Philippine market

Market strategy
Government has lots of room to lever up!
Source: CLSA
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0.0%
10.0%
20.0%
30.0%
40.0%
50.0%
60.0%
70.0%
80.0%
0
1,000
2,000
3,000
4,000
5,000
6,000
1
9
9
5
1
9
9
6
1
9
9
7
1
9
9
8
1
9
9
9
2
0
0
0
2
0
0
1
2
0
0
2
2
0
0
3
2
0
0
4
2
0
0
5
2
0
0
6
2
0
0
7
2
0
0
8
2
0
0
9
2
0
1
0
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0
1
1
2
0
1
2
2
0
1
3
Domestic debt (PHP bn) Foreign debt (PHP bn)
Total debt to GDP (RHS) Foreign debt to GDP (RHS)
Alfred Dy
alfred.dy@clsa.com
+63 2 860 4008
23 April 2014
Philippines
Market Strategy
www.clsa.com
Lots of leg room!
The PCOMP is off to a jackrabbit start, up 15.8% YTD to 6,767.51. In spite
of strong start, we remain bullish and expect the PCOMP to be at 7,480 by
YE15 translating to potential total returns of 12.8%. We note that
Philippines remains an early infrastructure and credit cycle story.
Further, earlier inflation fears are now waning with government guiding
for lower inflation next year. Conviction picks are Ayala Corporation,
Universal Robina, Banco De Oro, and ABS-CBN.
A jackrabbit start
q The PCOMP is now at 6,784.95, up 15.2% YTD.
q Top five performing stocks in our coverage are: (1) Semirara (+43.8%); (2) D&L
(+42.9%); (3) Megaworld (+41%); (4) Phoenix Petro (+38.9%); and (5) JG
Summit (+35.1%).
q Top five laggards in our coverage are: (1) Travellers (-8.1%); (2) Melco Phils (-
6.9%); (3) Security Bank (-2.3%); (4) Megawide (-1.7%); and (5) GMA (-1.2%).
Hardly any leverage in the system
q The beauty of the Philippine story is that the next economic crisis is still a long
ways ahead. Typically, economic crises are preceded with excessive leverage which
the Philippines does not have much.
q Country debt to GDP ratio is at 49%. Banking sector loan to deposit ratio is at 60%.
Corporate debt to equity ratio is at 0.21x. Consumer debt to GDP ratio is at 6%.
q Infrastructure spending is beginning to pick up. This plus rising population and per
capita GDP suggest lots of potential leveraging ahead.
Lower inflation ahead?
q The Central Bank has kept its inflation targets steady at 3% to 5% for 2014 and
2% to 4% in 2015 and 2016.
q Our economics team is looking at average inflation of 4.3% in 2014 and 4.4% in
2015. They are expecting 100bps increase in policy rates by YE15.
q Central Banks inflation targets reinforce our positive view on the market as low
inflation could translate to low interest rates. Low rates, in turn, are positive for the
market and cyclicals like banking, property, and construction counters.
Still bullish
q We remain bullish and expect the PCOMP to hit 7,480 by YE15, translating to
potential total returns of 12.8%
q Our preferred sectors remain to be conglos, consumer, banks, and quasi-consumer.
q Conviction picks are Ayala Corporation, Universal Robina, Banco De Oro, and ABS-
CBN. We are removing Travellers from our conviction basket.
Prepared for - W: jkim@matchpointim.com
Lots of leg room! Philippine market
23 April 2014 alfred.dy@clsa.com 2
A jackrabbit start
The PCOMP is now at 6,784.95, up 15.2% YTD. Top five performing stocks in
our coverage are: (1) Semirara Mining (up 43.8%); (2) D&L (up 42.9%); (3)
Megaworld (up 41%); (4) Phoenix Petro (up 38.9%); and (5) JG Summit (up
35.1%). Top five laggards in our coverage are: (1) Travellers Intl (down
8.1%); (2) Melco Phils (down 6.9%); (3) Security Bank (down 2.3%); (4)
Megawide (down 1.7%); and (5) GMA (down 1.2%). We trace the strong
performance of the PCOMP YTD to (1) strong macro and corporate backdrop;
(2) lower than expected inflation in March 2014; and (4) possibility of no rate
hike in the US until 3Q15.
Figure 1
Coverage performance in 2013 and ytd
BB Company 2013 performance YTD performance Current price
SCC PM Semirara Mining 23.4% 43.8% 414.2
DNL PM D&L 44.2% 42.9% 9
MEG PM Megaworld 17.0% 41.0% 4.57
PNX PM Phoenix Petro (35.2%) 38.9% 6.25
JGS PM JG Summit (2.4%) 35.1% 52.1
URC PM URC 35.9% 30.6% 146
BDO PM BDO (5.8%) 29.7% 89
EEI PM EEI (5.4%) 26.7% 12.1
ALI PM Ayala Land (6.4%) 24.0% 30.7
DMC PM DMCI 8.0% 23.2% 69
MPI PM Metro Pacific (2.9%) 21.8% 5.26
LTG PM LT Group 15.4% 21.6% 18.76
PGOLD PM Puregold 15.5% 21.1% 45.9
VLL PM Vista Land 7.0% 20.6% 6.27
ROCK PM Rockwell Land (38.7%) 20.1% 1.79
AC PM Ayala Corp 0.2% 18.9% 616
LRI PM Lafarge Republic (22.6%) 17.5% 10.34
BLOOM PM Bloomberry (34.8%) 16.1% 10
RLC PM Robinsons Land (3.8%) 16.0% 23.15
BPI PM BPI (10.5%) 15.3% 96.15
PX PM Philex Mining (47.1%) 15.3% 9.13
EMP PM Emperador 42.5% 15.0% 12.3
FLI PM Filinvest Land (4.4%) 14.9% 1.62
PIP PM Pepsi-Cola (31.0%) 14.7% 5.16
MBT PM Metrobank (3.7%) 13.8% 86
ABSP PM ABS-CBN (5.9%) 13.4% 36.3
SMPH PM SM Prime (11.0%) 12.9% 16.58
RCB PM RCBC (29.2%) 12.8% 47.95
TEL PM PLDT 7.3% 10.8% 2894
SM PM SM Investments 0.8% 5.0% 746.5
GLO PM Globe Telecom 50.2% 1.8% 1670
JFC PM Jollibee 71.7% 1.8% 176.2
DMPL PM Del Monte Pacific 0.4% 22.8
PNB PM PNB (5.2%) (0.9%) 84.1
GMAP PM GMA (13.6%) (1.2%) 7.95
MWIDE PM Megawide (1.1%) (1.7%) 13.76
SECB PM Security Bank (10.5%) (2.3%) 112.9
MCP PM Melco Phils 12.9% (6.9%) 12.74
RWM PM Travellers Intl (8.1%) 9.45
Source: Bloomberg
Prepared for - W: jkim@matchpointim.com
Lots of leg room! Philippine market
23 April 2014 alfred.dy@clsa.com 3
Hardly any leverage in the system
The beauty of the Philippine story is that the next economic crisis is still a
long ways ahead. Typically, economic crises are preceded with excessive
leverage which the Philippines does not have that much as of now. Country
debt to GDP ratio is at 49%. Banking sector loan to deposit ratio is at 60%.
Corporate debt to equity ratio is at 21%. Consumer debt to GDP ratio is at
6%. Infrastructure spending is beginning to pick up. This plus rising
population and per capita GDP suggest lots of potential leveraging ahead.
Figure 2
Historical loan-to-deposit ratio
Source: Bangko Sentral ng Pilipinas
Figure 3
Corporates have delevered
Source: CLSA
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8,000
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Loans (PHP bn)
Deposits (PHP bn)
Loan-to-deposit ratio (%)
53.2
28.4
46.0
27.6
15.2
26.6
33.8
29.8
28.0
24.6
21.3
0
10
20
30
40
50
60
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Net debt/equity
Prepared for - W: jkim@matchpointim.com
Lots of leg room! Philippine market
23 April 2014 alfred.dy@clsa.com 4
Figure 4
Consumer loans to GDP
Source: Bangko Sentral ng Pilipinas
Figure 5
Philippine investments is picking up
Source: CLSA
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7.0%
0
100
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800
Consumer loans Consumer loans to GDP (RHS)
90
95
100
105
110
115
120
125
130
135
140
145
150
Dec 06 Dec 07 Dec 08 Dec 09 Dec 10 Dec 11 Dec 12 Dec 13
Real GDP growth
Real private consumption
Real investment (GFCF)
(1Q08=100, sea adj)
Prepared for - W: jkim@matchpointim.com
Lots of leg room! Philippine market
23 April 2014 alfred.dy@clsa.com 5
Lower inflation ahead?
The Central Bank has kept its inflation targets steady at 3% to 5% for 2014
and 2% to 4% in 2015 and 2016. Our economics team is looking at average
inflation of 4.3% in 2014 and 4.4% in 2015. They are expecting 100bps
increase in policy rates by YE15. Central Banks inflation targets reinforce our
positive view on the market as low inflation could translate to low interest
rates. Low rates, in turn, are positive for the market and cyclicals like
banking, property, and construction counters. Note that property and banks
have the highest effective weightings in the PCOMP at 23% and 21%
respectively.
Figure 6
Inflation should remain low at least until 2015
Source: CLSA Asia-Pacific Markets
Figure 7
Overnight rates
Source: CLSA Asia-Pacific Markets
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
Inflation
Tolerance range
Target inflation
0
5
10
15
20
25
30
35
40
Overnight lending rate Overnight borrowing rate
Prepared for - W: jkim@matchpointim.com
Lots of leg room! Philippine market
23 April 2014 alfred.dy@clsa.com 6
Figure 8 Figure 9
Reserve requirements across countries Historical reserve requirements in the Philippines
Source: CLSA Asia-Pacific Markets Source: CEIC, CLSA Asia-Pacific Markets
0.0%
0.0%
3.0%
3.5%
4.5%
5.0%
6.0%
7.5%
9.0%
19.0%
21.5%
30.0%
0.0% 5.0% 10.0% 15.0% 20.0% 25.0% 30.0% 35.0%
Japan
Hong Kong
Singapore
Malaysia
South Korea
Taiwan
Thailand
Indonesia
Australia
Philippines
China
India
10
12
14
16
18
20
22
24
Series1
Prepared for - W: jkim@matchpointim.com
Lots of leg room! Philippine market
23 April 2014 alfred.dy@clsa.com 7
Still bullish
We remain bullish and expect the PCOMP to hit 7,480 by YE15, translating to
potential total returns of 12.8%. Our YE15 PCOMP target translates to 2015
PER of 17.7x which is still lower than 18 year mean market PER of 17.9x. Our
preferred sectors remain to be conglomerates, consumer, banks, and quasi-
consumer. Conviction picks are Ayala Corp, Universal Robina, Banco De Oro,
and ABS-CBN. Note that we are also upgrading our 12-month target price on
Banco De Oro by 5.5% to P106.9/share due to higher PBV assumption given
strong positioning of the bank. Our target price translates to 2015 PBV of
1.9x. Cum dividend, we are looking at potential total returns of 21.7%. We
are removing Travellers International from our conviction basket given weak
2013 results. We are reviewing our recommendation and earnings forecasts
on the stock.
Figure 10 Figure 11
Philippine market PE bands Philippine market PB bands
Source: CLSA Source: CLSA
Figure 12
Conviction BUYs
PE (x) PB (x)
BB Company Market cap (US$m) 2014 2015 2014 2015 Rec Target Price
AC PM Ayala Corp 8,363.62 20.7 17.3 2.5 2.2 BUY 710.0 621.0
URC PM URC 7,160.05 27.3 23.3 5.9 5.5 BUY 168.0 146.0
BDO PM BDO 7,141.54 16.2 14.1 1.7 1.6 BUY 106.9 88.8
ABSP PM ABS-CBN 698.46 13.5 10.8 1.4 1.3 BUY 52.0 36.0
Source: CLSA
6.1x
11.1x
16.1x
21.1x
26.1x
31.1x
36.1x
41.1x
46.1x
Jan97 Jan00 Jan03 Jan06 Jan09 Jan12
0.7x
1.2x
1.7x
2.2x
2.7x
3.2x
3.7x
4.2x
4.7x
5.2x
Jan97 Jan99 Jan01 Jan03 Jan05 Jan07 Jan09 Jan11 Jan13
Prepared for - W: jkim@matchpointim.com
Lots of leg room! Philippine market
23 April 2014 alfred.dy@clsa.com 8
Figure 13 Figure 14
Ayala Corp PE bands Ayala Corp PB bands
Source: CLSA Source: CLSA
Figure 15 Figure 16
URC PE bands URC PB bands
Source: CLSA Source: CLSA
min9.9x
13.8x
avg17.7x
21.7x
max25.7x
160.0
260.0
360.0
460.0
560.0
660.0
760.0
860.0
Apr09 Apr10 Apr11 Apr12 Apr13 Apr14
Ayala Corp- Price to Earnings Bands
Source: CLSA Evalu@tor
min0.87x
1.35x
avg1.82x
2.38x
max2.95x
160.0
260.0
360.0
460.0
560.0
660.0
760.0
Apr09 Apr10 Apr11 Apr12 Apr13 Apr14
Ayala Corp - Price to Book Value Bands
Source: CLSA Evalu@tor
min2.1x
8.1x
avg14.1x
19.7x
max25.3x
4.7
24.7
44.7
64.7
84.7
104.7
124.7
144.7
164.7
Apr09 Apr10 Apr11 Apr12 Apr13 Apr14
URC- Price to Earnings Bands
Source: CLSA Evalu@tor
min0.37x
1.49x
avg2.61x
4.17x
6.6
26.6
46.6
66.6
86.6
106.6
126.6
146.6
Apr09 Apr10 Apr11 Apr12 Apr13 Apr14
URC - Price to Book Value Bands
Source: CLSA Evalu@tor
Prepared for - W: jkim@matchpointim.com
Lots of leg room! Philippine market
23 April 2014 alfred.dy@clsa.com 9
Figure 17 Figure 18
ABS-CBN PE bands ABS-CBN PB bands
Source: CLSA Source: CLSA
Figure 19 Figure 20
Banco De Oro PE bands Banco De Oro PB bands
Source: CLSA Source: CLSA
min5.9x
9.3x
avg12.6x
15.5x
max18.4x
13.0
23.0
33.0
43.0
53.0
63.0
73.0
Apr09 Apr10 Apr11 Apr12 Apr13 Apr14
ABS-CBN- Price to Earnings Bands
Source: CLSA Evalu@tor
min0.80x
1.14x
avg1.48x
1.93x
16.0
26.0
36.0
46.0
56.0
66.0
Apr09 Apr10 Apr11 Apr12 Apr13 Apr14
ABS-CBN - Price to Book Value Bands
Source: CLSA Evalu@tor
min9.5x
10.9x
avg12.3x
14.1x
max16.0x
24.0
34.0
44.0
54.0
64.0
74.0
84.0
94.0
104.0
Apr09 Apr10 Apr11 Apr12 Apr13 Apr14
BDO- Price to Earnings Bands
Source: CLSA Evalu@tor
min0.98x
1.18x
avg1.38x
1.70x
max2.02x
25.0
35.0
45.0
55.0
65.0
75.0
85.0
95.0
105.0
115.0
Apr09 Apr10 Apr11 Apr12 Apr13 Apr14
BDO - Price to Book Value Bands
Source: CLSA Evalu@tor
Prepared for - W: jkim@matchpointim.com
Lots of leg room! Philippine market
23 April 2014 alfred.dy@clsa.com 10
Companies mentioned
ABS-CBN (ABSP PM - P36.00 - BUY)
Ayala Corp (AC PM - P621.00 - BUY)
BDO (BDO PM - P88.75 - BUY)
D&L (DNL PM - P9.10 - BUY)
GMA (GMAP PM - P8.00 - BUY)
JG Summit (JGS PM - P51.85 - UNDERPERFORM)
Megawide (MWIDE PM - P13.70 - BUY)
Megaworld (MEG PM - P4.47 - OUTPERFORM)
Melco Phils (MCP PM - P12.42 - BUY)
Phoenix Petro (PNX PM - P6.11 - BUY)
Security Bank (SECB PM - P112.70 - BUY)
Semirara Mining (SCC PM - P419.00 - UNDERPERFORM)
Travellers Intl (RWM PM - P9.48 - BUY)
URC (URC PM - P146.00 - BUY)
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Prepared for - W: jkim@matchpointim.com