strategy its more fun investing

7/31/2019 Strategy Its More Fun Investing

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Its More Fun Investing in the Philippines

Philippine stock

market managed to

perform well despiteall the bad news that

came out of the US,

Europe and China.

PSEi, 18.5%

S&P500,

8.4%

Euro Stoxx 50,-5.6%

SH Comp,-1.4%

80

90

100

110

120

130

Jan

Feb

Mar

Apr

May

Jun

Jul

Comparative Performance (YTD)

Source: Bloomberg


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Philippine Economy: So Far So Good

2007 2008 2009 2010 2011 5-yr Ave 1Q12

Philippines 6.6 4.2 1.1 7.7 3.9 4.7 6.4

US 1.9 -0.3 -3.5 3.0 1.7 0.6 2.0

Euro zone 0.6 -0.6 -0.6 0.5 0.2 0.0 0.0

China 11.4 9.2 8.5 10.4 9.3 9.8 8.1


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Philippine Economy: So Far So Good

1Q GDP Growth Drivers

Consumer Spending +6.6%

Government Spending +24.0%

Exports +7.9%


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Outlook Remains Favorable

Consumer spending growth to remain resilient

Government ready and willing to spend

PPP projects gaining momentum

Mining industry ensuring sustainable growth


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Consumer Spending

Growth to Remain Resilient

OFW remittances and BPO revenues continue to increase. . .

1,4752,420

3,257

4,875

6,061

7,200

9,000

11,000

0

2,000

4,000

6,000

8,000

10,000

12,000

20042005200620072008200920102011

BPO Revenues (US$ Mil)

14.2%

10.1%12.8%

25.0%

19.4%

13.2%13.7%

5.6%8.2%7.2%

5.3%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

0.0

5.0

10.0

15.0

20.0

25.0

20022003200420052006200720082009201020112012

Source: BPAPSource: BSP

OFW Remittances (US$Bil)


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Consumer Spending


. . . thanks to the significant

wage differential

Daily Minimum Wages (in US$)Cambodia 2.03

Vietnam 2.20

Indonesia 2.93

China 3.99

Thailand 6.92

Philippines 9.36

Taiwan 19.69

Hong Kong 28.87

South Korea 30.71

Japan 64.86

New Zealand 66.53

Australia 123.71

Source: DOLE


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Consumer Spending


Favorable Demographics

Population

Growth1.9%

Median Age 22.9

Age % of Population

0 15 34.6%

16 65 61.1%

Above 65 4.3%

10.0 5.0 0.0 5.0 10.0

0

10

20

30

40

50

60

70

80

Age-Sex Population Pyramid (in Millions)

Young and growing population to ensure continuous

growth in consumer spending

Female

MaleSource: CIA World Fact Book


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Consumer Spending


Falling commodity

prices to givespending power aboost

400

450

500

550

600

Jul-11 Nov-11 Mar-12 Jul-12

CRB Commodity Index

Source: Bloomberg


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Government Ready and Willing to Spend

Government Finances

improving 64.665.7

72.5

77.7 78.2

71.4

63.9

55.857 57.3

55.4

50.9 50.548.6

40

45

50

55

60

65

70

75

80

85

2000200120022003200420052006200720082009201020112012F2013F

Debt to GDP

Source: DBM


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Department of Budget and Management already releasedPhp1.36 Tril or 74.9% of the 2012 National Budget as of

June 30, 2012

2012 Target YTD ending May

Value

(PhpBil)% Growth % of GDP

Value

(PhpBil)% Growth

Revenue 1,560.0 14.8% 14.2% 654.6 11.6%

Expenditures 1,839.0 18.1% 17.0% 668.4 13.1%

Budget Deficit (279.1) 41.1% (2.6%) (22.8) NA

Budgeted & Actual Spending for 2012

Source: DBM


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Government expenditure set to increase by another 10.5% in2013, with infrastructure spending up by 20.8%

Value (PhpBil) % Growth

Total Spending 2,006.0 10.5%

Infrastructure 409.8 20.8%

Economic & Social Services 1,209.3 14.9%

Debt Services 333.9 0.2%

2013 Budget Highlights

Source: DBM


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Strong likelihood of

another earlyenactment of the

budget in 2013.

Budget Preparation1. Budget Call

2. Stakeholder Engagement

3. Technical Budget Hearings

4. Executive Review

5. Consolidation, Validation andConfirmation

6. Presentation to President and Cabinet

7. The Presidents Budget

Budget Legislation

1. House Deliberations

2. Senate Deliberations

3. Bicameral Deliberations

4. Ratification and Enrollment

5. Veto Message

6. Enactment

Budget Preparation & Legislation Flow Chart

We are Here


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PPP Projects Gaining Momentum

PPP Process Flow Chart

Step 1: Business Case/Feasibility Study Preparation

Step 2: Project Review & Evaluation

NEDA-ICC Approval

Step 3: For Publication of Invitation to Pre-Qualify & Bid

Step 4: Bidder Due Diligence

Step 5: Award of Project

* Step 3 to 5 will take 6 months based on government estimates


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PPP Projects with High Probability of Award in 2H12

Project Value (PhpBil)

School Infrastructure Project 10.04

LRT Line 1 South Extension and

Operation & Maintenance 9.20

NAIA Expressway Project (Phase II) 15.77

NLEX-SLEX Connector Road 20.18

55.19Source: PPP Center, COL Estimates


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PPP Projects Gaining MomentumOther PPP Projects

Project Value (PhpBil)

CALA Expressway (Cavite & Laguna Side) 19.69Modernization of Philippine Orthopedic Center 5.52

Vaccine Self-Sufficiency Project (Phase II) 0.45

LRT Line 2 East Extension and Operation & Maintenance 11.90

Operation & Maintenance of the Laguindingan Airport 1.80

New Bohol (Panglao) Airport Development 8.00

Mactan-Cebu Int'l Airport Passenger Terminal Bldg. 10.15Automatic Fare Collection System 1.80

Integrated Transport System NA

New Centennial Water Supply Source Project 25.00

O&M of Angat Hydro-Electric Power Plant 1.60

Balara Water Hub 20.00

Grains Central Project 1.25Establishment of Cold Chain Systems Covering Strategic Areas in the

Phil.5.30

Logistics Support on the Agri-Fishery Products 0.03

O&M of the Puerto Princesa Airport NA

Cebu Bus Rapid Transit Demonstration Project NA

Improvement/Rehabilitation of the Quirino Highway NA

Source: PPP Center, COL Estimates 112.49


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Value (PhpBil) % of GDP

2011 2.00 0.0%

2012E 55.19 0.5%

2013E 112.49 1.0%

Potential Value of PPP Project Awards

Source: PPP Center, COL Estimates


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Mining Industry

Ensuring Sustainable Growth

Huge potential of the mining industry

9 Mil ha. out of 30 Mil ha. have high mineral potential

Mineral reserves estimated at US$1.0Tril

Aquino Government targeting US$12Bil worth of investmentsin the next 5 years (vs. US$4.4Bil worth of investments from

2004-2011)


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Mining Industry

Ensuring Sustainable Growth

Negatives:

Delays and Higher Costs

No mining permits will be

awarded until law onrevenue sharing scheme is

passed

Government share in

revenues to increase from

2% to 5%-7%

Abandoned ores and wastes

will now be bid out

Executive Order 79: Positives Outweigh Negatives

Positives:

Sustainability is Ensured

Better legislation and

reduction of red tape toattract more investments

Government tax revenues to

increase

Environmental protection

emphasized

Incentives for investments in

higher value added

processes


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Abundance of Favorable Developments

S&P upgraded Philippines credit rating just one notchlower than investment grade

Bank lending grows 14.7% in May

Power consumption up 8.5% in 2Q12

Exports up 19.7% in May


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We are Still in the Early Stages

No signs of excessive borrowings yet

58%

31%

0%

10%

20%

30%

40%

50%

60%

70%

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

May-12

Loans to GDPHouse Debt to GDP

Malaysia 75.9

South Korea 67.8

Taiwan 64.2

Hong Kong 60.3Singapore 49.9

Thailand 26.2

China 18.7

Indonesia 13.6

India 9.1Sri Lanka 8.3

Philippines 5.6

Source: CEIC, COL estimatesSource: NSCB, BSP, COL estimates


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We are Still in the Early Stages

Regional Investments-to-

GDP Ratio

Country Inv-to-GDPPhilippines 22%

India 31%

Indonesia 32%

Malaysia 20%

Thailand 26%Vietnam 39%

17%

0%

5%

10%

15%

20%

25%

30%Investments to GDP (%)

Investments: Still a long way to go

Source: Bloomberg, BSP, NSCB, COL

estimates

Source: NSCB, COL estimates


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But it wont be a Smooth Ride Up

Serious problems overseas

Valuations are not attractive

Share placements to sap liquidity


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Serious Problems Overseas

US Europe China

Debt ceilingSignificant differences in the economic

condition of member economiesWeak exports

Fiscal cliff No flexibility in monetary policyHousing

bubble

Poor access to capital markets Overinvestment

Harsh austerity measures have to be

implemented to avail of bailout funds

No meaningful structural reforms have

yet to be implemented


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Valuations are not Attractive

PSEi currently trading at the high end of its historical

trading range

0

5

10

15

20

25

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Forward PE Band

16.3

14.2

12.1

Source: PSE, COL Estimates


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Valuations are not Attractive

PSEi is also expensive

relative to foreign markets

Trailing

PE

Forward

PE

Philippines 17.8 16.2

Thailand 15.3 12.7

Vietnam 11.0 10.0

Malaysia 15.5 15.0

Indonesia 17.9 14.3

S&P 13.8 13.2

Brazil 11.4 10.1

Russia 5.0 5.3

India 16.4 15.0

China 11.7 9.7

Source: Bloomberg,

COL estimates


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Share Placements to Sap Liquidity

Date Company Value (PhpBil)

June BDO 43.5

June URC 7.4

July ALI 13.6

July AC 6.5

July PGOLD 6.5

Total 77.5

Recent Share Placements

Source: PSE


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Strategy

Stay invested

Fundamentals will eventually catch up with valuations

Pullbacks are opportunities to buy more

Philippine economy is resilient to developments overseas

Share placements are only short-term drags, as proceeds

enable companies to fund expansion


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Fundamentals to Catch Up with Valuations

Scenario Analysis: When will PSEi reach 10,000?

Assumptions Scenario 1 Scenario 2 Scenario 3

PSEi EPS Growth 10% 12% 15%

Forward P/E 14X 16X 18XYears to PSEi

10,0008 5.5 3.5

Implied CAGR 8.7% 12.9% 20.9%


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Proceeds of Share Placements

to Fund Expansion

Share Placements

CompanyType of Share

OfferingUse of Proceeds

BDO Rights offering Address CAR problems, to grow loan portfolio

URC Treasury shares For potential acquisition and general corporatepurposes

ALI Primary sharesTo fund its expansion program including land

banking & the planned acquisition of a stake in

Ortigas family's OCLP Holdings Inc.

AC Treasury sharesHelp fund investments of up to US$1 Bil over the

next 5 years in transport, infrastructure & power

generation sectors

PGOLD Secondary shares NA


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Model Portfolio: Maintaining Growth Bias;

Adding BDO and SMPH

FV Buy Date Buy PriceCurrent

Price

Current

Return

Buy Below

Price

Growth Stocks

MBT 108.00 5-Jan-12 70.70 95.30 34.8% 94.00

BDO 80.50 25-Jul-12 61.25 61.25 - 70.00

MPI 4.70 5-Jan-12 3.66 4.12 12.6% 4.08

AC 467.70 5-Jan-12 333.00 415.00 24.6% 407.00AGI 14.90 5-Jan-12 10.66 11.52 8.1% 12.80

ALI 22.00 5-Jan-12 15.30 19.94 30.3% 19.12

EEI 8.68 30-Mar-12 6.07 6.86 13.0% 7.55

PGOLD 29.00 11-Jun-12 24.60 25.90 5.3% 25.22

SMPH 16.00 25-Jul-12 13.26 13.26 - 13.90Dividend Plays

BPI 80.00 5-Jan-12 56.60 72.00 27.2% 69.50

RLC 19.90 5-Jan-12 11.58 18.80 62.3% 17.30

MWC 29.00 5-Jan-12 21.50 25.25 17.4% 25.20


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Summary:


The Philippine stock market has done well so far this year. It

should continue to do well in the future due to its resilient

consumers, the governments ability and willingness to spend,

and the growing momentum of PPP projects among otherthings.

There are also no signs of a bubble yet given the absence ofexcessive borrowings and investments.


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Summary:


It wont be a smooth ride up however due to serious problems

prevailing overseas, expensive valuations, and numerous share

placements that are sapping liquidity.

Nevertheless, investors should stay invested.

Fundamentals should eventually catch up with expensive

valuations, allowing share prices to continue going up.


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Summary:


Meanwhile, pullbacks brought about by developments overseas andshare placements are opportunities to buy more stocks. We are

confident that the Philippines will remain resilient to developments

overseas, while share placements allow companies to raise funds to

finance their expansion plans.

Given our favorable view on growth, our model portfolio is

comprised mostly of growth stocks (MBT, MPI, AC, AGI, ALI, EEI and

PGOLD).

We also have some high dividend yielding stocks in our portfolio.

These stocks will continue to be in favor given the low interest rate

environment (BPI, RLC and MWC).


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Summary:


We also added BDO and SMPH in our model portfolio.

BDOs stronger capital base should enable it to resume the

rapid growth of its lending portfolio and allow profitability to

reach new highs starting 2015. Valuations are also attractive.

SMPH should be a major beneficiary of the favorable growthoutlook for consumer spending in the country given its dominant

leadership position in the mall leasing business.


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