Philippines Property Sector

DISCLOSURE APPENDIX AT THE BACK OF THIS REPORT CONTAINS IMPORTANT DISCLOSURES, ANALYST CERTIFICATIONS, LEGAL ENTITY DISCLOSURE AND THE STATUS OF NON-US ANALYSTS. US Disclosure: Credit Suisse does and seeks to do business with companies covered in its research reports. As a result, 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.

12 September 2016 Asia Pacific/Philippines

Equity Research Real Estate Management & Development

Philippines Property Sector Research Analysts

Danielo Picache

632 858 7758

[email protected]

Sofia Cabral

63 2 858 7757

[email protected]

SECTOR REVIEW

Hard hat area…falling presales

Figure 1: Aggregate residential presales, 2011 to 2018E

Source: Company data, Credit Suisse estimates

■ Worst is yet to come for residential trends. Our detailed affordability

analysis suggests weakness in residential presales to persist (i.e. -2% YoY

in FY16E, then another 7% decline p.a. in 17-18E). Given that the

residential segment remains a significant contributor to revenue (~32-

80%), EBITDA (~16-55%), and NAV (~9-30%) of Philippine's property

companies, the worst is not over for some. We downgrade both MEG and

FLI to UNDERPERFORM given their concentrated exposure to the

residential segment and upgrade SM Prime to OUTPERFORM. We keep

ALI at NEUTRAL.

■ Revisiting the affordability thesis. Our expectations of declining presales

in 2016-18E is mainly driven by deferred project launches, banks' stricter

lending standards and minimal improvement in overall residential

affordability. Average household income in the Philippines is low and with

income distribution highly skewed to the right, we believe residential

affordability is a key driver to total residential demand. While there is some

supply-side pressure on residential prices and potential for household

income to recover, we believe improvement in affordability is minimal in the

next 2-3 years given long-term mortgage financing is still limited

■ Divergence of landlords over residential to persist. For the sector, we

pick out RLC and SMPH as our preferred exposure. Unlike the rest of their

peers, we expect these traditional landlords to sustain their outperformance

given robust and sustainable recurring income growth and high earnings

visibility driven by malls and office leasing operations. These landlords

might be trading at elevated multiples over their five-year mean, but these

are supported by solid growth (17% p.a. EPS growth 2016-18E), or higher

than MEG and FLI's 9-10% p.a. Our 2016-18E EPS forecasts for the sector

are revised downwards by 3%/5%/6%, respectively, with sector earnings

growth expected at 15% p.a. in the next three years.

9%

47%

11%18%

7%

-2%-7%

-7%

-20%

-10%

0%

10%

20%

30%

40%

50%

0

50,000

100,000

150,000

200,000

250,000

300,000

2011 2012 2013 2014 2015 2016E 2017E 2018E

ALI FLI MEG RLC SMPH YoY growth

We forecast 2H16 presalesto decline -4% YoY, bringing FY16

total presales down -2% YoY

12 September 2016

Philippines Property Sector 2

Focus charts Figure 2: Residential pre-sales momentum has been

weak and we expect it to continue…

Figure 3: …due to deferred launches, stricter lending

standards, and minimal improvement in affordability

Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates

Figure 4: Affordability is relevant for Phils given

income distribution is highly skewed to elite few

Figure 5: Resi affordability has improved, but we

expect minimal improvement after peaking in 2011

Source: FIES, Credit Suisse research Source: FIES, PSA, Credit Suisse estimates

Figure 6: Phils property stocks has rerated… Figure 7: …mainly the landlords, SMPH and RLC


Figure 8: We expect 15% p.a. growth in 2016-18E Figure 9: But prefer "safety" of recurring income


9%

47%

11%18%

7%

-2%

-7%-7%

-20%

-10%

0%

10%

20%

30%

40%

50%

0

50,000

100,000

150,000

200,000

250,000

300,000

2011 2012 2013 2014 2015 2016E 2017E 2018E

ALI FLI MEG

RLC SMPH YoY growth

0

50,000

100,000

150,000

200,000

250,000

2013 2014 2015 2016E 2017E 2018E

ALI FLI MEG RLC SMPH

We expect residential launchest o decline by -3% p.a.

on average in 2016-18E

4.6

15.8

25.3

33.5

8.9

4.5

7.3

19.5

33.0

27.0

16.8

2.2

0.8

0.7

50.0 30.0 10.0 10.0 30.0 50.0

Poor (less than P7,890/mo)

Low-income (P7,890 to P15,780/mo)

Lower mid-income (P15,780 toP31,560/mo)

Middle-income (P31,560 toP78,900/mo)

Upper middle income (P78,900 toP118,350/mo)

Upper income (P118,350 toP157,800/mo)

Rich (at least P157,800)

# of households distribution Average monthly income distribution

86.5

198.0 198.3

208.1

80

100

120

140

160

180

200

220

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

E

2017

E

2018

E

...but has been flattish since.We expect minimal improvements in

overall affordability moving forward unless there are

structural changes in long-term financing

Affordability more than doubledfrom 2000 to 2011...

1.0

1.3

1.6

1.9

2.2

2.5

2.8

3.1

Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16

PBR Ave-2SD Ave-1SD

Average Ave+1SD Ave+2SD

-0.92-0.82

0.11

0.45

1.45

0.060.24

0.49

0.87

2.12

-1.50

-1.00

-0.50

0.00

0.50

1.00

1.50

2.00

2.50

FLI ALI RLC MEG SMPH FLI ALI MEG RLC SMPH

Stdev from 5-yr ave P/E Stdev from 5-yr ave P/B

36 40

45

51 59

69

78

90 39%

10%11%

16%15% 16%

13%15%

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

0

10

20

30

40

50

60

70

80

90

100

2011A

2012A

2013A

2014A

2015A

2016E

2017E

2018E

Sector income (P bn) Growth (% YoY)

47%55%

41%

18% 16%

30%18%

24%

55%

75%

15% 27%

33%21%

6%8%0% 3% 6%

2%

0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

0.9

1


Residential Malls Office Hotels

12 September 2016


Hard hat area…falling presales Worst is yet to come for residential trends Our detailed affordability analysis suggests weakness in residential presales to persist

(i.e. -2% YoY in FY16E, then another 7% decline p.a. in 2017-18E) mainly driven by

deferred project launches, banks' stricter lending standards, and minimal improvement in

overall residential affordability. Given the residential segment remains a significant

contributor to revenue (~32-80%), EBITDA (~16-55%), and NAV (~9-30%) of Philippine's

property companies, the worst is not over for some. We downgrade both MEG and FLI to

UNDERPERFORM given their concentrated exposure to the residential segment and

upgrade SM Prime to OUTPERFORM. We keep ALI at NEUTRAL.

After a huge cut in residential launches in 2015 (i.e. it was down by 17% YoY mainly from

MEG's deferred launches), we expect yearly additions to normalise. Total residential

launches for the period are generally on track based on our estimates, i.e., aggregate

sales value of residential projects launched by these property companies have already

reached P76.5 bn, or 48% of our FY16E forecast. We expect total launches for FY16E to

be flat on a YoY basis at P160 bn. For 2017-18E we estimate another 3-4% decline in

residential launches as property companies continue to manage their pipeline.

Revisiting the affordability thesis Average household income in the Philippines is low and with income distribution highly

skewed to the right, we believe residential affordability is a key driver to total residential

demand. While there is some supply-side pressure on residential prices (we estimate

residential price appreciation normalising to 2% p.a. vs the 8% p.a. in 2011-15) and

potential for household income to recover (we assume average household income based

on GNI per capita to grow by 4% p.a. in 2016-18E), we believe improvement in

affordability is minimal in the next 2-3 years given long-term mortgage financing is still

limited (i.e. government financing schemes/programmes have generally been

unsuccessful with loan grants from the Pag Ibig fund lagging significantly at 2% p.a. in the

past five years vs 19% p.a. for banks' mortgage growth; meanwhile banks have been risk-

averse on extending long-term loans to consumers, i.e., 6-10 year average tenors).

We estimate overall affordability to only improve by 5% going into 2018E as a base case

for our Residential Affordability Index (i.e., ratio between the average monthly income of a

typical single household and the required monthly amortisation for a median-priced

residential property), which we believe is not significant enough to sustainably drive a

recovery in residential demand in the next three years.

Divergence of landlords over residential to persist For the sector, we pickout RLC and SMPH as our preferred exposure. Unlike the rest of

their peers, we expect these traditional landlords to sustain their outperformance given

robust and sustainable recurring income growth and high earnings visibility driven by malls

and office leasing operations. These landlords might be trading at elevated multiples over

their five-year mean, but these are supported by solid bottom-line growth (17% p.a. EPS

growth 2016-18E), or higher than MEG and FLI's 9-10% p.a. Our 2016E/17E/18E EPS

forecasts for the sector are revised downwards by 3%/5%/6%, respectively, with sector

earnings growth expected at 15% p.a. in the next three years.

In terms of top-line growth, we expect residential realised revenue to decelerate further in

2016-17E at 7% p.a. before potentially bottoming out in 2018E at 5% YoY. Key risks for

the residential segment are any further delay in bookings of presales and slower

construction completion that could drag top-line growth. On the flip side, our expectations

of a sustained rollout in additional office and malls space and sustained take-up rates will

drive the recurring income growth of these property companies at 16% p.a. in the next

three years. Key risk here is downward pressure on average lease rates given the record

supply coming specially for the office segment.

We forecast residential presales to decline by

2%/7%/7% in 2016-18E; we have Underperform

ratings on MEG and FLI

Affordability is a key driver for residential

demand in the Philippines; in our view, there will be

minimal improvement in affordability given

still limited long-term mortgage financing

We believe traditional landlords like RLC and SMPH will continue to outperform; we expect EPS growth for both to

average 17% p.a. in 2016-18E

12 September 2016


Valuation summary

Figure 10: Philippines' property sector valuation summary

ALI FLI MEG RLC SMPH Sector

Rating NEUTRAL UNDERPERFORM UNDERPERFORM OUTPERFORM OUTPERFORM

Share price (P) 38.00 1.82 4.55 30.00 26.90

Target price (P) 40.70 1.60 4.00 36.30 31.90

% up/downside 7.1 -12.1 -12.1 21.0 18.6 11.3

Market cap (P bn) 559,082 44,135 146,654 122,815 776,849 1,649,534

Market cap (US$ mn) 11,786 930 3,092 2,589 16,377 34,775

Valuation ratios:

P/E (x) 2014A 36.3 9.6 15.9 25.8 40.8 35.1

2015A 31.5 8.7 14.2 21.5 37.1 31.3

2016E 27.2 8.1 13.3 18.2 30.8 26.5

2017E 24.5 7.3 11.9 15.5 26.9 23.4

EPS (% YoY) 2014A 25.4 15.8 1.6 5.8 12.6 15.5

2015A 15.1 10.4 12.2 20.3 9.8 12.6

2016E 16.0 7.4 6.9 17.7 20.4 17.1

2017E 11.1 11.3 11.7 18.0 14.5 13.3

EPS CAGR (%) 16-18E 14.9 9.5 10.3 17.4 16.7 15.4

P/B (x) 2014A 5.0 0.9 1.3 2.3 4.4 4.1

2015A 4.1 0.8 1.2 2.2 4.0 3.6

2016E 3.8 0.7 1.1 2.0 3.7 3.3

2017E 3.4 0.7 1.0 1.8 3.3 3.0

Dividend yield (%) 2014A 1.1 2.7 0.9 1.2 0.7 0.9

2015A 1.1 3.1 1.3 1.2 0.8 1.0

2016E 1.3 3.1 0.8 1.2 1.0 1.1

2017E 1.4 3.4 0.9 1.2 1.1 1.3

ROA (%) 2014A 4.1 4.4 4.6 5.9 5.1 4.8

2015A 4.2 4.4 4.3 6.2 5.1 4.8

2016E 4.4 4.3 4.3 6.3 5.6 5.1

2017E 4.4 4.6 4.6 6.6 6.0 5.4

ROE (%) 2014A 14.3 9.1 9.0 9.3 11.7 12.1

2015A 14.5 9.4 8.9 10.4 11.4 12.1

2016E 14.6 9.4 8.9 11.3 12.4 12.7

2017E 14.7 9.7 9.2 12.1 13.0 13.1

Source: IBES, company data, Credit Suisse estimates

12 September 2016


Worst is yet to come for residential trends Our detailed affordability analysis suggests that the weakness in residential presales will

persist (i.e. -2% YoY in FY16E, then another 7% decline p.a. in 17-18E). Given that the

residential segment remains a significant contributor to revenue (~32-80%), EBITDA (~16-

55%), and NAV (~9-30%) of Philippines' property companies, the worst is not over for some.

Turnaround in residential not yet in sight

Residential presales have been weaker than expected

On an aggregate basis (for the five property companies we cover), we saw a further

deceleration in residential presales in 2Q16, which brought total 1H16 presales to end flat

YoY (a sharp slowdown from the 7% growth in 1H15/2H15).

We expect the weakness in take-up rates to persist so we see a further deceleration in

presales in 2H16 by -4% YoY, which should bring the 2016E aggregate down by -2% YoY.

Mainly driven by deferred project launches, banks' stricter lending standards, and minimal

improvement in overall residential affordability, we forecast residential presales to decline

by another 7% p.a. in 2017-18E.

Figure 11: Aggregate residential presales, 2011-18E (P mn)


Risk-reward not favourable for property companies with more residential exposure

MEG reported the weakest pre-sales momentum in the sector and the numbers are not

looking very encouraging. To put it simply, pre-sales growth worsened for the quarter

(2Q16 down by -26%, vs -6% in 1Q16) despite being able to launch new projects in 2Q16

(it did not launch any in 1Q16). Its flagship “Megaworld” brand (which accounts for two-

thirds of its residential mix and is catered towards the mid-to-high end segment of the

market) showed a sharp decline in presales, which in a way can be a read-through on the

further slowdown in demand for residential projects in Metro Manila (i.e., Metro Manila

accounts for 95% of MEG's residential exposure).

Coming off a high base, we estimate SMPH's presales to decline fastest at 13% p.a. for

2016-18E followed by MEG at 7% p.a. Both companies' residential businesses are highly

concentrated in Metro Manila, hence, our more bearish forecasts. Nevertheless, the

residential segment is a smaller proportion of SMPH's overall business compared to MEG.

9%

47%

11%18%

7%

-2%-7%

-7%

-20%

-10%

0%

10%

20%

30%

40%

50%

0

50,000

100,000

150,000

200,000

250,000

300,000

2011 2012 2013 2014 2015 2016E 2017E 2018E

ALI FLI MEG RLC SMPH YoY growth

We forecast 2H16 presalesto decline -4% YoY, bringing FY16

total presales down -2% YoY

Deferred project launches, stricter

lending standards, and minimal improvement

in affordability will limit any recovery in

residential presales

12 September 2016


The narrative among property companies has been the same, i.e., they will consciously

shift to a more recurring income stream in order to offset the potential weakness in the

residential segment. Nevertheless, the slowdown in residential, in terms of both presales

and realised revenue, continues to be a drag with 1H16 revenue/EBITDA/net income

growth for the five property companies we cover only at 9%/13%/12% YoY (a slowdown

versus the three-year CAGR 2013-15A of 15%/19%/14% p.a).

Figure 12: 1H16/2Q16 earnings performance

1H16 vs 1H15 2Q16 vs 2Q15

ALI SMPH MEG RLC FLI ALI SMPH MEG RLC FLI

Total revenues (YoY) 9% 9% 5% 12% 6% 11% 9% 0% 10% 9%

EBITDA (YoY) 5% 10% 6% 13% 10% 3% 9% 3% 8% 10%

EBITDA margin 40% 55% 40% 55% 37% 41% 54% 44% 54% 35%

Pre-tax income (YoY) 16% -26% 10% 15% 10% 19% 10% 8% 10% 16%

Pre-tax income margin 28% 41% 34% 40% 37% 29% 41% 37% 40% 36%

Reported net income (YoY) 16% -33% 11% 12% 6% 18% 12% 9% 7% 1%

Core net income (YoY) 16% 12% 11% 12% 6% 18% 12% 9% 7% 1%

Core net income margin 18% 32% 25% 30% 29% 18% 32% 28% 31% 27%


So stick to the safety of traditional landlords: RLC and SMPH

On a one-year view, we believe investors should stay in the safety of sustainable recurring

income growth and higher earnings visibility from traditional landlords such as SMPH and

RLC. We estimate better EPS growth potential for these two companies at 17% p.a. in

2016-18E, which is slightly higher than the sector average of 15%, but significantly faster

than the traditional residential developers like MEG and FLI at 9-10% p.a.

Note that SMPH and RLC's business model continues to be more defensive such that

68% of their 2017E core operating revenue and 82-83% of their 2017E EBITDA are

generated by their recurring businesses, i.e., malls, office leasing and hotels. The opposite

can be said of the other three property companies as seen in the charts below.

Figure 13: Revenue breakdown, 2017E Figure 14: EBITDA breakdown, 2017E


63%

80%73%

32% 32%

16%

8%

10%

46%

59%

6%

12%14%

12%

6%6%

0% 3%9%

3%8%

0% 0% 0% 0%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%


Residential Malls Office Hotels Others

47%55%

41%

18% 16%

30%18%

24%

55%

75%

15% 27%

33%21%

6%8%0% 3% 6%

2%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%


Residential Malls Office Hotels

We expect faster earnings growth for the

traditional landlords, RLC and SMPH

12 September 2016


Landlords' outperformance drove sector rerating

Property sector now trading near its peak level…

Our aggregate valuation computation for the Philippine property stocks we cover suggests

that the sector is peaking, i.e., forward-looking P/B traded to as high as 2.8x, or at its +2

sd five-year average. Despite the unexciting 1H16 results and signals of further weakness

in the residential development segment, investors were generally still positive on the

sector as a whole (i.e. four of the property names' share price outperformed the PCOMP

on a YTD basis).

Figure 15: PH property sector forward P/B (x)

Figure 16: Share price performance, 2016 YTD vs

2015


…with investors showing clear preference for traditional landlords like SMPH

In our view, investors have been willing to pay a premium for visibility of earnings and

sustainability of returns, features that are inherent to the business model of traditional

landlords. There is enough proof to suggest that this remains to be the case, i.e., a

structural rerating of SMPH and RLC based on five-year P/B and P/E historical trends as

seen in the chart below, e.g., SMPH's forward P/E and P/B is currently 1.45x and 2.12x

standard deviations above five-year mean, respectively.

SMPH, even though its corporate restructuring initiated in 2013, has come out as a clear

outperformer in the sector for almost two years now (absolute stock return of 27% in FY15;

29% in 2016 YTD). While we can generally attribute its outperformance to its status as

being the biggest landlord in the country and a major beneficiary of the resurgence in

private consumption during this year's election season, investors were also optimistic

about the potential impact of two drivers for the stock, namely:

■ Revival of the REIT here in the Philippines, which allows SMPH to tap the capital

markets for financing needs given its aggressive growth plans amid higher leverage.

■ The awarding of the land reclamation contracts in Metro Manila (660 ha in Pasay and

Parañaque) and in Cebu (1,500 ha). Just like RLC, SMPH has low land inventory at

this point so securing the aforementioned land deals is critical for it to sustain its growth

in these two prime real estate markets.

1.0

1.3

1.6

1.9

2.2

2.5

2.8

3.1


PBR Ave-2SD Ave-1SD


24

109 9

7

2

27

24

-4

-8

19

-15

-10

-5

0

5

10

15

20

25

30

SMPH.PS ALI.PS RLC.PS PCOMP MEG.PS FLI.PS

Ytd 2015

Revival of REIT talks and potential for

reclamation deals have been driving SMPH's outperformance this

year

12 September 2016


Figure 17: Std dev of current forward P/E and P/B vs five-year averages


Demand (end-users and investors) is losing steam

Rising vacancy and contracting rental rates on residential in key CBDs…

Residential vacancy rates have been creeping up in the Makati and Fort Bonifacio CBDs,

which are prime residential markets and are seen by many as microcosms of the current

demand situation in Metro Manila.

According to data from Colliers International Philippines as 2Q16, overall residential

vacancy in Makati alone has increased to 10.3% (from 9.6% in 1Q16), which is higher than

the ten-year average vacancy rate of 8.8% (but still lower than the post-AFC peak of

16.0% in 2003). Meanwhile in Fort Bonifacio, the level of vacancy is now at 9.2% (from

8.6% in 1Q16) with vacancy rates highest for luxury (at 9%) and grade B (at 10.5%)

condominium buildings.

The higher vacancy rates have resulted in lower rental rates across the key residential

markets, i.e., in Makati it was down by -1.2% QoQ and -0.8% YoY; in Fort Bonifacio it

ended lower by -1.7% QoQ and -1.8% YoY.

-0.92 -0.82

0.11

0.45

1.45

0.060.24

0.49

0.87

2.12

-1.50

-1.00

-0.50

0.00

0.50

1.00

1.50

2.00

2.50

FLI ALI RLC MEG SMPH FLI ALI MEG RLC SMPH

Stdev from 5-yr ave P/E Stdev from 5-yr ave P/B

Residential vacancy rates rising in key

CBDs in Metro Manila; rental rates declined

QoQ in 2Q16

12 September 2016


Figure 18: Makati residential vacancy rates Figure 19: Metro Manila residential rental rates

Source: Colliers, Credit Suisse estimates Source: Colliers, Credit Suisse estimates

…and record construction completions this year and in 2017E…

New supply (i.e. completed projects) of residential units in key Metro Manila CBDs is

expected to post its highest growth in recent years at 17% YoY this year and 12% YoY in

2017E (then normalises in 2018-19E). As seen in the table below, Makati and Fort

Bonifacio are scheduled to flood the market with the highest number of residential units in

the next two years.

Note that it is safe to assume for potential delays in completions as was the case in

previous years mainly due to slower-than-expected presales (i.e., this creates a delay

such that developers normally try to hit a 60-70% take-up rate of their project before they

begin construction) and the lack of skilled labour (according to construction companies the

number of construction workers is not able to catch up with the number of property

developments in Metro Manila).

Figure 20: Forecast residential completions in Metro Manila CBDs, as of 2Q16

Location As of 2013 2014A 2015A 2016E 2017E 2018E 2019E As of 2019E

Makati CBD 17,656 681 1,000 3,660 3,100 1,072 598 27,767

Rockwell 3,718 441 - - 346 492 269 5,266

Fort Bonifacio 17,513 1,914 2,779 6,730 4,125 2,311 2,075 37,447

Ortigas 11,921 1,899 2,430 1,355 899 422 570 19,496

Eastwood 6,830 718 - - 988 - 632 9,168

Total 57,638 5,653 6,209 11,745 9,458 4,297 4,144 99,144

Total as of end-year 57,638 63,291 69,500 81,245 90,703 95,000 99,144

YoY growth 10% 10% 17% 12% 5% 4%

Source: Colliers, Credit Suisse estimates

…could keep a lid on rental yields and prices

In any case, we believe the potential increase in new supply of residential units in Metro

Manila for the next two years (2016-17E), weak pre-selling momentum and high vacancy

rates should cap any potential recovery in residential property prices (down by

3.0%/1.5%/2.3% QoQ in Makati, Rockwell, and BGC, respectively) and rental yields

(averaging at 7.0% for all three CBDs; a minimal spread over one-year repricing mortgage

loan rates of 5.25-5.50%).

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

1Q10

3Q10

1Q11

3Q11

1Q12

3Q12

1Q13

3Q13

1Q14

3Q14

1Q15

3Q15

1Q16

Luxury Others All grades

400

500

600

700

800

900

1,000

1Q10

3Q10

1Q11

3Q11

1Q12

3Q12

1Q13

3Q13

1Q14

3Q14

1Q15

3Q15

1Q16

Makati CBD Rockwell Bonifacio Global City

Expected record supply coming through in

2016-17E

12 September 2016


This, in our view, could have a dampening impact on sentiment in the primary and

secondary markets alike. End-users may be struggling to decide on purchasing their own

residential unit in Metro Manila given the minimal improvement in housing affordability

(household income over monthly mortgage amortisation, to be discussed in the next

section). For potential investors in Metro Manila residential property (particularly mid- to

high-end), the weakness in the secondary market based on the recent vacancy and rental

rates data may wait out for conditions to stabilise before re-entering the market due to the

risk of a squeeze in rental yields.

Figure 21: Metro Manila average residential property

prices (P/sq m) Figure 22: Metro Manila residential rental yields

Source: Colliers, Credit Suisse estimates Source: Colliers, Credit Suisse estimates

Launches are normalising, but mortgage lending

continues to decelerate

We expect residential launches to decline still

After a huge cut in residential launches in 2015 (they were down by 17% YoY mainly from

MEG's deferred launches), we expect yearly additions will normalise. Total residential

launches for the period are generally on track based on our estimates, i.e., aggregate

sales value of residential projects launched by these property companies have already

reached P76.5 bn, or 48% of our FY16E forecast. We expect total launches for FY16E to

be flat on a YoY basis at P160 bn. For 2017-18E, we estimate another 3-4% decline in

residential launches as property companies continue to manage their pipeline.

80,000

90,000

100,000

110,000

120,000

130,000

140,000

150,000

160,000

170,000

180,000

1Q10

3Q10

1Q11

3Q11

1Q12

3Q12

1Q13

3Q13

1Q14

3Q14

1Q15

3Q15

1Q16


6.0%

6.5%

7.0%

7.5%

8.0%

8.5%

9.0%

1Q10

3Q10

1Q11

3Q11

1Q12

3Q12

1Q13

3Q13

1Q14

3Q14

1Q15

3Q15

1Q16


Residential launches are seen to be flat YoY this year; but down 3-

4% in 2017-18E

12 September 2016


Figure 23: Sales value of residential project launches


Some developers delay their launches due to tepid demand and increasing

inventory

Note here that some of the property companies are slowing down their launches and seem

to be lagging their targets this year. MEG has so far launched P9 bn worth of new

residential projects, while FLI has launched P4.0 bn in 1H16, both of which only account

for 30-33% of our FY16E assumption of P30.0 bn and P13.0 bn, respectively.

In terms of unsold inventory, we believe there is minimal visibility for the sector as a whole,

though the closest we get in terms of indication from the property companies is that their

level of inventory (i.e. unsold ready-for-occupancy and under-construction units) is good

for 18-36 months' worth of presales. Our overall sense of the market is that property

companies are making a conscious effort to manage their current inventory levels given

the tepid demand experienced in the past couple of quarters.

Figure 24: Residential licences to sell (LTS) data


0

50,000

100,000

150,000

200,000

250,000

2013 2014 2015 2016E 2017E 2018E


We expect residential launchest o decline by -3% p.a.

on average in 2016-18E

There was a huge cut inlaunches in 2015 i.e. down

17% YoY

0

50

100

150

200

250

300

199

4

199

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201

0

201

1

201

2

2013

2014

2015

Jan-

May

'16

Metro Manila Outside Metro Manila

Residential licenses to sell (LTS) suggest robust pipeline. But withslower presales numbers, will actual launches really push through?

Launched projects in 1H16 for MEG and FLI are lagging our FY16

estimates

12 September 2016


Mortgage lending continues to decelerate…

Since the central bank's implementation of additional guidelines to monitor real estate

exposure, we have noticed that real estate loans specifically to the residential segment

decelerated (1Q16 was at 12% YoY vs average of 24% in FY14). This is markedly

different from the trend of total real estate loans, which continue to grow at 22% as at end-

1Q16—mainly driven by lending to commercial property.

Figure 25: Residential mortgage lending vs system-wide loans


…as credit standards tighten

According to the latest (2Q16) Senior Bank Loan Officer's surveys conducted quarterly by

the BSP, there was a reported net tightening of credit standards for residential mortgage

lending relative to overall consumer lending. The Diffusion Index (DI) for credit standards

on residential mortgage loans is now at 5.0 as at 2Q16 compared to the -5.9 in 1Q16.

Note that a positive value signifies that the proportion of banks that have tightened their

credit standards are greater vis-à-vis the number of banks that eased. This was mainly

attributed to reduced risk tolerance of banks for this type of loan and the perceived stricter

financial system regulations (i.e., stricter collateral requirements for household loans).

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q

2009 2010 2011 2012 2013 2014 2015 2016

Residential mortgage System-wide loans Total real estate loans

Lending standards of banks specifically for residential mortgage

tightened in 2Q16

12 September 2016


Figure 26: Credit standards for residential mortgages

Diffusion Index for credit standards: a positive value signifies net tightening on a QoQ basis, a negative value means net loosening


Exposure for banks to the real estate sector is now slightly above the prudential limit of

20% of total loans set by the BSP. Note that a more comprehensive definition of total Real

Estate Exposure (REE), which combines real estate loans and investments in debt

securities issued by property companies, has been introduced in 2012 to include loans to

developers of socialised and low-cost housing, loans to individuals and loans supported by

non-risk collaterals or Home Guarantee Corp. (HGC) guarantee, and exposure of banks'

trust departments and thrift bank units. As at 1Q16, REE of the banking industry was

already at 20.8%. Nevertheless, this appears to be a 'manageable' level according to the

BSP, given that overall real estate NPL trend remains benign (currently at 2.1% NPL ratio)

and banks have sufficient capital based on their real estate stress test results.

Figure 27: Real exposure of banks and real estate

NPL ratio Figure 28: Breakdown of real exposure for banks


-15.0

-10.0

-5.0

0.0

5.0

10.0

15.0

20.0

25.0

30.0

1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q

2009 2010 2011 2012 2013 2014 2015 2016

Commercial real estate loans Residential mortgage loans

0%

1%

2%

3%

4%

5%

6%

7%

8%

12%

13%

14%

15%

16%

17%

18%

19%

20%

21%

22%

1Q 3Q 1Q 3Q 1Q 3Q 1Q 3Q 1Q 3Q 1Q 3Q 1Q 3Q

2010 2011 2012 2013 2014 2015 2016

RELs/TLP (LHS) Non-perf RELs ratio (RHS)

Real estate loans now at 20.8% of total system-wide loans

Non-performing real estate loansremain close to historic-lows at 2.1% of total

0

200

400

600

800

1,000

1,200

1,400

1,600

1,800

1Q 3Q 1Q 3Q 1Q 3Q 1Q 3Q 1Q 3Q 1Q 3Q 1Q 3Q 1Q 3Q 1Q 3Q

2008 2009 2010 2011 2012 2013 2014 2015 2016

Residential loans Commercial loans Real estate investment

Total real estate exposure of Phils banksreached P1.55tn as at end-1Q16, or 22% YoY

Roughly 65% of real estate loans are forcommercial, the remainder is

for residential

After implementing regulatory measures in

past years, BSP is comfortable with the current exposure of banks to real estate

12 September 2016


BSP's housing index improves monitoring of residential market

While there are minimal talks about additional macro-prudential measures on the real

estate sector, we believe the central bank will continue to closely monitor the market for

any hint of asset price bubbles or risk of credit quality deterioration. The central bank

recently introduced the Residential Real Estate Price Index (RREPI), which is based on

the appraised value of housing loan applications by residential buyers. This additional tool

for policy-making is deemed critical to strengthening the central bank's ability to monitor

systemic risks inherent in a robust credit growth cycle amid a highly liquid financial system

that the country as a whole is currently enjoying.

A quick review: BSP regulations on the real estate sector

To proactively prevent aggressive risk-taking activities in real estate lending and the threat

of a real estate bubble occurring in the Philippines, the Bangko Sentral ng Pilipinas (BSP)

has been gradually introducing new regulatory requirements, which set the tone for

Philippine's real estate lending moving forward.

■ Redefining real estate exposure for banks: In 2012, the BSP redefined the meaning of

real estate exposure for banks by including investments in equity and debt securities

used for financing real estate activities. It also amended earlier rules excluding loans

used for the acquisition and/or development of socialised and low-cost housing from

the computation of a bank's total real estate loans (RELs). The BSP has a 'soft' cap on

real estate exposure for individual banks at 20% of total loans.

■ Stress test on real estate exposure: In 2014, the central bank introduced the Real

Estate Stress Test (REST) limit for universal/commercial banks (U/CBs), which require

them to maintain minimum CET-1 capital levels under Basel III, on a solo and

consolidated basis, under the prescribed write-off rate of 25% of total real estate

exposure.

■ Stricter credit risk guidelines: While the BSP's new credit risk management guidelines

focus on cash flow analysis and ability-to-pay as the standards for assessing a

borrower's creditworthiness, we believe that the enhanced regulations are meant to

specifically emphasise the collateralisation for secured loans, especially in light of

higher capital requirements under Basel III. While there was no change in the

computation of collateral-to-value limits of 60%, the central bank did guide for higher

provisioning requirement for unsecured lending.

Central bank adds residential price index

to better monitor the market for any sign of

over exuberance

12 September 2016


Revisiting the affordability thesis We believe a worthwhile exercise is to revisit one aspect of this long-standing debate

about the country's property cycle—and that is affordability. We take an initial stab on

assessing the viability of owning a residential property specifically in Metro Manila by

creating a residential affordability index.

Average household income in the Philippines is low and with income distribution highly

skewed to the right, we believe residential affordability is a key driver to total residential

demand. While there is some supply-side pressure on residential prices and potential for

household income to recover, we believe improvement in affordability is minimal in the

next 2-3 years given long-term mortgage financing is still limited.

How affordable is residential property?

Residential affordability doubled from its lows in the previous decade…

While there has been a significant improvement in affordability throughout the last 15

years, we believe it is still relatively expensive to own a residential unit specifically in the

CBDs for a typical Filipino household. Our residential affordability index essentially follows

the computation of the National Association of Realtors in the US, whereby it determines

the ratio between the average monthly income of a typical single family household and the

required monthly amortisation for a median-priced residential property in the

aforementioned area.

Figure 29: Credit Suisse residential affordability index

Source: FIES, PSA, Credit Suisse estimates

…though it is still expensive for a middle-income family

Our reading of the index suggests it has improved by 129% at 198.0 in 2011 (vs 86.0 in

2000). Nevertheless, we believe there has been minimal improvement in overall

affordability since 2011, which is mainly driven by the relentless increase in property

prices, sluggish household income growth, and lack of structural changes in financing

options for buyers (government financing schemes/programmes have generally been

unsuccessful; meanwhile banks have been risk-averse on extending long-term loans to

consumers).

86

198 198

208

80

100

120

140

160

180

200

220

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

E

2017

E

2018

E

...but has been flattish since. We expect minimal improvements

in overall affordability moving forward unless

there are structural changes.

Affordability more than doubledfrom 2000 to 2011...

Affordability is a key driver for residential

demand, though we do not see a significant improvement in the

next 2-3 years

12 September 2016


While we anticipate some improvement in overall affordability (i.e. by 5% going to 2018E)

as a base case, we believe this is not significant enough to sustainably drive a recovery in

residential demand in the next three years. We assume:

■ Residential price appreciation to normalise: We estimate residential prices on a per sq

m basis should normalise to 2% p.a. vs the 8% p.a. that we have seen in the previous

five years (2011-15). Prices will be subdued driven by supply-side pressure, i.e., (1)

high levels of unsold inventory with property companies still sounding hopeful of future

residential launches, and (2) expectation of record completions particularly in the Metro

Manila CBDs should keep vacancy rates elevated in the secondary market.

■ Household income to slightly recover: We assume average household income (based

on GNI per capita) to slightly recover to grow by 4% p.a. in 2016-18E (vs marked

slowdown in 2015 to 3%) on the back of expectations of a steady jobs market, stable

remittances growth and potential trickle-down effects from the government's increased

spending. Personal income tax cuts are also seen as a positive driver to household

income, though are unquantifiable at this point given these could be offset by higher

taxes on certain consumer products and services.

■ Though long-term financing is lacking: On the financing side, we expect banks'

mortgage rates to gradually increase specifically in 2017-18E (i.e., by 50 bp to 8.5%

and 9.0% on a ten-year loan). This is in line with expectations of some tightening

measures by the central bank entering into next year, along with the pre-existing

stricter lending standards of banks to the residential sector.

We define affordability as a monthly mortgage amortisation over monthly

household income for an average family

A couple of caveats in our assumption that we have to take into account are as follows:

■ Unit price per sq m of a residential property: We used the historical data from Colliers

International Philippines for a residential unit (three-bedroom luxury), which we

discounted by 70% to arrive at a relatively mid-market pricing for residential projects.

■ Equity or downpayment: We assumed a downpayment scheme of 20% during the most

part of the past decade (i.e. 2000-09), but readjusted it to 10% starting 2010 as

property companies offered more lenient entry levels for borrowers and banks started

to offer more lenient financing schemes (i.e., higher loan-to-value).

■ Mortgage interest rate: We used historical data on interest rates specifically a ten-year

fixed rate mortgage loan offered by the major banks.

■ Average household income: We used the Philippine Statistics Authority's data on

Gross National Income (GNI) over estimates of the number of households in the

country from Euromonitor.

Housing affordability is traditionally low

We believe housing affordability is a key determinant of residential demand in a market

like the Philippines where income distribution is highly skewed to the right (i.e. the elite

few). Income, or at least expectation of higher income, in theory, should drive demand for

residential. Though data suggests that the increase in residential prices (due to high

construction cost and land prices) have been outpacing income growth for households.

While we expect residential prices to

normalise and household income to

recover, we think there is still limited long-term

mortgage financing available to buyers

Improvement in affordability during the

previous decade mainly driven by cheap

financing

12 September 2016


Based on our computation, residential affordability may have already peaked as early as in

2011:

■ Much of the improvement in residential affordability in the previous decade (2000-10) was mainly driven by cheaper financing—we estimate that annual interest rate for a ten-year mortgage declined from a high of 19.6% in 2000 to 11.2% in 2010. Nevertheless, average monthly mortgage payments remained high relative to household income as lowering of mortgage interest rates were more gradual, i.e., it only declined by 270 bp to 8.5% p.a. in 2015 versus in 2010.

■ Residential price growth outpaced household income growth: We believe the rate in improvement of residential affordability may have already reached its peak as early as in 2011, which was mainly due to a further acceleration in the price increase of residential units at 8% p.a. in 2011-15 compared to the increase in average household income of 5% p.a. (it was the reverse in 2000-10 when residential prices were growing 4% p.a. vs household income growth of 7% p.a.).

■ Smaller cut units and lowering of downpayments barely improved affordability in 2011-2015: Two key adjustments we made for the 2011-15 period are: (1) we reduced the unit size of a typical residential unit from 35 sq m to 25 sq m as property companies started to offer smaller cut units to manage the saleability of their product offerings and cater to a "captive market" (i.e. BPO employees), and (2) we cut the downpayment assumption to 10% from 20% as banks started to relax their LTV rules in order to penetrate into a higher-yielding segment.

Unit cost of residential property is high relative to regional peers

Based on the data from Langdon & Seah Philippines, the average unit cost for residential

projects (i.e. high-rise apartments, terraced houses, and detached houses) in Metro

Manila is higher compared to many other neighbouring cities in the region; in 2015 it

averaged US$1,026/sq m—higher than in other cities except Singapore. Note also that

average unit construction cost in Metro Manila has consistently been increasing in the past

four years (only Brunei and Jakarta are showing higher p.a. hike since 2011).

Figure 30: Average unit costs (select residential projects) for ASEAN cities, US$/sq m

Note: total construction costs include mechanical, electrical, hydraulic, fire, and lifts/escalators services. Source: Langdon & Seah Phils., Credit Suisse research

890

1,450

383

667

965

679 680

1,240

2,575

808

983

1,156

939 825

648

1,858

258

463

678

392 440

1,325

2,573

798 808

952 1,017

515

0

500

1,000

1,500

2,000

2,500

3,000

Manila Singapore Kuala Lumpur Bangkok Brunei Jakarta Ho Chi Minh

Apartments, high rise, average standard Apartments, high rise, high end Terraced houses, average standard Detached houses, high end

4-year CAGR Manila Singapore Kuala Lumpur Bangkok Brunei Jakarta Ho Chi Minh

Apartments, high rise, average standard 2% -2% -4% -5% 4% 7% 1%

Apartments, high rise, high end 4% 0% -6% -4% 3% 7% 0%

Terraced houses, average standard 3% -1% -5% -6% 8% 1%

Detached houses, high end 4% 3% -4% -4% 7% 24% 0%

Next to Singapore, unit cost of residential

property in Manila is high vs other cities in

ASEAN

12 September 2016


The key reason for this is the increase in construction material prices as well as land

prices in the capital. Using the Construction Material Wholesale Price Index (CMWPI) it

showed that prices of such raw materials have increased by 6% p.a. in the past 15 years,

which is mainly driven by the sustained price hike in two of the main construction materials

i.e. concrete products (44% of the index) and reinforcing steel (12%).

Land prices, on the other hand, have appreciated alongside the boom in the property market.

In Makati alone, they have appreciated by around 5.3% p.a. in the past 15 years. Note that the

current level of P545,000/sq m as at 2Q16 is already higher (27% premium) than its peak

during the AFC, which is mainly driven by lack of supply and investor speculation.

Figure 31: Construction Material Wholesale Price

Index (CMWPI), NCR Figure 32: Metro Manila land values

Source: PSA, Credit Suisse research Source: Colliers International Phils., Credit Suisse research

Few low-cost alternatives to housing

There have been several estimates of the current housing backlog in the Philippines: the

Subdivision & Housing Developers Association (SHDA) computed 3.9 mn unaddressed

housing needs between 2001 and 2011. SHDA also expects 6.2 mn new housing needs in

2012-30, or an average of 346k housing units per year. Note that of the expected housing

needs in 2012-30, around two-thirds are targeted to the socialised housing (25% of total

housing need) and economic housing (42%) market segments.

Figure 33: Estimated new housing need, 2012-30

Price range Units needed % of total need

Can't afford/needs subsidy 450k and below 1,449,854 23%

Socialised housing 450k and below 1,582,497 25%

Economic housing 450k to 1.7mn 2,588,897 42%

Affordable/low cost housing 1.7mn to 3.0mn 605,692 10%

Mid cost housing 3.0-6.0mn No need

High-end/luxury 6.0mn and higher No need

Total need 6,226,940

Source: SHDA, Credit Suisse research

Major residential developers have been disinclined to aggressively service the housing

backlog in the country mainly due to (1) slim profit margins, (2) limited location for such

development, and (3) reported high levels of foreclosures or backouts experienced by

mortgage financing programmes offered by government agencies like the Home

Development Mutual Fund (HDMF or the Pag Ibig Fund) and the Social Security System

80

130

180

230

280

330

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

1Q16

2Q16

CMWPI Concrete products Reinforcing steel

Wholesale prices of constructionmaterials in Metro Manila have

increased by 6% p.a. in 2001-2015)

0

100,000

200,000

300,000

400,000

500,000

600,000

1996

1998

2000

2002

2004

2006

2008

2010

2012

1Q14

3Q14

1Q15

3Q15

1Q16

Makati Ortigas BGC

Experts forecast sizeable housing

backlog, though most are in the lower end of

the market

12 September 2016


(SSS). These agencies would normally offer the most accommodative mortgage financing

package in the market (i.e. loan terms of 25-30 years, competitive loan rates, and high

LTVs), and yet the level of default (i.e. Pag Ibig reported NPL ratio is 12.6% vs banks'

systemwide residential NPL ratio of 3.1%) is still a worrying sign for most major developers.

Only FLI ,of the five property companies that we cover, has a sizeable enough exposure to

the socialised and low-cost segments of the residential market; these account for roughly

25% of their residential sales.

Figure 34: Breakdown of residential sales by residential brand

Socialised/Economic

(Php0.2-0.7mn per unit)

Low-cost/Affordable


Middle


Upper middle


High end

(Php10.0mn and above)

Ayala Land BellaVita Amaia Avida Alveo Ayala Land Premier

2% 8% 24% 33% 33%

Megaworld Empire East & Sun Trust Megaworld/ Global Estate

30% 70%

Robinsons Land Communities/Homes Robinsons Residences Robinsons Luxuria

43% 50% 7%

SM Prime SMDC

100%

Filinvest Land Pabahay Futura Homes Filinvest Filinvest Premiere

7% 18% 67% 8%


Innovative housing finance is limited

Outside of the mortgage financing programmes offered by Pag Ibig and the SSS, there

appear to be limited options available for residential buyers to avail long-term financing or

other sustainable financing schemes in the market. While in-house financing or deferred

payments schemes offered by property developers themselves (whereby downpayments

for residential units availed during pre-selling are payable in monthly instalments during

the duration of the construction period) have effectively lowered the upfront cost for buying

residential properties, the balloon payment at the end of the downpayment period still

needs some form of bank financing. Banks, on their part, have been accommodative to the

point where they have increased their LTV limits to 90-95% and lowered their mortgage

rates, though the average tenor of their mortgage products is still conservative at 6-10

years.

Microfinance schemes or NGO-initiated subsidy programmes have been unsuccessful in

the past mainly as:

■ Good land titling systems are lacking, which delays the application process for loans

due to deficiencies in collaterals (i.e. all housing programmes are essentially mortgage-

based with land as collateral particularly for lots or house and lot units).

■ Liquidity constraints and bureaucratic delays have made government housing finance

programmes unsustainable. The case in point is the five-year and nine-year delay in

adjusting the loans ceiling for socialised and economic housing.

■ Default rates have been high and subsidy transfer mechanisms have been poor.

Note that loan grants from the Pag Ibig Fund have been significantly lagging loan growth

from banks (i.e. 2% p.a. vs 19% p.a. in the past five years).

Microfinance and government/NGO

programmes for mortgage financing

have been unsuccessful so far

12 September 2016


Is there a potential structural shift to improve

residential affordability

Household's ability to pay has to dramatically improve

Income (or expectation of higher income) is a major determinant of housing demand.

Based on the data from the Family Income and Expenditure Survey (FIES) by the

Philippine Statistics Authority (PSA), there is already an existing market of family

households that (in theory) have sufficient monthly income to avail of financing products

(from say the Pag Ibig Fund) to purchase housing units in the socialised to the

affordable/low cost segments. For example, middle-income families already account for

16.8% of total households in the country and their monthly income of P31,560-78,900 is

enough to service a mortgage for an affordable housing unit priced at P3.0 mn (i.e.

monthly amortisation of P19.9k based on ten-year repricing period on a 30-year loan).

Figure 35: Distribution of households and shares of household income by

income class, 2012 FIES

Source: FIES, Credit Suisse research

The caveat here is that providing the required equity portion of housing loans has been a

major constraint for most households in the past and we do not expect any further

improvement in the low down-payment schemes offered by developers. Also, the income

available for housing is, however, minimal—i.e. housing expenditure represents 13% (as

high as 27% for Metro Manila households) of total expenditure. Increase in housing

expenditure is possible through an increase in income (i.e. proposed adjustments in

personal income tax, though the net impact is uncertain at this point given other potential

changes in consumption taxes such as VAT, and other potential government programmes

as will be discussed below) or through income transfers (e.g. subsidies).

4.6

15.8

25.3

33.5

8.9

4.5

7.3

19.5

33.0

27.0

16.8

2.2

0.8

0.7

50.0 40.0 30.0 20.0 10.0 0.0 10.0 20.0 30.0 40.0 50.0

Poor (less than P7,890/mo)

Low-income (P7,890 to P15,780/mo)

Lower mid-income (P15,780 to P31,560/mo)

Middle-income (P31,560 to P78,900/mo)

Upper middle income (P78,900 to P118,350/mo)

Upper income (P118,350 to P157,800/mo)

Rich (at least P157,800)

# of households distribution Average monthly income distribution

Middle-income households (monthly

income of P31.6-78.9k) accounts for 16.8% of

total households in the country

12 September 2016


Figure 36: Breakdown of household expenditure, FIES 2012

Source: FIES, Credit Suisse research

Price inflation of housing in the market has to stabilise

Residential prices have plateaued in Metro Manila; but provincial locations are showing a

healthy price appreciation. There are different ways to measure the unit price of housing,

to wit: indices of construction materials and rental prices, land and housing values and

work place-based price index (i.e. price variation is computed as the variation in expense

by workplace for a given quantity of housing). The BSP has initiated its own Residential

Real Estate Priced Index (RREPI) in 1Q16, which is essentially based on banks' approved

housing loan applications.

Figure 37: Residential Real Estate Price Index

Source: BSP, Credit Suisse research

Food43%

Housing13%

Water, electricity, gas and other fuels

8%

Transportation7%

Miscellaneous goods and services

7%

Education4%

95.0

100.0

105.0

110.0

115.0

120.0

1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q

2014 2015 2016

Philippines National Capital Region (NCR) Areas outside NCR (AONCR)

Based on the RREPI of the BSP, residential

prices particularly in Metro Manila have been

plateauing

12 September 2016


Will the new government be supportive of the

residential market?

Amendments to the balanced housing development programme already approved

In July 2016, RA No. 10884 or the "Balanced Housing Development Amendments" lapsed

into law as a consolidation of both House Bill No. 4116 and Senate Bill No. 2947. The

measure seeks to expand the coverage of the current Balanced Housing Development

Program by including 'residential condominium units' in the provision of socialised housing

and requiring developers to allot 15% of total subdivision area/cost (previously at 20%) or

5% of condominium area/project cost to socialised housing.

The law also provides that a socialised housing certification should be issued to private sector

participants in the area of socialised housing in order to address concerns on BIR ruling

requirements and allow an easier availment of tax exemption. The recent enactment of the

foregoing amendments will presumably push the government's efforts in urban development

and the optimisation of the use of residential land more effectively moving forward.

Some of the key legislations being lined up

■ Consolidate key shelter agencies. In December 2015, a bill seeking to consolidate

the functions of key shelter agencies under one department (the Department of

Housing and Urban Development or DHUD) was approved on the third and final

reading at the House of Representatives. Some of the new functions of the agency are:

− To formulate the national and urban development and housing policies (i.e. address

housing backlog, among others) that are consistent with the Philippine

Development Plan;

− To develop mechanisms that will initiate and promote the establishment of new

settlements and urban renewal programmes;

− To create a single regulatory system that will govern all activities related to housing

and urban development programmes; and

− To identify and designate lands for development in coordination with the

Department of Environment and Natural Resources and the Department of Agrarian

Reform.

The bill also states that the current Housing and Land Use Regulatory Board will be

reconstituted as the Human Settlements Adjudicatory Commission (HSAC) under the

DHUD. The HSAC will act as a quasi-judicial body with exclusive jurisdiction over issues

arising from the interpretation of the current Urban Development and Housing Act.

■ Home Mortgage Relief Act of 2014: The Home Mortgage Relief Act of 2014 or

Senate Bill No. 2148 aims to provide a tax incentive for individuals looking to acquire a

first family home. The bill proposes that the interest paid during a taxable year from any

loan obtained for the purpose of acquiring or constructing a first family home be

deductible from the individual's gross income. The value of the family home however

must not exceed P2.5 mn. The proposal remains pending in the Committee to this day.

■ First Time Homebuyers Act: The First Time Homebuyers Act or House Bill 414 aims

to make first-time home purchase more affordable by enticing developers to sell

housing units at a discount, provide further easing in loan financing, and provide a

three-year exemption for first-time home buyers from realty and other local taxes.

In December 2015, the House Committee on Ways and Means approved tax

provisions under the unnumbered substitute bill to House Bill 414. The substitute bill

was previously approved and referred to the Committee on Ways and Means by the

Committees on Housing and Urban Development. The measure has been endorsed to

There is a need for more support from the

government to improve the potential of the

residential market such as in the form of tax

incentives

12 September 2016


the House plenary for deliberation and approval. Among the tax provisions approved

by the Committee on Ways and Means were:

− An exemption for first-time homebuyers from the payment of transfer tax related to

their home purchase; and

− Incentives for establishments providing minimum discount of five percent to first-

time homebuyers, which would allow the developer to claim financial loss on the

discount as a tax deduction and furthermore, allow the developer to claim the cost

of the discount as a deduction to gross income for the same taxable year.

12 September 2016


Divergence of landlords over residential to persist

Expectations on residential may not be at trough yet

Following the weak momentum of the residential segment in 1H16, we adjusted our profit

forecasts lower mainly as we cut our key assumptions particularly on presales, realised

revenue and residential profit margins.

We cut our sector earnings forecast by 2.9%/5.0%/6.1% in 2016-18E

Our earnings forecast for the sector in the three years 2016-17E is now revised

downwards by 3-6% on average.

Figure 38: Summary of earnings revisions

Year 2016 2017 2018

New forecasts

Sector 68,924 77,958 89,800

Robinsons Land 6,706 7,910 9,230

SM Prime Holdings 25,186 28,833 33,207

Ayala Land 20,535 22,810 26,834

Megaworld Corp 11,115 12,417 13,955

Filinvest Land 5,381 5,988 6,573

Previous forecasts

Sector 71,004 82,043 98,603

Robinsons Land 7,244 8,437 9,783

SM Prime Holdings 26,524 30,643 38,353

Ayala Land 19,715 22,759 27,747

Megaworld Corp 11,895 13,750 15,561

Filinvest Land 5,626 6,453 7,159

Change from previous (%)

Sector (2.9) (5.0) (6.1)

Robinsons Land (7.4) (6.2) (5.7)

SM Prime Holdings (5.0) (5.9) -

Ayala Land 4.2 0.2 (3.3)

Megaworld Corp (6.6.) (9.7) (10.3)

Filinvest Land (4.3) (7.2) (8.2)


Key changes that we made per company as follows:

■ Ayala Land: We increase our 2016E/17E earnings forecasts by 4%/0.2% (but cut our

18E estimate by 3%) as while we temper our residential revenue forecasts by

-2% on average (16-18E) and rental income by -4% in 2016E, we assume better

margins across the board (resilient GPMs particularly on vertical development driven

by superb cost controls, and better EBITDAM on leasing). We expect EPS growth to

remain robust at 14.9% p.a. in 2016-18E, though, we are cautious about the drag of its

residential development segment (63% of operating revenue; 47% of core EBITDA).

■ Filinvest Land: We revise downwards our earnings estimates by 4-8% for FLI in 2016-

18E on account of our expectations that weak revenue performance of its residential

segment and malls business will persist. We cut our residential revenue forecast by 3-

4% in the next three years as we expect weak presales and slower bookings and

construction completion. Meanwhile, we reduce our rental income estimate for its malls

business given slower-than-expected ramp up in occupancy and potentially weak

rental reversions.

We cut our earnings forecast (2016-18E) the most for MEG and FLI

12 September 2016


■ Megaworld: We cut our net income forecasts by around 7-10% for MEG in 2016-18E

mainly driven by our more pessimistic view on revenue growth across its business

segments. The most significant cut we made was on its residential segment (6-11%

downward revision in realised revenue) as we assume weak presales and delayed

bookings will continue to drag revenue trends. We also reduced our rental income from

its retail leasing segment as we take into account some softness in occupancy ramp up

and rental reversion.

■ Robinsons Land: We cut earnings by around 6-7% mainly driven by lower revenue

forecasts for residential (by -6% to -8%). This is partially offset by better EBITDAM

expectations for its office and malls segment as a result of faster ramp up in occupancy

rates and stable rental rates. We forecast earnings growth of 17% p.a. in 2016-18E,

which is driven by high visibility in the contribution of its leasing operations.

■ SM Prime: We reduce our earnings forecasts by 5-6% for 2016-18E mainly on the

back of cuts in residential realised revenue (i.e. by -24 to 27% in 2016-18E) as we

assume normalisation of take-up rates and slower completion of residential projects

(more conservative versus company's guidance). Nevertheless, this is cushioned by

our expectation of sustained growth in GLA build out and better EBITDAM for its malls

and commercial leasing segment due to higher occupancy and stable rental rates. As a

whole we expect bottom-line growth to reach 17% p.a. 2016-18E.

Net income growth of 15% p.a. expected for the next three years (2016-18E)

All in all, we expect the sector to post an average of 15% growth in net income for the next

three years, which is broadly in line with the pace we have seen in the previous two years

(2014-15A).

Figure 39: Aggregate net income growth for the Phils property sector


In terms of top-line growth, we expect residential realised revenue to decelerate further in

2016-17E at 7% p.a. before potentially bottoming out in 2018E at 5% YoY. This is mainly

driven by a further deterioration in pre-selling momentum as we expect aggregate

reservation sales for the companies we cover to decline by 2%/7%/7% in 2016-18E. Key

risk here is any further delay in bookings of presales and slower construction completion.

36 40 45

51 59

69

78

90 39%

10%11%

16% 15% 16%13%

15%

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

0

10

20

30

40

50

60

70

80

90

100

2011A 2012A 2013A 2014A 2015A 2016E 2017E 2018E

Sector income (P bn) Growth (% YoY)

We forecast faster earnings growth for the

traditional landlords, RLC and SMPH, at 17%

p.a. in 2016-18E

Revenue growth sustainable for office

and malls leasing operations

12 September 2016


On the flip side, our expectation of a sustained rollout in additional office and malls space

and sustained take-up rates will drive the recurring income growth of these property

companies at 15%/16%/17% YoY in the next three years. Key risk here is downward

pressure on average lease rates given the record supply coming specially for the office

segment.

Figure 40: Aggregate residential revenue growth Figure 41: Aggregate recurring income growth


We expect office GLA to grow by 19% p.a. in 2016-18E for the property companies we

cover. In terms of growth for each of the companies, FLI will be the most aggressive in

terms of growing its office portfolio at 22% p.a. followed by ALI at 21% p.a. during the next

three years.

As for malls, we expect additional spaces for the next three years to grow by 9% p.a. with

MEG and ALI posting the fastest growth rate at 18% p.a. and 17% p.a., respectively.

Figure 42: Office GLA growth forecasts, 2016-18E Figure 43: Malls space growth forecasts, 2016-18E


25% 24%

15%

10%

7% 7%

5%

0%

5%

10%

15%

20%

25%

30%

0

20,000

40,000

60,000

80,000

100,000

120,000

140,000

160,000

180,000

2012 2013 2014 2015 2016 2017 2018

ALI FLI MEG

RLC SMPH YoY growth

10%

14% 14%14%

15%16%

17%

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

0

20,000

40,000

60,000

80,000

100,000

120,000

140,000

160,000

180,000

2012 2013 2014 2015 2016 2017 2018

ALI FLI MEG

RLC SMPH YoY growth

1,62

3,19

5

1,90

7,01

0

2,31

6,31

9

457,152

467,473

658,406

0

500,000

1,000,000

1,500,000

2,000,000

2,500,000

3,000,000

3,500,000

4,000,000

4,500,000

2013 2014 2015 2016E 2017E 2018E

Current office GLA additional GLA

19% growth in office GLA p.a.expected in 2016-18E

8,62

1,06

8

9,21

2,39

0

10,3

40,9

25

776,283

1,170,901

1,087,564

0

2,000,000

4,000,000

6,000,000

8,000,000

10,000,000

12,000,000

14,000,000

16,000,000

2013 2014 2015 2016E 2017E 2018E

Current retail GLA additional GLA

9% growth p.a. in mallsspace expected in 2016-18E

12 September 2016


Positive surprises appear limited

Average earnings revisions have been mostly negative

2016-17E EPS revision trends on a YTD basis have been negative as most of the

companies really disappointed in terms of their residential revenue performance. This is

evident for certain residential players like FLI who reported weak realised revenue growth

despite healthy pre-selling numbers. MEG, on the other hand, had the worst 1H16

earnings results mainly due to negative pre-sales numbers across its residential brands

and the flattish residential revenue growth during the period.

Ramp up in leasing operations may not be enough to offset the drag of residential

on near-term profit recovery

While the ramp up in leasing operations for these property companies has been generally

in line with expectations, the potential revenue contribution from these business segments

may already be fully factored in (i.e. ample guidance from companies' management in

terms of schedule of GLA expansion) by the street. Near term, or in the next couple of

quarters, we believe the downside risk on the residential segment particularly for

traditional residential players like MEG (residential accounts for 73% of 2017E total

operating revenues; 41% of EBITDA) and FLI (80% of total operating revenue; 55% of

EBITDA) will be a drag to any improved revenue contribution from their leasing operations.

Figure 44: Phils property 2016E EPS revision, YTD Figure 45: Phils property 2017E EPS revision, YTD


Build out in recurring income for MEG and FLI is a well-known thesis, though,

overplayed, in our view

The potential for the likes of ALI, MEG, and FLI to build out their leasing portfolio in the

next three years in order to offset the drag of their residential business is well known. We

expect ALI to be relatively more successful in seeing through the positive impact of such

shift in business model to its EBITDA growth in 2016-18E (i.e. 16% CAGR, EBITDAM

improving by 6.6 pp).

Nevertheless, MEG and FLI will still see EBITDA growth to be subdued by their residential

business moving into 2018E (i.e. we forecast 10-12% CAGR for MEG and FLI, vs 14-16% p.a.

for the other three players). We are assuming a more conservative ramp-up phase in terms of

leasing out the yearly additions in office and malls GLA for MEG and FLI mainly as:

■ Their smaller mall formats are highly dependent on build out of their mixed-use or

township developments which then limits their catchment,

-6%

-5%

-4%

-3%

-2%

-1%

0%

1%

2%

Jan-

16

Jan-

16

Jan-

16

Feb-

16

Feb-

16

Mar

-16

Mar

-16

Apr-1

6

Apr-1

6

May

-16

May

-16

Jun-

16

Jun-

16

Jul-1

6

Jul-1

6

Jul-1

6

Aug-

16

Aug-

16

ALI SMPH MEG RLC FLI

-7%

-6%

-5%

-4%

-3%

-2%

-1%

0%

1%Ja

n-16

Jan-

16

Jan-

16

Feb-

16

Feb-

16

Mar

-16

Mar

-16

Apr-1

6

Apr-1

6

May

-16

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-16

Jun-

16

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16

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6

Jul-1

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Jul-1

6

Aug-

16

Aug-

16

ALI SMPH MEG RLC FLI

EPS revision trend has been mostly negative

for MEG and FLI so far this year

12 September 2016


■ They do not have retail affiliates or long established mall brands to serve as anchor

tenants (i.e. SMPH and RLC's retail affiliates normally takes 50% of mall space on

rollout)

■ Intense competition and record completions in office projects could surprise to the

downside as ramp-up in occupancy lags based on the lackluster pre-leasing or pre-

commitment guidance by the companies.

Figure 46: EBITDA growth and EBITDAM comparison

EBITDA breakdown

EBITDA growth EBITDAM Residential Malls + Office + Hotels

2016E 2017E 2018E 3-yr CAGR 2016E 2017E 2018E Δ vs 2015A 2015A 2018E Δ vs 2015A 2015A 2018E Δ vs 2015A

ALI 16% 14% 18% 16% 36% 38% 40% 6.6% 53% 42% -11% 47% 58% 11%

FLI 10% 10% 9% 10% 41% 41% 42% 2.2% 56% 49% -7% 44% 51% 7%

MEG 14% 13% 11% 12% 41% 44% 45% 6.9% 44% 33% -10% 56% 67% 10%

RLC 16% 18% 15% 16% 55% 56% 56% 1.7% 17% 17% 0% 83% 83% 0%

SMPH 16% 13% 12% 14% 55% 54% 55% 1.5% 17% 15% -2% 83% 85% 2%


Target and EPS estimates relative to the Street

In general, our numbers versus the street's follow our stock recommendation, i.e., our

target prices and EPS estimates for our buy-rated stocks, RLC and SMPH, are higher than

IBES consensus estimates. We believe this is mainly driven by our more optimistic view

on (1) occupancy rates specifically for their malls business given their market-leading

position across geographies, and (2) more stable EBITDAM expectations given the higher

contribution of their well-established leasing operations.

On the other hand, we have a more bearish view on MEG and FLI, which is further

highlighted by our lower than IBES consensus target prices and EPS numbers. We believe

this is mainly due to our negative view on residential bookings and completions.

Figure 47: CS versus IBES estimates

Reuters Target EPS (P)

ticker price (P) 2016E 2017E 2018E Ave

RLC.PS 15% 2% 5% 6% 4%

SMPH.PS 27% 2% 2% 7% 4%

ALI.PS -7% 1% -3% -2% -1%

MEG.PS -25% -5% -4% -5% -5%

FLI.PS -22% -2% -2% -6% -3%


Forward-looking P/E already peaking

The Philippine property sector is now trading at a forward P/E of 23.1x, or slightly above its

+1 sd five-year mean. This seems to be frothy at this point given the vulnerability of

earnings to the potential drag of weaker-than-expected contribution of the residential

segment.

We are more bullish on RLC and SMPH (vs the street) in terms of EPS

forecasts and TP

12 September 2016


Figure 48: PH property sector forward P/E (x)


Stick to RLC and SMPH

Change to RNAV valuation

We shift to an RNAV valuation methodology (previously we used DCF) to derive our 12-

month target prices for the property companies we cover.

Figure 49: Philippines Property Sector—RNAV valuation summary


Value (P

mn)

Value

(P/sh)

% firm

value

Value (P

mn)

Value

(P/sh)

% firm

value

Value

(P mn)

Value

(P/sh)

% firm

value

Value

(P mn)

Value

(P/sh)

% firm

value

Value

(P mn)

Value

(P/sh)

% firm

value

Malls 193,679 13.2 19% 19,617 0.8 16% 66,504 2.1 22% 115,190 28.1 50% 543,362 18.8 46%

Office 98,930 6.7 10% 30,630 1.3 25% 93,040 2.9 30% 43,913 10.7 19% 46,697 1.6 4%

Hotels 35,159 2.4 3% - - - 5,122 0.2 2% 8,818 2.2 4% 9,683 0.3 1%

Residential 209,674 14.3 20% 35,665 1.5 30% 92,683 2.9 30% 23,696 5.8 10% 111,447 3.9 9%

Raw land 467,108 31.8 46% 30,279 1.2 25% 42,819 1.3 14% 37,200 9.1 16% 419,835 14.5 36%

Other assets 19,890 1.4 2% 4,581 0.2 4% 4,937 0.2 2% 0 0.0 0% 46,957 1.6 4%

Firm value 1,024,441 69.7 100% 120,773 5.0 100% 305,106 9.4 100% 228,816 55.9 100% 1,177,981 40.8 100%

17E net debt (cash) 149,295 10.2 42,116 1.7 27,542 0.9 30,438 7.4 151,996 5.3

Minority interest 19,157 1.3 235 0.0 18,554 0.6 137 0.0 4,481 0.2

Equity value 855,989 58.2 78,422 3.2 259,009 8.0 198,241 48.4 1,021,504 35.4

17E o/s (in mn) 14,696 24,250 32,371 4,094 28,879

RNAV (P/sh) Php58.20 Php3.20 Php8.00 Php48.40 Php35.40

Discount to RNAV -30% -50% -50% -25% -10%

12M target price Php40.70 Php1.60 Php4.00 Php36.30 Php31.90

Current disc-to-RNAV -34% -43% -43% -37% -23%


Key assumptions are as follows:

■ Malls: We compute for the attributable net operating income for 2017E from the

company's mall or retail center business and apply a 7% cap rate.

■ Office: We compute for the attributable net operating income for 2017E from the

company's office leasing business and apply a 7% cap rate.

8

12

16

20

24

28


PER Ave-2SD Ave-1SD


12 September 2016


■ Hotels: We compute for the attributable net operating income for 2017E from the

company's hotels/tourism business and apply a 10% cap rate.

■ Residential: We compute for the NPV of the company's 2017-27E residential business

NOPAT assuming terminal growth rate of 4% and WACC of 9.5% (risk-free rate of

4.5%, risk premia of 5.0%, beta of 1.2, after-tax cost of debt of 5.6%).

■ Landbank: We use latest company estimates or realisable value based on assumed

changes in zonal values for the company's landbank.

■ Other assets: We use book value of investments in associates/JVs and available for

sale securities.

We attribute wider NAV discounts on the residential developers

For MEG and FLI, we use NAV discount of 50% due to their higher exposure to the risky

residential development segment and low visibility of the potential contribution of their raw

landbank.

Figure 50: RNAV discounts


-30%

-50% -50%

-25%

-10%

-34%

-43% -43%

-37%

-23%

-46%-49%

-52%

-40%

-22%

-60%

-50%

-40%

-30%

-20%

-10%

0%


Discount to RNAV Current disc to RNAV Five-year average discount

12 September 2016


Asia Pacific/Philippines Real Estate Management & Development

Ayala Land (ALI.PS / ALI PM) Rating NEUTRAL Price (09 Sep 16, P) 38.00 Target price (P) (from 37.70) 40.70 Upside/downside (%) 7.1 Mkt cap (P/US$ mn) 559,082 / 11,786 Enterprise value (P mn) 689,591 Number of shares (mn) 14,713 Free float (%) 52.1 52-wk price range (P) 42.00-27.20 ADTO-6M (US$ mn) 9.8 *Stock ratings are relative to the relevant country benchmark.

¹Target price is for 12 months.

Research Analysts

Danielo Picache

632 858 7758

[email protected]

Sofia Cabral

63 2 858 7757

[email protected]

Strong execution priced-in

■ Office and retail space build out coming through. We increase our 2016-

17E earnings forecasts by 4%/0.2% (but cut our 18E estimate by 3%) as

while we temper our residential revenue forecasts by -2% on average (16-

18E) and rental income by -4% in 2016E, we assume better margins across

the board (resilient GPMs particularly on vertical development driven by

superb cost controls and better EBITDAM on leasing). We expect EPS

growth to remain robust at 14.9% p.a. in 2016-18E, though we are cautious

about the drag of its residential development segment (63% of operating

revenues; 47% of core EBITDA). Maintain NEUTRAL on ALI.

■ Positioned to grow…ALI is well positioned to sustain its growth which is

mainly anchored upon its huge developable landbank of ~9,000 hectares. It

continues to be aggressive on rolling-out its office and malls projects (i.e.

+21% and +17% p.a. in 2016-18E), which at this point seem to show healthy

levels of take-up rates (93% for malls; 85% for office). We forecast its

investment property portfolio to increase its contribution to EBITDA by 11 pp

(to 58%), driving EBITDA growth by 16% p.a. through 2018E.

■ …but watch out for weak mid-market resi business. Residential inventory

has been well managed despite sustained launches of new projects

(launches so far are tracking within our estimate). The key concern here,

though, is that the breakdown of its unsold inventory still shows a lumpy

amount from its mid-market brand (Avida), which has been relatively weak in

terms of presales (2% growth vs total pre-sales growth of 5% YoY).

■ Fully priced-in at this point. We adjust our TP by 8% to P40.7 based on our

RNAV valuation (using a 30% discount to gross NAV estimate of P58.2),

though we maintain our NEUTRAL rating on the stock. ALI has consistently

delivered sector-best ROEs (we forecast it to reach 15.7% in 2018E), though

given aggressive development plans and elevated leverage levels (net D/E of

~80% in 2016-17E, highest in the sector) the company is running the risk of

having to raise additional equity.

Share price performance

The price relative chart measures performance against the

PHILIPPINE STOCK EXC PSEI INDEX which closed at

7,581.79 on 09/09/16. On 09/09/16 the spot exchange rate

was P47.44/US$1

Performance 1M 3M 12M Absolute (%) -7.7 2.4 12.9 Relative (%) -1.8 1.5 2.9

Financial and valuation metrics

Year 12/15A 12/16E 12/17E 12/18E Revenue (P mn) 100,660.8 109,818.7 118,730.3 130,795.4 EBITDA (P mn) 33,803.4 39,194.8 44,672.9 52,565.4 EBIT (P mn) 28,733.8 32,949.0 37,108.0 43,921.1 Net attributable profit (P mn) 17,568.2 20,535.5 22,809.6 26,834.4 EPS (CS adj.) (P) 1.20 1.40 1.55 1.83 Change from previous EPS (%) n.a. 4.1 0.2 (3.4) Consensus EPS (P) n.a. 1.39 1.61 1.89 EPS growth (%) 15.1 16.0 11.1 17.6 P/E (x) 31.5 27.2 24.5 20.8 Dividend yield (%) 1.1 1.3 1.4 1.7 EV/EBITDA (x) 19.8 17.8 15.9 13.4 ROE (%) 14.5 14.6 14.7 15.7 Net debt/equity (%) 74.7 84.3 82.5 72.9 NAV per share (P) - - - - Disc./(prem.) to NAV (%) - - - -

Source: Company data, Thomson Reuters, Credit Suisse estimates

12 September 2016


Ayala Land (ALI.PS / ALI PM)

Price (09 Sep 2016): P38.00; Rating: NEUTRAL; Target Price: (from P37.70) P40.70; Analyst: Danielo Picache

Earnings Drivers 12/15A 12/16E 12/17E 12/18E

Residential take-up (%) 7.27 5.72 2.16 18.86 GLA - Office ('000 sqm) 714.6 876.6 1,070 1,263 GLA - Retail ('000 sqm) 1,450 1,632 1,804 2,302 Rent escalation-Office (%) 1.29 1.50 2.00 2.00 Rent escalation-Retail (%) 9.94 8.00 9.00 7.50

Income Statement (P mn) 12/15A 12/16E 12/17E 12/18E

Sales revenue 100,661 109,819 118,730 130,795 Cost of goods sold 60,691 64,326 67,800 71,533 EBITDA 33,803 39,195 44,673 52,565 EBIT 28,734 32,949 37,108 43,921 Net interest expense/(inc.) 6,506 7,142 8,123 8,857 Recurring PBT 27,751 32,310 35,948 42,162 Profit after tax 20,897 24,232 26,908 31,643 Revaluations 0 0 0 0 Reported net profit 17,568 20,535 22,810 26,834 Net profit (Credit Suisse) 17,568 20,535 22,810 26,834

Balance Sheet (P mn) 12/15A 12/16E 12/17E 12/18E

Cash & cash equivalents 19,087 16,097 20,907 20,949 Current receivables 64,961 78,505 80,993 82,325 Inventories 59,247 62,597 63,262 60,130 Properties under development 0 0 0 0 Other current assets 22,908 24,319 26,208 28,665 Current Assets 166,204 181,517 191,370 192,069 Property, plant & equip. 24,246 32,104 38,740 43,498 Properties under development 0 0 0 0 Investment Properties 0 0 0 0 Investment in Associates/JV 17,522 18,082 18,658 19,243 Intangibles 0 0 0 0 Other non-current assets 234,370 264,106 287,864 309,781 Total assets 442,342 495,810 536,632 564,591 Current liabilities 146,133 170,841 171,831 182,754 Total liabilities 292,516 331,328 355,686 364,044 Shareholders' equity 134,244 147,570 162,375 179,795 Minority interests 16,095 17,502 19,157 21,314 Total liabilities & equity 442,342 495,810 536,632 564,591

Cash Flow (P mn) 12/15A 12/16E 12/17E 12/18E

EBIT 28,734 32,949 37,108 43,921 Net interest (527) (779) (1,200) (1,834) Tax paid (7,846) (7,848) (8,860) (10,242) Working capital (6,182) (4,968) 958 5,499 Other cash and non-cash items 429 4,228 5,457 6,323 Operating cash flow 14,608 23,582 33,462 43,667 Capex (35,314) (42,047) (35,673) (33,374) Free cash flow to the firm (20,706) (18,465) (2,211) 10,293 Investing cash flow (40,506) (43,385) (37,194) (35,187) Equity raised 16,221 0 0 0 Dividends paid (6,157) (7,271) (8,067) (9,476) Financing cash flow 22,306 16,813 8,542 (8,438) Total cash flow (3,593) (2,990) 4,810 42 Adjustments 0 0 0 0 Net change in cash (3,593) (2,990) 4,810 42

Per share 12/15A 12/16E 12/17E 12/18E

Shares (wtd avg.) (mn) 14,583 14,698 14,698 14,698 EPS (Credit Suisse) (P) 1.20 1.40 1.55 1.83

DPS (P) 0.42 0.49 0.54 0.64 BVPS (P) 9.21 10.04 11.05 12.23 NAV per share (P) n.a. n.a. n.a. n.a.

Earnings 12/15A 12/16E 12/17E 12/18E

Growth (%) Sales revenue 13.1 9.1 8.1 10.2 EBIT 22.6 14.7 12.6 18.4 EPS 15.1 16.0 11.1 17.6 Margins (%) EBITDA 33.6 35.7 37.6 40.2 EBIT 28.5 30.0 31.3 33.6

Valuation (x) 12/15A 12/16E 12/17E 12/18E

P/E 31.5 27.2 24.5 20.8 P/B 4.13 3.78 3.44 3.11 Dividend yield (%) 1.1 1.3 1.4 1.7 EV/Sales 6.7 6.4 6.0 5.4 EV/EBITDA 19.8 17.8 15.9 13.4 EV/EBIT 23.4 21.2 19.1 16.1

ROE analysis (%) 12/15A 12/16E 12/17E 12/18E

ROE 14.5 14.6 14.7 15.7 ROIC 9.0 8.8 8.8 9.7

Credit ratios 12/15A 12/16E 12/17E 12/18E

Net debt/equity (%) 74.7 84.3 82.5 72.9 Net Debt/EBITDA (x) 3.31 3.54 3.34 2.78

Company Background

Ayala Land is the largest and most diversified real estate company in the Philippines. It has organized its operations into several business lines such as property development, hotels and resorts and property management services.

Blue/Grey Sky Scenario

Our Blue Sky Scenario (P) (from 41.40) 46.56

Assumes discount to gross NAV narrows to 30% brought by better-than-expected residential trends and ramp-up in leasing operations.

Our Grey Sky Scenario (P) (from 34.40) 34.92

Assumes discount to gross NAV widens to 40% given worse-than-expected residential pre-sales and weak lease-out rates for new investment properties.


The price relative chart measures performance against THE PHILIPPINE

STOCK EXC PSEI INDEX which closed at 7,581.79 on 09-Sep-2016

On 09-Sep-2016 the spot exchange rate was P47.44/US$1


12 September 2016


Focus tables and charts

Figure 51: ALI—ROE DuPont analysis

12/11A 12/12A 12/13A 12/14A 12/15A 12/16E 12/17E 12/18E

EBIT margin 24.7% 23.7% 24.3% 26.3% 28.5% 30.0% 31.3% 33.6%

Asset turnover (x) 0.27 0.22 0.23 0.23 0.23 0.22 0.22 0.23

Interest burden (x) 1.05 1.12 1.02 1.02 0.97 0.98 0.97 0.96

Tax burden (x) 0.61 0.62 0.62 0.62 0.63 0.64 0.63 0.64

Financial leverage (x) 2.80 3.52 3.59 3.77 3.66 3.52 3.46 3.30

ROE—DuPont 11.9% 12.5% 12.9% 14.3% 14.5% 14.6% 14.7% 15.7%

Net debt to equity 15.5% 44.6% 66.0% 78.7% 74.7% 84.3% 82.5% 72.9%


Figure 52: ALI—forward P/E vs five-year mean (x) Figure 53: ALI—forward P/B vs five-year mean (x)


Figure 54: ALI—RNAV valuation summary table

RNAV Summary Value (Pmn) Value (P/sh) % firm value Valuation approach

Malls operations 193,679 13.2 19% 17E NOI, 7% cap rate

Office leasing 98,930 6.7 10% 17E NOI; 7% cap rate

Hotels operations 35,159 2.4 3% 17E NOI;11% cap rate

Residential development 209,674 14.3 20% NPV

Raw land 467,108 31.8 46% Company/CS estimate

Other assets 19,890 1.4 2%

Firm value 1,024,441 69.7 100%

17E net debt (cash) 149,295 10.2

Minority interest 19,157 1.3

Equity value 855,989 58.2

17E o/s (in mn) 14,696

RNAV (P/sh) Php58.20

Discount to RNAV -30%

12M target price Php40.70

Current disc-to-RNAV -34%


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12 September 2016



Filinvest Land (FLI.PS / FLI PM) Rating (from NEUTRAL) UNDERPERFORM Price (09 Sep 16, P) 1.82 Target price (P) (from 1.68) 1.60 Upside/downside (%) -12.1 Mkt cap (P/US$ mn) 44,135 / 930.42 Enterprise value (P mn) 85,242 Number of shares (mn) 24,250 Free float (%) 32.5 52-wk price range (P) 2.05-1.43 ADTO-6M (US$ mn) 0.8 *Stock ratings are relative to the relevant country benchmark.


Research Analysts

Danielo Picache

632 858 7758

[email protected]

Sofia Cabral

63 2 858 7757

[email protected]

Delays can hurt

■ Bottom line to be dragged down by residential and malls. We revise our

earnings estimates downwards by 4-8% for FLI in 2016-18E on account of

our expectations that weak revenue performance of its residential segment

and malls business will persist. We cut our residential revenue forecast by 3-

4% in the next three years as we expect weak presales and slower bookings

and construction completions. Meanwhile, we reduce our rental income

estimate for its malls business given slower-than-expected ramp up in

occupancy and potentially weak rental reversions. Downgrade to

UNDERPERFORM (from Neutral).

■ Delays in leasing space roll-out hurts. In hindsight, the potential for

recurring income growth would have offset our present concern on its

residential segment, though delays in the completion (mall/retail projects) and

slower-than-expected occupancy ramp-up (office projects) have been

dragging earnings growth expectations. Management is still bullish on its

build out plans for office and malls in 2016-18E (+22% for office; +11% for

malls p.a.), we assume some execution risk and factor in lower occupancy.

■ Sluggish growth vs peers. We forecast EPS growth of 9.5% p.a. in 2016-

18E for FLI, which is the slowest among the property companies that we

cover. It is the most exposed to our expectations of further weakness in the

residential sector with 80% of revenue and 55% of its EBITDA are generated

from it. We remain concerned about the resilience of FLI's end-user market

orientation and product affordability amid the softening trend of residential.

■ Turnaround not yet in sight. We cut our TP by -5% to P1.6 based on our

RNAV valuation (using a 50% discount to gross NAV estimate of P3.2, five-

year average discount is at 49%). In theory FLI is well positioned to enhance

its growth potential given its sizeable landbank (~2,000 hectares) and focus

on residential affordability (affordable and mid-income brands account for

87% of residential business). Nevertheless, execution risk is amplified by

delays in the past.


The price relative chart measures performance against

THE PHILIPPINE STOCK EXC PSEI INDEX which closed

at 7,581.79 on 09/09/16. On 09/09/16 the spot exchange

rate was P47.44/US$1

Performance 1M 3M 12M Absolute (%) -7.1 -8.5 8.2 Relative (%) -1.3 -9.5 -1.8


Year 12/15A 12/16E 12/17E 12/18E Revenue (P mn) 17,003.5 18,135.8 19,707.8 21,225.1 EBITDA (P mn) 6,764.3 7,432.6 8,164.4 8,915.5 EBIT (P mn) 6,272.5 6,692.8 7,369.8 8,031.3 Net attributable profit (P mn) 5,011.8 5,381.4 5,987.8 6,573.2 EPS (CS adj.) (P) 0.21 0.22 0.25 0.27 Change from previous EPS (%) n.a. (4.3) (7.2) (8.2) Consensus EPS (P) n.a. 0.23 0.26 0.31 EPS growth (%) 10.4 7.4 11.3 9.8 P/E (x) 8.7 8.1 7.3 6.7 Dividend yield (%) 3.1 3.1 3.4 3.8 EV/EBITDA (x) 12.6 11.5 10.6 9.3 ROE (%) 9.4 9.4 9.7 9.9 Net debt/equity (%) 73.6 68.6 65.3 56.2 NAV per share (P) - - - - Disc./(prem.) to NAV (%) - - - -


12 September 2016


Filinvest Land (FLI.PS / FLI PM)

Price (09 Sep 2016): P1.82; Rating: (from NEUTRAL) UNDERPERFORM; Target Price: (from P1.68) P1.60; Analyst: Danielo Picache


Residential take-up (%) 6.36 -1.22 -4.76 -6.26 GLA - Office ('000 sqm) 275.0 348.1 414.6 500.0 GLA - Retail ('000 sqm) 220.9 276.8 291.9 305.7 Rent escalation-Office (%) 7.81 -2.00 -3.00 3.00 Rent escalation-Retail (%) -10.61 -10.00 -5.00 0.00


Sales revenue 17,003 18,136 19,708 21,225 Cost of goods sold 8,819 9,412 10,157 10,833 EBITDA 6,764 7,433 8,164 8,916 EBIT 6,273 6,693 7,370 8,031 Net interest expense/(inc.) 75 65 (13) (81) Recurring PBT 6,374 6,847 7,616 8,361 Profit after tax 5,099 5,477 6,093 6,689 Revaluations 0 0 0 0 Reported net profit 5,012 5,381 5,988 6,573 Net profit (Credit Suisse) 5,012 5,381 5,988 6,573


Cash & cash equivalents 6,596 6,631 5,454 7,809 Current receivables 23,518 25,026 27,406 28,121 Inventories 26,001 24,734 22,972 20,736 Properties under development 0 0 0 0 Other current assets 5,416 5,492 5,780 6,010 Current Assets 61,531 61,884 61,611 62,677 Property, plant & equip. 1,357 1,308 1,300 1,292 Properties under development 0 0 0 0 Investment Properties 0 0 0 0 Investment in Associates/JV 4,141 4,283 4,418 4,563 Intangibles 4,567 4,567 4,567 4,567 Other non-current assets 49,737 54,405 60,281 64,900 Total assets 121,333 126,446 132,178 137,998 Current liabilities 16,031 19,872 16,277 17,427 Total liabilities 65,498 66,541 67,671 68,463 Shareholders' equity 55,364 59,434 64,035 69,064 Minority interests 235 235 235 235 Total liabilities & equity 121,333 126,446 132,178 137,998


EBIT 6,273 6,693 7,370 8,031 Net interest (73) (65) 13 81 Tax paid (592) (1,367) (1,520) (1,669) Working capital (2,799) 335 13 2,351 Other cash and non-cash items 1,346 1,158 1,272 1,406 Operating cash flow 4,155 6,754 7,148 10,200 Capex (5,481) (5,398) (6,662) (5,493) Free cash flow to the firm (1,326) 1,356 486 4,707 Investing cash flow (5,465) (5,398) (6,662) (5,493) Equity raised 0 0 0 0 Dividends paid (1,365) (1,365) (1,492) (1,660) Financing cash flow 3,598 (1,320) (1,664) (2,351) Total cash flow 2,288 35 (1,178) 2,356 Adjustments 0 0 0 0 Net change in cash 2,288 35 (1,178) 2,356

Per share 12/15A 12/16E 12/17E 12/18E



Earnings 12/15A 12/16E 12/17E 12/18E


Valuation (x) 12/15A 12/16E 12/17E 12/18E



ROE 9.4 9.4 9.7 9.9 ROIC 5.4 5.4 5.7 6.0



Company Background

Filinvest Land develops residential properties and mainly targets the low to middle income segments and the overseas Filipino market. It also engages in commercial and the office development.



Assumes discount to gross NAV narrows to 40% brought by better-than-expected residential trends and execution risk on new leasing projects mitigated.








12 September 2016



Figure 55: FLI—ROE DuPont analysis

12/11A 12/12A 12/13A 12/14A 12/15A 12/16E 12/17E 12/18E

EBIT margin 40.0% 36.0% 34.9% 35.0% 36.9% 36.9% 37.4% 37.8%

Asset turnover (x) 0.12 0.13 0.13 0.15 0.14 0.14 0.15 0.15


Tax burden (x) 0.83 0.83 0.83 0.80 0.79 0.79 0.79 0.79


ROE - DuPont 6.9% 7.7% 8.3% 9.1% 9.4% 9.4% 9.7% 9.9%



Figure 56: FLI—forward P/E vs five-year mean (x) Figure 57: FLI—forward P/B vs five-year mean (x)


Figure 58: FLI—RNAV valuation summary table

RNAV Summary Value (Pmn) Value (P/sh) % firm value Valuation approach

Mall operations 19,617 0.8 16% 17E NOI, 7% cap rate





Firm value 120,773 5.0 100%

17E net debt (cash) 42,116 1.7

Minority interest 235 0.0


17E o/s (in mn) 24,250

RNAV (P/sh) Php3.20





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12 September 2016



Megaworld Corp (MEG.PS / MEG PM) Rating (from NEUTRAL) UNDERPERFORM Price (09 Sep 16, P) 4.55 Target price (P) (from 5.15) 4.00 Upside/downside (%) -12.1 Mkt cap (P/US$ mn) 146,654 / 3,092 Enterprise value (P mn) 176,855 Number of shares (mn) 32,232 Free float (%) 33.2 52-wk price range (P) 5.47-3.10 ADTO-6M (US$ mn) 4.3 *Stock ratings are relative to the relevant country benchmark.


Research Analysts

Danielo Picache

632 858 7758

[email protected]

Sofia Cabral

63 2 858 7757

[email protected]

Margin of error trimmed

■ Expectations too much to handle. We cut our net income forecasts by

around 7-10% for MEG in 2016-18E mainly driven by our more pessimistic

view on revenue growth across its business segments. The most significant

cut we made was on its residential segment (6-11% downward revision in

realised revenue) as we assume weak presales and delayed bookings will

continue to drag revenue trends. We also reduced our rental income from its

retail leasing segment as we take into account some softness in occupancy

ramp up and rental reversion. We downgrade MEG to UNDERPERFORM.

■ Weakness in core residential brands. MEG reported the weakest pre-sales

momentum in the sector and the numbers are not looking very encouraging

such that we aggressively cut our sales take-up numbers (we expect an 8%

and 11% decline in 2016-17E, or -7% p.a. through 18E). The company has

massively scaled back on its residential launches (-52% YoY in 2015), though

new offerings so far have lagged their already lowered target for this year

(i.e., 1H16 launches only account for 30% of FY16 target).

■ Build out of leasing operations not enough to cushion. While we see its

leasing operations (GLA growth of 18% p.a. in 2016-18E for both office and

retail businesses) accounting for a bigger contribution to EBITDA (from 56%

in 2015A to 67% in 2018E), we believe the drag of its residential segment will

keep bottom-line growth unexciting (10.3% p.a. in 2016-18E).

■ Not yet at trough. We cut our TP by -22% to P4.0 based on our RNAV

valuation (using a 50% discount to gross NAV estimate of P8.0, five-year

average discount is at 52%). Aside from its weak residential business, note

that there are pre-existing worries about its unhedged USD debt position

(40% of total debt, though, net D/E is lowest in the sector) and mounting

unrealised losses on AFS (i.e. cross-holdings of common stocks of parent

and sister companies, was at -P2.9 bn in 1H16).






Performance 1M 3M 12M Absolute (%) -16.8 3.4 5.8 Relative (%) -11.0 2.5 -4.2




12 September 2016


Megaworld Corp (MEG.PS / MEG PM)

Price (09 Sep 2016): P4.55; Rating: (from NEUTRAL) UNDERPERFORM; Target Price: (from P5.15) P4.00; Analyst: Danielo Picache Earnings Drivers 12/15A 12/16E 12/17E 12/18E

Residential take-up (%) 0.00 -0.08 -0.11 -0.01 GLA - Office ('000 sqm) 737.0 851.0 1,009 1,219

GLA - Retail ('000 sqm) 236.0 272.8 353.7 390.5

Rent escalation-Office (%) 6.73 1.00 1.00 1.00

Rent escalation-Retail (%) 13.55 1.00 1.00 1.00


Sales revenue 42,253 44,978 47,545 50,968

Cost of goods sold 20,418 20,674 20,812 21,487

EBITDA 16,274 18,486 20,816 23,143

EBIT 14,925 16,890 18,818 20,678

Net interest expense/(inc.) 1,389 1,961 2,138 1,928

Recurring PBT 13,675 15,081 16,847 18,934

Profit after tax 10,575 11,507 12,854 14,447

Revaluations 0 0 0 0

Reported net profit 10,215 11,115 12,417 13,955

Net profit (Credit Suisse) 10,215 11,115 12,417 13,955


Cash & cash equivalents 22,763 27,999 26,496 21,869 Current receivables 27,363 27,347 27,612 28,108

Inventories 76,325 74,120 71,707 68,667

Properties under development 0 0 0 0

Other current assets 4,725 4,763 5,026 5,378

Current Assets 131,175 134,228 130,842 124,022

Property, plant & equip. 3,051 4,218 5,570 7,125

Investment in Associates/JV 6,772 7,043 7,360 7,728

Intangibles 0 0 0 0

Other non-current assets 110,686 119,594 132,504 147,340

Total assets 251,685 265,082 276,276 286,215

Current liabilities 36,479 35,744 49,007 41,137

Total liabilities 117,271 120,347 119,968 116,890

Shareholders' equity 119,235 129,166 140,300 152,826

Minority interests 17,725 18,117 18,554 19,046

Total liabilities & equity 251,685 265,082 276,276 286,215


EBIT 14,925 16,890 18,818 20,678 Net interest (1,389) (1,961) (2,138) (1,928)

Tax paid (1,792) (2,133) (2,379) (2,673)

Working capital (15,333) (1,536) 4,672 2,297

Other cash and non-cash items 1,824 573 1,010 2,479

Operating cash flow (1,765) 11,834 19,982 20,853

Capex (17,938) (11,277) (16,037) (18,371)

Free cash flow to the firm (19,703) 556 3,945 2,482

Investing cash flow (19,965) (11,779) (16,548) (18,894)

Equity raised 8 0 0 0

Dividends paid (1,936) (1,226) (1,334) (1,490)

Financing cash flow 19,386 5,420 (4,666) (6,278)

Total cash flow (2,344) 5,475 (1,232) (4,319)

Adjustments 0 0 0 0

Net change in cash (2,344) 5,475 (1,232) (4,319)

Per share 12/15A 12/16E 12/17E 12/18E


DPS (P) 0.06 0.04 0.04 0.05

BVPS (P) 3.75 3.99 4.33 4.72

NAV per share (P) n.a. n.a. n.a. n.a.

Earnings 12/15A 12/16E 12/17E 12/18E

Growth (%)

Sales revenue 13.3 6.4 5.7 7.2

EBIT 24.1 13.2 11.4 9.9

EPS 12.2 6.9 11.7 12.4

Margins (%)

EBITDA 38.5 41.1 43.8 45.4

EBIT 35.3 37.6 39.6 40.6

Valuation (x) 12/15A 12/16E 12/17E 12/18E

P/E 14.2 13.3 11.9 10.6 P/B 1.21 1.14 1.05 0.96

Dividend yield (%) 1.3 0.8 0.9 1.0

EV/Sales 4.2 3.9 3.7 3.4

EV/EBITDA 10.8 9.6 8.4 7.5

EV/EBIT 11.8 10.5 9.3 8.4


ROE 8.9 8.9 9.2 9.5 ROIC 7.5 7.6 8.0 8.3



Company Background

Megaworld is one of the country's leading residential property developers and mainly targets the medium to high income segments. It is known for its mixed-use developments and is one of the country's largest landlords for business process outsourcing.



Assumes discount to gross NAV narrows to 40% brought by better-than-expected residential trends and ramp-up in leasing operations.








12 September 2016



Figure 59: MEG—ROE DuPont analysis

12/11A 12/12A 12/13A 12/14A 12/15A 12/16E 12/17E 12/18E

EBIT margin 38.1% 30.2% 33.4% 32.3% 35.3% 37.6% 39.6% 40.6%

Asset turnover (x) 0.18 0.19 0.19 0.17 0.17 0.17 0.17 0.18


Tax burden (x) 0.79 0.76 0.76 0.77 0.75 0.74 0.74 0.74


ROE - DuPont 13.9% 11.0% 10.1% 9.0% 8.9% 8.9% 9.2% 9.5%

Net debt to equity -12.2% -8.3% -3.1% 6.5% 22.2% 21.0% 17.6% 15.5%


Figure 60: MEG—forward P/E vs five-year mean (x) Figure 61: MEG—forward P/B vs five-year mean (x)


Figure 62: MEG—RNAV valuation summary table

RNAV summary Value (P mn) Value (P/sh) % firm value Valuation approach

Retail center 66,504 2.1 22% 17E NOI, 7% cap rate


Hotels operations 5,122 0.2 2% 17E NOI;10% cap rate




Firm value 305,106 9.4 100%




17E o/s (in mn) 32,371

RNAV (P/sh) Php8.00





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12 September 2016



Robinsons Land Corporation (RLC.PS / RLC PM) Rating OUTPERFORM Price (09 Sep 16, P) 30.00 Target price (P) (from 32.70) 36.30 Upside/downside (%) 21.0 Mkt cap (P/US$ mn) 122,815 / 2,589 Enterprise value (P mn) 154,155 Number of shares (mn) 4,094 Free float (%) 38.2 52-wk price range (P) 33.15-23.10 ADTO-6M (US$ mn) 1.5 *Stock ratings are relative to the relevant country benchmark.


Research Analysts

Danielo Picache

632 858 7758

[email protected]

Sofia Cabral

63 2 858 7757

[email protected]

Strong growth with high visibility

■ A safe bet with good earnings growth. We cut earnings by around 6-7%

mainly driven by lower revenue forecasts for residential (by -6% to -8%). This

is partially offset by better EBITDAM expectations for its office and malls

segment as a result of faster ramp up in occupancy rates and stable rental

rates. We forecast earnings growth of 17% p.a. in 2016-18E, which is driven

by high visibility in the contribution of its leasing operations. Maintain

OUTPERFORM.

■ Leasing operations in full swing. As a traditional mall landlord, RLC

continues to reap the benefits of being a first mover in greenfield markets in

order to cushion the impact of intensifying competition in Metro Manila.

Meanwhile, its market positioning in the office segment is also more

defensive such that its build-outs are in "less crowded" CBDs. In general we

expect EBITDA growth to be sustainable (i.e. 16% p.a. in 2016-18E).

■ Build-out is on target. We forecast malls' GLA to grow 12% p.a. in 2016-

18E with occupancy ramp-up averaging close to its historical system-wide

occupancy rates of ~95% given its provincial growth orientation (65% of total

malls GLA) and strong tie-up with retail affiliates (40-45% of malls space is

anchored by RRHI). For office, GLA is expected to grow by 14% p.a. in 2016-

18E, which is predominantly still in Metro Manila (pre-commitments have

been encouraging through the efforts of a dedicated leasing department

carrying out the leasing activities of new buildings).

■ Deserves premium valuations. We hike our TP by 11% to P36.3 based on

our RNAV valuation (using a 25% discount to gross NAV estimate of P48.4,

five-year average discount is at 40%). While not a catalyst per se, it is still

encouraging to see some recovery in residential trends for RLC as it

managed its launches and consolidated its inventory in past years.

Meanwhile, we are not factoring in any realisable value from its recently

acquired land in China given low visibility of potential impact.






Performance 1M 3M 12M Absolute (%) -6.3 3.4 4.7 Relative (%) -0.4 2.5 -5.3




12 September 2016


Robinsons Land Corporation (RLC.PS / RLC PM)

Price (09 Sep 2016): P30.00; Rating: OUTPERFORM; Target Price: (from P32.70) P36.30; Analyst: Danielo Picache Earnings Drivers 09/15A 09/16E 09/17E 09/18E

Residential take-up (%) -3.72 4.99 8.73 -2.99 GLA - Office ('000 sqm) 311.7 326.7 376.7 456.7

GLA - Retail ('000 sqm) 1,095 1,260 1,386 1,525

Rent escalation-Office (%) 16.69 6.00 6.50 5.00

Rent escalation-Retail (%) 5.99 3.00 5.00 3.00


Sales revenue 19,733 22,451 26,140 30,167 Cost of goods sold 6,728 7,610 8,672 10,040

EBITDA 10,705 12,429 14,661 16,870

EBIT 7,554 8,902 10,508 12,247

Net interest expense/(inc.) (34) 18 29 20

Recurring PBT 7,589 8,884 10,479 12,227

Profit after tax 5,701 6,707 7,912 9,231

Revaluations 0 0 0 0

Reported net profit 5,700 6,706 7,910 9,230

Net profit (Credit Suisse) 5,700 6,706 7,910 9,230


Cash & cash equivalents 1,193 1,052 1,349 1,280 Current receivables 5,021 5,356 5,890 6,230

Inventories 15,475 15,136 14,634 13,926


Other current assets 3,947 4,297 4,857 5,167

Current Assets 25,636 25,840 26,731 26,604

Property, plant & equip. 3,507 3,923 4,193 4,445


Investment Properties 0 0 0 0

Other non-current assets 69,925 85,176 92,166 98,563

Total assets 99,068 114,940 123,091 129,611

Current liabilities 12,960 19,385 16,743 23,822

Total liabilities 42,274 52,912 54,624 53,388

Shareholders' equity 56,824 62,056 68,493 76,249

Minority interests 134 136 137 138

Total liabilities & equity 99,068 114,940 123,091 129,611


EBIT 7,554 8,902 10,508 12,247 Net interest 34 (18) (29) (20)

Tax paid (1,052) (1,518) (1,772) (2,077)

Working capital (142) 843 991 1,681

Other cash and non-cash items 2,361 3,177 3,592 4,314

Operating cash flow 8,756 11,386 13,290 16,144

Capex (9,546) (16,425) (6,681) (6,143)

Free cash flow to the firm (790) (5,038) 6,609 10,001

Investing cash flow (12,088) (14,805) (6,904) (6,422)

Equity raised 0 0 0 0

Dividends paid (1,474) (1,474) (1,474) (1,474)

Financing cash flow 6,213 7,138 (1,771) (4,630)

Total cash flow 2,880 3,719 4,615 5,092

Adjustments 0 0 0 0

Net change in cash 2,880 3,719 4,615 5,092

Per share 09/15A 09/16E 09/17E 09/18E


DPS (P) 0.36 0.36 0.36 0.36

BVPS (P) 13.88 15.16 16.73 18.63

NAV per share (P) n.a. n.a. n.a. n.a.

Earnings 09/15A 09/16E 09/17E 09/18E

Growth (%)

Sales revenue 15.7 13.8 16.4 15.4

EBIT 21.0 17.8 18.0 16.5

EPS 20.3 17.7 18.0 16.7

Margins (%)

EBITDA 54.3 55.4 56.1 55.9

EBIT 38.3 39.7 40.2 40.6

Valuation (x) 09/15A 09/16E 09/17E 09/18E

P/E 21.5 18.2 15.5 13.2 P/B 2.16 1.98 1.79 1.61

Dividend yield (%) 1.2 1.2 1.2 1.2

EV/Sales 7.4 6.9 5.9 4.9

EV/EBITDA 13.7 12.4 10.5 8.9

EV/EBIT 19.4 17.4 14.6 12.2


ROE 10.4 11.3 12.1 12.8 ROIC 7.6 7.7 8.2 9.2



Company Background

Robinsons Land is one of the country's leading property companies and adopts a diversified business model, with both investment and development components. It is part of the JG Summit group of companies.



Assumes discount to gross NAV narrows to 15% given better-than-expected ramp-up in leasing operations and more visibility on the China venture.


Assumes discount to gross NAV widens to 35% due to worse-than-expected lease-out trends of Metro Manila office projects.






12 September 2016



Figure 63: RLC—ROE DuPont analysis

12/11A 12/12A 12/13A 12/14A 12/15A 12/16E 12/17E 12/18E

EBIT margin 35.3% 38.8% 37.6% 36.6% 38.3% 39.7% 40.2% 40.6%

Asset turnover (x) 0.20 0.19 0.21 0.20 0.20 0.20 0.21 0.23


Tax burden (x) 0.82 0.76 0.75 0.76 0.75 0.75 0.75 0.75


ROE - DuPont 12.0% 10.0% 9.4% 9.3% 10.4% 11.3% 12.1% 12.8%



Figure 64: RLC—forward P/E vs five-year mean (x) Figure 65: RLC—forward P/B vs five-year mean (x)


Figure 66: RLC—RNAV valuation summary table

RNAV Summary Value (P mn) Value (P/sh) % firm value Valuation approach

Malls operations 115,190 28.1 50% 2017E NOI; Cap rate - 7%

Office leasing 43,913 10.7 19% 2017E NOI; Cap rate - 7%

Hotels operations 8,818 2.2 4% 2017E NOI; Cap rate - 10%



Other assets - - -

Firm value 228,816 55.9 100%


Minority interest 137 0.0


17E o/s (in mn) 4,094






5

10

15

20

25




0.5

0.8

1.1

1.4

1.7

2.0

2.3

2.6




12 September 2016



SM Prime Holdings (SMPH.PS / SMPH PM) Rating (from NEUTRAL) OUTPERFORM Price (09 Sep 16, P) 26.90 Target price (P) (from 21.50) 31.90 Upside/downside (%) 18.6 Mkt cap (P/US$ mn) 776,849 / 16,377 Enterprise value (P mn) 913,150 Number of shares (mn) 28,879 Free float (%) 29.4 52-wk price range (P) 31.00-18.84 ADTO-6M (US$ mn) 9.4 *Stock ratings are relative to the relevant country benchmark.


Research Analysts

Danielo Picache

632 858 7758

[email protected]

Sofia Cabral

63 2 858 7757

[email protected]

Build, and they will come

■ Malls to anchor sustained growth moving forward. We reduce our

earnings forecasts by 5-6% for 2016-18E mainly on the back of cuts in

residential realised revenue (i.e. by -24-27% in 2016-18E) as we assume

normalisation of take-up rates and slower completion of residential projects

(more conservative versus company's guidance). Nevertheless, this is

cushioned by our expectation of sustained growth in GLA build out and better

EBITDAM for its malls and commercial leasing segment due to higher

occupancy and stable rental rates. As a whole we expect bottom-line growth

to reach 17% p.a. 2016-18E. We upgrade SMPH to OUTPERFORM.

■ Dominant market share. We forecast additional malls space to hit 6% p.a. in

2016-18E, which is enough to maintain its dominant market share in the malls

segment (at ~55%). Given the wide catchment area of its malls, which are

positioned as destination malls, SMPH's strategy is to leverage on this to

further diversify its product offerings in adjacent landbank to malls as mixed-

use developments (e.g. Mall of Asia complex) take advantage of synergies.

■ Landbank deals a structural driver. SMPH already has a sizeable landbank

(~1,100 hectares), though key drivers for its sustained share price

outperformance are the pending (i.e. just awaiting approval from Office of the

President) reclamation deals, particularly in Metro Manila (660 hectares in

total, 49% is attributable to SMPH). With these reclamation projects, SMPH

could end up with the highest land inventory among its peers in Metro Manila.

■ More headroom for a rerating. We hike our TP by 48% to P31.9 based on

our RNAV valuation (using a 10% discount to gross NAV estimate of P35.4,

five-year average discount is at 22%). Note that of the reclamation projects,

we only included the one in Cordova (Cebu), as while there is progress made

on the Metro Manila deals (i.e. positive feedback from the DENR's EIA

report), we believe there is still low visibility of its awarding to SMPH

(legislators and other property developers are still contesting the initial

awarding by local governments to SMPH).






Performance 1M 3M 12M Absolute (%) -11.1 10.9 38.2 Relative (%) -5.2 10.0 28.2


Year 12/15A 12/16E 12/17E 12/18E Revenue (P mn) 71,511.3 80,662.9 92,914.5 102,566.2 EBITDA (P mn) 38,405.8 44,676.5 50,383.1 56,664.2 EBIT (P mn) 31,438.8 36,227.2 40,985.7 46,417.1 Net attributable profit (P mn) 20,891.4 25,186.1 28,833.0 33,207.3 EPS (CS adj.) (P) 0.72 0.87 1.00 1.15 Change from previous EPS (%) n.a. (5.0) (5.9) - Consensus EPS (P) n.a. 0.86 0.97 1.08 EPS growth (%) 9.8 20.4 14.5 15.4 P/E (x) 37.1 30.8 26.9 23.4 Dividend yield (%) 0.8 1.0 1.1 1.3 EV/EBITDA (x) 23.6 20.5 18.4 16.3 ROE (%) 11.4 12.4 13.0 13.6 Net debt/equity (%) 60.1 58.4 58.6 51.3 NAV per share (P) - - - - Disc./(prem.) to NAV (%) - - - -


12 September 2016


SM Prime Holdings (SMPH.PS / SMPH PM)

Price (09 Sep 2016): P26.90; Rating: (from NEUTRAL) OUTPERFORM; Target Price: (from P21.50) P31.90; Analyst: Danielo Picache


GFA - PH Malls ('000 sqm) 7,339 7,676 8,453 8,853 GFA - CH Malls ('000 sqm) 945.2 945.2 1,134 1,323 Rent escalation-PH (%) 1.44 5.00 5.00 5.00 Rent escalation-CH (%) 1.68 4.00 3.00 2.00


Sales revenue 71,511 80,663 92,914 102,566 Cost of goods sold 12,039 13,032 15,345 16,079 EBITDA 38,406 44,677 50,383 56,664 EBIT 31,439 36,227 40,986 46,417 Net interest expense/(inc.) 3,379 6,487 6,911 7,063 Recurring PBT 34,911 32,139 36,793 42,375 Profit after tax 28,893 25,712 29,435 33,900 Revaluations 0 0 0 0 Reported net profit 28,302 25,186 28,833 33,207 Net profit (Credit Suisse) 20,891 25,186 28,833 33,207


Cash & cash equivalents 25,870 17,821 16,292 15,738 Current receivables 31,354 32,092 34,461 34,181 Inventories 27,980 27,781 26,716 29,041 Properties under development 0 0 0 0 Other current assets 12,788 14,016 15,606 17,479 Current Assets 97,992 91,711 93,075 96,439 Property, plant & equip. 1,680 1,820 1,939 1,906 Properties under development 0 0 0 0 Investment Properties 0 0 0 0 Investment in Associates/JV 22,080 22,080 22,080 22,080 Intangibles 0 0 0 0 Other non-current assets 312,076 344,898 377,248 392,609 Total assets 433,828 460,509 494,341 513,034 Current liabilities 69,491 51,357 69,267 56,453 Total liabilities 217,986 222,383 235,165 231,493 Shareholders' equity 194,483 212,113 232,296 255,541 Minority interests 3,354 3,880 4,481 5,174 Total liabilities & equity 433,828 460,509 494,341 513,034


EBIT 31,439 36,227 40,986 46,417 Net interest (2,210) (5,701) (6,051) (6,093) Tax paid (5,447) (5,744) (6,883) (7,905) Working capital (1,070) (379) (4,559) (3,181) Other cash and non-cash items 7,845 10,501 11,797 13,065 Operating cash flow 30,556 34,904 35,289 42,304 Capex (37,342) (34,579) (31,635) (14,642) Free cash flow to the firm (6,786) 325 3,653 27,662 Investing cash flow (59,821) (28,819) (32,116) (16,791) Equity raised 2 0 0 0 Dividends paid (6,055) (7,556) (8,650) (9,962) Financing cash flow 21,561 (7,298) 2,838 (17,871) Total cash flow (7,704) (1,213) 6,011 7,642 Adjustments 0 0 0 0 Net change in cash (7,704) (1,213) 6,011 7,642

Per share 12/15A 12/16E 12/17E 12/18E



Earnings 12/15A 12/16E 12/17E 12/18E


Valuation (x) 12/15A 12/16E 12/17E 12/18E



ROE 11.4 12.4 13.0 13.6 ROIC 8.1 8.0 8.3 8.9



Company Background

SM Prime is the country's largest commercial shopping centre owner and operator. Its main sources of revenues include rental income from leases in the mall and food court, cinema ticket sales and amusement income. As of 2011, the company has 42 SM Superma



Assumes discount to gross NAV narrows to 5% given better-than-expected ramp-up in leasing operations and more visibility on China venture.


Assumes discount to gross NAV widens to 20% due to worse-than-expected lease-out trends of malls and office projects.






12 September 2016



Figure 67: SMPH—ROE DuPont analysis

12/12A 12/13A 12/14A 12/15A 12/16E 12/17E 12/18E

EBIT margin 38.6% 40.4% 41.8% 44.0% 44.9% 44.1% 45.3%

Asset turnover (x) 0.20 0.18 0.17 0.16 0.18 0.19 0.20

Interest burden (x) 0.93 0.91 0.86 1.11 0.89 0.90 0.91

Tax burden (x) 0.79 0.74 0.78 0.60 0.78 0.78 0.78

Financial leverage (x) 2.37 2.50 2.48 2.37 2.27 2.22 2.10

ROE - DuPont 13.5% 12.1% 11.7% 11.4% 12.4% 13.0% 13.6%

Net debt to equity 39.4% 47.6% 46.5% 60.1% 58.4% 58.6% 51.3%


Figure 68: SMPH—forward P/E vs five-year mean (x) Figure 69: SMPH—forward P/B vs five-year mean (x)


Figure 70: SMPH—RNAV valuation summary table

RNAV Summary Value (P mn) Value (P/sh) % firm value Valuation approach

Malls operations 543,362 18.8 46% 17E NOI; Cap rate - 7%

Office leasing 46,697 1.6 4% 17E NOI; Cap rate - 7%

Hotels operations 9,683 0.3 1% 17E NOI; Cap rate - 10%



Other assets 46,957 1.6 4% JV investments + AFS

Firm value 1,177,981 40.8 100%

17E net debt (cash) 151,996 5.3


Equity value 1,021,504 35.4

17E o/s (in mn) 28,879






12

17

22

27

32




1.5

2.0

2.5

3.0

3.5

4.0




12 September 2016


Companies Mentioned (Price as of 09-Sep-2016) Ayala Land (ALI.PS, P38.0, NEUTRAL, TP P40.7) Filinvest Land (FLI.PS, P1.82, UNDERPERFORM, TP P1.6) Megaworld Corp (MEG.PS, P4.55, UNDERPERFORM, TP P4.0) Robinsons Land Corporation (RLC.PS, P30.0, OUTPERFORM, TP P36.3) SM Prime Holdings (SMPH.PS, P26.9, OUTPERFORM, TP P31.9)

Disclosure Appendix

Important Global Disclosures Danielo Picache and Sofia Cabral each certify, with respect to the companies or securities that the individual analyzes, that (1) the views expressed in this report accurately reflect his or her personal views about all of the subject companies and securities and (2) no part of his or her compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this report.

3-Year Price and Rating History for Ayala Land (ALI.PS)

ALI.PS Closing Price Target Price

Date (P) (P) Rating

02-Oct-13 28.05 35.00 O

15-May-14 32.55 *

29-Jul-14 30.75 37.00 O *

28-Apr-15 39.50 39.10 N

12-May-16 35.25 37.70

* Asterisk signifies initiation or assumption of coverage.

O U T PERFO RM

N EU T RA L

3-Year Price and Rating History for Filinvest Land (FLI.PS)

FLI.PS Closing Price Target Price

Date (P) (P) Rating

02-Oct-13 1.60 1.57 N

15-May-14 1.57 *

29-Jul-14 1.47 1.62 N *

06-Jul-15 1.87 1.81

25-Jan-16 1.47 1.68


N EU T RA L

3-Year Price and Rating History for Megaworld Corp (MEG.PS)

MEG.PS Closing Price Target Price

Date (P) (P) Rating

02-Oct-13 3.28 4.20 O *

15-May-14 4.65 *

29-Jul-14 4.21 4.84 N *

06-Jul-15 4.82 5.20

07-Mar-16 3.85 5.20 O

07-Jun-16 4.61 5.15

10-Aug-16 5.47 5.15 N


O U T PERFO RM

N EU T RA L

12 September 2016


3-Year Price and Rating History for Robinsons Land Corporation (RLC.PS)

RLC.PS Closing Price Target Price

Date (P) (P) Rating

02-Oct-13 21.20 25.00 O

15-May-14 22.95 *

16-May-14 22.45 *

29-Jul-14 22.50 28.90 O *

16-Mar-15 28.80 33.20

02-Mar-16 26.25 32.70


O U T PERFO RM

3-Year Price and Rating History for SM Prime Holdings (SMPH.PS)

SMPH.PS Closing Price Target Price

Date (P) (P) Rating

02-Oct-13 16.20 17.50 N

15-May-14 16.98 *

29-Jul-14 15.76 19.50 O *

14-Apr-15 20.50 21.50 N


N EU T RA L

O U T PERFO RM

The analyst(s) responsible for preparing this research report received Compensation that is based upon various factors including Credit Suisse's total revenues, a portion of which are generated by Credit Suisse's investment banking activities

As of December 10, 2012 Analysts’ stock rating are defined as follows: Outperform (O) : The stock’s total return is expected to outperform the relevant benchmark* over the next 12 months. Neutral (N) : The stock’s total return is expected to be in line with the relevant benchmark* over the next 12 months. Underperform (U) : The stock’s total return is expected to underperform the relevant benchmark* over the next 12 months. *Relevant benchmark by region: As of 10th December 2012, Japanese ratings are based on a stock’s total return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attractive, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. As of 2nd October 2012, U.S. and Canadian as well as European ra tings are based on a stock’s total return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attractive, Neutrals the less attractive, and Underperforms the least at tractive investment opportunities. For Latin American and non-Japan Asia stocks, ratings are based on a stock’s total return relative to the average total return of the relevant country or regional benchmark; prior to 2nd October 2012 U.S. and Canadian ratings were based on (1) a stock’s absolute total return potential to its current share price and (2) the relative attractivene ss of a stock’s total return potential within an analyst’s coverage universe. For Australian and New Zealand stocks, the expected total return (ETR) calculation includes 12-month rolling dividend yield. An Outperform rating is assigned where an ETR is greater than or equal to 7.5%; Underperform where an ETR less than or equal to 5%. A Neutral may be assigned where the ETR is between -5% and 15%. The overlapping rating range allows analysts to assign a rating that puts ETR in the context of associated risks. Prior to 18 May 2015, ETR ranges for Outperform and Underperform ratings did not overlap with Neutral thresholds between 15% and 7 .5%, which was in operation from 7 July 2011. Restricted (R) : In certain circumstances, Credit Suisse policy and/or applicable law and regulations preclude certain types of communications, including an investment recommendation, during the course of Credit Suisse's engagement in an investment banking transaction and in certain other circumstances. Not Rated (NR) : Credit Suisse Equity Research does not have an investment rating or view on the stock or any other securities related to the company at this time. Not Covered (NC) : Credit Suisse Equity Research does not provide ongoing coverage of the company or offer an investment rating or investment view on the equity security of the company or related products.

Volatility Indicator [V] : A stock is defined as volatile if the stock price has moved up or down by 20% or more in a month in at least 8 of the past 24 months or the analyst expects significant volatility going forward.

Analysts’ sector weightings are distinct from analysts’ stock ratings and are based on the analyst’s expectations for the fundamentals and/or valuation of the sector* relative to the group’s historic fundamentals and/or valuation: Overweight : The analyst’s expectation for the sector’s fundamentals and/or valuation is favorable over the next 12 months. Market Weight : The analyst’s expectation for the sector’s fundamentals and/or valuation is neutral over the next 12 months. Underweight : The analyst’s expectation for the sector’s fundamentals and/or valuation is cautious over the next 12 months. *An analyst’s coverage sector consists of all companies covered by the analyst within the relevant sector. An analyst may cover multiple sectors.

12 September 2016


Credit Suisse's distribution of stock ratings (and banking clients) is:

Global Ratings Distribution

Rating Versus universe (%) Of which banking clients (%) Outperform/Buy* 54% (55% banking clients) Neutral/Hold* 29% (21% banking clients) Underperform/Sell* 17% (47% banking clients) Restricted 0% *For purposes of the NYSE and NASD ratings distribution disclosure requirements, our stock ratings of Outperform, Neutral, and Underperform most closely correspond to Buy, Hold, and Sell, respectively; however, the meanings are not the same, as our stock ratings are determined on a relative basis. (Please refer to definitions above.) An investor's decision to buy or sell a security should be based on investment objectives, current holdin gs, and other individual factors.

Credit Suisse’s policy is to update research reports as it deems appropriate, based on developments with the subject company, the sector or the market that may have a material impact on the research views or opinions stated herein. Credit Suisse's policy is only to publish investment research that is impartial, independent, clear, fair and not misleading. For more detail please refer to Credit Suisse's Policies for Managing Conflicts of Interest in connection with Investment Research: http://www.csfb.com/research-and-analytics/disclaimer/managing_conflicts_disclaimer.html Credit Suisse does not provide any tax advice. Any statement herein regarding any US federal tax is not intended or written to be used, and cannot be used, by any taxpayer for the purposes of avoiding any penalties.

Target Price and Rating Valuation Methodology and Risks: (12 months) for Ayala Land (ALI.PS)

Method: Our target price of P40.7 and NEUTRAL rating for ALI is based on an RNAV valuation methodology where we assume (1) a 7% cap rate on 2017E NOI contribution from malls and office leasing operations, (2) a 10% cap rate on 2017E NOI contribution from hotels/tourism, (3) a ten-year NPV of ALI's residential business NOPAT assuming a terminal growth rate of 4% and a WACC of 9.5%, (4) the latest company estimates or realisable value based on assumed changes in zonal values for the company's landbank, (5) a book value of their other financial assets and/or investments in JVs/associates, and (6) a 30% discount to gross NAV to derive our target price. We have a NEUTRAL rating for ALI as while valuations are undemanding and it is consistent with its build-out of investment properties, we are still concerned about the slowdown in its residential development segment.

Risk: Upside risks to our target price of P40.7 and NEUTRAL rating for ALI include better-than-expected ramp up in occupancy of new office space particularly in the non-CBD or provincial locations. Downside risks include: (1) a sudden spike in interest rates resulting in weakening of mortgage demand and possible defaults in existing mortgage payments; (2) capital raising through equity offering, which is dilutive to near-term profitability.

Target Price and Rating Valuation Methodology and Risks: (12 months) for Filinvest Land (FLI.PS)

Method: Our target price of P1.6 and UNDERPERFORM rating for FLI is based on an RNAV valuation methodology where we assume (1) a 7% cap rate on 2017E NOI contribution from malls and office leasing operations, (2) a 10% cap rate on 2017E NOI contribution from hotels/tourism, (3) a ten-year NPV of ALI's residential business NOPAT assuming a terminal growth rate of 4% and a WACC of 9.5%, (4) the latest company estimates or realisable value based on assumed changes in zonal values for the company's land bank, (5) a book value of their other financial assets and/or investments in JVs/associates, and (6) a 50% discount to gross NAV to derive our target price. We have an UNDERPERFORM rating for FLI due to our worries about the potential weakness of its residential segment, which is vulnerable to a slowdown in OFW remittances (i.e. 30-35% of its residential sales are to the OFW market). We also take into account its past delays in completing and ramping up the occupancy of its office projects, which is a reflection of some execution risk on its growth strategy.

Risk: Risks to our target price of P1.6 and UNDERPERFORM rating for FLI include: (1) a more resilient growth trend for its residential business given its focus on affordability, (2) better-than-expected ramp up in occupancy of new office space particularly in the non-CBD or provincial locations; (3) capital raising through equity offering, which is dilutive to near-term profitability.

Target Price and Rating Valuation Methodology and Risks: (12 months) for Megaworld Corp (MEG.PS)

Method: Our target price of P4.0 and UNDERPERFORM rating for MEG is based on an RNAV valuation methodology where we assume (1) a 7% cap rate on 2017E NOI contribution from malls and office leasing operations, (2) a 10% cap rate on 2017E NOI contribution from hotels/tourism, (3) a ten-year NPV of ALI's residential business NOPAT assuming a terminal growth rate of 4% and a WACC of 9.5%, (4) the latest company estimates or realisable value based on assumed changes in zonal values for the company's land bank, (5) a book value of their other financial assets and/or investments in JVs/associates, and (6) a 50% discount to gross NAV to derive our target price. We have an UNDERPERFORM rating for MEG given our expectation that its weak residential presales will likely persist (i.e. bulk of its residential offerings are in Metro Manila, which has been experiencing some saturation due to softening demand and excess supply).

Risk: Risks to our target price of P4.0 and UNDERPERFORM rating for MEG include (1) better-than-expected recovery in its presales trend as the company aggressively push-out unsold inventory, (2) faster ramp-up of office and malls expansion to fully offset the drag of its weak residential business, (3) favourable market conditions that will mitigate the concerns about its unhedged USD debt positions and mark-to-market securities portfolio.

12 September 2016


Target Price and Rating Valuation Methodology and Risks: (12 months) for Robinsons Land Corporation (RLC.PS)

Method: Our target price of P36.3 and OUTPERFORM rating for RLC is based on an RNAV valuation methodology where we assume (1) a 7% cap rate on 2017E NOI contribution from malls and office leasing operations, (2) a 10% cap rate on 2017E NOI contribution from hotels/tourism, (3) a ten-year NPV of ALI's residential business NOPAT assuming a terminal growth rate of 4% and a WACC of 9.5%, (4) the latest company estimates or realisable value based on assumed changes in zonal values for the company's land bank, (5) a book value of their other financial assets and/or investments in JVs/associates, and (6) a 25% discount to gross NAV to derive our target price. We have an OUTPERFORM rating for RLC as we think the company is able to deliver high visibility on its earnings growth moving forward driven by its sustained malls and office expansion.

Risk: Risks to our target price of P36.3 and OUTPERFORM rating for RLC include: (1) weaker-than-expected ramp-up in occupancy of its office projects particularly in the highly saturated BGC CBD, (2) inability to expand its land bank particularly in up-and-coming provincial locations, (3) deterioration of investor confidence towards their investments in China, which has so far offered low visibility about future development plans.

Target Price and Rating Valuation Methodology and Risks: (12 months) for SM Prime Holdings (SMPH.PS)

Method: Our target price of P31.9 and OUTPERFORM rating for SMPH is based on an RNAV valuation methodology where we assume (1) a 7% cap rate on 2017E NOI contribution from malls and office leasing operations, (2) a 10% cap rate on 2017E NOI contribution from hotels/tourism, (3) a ten-year NPV of ALI's residential business NOPAT assuming a terminal growth rate of 4% and a WACC of 9.5%, (4) the latest company estimates or realisable value based on assumed changes in zonal values for the company's land bank, (5) a book value of their other financial assets and/or investments in JVs/associates, and (6) a 10% discount to gross NAV to derive our target price. We have an OUTPERFORM rating for SMPH given that it will be able to sustain its dominant market share specifically for its malls moving forward and integrate other property developments into its mall complexes to further its diversify its product offerings. We also think that the company can benefit from its aggressive expansion particularly in their future land reclamation projects in order to further boost its land bank.

Risk: Risks to our target price of P31.9 and OUTPERFORM rating for SMPH include: (1) weaker-than-expected residential pre-sales in the ensuing years given their high concentration in just one price segment, which are also mostly in Metro Manila, (2) failure to secure land reclamation deals, which then limits its expansion specifically in Metro Manila, (3) further deterioration in its China malls venture, which has been delayed for several quarters now due to slow take-up.

Please refer to the firm's disclosure website at https://rave.credit-suisse.com/disclosures for the definitions of abbreviations typically used in the target price method and risk sections.

See the Companies Mentioned section for full company names The subject company (RLC.PS, MEG.PS, SMPH.PS, ALI.PS) currently is, or was during the 12-month period preceding the date of distribution of this report, a client of Credit Suisse. Credit Suisse provided investment banking services to the subject company (ALI.PS) within the past 12 months. Credit Suisse has received investment banking related compensation from the subject company (ALI.PS) within the past 12 months Credit Suisse expects to receive or intends to seek investment banking related compensation from the subject company (RLC.PS, MEG.PS, FLI.PS, SMPH.PS, ALI.PS) within the next 3 months.

For date and time of production, dissemination and history of recommendation for the subject company(ies) featured in this report, disseminated within the past 12 months, please refer to the link: https://rave.credit-suisse.com/disclosures/view/report?i=247505&v=-6r13c820jffq6q48ywnqmr6xl .

Important Regional Disclosures Singapore recipients should contact Credit Suisse AG, Singapore Branch for any matters arising from this research report. The analyst(s) involved in the preparation of this report may participate in events hosted by the subject company, including site visits. Credit Suisse does not accept or permit analysts to accept payment or reimbursement for travel expenses associated with these events. Restrictions on certain Canadian securities are indicated by the following abbreviations: NVS--Non-Voting shares; RVS--Restricted Voting Shares; SVS--Subordinate Voting Shares. Individuals receiving this report from a Canadian investment dealer that is not affiliated with Credit Suisse should be advised that this report may not contain regulatory disclosures the non-affiliated Canadian investment dealer would be required to make if this were its own report. For Credit Suisse Securities (Canada), Inc.'s policies and procedures regarding the dissemination of equity research, please visit https://www.credit-suisse.com/sites/disclaimers-ib/en/canada-research-policy.html. Credit Suisse has acted as lead manager or syndicate member in a public offering of securities for the subject company (RLC.PS, ALI.PS) within the past 3 years. Principal is not guaranteed in the case of equities because equity prices are variable. Commission is the commission rate or the amount agreed with a customer when setting up an account or at any time after that. This research report is authored by: Credit Suisse Securities (Philippines) Inc. .............................................................................................................. Danielo Picache ; Sofia Cabral To the extent this is a report authored in whole or in part by a non-U.S. analyst and is made available in the U.S., the following are important disclosures regarding any non-U.S. analyst contributors: The non-U.S. research analysts listed below (if any) are not registered/qualified as research analysts with FINRA. The non-U.S. research analysts listed below may not be associated persons of CSSU and therefore may not be subject to the

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12 September 2016


NASD Rule 2711 and NYSE Rule 472 restrictions on communications with a subject company, public appearances and trading securities held by a research analyst account. Credit Suisse Securities (Philippines) Inc. .............................................................................................................. Danielo Picache ; Sofia Cabral

For Credit Suisse disclosure information on other companies mentioned in this report, please visit the website at https://rave.credit-suisse.com/disclosures or call +1 (877) 291-2683.

12 September 2016


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