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Philippine Strategy:External outlook, and Raising potential growthRafael Garchitorena

December 2010

All prices are those current at the end of the previous trading session unless otherwise indicated. Prices are sourced from local exchanges via Reuters, Bloomberg and other vendors. Data is sourced from Deutsche Bank and subject companies. Deutsche Bank does and seeks to do business with companies covered in its research reports. Thus, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. DISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED IN APPENDIX 1. MICA(P) 007/05/2010

Rafael [email protected]

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Phenomenal last 2 years

2/1/2011 2010 DB Blue template

1

Source: PSE

0

500

1000

1500

2000

2500

3000

3500

4000

4500

+42% +26% +15% +42% +21% -48% +65% +30% ????

Where do we go from here?


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The bull lives pa rin• We are long-term bullish

• Economy structurally more sound than 10/20/30 yrs ago

• Companies are in good shape

• Confidence is high

• Valuations are not excessive


2


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External accounts healthier than ever before


3

Source: BSP, Deutsche Bank estimates

Driven largely by OFW Remittances – more stable than commodities?

Current Import GIR to

(in $bn) Remittances account GIR cover ext'l debt1991 1.6 -1.7 4.5 3.4 15%

1992 2.2 -1.7 5.3 3.4 17%

1993 2.3 -3.7 5.9 3.1 17%

1994 3.0 -3.9 7.1 3.1 19%

1995 3.9 -4.2 7.8 2.6 21%

1996 4.3 -4.5 11.7 3.2 29%

1997 5.7 -4.3 8.8 2.0 20%1998 7.4 1.3 10.8 3.0 23%

1999 6.0 -2.9 15.1 4.5 30%

2000 6.1 -2.2 15.1 3.5 29%

2001 6.0 -1.7 15.7 4.0 30%

2002 6.9 -0.3 16.4 4.0 31%

2003 7.6 0.3 17.1 4.0 30%

2004 8.6 1.6 16.2 3.6 30%

2005 10.7 2.0 18.5 3.8 34%

2006 12.8 5.3 23.0 4.2 43%

2007 14.4 7.1 33.8 5.8 61%

2008 16.4 3.6 37.6 6.0 70%

2009 17.3 8.6 44.2 8.7 83%

2010F 18.7 12.7 60.0 12.9 107%


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Structurally more able to withstand global stress


4

No recession in 2008/09

Source: Bangko Sentral ng Pilipinas, Deutsche Bank

0%

20%

40%

60%

80%

100%

120%

0

10,000

20,000

30,000

40,000

50,000

60,000

70,000 GIR

Gross International Reserves (US$mn) GIR / Ext debt

-6.0

-4.0

-2.0

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

19

93

19

94

19

95

19

96

19

97

19

98

19

99

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

20

10

F

Current account ($bn)


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Deutsche Bank

Growing pool of domestic savings


5

Provides cheap source of long-term Peso funding

Source: Bangko Sentral ng Pilipinas, Deutsche Bank

0

200

400

600

800

1,000

1,200

SDAs (Pbn)P1.2trn

at mid-Nov

0

200

400

600

800

1,000

1,200

1,400

1,600

1,800

2,000

Banks' Trust AUMs (Pbn)


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Deutsche Bank

Yield curve down c1,500bps since the 1990s


6

Source: BSP, Deutsche Bank estimates

Long-term, capital intensive projects are now feasible

0

4

8

12

16

20

24

Oct-

98

Oct-

99

Oct-

00

Oct-

01

Oct-

02

Oct-

03

Oct-

04

Oct-

05

Oct-

06

Oct-

07

Oct-

08

Oct-

09

Oct-

10

10yr PDSF

0

4

8

12

16

20

24

1M 3M 6M 1Y 2Y 3Y 5Y 7Y 10Y 20Y

(%)

Yield Curve

1997 2000 2005 2009 Sept'10 Nov'10

1997

2000

2005

2009

2010


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Growth levels already above 10-yr averages


7

Source: NSCB, Meralco, CAMPI, CEMAP, Deutsche bank estimates

-20%

-10%

0%

10%

20%

30%

40% Car sales

-10%

-5%

0%

5%

10%

15%Cement sales

0%

2%

4%

6%

8%

10%

12%

14%Electricity sales

0%

1%

2%

3%

4%

5%

6%

7%

8%GDP growth

But is 5% GDP growth good enough?


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Investments crucial to raising growth trajectory


8

Source: National Statistical Coordination Board, Bangko Sentral ng Pilipinas

5%

11%

24%

14%

0%

5%

10%

15%

20%

25%Investments as % of GDP

Remittances as % of GDP

Akin to an airplane running on only one engine = Consumption


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The “lost decade” of under-investment


9

Cement, car sales just now beating 1996 levels, despite 30% more people

Source: Various government and industry agencies, Deutsche Bank

Population Investments Construction Cement Car sales Loans

(mn) to GDP (%) to GDP (%) (mn tons) ('000 units) to GDP (%)

1997 72 25 6.4 15 144 59

1998 73 20 5.9 13 80 51

1999 75 19 5.5 12 74 45

2000 77 21 6.5 12 63 43

2001 79 19 4.9 12 77 39

2002 80 18 4.8 13 86 37

2003 82 17 4.5 12 92 35

2004 84 17 4.4 12 88 32

2005 85 15 3.9 12 97 30

2006 87 14 4 11 100 28

2007 89 15 4.5 13 118 31

2008 90 15 4.7 13 124 33

2009 91 14 4.9 14 132 33

2010 93 20 6.1 16 169 35


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Confidence is key


10

Source: National Statistical Coordination Board, Deutsche Bank

10%

12%

14%

16%

18%

20%

22%

24%

26%

28%

Investments as % of GDP

Estrada

Aquino


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Business / Consumer confidence at all-time highs


11

-40%

-30%

-20%

-10%

0%

10%

20%

30%

40%

50%

60%

Business confidence Consumer confidence

Source: BSP

Strike while the iron is hot – put through much needed reforms


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• Budget deficit – in particular, revenue generation, collection

• Execution of PPP auctions – transparency of process

• Policy stability – rules don’t change mid-stream

• Corruption

• Peace and order

Signs investors are looking for


12


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Emerging market flows to continue


13

Source: Deutsche Bank 2H10 Institutional Survey

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

Anticipated Asset Allocation changes, next 12 mths

Increase Decrease


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Asia is the preferred destination


14

Source: Deutsche Bank 2H10 Institutional Survey

57%

23%

11%7%

2% 1%

0%

10%

20%

30%

40%

50%

60%

Asia Latin America US Eastern

Europe

Western

Europe

Other EM

Region expected to show the best growth/value (5yrs)


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PSE foreign buying not yet at 2006/07 levels


15

Source: Philippine Stock Exchange, Deutsche Bank; * Excluding CEB IPO

1000

1500

2000

2500

3000

3500

4000

4500

(15.0)

(10.0)

(5.0)

-

5.0

10.0

15.0

20.0

25.0

30.0

Ma

r-0

5

Jun

-05

Se

p-0

5

De

c-0

5

Ma

r-0

6

Jun

-06

Se

p-0

6

De

c-0

6

Ma

r-0

7

Jun

-07

Se

p-0

7

De

c-0

7

Ma

r-0

8

Jun

-08

Se

p-0

8

De

c-0

8

Ma

r-0

9

Jun

-09

Se

p-0

9

De

c-0

9

Ma

r-1

0

Jun

-10

Se

p-1

0

De

c-1

0

Ma

r-1

1

Foreign net buying/(selling) in Pbn, lhs PCOMP, rhs

|------- Jan'06 - Aug'07 -------|

$2.3bn

|------ Sep'07 - Jun'09 ------|

($1.8bn)

|-- Jul'09 - Jul'10 --|

$0.4bn

|Aug-Nov'10 |

$0.7bn*


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Client visits


16

9

23

39

58

70

55

44

54

0

10

20

30

40

50

60

70

80

2003 2004 2005 2006 2007 2008 2009 2010

Foreign client visits with DB Regis

Source: Deutsche Bank


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Lots of catching up to do


17

Source: National Statistical Coordination Board, CEIC, Deutsche Bank

0

5

10

15

20

25

30

35

Investments to GDP (%)

Philippines Indonesia

0

500

1,000

1,500

2,000

2,500

3,000

3,500

GDP per Capita (US$)

Philippines Indonesia


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01/02/2011 16:20:53 2010 DB Blue template

Appendix 1Important DisclosuresAdditional Information Available upon Request

7. Deutsche Bank and/or its affiliate(s) has received compensation from this company for the provision of investment banking or financial advisory services within the past year.

8. Deutsche Bank and/or its affiliate(s) expects to receive or intends to seek compensation for investment banking services from this company in the next three months.

14. Deutsche Bank and/or its affiliate(s) has received non-investment banking related compensation from this company within the past year.

For disclosures pertaining to recommendations or estimates made on securities other than the primary subject of this research, please see the most recently published company report or visit our global disclosure look-up page on our website at http://gm.db.com.

D isclo su r e Ch eck l i st

Co m pan y T ick e r Pr ice D isc lo su r e

Rafael [email protected]+632 894 6644

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01/02/2011 16:20:53 2010 DB Blue template

Special Disclosures

Please also refer to disclosures in the “Important Disclosures Required by US Regulators” and the Explanatory Notes.

7.Deutsche Bank and/or its affiliate(s) has received compensation from this company for the provision of investment banking or financial advisory services within the past year.For disclosures pertaining to recommendations or estimates made on securities other than the primary subject of this research, please see the most recently published company report or visit our global disclosure look-up page on our website at http://gm.db.com/ger/disclosure/DisclosureDirectory.eqsr.

Analyst CertificationThe views expressed in this report accurately reflect the personal views of the undersigned lead analyst about the subject issuers and the securities of those issuers. In addition, the undersigned lead analyst has not and will not receive any compensation for providing a specific recommendation or view in this report. Gio Dela-Rosa


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01/02/2011 16:20:53 2010 DB Blue template

Buy: Based on a current 12-month view of total shareholder return (TSR = percentage change in share price from current price to projected target price plus projected dividend yield), we recommend that investors buy the stock.

Sell: Based on a current 12-month view of total shareholder return, we recommend that investors sell the stock.

Hold: We take a neutral view on the stock 12 months out and, based on this time horizon, do not recommend either a Buy or Sell.

Notes:

1. Newly issued research recommendations and target prices always supersede previously published research.

2. Ratings definitions prior to 27 January, 2007 were:

Buy: Expected total return (including dividends) of 10% or moreover a 12-month period

Hold: Expected total return (including dividends) between -10%and 10% over a 12-month period

Sell: Expected total return (including dividends) of -10% orworse over a 12-month period

Equity Rating Key Equity Rating Dispersion and Banking

Relationships


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Regulatory Disclosures

1. Important Additional Conflict Disclosures

Aside from within this report, important conflict disclosures can also be found at https://gm.db.com/equities under the “Disclosures Lookup” and “Legal” tabs. Investors are strongly encouraged to review this information before investing.

2. Short-Term Trade Ideas

Deutsche Bank equity research analysts sometimes have shorter-term trade ideas (known as SOLAR ideas) that are consistent or inconsistent with Deutsche Bank’s existing longer term ratings. These trade ideas can be found at the SOLAR link at http://gm.db.com.

3. Country-Specific Disclosures

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Philippine Strategy: External outlook, and · Philippine Strategy: External outlook, and ... Deutsche Bank; * Excluding CEB IPO 1000 1500 2000 2500 3000 3500 4000 4500 (15.0 ... Philippines