COLing the Shots 20152H

The PSEi remains on track to hit 10,000

The pace will slow down in the ST due

to numerous speed bumps

There is still opportunity to generate

returns through stock picking

Stock Market Shifting Gears

2

What has Changed?

3

PSEi now up by only

3.5% after rising by

as much as 12.4% in

2015

PSEi

SOURCE: BLOOMBERG

5000

5500

6000

6500

7000

7500

8000

8500

7,479

What has Changed?

4

Disappointing 1Q GDP &

corporate profits

Sell-off in Thailand & Indonesia

Growing preference for

Japanese & Chinese stock

markets

Concerns of contagion due to

possible Greek default

Reasons for Pull Back

PSEi SET JCI

SOURCE: BLOOMBERG

90

95

100

105

110

115

+3.5%

-5.4%

-8.8%

The Bad News

5

THE MARKET MIGHT TAKE A WHILE

TO RECOVER

Banks: Flat net interest margin

Gaming: Over optimistic

forecast; Delay in operations

Consumers: Below expected 1Q

earnings results; More intense

competition

Power: Delay in operations

Reasons for More

Subdued Outlook

Year

2015

2016

Old

15%

NA

New

4%

10%

PSEi EPS Growth Forecast Slows

SOURCE: COL & CONSENSUS ESTIMATES

PSEi end 2015 target revised to 7,950

6

Weak exports

High inflation and

interest rates

Disappointing

government spending

Weak exports

Investment growth

hampered by low capacity

utilization

Consumption hurt by high

debt levels and tight

credit conditions

Thai & Indonesian Markets

Continue to Deteriorate

7

Fed to Start Raising

Rates Soon

Consensus Forecast Fed Fund Rates

SOURCE: BLOOMBERG

Will we see a repeat of the 2013

taper tantrums?

0

0.2

0.4

0.6

0.8

1

1.2

1.4

1.6

1.8

2

Jul-15 Oct-15 Jan-16 Apr-16 Aug-16 Nov-16

Upper Bound Lower Bound Median

The Good News

8

WEAKNESS IS ONLY TEMPORARY

LT Outlook for the Stock Market

Remains Attractive

Philippines has one of the best fundamental

long term stories globally

Liquidity conditions remain favorable for stocks

Less risk of contagion from a Greek default

No signs of a bear market

9

World

High income economies

Developing economies

Philippines

Thailand

Indonesia

2015E

2.8%

2.0%

4.4%

6.5%

3.5%

4.7%

2016E

3.3%

2.4%

5.2%

6.5%

4.0%

5.5%

2017E

3.2%

2.2%

5.4%

6.3%

4.0%

5.5%

Philippines BEST FUNDAMENTAL LONG TERM STORY GLOBALLY

SOURCE: WORLD BANK

Philippines boasts of one of the fastest GDP growth globally

10


78.8% 75.7%

79.1%

21.0% 23.3% 20.7% 22.2% 22.0% 22.0%

0.00%

10.00%

20.00%

30.00%

40.00%

50.00%

60.00%

70.00%

80.00%

90.00%

2012 2013 2014

13.3% 12.6% 12.4%

6.9% 7.5%

5.5%

1.2% 1.7% 1.6%

0.00%

2.00%

4.00%

6.00%

8.00%

10.00%

12.00%

14.00%

2012 2013 2014

Gross Exports (% of GDP) Mining and Petroleum Exports (% of GDP)

THAILAND INDONESIA PHILIPPINES

SOURCE: BANK OF THAILAND, BANK INDONESIA, NSO, NSCB

Less dependent on exports

11

OFW remittances remain

healthy (+5.4% Jan-May)

BPO revenues continue to grow

(+18.7% 14, +12.2% 15E)

Resilient to

External Factors

Philippines BEST FUNDAMENTAL LONG TERM STORY

GLOBALLY

Current Account

SOURCE: BSP

Strong current account position

minimizes threat of sharp rate hikes

& significant peso weakness

-4.0%

-3.0%

-2.0%

-1.0%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

2010 2011 2012 2013 2014

THAILAND INDONESIA PHILIPPINES

4.4%

3.3%

-2.9%

12


Government Finances Remain Healthy

Budget Deficit/GDP

-6.0%

-5.0%

-4.0%

-3.0%

-2.0%

-1.0%

0.0%

30%

40%

50%

60%

70%

80%

Problem of deployment, not ability to spend

Budget Deficit/GDP Govt Debt/GDP

SOURCE: BTr

-1.1%

45.0%

13

Government spending picking

up after a slow start

Growth in Government Expenditures

& Capital Outlay

-5.4%

9.6% 11.2% 9.0% 9.2%

-11.0% -11.0% -11.0%

40.3%

28.5%

-20.0%

-10.0%

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

Jan Feb Mar Apr May

*CO growth for Jan-Mar average only

SOURCE: DBM, BTr

Philippines BEST FUNDAMENTAL LONG

TERM STORY GLOBALLY

EXPENDITURES CAPITAL OUTLAY

14

Capital Formation (Ex-Change in Inventory)

Y/Y GROWTH % GDP

SOURCE:NSCB

10.1%

18

19

20

21

22

-20.00

-10.00

0.00

10.00

20.00

30.00

1Q

05

3Q

05

1Q

06

3Q

06

1Q

07

3Q

07

1Q

08

3Q

08

1Q

09

3Q

09

1Q

10

3Q

10

1Q

11

3Q

11

1Q

12

3Q

12

1Q

13

3Q

13

1Q

14

3Q

14

1Q

15


TERM STORY GLOBALLY

Investment spending also

picking up

21.7%

15

Manufacturing Sector Capacity Utilization

SOURCE:PHILIPPINE STATISTICS AUTHORITY

72

74

76

78

80

82

84

86

83.2%

High capacity utilization to justify more future investments


16

Growing Pipeline of PPP Projects

PROJECTS IN THE BIDDING STAGE

PROJECT AWARDED

SOURCE: PPP CENTER

PPP Projects (in US$ Bil)

12.1

6.3


TERM STORY GLOBALLY

To boost economic growth,

increase productivity

17 Liquidity Conditions Remain Favorable for Stocks

18

As of

GDP growth (%)

Fed Fund Rate (%)

Jun-13

2.3 to 2.5

3.75 to 4.25

Jun-15

2.0 to 2.3

3.5 to 3.75

Central Tendency* of Long Run Economic Projections (Federal Reserve Board Members & Federal Reserve Bank Presidents)

*EXCLUDES THREE HIGHEST AND THREE LOWEST PROJECTIONS

Liquidity Conditions

Remain Favorable for Stocks

Pace of tightening expected to be slower

19

Bulk of Greek debts no

longer held by private

investors

Creation of ESM and OMT

What has Changed?

Comparison of European Interest Rates

PORTUGAL

ITALY

GREECE

SPAIN

Less Risk of

Contagion from a

Greek Default

0.0

5.0

10.0

15.0

20.0

25.0

30.0

35.0

40.0

SOURCE: BLOOMBERG

20

No Signs of a

Bear Market

21

Debt levels are not excessive

Median net D/E of COL

monitored stocks only 0.28X

Banks are awash with cash

Bank Loans/GDP

SOURCE: VARIOUS CENTRAL BANKS

No Signs of a

Bear Market

50

55

60

65

70

75

80

Loans to Deposit Ratio

SOURCE: BSP, BLOOMBERG

35.2% 40.5%

97.9%

0.00%

20.00%

40.00%

60.00%

80.00%

100.00%

120.00%

Indonesia Philippines Thailand

65.9%

22

No Signs of a Bear Market

Inflation rate remains low

Inflation Rate

SOURCE: BSP, BLOOMBERG

0.0

1.0

2.0

3.0

4.0

5.0

6.0

Jan-13 Apr-13 Jul-13 Oct-13 Jan-14 Apr-14 Jul-14 Oct-14 Jan-15 Apr-15

HEADLINE CORE

2.0%

1.2%

23

Negative

Telco

Mining

Consumer

Gaming

Positive/Neutral

Airlines

Banks

Properties

Power

Sector Outlook

Not All Sectors are Facing Challenges

24

View Positives Negatives EPS Growth

2015 2016

+ Growing demand Lower oil price to boost margins

Industry consolidation boost pricing power

Attractive valuation

659% 0%

Airlines

25


2015 2016

N Strong lending growth Faster EPS growth to resume in 2016

Ample liquidity conditions hamper

ability to increase net

interest margins

5% 13%

Banks

26


2015 2016

N Favorable demographics, increasing affordability fuel demand

Demand for offices remain strong

Higher rates hurting sentiment for the

sector, particularly for

those focused on

residential

10%* 13%

Properties

*Core earnings only

27


2015 2016

N Growing demand for power & high utilization rates mean ample room for growth

Profits to recover in 2016 after 2015 profits hurt by delays

-12% 16%

Power

28


2015 2016

- Demand for broadband remains strong Weakening cellular

revenues

Intense competition

1% -4%

Telco

29


2015 2016

- Falling commodity

prices to hurt

revenues & margins

1% 4%

Mining

30


2015 2016

- Resilient consumers Low penetration means good growth potential

Intensifying competition

Lofty expectations Unattractive

valuations

10% 15%

Consumer

31


2015 2016

- Huge growth potential since sector still in infancy Expectations too

optimistic

High level of uncertainty

Poor sentiment

-25% 41%

Gaming

32

Strategy

Stay Invested,

Focus on Stock Picking

While the stock markets short term outlook has deteriorated, investors

should stay invested as the long term

outlook remains attractive

There is also opportunity to generate

returns through stock picking

Focus on stocks that have been sold

off despite having a positive outlook

both in the short term and the long

term

33

2H2015 Stock Picks

Market leader for domestic travel with a 64%

market share

A major beneficiary of industry consolidation

and falling oil prices

Core profits to more than double to ~Php6.5Bil

in 2015

Fair Value: Php156.00

Buy Below: Php136.00

Cebu Air, Inc.

(CEB)

34

2H2015 Stock Picks

Second largest bank (assets and deposits),

making it one of the major beneficiaries of the

growing demand for loans

No more risk of capital raising (raised Php32Bil

from its recently concluded rights offering)

Trading at only 1.5X P/BV vs. 1.9X P/BV for

BDO and 2.4X P/BV for BPI


Buy Below: Php89.00

Metrobank

(MBT)

35

2H2015 Stock Picks

Despite being one of the biggest residential

property developers, it is still predominantly a

Philippine mall operator (70% of operating

income, 64% of NAV) providing it with strong

recurring cash flow and making it a good proxy

for consumer spending

Revenues from residential property business

remains strong, growing by 6.6% in 2014 and

7% in 1Q15


Buy Below: Php20.50

SM Prime

Holdings, Inc.

(SMPH)

36

2H2015 Stock Picks

Successfully transitioned from being a pure

horizontal developer in the provinces to a

diversified residential property developer with

mid and high rise developments in Manila

Plans to triple its rental income portfolio in five

years, boosting recurring cash flow

Profits to increase by a CAGR of 13.3% in the

next three years

Attractive valuation at 8.7X 2015E P/E and

46.5% discount to NAV

Fair Value: Php2.42

Buy Below: Php2.10

Filinvest Land Inc.

(FLI)

37

2H2015 Stock Picks

One of the most diversified property

companies in terms of sources of profits and

location with an excellent track record of

growth and execution

To triple its investment portfolio over the next

seven years

Huge unbooked revenues of Php127 Bil

equivalent to 2.3X residential revenues in

FY14

Huge landbank in major real estate

developments to support future growth


Buy Below: Php37.50

Ayala Land Inc.

(ALI)

38

2H2015 Stock Picks

~90% of attributable capacity covered by

long term supply contracts, providing

stability

Expansion of gas plants to grow capacity

by 23.6% and recurring profits by 24.2%

from 2014 to 2016

Sold-off recently after 49% owned

subsidiary EDC came out with negative

earnings guidance

Compelling valuation at 14.2X 2016E P/E,

35% upside to our FV estimate


Buy Below: Php31.00

First Gen

Corporation

(FGEN)

39

2H2015 Stock Picks

Among the oldest and most diversified

holding companies in the country with a

reputation of excellence given its investments

in market leaders BPI, ALI, GLO, and MWC

Diversification into power and infrastructure to

help drive LT growth and increase defensive

sources of income and cash flow


Buy Below: Php763.00

Ayala Corporation

(AC)

40

Sector

Airlines

Banks

Properties

Power

Conglomerates

Summary of Stock Picks

Top Picks

CEB

MBT

SMPH

FLI

ALI (NEW)

FGEN

AC

FV

156.00

102.00

23.60

2.42

43.17

35.70

877.00

Buy Below

Price

136.00

89.00

20.50

2.10

37.50

31.00

763.00

41

Summary The Philippine market is currently

suffering from a correction that was

initially brought about by disappointing

first quarter corporate earnings and

GDP growth, foreign funds flowing out

of TIPs to North Asia, and concerns of

a possible Greek default.

While the attractiveness of China and a

possible Greek default are no longer

concerns, the near term outlook for the

stock market remains cautious given

challenges facing listed companies, the

continuous sell-off of Thailand and

Indonesian stock markets and the

upcoming Fed rate hike in the U.S.

42

Summary Nevertheless, we believe that the markets weakness is only temporary. Indicators continue to point to a

favorable long term outlook for the

economy.

The Philippines currently also has one

of the best fundamental long term

stories globally, while liquidity

conditions remain favorable for stocks.

Despite the ongoing market weakness,

there are also no indications that we

are about to enter a bear market.

Moreover, not all sectors are facing

challenges.

43

Summary

Given the said factors, investors should

stay invested. There is also an

opportunity to generate returns through

stock picking. Focus on stocks that

have been sold off despite having a

positive outlook both in the short term

and the long term.

Our stock picks are CEB, MBT, SMPH,

FLI, ALI, FGEN and AC.

A 40 MINUTE Q&A SESSION

WILL BE HELD.

Documents

COLing the Shots 20152H