WE D 12 APR 2017

CEMEX HOLDINGS PHILIPPINES. INC:

Play on infrastructure growth

We are initiating coverage on Cemex Holdings Philippines, Inc. (CHP) with a BUY recommendation SHARE DATA
and FV estimate of Php9.3/sh based on the DCF method. Although the company reported a weaker
than expected 4Q16 earnings, we believe that its medium to long term prospects remain bright. Rating BUY
The favorable economic outlook of the country coupled with the governments aggressive plans in Ticker CHP
developing public infrastructure bodes well for CHP.
Fair Value (Php) 9.30
Beneficiary of the growing construction industry. CHP is poised to benefit from the Philippines Current Price 7.81
growing construction industry due to the countrys strong GDP growth. Also, we expect construction to
continue to expand following the governments commitment to build more infrastructure projects. The Upside (%) 19.08
government dubbed the next six years as the golden age of infrastructure with the implementation of
projects ranging from road networks, airport and seaport modernization, and transit systems.
SHARE PRICE MOVEMENT
Capacity expansion to meet rising demand. CHP is well positioned to take advantage of the
growing cement demand in the country. According to the Cement Industry Report, cement demand
110
is estimated to grow at a CAGR of 8.4% from 2015-2019 or from 24.4Mil ton to 33.9Mil ton. CHP is
expanding its production capacity in its Solid plant in Rizal by 1.5Mil ton, bringing the companys total 100
capacity to 7.2Mil ton by 4Q19. This is expected to increase the companys market share, specifically
in Luzon, which accounts for 65% of total country demand. 90

80
Short term weak earnings, medium to long term prospects remain favorable. CHP registered
a Php7.2Mil pro forma loss in 4Q16 primarily due to low sales volume and sales price during the 70
quarter. Sales volume declined by 8% while sales price declined by 5% because of lower cement
demand and intensified market competition among local players and import traders. According to 60
CHP, they expect the slow pace of public construction to continue until 1H17. Nevertheless, we
believe public construction will pick up during the second half and the succeeding years. Despite the 50
12-Jan-17 12-Feb-17 12-Mar-17 12-Apr-17
slow volume growth in 2017, we forecast net income to double compared to last year mainly due to
the elimination of FX and lower interest expense. We then forecast net income to grow at a CAGR CHP PSEi

of 10.0% from 2018-2021.

Relatively cheap valuation. Our FV estimate on CHP is Php9.3/sh based on the DCF method
with WACC of 8.7% and a terminal growth rate of 3.0%. This implies a 21% upside to the current ABSOLUTE PERFORMANCE
price of Php7.63/sh. Moreover, CHP is attractively valued relative to its peers. It currently trades at
1M 3M YTD
a 2017E P/E of 14.4X, which is below the median 2017E P/E of 16.3X of its regional peers. Its 2017
EV/EBITDA of 9.2X is also lower compared to the median 2017 EV/EBITDA of 10.0X of its regional CHP -9.19 -34.37 -29.64
peers.
PSEi 6.72 4.98 11.49

FORECAST SUMMARY:
Year to Dec. 31 2014 2015 2016 2017 2018
Revenues 19,497 23,937 24,806 24,543 26,035 MARKET DATA
% change y/y 16.2 22.8 3.6 (1.1) 6.1
EBIT 801 2,894 3,213 4,599 4,841 Market Cap 40,576.04Mil
% change y/y (13.4) 261.4 (35.0) 43.1 5.3 Outstanding Shares 5,195.40Mil
EBIT Margin (%) 4.1 12.1 13.0 18.7 18.6
Net Profit 507 2,183 1,413 2,753 2,916 52 Wk Range 6.70 - 12.96
% change y/y 11.7 331.0 (53.1) 94.8 5.9 3Mo Ave Daily T/O 133.26Mil
NPM (%) 2.6 9.1 5.7 11.2 11.2
EPS 0.50 0.53 0.56
% change y/y (29.6) 6.0 5.9

RELATIVE VALUE
P/E(X) 15.3 14.4 13.6 Frances Rolfa Nicolas
P/BV(X) 0.8 1.3 1.2
Research Analyst
ROE(%) 5.2 9.2 8.9
BVPS(P) 10.1 6.1 6.6 rolfa.nicolas@colfinancial.com
Dividend Yield (%)
so urce: CHP

Disclaimer: All content provided in COL Reports are meant to be read in the COL Financial website. Accuracy and completeness of content cannot be guaranteed if reports are viewed outside of
the COL Financial website as these may be subject to tampering or unauthorized alterations.
 I n i t i at i n g C o ver ag e I C em ex H o l d i n g s P hi l i ppi nes, Inc.

WED 12 A PR 2017

Initiating coverage with a BUY rating

We are initiating coverage on Cemex Holdings Philippines, Inc. (CHP) with a BUY recommendation
and FV estimate of Php9.3/sh based on the DCF method. Although the company reported a
weaker than expected 4Q16 earnings, we believe that its medium to long term prospects remain
bright. The favorable economic outlook of the country coupled with the governments aggressive
plans in developing public infrastructure bodes well for CHP. Moreover, its capacity expansion is
timely to support the growing demand for cement, and its recent refinancing is expected to improve
earnings and lessen FX exposure. We also believe that the market has already priced in the
disappointing 4Q16 earnings and the expected slowdown in 1H17 as the stock already declined by
32% since the FY16 results came out.

Company background

Cemex Holdings Philippines, Inc. (CHP) is a newly formed subsidiary of CEMEX Asian South East
Corporation, which is indirectly owned by CEMEX, S.A.B. de C.V., (CEMEX) one of the largest
cement companies in the world. Though only incorporated in 2015, CHP has been operating in the
cement market since 1997 with local brands that have over 75 years of history. The company owns
two cement plants, the APO cement plant in Cebu and the Solid cement plant located in Rizal. The
APO plant serves the Visayas and Mindanao region, while the Solid plant serves the Luzon region.
Moreover, CHP has 4 marine distribution terminals and 16 land distribution centers strategically
located across the country.

Exhibit 1: Corporate Structure

Source: CHP Prospectus

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 I n i t i at i n g C o ver ag e I C em ex H o l d i n gs P hi l i ppi nes, Inc.

W ED 12 A PR 2017

CHP is the third largest cement producer in the Philippines with aggregate installed annual capacity
of 5.7Mil tons of cement. In terms of market share, the company ranks third with ~20% of the
market based on sales volume as of 2015. Meanwhile, Lafarge Holcim is number one with 31%
of the market share, and Republic Cement is second with 26%. Specifically, CHP ranks fourth in
Luzon, first in Visayas and second in Mindanao. As of FY16, total sales volume reached 5.1Mil
tons while, pro forma net sales reached Php25.4Bil.

Exhibit 2: Market share as of 2015

Goodfound Mabuhay Others
1% 2%
Taiheiyo 4%
4%
Lafarge Holcim
San Miguel 31%
12%

Cemex
20%

Republic
26%
Source: CHP prospectus

Cement operations

CHPs products primarily comprise of gray portland cement, masonry or mortar cement, blended
cement and ready-mix concrete. Majority of its raw materials such as limestone, pozzolans, and
clay are sourced from APO Land & Quary Corporation (ALQC) and Island Quarry and Aggregates
Corporation (IQAC), both of which are owned by companies wherein CEMEX have equity interests
in.

In producing cement, CHP makes use of the dry process, where the limestone and clay are first
pre-homogenized and dried, then fed to the kiln. The dry process is more efficient because it uses
less energy and fuel compared to the wet process.

CHP sells directly to retailers such as hardware stores, and institutional customers such as
contractors, instead of the traditional distributors. The companys cement products are sold under
the APO, Island, and Rizal brand names, while its ready-mix products are sold under brands such
as Promptis.

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of the COL Financial website as these may be subject to tampering or unauthorized alterations.
 I n i t i at i n g C o ver ag e I C em ex H o l d i n g s P hi l i ppi nes, Inc.

WED 12 A PR 2017

Beneficiary of the growing construction industry

CHP is poised to benefit from the Philippines growing construction industry due to the countrys
strong GDP growth. Historically, the construction industry grew faster than real GDP. From 2005
to 2015, GDP grew at a CAGR of 5.4% while the construction industry grew at a CAGR of 7.9%.
Likewise, cement demand grew robustly during the same period at a CAGR of 7.7%. The countrys
GDP is expected to grow ~7.0% from 2017 to 2020, driving the Philippine construction industry.
There is also a huge potential for growth because the Philippines has one of the lowest per capita
consumption of cement amongst the larger Southeast Asian economies.

Exhibit 3: GDP, cement demand, and construction growth

250.0

CAGR = 7.9%

200.0 CAGR = 7.7%

CAGR = 5.4%

150.0

100.0

50.0
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Real GDP Cemant Demand Construction

Source: Philippine Statistical Yearbook

Exhibit 4: Cement consumption and construction statistics in selected Southeast Asian Countries

Source: CHP, Cement Industry report

Disclaimer: All content provided in COL Reports are meant to be read in the COL Financial website. Accuracy and completeness of content cannot be guaranteed if reports are viewed outside 4
of the COL Financial website as these may be subject to tampering or unauthorized alterations.
 I n i t i at i n g C o ver ag e I C em ex H o l d i n gs P hi l i ppi nes, Inc.

W ED 12 A PR 2017

Going forward, we expect construction to continue to expand following the governments

commitment to build more infrastructure projects. The government dubbed the next six years as
the golden age of infrastructure with the implementation of projects ranging from road networks,
airport and seaport modernization, and transit systems. Some of the projects underway include
MRT Line 7, MactanCebu International Airport Passenger Terminal Building, and Metro Manila
Skyway Stage 3 among others.

Moreover, the Department of Finance (DoF) said that the total infrastructure budget is projected
to grow from Php861Bil in 2017 to Php1.832Tril by 2022 or from 5.4% to 7.1% of GDP. This is an
improvement from the 2010 infrastructure spending of Php165Bil or 1.8% of GDP.

Exhibit 5: Proportion of infrastructure spending to GDP (2010-2022)

8
7.1
6.9
7 6.6 6.7 6.7

6 5.4
5.1
5

4
3.3
3 2.7 2.7
2.0
1.8 1.8
2

0
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022

Source: Department of Budget and Management

Rising costs and stricter guidelines to reduce cement imports from traders

Cement companies in the Philippines typically rely on cement imports to supplement their plant
capacities. Aside from cement companies, there are also independent traders who bring in cement
imports in the country. Last year, cement imports from independent traders grew by more than
six times from 0.3Mil MT in 2015 to 1.9Mil MT in 2016. Most of these came from Vietnam, which
is experiencing overcapacity. Likewise, its market share grew significantly from 1.3% in 2015 to
~8% in 2016. The higher market share can be attributed to the cheaper selling price of imported
cement at US$88-92/ton, compared to domestic cement at US$95-100/ton. Moreover, freight costs
were lower due to low oil prices, and the Philippine peso was relatively stronger for the most part
of 2016.

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of the COL Financial website as these may be subject to tampering or unauthorized alterations.
 I n i t i at i n g C o ver ag e I C em ex H o l d i n g s P hi l i ppi nes, Inc.

WED 12 A PR 2017

Exhibit 6: Cement imports (in thousand metric tons)

2000 1870

1500

1000

500 338 314

244 302
116 113
10 13 1 1 30 0 0 4
0
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Source: CEMAP

Moving forward, we expect imported cement to decline because of increasing import costs and
stricter regulations in the Philippines. The Department of Trade and Industry recently issued
Department Administrative Order (DAO) No. 1702 requiring strict standards and compliance tests
on cement imports. Note that this only applies to independent traders as imports by local producers
are not subject to the DTIs requirements. On the supply side, the government of Vietnam has
exempted its cement products from input VAT and imposed a 5% export tax, increasing the cost
for exporters. This should narrow the gap between imported and domestic cement prices.

Capacity expansion to meet rising demand

CHP is well positioned to take advantage of the growing cement demand in the country. According
to the Cement Industry Report, cement demand is estimated to grow at a CAGR of 8.4% from
2015-2019 or from 24.4Mil ton to 33.9Mil ton. CHP is expanding its production capacity in its Solid
plant in Rizal by 1.5Mil ton, bringing the companys total capacity to 7.2Mil ton by 4Q19. This is
expected to increase the companys market share, specifically in Luzon, which accounts for 65%
of total country demand.

Meanwhile, total capacity of the industry is expected to grow slower, from 26.6Mil ton in 2015 to
30.7Mil ton in 2019 (including CHP expansion) based on disclosed expansion plans. Note that it
takes 2-3 years to build a cement plant hence supply will not be able to catch up with the demand
easily. Rising demand, coupled with a tight supply should be positive for cement prices.

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W ED 12 A PR 2017

Exhibit 7: Capacity expansions by cement producers

Source: CHP, Cement Industry report

Direct sales approach lead to efficient cash collection

As mentioned above, CHP uses a direct sales approach where it sells substantially all of its cement
directly to its customers instead of the traditional distributors. According to CHP, the direct sales
approach results to higher revenue per ton of cement, better customer relationship, and enhanced
customer loyalty. Moreover, it allows efficient cash collection and lower credit risk. The company
also said that 70% of its sales are cash sales while sales on account are collected in less than a
month.

Energy price positions to moderate increasing costs

Cement operations consume significant amounts of fuel and electricity. Note that power and fuel
accounted for 38% of CHPs cost of sales in 2016. Coal and fuel prices have been increasing
towards the end of 2016. This prompted the company to secure favorable price positions on its
energy needs. According to CHP, over 2/3 of its coal requirements are already fixed at low 2016
prices. In addition, the company was able to secure new, lower priced power contracts. We expect
that these positions will moderate cost increases and improve CHPs margins.

Debt refinancing to lower financial expenses

Last February, CHP signed a senior unsecured peso term loan facility agreement with BDO to
refinance a majority of its US$ long-term debt with New Sunward Holding BV (NSH). This is
expected to lower CHPs interest expense and lessen FX exposure, which will result to higher and
more stable earnings.

The peso term loan will be structured into a fixed (40%) and variable (60%) rate tranches. The fixed
tranche will bear a 5.6205% interest rate while the variable tranche rate would depend on market
conditions. The estimated blended rate of the loan is 4.6%, significantly lower that the interest rate
of the NSH loan of 7.535%. Note that for FY16, CHP incurred Php1.4Bil FX losses and Php1.2Bil
financial expenses. Moving forward, we estimate the interest expense to be 35-40% lower and the
FX exposure to be significantly reduced.

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 I n i t i at i n g C o ver ag e I C em ex H o l d i n g s P hi l i ppi nes, Inc.

WED 12 A PR 2017

Short term weak earnings, medium to long term prospects remain

favorable

CHP registered a Php7.2Mil pro forma loss in 4Q16. Excluding FX losses of Php490Mil, core
earnings reached Php483Mil. Aside from the FX losses, results were dragged by the low sales
volume and sales price during the quarter. Sales volume declined by 8% while sales price declined
by 5% because of lower cement demand and intensified market competition among local players
and import traders. Moreover, the company experienced difficulty in distributing in the Visayas
and Mindanao region due to adverse weather conditions. The company estimated an additional
downtime of 12 days (compared to the same quarter in 2015) due to inability to operate in some
ports.

For FY16, sales volume increased by a mere 1%, significantly lower compared to years 2014 and
2015, when sales volume grew by 15% and 13% respectively. This is also lower compared to the
industry volume growth of 6.6% in 2016. Likewise, sales price slightly increased by 1% for FY16.

According to CHP, they expect the slow pace of public construction to continue until 1H17. The
high construction activity during the early part of 2016 and the transition in government will cause
the sales volume to be lower on a y/y basis. Note that 1H11 (year after election) also resulted in a
slowdown of construction activity. Moreover, the company said that the volume during the first two
months of the year was slow because of the rainy/cold weather. Nevertheless, we believe public
construction will pick up during the second half and the succeeding years.

Given the performance in 4Q16 and the expected slow pace in 1H17, we have taken a conservative
stance in forecasting our sales volume and price. We expect CHPs sales volume to increase by
2.0% in 2017, 4% in 2018 and 6% in 2019. We then expect years 2020 to 2021 to grow by 8%.
Meanwhile, we expect CHPs price to decrease by 3% in 2017. We then expect price to increase
by 2% annually starting 2018, conservative compared to the 3.6% and 2.7% historical CAGR of
wholesale and retail cement prices in the country. Note that there could be an additional upside in
case volume picks up. Cement prices typically react based on sales volume, hence a surprise in
volume would lead to higher prices.

Exhibit 8: Sales volume forecast

in Mil tonnes 2016 2017 2018 2019 2020 2021
Sales Volume 5.1 5.2 5.4 5.7 6.2 6.7
growth (%) 2.0 4.0 6.0 8.0 8.0
Source: CHP, COL estimates

As the cement plants are already operating at full capacity, we expect the increase in demand
from 2017-2019 to be supplied by cement imports. This may lower the margins of the company as
imports have higher costs compared to locally produced cement. As discussed above, capacity is
expected to increase starting 4Q19, hence we expect lesser imports and better margins starting
2020.

Despite the slow volume growth in 2017, we forecast net income to double compared to last year
mainly due to the elimination of FX and lower interest expense from the refinancing. We then
forecast net income to grow at a CAGR of 10.0% from 2018-2021.

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W ED 12 A PR 2017

Exhibit 9: Revenues and net income forecast

in Mil Php 2016 2017 2018 2019 2020 2021
Revenues 24,806 24,543 26,035 28,149 31,008 34,160
growth (%) -1.1 6.1 8.1 10.2 10.2
Net income 1,413 2,753 2,916 3,040 3,646 4,036
growth (%) 94.8 5.9 4.2 19.9 10.7
Source: CHP, COL estimates

Relatively cheap valuation

Our FV estimate on CHP is Php9.3/sh based on the DCF method with WACC of 8.7% and a terminal
growth rate of 3.0%. This implies a 21% upside to the current price of Php7.63/sh. Moreover, CHP
is attractively valued relative to its peers. It currently trades at a 2017E P/E of 14.4X, which is below
the median 2017E P/E of 16.3X of its regional peers. Its 2017 EV/EBITDA of 9.2X is also lower
compared to the median 2017 EV/EBITDA of 10.0X of its regional peers.

Exhibit 10: Relative Valuation

Company Symbol FY17 PE FY17 EV/EBITDA
Holcim Philippines Inc. HLCM PM 15.4 9.5
Indocement Tunggal Prakarsa Tbk PT INTP IJ 17.3 10.0
Anhui Conch Cement Co. Ltd. 914 HK 12.3 6.3
Lucky Cement Ltd. LUCK PA 18.1 10.2
Siam City Cement PCL SCCC TB 16.3 10.3
Asia Cement Corp. 1102 TT 18.2 17.1
Semen Indonesia Persero Tbk PT SMGR IJ 13.6 8.1
Cemex Holdings Philippines Inc. CHP PM 14.4 9.2
Median ex CHP 16.3 10.0
Source: Bloomberg, COL estimates

Risks

Seasonality of operations. Heavy rain and sustained rainfalls can slow down construction
activity and consequently decrease the demand for construction materials. The rainy season in the
Philippines, typically lasts six months (June- November) during which sales volume is expected
to decline. Also, adverse weather conditions can hamper distribution specially in the Visayas and
Mindanao markets, where products are primarily distributed by sea.

Delay in the roll out of infrastructure projects to affect volume and price. CHP rely heavily
on public construction in the country. Hence, any delay in the roll out of the planned government
infrastructure projects will affect CHPs volume. As mentioned above, volume drives the cement
price. Hence, without the expected demand from said projects, CHP will not be able to increase
its prices.

Intense competition. The cement industry is highly competitive and is served by established
companies and new market entrants. As demand is expected to remain weak until 1H17, we
expect competition to remain high. This could affect CHPs operations and might require additional
cost to protect market share.

Disclaimer: All content provided in COL Reports are meant to be read in the COL Financial website. Accuracy and completeness of content cannot be guaranteed if reports are viewed outside 9
of the COL Financial website as these may be subject to tampering or unauthorized alterations.
 I n i t i at i n g C o ver ag e I C em ex H o l d i n g s P hi l i ppi nes, Inc.

WED 12 A PR 2017

Important Rating Definitions

BUY
Stocks that have a BUY rating have attractive fundamentals and valuations based on our analysis. We expect the share price to outperform the market in the
next six to 12 months.

HOLD
Stocks that have a HOLD rating have either 1) attractive fundamentals but expensive valuations 2) attractive valuations but near-term earnings outlook might
be poor or vulnerable to numerous risks. Given the said factors, the share price of the stock may perform merely in line or underperform in the market in the
next six to twelve months.

SELL
We dislike both the valuations and fundamentals of stocks with a SELL rating. We expect the share price to underperform in the next six to12 months.

Important Disclaimer

Securities recommended, offered or sold by COL Financial Group, Inc. are subject to investment risks, including the possible loss of the principal amount
invested. Although information has been obtained from and is based upon sources we believe to be reliable, we do not guarantee its accuracy and said
information may be incomplete or condensed. All opinions and estimates constitute the judgment of COLs Equity Research Department as of the date of the
report and are subject to change without prior notice. This report is for informational purposes only and is not intended as an offer or solicitation for the purchase
or sale of a security. COL Financial and/or its employees not involved in the preparation of this report may have investments in securities of derivatives of the
companies mentioned in this report and may trade them in ways different from those discussed in this report.

COL Research Team

April Lynn Tan, CFA

VP & Head of Research
april.tan@colfinancial.com

Charles William Ang, CFA George Ching Richard Laeda, CFA

Deputy Head of Research Senior Research Manager Senior Research Manager
charles.ang@colfinancial.com george.ching@colfinancial.com richard.laneda@colfinancial.com

Frances Rolfa Nicolas Andy Dela Cruz Justin Richmond Cheng

Research Analyst Research Analyst Research Analyst
rolfa.nicolas@colfinancial.com andy.delacruz@colfinancial.com justin.cheng@colfinancial.com

Kyle Velasco John Martin Luciano

Research Analyst Research Analyst
kyle.velasco@colfinancial.com john.luciano@colfinancial.com

Contact

COL Financial Group, Inc.

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Exchange Road, Ortigas Center, Pasig City
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Tel No. +632 636-5411
Fax No. +632 635-4632
Website: www.colfinancial.com

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