It’s More Fun Investing in the Philippines Comparative Performance (YTD)130 PSEi, 18.5% Philippine stock120 market managed to S&P500, 8.4% perform well despite110 SH Comp, all the bad news that100 -1.4% came out of the US, Europe and China. 90 Euro Stoxx 50, -5.6% 80 Jun Jul Jan Feb Apr Mar MaySource: Bloomberg
Philippine Economy: So Far So Good 2007 2008 2009 2010 2011 5-yr Ave 1Q12Philippines 6.6 4.2 1.1 7.7 3.9 4.7 6.4US 1.9 -0.3 -3.5 3.0 1.7 0.6 2.0Euro zone 0.6 -0.6 -0.6 0.5 0.2 0.0 0.0China 11.4 9.2 8.5 10.4 9.3 9.8 8.1
Philippine Economy: So Far So Good 1Q GDP Growth Drivers Consumer Spending +6.6% Government Spending +24.0% Exports +7.9%
Outlook Remains Favorable Consumer spending growth to remain resilient Government – ready and willing to spend PPP projects gaining momentum Mining industry – ensuring sustainable growth
Consumer SpendingGrowth to Remain Resilient Daily Minimum Wages (in US$) Cambodia 2.03 Vietnam 2.20 Indonesia 2.93. . . thanks to the significant China 3.99wage differential Thailand 6.92 Philippines 9.36 Taiwan 19.69 Hong Kong 28.87 South Korea 30.71 Japan 64.86 New Zealand 66.53 Australia 123.71 Source: DOLE
Consumer SpendingGrowth to Remain Resilient Age-Sex Population Pyramid (in Millions) 80 Favorable Demographics 70Population 1.9%Growth 60Median Age 22.9 50Age % of Population 400 – 15 34.6% 3016 – 65 61.1% 20Above 65 4.3% 10 Female 0 10.0 5.0 0.0 5.0 10.0 Male Source: CIA World Fact Book Young and growing population to ensure continuous growth in consumer spending
Consumer SpendingGrowth to Remain Resilient CRB Commodity Index 600 550Falling commodityprices to givespending power a 500boost 450 400 Jul-11 Nov-11 Mar-12 Jul-12 Source: Bloomberg
Government – Ready and Willing to Spend Debt to GDP 85 80 77.7 78.2 75 72.5 71.4Government Finances 70 65.7 64.6improving 65 63.9 60 57 57.3 55.8 55.4 55 50.9 50.5 50 48.6 45 40 2000200120022003200420052006200720082009201020112012F 013F 2 Source: DBM
Government – Ready and Willing to Spend Budgeted & Actual Spending for 2012 2012 Target YTD ending May Value Value % Growth % of GDP % Growth (PhpBil) (PhpBil)Revenue 1,560.0 14.8% 14.2% 654.6 11.6%Expenditures 1,839.0 18.1% 17.0% 668.4 13.1%Budget Deficit (279.1) 41.1% (2.6%) (22.8) NASource: DBM Department of Budget and Management already released Php1.36 Tril or 74.9% of the 2012 National Budget as of June 30, 2012
Government – Ready and Willing to Spend 2013 Budget Highlights Value (PhpBil) % GrowthTotal Spending 2,006.0 10.5%Infrastructure 409.8 20.8%Economic & Social Services 1,209.3 14.9%Debt Services 333.9 0.2%Source: DBM Government expenditure set to increase by another 10.5% in 2013, with infrastructure spending up by 20.8%
Government – Ready and Willing to Spend Budget Preparation & Legislation Flow Chart Budget Preparation 1. Budget Call 2. Stakeholder Engagement 3. Technical Budget HearingsStrong likelihood of 4. Executive Reviewanother early 5. Consolidation, Validation and Confirmationenactment of the 6. Presentation to President and Cabinetbudget in 2013. 7. The President’s Budget Budget Legislation 1. House Deliberations We are Here 2. Senate Deliberations 3. Bicameral Deliberations 4. Ratification and Enrollment 5. Veto Message 6. Enactment
PPP Projects Gaining Momentum PPP Process Flow Chart Step 1: Business Case/Feasibility Study Preparation Step 2: Project Review & Evaluation NEDA-ICC Approval Step 3: For Publication of Invitation to Pre-Qualify & Bid Step 4: Bidder Due Diligence Step 5: Award of Project * Step 3 to 5 will take 6 months based on government estimates
PPP Projects Gaining Momentum PPP Projects with High Probability of Award in 2H12 Project Value (PhpBil)School Infrastructure Project 10.04LRT Line 1 South Extension and 9.20Operation & MaintenanceNAIA Expressway Project (Phase II) 15.77NLEX-SLEX Connector Road 20.18 55.19Source: PPP Center, COL Estimates
PPP Projects Gaining Momentum Other PPP Projects Project Value (PhpBil) CALA Expressway (Cavite & Laguna Side) 19.69 Modernization of Philippine Orthopedic Center 5.52 Vaccine Self-Sufficiency Project (Phase II) 0.45 LRT Line 2 East Extension and Operation & Maintenance 11.90 Operation & Maintenance of the Laguindingan Airport 1.80 New Bohol (Panglao) Airport Development 8.00 Mactan-Cebu Intl Airport Passenger Terminal Bldg. 10.15 Automatic Fare Collection System 1.80 Integrated Transport System NA New Centennial Water Supply Source Project 25.00 O&M of Angat Hydro-Electric Power Plant 1.60 Balara Water Hub 20.00 Grains Central Project 1.25 Establishment of Cold Chain Systems Covering Strategic Areas in the 5.30 Phil. Logistics Support on the Agri-Fishery Products 0.03 O&M of the Puerto Princesa Airport NA Cebu Bus Rapid Transit Demonstration Project NA Improvement/Rehabilitation of the Quirino Highway NA Source: PPP Center, COL Estimates 112.49
PPP Projects Gaining Momentum Potential Value of PPP Project Awards Value (PhpBil) % of GDP 2011 2.00 0.0% 2012E 55.19 0.5% 2013E 112.49 1.0% Source: PPP Center, COL Estimates
Mining IndustryEnsuring Sustainable GrowthHuge potential of the mining industry 9 Mil ha. out of 30 Mil ha. have high mineral potential Mineral reserves estimated at US$1.0Tril Aquino Government targeting US$12Bil worth of investments in the next 5 years (vs. US$4.4Bil worth of investments from 2004-2011)
Mining IndustryEnsuring Sustainable GrowthExecutive Order 79: Positives Outweigh NegativesNegatives: Positives:Delays and Higher Costs Sustainability is Ensured• No mining permits will be • Better legislation and awarded until law on reduction of red tape to revenue sharing scheme is attract more investments passed • Government tax revenues to• Government share in increase revenues to increase from • Environmental protection 2% to 5%-7% emphasized• Abandoned ores and wastes • Incentives for investments in will now be bid out higher value added processes
Abundance of Favorable Developments S&P upgraded Philippines’ credit rating just one notch lower than investment grade Bank lending grows 14.7% in May Power consumption up 8.5% in 2Q12 Exports up 19.7% in May
We are Still in the Early StagesNo signs of excessive borrowings yet Loans to GDP House Debt to GDP 70%Malaysia 75.9 60% 58%South Korea 67.8 50%Taiwan 64.2Hong Kong 60.3 40%Singapore 49.9 31% 30%Thailand 26.2China 18.7 20%Indonesia 13.6 10%India 9.1 0%Sri Lanka 8.3 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 May-12Philippines 5.6Source: CEIC, COL estimates Source: NSCB, BSP, COL estimates
We are Still in the Early StagesInvestments: Still a long way to go Investments to GDP (%) 30% Regional Investments-to- 25% GDP Ratio 20% 17%Country Inv-to-GDPPhilippines 22% 15%India 31%Indonesia 32% 10%Malaysia 20% 5%Thailand 26%Vietnam 39% 0%Source: Bloomberg, BSP, NSCB, COLestimates Source: NSCB, COL estimates
But it won’t be a Smooth Ride Up Serious problems overseas Valuations are not attractive Share placements to sap liquidity
Serious Problems Overseas US Europe China Significant differences in the economicDebt ceiling Weak exports condition of member economies HousingFiscal cliff No flexibility in monetary policy bubble Poor access to capital markets Overinvestment Harsh austerity measures have to be implemented to avail of bailout funds No meaningful structural reforms have yet to be implemented
Valuations are not Attractive Forward PE Band252015 16.3 14.2 12.11050 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Source: PSE, COL Estimates PSEi currently trading at the high end of its historical trading range
Valuations are not Attractive Trailing Forward PE PE Philippines 17.8 16.2 Thailand 15.3 12.7PSEi is also expensive Vietnam 11.0 10.0relative to foreign markets Malaysia 15.5 15.0 Indonesia 17.9 14.3 S&P 13.8 13.2 Brazil 11.4 10.1 Russia 5.0 5.3 India 16.4 15.0 China 11.7 9.7 Source: Bloomberg, COL estimates
Share Placements to Sap Liquidity Recent Share Placements Date Company Value (PhpBil) June BDO 43.5 June URC 7.4 July ALI 13.6 July AC 6.5 July PGOLD 6.5 Total 77.5 Source: PSE
Strategy Stay invested • Fundamentals will eventually catch up with valuations Pullbacks are opportunities to buy more • Philippine economy is resilient to developments overseas • Share placements are only short-term drags, as proceeds enable companies to fund expansion
Fundamentals to Catch Up with Valuations Scenario Analysis: When will PSEi reach 10,000? Assumptions Scenario 1 Scenario 2 Scenario 3 PSEi EPS Growth 10% 12% 15% Forward P/E 14X 16X 18X Years to PSEi 8 5.5 3.5 10,000 Implied CAGR 8.7% 12.9% 20.9%
Proceeds of Share Placementsto Fund Expansion Share Placements Type of ShareCompany Use of Proceeds Offering BDO Rights offering Address CAR problems, to grow loan portfolio For potential acquisition and general corporate URC Treasury shares purposes To fund its expansion program including land ALI Primary shares banking & the planned acquisition of a stake in Ortigas familys OCLP Holdings Inc. Help fund investments of up to US$1 Bil over the AC Treasury shares next 5 years in transport, infrastructure & power generation sectors PGOLD Secondary shares NA
Summary:It’s More Fun Investing in the Philippines The Philippine stock market has done well so far this year. It should continue to do well in the future due to its resilient consumers, the government’s ability and willingness to spend, and the growing momentum of PPP projects among other things. There are also no signs of a bubble yet given the absence of excessive borrowings and investments.
Summary:It’s More Fun Investing in the Philippines It won’t be a smooth ride up however due to serious problems prevailing overseas, expensive valuations, and numerous share placements that are sapping liquidity. Nevertheless, investors should stay invested. Fundamentals should eventually catch up with expensive valuations, allowing share prices to continue going up.
Summary:It’s More Fun Investing in the Philippines Meanwhile, pullbacks brought about by developments overseas and share placements are opportunities to buy more stocks. We are confident that the Philippines will remain resilient to developments overseas, while share placements allow companies to raise funds to finance their expansion plans. Given our favorable view on growth, our model portfolio is comprised mostly of growth stocks (MBT, MPI, AC, AGI, ALI, EEI and PGOLD). We also have some high dividend yielding stocks in our portfolio. These stocks will continue to be in favor given the low interest rate environment (BPI, RLC and MWC).
Summary:It’s More Fun Investing in the Philippines We also added BDO and SMPH in our model portfolio. BDO’s stronger capital base should enable it to resume the rapid growth of its lending portfolio and allow profitability to reach new highs starting 2015. Valuations are also attractive. SMPH should be a major beneficiary of the favorable growth outlook for consumer spending in the country given its dominant leadership position in the mall leasing business.