Positioning for 2015

8/10/2019 Positioning for 2015

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The remaining part of 2014 brings

both goodand badnews


3/33

First, the bad news

The market would most likely remain weak

August

historically the

weakest month of

the year

PSEi no longer

cheap

Foreign investors

are once again

exiting the market

- Rising inflation

- Political noise


4/33

5500

6000

6500

7000

7500

8000

7,800PSEi

Now, the good news

The long wait is almost over

PSEi to exit

consolidation

approaching 2015

End 2015 target

is 7,800


5/33

Reasons for Bullish 2015 Outlook

Pace of

monetary

tightening

slower thanexpected

Economic

growth

gaining

momentum

Fundamentals

to catch up

with valuations

Poor sentiment

acts as a

contrarian

indicator


6/33

Pace of Monetary

Tightening Slower

than Expected

May 13 Prospects of

Reduced Liquidity Trigger

Market Sell-off


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Pace of Monetary Tightening Slower than ExpectedJune 14 - DM Central Bank More Dovish than Expected

ECB announced several

liquidity enhancing

measures

Reduction of ECBs

base rate from 0.25%

to 0.15%

Introduction of a

negative deposit rate

(-0.1%)

Opening of a EUR400

Bil liquidity channel tied

to bank lending

Fed officials on the

average reduce their long-

run interest rate forecast

From 4.00% to 3.75%

Due to a less optimisticLT growth outlook on

the US economy


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Pace of Monetary Tightening Slower than ExpectedPhilippine Inflation Under Control

Jan-13

Feb-13

Mar-13

Apr-13

May-13

Jun-13

Jul-13

Aug-13

Sep-13

Oct-13

Nov-13

Dec-13

Jan-14

Feb-14

Mar-14

Apr-14

May-14

Jun-14

INFLATION RATE Headline

Core

Source: NSO


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63.169.7

36.930.3

%ofPopulation

Productive Population

Dependent population

A period of high

economic growth

brought about by a

larger number of people

entering the productive

ages

Source: UN

PRODUCTIVE VS.

DEPENDENT

POPULATION

Economic Growth Gaining MomentumPhilippines to Enter Demographic Window in 15


10/33

Fixed capital formation

trending higher

Source: NSCB

FIXED CAPITAL

FORMATION/GDP

1Q01

3Q01

1Q02

3Q02

1Q03

3Q03

1Q04

3Q04

1Q05

3Q05

1Q06

3Q06

1Q07

3Q07

1Q08

3Q08

1Q09

3Q09

1Q10

3Q10

1Q11

3Q11

1Q12

3Q12

1Q13

3Q13

1Q14

Fixed Capital/GDP

Average of last 4Q

Economic Growth Gaining MomentumInvestment Spending Continues to Pick-Up


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2

16.3

25.1

89.5

2011 2012 2013 2014

PPP Projects Awarded

PPP Projects Awarded

* Includes those that are in the process of awarding

Source: PPP Center

VALUE OF PPP

PROJECTS AWARDED

SO FAR (PHP BIL)

2.0

16.3

25.1

119.5

Economic Growth Gaining MomentumGrowing Pipeline of PPP Projects


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*In the process of awarding

Source: PPP Center

VALUE OF PPP PROJECTS AWARDED SO FAR

2011 2012

Daang Hari-SLEx Link Road 2.0 2011

PPP for School Infrastructure Project (Phase I) 16.3 2012

NAIA Expressway Project 15.5 2013

PPP for School Infrastructure Project (Phase II) 3.9 2013

Modernization of the Philippine Orthopedic Center 5.7 2013

Automatic Fare Collection System 1.7 2014

Mactan-Cebu Intl Airport Passenger Terminal Bldg 17.5 2014Cavite Laguna Expressway* 35.4 2014

LRT Line 1 Cavitex Extension & Operation Mgmt* 64.9 2014

Economic Growth Gaining MomentumGrowing Pipeline of PPP Projects


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Source: NSCB

9.7% 9.7% 10.8%11.1%

10.6%

7.6%

21.6%

12.0%

2010 2011 2012 2013

Gov't Spending (RHS %GDP)

Gov't Spending (LHS %Growth)

Economic Growth Gaining MomentumGovernment Spending on the Rise


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Source: DOF, DBM, NEDA

2013E 2014E 2015E 2016E

Infra Spending (Php Bil) 295 399 601 835

% Change 24% 35% 51% 39%

% GDP 2.5% 3.0% 4.0% 5.0%

Economic Growth Gaining MomentumWith Focus on Infrastructure Spending


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Source: DBM

2011 2012 2013

Value (Php Bil) 75.1 53.2 16.0

% GDP 0.8% 0.5% 0.1%

PROGRAMS & PROJECTS FUNDED THROUGH DAP

Economic Growth Gaining MomentumRemoval of DAP to have Minimal Impact


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Source: Bloomberg, COL Estimates

*Due to one-offs

** Vulnerable to downside risk

SECTOREPS Growth P/E

2014E 2015E 2014E 2015E

PSEi 5.0% 14.5% 19.4 16.9

Banks 1.7% 15.3% 14.0 12.1Conglomerates -0.3% 15.2% 16.0 16.5

Consumer** 10.6% 16.4% 29.6 25.4

Gaming* 240.3% 87.9% 33.6 17.9

Mining* 43.8% 34.2% 20.0 14.9

Power 20.8% 20.9% 15.5 12.8Property 12.1% 13.7% 20.9 18.3

Telecoms 2.2% 3.1% 17.1 16.6

Others 14.6% 30.9% 20.4 15.6

Fundamentals to Catch up with ValuationsEPS Growth to Jump from 5% 14 to 14% in 15


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Source: Bloomberg, COL Estimates

*Due to one-offs

** Vulnerable to downside risk

Fundamentals to Catch up with ValuationsDrivers of Strong EPS Growth


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14.7

12.3

17.2

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Source: Bloomberg

PSEi FORWARD

P/E BAND 16.9x

Fundamentals to Catch up with ValuationsPSEi to Trade at more Reasonable Valuations


19/33

Why Interest Rates

wil l Stay Low

Stronger government

finances

Stronger external account

position

Ratings upgrade

3.9

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

10-YR BOND RATE

Fundamentals to Catch up with ValuationsLower Interest Rates Justify Higher P/Es


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IN PHP BIL 6M13 6M14 % CHANGE

Ave Daily Value T/O 11.5 8.1 -29.3%

Local 5.5 3.9 -28.5%

Foreign 6.0 4.2 -30.0%

Net Foreign Buying 61.5 44.9 -26.9%

Mutual Fund Net Sales

(Equity & Balanced Funds)25,574.3 2,481.1 -90.3%

COMPARISON OF 6M13 & 6M14

Source: Bloomberg, PIFA

Poor Investor Sentiments Acts as a

Good Contrarian Indicator

Investor Participation Down Significantly


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AEC Both a Threat & an Opportunity

AEC WHAT TO EXPECT

BY 2015

- ASEAN Economic Community

or AEC

- Free flow of goods, services,investment, capital, skilled labor

between ASEAN countries

More intense competition

Philippines is not competitive in

attracting investments

Philippine companies are small

relative to foreign companies


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LISTED COMPANIES

ARE NOT WORRIES

- Most have already been

preparing for AEC

- Tariffs have already beenreduced for most products as a

result of AFTA (effective ~

2008)

Dominant leadership position and strong

branding in competitive local market

Domestic scale, distribution network

Some have experience operating

overseas


23/33




LISTED COMPANIES

ARE NOT WORRIESLower cost of raw materials

Ease of deploying labor

Ease of expansion in ASEAN


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BANKS

EPS growth to rebound from 1.7%

to 15.3%

Trading gains bottom

Net interest margins to rise

Higher demand for loans where big

banks have an advantage

Potential threat from foreign banksnot expected in the ST

TOP PICKS: BDO & MBT

Market Weakness in 2H14

Opportunity to Accumulate for 15


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POWER

Rapid sector EPS growth of20.9%

Power shortage to improve

sentiment for the sector

Could benefit from increase in

WESM prices

TOP PICKS: AP




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INFRASTRUCTURE

Higher infrastructure spending

Launch of more PPPs

TOP PICKS: AC & EEI


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PROPERTY

Residential sector in a secular bull

market due to favorable demographics

and low interest rates

No signs of a bubble

Oversupply concerns overblown as take

up sales remain strong

Strong growth of BPO sector continues

to drive demand for office space and

growth in recurring income

Large players with huge landbank, strong

recurring income base and balance

sheet have the greatest advantage

TOP PICKS: ALI, MEG & SMPH




28/33

TEL

Stable earnings and high dividend

yield

DNL

Best proxy for the consumer sector as it is

a beneficiary of the countrys resilient

consumer spending

Focus on specialized products makes itless vulnerable to competition

Wait for pullbacks as prices currently

elevated




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* Buy Below Price provides upside of at least 25% for property stocks to factor in negative sentiment

STOCK PRICE 15 FV BUY BELOW PRICE

BDO 89.90 107.00 93.04

MBT 85.65 111.00 96.52

AP 36.80 45.85 39.87

AC 647.00 757.00 658.26

EEI 11.20 13.70 11.91

ALI 30.70 37.55 30.04*

MEG 4.26 5.82 4.66*

SMPH 15.76 20.86 16.69*

TEL 3,022.00 3,345.00 2,908.70

DNL 11.20 11.50 10.00

SUMMARY OF STOCK PICKS




30/33

The market would most likely remain weak for the remaining part

of 2014 due to concerns of rising inflation, political noise and

focus on the PSEis 2014 valuation.

However, we believe that the stock market will exit the

consolidation phase as we approach 2015, and the second half of2014 would be the best time to start positioning for this

eventuality.


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Reasons for our bullish 2015 outlook include the slower than

expected monetary tightening globally and only a slight increase in

interest rates domestically; the growing momentum of domestic

economic growth brought about by resilient consumer spending and

higher investment and infrastructure spending; recovery of listed

companies earnings growth; and poor investor sentiment.

Our favorite sectors and stock picks for 2015 include the banking

sector (BDO & MBT), the power sector (AP), infrastructure plays (AC

& EEI), TEL & DNL.


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Documents

Positioning for 2015