N/A. Ready for takeoff. MacroAsia Corporation THU 13 JULY 2017

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1 MacroAsia Corporation Ready for takeoff Expanding the catering business to a wider market. Given its strong track record as evidenced by its numerous excellence awards from foreign airline customers, performance of MAC s catering business which accounts for 59% of revenues has been very strong. Operating profits registered a four year CAGR of 15.1% while earnings jumped by 106% to Php92.7Mil in 1Q17. Future growth is expected to remain strong. The CAPA projects international passengers in NAIA to increase by at least 7.0% annually for the next couple of years, benefiting MAC. Meanwhile, MAC plans to secure more non-airline institutional clients. At present, it already caters to clients such as BPI, ADB and Uber amongst others. To execute its growth plans, MAC is currently developing a Php600 Mil multilevel kitchen in Sucat that will boost its capacity. LTP: Capitalizing on competitive advantages to grow profits. During 2016, MAC s equity share in LTP s net income surged by 70% to Php532Mil. In 1Q17, it increased by another 261% to Php264Mil. One reason for the growth is the expansion of LTP s hangar in 2016 which enabled it to double its capacity to service A380 aircrafts. Note that LTP is only one of two companies in Asia that can service A380s, allowing LTP to charge higher rates and earn higher margins on the service. Another reason for the rapid earnings growth is the awarding of MRO contracts from two new customers (British Airways and Korean Air). Due to the said factors, LTP is currently operating at around 86% capacity utilization, up from around 74% in Based on our discussion with management, they are confident of at least matching 2017 s profits in 2018 as demand for their services continues to be strong. Attractive valuations, share buyback initiated. MAC s share price has increased significantly this year. Nevertheless, at Php8.40, MAC is trading at a 17E P/E of only 8.6X, a discount relative to the regional median 17E P/E of 21.9X. This is based on the assumption that the company will be able to earn Php1.2Bil for the full year, up 175% y/y. Despite the significant jump, we believe that the said number is achievable given the strong earnings growth MAC exhibited in the first quarter. MAC will also no longer incur a Php212.9Mil one time provision for deferred mining charges which was booked in As a sign of its confidence on it earnings performance, MAC started a Php210Mil share buy-back program last June. As of this writing, the company has bought back Php4.0 Mil worth of shares, equivalent to 640,000 shares at an average price of Php6.29/sh. FORECAST SUMMARY (in Php Mil) Revenues 1,610 1,723 1,921 2,335 % change y/y 0.7% 7.0% 11.5% 21.5% Operating income (247) % change y/y n/a n/a 250.2% 48.6% Operating margin (%) -15.3% 5.5% 17.3% 21.1% Net income (161) % change y/y 0.0% n/a 180.0% 28.9% Net margin (%) n/a n/a 17.8% 18.9% EPS (Php) (0.13) % change y/y 0.0% (176) RELATIVE VALUE P/E (X) P/BV (X) ROE (%) Dividend yield (%) source: M AC N/A TICKER: MAC FAIR VALUE: N/A CURRENT PRICE: 8.50 UPSIDE: N/A SHARE PRICE MOVEMENT Apr May Jun Jul-17 MAC PSEi ABSOLUTE PERFORMANCE 1M 3M YTD MAC PSEi MARKET DATA Market Cap 10,824.02Mil Outstanding Shares 1,232.80Mil 52 Wk Range Mo Ave Daily T/O 10.59Mil KYLE JEMMRIC VELASCO RESEARCH ANALYST kyle.velasco@colfinancial.com 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.

2 Company Background MacroAsia Corporation (MAC) is a holding company primarily engaged in aviation support businesses. It operates thru two main subsidiaries, namely MacroAsia Catering Services, Inc. (MACS, 67% owned) and MacroAsia Airport Services Corporation (MASCORP, 100% owned). MACS provides in-flight catering services to several airlines, and captures about 60% market share of the foreign airline catering services. Meanwhile, MASCORP provides ground handling services to both local and foreign clients in majority of the airports in the country. In addition to these two subsidiaries, MAC has a 49% equity stake in Lufthansa Technik Philippines, Inc. (LTP) and a 40% stake in Cebu Pacific Catering Services Inc. (CPCS). LTP provides maintenance, repair and overhaul (MRO) services in several airports in the country while CPCS is a full service airline catering company in Mactan Cebu International Airport. Besides aviation support, MAC also has business interests in water treatment, mining, property and air taxi segments. In terms of revenue contribution, MACS accounts for the bulk at 59% of the total. Meanwhile, MASCORP accounts for 29% of the total. The remaining 12% is distributed among the water treatment, property and mining businesses of MAC. In terms of income, equity earnings from LTP accounts for the bulk of MAC s profits at about 70%. Meanwhile, MACS and MASCOP account for 24% and 10%, respectively. The other businesses, including water treatment, are still in the red. Exhibit 1: MAC corporate structure source: MAC COL Financial Group, Inc. 2

3 Exhibit 2: Revenue Breakdown source: MAC Exhibit 3: Earnings Breakdown in Php '000 1Q16 1Q17 % Growth 1Q17 % Pre-tax In-flight and other catering services (MACS) 44,947 92, % 24.4% Ground handling and aviation (MASCORP) 15,044 38, % 10.1% Water-related projects (2,389) (1,911) -20% -0.5% Share in net income (loss) of associates (LTP) 73, , % 69.6% Others (11,867) (13,567) 14% -3.6% Total 118, , % 100.0% source: MAC -3.6% 24.4% 10.1% 69.6% In-flight and other catering services (MACS) Water-related projects Ground handling and aviation (MASCORP) Share in net income (loss) of associates (LTP) Others COL Financial Group, Inc. 3

4 Key Investment Highlights: Expanding the catering business to a wider market MAC s core business is its catering service under MACS which accounted for 59% of revenues in 1Q17. Historical growth of MACS has been very strong. During the past four years, revenues grew by a CAGR of 10%, while operating profits increased by a CAGR of 15.1%. During 1Q17, the segment s revenues grew by 20% y/y to Php408Mil while earnings jumped by 106% to Php92.7Mil. MACS is also a consistent recipient of awards for excellence including Gold Awards and Best Caterer Awards from top tier airlines such as All Nippon Airways, Cathay Pacific and Singapore Airlines. In 2016, the caterer served around 14,000 meals per day in its kitchen inside NAIA. MACS future growth will be driven by two factors the growing number of international passenger traffic in Manila and continuing expansion of food services for non-airline institutional clients. The Center for Asia Pacific Aviation (CAPA) projects international passengers in NAIA to increase by at least 7.0% annually for the next couple of years, primarily driven by increased tourism in the country. As discussed earlier, MACS has a 60% market share in the foreign airline catering services and should benefit from the increased passenger volume. MACS also plans to expand more aggressively into non-airline catering opportunities. At present, MACS already caters to clients such as BPI, ADB and Uber amongst others. Additionally, in the past, the caterer also served the catering requirements of integrated resorts and casinos such as Resorts World, Soliare and Okada. Moving forward, MACS is looking to also service the catering requirements of the BPO, casino and hotel sectors. According to management, its size and scale provides it with a cost advantage over other caterers. The local catering industry is highly fragmented, comprised of numerous small players. MACS cost competitiveness is evidenced by its healthy operating margin. During the past 4 years, MACS average gross margin was 32%. This compares favorably with the 29% gross margin of its regional peers. To achieve its goal of expanding more aggressively into non-airline catering opportunities, MACS is currently developing a Php600 Mil multilevel kitchen in Sucat that is scheduled for completion in February of Moreover, the utilization of the said facility will enable it to boost margins. According to MACS, it currently has to pay a 7% concession privilege fee to the Manila International Airport Authority (MIAA) on food that is prepared in its kitchen inside NAIA even for non-airline customers. COL Financial Group, Inc. 4

5 LTP: Capitalizing on competitive advantages to grow profits During 2016, MAC s equity share in LTP s net income surged by 70% to Php532Mil. LTP s earnings contribution remained strong during 1Q17, increasing by 261% to Php264Mil. One reason for the growth is the expansion of LTP s hangar in 2016 which enabled it to double its capacity to service A380 aircrafts. Prior to the said expansion, only one of its seven hangars could accommodate A380s. According to management, LTP is only one of two companies in Asia that can service A380s, the other one being HMS Services Ltd in Singapore. Because of this, LTP can charge higher rates and earn higher margins on the service. Management also explained that while there are numerous companies that provide MRO services to other types of aircrafts in Asia, LTP has numerous competitive advantages including quality of service brought about by its partnership with Lufthansa (51% ownership), lower cost (due to the lower cost of labor in the country), familiarity with the English language (which makes training local engineers easier), and the central location of the Philippines. Another reason for the rapid earnings growth is the awarding of MRO contracts from two new customers (British Airways and Korean Air). Due to the said factors, LTP is currently operating at around 86% capacity utilization, up from around 74% in Based on our discussion with management, they are confident of at least matching 2017 s profits in 2018 as demand for their services continues to be strong. In fact, it had to turn down some clients due to capacity constraints. Ground handling business still has significant growth potential During the past four years, MASCORP s revenues grew by a CAGR of 13%, while operating profits increased by a CAGR of 24%. During 1Q17, total revenues reached Php201Mil, up 20% y/y, while earnings jumped by 154% to Php32.8Mil as it expanded its ground handling stations to 23 from only seven last year. Potential for growth remains significant as Management believes that it can still expand its operations to as much as 30 ground handing stations in the near term. Water concession to provide earnings stability MAC entered the water treatment segment thru MAPDC s SNV Resources Development Corp. in Solano, Nueva Vizcaya and its latest acquisition of 67% of Boracay Tubi System, Inc. According to MAC, it decided to venture into the water treatment business since it wanted to create a more stable source of profits given the volatile nature of aviation related businesses. As of 1Q17, the company already had 3,500 subscribers and it plans to grow this number to 20,000 subscribers by end The company plans to achieve this by acquiring more treatment facilities in several locations including Mabini, Pangasinan and Cavite. COL Financial Group, Inc. 5

6 Attractive valuations MAC s share price has increased significantly this year, rising 261% from its end 16 price of Php2.41/sh. Nevertheless, at Php8.40, MAC is trading at a 17E P/E of only 8.6X, a discount relative to the regional median 17E P/E of 21.9X. This is based on the assumption that the company will be able to sustain its 1Q17 profit growth to earn Php1.2Bil for the full year. Despite the significant jump, we believe that the said number is achievable given the strong earnings growth MAC exhibited in the first quarter. MAC will also no longer incur a Php212.9Mil one time provision for deferred mining charges which was booked in At 175%, MAC s profit growth would be much faster than that of its other peers, the median of which is only 9.5%. As a sign of its confidence on it earnings performance, MAC started a Php210Mil share buyback program last June. As of this writing, the company has bought back Php4.0 Mil worth of shares, equivalent to 640,000 shares at an average price of Php6.29/sh. Exhibit 4: Relative Valuations Company 17E P/E 17E EPS MacroAsia Corporation % SATS Ltd % Shanghai International Airport Co % Airports of Thailand PCL % Xiamen International Air % Beijing Capital Intl Airport % Guangzhou Baiyun International Airport % Shenzhen Airport Co % Sia Engineering Company % Median % source: Bloomberg, COL estimates Risks: Weaker demand brought about by another global scare One of the key risk that MAC faces is another global scare that would frighten people from flying. Recall that during worldwide epidemics (i.e. SARS, H1N1, Ebola) or terror attacks, the airline industry s ticket sales were significantly hit. More seats will be left empty and this in turn would mean less demand for airplane catering and ground handling services, hurting the company s topline. COL Financial Group, Inc. 6

7 Weak dollar As MAC mainly serves to foreign clients, bulk of the company s revenues (85%) is dollar denominated. Meanwhile, almost all of MAC s cost is denominated in peso. Additionally, the company doesn t have any derivative instruments for it to hedge against a weaker dollar. Nevertheless, the dollar is currently strong, benefiting the company. Concentration risk According to Management, around 40% of LTP s base revenues come from Philippine Airlines, which shares the same principal as MAC. In 2012, MAC registered a loss of Php180Mil from a profit of Php310Mil the previous year, as Philippine Airlines cut down on LTP s MRO services after management control of the airline was acquired by SMC in Philippine Airlines was bought back fully by Lucio Tan in late 2014, allowing a stronger business relationship between PAL and LTP. To address concentration risk, LTP increased its focus on heavy base maintenance, opening further its hangars to more foreign airline clients that require C and D-checks. Efforts have paid off as evidenced by its greater capacity to serve A380 aircrafts and existing long-term contracts with foreign airlines like Qantas, British Airways, Lufthansa, among others. COL Financial Group, Inc. 7

8 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 COL s 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 LAÑEDA, 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 JEMMRIC VELASCO RESEARCH ANALYST kyle.velasco@colfinancial.com JOHN MARTIN LUCIANO RESEARCH ANALYST john.luciano@colfinancial.com COL FINANCIAL GROUP, INC D EAST TOWER, PHILIPPINE STOCK EXCHANGE CENTRE, EXCHANGE ROAD, ORTIGAS CENTER, PASIG CITY PHILIPPINES 1605 TEL NO FAX NO WEBSITE: COL Financial Group, Inc. 8