippines

DMCI HoldingsDMC PM

Target (PHP): 64.90

Upside: 15.5%

24 Oct price (PHP): 56.20

Buy

Outperform (initiation)

Hold

Underperform

Sell

1

2

3

4

5

90

101

113

124

135

35

43

50

58

65

Oct-11 Jan-12 Apr-12 Jul-12 Oct-12

Share price performance

DMCI (LHS)Relative to PCOMP Index (RHS)

(PHP) (%)

12-month range 36.40-63.40

Market cap (USDbn) 3.61

3m avg daily turnover (USDm) 2.03

Shares outstanding (m) 2,655

Major shareholder Dacon Corp (51.5%)

Financial summary (PHP)

Year to 31 Dec 12E 13E 14E

Revenue (m) 53,601 56,573 59,719

Operating profit (m) 17,011 18,954 20,748

Net profit (m) 11,479 13,755 15,150

Core EPS (fully-diluted) 4.323 5.180 5.705

EPS change (%) 19.6 19.8 10.1

Daiwa vs Cons. EPS (%) 1.8 (3.3) 19.1

PER (x) 13.0 10.8 9.9

Dividend yield (%) 2.2 2.7 3.0

DPS 1.249 1.537 1.712

PBR (x) 3.7 3.0 2.5

EV/EBITDA (x) 7.4 6.7 6.1

ROE (%) 30.7 30.6 28.1

Rommel Rodrigo(632) 813 7344 ext. 302

[email protected]

How do we justify our view?How do we justify our view?


26 October 2012

- 2 -

Initiation: building a firm foundation ............................................................................................ 6

ROAE highest among its peers ................................................................................................... 6

A well-balanced portfolio that should continue to deliver stable revenue growth .................... 6

What drives the share price? ....................................................................................................... 7

Valuation suggests price has not yet peaked .............................................................................. 8

Rating and target price ............................................................................................................... 8

EPS analysis ................................................................................................................................ 9

Investment risks ......................................................................................................................... 10

Appendix: company background ............................................................................................... 11

Operating units should see continued earnings stability .......................................................... 11

Majority of DMC is owned by tier-1 institutional investors ...................................................... 16

Contents


26 October 2012

- 3 -

Growth outlook DMC: revenue breakdown and net profit (2006-15E)

DMC‟s diversification beyond the scope of its cyclical construction business in early 2000 led to better earnings growth as the company focused on other businesses that had strong synergies with its construction business. With the current operating divisions (mining, power, construction and real estate), we forecast a 2010-13 revenue CAGR of 17.3%, which we expect to underpin earnings growth.

Source: Company, Daiwa forecasts

Valuation DMC: SOTP-derived NAV breakdown

We use an SOTP methodology to value DMC, within we which we employ a DCF approach for its main operating units (96% of the DMC‟s NAV, based on our estimates). We value all the operating divisions on the basis of free cash flow to the company, using an average WACC of 9.02% and an average terminal growth rate of 3.9%. We apply a 20% conglomerate discount to our NAV to derive our six-month target price. We believe this discount is reasonable, given that much of the company‟s business-growth potential should be visible from 2012-14. We believe our valuation approach captures both the company‟s long-term earnings-growth prospects and its short-term earnings visibility.

Source: Daiwa estimates

Earnings revisions DMC: historical and forecast EPS, consensus and relative to actual EPS (PHP)

We expect the domestic economic environment to remain healthy over the medium term, which should help to boost the earnings quality of DMC as all of its operating businesses are based in the Philippines. Over the past four years, the Bloomberg-consensus EPS forecasts have varied considerably compared with the company‟s actual EPS except for 2011, which suggests to us that the market now has a greater understanding of DMC‟s investment strategy.

Source: Company, Bloomberg, Daiwa forecasts

How do we justify our view?

Growth outlook

Valuation

Earnings revisions

0

5,000

10,000

15,000

20,000

0

20,000

40,000

60,000

80,000

2006 2007 2008 2009 2010 2011 2012E 2013E 2014E 2015E

Mining Electricity sales

Construction contracts Real estate sales

Merchandise sales and others Net income attributable to equity holders (RHS)

(PHPm) (PHPm)

Mining24.9%

Power18.4%

Real Estate11.6%

Construction21.1%

Water Utility20.0%

Infrastructure3.2%

Other Assets and Investments

0.7%

17.9%

-12.7%

9.1%

-1.1%

-15%

-10%

-5%

0%

5%

10%

15%

20%

0.00

1.00

2.00

3.00

4.00

5.00

6.00

2008 2009 2010 2011 2012E 2013E 2014E

Actual EPS Consensus

Daiwa Relative to Actual EPS (RHS)

Buy

Outperform (initiation)

Hold

Underperform

Sell

1

2

3

4

5


26 October 2012

- 4 -

Key assumptions

Profit and loss (PHPm)

Cash flow (PHPm)


Year to 31 Dec 2007 2008 2009 2010 2011 2012E 2013E 2014E

Coal sales volume (Metric ton) 0.0 3,314.0 4,464.0 7,146.0 6,520.0 6,715.6 6,917.1 7,124.6

Blended FPOB Price (Php) 0.00 2,549.27 2,599.79 2,343.18 3,032.24 2,797.42 2,853.37 2,910.43

Electricity sold (gWh) 0.0 0.0 0.0 1,657.0 2,025.0 3,061.2 3,061.2 3,061.2

Average tariff (Php/kWh) 0.00 0.00 0.00 4.90 4.75 4.02 4.18 4.35

Water rate average - all in tariff (Php) 0.0 0.0 0.0 32.2 34.0 35.4 37.9 40.4

Annual billed volume (mcm) 0.00 0.00 0.00 373.80 404.70 440.31 471.14 499.40

Year to 31 Dec 2007 2008 2009 2010 2011 2012E 2013E 2014E

Mining 6,467 9,170 11,602 16,030 18,682 21,348 22,504 23,724

Electricity sales 0 0 443 8,948 10,421 12,312 12,805 13,317

Other Revenue 7,709 8,978 15,222 18,506 18,700 19,940 21,264 22,678

Total Revenue 14,176 18,148 27,268 43,484 47,803 53,601 56,573 59,719

Other income 1,260 79 1,675 1,893 2,185 2,764 3,232 3,699

COGS (8,715) (12,865) (19,754) (27,482) (28,534) (29,457) (30,724) (32,046)

SG&A (1,723) (1,773) (2,348) (4,649) (5,007) (6,754) (6,982) (7,477)

Other op.expenses (1,790) (1,330) (1,423) (3,227) (3,094) (3,142) (3,145) (3,147)

Operating profit 3,208 2,259 5,417 10,018 13,353 17,011 18,954 20,748

Net-interest inc./(exp.) (144) 58 289 (519) (164) 127 369 571

Assoc/forex/extraord./others 42 124 64 488 433 442 450 459

Pre-tax profit 3,106 2,440 5,770 9,987 13,622 17,580 19,773 21,778

Tax (545) (596) (601) (1,029) (1,345) (2,893) (3,254) (3,584)

Min. int./pref. div./others (287) (155) (465) (1,090) (2,681) (3,208) (2,764) (3,044)

Net profit (reported) 2,274 1,688 4,704 7,867 9,595 11,479 13,755 15,150

Net profit (adjusted) 2,274 1,688 4,704 7,867 9,595 11,479 13,755 15,150

EPS (reported)(PHP) 0.856 0.636 1.771 2.963 3.613 4.323 5.180 5.705

EPS (adjusted)(PHP) 0.856 0.636 1.771 2.963 3.613 4.323 5.180 5.705

EPS (adjusted fully-diluted)(PHP) 0.856 0.636 1.771 2.963 3.613 4.323 5.180 5.705

DPS (PHP) 0.000 0.000 0.200 0.500 1.000 1.249 1.537 1.712

EBIT 3,208 2,259 5,417 10,018 13,353 17,011 18,954 20,748

EBITDA 4,997 3,589 6,840 13,245 16,447 20,154 22,099 23,895

Year to 31 Dec 2007 2008 2009 2010 2011 2012E 2013E 2014E

Profit before tax 3,106 2,440 5,770 9,987 13,622 17,580 19,773 21,778

Depreciation and amortisation 1,906 1,567 1,423 3,227 3,094 3,142 3,145 3,147

Tax paid (440) (578) (525) (728) (850) (2,893) (3,254) (3,584)

Change in working capital 1,205 (4,224) 3,535 1,193 (4,863) 11,642 2,270 2,373

Other operational CF items 1,534 (10) 1,121 2,185 2,325 2,637 2,863 3,127

Cash flow from operations 7,311 (806) 11,324 15,863 13,328 32,108 24,796 26,841

Capex (1,233) (2,627) (3,898) (4,411) (3,539) (3,981) (4,658) (5,450)

Net (acquisitions)/disposals (2,793) 1,337 (954) (490) (34) (1,745) (1,987) (2,296)

Other investing CF items 98 (355) (6,477) (8,202) 496 (271) 0 0

Cash flow from investing (3,928) (1,645) (11,329) (13,103) (3,078) (5,997) (6,645) (7,746)

Change in debt (2,776) (2,127) (9,014) (10,521) (11,411) 5,311 523 535

Net share issues/(repurchases) 4,762 4,047 11,712 20,720 13,083 5,311 523 535

Dividends paid (381) (266) (542) (1,328) (2,627) (3,316) (4,081) (4,545)

Other financing CF items (496) 191 557 (1,425) 371 (176) 91 96

Cash flow from financing 1,109 1,845 2,713 7,446 (583) 7,129 (2,943) (3,380)

Forex effect/others 0 0 0 0 0 0 0 0

Change in cash 4,491 (606) 2,708 10,206 9,667 33,240 15,207 15,714

Free cash flow 6,078 (3,433) 7,426 11,452 9,788 28,127 20,138 21,391

Financial summary


26 October 2012

- 5 -

Balance sheet (PHPm)

Key ratios (%)


Company profile

DMCI Holdings is a leading conglomerate with strong synergy in its business operations such construction, power, real estate and mining. All these segments benefit the company's technical expertise in all fields of engineering. The Group‟s ultimate goal is to play a vital role in the nation‟s bid toward progress, inspired by its vision to become an institution in the construction industry committed to the economic and social development of the country.

As at 31 Dec 2007 2008 2009 2010 2011 2012E 2013E 2014E

Cash & short-term investment 3,540 3,069 3,262 9,947 15,066 17,448 18,011 18,344

Inventory 6,376 8,931 10,660 12,705 17,485 17,430 17,920 18,425

Accounts receivable 2,861 6,599 5,404 9,179 8,408 14,092 14,918 15,793

Other current assets 3,889 2,598 4,170 4,534 5,151 5,266 5,386 5,511

Total current assets 16,665 21,197 23,497 36,364 46,109 54,235 56,233 58,073

Fixed assets 2,933 4,475 21,970 21,781 23,419 27,401 32,059 37,509

Goodwill & intangibles 0 0 0 0 0 0 0 0

Other non-current assets 8,708 9,982 12,172 13,121 14,655 17,363 20,620 24,556

Total assets 28,307 35,654 57,638 71,266 84,184 98,998 108,912 120,138

Short-term debt 40 438 1,207 760 1,491 3,161 3,256 3,353

Accounts payable 2,767 5,651 8,141 10,102 11,926 13,205 14,009 14,574

Other current liabilities 5,701 6,203 9,282 9,507 9,140 11,146 11,395 11,650

Total current liabilities 8,509 12,292 18,630 20,369 22,557 27,511 28,659 29,578

Long-term debt 2,022 3,953 14,284 15,859 17,776 21,416 21,844 22,281

Other non-current liabilities 1,112 943 1,330 2,615 3,381 2,932 3,106 3,303

Total liabilities 11,643 17,188 34,244 38,843 43,714 51,859 53,610 55,162

Share capital 7,422 7,421 7,421 7,421 7,421 7,421 7,421 7,421

Reserves/R.E./others 7,099 9,078 13,047 19,529 26,471 33,411 41,573 51,247

Shareholders' equity 14,521 16,499 20,468 26,951 33,892 40,832 48,994 58,668

Minority interests 2,143 1,967 2,926 5,472 6,578 6,307 6,307 6,307

Total equity & liabilities 28,307 35,654 57,638 71,266 84,184 98,998 108,912 120,138

EV 145,415 147,894 157,608 151,996 149,168 150,133 148,137 146,077

Net debt/(cash) (1,477) 1,323 12,229 6,672 4,201 7,129 7,089 7,291

BVPS (PHP) 5.468 6.213 7.708 10.149 12.763 15.376 18.450 22.093

Year to 31 Dec 2007 2008 2009 2010 2011 2012E 2013E 2014E

Sales (YoY) 43.4 28.0 50.3 59.5 9.9 12.1 5.5 5.6

EBITDA (YoY) 88.6 (28.2) 90.6 93.6 24.2 22.5 9.7 8.1

Operating profit (YoY) 180.5 (29.6) 139.8 84.9 33.3 27.4 11.4 9.5

Net profit (YoY) 103.9 (25.8) 178.7 67.2 22.0 19.6 19.8 10.1

Core EPS (fully-diluted) (YoY) 103.9 (25.8) 178.7 67.2 22.0 19.6 19.8 10.1

Gross-profit margin 38.5 29.1 27.6 36.8 40.3 45.0 45.7 46.3

EBITDA margin 35.3 19.8 25.1 30.5 34.4 37.6 39.1 40.0

Operating-profit margin 22.6 12.4 19.9 23.0 27.9 31.7 33.5 34.7

ROAE 18.7 10.9 25.4 33.2 31.5 30.7 30.6 28.1

ROAA 9.3 5.3 10.1 12.2 12.3 12.5 13.2 13.2

ROCE 19.1 10.9 17.5 22.8 24.6 25.9 24.9 24.3

ROIC 18.4 9.8 17.5 24.1 28.7 28.7 27.1 25.7

Net debt to equity n.a. 8.0 59.7 24.8 12.4 17.5 14.5 12.4

Effective tax rate 17.6 24.4 10.4 10.3 9.9 16.5 16.5 16.5

Accounts receivable (days) 86.2 95.1 80.3 61.2 67.1 76.6 93.6 93.9

Current ratio (x) 2.0 1.7 1.3 1.8 2.0 2.0 2.0 2.0

Net interest cover (x) 22.3 n.a. n.a. 19.3 81.6 n.a. n.a. n.a.

Net dividend payout 0.0 0.0 11.3 16.9 27.7 28.9 29.7 30.0

Financial summary continued …


26 October 2012

- 6 -

Initiation: building a firm foundation

We expect DMC to generate higher returns than its conglomerate peers.

ROAE highest among its peers

Higher returns to shareholders

We forecast a 2013 ROAE for DMC of 30.6%, the highest among its peers with similar business profiles in the conglomerate space in the Philippines. In our opinion, the company has one of the most attractive valuations and the strongest earnings-growth potential among Philippines conglomerates, with a PER of 10.8x based on our 2013 EPS forecast. In terms of 2013E PERs among conglomerates, DMC is followed by Aboitiz Equity Ventures (AEV PM) Not rated) with an ROAE of 22.37% and a PER of 12.1x (based on the Bloomberg-consensus forecast). The process of filtering stocks in the following chart was random, focusing only on Philippine holdings stocks with subsidiaries they held that are exposed in heavy industries such as power, energy, utility and real estate businesses. DMC focuses on underserved segments of the domestic economy in which we believe the company has the expertise to achieve high-quality finished projects. Selected Philippine conglomerates: PERs and ROAEs

Source: Bloomberg, Daiwa estimates for DMC

Peer comparison: 2013E key metrics

Company 2013E EPS growth (%)

2013E PER (x)

2013E PBR (x)

2013E ROE (%)

Upside potential (target price vs.

current share price)

Ayala Corp. 12.3 18.7 1.89 9.3 16.6

Aboitiz Equity Ventures (5.0) 12.1 2.57 22.4 0.9

Alliance Global, Inc. 15.3 11.6 1.65 13.1 3.1

DMC 19.8 10.8 3.05 30.6 15.5

JG Summit 26.1 11.4 1.27 11.8 24.2

Metro Pacific Investments 15.9 12.6 1.12 9.4 21.8

SM Investments PM 15.0 18.8 2.59 12.9 (1.2)

San Miguel Corp 18.9 11.3 0.82 11.9 4.2

Industry average 14.8 13.4 1.87 15.2 10.7

Source: Bloomberg, Daiwa forecasts (DMC)

Note: based on share prices as at 24 October 2012

A well-balanced portfolio that should continue to deliver stable revenue growth

Focusing on underserved industries in the domestic economy

DMC is a conglomerate that started business as a construction firm in 1954. It has developed into a conglomerate with one of the highest market caps in the Philippines. The company‟s main businesses are: 1) mining, 2) power, 3) real estate, and 4) construction. In addition, it holds a minority stake in a water utility business. DMC‟s construction business has been at the core of all the other business ventures the company has been involved in over the past 50 years due to its engineering expertise. All its businesses – real estate, power plants, construction (infrastructure projects), and mining – require engineering expertise. We believe that focusing on these sectors provides considerable revenue-growth potential for DMC, as these sectors remain underserved in the Philippines.

PPP projects should now be in focus

We think PPP projects will start to go out to tender starting from the end of 2H12 after almost two years of delays. The government has fine-tuned the key guidelines, and we now expect it to set out its flagship projects. For 2012, the government has identified priority projects amounting to PHP163.82bn (USD3,723m) (see the following table) in addition to government spending on infrastructure of PHP182bn (USD4,136m). Listed companies, especially, conglomerates with infrastructure portfolios, are planning to bid in these auctions and should be the main beneficiaries.

AC

AEV

MPI

DMC

0.0

5.0

10.0

15.0

20.0

25.0

30.0

35.0

0 5 10 15 20 25 30

RO

AE

201

3E

PER 2013E

Attractive Premium

Opportunistic Laggard


26 October 2012

- 7 -

Government priority projects to be auctioned under PPP programmes

PPP projects Project amount

(PHPm) USDm

Dept of Education Public school classroom contract* 10,400 236.36

Vaccine Self-Sufficiency Program 900 20.45

Modernization of the Philippine Orthopedic Center 5,000 113.64

Common Fare Collection System 1,800 40.91

Laguindingan Airport Operations and Maintenance contract 7,800 177.27

New Bohol Airport 8,000 181.82

Mactan Terminal 2 Airport Development project 10,150 230.68

Metropolitan Waterworks and Sewerage System (MWSS) New Water Supply deal

25,000 568.18

Operation and maintenance contracts for the Agus hydroelectric power plant’s turbines

1,500 34.09

Cold Chain Systems project 5,300 120.45

Puerto Princesa Airport Development Project 4,200 95.45

North Luzon Expressway-South Luzon Expressway Connector project

20,280 460.91

Cavite-Laguna Expressway 19,690 447.50

LRT-2 East Extension/Operation and Maintenance contract 11,300 256.82

Corn Bulk Handling and Trans shipment System project 12,500 284.09

Balara Water Hub 20,000 454.55

Total 163,820 3,723

Source: PPP Centre

Note: The tender for this contract has been awarded to BF Construction and MWIDE PM

DMC: a direct infrastructure play

We estimate that 99.3% of DMC‟s asset valuation is exposed to heavy industries, making it a direct infrastructure play in the Philippine. We expect it to be one of the major holding companies participating in government PPP tenders. However, we do not factor this into our forecasts or valuation. In this initiation report, we focus on the existing projects of the company and forecast a net-income (attributable to shareholders) CAGR of 16.4% for 2012-14, due to diversified core businesses that have strong synergies, which in return should provide healthy returns to shareholders. DMC: net-income breakdown (2009-15E)


What drives the share price?

Awarded contracts and tenders are the key share-price drivers

Since 2010, DMC‟s share price has generally outperformed the PSEi when the company has secured new contracts or won tenders either from the government or from the private sector. This suggests that DMC‟s share-price momentum comes primarily from the company‟s core expansion, which is turn drives strong results in its bottom line. DMC: share-price performance vs. the PSEi (2010-Oct 2012)

Year PSEi (%) PER (x) DMC (%) PER(x) Relative to

index (%)

2010 37.6% 13.69 271.1% 12.45 233.5%

2011 4.1% 15.27 14.7% 11.5 10.7%

2012* 23.6% 17.95 36.1% 13.0 12.4%

Source: Bloomberg & Daiwa estimates, *year to 24 October 2012

DMC: strong share-price movements in PHP (2004-12)

Source: Technistocks, Company

Given DMC‟s engineering expertise and its experience in construction, a track record of winning bids and price competitiveness, and its ability to execute on high-quality projects, we expect the company to win some of the major tenders from among the government‟s PPP projects as well as private contracts both inside and outside its core businesses over the next few years. We expect projects in the government‟s PPP scheme to start being awarded from 2013, the year when the second half of the current administration starts. Although we do not include any of these projects in our forecasts for the construction business, we estimate the contracts could increase its construction segment revenue by 7% YoY in 2013 and account for 22% of DMC‟s 2013 consolidated revenue.

0

5,000

10,000

15,000

20,000

2009 2010 2011 2012E 2013E 2014E 2015E

Mining Electricity Construction Real estate Others Water

0

10

20

30

40

50

60

70

Dec-04 Dec-05 Dec-06 Dec-07 Dec-08 Dec-09 Dec-10 Dec-11

DMC shar e price

Won the tender for

Maynilad

Water

Awarded 600MW CALACA coal-fired

thermal-power Turn around in SCC's PM

operations

Sold AG&P for PHP1.75bn; won mining contract for Benguet

SCPC signed a 7+3-year contract with Meralco; completed rehabilitation of Calaca unit 2


26 October 2012

- 8 -

DMC: construction segment order-book backlog

Source: DMC

Valuation suggests price has not yet peaked

We expect the share price to rise

The DMC stock is trading currently at a forward PER (based on our 2012 EPS forecast) of 13.0x, which is slightly above its average +1SD level of 12.98x. In 2010, the stock reached a PER of 15x, close to +2SD, in late 2010 (see see following chart). Our SOTP valuation implies a 2013E PER of 12.5x, above the stock‟s average over the past five years of 9.60x. In our opinion, the market has not fully priced in the positive earnings-growth prospects of the company‟s four main businesses and the expected improvements in its operations. Thus, we see further share-price upside potential over the next six months.

DMC: forward PER (x) December 2007-October 2012)


Power division has secured several contracts

Despite the decrease in coal prices globally this year, the sales volume and prices of DMC‟s mining subsidiary, Semirara Mining Corp (SCC) (Not rated), are unlikely to be affected given that its main customer is the coal thermal-power plant (Unit 1 and 2 600MW

Coal-fired Thermal Power Plant) under Sem-Calaca Power Corp (SCPC), which is 100%-owned by SCC. SCPC has secured bilateral agreements and is now less exposed to the volatility of spot prices, as Meralco (Not rated) renewed a power-supply contract agreement at the end of last year for a seven-year period with an option to extend it for an additional three years.

Rating and target price

Six-month target price of PHP64.90

We initiate coverage of DMC with an Outperform (2) rating and six-month target price of PHP64.90 (implying 15.5% potential upside). We use an SOTP methodology to value DMC, employing a DCF approach for the company‟s main operating units (96% of the DMC‟s NAV, based on our estimates). We value all the operating divisions on the basis of free cash flow to the company, with an average WACC of 9.02% and an average terminal growth rate of 3.9%. We apply a 20% conglomerate discount to our NAV to derive our six-month target price. We believe that such a discount is reasonable, given that we expect much of the company‟s business-growth potential to be visible from 2012-14. We believe this approach captures both the company‟s long-term earnings-growth prospects and its short-term earnings visibility. DMC: breakdown of SOTP-derived target price

Business Segment % of Total Valuation

(PHPm) Valuation

method

Mining 25.0% 56,104 DCF

Power 18.1% 40,606 DCF/PER

Real Estate 11.7% 26,111 RNAV

Construction 21.2% 47,424 DCF

Water Utility 20.1% 45,050 DCF

Infrastructure 3.2% 7,275 P/S

Other Assets and Investments 0.7% 1,553 DCF

Total 100.0% 224,123

Less Debt

8,661

Tota value without the conglomerate discount 215,462

20% conglomerate discount

43,092

Total equity value

172,370

Target price (per share, PHP)

64.90

Source: Daiwa estimates and forecasts

Sources of business growth

In our valuation, we include the projects and expansion programmes of the company‟s core and non-core operating units over the next three years, as follows.

Building of a new 300MW power plant. SCPC is currently building a new power plant that is due to be operational in 2015. It is a 2x 150MW coal-fired thermal-power plant, like the current power plant, but will use a new technology that can burn a low grade of coal. We forecast this to result in an additional PHP1bn in net profit for DMC. Most of the

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26 October 2012

- 9 -

company‟s power business capacity is sold under bilateral agreements to the power-distribution companies. In the company‟s 1H12 financial report, 99% of the volume sold was through the bilateral agreements to the electricity distribution utilities, with only 1% sold on the spot market. This was a big change from 2011, when the volume sold on the spot market accounted by 27% of the total.

Acquisition of ENK PLC. In 2007, ENK entered into a joint-venture agreement with Rusina Mining NL (Rusina) to develop two nickel deposits on Luzon Island in the Philippines: Acoje and Zambales Chromite. ENK merged with Rusina in 2010, gaining sole ownership of both the assets. DMC currently holds a 60% stake in the merged entity, ENK PLC. We include in our valuation and revenue forecasts the contribution from Acoje Mining‟s (60% owned by ENK) nickel operations.

Construction projects in the PPP pipeline. DMC has been contracted by Marubeni to construct the MRT 7 metro light rail line in the north of Manila. This project was awarded to San Miguel Corp (SMC) (Not rated). DMC‟s construction unit expects to see revenue of USD500m when SMC gives the project final approval, expected in 2-3 years‟ time.

Rate rebasing tariff adjustment for 2013. DMC‟s non-core unit, Maynilad Water Service (in which it has a 42% stake), is in the process of negotiating with the government a tariff adjustment that covers the next five years. We assume that the average tariff will increase by 30%, spread over the next five years (2013-17). We expect this to result in 14.4% YoY sales growth for 2013 and billed volume growth of 7% YoY.

Toll road due to be operational in 2015. DMC has a 25% minority stake in Tarlac-Pangasinan-La Union Expressway (TPLEX), a joint venture between SMC and other domestic contractors. This is an 88km-long two-lane road. The construction started in 2Q10 and PHP1.9bn was paid to D.M.Consunji, DMC‟s construction unit. We believe that at some point in time DMC may sell its stake in the expressway, but we do not include this in our valuation. We include only the toll-road revenue potential based on DMC‟s stake in our valuation.

We do not include the following in our valuation.

PPP projects, such as the building of the Light Rail Transit line extension in Manila, the construction cost of which is valued by the government at PHP25bn, and the MRT 3 project (another light rail

transit system in Manila, for which the government has yet to finalise the tender process.

EPS analysis

2011 EPS consensus revisions versus actual

For 2011, DMC saw a 22% YoY rise in its net income (attributable to shareholders) to PHP9.6bn from PHP7.9bn for 2010. Despite a decline in its general construction revenue and the absence of operating results from the steel-fabrication business, significant revenue growth in the coal, nickel, and power segments along with sustained revenue improvements in the real-estate and water businesses led to the rise in the consolidated net profit. For 2011, mining was the main driver of the PHP1.7bn increase in the company‟s income due to a rise in coal prices and an improvement in the operation of the nickel business. The real-estate and power-generation segments also saw significant revenue growth due to healthy housing sales and increased generation capacity from the rehabilitated Calaca unit 2 power plant. Investments in the water business accounted for 23% of total net income (up from 19.5% for 2010). The Bloomberg-consensus 2011 (adjusted) EPS forecast rose by 5.5% in 1H11 and was cut by 5.7% in 2H11. The ultimate 2011 consensus forecast of PHP3.584 was still 0.7% lower than the actual EPS of PHP3.61. In our view, volatile coal prices, with 30% of SCPC‟s electricity sold on the spot market, led to frequent revisions to analysts‟ EPS forecasts. DMC: 2011 consensus EPS revisions (PHP)

Source: Bloomberg

2012E EPS consensus revisions and Daiwa forecast

Since early October the Bloomberg-consensus 2012 EPS forecast has been raised by 3.5%, from a low of PHP4.098 to PHP4.245. We believe this now factors in the potential from construction revenue from the

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26 October 2012

- 10 -

government‟s decision to fast-track PPP programmes, for which we expect tenders to be released in 2013. We believe the initial reason for the revisions to the consensus EPS forecast in July of this year was due to the weaker coal prices and a slight slowdown in power-business sales during 1H12. However, we now believe it is fully priced in, and that the consensus EPS forecast for 2H12 will be raised more before the end of this year. Our forecasts start at 2H12; in the chart that follows, we highlight our 2013E EPS of PHP4.323. DMC: 2012 consensus EPS forecast revisions and Daiwa forecast

Source: Bloomberg, Daiwa forecasts

Investment risks

There are risks that could derail our six-month investment view for the company that we have not factored into our model.

Disruptions at power-plant operations

In 2011, the company‟s Unit 2 power plant was running at an average load of 254MW due to extended commissioning and a high pressure-heater leak. The gross power generation for 2011 was 1,132 GWh, with 43% capacity-factor, 60% availability, and 36% forced-outage rates. The rehabilitation of the Calaca Power Plant Unit 2 was completed at the end of 2011, while Unit 1 was rehabilitated this year and started operating only in the second half of 2012. The power plants are closed for maintenance for two months every year. If the shutdown period exceeds the designated period, which is in our valuation forecast, this would have an adverse impact on our earnings forecasts. We carried out a sensitivity analysis to see what the impact would be on DMC‟s P&L if the shutdown period were to extend beyond two months.

DMC: 2013E sensitivity analysis for revenue and net profit (%)

Delay in months Base

+1 mon +2 mon +3 mon + 4 mon +5 mon +6 mon

Revenue 56,573 (3.2) (6.5) (9.7) (13.0) (16.2) (19.5)

Net profit 13,755 (2.8) (5.6) (8.4) (11.1) (13.9) (16.7)


Continued slowdown in global economy could affect coal sales volume

If the global economic slowdown continues until 2H13, particularly in Asia, there could be adverse effects on DMC‟s subsidiary coal-mining business in that its coal sale exports could drop significantly. In 2010 and 2011, 57% and 37%, respectively, of SCC‟s total coal sales were export-bound. However, in our forecasts, we assume that only 12% will be for export as Sem-Calaca Power Corp (SCPC), DMC‟s power company under its mining company, has finalised an agreement with Meralco, with 420MW allotted to the bilateral agreement. We believe SCC will continue to protect its coal mine by prioritising local demand rather than conducting external trade, given the demand and price volatility of coal seen in 2011. During this time, the increase in production-marketing efforts was restrained by the weak global economic climate, where coal exports declined by 41% YoY. In the mining division, coal revenue accounts for 87% of the total mining revenue. Therefore, any change in the price of coal could affect both DMC‟s top line and bottom line. DMC: 2013 sensitivity analysis for revenue and net profit (%)

Mining-coal price Base -2% -5% -8% -10% -20%

Revenue 56,573 (1.37) (2.39) (3.42) (4.10) (7.52)

Net profit 13,755 (3.91) (6.85) (9.79) (11.74) (21.53)


Failure to launch new 300MW power plant in 2015

In our forecasts, we have factored in a new 300MW coal-fired thermal-power plant, which is scheduled to become operational in 2H15. We forecast this plant to contribute PHP1bn to DMC‟s bottom line for the given period. If the operation is delayed, we might have to reduce our valuation for the power division and its earnings forecasts for 2015, which would have a negative effect on DMC.

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26 October 2012

- 11 -

Appendix: company background

DMC: significant events

Year

2011 Won various building projects, including a casino hotel worth PHP8.6bn

Completed rehabilitation of the Calaca Plant unit 2 (300MW)

SCPC signed contract with Meralco for 7+3 years

2010

AG&P was sold for PHP1.75bn

DMCI Mining Corp, won mining contracts for Benguet's nickel mine in Zambales

2009

Awarded a 600MW coal-fired thermal-power plant

Awarded an elevated road construction (2yrs) and building contract (3yrs) worth PHP11bn

2008

Awarded a building contract (2 1/2 yrs) worth PHP5bn

DMCI-MPIC consortium new ownership at 45:55 respectively

Maynilad exits the corporate rehabilitation business due to earnings losses

2007 Awarded the right to build and operate of a 13MW power plant in Masbate

Actual handover of Maynilad operations to DMCI-MPIC consortium

2006 DMCI-MPIC consortium (505:50) wins the bid to own 84% of Maynilad

2004 Turnaround of Semirara Mining Corporation

2000 Created residential development division (DMCI Homes)

1997 Expanded into coal, real estate, steel fabrication, and water

1995 Listed on the PSE on 18 December 1995; diversified into construction-related

business with stable operations

1980s Won various significant government infrastructure projects

1970s Built Brunei's New Istana (Sultan's Palace)

Ventured into international construction projects

1960s Became the leading building contractor in the Philippines

1954 Started as a construction business

Source: Company

Operating units should see continued earnings stability

We forecast the company‟s four key operating units to increase DMC‟s operating margin to 34.7% for 2014, from 27.9% for 2011, as we expect enhanced core revenue streams from higher sales at the company‟s electricity and mining divisions following the signing of a long-term contract with Manila Electric Co. We believe the construction and real-estate divisions should provide stable recurring earnings for 2013-15, especially as PPP projects are becoming more visible – we believe the government will be ready to release for tender priority projects starting in 2013.

I. Construction division: at the centre of the core businesses

D.M. Consunji was founded in 1954 and is seen as being one of the leaders in the Philippine construction industry. It has built more than 500 buildings, structures and landmarks, and has pioneered construction techniques in the Philippines. It was the first company in the country to use precast, pre-stressed and high-strength ready-mixed concrete. We value D.M. Consunji at PHP36,473m (USD879m) on a DCF basis, with a WACC of 9.5% and a terminal growth

rate of 4.5% (the past 25-year average GDP growth rate in the Philippines).

DMC: main construction projects

Year Construction contracts Estimated

amount (PHPm)

1Q12

TV5 Media Centre (PLDT & MPI group) n.a.

MRT 7 (SMC PM) 20,750

2x150MW coal-fired power plant (SLPC) n.a.

1x135MW thermal power plant (SLTEC) n.a.

2011

Entertainment City (BLOOM PM) 8,600

Makati Diamond Residences 625

NAC Tower 800

2009

Skyway extension 8,000

168 Residences 3,000

Raffles Suite & Residences & Fairmont Hotel n.a

LRT North Extension 770

Grand Tower 648

Source: Company

DMC: breakdown of construction projects

Source: Company

DMC: construction division EBITDA and EBIT


II. Real-estate division: should see continued stable revenue

DMCI Homes is DMC‟s residential development arm. It is the only integrated energy-performance certified and large-scale developer in the country to offer affordable homes to the middle-income market (including overseas Filipino workers) in Metro Manila. Its units sell at comparatively lower

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26 October 2012

- 12 -

prices, with the price per unit of PHP1.5-3bn, which is 10-15% (in price per sq m) lower than competitors selling the same type of unit. To date, DMCI Homes has more than 30 projects in Metro Manila, Cavite, Laguna and Boracay. We value DMCI Homes at PHP20,081m (USD484m) on a DCF basis, with a WACC of 8.33% and a terminal growth rate of 4.5%.

DMCI Homes: housing sales report (PHPm) (1999-2011)

Source: Company

DMCI Homes: revenue, sales & reservation, and net profit (PHPm)

Source: Company

DMC: real-estate division EBITDA and EBIT (2007-15E) (PHP)


III. Mining: provides opportunities given rising commodity demand

DMCI Holdings has two mining assets, coal (located in the Visayan region) and nickel mines that are located in western central Luzon Island, 290km north of Metro Manila. These mining assets comprise one-third of DMC‟s consolidated income and constitute 25% of DMC‟s net asset value currently. The mining division is an important asset as it gives DMC more opportunities to gain share of high demand for commodities, especially coal due to the volatility of crude-oil supply, while the nickel business could be a benefit if more demand for nickel ore arises in the global markets, such as China.

a. Coal mining: supplies power business

Coal-mining subsidiary Semirara Mining Corp (SCC) is the only large-scale coal producer in the Philippines, located on Semirara Island in Caluya, Antique, south of Metro Manila. It has an estimated 150m tonnes or 30% of the country‟s known coal reserves, according to JORC. SCC accounts for over 90% of the country‟s total coal production. In 2007, SCC started to export to China, Hong Kong, India and Thailand, the first in the Philippines to do so. Semirara‟s average coal grade is 5,300kcal. We value the Semirara coal operations at PHP45,039m (USD1,085m) on a DCF basis, with a WACC of 9.41% and a terminal growth rate of 3.0%.

DMC: coal sales volume and coal production (tonnes)

Source: Company

Demand for Semirara coal, both from the local and export markets, remained strong in 2011. However, given the company‟s revised objective of investing most of its resources in power generation, it strategically cut export sales in 2011, such that sales, at 6.52m tonnes, were 9% YoY lower than the 2010 sales volume of 7.15m tonnes.

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Sales volume Total coal production


26 October 2012

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The cut in the sales volume came from export deliveries, which dropped by 41% YoY, to 2.43m tonnes from 4.10m tonnes in 2010. Conversely, local sales increased by 34% YoY, to 4.09m tonnes from 3.05m tonnes in 2010. With increasing local demand, marketing efforts have shifted back to prioritising the domestic market, where DMC can make full use of its competitive advantage over imported coal. Thus, from a 43:57 market share in favour of export sales over domestic sales in 2010, the scale tipped to 63:37 in 2011. SCC: composite coal price

Source: Company

SCC: sales volume breakdown

2008 2009 2010 2011

Total local sales volume (tonne) 2,321 2,202 3,047 4,090

Blended FOB price/tonne (PHP) 2,846 3,341 2,565 3,083

Export sales volume (tonne) 993 2,262 4,099 2,430

% to total vol. 30.0% 50.7% 57.4% 37.3%

FOB price/tonne (PHP) 1,855 1,878 2,178 2,947

Total sales vol. (local & export) 3,314 4,464 7,146 6,520

Blended FOB price/tonne (PHP) 2,549 2,600 2,343 3,032

Source: company

SCC: revenue, net profit & composite price

Source: Company

DMC: coal-mining division EBITDA & EBIT (PHP)

Source: Company and Daiwa forecasts

Indonesian coal reference price (Melawan Coal 5,400kcal)

Source: Bloomberg

Note: the price reference is an average of the Indonesia Coal Index, Platts-1, Newcastle Export Index and global Coal NEWC Index from the previous month. Melawan Coal specification is almost the same as Semirara Coal at 5,300kcal

b. Nickel mining: opportunistic as base-metal-

ore demand is likely to have bottomed out

DMCI Mining Corp, DMC‟s nickel and metal (non-coal) mining company has a nickel asset through ENK Plc, which is a nickel-laterite development and production company focused on developing its Acoje project in the Philippines. ENK has developed a tank-leaching technology to remove nickel from ore, which is cost-effective, commercially viable and environmentally sensitive. Incorporated in England and Wales on 12 June 2000, the company was successfully listed on the Alternative Investment Market in the UK in March 2004. It was listed on the Australian Securities

Exchange (ASX) in June 2010. ENK was founded in the middle of 2003 as European Nickel plc, and initially pursued the development of the Caldag mine, a nickel asset in Western Turkey. In 2007, ENK entered into a joint venture with Rusina Mining NL (Rusina) to develop two nickel deposits on Luzon Island in the Philippines; Acoje

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26 October 2012

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and Zambales Chromite. ENK merged with Rusina in 2010, gaining sole ownership of both assets in the Philippines. We value DMC‟s nickel operations at PHP11,871m (USD286m) using a DCF methodology, with a WACC of 8.84% and a terminal growth rate of 3.0%. We consider our chosen growth rate to be conservative for nickel mining in the Philippines (over our forecast period), where demand for nickel mines depends heavily on the global demand for nickel, particularly in China (90% of Philippine nickel ore is exported to China).

DMC: nickel-mining revenue, EBITDA and EBITDA margin


The Philippines is one of the major suppliers of nickel ore to China

Our regional economics team believes a strong recovery in China‟s domestic economy will start in 4Q12, and recently revised up its 2013 GDP growth forecast for China to 8% YoY (from 7.9% YoY) (see Daiwa‟s report, „China Economy: The recovery has started‟, published on 18 October 2012). As such, we are confident that there will be a need again for the Philippines to supply China much-needed nickel ore. In 2006, China imported 3.6m tonnes of low-grade nickel ore, while in 2007 imports rose to 11-12m tonnes, with the majority of the material supplied by the Philippines, Indonesia and New Caledonia.

China: quantity of imported nickel from the Philippines (tonnes)

Source: Bloomberg (CNOIIQPH Index)

Nickel spot price on the LME

Source: Bloomberg

Nickel forecast price

Source: Bloomberg

IV. Power division: stable recurring income through long-term bilateral agreements

The acquisition and operation of the 2 x 300MW power plants in Calaca Batangas have ensured a stable market for the coal business segment and given Semirara SCC, as a group, a dominant position in the power sector. SCPC is 100%-owned by Semirara Mining Corp. Based on our estimates of the asset value of DMC, 99.6% of DMCI‟s power-business asset is structured under SCPC.

(60% )

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Nickel Revenue EBITDA EBITDA Margin (RHS)

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Median price for analysts in the Bloomberg consensus for the past 6 quarters

(USD/tonne)


26 October 2012

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In 2009, DMC won the bid for government power assets, the 2 x 300MW Calaca Thermal Coal-Fired Power Plants. The power plant comprises Unit I and II, each with 300MW installed capacity. Unit I has been operating for 25 years and has consistently seen issues relating to safety, reliability, efficiency, and upgrades. As such, obsolescence and environmental issues have occurred. It was officially closed for rehabilitation on 29 August 2011 and was back on the grid in 2H12. In December 2011, SCPC signed a new power supply contract with Meralco, effective 26 December 2011, for a term of seven years and with an option to extend for a further three years upon mutual agreement. The initial contracted capacity is 210MW and should be increased to 420MW of the total installed capacity of 600MW once commercial operations of both units start. We value DMC‟s power operations at PHP31,230m (USD752m) using a DCF methodology, with a WACC of 8.42% and a terminal growth rate of 3.0%. The growth rate reflects the conservative growth rate of the Philippines power sector currently.

DMC: power division: 2-year operating performance

2010 2011

Volume sold (’000 gWh) 1,850 2,025

gWh generation (’000) 1,657 1,860

Revenue (PHPm) 8,660 9,618

Average price (PHP) 4.90 4.76

Cost of sales per Kwh 3.34 3.16

Gross margin/unit 1.56 1.59

Net income (PHPm) 1,440 1,872

Source: Company

DMC sales mix ratio

Source: Company

DMC: sales-mix ratio

Source: Company

DMC: power division revenue, EBITDA & EBITDA margin


V. Water utility: sustained earnings contribution from a non-core investment

The company‟s investment in the water sector is recognised mainly through its partnership with Metro Pacific Investments Corp (MPIC), which has operations under Maynilad. Maynilad handles the water distribution and sewer services for the western side of Metro Manila. It holds a 25-year exclusive concession to provide water in the West Zone, which started in 1997. An extension of 15 years was approved by Metropolitan Waterworks and Sewerage System (MWSS). Maynilad currently supplies approximately over 2,100m litres per day of water to 8.2m of the area‟s 9.3m population. It is the largest water concessionaire in terms of customer base. We expect 2013 to be a rate rebasing year, when the regulatory body will grant an additional base tariff for the next five years. We estimate that Maynilad will be granted PHP7.1/per cubic meter, which should be spread over the next five years, or equivalent to PHP1.42/per cubic metre yearly.

Meralco81.0%

Batelec 112.0%

Trans Asia6.0% Others

1.0%

SPOT market0.0%

1H12

Meralco38.4%

Batelec 111.1%

Trans Asia2.0%

Others 21.2%

SPOT market27.3%

2011

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26 October 2012

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Maynilad: operating indicators

2010 2011 2012E 2013E 2014E 2015E

Average – all-in tariff (PHP) 32.24 34.02 35.42 37.86 40.41 41.86

Annual billed vol (mcm) 373.80 404.70 440.31 471.14 499.40 524.37

Total Revenue (PHPm) 12,050 13,769 15,597 17,836 20,181 21,951

Water supplied (mcm) 804 776 733 760 780 795

NRW (mcm) 430 371 293 289 281 270

NRW (%) ave. 53.48 47.83 39.96 38.00 36.00 34.00

Daily billed vol. (mld) 1,024 1,109 1,206 1,291 1,368 1,437

Source: Maynilad, Daiwa forecasts

DMC expects to carry out major construction and engineering work

Maynilad is expected to incur capex of PHP43bn on infrastructure over the next 5-6 years. D.M. Consunji expects to be awarded about 15% of this, or PHP6.45bn, or around PHP1bn a year. DMC sees the potential for a significant improvement in Maynilad‟s key performance measures/metrics. Maynilad‟s non-revenue water (NRW) started at 66% in 1997 and is currently at 45%. It expects to bring this down to 40% by the end of 2012. Maynilad: key indicators – billed volume and NRW

Source: Maynilad and Daiwa forecasts

Maynilad: daily billed volume

Source: Maynilad and Daiwa forecasts

We value DMC‟s 42% stake in Maynilad (42%) at PHP34,648m (USD835m) using a DCF methodology, with a WACC of 8.21% and a terminal growth rate of 4.5%, the same as the domestic growth rate in the Philippines for the past 25 years. The Philippine domestic economy depends heavily on personal consumption, which accounts for 75% of the country‟s GDP. DMC: water division EBITDA (PHP) and EBITDA margin


Majority of DMC is owned by tier-1 institutional investors

We believe long-term institutional investors have recognised DMC‟s positive potential and that the stock will continue to provide healthy returns. Also, we believe DMC has the capability to pay a regular cash dividend for the medium-to-long term given that its core operating divisions, including the water business, have stable cash flows.

DMC: selected top institutional shareholders (19 October 2012)

Source: Bloomberg

0

10

20

30

40

50

60

0

200

400

600

800

2010

2011

2012

E

2013

E

2014

E

2015

E

2016

E

2017

E

2018

E

2019

E

2020

E

2021

E

2022

E

Annual billed volume (mcm) Non revenue water (mcm)

Non revenue water (% ) ave. (RHS)

(mcm) (% )

0

500

1,000

1,500

2,000

2,500

2010

2011

2012

E

2013

E

2014

E

2015

E

2016

E

2017

E

2018

E

2019

E

2020

E

2021

E

2022

E

(mld)

0%

10%

20%

30%

40%

50%

60%

70%

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

2007 2008 2009 2010 2011 2012E 2013E 2014E 2015E

EBITDA LHS EBITDA Margin RHS

Majority

Shareholders71.1%

Other Minority

0.9%Market

25.9%

Fidelity Int'l

0.5% Legg Mason

0.3%Amundi

0.2%Rcm Capital

0.2%Frank Russell

0.2% Blackrock

0.2%

State Street Corp

0.1%

First State

Investments 0.1%

JF Asset

Management Ltd0.1%

Schroder

Investment Mgmt Ltd

0.1%

Baring Asset

Management Asia Ltd

0.1%


26 October 2012

- 17 -

DMC: SOTP-NAV valuation summary

PHP (000,000)

Company Company

Type Valuation

method Business

Type Key assumptions

Value (PHPm)

Total fair value DMC's % Attributable % Total

Mining Rev Gr%* EBITDA%* WACC T-Gr%

Semirara Mining Corp Public DCF Core 15.75% 52.59% 9.41% 3.00% 72,622 56.0% 40,668 18.1%

Nickel (Acoje) Public DCF Core 4.50% 46.10% 8.84% 3.00% 25,726 60.0% 15,436 6.9%

Power

Sem-Calaca Power Corporation Public DCF Core 18.15% 30.00% 8.42% 3.00% 70,895 56.0% 39,701 17.7%

Real Estate

DMCI Project Developers, Inc. Private RNAV Core 6.00% 29.99% 8.33% 4.50% 26,111 100.0% 26,111 11.7%

Construction

DM.M. Consunji, Inc. Private DCF Core 7.00% 18.94% 9.50% 4.50% 47,424 100.0% 47,424 21.2%

Water Utility

DMCI-MPIC Water Co., Inc. Private DCF JV 13.27% 60.42% 8.21% 4.50% 107,263 42.0% 45,050 20.1%

Other Assets and Investments

Merchandise Private DCF Others 15% 8% 10.45% 4.50% 1,553 100.0% 1,553 0.7%

Infrastructure Multiple Key Revenue Determinants

Private Infra Dev't Corp. Private P/S JV 4.0 Revenue per km 29,100 25.0% 7,275 3.2%

DMCI Power Corp Private PER Core 11.31 Net profit (price to earnings by peers) 905 100.0% 905 0.4%

Total Attributable Firm Value to DMC 224,123 100.0%

DMC's Consolidated Drafts & Loans Payable and Long-term Debt, net of Cash and Cash Equivalent, as at 31 Dec 2012 (estimate) 8,661

Total Equity Value Attributable to Common Shareholders, without Conglomerate Discount 215,462

20% Conglomerate Discount 43,092

Total equity value 172,370

Outstanding no of shares 2,655

Daiwa target price (PHP) 64.90


DMC: company structure (June 2012)

Source: Company


26 October 2012

- 18 -

Daiwa’s Asia Pacific Research Directory

SOUTH KOREA

Chang H LEE (82) 2 787 9177 [email protected]

Head of Korea Research; Strategy; Banking/Finance

Sung Yop CHUNG (82) 2 787 9157 [email protected]

Pan-Asia Co-head/Regional Head of Automobiles and Components; Automobiles; Shipbuilding; Steel

Anderson CHA (82) 2 787 9185 [email protected]

Banking/Finance

Mike OH (82) 2 787 9179 [email protected]

Capital Goods (Construction and Machinery)

Sang Hee PARK (82) 2 787 9165 [email protected]

Consumer/Retail

Jae H LEE (82) 2 787 9173 [email protected]

IT/Electronics (Tech Hardware and Memory Chips)

Thomas Y KWON (82) 2 787 9181 [email protected]

Pan-Asia Head of Internet & Telecommunications; Software (Korea) – Internet/On-line Game

Shannen PARK (82) 2 787 9184 [email protected]

Custom Products Group

TAIWAN

Mark CHANG (886) 2 8758 6245 [email protected]

Head of Research; Regional Head of Small/Medium Cap; Small/Medium Cap (Regional)

Yoshihiko KAWASHIMA (886) 2 8758 6247 [email protected]

Consumer/Retail

Birdy LU (886) 2 8758 6248 [email protected]

IT/Technology Hardware (Handsets and Components)

Christine WANG (886) 2 8758 6249 [email protected]

IT/Technology Hardware (PC Hardware)

Chris LIN (886) 2 8758 6251 [email protected]

IT/Technology Hardware (Panels)

INDIA

Punit SRIVASTAVA (91) 22 6622 1013 [email protected]

Head of Research; Strategy; Banking/Finance

Navin MATTA (91) 22 6622 8411 [email protected]

Automobiles and Components

Saurabh MEHTA (91) 22 6622 1009 [email protected]

Capital Goods; Utilities

Mihir SHAH (91) 22 6622 1020 [email protected]

FMCG/Consumer

Deepak PODDAR (91) 22 6622 1016 [email protected]

Materials

Nirmal RAGHAVAN (91) 22 6622 1018 [email protected]

Oil and Gas; Utilities

SINGAPORE

Adrian LOH (65) 6499 6548 [email protected]

Head of Singapore Research, Regional Head of Oil and Gas; Oil and Gas (ASEAN and China); Capital Goods (Singapore)

Srikanth VADLAMANI (65) 6499 6570 [email protected]

Banking (ASEAN)

David LUM (65) 6329 2102 [email protected]

Property and REITs

Ramakrishna MARUVADA (65) 6499 6543 [email protected]

Head of ASEAN & India Telecommunications; Telecommunications (ASEAN & India)

HONG KONG

Nagahisa MIYABE (852) 2848 4971 [email protected]

Regional Research Head

John HETHERINGTON (852) 2773 8787 [email protected]

Regional Head of Product Management

Pranab Kumar SARMAH (852) 2848 4441 [email protected]

Regional Head of Research Promotion

Mingchun SUN (852) 2773 8751 [email protected]

Head of China Research; Chief Economist (Regional)

Dave DAI (852) 2848 4068 [email protected]

Deputy Head of Hong Kong and China Research; Pan-Asia/Regional Head of Clean Energy and Utilities; Utilities; Power Equipment; Renewables (Hong Kong, China)

Kevin LAI (852) 2848 4926 [email protected]

Deputy Head of Regional Economics; Macro Economics (Regional)

Chi SUN (852) 2848 4427 [email protected]

Macro Economics (China)

Jonas KAN (852) 2848 4439 [email protected]

Head of Hong Kong Research; Head of Hong Kong and China Property; Regional Property Coordinator; Property Developers (Hong Kong)

Jeff CHUNG (852) 2773 8783 [email protected]

Automobiles and Components (China)

Grace WU (852) 2532 4383 [email protected]

Head of Greater China FIG; Banking (Hong Kong, China)

Jerry YANG (852) 2773 8842 [email protected]

Banking/Diversified Financials (Taiwan)

Leon QI (852) 2532 4381 [email protected]

Banking (Hong Kong, China)

Joseph HO (852) 2848 4443 [email protected]

Head of Industrials and Machineries (Hong Kong, China); Capital Goods –Electronics Equipments and Machinery (Hong Kong, China)

Bing ZHOU (852) 2773 8782 [email protected]

Consumer/Retail (Hong Kong, China)

Hongxia ZHU (852) 2848 4460 [email protected]

Consumer, Pharmaceuticals and Healthcare (China)

Eric CHEN (852) 2773 8702 [email protected]

Pan-Asia/Regional Head of IT/Electronics; Semiconductor/IC Design (Regional)

Felix LAM (852) 2532 4341 [email protected]

Head of Materials (Hong Kong, China); Cement and Building Materials (China, Taiwan); Property (China)

John CHOI (852) 2773 8730 [email protected]

Head of Multi-Industries (Hong Kong, China); Small/Mid Cap (Regional); Internet (China)

Kelvin LAU (852) 2848 4467 [email protected]

Head of Transportation (Hong Kong, China); Hong Kong and China Research Coordinator; Transportation (Regional)

Jibo MA (852) 2848 4489 [email protected]

Head of Custom Products Group; Custom Products Group

Thomas HO (852) 2773 8716 [email protected]

Custom Products Group

PHILIPPINES

Rommel RODRIGO (63) 2 813 7344 ext 302

[email protected]

Head of Philippines Research; Strategy; Capital Goods; Materials

Danielo PICACHE (63) 2 813 7344 ext 293

[email protected]

Property; Banking; Transportation – Port


26 October 2012

- 19 -

Daiwa offices

Office / Branch / Affiliate Address Tel Fax

DAIWA SECURITIES GROUP INC

HEAD OFFICE Gran Tokyo North Tower, 1-9-1, Marunouchi, Chiyoda-ku, Tokyo, 100-6753 (81) 3 5555 3111 (81) 3 5555 0661

Daiwa Securities Trust Company One Evertrust Plaza, Jersey City, NJ 07302, U.S.A. (1) 201 333 7300 (1) 201 333 7726

Daiwa Securities Trust and Banking (Europe) PLC (Head Office) 5 King William Street, London EC4N 7JB, United Kingdom (44) 207 320 8000 (44) 207 410 0129

Daiwa Securities Trust and Banking (Europe) PLC (Dublin Branch) Level 3, Block 5, Harcourt Centre, Harcourt Road, Dublin 2, Ireland (353) 1 603 9900 (353) 1 478 3469

DAIWA CAPITAL MARKETS LIMITED

HEAD OFFICE Gran Tokyo North Tower, 1-9-1, Marunouchi, Chiyoda-ku, Tokyo, 100-6753

(03) 5555 3111 (03) 5555 0661

Daiwa Capital Markets America Inc Financial Square, 32 Old Slip, New York, NY10005, U.S.A. (1) 212 612 7000 (1) 212 612 7100

Daiwa Capital Markets America Inc. San Francisco Branch 555 California Street, Suite 3360, San Francisco, CA 94104, U.S.A. (1) 415 955 8100 (1) 415 956 1935

Daiwa Capital Markets Europe Limited 5 King William Street, London EC4N 7AX, United Kingdom (44) 20 7597 8000 (44) 20 7597 8600

Daiwa Capital Markets Europe Limited, Frankfurt Branch Trianon Building, Mainzer Landstrasse 16, 60325 Frankfurt am Main, Federal Republic of Germany

(49) 69 717 080 (49) 69 723 340

Daiwa Capital Markets Europe Limited, Paris Branch 127, Avenue des Champs-Elysées, 75008 Paris, France (33) 1 56 262 200 (33) 1 47 550 808

Daiwa Capital Markets Europe Limited, Geneva Branch 50 rue du Rhône, P.O.Box 3198, 1211 Geneva 3, Switzerland (41) 22 818 7400 (41) 22 818 7441

Daiwa Capital Markets Europe Limited, Milan Branch Via Senato 14/16, 20121 Milan, Italy (39) 02 763 271 (39) 02 763 27250

Daiwa Capital Markets Europe Limited, Moscow Representative Office

25/9, build. 1, Per. Sivtsev Vrazhek, Moscow 119002, Russian Federation (7) 495 617 1960 (7) 495 244 1977

Daiwa Capital Markets Europe Limited, Bahrain Branch 7th Floor, The Tower, Bahrain Commercial Complex, P.O. Box 30069, Manama, Bahrain

(973) 17 534 452 (973) 17 535 113

Daiwa Capital Markets Europe Limited, Dubai Branch The Gate village Building 1, 1st floor, Unit-6, DIFC, P.O.Box-506657, Dubai, UAE.

(971) 47 090 401 (971) 43 230 332

Daiwa Capital Markets Hong Kong Limited Level 28, One Pacific Place, 88 Queensway, Hong Kong (852) 2525 0121 (852) 2845 1621

Daiwa Capital Markets Singapore Limited 6 Shenton Way #26-08, DBS Building Tower Two, Singapore 068809, Republic of Singapore

(65) 6220 3666 (65) 6223 6198

Daiwa Capital Markets Australia Limited Level 34, Rialto North Tower, 525 Collins Street, Melbourne, Victoria 3000, Australia

(61) 3 9916 1300 (61) 3 9916 1330

DBP-Daiwa Capital Markets Philippines, Inc 18th Floor, Citibank Tower, 8741 Paseo de Roxas, Salcedo Village, Makati City, Republic of the Philippines

(632) 813 7344 (632) 848 0105

Daiwa-Cathay Capital Markets Co Ltd 14/F, 200, Keelung Road, Sec 1, Taipei, Taiwan, R.O.C. (886) 2 2723 9698 (886) 2 2345 3638

Daiwa Securities Capital Markets Korea Co., Ltd. One IFC, 10 Gukjegeumyung-Ro, Yeouido-dong, Yeongdeungpo-gu, Seoul, 150-876, Korea

(82) 2 787 9100 (82) 2 787 9191

Daiwa Securities Capital Markets Co Ltd, Beijing Representative Office

Room 3503/3504, SK Tower, No.6 Jia Jianguomen Wai Avenue, Chaoyang District, Beijing 100022, People‟s Republic of China

(86) 10 6500 6688 (86) 10 6500 3594

Daiwa SSC Securities Co Ltd 45/F, Hang Seng Tower, 1000 Lujiazui Ring Road, Pudong, Shanghai 200120, People‟s Republic of China

(86) 21 3858 2000 (86) 21 3858 2111

Daiwa Securities Capital Markets Co. Ltd, Bangkok Representative Office

Level 8 Zuellig House, 1 Sliom Road, Bangkok 10500, Thailand

(66) 2 231 8381 (66) 2 231 8121

Daiwa Capital Markets India Private Ltd 10th Floor, 3 North Avenue, Maker Maxity, Bandra Kurla Complex, Bandra East, Mumbai – 400051, India

(91) 22 6622 1000 (91) 22 6622 1019

Daiwa Securities Capital Markets Co. Ltd, Hanoi Representative Office

Suite 405, Pacific Palace Building, 83B, Ly Thuong Kiet Street, Hoan Kiem Dist. Hanoi, Vietnam

(84) 4 3946 0460 (84) 4 3946 0461

DAIWA INSTITUTE OF RESEARCH LTD

HEAD OFFICE 15-6, Fuyuki, Koto-ku, Tokyo, 135-8460, Japan (81) 3 5620 5100 (81) 3 5620 5603

MARUNOUCHI OFFICE Gran Tokyo North Tower, 1-9-1, Marunouchi, Chiyoda-ku, Tokyo, 100-6756 (81) 3 5555 7011 (81) 3 5202 2021

New York Research Center 11th Floor, Financial Square, 32 Old Slip, NY, NY 10005-3504, U.S.A. (1) 212 612 6100 (1) 212 612 8417

London Research Centre 3/F, 5 King William Street, London, EC4N 7AX, United Kingdom (44) 207 597 8000 (44) 207 597 8550


26 October 2012

- 20 -

Disclaimer

This publication is produced by Daiwa Securities Group Inc. and/or its non-U.S. affiliates, and distributed by Daiwa Securities Group Inc. and/or its non-U.S. affiliates, except to the extent expressly provided herein. This publication and the contents hereof are intended for information purposes only, and may be subject to change without further notice. Any use, disclosure, distribution, dissemination, copying, printing or reliance on this publication for any other purpose without our prior consent or approval is strictly prohibited. Neither Daiwa Securities Group Inc. nor any of its respective parent, holding, subsidiaries or affiliates, nor any of its respective directors, officers, servants and employees, represent nor warrant the accuracy or completeness of the information contained herein or as to the existence of other facts which might be significant, and will not accept any responsibility or liability whatsoever for any use of or reliance upon this publication or any of the contents hereof. Neither this publication, nor any content hereof, constitute, or are to be construed as, an offer or solicitation of an offer to buy or sell any of the securities or investments mentioned herein in any country or jurisdiction nor, unless expressly provided, any recommendation or investment opinion or advice. Any view, recommendation, opinion or advice expressed in this publication may not necessarily reflect those of Daiwa Securities Capital Markets Co. Ltd., and/or its affiliates nor any of its respective directors, officers, servants and employees except where the publication states otherwise. This research report is not to be relied upon by any person in making any investment decision or otherwise advising with respect to, or dealing in, the securities mentioned, as it does not take into account the specific investment objectives, financial situation and particular needs of any person. Daiwa Securities Group Inc., its subsidiaries or affiliates, or its or their respective directors, officers and employees from time to time have trades as principals, or have positions in, or have other interests in the securities of the company under research including derivatives in respect of such securities or may have also performed investment banking and other services for the issuer of such securities. The following are additional disclosures.

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Within the preceding 12 months, The subsidiaries and/or affiliates of Daiwa Securities Group Inc. * has lead-managed public offerings and/or secondary offerings (excluding straight bonds) of the securities of the following companies: SBI Holdings Inc. (6488 HK); Shunfeng Photovoltaic International Ltd. (1165 HK); Rexlot Holdings Limited (555 HK); China Outfitters Holdings Limited (1146 HK); Beijing Jingneng Clean Energy Co. Limited (579 HK); Infraware Inc. (041020 KS)

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https://daiwa3.bluematrix.com/sellside/Disclosures.action



http://www.sec.gov.ph/irr/AmendedIRRfinalversion.pdf%20and%20http:/www.pse.com.ph/


26 October 2012

- 21 -

transactions with the issuers of the securities referred to herein (the “Securities”), perform services for or solicit business from such issuers, and/or have a position or effect transactions in the Securities or options thereof and/or may have acted as an underwriter during the past twelve months for the issuer of such securities. In addition, employees of Daiwa Capital Markets Europe Limited and its affiliates may have positions and effect transactions in such securities or options and may serve as Directors of such issuers. Daiwa Capital Markets Europe Limited may, to the extent permitted by applicable UK law and other applicable law or regulation, effect transactions in the Securities before this material is published to recipients.

This publication is intended for investors who are not Retail Clients in the United Kingdom within the meaning of the Rules of the FSA and should not therefore be distributed to such Retail Clients in the United Kingdom. Should you enter into investment business with Daiwa Capital Markets Europe‟s affiliates outside the United Kingdom, we are obliged to advise that the protection afforded by the United Kingdom regulatory system may not apply; in particular, the benefits of the Financial Services Compensation Scheme may not be available. Daiwa Capital Markets Europe Limited has in place organisational arrangements for the prevention and avoidance of conflicts of interest. Our conflict management policy is available at http://www.uk.daiwacm.com/about-us/corporate-governance-and-regulatory. Regulatory disclosures of investment banking relationships are available at https://daiwa3.bluematrix.com/sellside/Disclosures.action.

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Research Analyst Certification For updates on “Research Analyst Certification” and “Rating System” please visit BlueMatrix disclosure link at https://daiwa3.bluematrix.com/sellside/Disclosures.action. The views about any and all of the subject securities and issuers expressed in this Research Report accurately reflect the personal views of the research analyst(s) primarily responsible for this report (or the views of the firm producing the report if no individual analysts[s] is named on the report); and no part of the compensation of such analyst(s) (or no part of the compensation of the firm if no individual analyst[s)] is named on the report) was, is, or will be directly or indirectly related to the specific recommendations or views contained in this Research Report.

The following explains the rating system in the report as compared to relevant local indices, based on the beliefs of the author of the report. "1": the security could outperform the local index by more than 15% over the next six months. "2": the security is expected to outperform the local index by 5-15% over the next six months. "3": the security is expected to perform within 5% of the local index (better or worse) over the next six months. "4": the security is expected to underperform the local index by 5-15% over the next six months. "5": the security could underperform the local index by more than 15% over the next six months. Additional information may be available upon request.

Japan - additional notification items pursuant to Article 37 of the Financial Instruments and Exchange Law (This Notification is only applicable where report is distributed by Daiwa Securities Co. Ltd.)

If you decide to enter into a business arrangement with us based on the information described in materials presented along with this document, we ask you to pay close attention to the following items.

In addition to the purchase price of a financial instrument, we will collect a trading commission* for each transaction as agreed beforehand with you. Since commissions may be included in the purchase price or may not be charged for certain transactions, we recommend that you confirm the commission for each transaction.

In some cases, we may also charge a maximum of ¥ 2 million (including tax) per year as a standing proxy fee for our deposit of your securities, if you are a non-resident of Japan.

For derivative and margin transactions etc., we may require collateral or margin requirements in accordance with an agreement made beforehand with you. Ordinarily in such cases, the amount of the transaction will be in excess of the required collateral or margin requirements.

There is a risk that you will incur losses on your transactions due to changes in the market price of financial instruments based on fluctuations in interest rates, exchange rates, stock prices, real estate prices, commodity prices, and others. In addition, depending on the content of the transaction, the loss could exceed the amount of the collateral or margin requirements.

There may be a difference between bid price etc. and ask price etc. of OTC derivatives handled by us.

Before engaging in any trading, please thoroughly confirm accounting and tax treatments regarding your trading in financial instruments with such experts as certified public accountants. *The amount of the trading commission cannot be stated here in advance because it will be determined between our company and you based on current market conditions and the content of each transaction etc.

When making an actual transaction, please be sure to carefully read the materials presented to you prior to the execution of agreement, and to take responsibility for your own decisions regarding the signing of the agreement with us.

Corporate Name: Daiwa Securities Co. Ltd. Financial instruments firm: chief of Kanto Local Finance Bureau (Kin-sho) No.108 Memberships: Japan Securities Dealers Association, Financial Futures Association of Japan Japan Securities Investment Advisers Association Type II Financial Instruments Firms Association

http://www.uk.daiwacm.com/about-us/corporate-governance-and-regulatory







64.90 15.5% 56.20 initiation: building a firm buy 1...

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