sunny with a chance of rain storms.pdf

7/29/2019 Sunny with a chance of rain storms.pdf

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Charac t er is t ic s o f a Per fec t Invest m ent

1 Attractive growth outlook

2 Cheap valuations


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Phi l ipp ines has an At t rac t ive LT Grow t h

Out look

1 Resilient consumer spending growth

2 Conditions ripe for investment spending to grow

3 Government ready and willing to spend

4 Less vulnerable to external shocks


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Resi l ient Consum er Spending Grow t h

Favorable Demographics

PopulationGrowth

1.9%

Median Age 23

Age % of Population

0 15 34.6%

16 65 61.1%

Above 65 4.3%

Young and growing population to ensure continuous growth inconsumer spending

Female

MaleSource: CIA World Fact Book

8.0 6.0 4.0 2.0 0.0 2.0 4.0 6.0 8.0

0

10

20

30

40

50

60

70

80

Age-Sex Population Pyramid (in Mill ions)


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OFW remittances and BPO revenues continue to increase. . .

1,475

2,4203,257

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)

Source: BPAPSource: BSP

OFW Remittances (US$Bil)

6.4%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


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Daily Minimum Wages (in US$)

Cambodia 2.03

Vietnam 2.20

Indonesia 2.93

China 3.99

Thailand 6.92

Philippines 9.36

Taiwan 19.69Hong Kong 28.87

South Korea 30.71

J apan 64.86

New Zealand 66.53

Australia 123.71

. . . thanks to the significantwage differential


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0.0

2.0

4.0

6.0

8.0

10.0

2003 2004 2005 2006 2007 2008 2009 2010 2011 1H12

GDP Consumer Spending


Mid-term elections toboost consumerspending in 2013

GDP and Consumer SpendingGrowth during Election Year

*Source: NSCB


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Condi t ions Ripe for Invest m ent

Spending t o Grow

Regional Investments-to-GDP Ratio

Country Inv-to-GDP

Philippines 19%

India 31%

Indonesia 32%

Malaysia 20%

Thailand 26%

Vietnam 39%

Numerous investment opportunities stillavailable

Source: Bloomberg, BSP,

NSCB, COL estimatesSource: NSCB, COL estimates

19%

0%

5%

10%

15%

20%

25%

30% Investments to GDP


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Spending t o Grow Banking Statistics(Universal & Commercial Banks)

NPL Ratio Provision/NPL

1997 4.7% 47.3%

1998 10.4% 38.3%

1999 12.3% 46.6%

2000 15.1% 43.6%

2001 17.3% 45.2%

2002 15.0% 51.2%

2003 14.1% 53.0%

2004 12.7% 60.4%

2005 8.2% 77.5%

2006 5.7% 82.6%

2007 4.4% 93.3%

2008 3.5% 100.0%

2009 3.0% 112.3%

2010 2.9% 118.3%

2011 2.2% 126.4%

3Q12 2.1% 136.0%Source: BSP

Capital Adequacy Ratio

Minimum Requirement BSP 10.0%

BaselIII

(2014)12.5%

Phil ippine Banks (1Q12) 18.0%

Source: BSP

Strong and liquid f inancial system


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Spending t o Grow

14.4%

3.9%

0%

2%

4%

6%

8%

10%

12%

14%

16%

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

10 Yr PDS T-F Rate at a Histor ic Low

Funding cost is very cheap

Source: Bloomberg


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Government

Ready and Wi l l ing t o Spend

Government financesimproving

64.665.7

72.5

77.778.2

71.4

63.9

55.857 57.3

55.4

50.950.548.0

40

45

50

55

60

65

70

75

80

85

2000200120022003200420052006200720082009201020112012F2013F

Debt to GDP

Source: DBM


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Government

Ready and Wi l l ing t o Spend

2013 budget passed on time

Growth in revenues partlyfunded by the sin tax bill(+Php30 Bil)

Growth in capital outlay

(infrastructure) and economic& social services spending tooutpace growth in totalspending

2013 Budget Highlights

Value(PhpBil)

1,780.1

2,021.1

413.2

1,208.6

333.9

% Growth

15.0%

13.9%

35.7%

14.8%

0.2%

Total Revenues

Total Spending

Capital Outlay(Infrastructure)

Economic & SocialServices

Debt Services


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Less Vu lnerab le to Ex t er na l Shock s

Source: NSCB


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Wit hout t he St ruc t u ra l Prob lem s o f

Developed Ec onom ies

Philippines vs. Developed Economies

Source: OECD Fact book, Fed, European Commission, Eurostat

% Population > 65 year old

Population average age

Household debt/disposable income

Public debt/GDP

Deficit/GDP

USA

13.3%

37.1

107.9%

73.6%

7.0%

Europe

17.9%

41.2

99.4%

82.5%

4.1%

Philippines

4.3%

23.1

9.2%

50.6%

2.3%


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How ever, Valuat ions ar e not Cheap

18.5

14.3

12.2

16.4

0

5

10

15

20

25

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

PSEi 12-Month Forward PE Band

PSEi Trading at the Upper End of its 10-Year Range


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How ever, Valuat ions ar e not Cheap

Relative Valuation of Phil ippines vs. Other Markets

Source: Bloomberg, COL Estimates

2012 PE

18.7

11.5

11.5

15.5

17.3

14.221.0

5.9

16.3

12.5

2013 PE

18.4

13.9

10.9

15.4

14.3

13.711.2

5.8

15.7

10.5

Philippines

Thailand

Vietnam

Malaysia

Indonesia

USBrazil

Russia

India

China


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Never t heless, Am ple L iquid i t y and Im prov ing Risk

Appet i t e w i l l Cont inue t o Push Mar ket Higher

Global Markets Rallying since June 2012. . .

Source: Bloomberg, COL Estimates

PSEi, 29.0%

S&P500, 16.0%

Euro Stoxx 50,23.5%

SH Comp, 2.1%

Nikkei 225 33.5%

80

90

100

110

120

130

140

May J un J ul Aug Sep Oct Nov Dec J an

Comparative Performance of Global Markets


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Grexit did not materialize

ECB announced that it would buy an unlimited amount of government bonds withmaturities of between one and three years, alleviating concerns of a liquidity crisiECB cuts key rates by 25 basis points

Greece and Spanish banks received bailout

Europe

. . . Driven by Ample Liquidity and Improving Risk Appetite

Key developments boosting liquidity and risk appetite


19/36



Fed announces QE3

US escapes fiscal cliff

Debt ceiling suspended

Indicators point to continuous recovery of the economy

USA


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Banks' reserve requirement ratio cut twice by a total of 100 basis points

Benchmark rates cut twice by a total of 56 basis points for 1-yr lending and 50basis points for 1-yr deposits

Floor for lending cut twice by a total of 20 percentage points to 70% of the

benchmark rate

Indicators point to the bottoming out of the economy

China




21/36

Government disclosed aggressive stimulus plan

Inflation target doubled to 2%

Open ended asset purchases

Fiscal stimulus package of 10.3 Tril Yen

Japan




22/36

BSP cuts rates four times for a total of 100 basis points

SDA rate cut by another 50 basis points this year

GDP growth surprises positively

Philippines




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Inflation remains benign (3.2% in 2012 vs. 3.0% to 5.0% target)

Economic condition of developed countries remain fragile

Concerns on the appreciation of the peso

No Signs that Interest Rates wi ll go up in 2013




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BSP paid ~ Php68 Bil in interest on SDA in 2012 (lost Php78 Bil in10M12)

50 basis point cut in SDA last J anuary came as a surprise

BSP considering the possibility of imposing reserve requirement ontrust products (including SDAs)

SDA to be Removed?



To potentially release Php1.6 Tril worth of liquidity into the system


25/36

Stocks Remain the Most Att ractive Asset Class

Comparative Yield of Different Asset Classes

* The PSEis earnings yield based on 6,500

Time Deposit

2.0% to 3.0%

SDA

3.0%

10-Yr T-Bond

3.9%

Stocks*

5.5%




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PSEi Traded at Higher Valuations before Peakingin 97, whi le Interest Rates were also Higher

* Source: PSE, Bloomberg, BSP, COL estimates



0

5

10

15

20

25

30

1994199519961997199819992000200120022003200420052006200720082009201020112012

PE Band ('94-'12)

Time Deposit Rates

1995 9.3

1996 11.5

1997 11.2

1998 12.71999 9.1

2000 8.0

2001 9.5

2002 5.0

2003 5.3

2004 6.3

2005 5.22006 4.9

2007 3.4

2008 4.1

2009 2.7

2010 3.1

2011 2.9

2012 2.9


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Global Risk-on Trade Still in the Early Stages

Source: ICI



-300,000

-200,000

-100,000

0

100,000

200,000

300,000

400,000

2007 2008 2009 2010 2011 2012

inUS$Mil

Yearly Mutual Fund Flows (07'-12')

Equity Bond

-15,000

-10,000

-5,000

0

5,000

10,000

15,000

20,000

1/2/2013 1/16/2013 1/30/2013

inUS$Mil

Weekly Mutual Fund Flows (YTD 13')

Equity Bonds


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Global Risk-on Trade Still in the Early Stages

Source: ICI



USA15.01

17.84

2.00

4.17

S&P 500 P/E (Today)

S&P 500 P/E (10-yr Ave)

10-Yr Bond Rate (Today)

10-Yr Bond Rate (07')


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Volat i l i t y t o Rem ain

Fed could phase out QE3 starting the end of the year

European economy still expected to get worse in 2013

Global Economies and Markets Sti ll Face Numerous Risks

China remains vulnerable to weakness in developedeconomies given its large dependence on exports


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Volat i l i t y t o Rem ain

Philippines could suffer from foreign fund outflows assuming that

the economic outlook of developed countries improve significantly

given cheaper valuations of foreign stocks

Negative surprises could have magnified impact on shareprices since investors already have very high expectations


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St ra tegy

Stay Invested, Think Long Term

Philippines LT fundamentals are attractive

Fundamentals will eventually catch up with valuations

Set Aside Some Cash, Use Long Term Money

To capitalize on opportunities created by selloffs. We recommenda buy on dips strategy.

To protect against volatility.


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Long Ter m Trend St i l l Up

Scenario Analysis: When wil l PSEi Reach 10,000?

Source: COL estimates

Scenario 1

10%

14X

7.5

6.0%

Scenario 2

12%

16X

5

9.1%

Scenario 3

15%

18X

3

15.6%

Assumptions

PSEi EPS Growth

Forward P/E

Years to PSEI 10,000

Implied CAGR


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St ock Pick sCOLing the Shots Model Portfolio

Source: COL estimates

Stock Current Price FV Buy Below Price

MBT 115.00 149.00 130.00

MPI 5.23 6.55 5.70

EEI 13.10 14.00 12.15

PGOLD 38.00 48.00 41.75

SMPH 18.88 26.35 22.90

BDO 87.85 112.00 97.40

AGI 20.65 26.75 23.25MEG 3.78 4.00 3.48

MER 305.00 380.00 330.00

TEL 2,850.00 3,500.00 3,043.00

DNL 6.76 9.75 8.45


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Summary

Despite the PSEis seemingly unattractive valuation, we think there isroom for prices to go up. The Philippines has a positive long term outlook

and boasts of relatively attractive fundamentals globally. Interest rates willalso most likely remain low for the rest of the year, sustaining theprevailing liquidity driven rally.

However, we expect to see a lot of volatility. The economic condition ofdeveloped countries remains very fragile as these nations continue toface numerous challenges. We could also witness a pickup in foreignselling in the Philippines as foreign investors switch to cheaper marketglobally.


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Summary

We advise investors to stay invested in the stock market to take

advantage of its favorable long term outlook. However, it would be wise toset aside some cash. Volatility could create opportunities to buy stockscheaply. Also, use long term cash as a protection against volatility.

Stocks that we like include MBT and BDO among the banks, PGOLD,SMPH and DNL as consumer plays, AGI as a consumer and tourismplays, MPI as an infrastructure play, and MER and TEL as dividend plays.We also like EEI and MEG, although we would only be buyers onpullbacks as valuations have gone up too significantly.


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Keeping You Ahead.

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