SM INVESTMENTS CORPORATION (A corporation duly organized and existing under Philippine laws)

Transcription

1 SM INVESTMENTS CORPORATION (A corporation duly organized and existing under Philippine laws) Shelf Registration in the Philippines of Fixed Rate Bonds in the aggregate principal amount of P50,000,000,000 to be offered within a period of three (3) years at an Offer Price of 100% of Face Value to be listed and traded through The Philippine Dealing and Exchange Corp. Prospectus dated 23 November 2016 THE SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED THESE SECURITIES OR DETERMINED IF THIS PROSPECTUS IS ACCUCATE OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE AND SHOULD BE REPORTED IMMEDIATELY TO THE SECURITIES AND EXCHANGE COMMISSION. i

2 SM INVESTMENTS CORPORATION 10th Floor, One E-Com Center Harbor Drive, Mall of Asia Complex CBP-IA, Pasay City 1300 Philippines Telephone No.: Website: This Prospectus relates to the shelf-registration and continuous offer of SM Investments Corporation (the Issuer or SMIC or the Company ) through a sale in the Philippines of Fixed Rate Bonds in the aggregate principal amount of P50,000,000,000 (the Bonds ). For the first tranche of the Bonds to be issued out of the shelf-registration, SMIC is offering Fixed Rate Bonds in the aggregate principal amount of P15,000,000,000 comprised of 7-year or Series G Bonds due in 2023, with an Over-subscription Option of up to P5,000,000,000 (the Series G Bonds or the Offer ). Assuming the Over-subscription Option is fully exercised, up to P20,000,000,000 in aggregate principal amount of the Series G Bonds will be issued by the Company pursuant to the Offer on 9 December 2016 (the Issue Date ) and at least P30,000,000,000 will be placed under shelf-registration to be offered over a period of three (3) years from the effective date of the registration statement of the Bonds. In the event that the Over-subscription Option is not fully exercised, the unexercised portion shall be placed under shelf-registration to be issued within the period prescribed by relevant regulations. The terms and conditions and use of proceeds of the portion of the Fixed Rate Bonds amounting to at least P30,000,000,000 which will be placed under shelf-registration will be subsequently determined in the offer supplement to be issued in relation to the issuance of such portion of the Fixed Rate Bonds. The Series G Bonds shall have a term of seven (7) years from the Issue Date, with a fixed interest rate equivalent to % p.a. Interest on the Series G Bonds shall be payable semi-annually in arrears on 9 June and 9 December of each year for each Interest Payment Date at which the Series G Bonds are outstanding, or the subsequent Business Day without adjustment if such Interest Payment Date is not a Business Day. The Maturity Date of the Series G Bonds shall be on 9 December 2023, which will also be the last Interest Payment Date. The Series G Bonds will be repaid at 100% of Face Value on the Maturity Date, unless otherwise redeemed or purchased prior to the Maturity Date, or as otherwise set out in Description of the Offer Redemption and Purchase and Description of the Offer Payment in the Event of Default sections on pages 13 and 19, respectively, of the Offer Supplement. The Series G Bonds have been rated PRS Aaa by Philippine Rating Services Corporation ( PhilRatings ). PhilRatings assigned a Stable outlook for the ratings of the proposed bonds. Obligations rated PRS Aaa are of the highest quality with minimal credit risk. The Issuer s capacity to meet its financial commitment is extremely strong. PRS Aaa is the highest credit rating assigned by PhilRatings. A Stable outlook, on the other hand, indicates that the ratings are likely to be maintained or to remain unchanged in the next twelve (12) months. A rating is not a recommendation to buy, sell or hold securities and may be subject to revision, suspension or withdrawal at any time by the assigning rating organization. The Series G Bonds shall be offered to the public at Face Value through the Underwriters named herein with the Philippine Depository & Trust Corp. ( PDTC ) as the Registrar of the Series G Bonds. It is intended that upon issuance, the Series G Bonds shall be issued in scripless form, with PDTC maintaining the scripless Register of Bondholders, and, as soon as reasonably practicable, listed in the Philippine Dealing & Exchange Corp. ( PDEx ). The Series G Bonds shall be issued in denominations of P20, each, as a minimum, and in multiples of P10, thereafter, and traded in denominations of P10, in the secondary market. SMIC expects to raise gross proceeds amounting to at least P15,000,000,000.00, up to a maximum of P20,000,000, assuming full exercise of the Over-subscription Option. Without such Over-subscription Option being exercised, the net proceeds are estimated to be at least P14,866.4 million after deducting fees, commissions and expenses relating to the issuance of the Series G Bonds. Assuming the Over-subscription Option is fully exercised, total net proceeds of the Offer is expected to amount to approximately P19,826.4 million. Proceeds of the Offer shall be used to finance future investments and strategic acquisitions (see Use of Proceeds ). The Joint Lead Underwriters shall receive a fee of 0.30% on the total face value of the Series G Bonds issued. The fee is inclusive of the fees to be ceded to any participating underwriters. Upon issuance, the Series G Bonds shall constitute the direct, unconditional, unsubordinated, and unsecured obligations of SMIC and shall at all times rank pari passu and rateably without any preference or priority amongst themselves and at least pari passu with all other present and future unsubordinated and unsecured obligations of SMIC, other than obligations preferred by law. The Series G Bonds shall effectively be subordinated in right of payment to all of SMIC s secured debts, if any, to the extent of the value of the assets securing such debt and all of its debt that is evidenced by a public instrument under Article 2244(14) of the Civil Code of the Philippines. The Issuer s total debt as at 30 June 2016, prior to the issuance ii

3 of the Series G Bonds, is P279,454 million. After the issuance of the Series G Bonds, SMIC s total debt shall be P294,454 million, assuming the Over-subscription Option is not exercised (see Capitalization and Indebtedness on page 67). On 28 September 2016, SMIC filed a Registration Statement with the Philippine Securities and Exchange Commission ( SEC ) in connection with the offer and sale to the public of debt securities with an aggregate principal amount of up to P50,000,000,000 under shelf registration, inclusive of the Offer. The SEC is expected to issue an order rendering the Registration Statement effective, and a corresponding permit to offer securities for sale covering the Offer. The Company is allowed under Philippine laws to declare dividends, subject to certain requirements. The Company s Board of Directors is authorized to declare dividends only from its unrestricted retained earnings, except with respect to P158.6 billion, representing accumulated equity in net earnings of subsidiaries, associate companies and joint ventures as of 30 June Dividends may be payable in cash, shares or property, or a combination of the three, as the Board of Directors shall determine. The declaration of stock dividends is subject to the approval of shareholders holding at least two-thirds of the Company s outstanding capital stock. The Company s Board of Directors may not declare dividends which will impair its capital. SMIC confirms that this Prospectus contains all material information relating to the Company, its affiliates and the Bonds which are in the context of the issue and offering of the Bonds (including all material information required by the applicable laws of the Republic of the Philippines). There are no other facts the omission of which would make any statement in this Prospectus misleading in any material respect. SMIC confirms that it has made all reasonable inquiries in respect of the information, data and analysis provided to it by its advisors and consultants or which is otherwise publicly available for inclusion into this Prospectus. SMIC, however, has not independently verified any such publicly available information, data or analysis. The price of securities can and does fluctuate, and any individual security may experience upward or downward movements, and may even become valueless. There is an inherent risk that losses may be incurred rather than profit made as a result of buying and selling securities. An investment in the Bonds described in this Prospectus involves a certain degree of risk. A prospective purchaser of the Bonds should carefully consider several risk factors inherent to the Company (detailed in Risk Factors on pages 27 to 56 of this Prospectus), in addition to the other information contained in this Prospectus, in deciding whether to invest in the Bonds. This Prospectus contains certain forward-looking statements. These forward-looking statements can generally be identified by use of statements that include words or phrases such as SMIC or its management believes, expects, anticipates, intends, plans, projects, foresees, and other words or phrases of similar import. Similarly, statements that describe SMIC s objectives, plans, and goals are also forward-looking statements. All forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from those contemplated by the relevant forward-looking statements. Nothing in this Prospectus is or should be relied upon as a promise or representation as to the future. The forward-looking statements included herein are made only as of the date of this Prospectus, and SMIC undertakes no obligation to update such forward-looking statements publicly to reflect subsequent events or circumstances. Neither the delivery of this Prospectus nor any sale made pursuant to the Offer shall, under any circumstance, create any implication that the information contained or referred to in this Prospectus is accurate as of any time subsequent to the date hereof. The Underwriters do not make any representation or warranty, express or implied, as to the accuracy or completeness of the information contained in this Prospectus. The contents of this Prospectus are not to be considered as definitive legal, business or tax advice. Each prospective purchaser of the Bonds receiving a copy of this Prospectus acknowledges that he has not relied on the Underwriters in his investigation of the accuracy of such information or in his investment decision. Prospective purchasers should consult their own counsel, accountants or other advisors as to legal, tax, business, financial and related aspects of the purchase of the Bonds, among others. Investing in the Bonds involves certain risks. For a discussion of certain factors to be considered in respect of an investment in the Bonds, see the section entitled Risk Factors. No dealer, salesman or other person has been authorized by SMIC and the Underwriters to give any information or to make any representation concerning the Bonds other than as contained herein and, if given or made, any such other information or representation should not be relied upon as having been authorized by SMIC or the Underwriters. SMIC is organized under the laws of the Philippines. Its principal office address is at the 10 th floor, One E-Com Center, Harbor Drive, Mall of Asia Complex, CBP-1A, Pasay City 1300, Philippines, with telephone number and fax number iii

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5 TABLE OF CONTENTS DEFINITIONS... 1 SUMMARY... 9 SUMMARY FINANCIAL INFORMATION SUMMARY OF THE OFFERING RISK FACTORS USE OF PROCEEDS DETERMINATION OF THE OFFER PRICE PLAN OF DISTRIBUTION DESCRIPTION OF THE BONDS INTERESTS OF LEGAL COUNSEL AND INDEPENDENT AUDITORS CAPITALIZATION AND INDEBTEDNESS DESCRIPTION OF THE ISSUER AND THE GROUP RECENT DEVELOPMENTS AND PROSPECTS MANAGEMENT S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS DESCRIPTION OF PROPERTIES BOARD OF DIRECTORS AND MANAGEMENT OF THE ISSUER MARKET PRICE OF AND DIVIDENDS ON THE ISSUER S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS DESCRIPTION OF DEBT TAXATION v

6 DEFINITIONS In this Prospectus, unless the context otherwise requires, the following terms shall have the meanings set out below. Aggregate Consolidated Indebtedness Alpha Star Anchor Tenant Articles of Incorporation BDO or Bank BDO Capital BIR Board or Board of Directors Bondholder Bonds BSP Business Day By-laws China Bank China Bank Capital CDHI Company, Issuer or SMIC Debt-equity ratio Directors DOSRI the total of bank loans, current and noncurrent portions of long-term debt, net of pledged time deposits Alpha Star Holdings Limited the primary tenants in any given Mall the Articles of Incorporation of SMIC as amended to date BDO Unibank, Inc. BDO Capital & Investment Corporation, an investment house and a wholly-owned subsidiary of BDO the Bureau of Internal Revenue of the Philippines the Board of Directors of SMIC a person or entity whose name appears, at any time, as a holder of the Bonds in the Register of Bondholders refers to the bonds in the aggregate principal amount of up to P50,000,000,000, to be issued by SMIC and which will be registered with the SEC under shelf-registration Bangko Sentral ng Pilipinas, the Philippine Central Bank means a day, other than Saturday, Sunday and public holidays, on which facilities of the Philippine banking system are open and available for clearing and banks are generally open for the transaction of business in the cities of Pasay and Makati the By-laws of SMIC as amended to date China Banking Corporation China Bank Capital Corporation, an investment house and a wholly-owned subsidiary of China Bank Costa del Hamilo, Inc. SM Investments Corporation the ratio of Aggregate Consolidated Indebtedness compared to the sum of such Aggregate Consolidated Indebtedness and total stockholders equity (excluding non-controlling interest) the directors of SMIC Directors, officers, stockholders and related interests 1

7 EPCIB Financial Statements GFA Government Grand China Gross profit margin Group GSIS Hedging Transactions HPI Home World Joint Issue Managers Joint Lead Underwriters Kultura Major Consignors Equitable PCI Bank, Inc. SMIC s audited consolidated financial statements and related notes as at 31 December 2013, 2014 and 2015, and for each of the three years in the period ended 31 December 2013, 2014 and 2015; its unaudited consolidated financial statements and related notes as at 30 June 2016, and for the six-month periods ended 30 June 2015 and 2016; and its unaudited pro forma consolidated financial statements and related notes as at 30 June 2016 and 31 December 2015, for the six-month periods ended 30 June 2015 and 2016 and for each of the years ended 31 December 2013, 2014 and gross floor area the Government of the Philippines Grand China International Limited sales minus cost of sales over sales SMIC, its subsidiaries and associated companies Government Service Insurance System Hedging Transactions means any transaction pursuant to which: (i) a bank deposit held in a currency other than Pesos; or (ii) securities or instruments denominated in a currency other than Pesos issued or guaranteed by (a) the Republic of the Philippines (or any agency, instrumentality, ministry, department or other authority thereof) or (b) entities which are rated at least A (long-term) by Standard & Poor s Ratings Services (or any successor) or A2 (long-term foreign currency senior unsecured debt rating) by Moody s Investors Service Inc. (or any successor), relating to, or acquired with, the proceeds of non-peso denominated indebtedness for borrowed monies, that is pledged for the purposes of raising an equivalent amount of Peso denominated indebtedness for borrowed monies, such transaction being for the sole purpose of limiting the currency exchange risk of such non-peso denominated indebtedness for borrowed monies in the ordinary course of business Highlands Prime, Inc. Home World Shopping Corporation BDO Capital & Investment Corporation and China Bank Capital Corporation BDO Capital & Investment Corporation, BPI Capital Corporation, China Bank Capital Corporation and First Metro Investment Corporation pursuant to the Issue Management and Underwriting Agreement Kultura Stores, Inc. Ace Express, Baby Company, Kultura, Signature Lines, SM Home, Sports Central, Supplies Station, Toy Kingdom and Watsons 2

8 Majority Bondholders Malls Management Companies Master Certificate of Indebtedness Material Subsidiary Bondholders representing not less than 51% of the outstanding Bonds SM City North EDSA, SM Mall of Asia, SM Megamall, SM Aura Premier, SM City Southmall, SM City BF Paranaque, SM City Fairview, SM City San Lazaro, SM City Marikina, SM City Manila, SM City Sta. Mesa, SM City Bicutan, SM City Sucat, SM Center Valenzuela, SM City Novaliches, SM Center Muntinlupa, SM Center Sangandaan, SM Center Las Pinas, SM Center Pasig, Cherry Foodarama Shaw Boulevard, SM Seaside City Cebu, SM City Cebu, SM City Dasmarinas, SM Cabanatuan, SM Lanang Premier, SM City Clark, SM City Pampanga, SM City Davao, SM City General Santos, SM City Bacoor, SM City Baguio, SM City Iloilo, SM City Consolacion, SM City Tarlac, SM City Taytay, SM City Marilao, SM City Masinag, SM City Cagayan de Oro, SM City Sta. Rosa, SM City Batangas, SM City Lucena, SM City Lipa, SM City Naga, SM City San Mateo, SM City Cauayan, SM City Bacolod, SM City Calamba, SM City Rosales, SM City Baliwag, SM City Rosario, SM City San Pablo, SM Center Molino, SM Megacenter Cabanatuan, SM City Olongapo, SM City San Fernando, SM Center Angono, SM City San Jose del Monte and SM City Trece Martires (see Description of the Issuer and the Group Malls and Real Estate SM Prime Holdings, Inc. Malls ) companies that manage and operate the Malls, including the provision of manpower, maintenance and engineering, security and promotional activities; and are controlled, directly or indirectly, by the Sy Family the certificate to be issued by the Issuer to the Trustee evidencing and covering such amount corresponding to the Bonds SM Prime Holdings, Inc., SM Retail Inc., SM Mart, Inc., Supervalue Inc. and Super Shopping Market, Inc. and shall include BDO Unibank, Inc. (prior to it becoming a Subsidiary and thereafter shall be tested as a Material Subsidiary pursuant to this Condition), and any Subsidiary of the Issuer: (a) whose gross revenues or (in the case of a Subsidiary which itself has subsidiaries) consolidated gross revenues, as shown by its latest audited income statement are at least 10% of the consolidated gross revenues as shown by the latest published audited consolidated income statement of the Issuer and its Subsidiaries; or (b) whose net income or (in the case of a Subsidiary which itself has subsidiaries) consolidated net income before taxation and extraordinary items, as shown by its latest audited income statement is at least 15% of the consolidated net income before taxation and extraordinary items, as shown by the latest published audited consolidated income statement of the Issuer and its Subsidiaries; or (c) whose gross assets or (in the case of a Subsidiary which itself has subsidiaries) gross consolidated assets, as shown by its latest audited balance sheet are at least 10% of the amount which equals the amount included in the consolidated gross assets of the Issuer and its Subsidiaries as shown by the latest published audited consolidated balance sheet of the Issuer and its Subsidiaries; provided that, in relation to paragraphs (a), (b) or (c) above: (i) in the case of a corporation or other business entity becoming a Subsidiary after the end of the financial period to which the 3

9 latest consolidated audited accounts of the Issuer relate, the reference to the then latest consolidated audited accounts of the Issuer for the purposes of the calculation above shall, until consolidated audited accounts of the Issuer for the financial period in which the relevant corporation or other business entity becomes a Subsidiary are published, be deemed to be a reference to the then latest consolidated audited accounts of the Issuer adjusted to consolidate the latest audited accounts (consolidated in the case of a Subsidiary which itself has Subsidiaries) of such Subsidiary in such accounts; (ii) if at any relevant time in relation to the Issuer or any Subsidiary which itself has Subsidiaries no consolidated accounts are prepared and audited, revenues, net income or gross assets of the Issuer and/or any such Subsidiary shall be determined on the basis of pro forma consolidated accounts prepared for this purpose by the Issuer and reviewed by the auditors for the purposes of preparing a certificate thereon to the Trustee; (iii) if at any relevant time in relation to any Subsidiary, no accounts are audited, its revenues, net income or gross assets (consolidated, if appropriate) shall be determined on the basis of pro forma accounts (consolidated, if appropriate) of the relevant Subsidiary prepared for this purpose by the Issuer and reviewed by the auditors for the purposes of preparing a certificate thereon to the Trustee; and (iv) if the accounts of any Subsidiary (not being a Subsidiary referred to in proviso (i) above) are not consolidated with those of the Issuer, then the determination of whether or not such Subsidiary is a Material Subsidiary shall be based on a pro forma consolidation of its accounts (consolidated, if appropriate) with the consolidated accounts (determined on the basis of the foregoing) of the Issuer; or (d) to which is transferred the whole or substantially the whole of the assets of a Subsidiary which immediately prior to such transfer was a Material Subsidiary, provided that the Material Subsidiary which so transfers its assets shall forthwith upon such transfer cease to be a Material Subsidiary and the Subsidiary to which the assets are so transferred shall cease to become a Material Subsidiary as at the date on which the first published audited accounts (consolidated, if appropriate) of the Issuer prepared as of a date later than such transfer are issued unless such Subsidiary would continue to be a Material Subsidiary on the basis of such accounts by virtue of the provisions of (a), (b) or (c) above. Metro Manila Mountain Bliss the metropolitan area comprising the cities of Caloocan, Las Piñas, Makati, Malabon, Mandaluyong, Manila, Marikina, Muntinlupa, Navotas, Parañaque, Pasay, Pasig, Quezon, San Juan, Taguig and Valenzuela and the municipality of Pateros, which together comprise the National Capital Region and are commonly referred to as Metropolitan Manila Mountain Bliss Resort and Development Corporation 4

10 MRDC Offer Offer Period ONB PAS Paying Agent Payment Date PDEx PDTC PDTC Rules Person Pesos or PHP or P PFRS Philippines PSE Public Debt Multi-Realty Development Corporation the offer of the Series G Bonds to the public by the Issuer under the terms and conditions as herein contained the period commencing within ten Business Days from the date of the issuance of the SEC Permit to Sell Securities, during which the Bonds shall be offered to the public One Network Bank, Inc., a subsidiary of BDO Philippine Accounting Standards Philippine Depository & Trust Corp., the party which shall receive the funds from the Issuer for payment of principal, interest and other amounts due on the Bonds and remit the same to the Bondholders based on the records shown in the Register of Bondholders each of the dates when payment of principal, interest and other amounts due on the Bonds are due and payable to the Bondholders; provided that, in the event any Payment Date falls on a day that is not a Business Day, the Payment Date shall be automatically extended without adjustment to interest accrued to the immediately succeeding Business Day Philippine Dealing & Exchange Corp. the Philippine Depository & Trust Corporation, the central depository and clearing agency of the Philippines which provides the infrastructure for handling the lodgment of the scripless Bonds and the electronic book-entry transfers of the lodged Bonds in accordance with the PDTC Rules, and its successor-in-interest the SEC-approved rules of the PDTC, including the PDTC Operating Procedures and PDTC Operating Manual, as may be amended, supplemented, or modified from time to time any individual, firm, corporation, partnership, association, joint venture, tribunal, limited liability company, trust, government or political subdivision or agency or instrumentality thereof, or any other entity or organization the lawful currency of the Philippines Philippine Financial Reporting Standards which includes statements named PFRS and PAS issued by the Financial Reporting Standards Council and Philippine Interpretations from International Financial Reporting Interpretations Committee (IFRIC) the Republic of the Philippines The Philippine Stock Exchange, Inc. means any present or future indebtedness in the form of, or represented by bonds, notes, debentures, loan stock or other securities that are at the time, or are of the type customarily quoted, listed or ordinarily dealt in on any stock exchange, over the counter or other securities market 5

11 R.A. No Register of Bondholders Registrar Reorganization Retail Affiliates Retail Subsidiaries ROE Sanford SEC Series G Bonds Singapore Stock Exchange Shares SM Department Stores Republic Act No. 8799, The Securities Regulation Code of the Philippines the electronic record of the issuances, sales and transfers of the Bonds to be maintained by the Registrar pursuant to and under the terms of the Registry and Paying Agency Agreement the Philippine Depository & Trust Corporation, being the registrar appointed by the Issuer to maintain the Register of Bondholders pursuant to the Registry and Paying Agency Agreement The corporate restructuring exercise to consolidate all of the SM Group s real estate companies and real estate assets under SM Prime, which was approved by the Board of Directors of SM Prime on 31 May 2013, ratified by the stockholders of SM Prime on 10 July 2013, and subsequently approved by the SEC on 10 October 2013 retail companies including ACE Hardware Philippines, Inc., Homeworld Shopping Corporation, International Toyworld, Inc., Nursery Care Corporation, Kultura Store, Inc., Star Appliance Center, Inc., CK Fashion Collection Corp., Signature Lines, Inc., Supplies Station, Inc., Sports Central (Manila), Inc., H & B, Inc., Fitness Health & Beauty Holdings Corp. among others, which are now subsidiaries of SM Retail the Group s retail and merchandising business, including SM Department Stores, SM Supermarkets, SM Hypermarkets, SaveMore, Waltermart Supermarket, Forever 21 and certain Retail Affiliates return on equity which measures the ratio of net income attributable to equity holders of the parent to average total equity (excluding non-controlling interest) Sanford Marketing Corporation (formerly Sanford Investments Corp.) the Securities and Exchange Commission of the Philippines refers to the portion of the Bonds in the aggregate principal amount of P15,000,000,000, and an Over-subscription Option of up to P5,000,000,000, to be issued by SMIC and which will mature on 9 December 2023 Singapore Exchange Securities Trading Limited common shares of the Issuer, which have a par value of =P10 per share the retail department stores operated by the Group under the SM name which presently include SM Makati, SM Cubao, SM North EDSA, SM Sta. Mesa, SM Quiapo, SM Harrison, SM Megamall, SM Cebu, SM Southmall, SM Bacoor, SM Fairview, SM Iloilo, SM Manila, SM Pampanga, SM Davao, SM Cagayan de Oro, SM Bicutan, SM Lucena, SM Baguio, SM Marilao, SM Dasmariñas, SM Batangas, SM Delgado, SM San Lazaro, SM Sucat, SM Sta. Rosa, SM Clark, SM Mall of Asia, SM Lipa, SM Bacolod, SM Taytay, SM Marikina, SM Baliwag, SM Naga, SM Rosales, SM Rosario, SM Tarlac, SM San Pablo, SM Calamba, SM Novaliches, SM Masinag, SM Olongapo, SM Consolacion, SM Lanang, SM General Santos City, SM San Fernando, SM Aura, SM BF Parañaque, SM Cauayan, SM Megacenter Cabanatuan, SM San Mateo, SM Cabanatuan, SM Seaside Cebu, SM San Jose Del Monte 6

12 and SM Trece Martires SM Mart SMDC SM Hotels SM Land SM Malls in China SM Prime or SMPH SM Retail SME Sports Central SSMI SSS Store Consignors Subsidiary Supplies Station SVI Sy Family Tax Code SM Mart, Inc., a 65.0% owned subsidiary through SM Retail SM Development Corporation SM Hotels and Conventions Corp. (formerly SM Hotels and Entertainment Corp.) SM Land, Inc. (formerly Shoemart, Inc.) which was merged with SM Prime in October 2013 SM Xiamen and Xiamen/Lifestyle Center, SM City Jinjiang, SM City Chengdu, SM City Zibo, SM City Chongqing and SM City Suzhou SM Prime Holdings, Inc. SM Retail, Inc. and its subsidiaries including the absorbed companies which originally held the ownership in the Retail Affiliates small and medium enterprise Sports Central (Manila), Inc. Super Shopping Market, Inc. Social Security System, the Philippines state pension fund for retired private sector employees suppliers who are allocated portions of the selling areas within the relevant departments of SM Department Stores within which to sell their merchandise. See Description of the Issuer and the Group Retailing and Merchandising The SM Stores - SM Department Stores at any particular time, any company or other business entity which is then directly or indirectly controlled, or more than 50%, of whose issued equity share capital (or equivalent) is then beneficially owned, by the Issuer and/or one or more of its Subsidiaries. For a company to be controlled by another means that the other (whether directly or indirectly and whether by the ownership of share capital, the possession of voting power, contract or otherwise) has the power to appoint and/or remove all or the majority of the members of the board of directors or other governing body of that company or otherwise controls or has a power to control the affairs and policies of that company and control shall be construed accordingly. Supplies Station, Inc. Supervalue, Inc. Mr. Henry Sy, Sr., his wife, Mrs. Felicidad T. Sy, and their children Teresita T. Sy, Elizabeth T. Sy, Henry T. Sy, Jr., Hans T. Sy, Herbert T. Sy and Harley T. Sy the amended Philippine National Internal Revenue Code of 1997 and its implementing rules and regulations 7

13 Total Assets Total Liabilities Total Equity Toy World Trustee Underwriters US Dollar, USD or US$ Watsons Waltermart consolidated total assets of the Issuer and its subsidiaries the aggregate of consolidated total current and consolidated total noncurrent liabilities of the Issuer as derived from the balance sheet of the relevant accounts, excluding any Peso-denominated indebtedness for borrowed monies entered into with respect to any Hedging Transaction the total consolidated equity of the Issuer as derived from the balance sheet of the relevant accounts International Toy World, Inc. Philippine National Bank Trust Banking Group, the entity appointed by the Issuer which shall act as the legal title holder of the Bonds and shall monitor compliance and observance of all covenants of and performance by the Issuer of its obligations under the Bonds and enforce all possible remedies pursuant to such mandate the entities appointed as the Underwriters for the Bonds pursuant to the Issue Management and Underwriting Agreement United States Dollars, the lawful currency of the United States of America Watsons Personal Care Stores (Philippines), Inc. Waltermart Supermarket, Inc. 8

14 SUMMARY The summary below is only intended to provide a limited overview of information described in more detail elsewhere in this Prospectus. As it is a summary, it does not contain all of the information that may be important to investors and terms defined elsewhere in this Prospectus shall have the same meanings when used in this summary. Prospective investors should therefore read this Prospectus in its entirety. The Issuer and the Group Overview The Issuer is the holding company of the Group, one of the largest conglomerates in the Philippines. The Issuer was incorporated in the Philippines on 15 January On 03 June 2009, the SEC approved the amendment of SMIC s Articles of Incorporation for the extension of the Company s corporate life for another 50 years from 15 January Its registered office is at the 10th Floor, One E-Com Center, Harbor Drive, Mall of Asia Complex, CBP-1A, Pasay City, Metro Manila, Philippines. Through its subsidiaries, associates and other investments, the Issuer operates a diversified range of businesses located in the Philippines. The Group s business activities and interests are divided into three principal business segments: Retail merchandising mainly through its department stores, supermarkets, SaveMore, hypermarkets, Waltermart and other specialty retail; Property Group composed of the following: - Shopping mall developments, where it is the leading shopping mall operator in the Philippines (SM Prime); - Real estate development and tourism (SM Prime and its subsidiaries SMDC, CDHI and HPI); - Commercial property development; - Hotels and conventions (SM Hotels); and Financial services, through its associate banks that have universal banking licenses in the Philippines (BDO and China Bank). As at 30 June 2016, the Issuer had two principal consolidated subsidiaries namely SM Prime and SM Retail, and two principal equity-accounted associates, namely BDO and China Bank, each of whose shares (except for SM Retail) are listed on the PSE, in which the Issuer had effective interests of 49.7%, 100.0%, 44.4%, and 19.9%, respectively. For the years ended 31 December 2013, 2014 and 2015, the Issuer s audited consolidated revenues were P253,580.0 million, P276,615.3 million and P295,877.7 million respectively, and its audited consolidated net income attributable to equity holders of the parent were P27,445.7 million, P28,398.6 million and P28,455.3 million, respectively. For the six months ended 30 June 2016, the Issuer s unaudited consolidated revenues was P151,088.0 million and its unaudited consolidated net income attributable to equity holders of the parent was P14,986.4 million. As at 31 December 2013, 2014 and 2015, the Issuer s audited consolidated total assets were P632,994.2 million, P711,884.6 million and P771,077.5 million respectively, and its audited total equity was P300,240.8 million, P349,948.4 million and P381,699.3 million respectively. As at 30 June 2016, the Issuer s 9

15 unaudited consolidated total assets was P770,169.5 million and its unaudited total equity was P392,748.2 million. The principal source of consolidated revenue of the Issuer is from the Retail Group which contributed P185,641.3 million, P201,450.0 million, P215,960.3 million, P98,862.2 million and P107,217.0 million respectively, or 73.2%, 72.8%, 73.0%, 71.0% and 71.0%, respectively, of its consolidated revenues for the years ended 31 December 2013, 2014, 2015 and the six months ended 30 June 2015 and Property contributed P55,981.6 million, P62,925.7million, P67,020.6 million, P34,317.6 million and P37,042.4 million or 22.1%, 22.8%, 22.6%, 24.6% and 24.5%, respectively, of the Issuer s consolidated revenues for the years ended 31 December 2013, 2014, 2015 and the six months ended 30 June 2015 and The Property Group and Retail Group contributed P15,626.9 million, P16,647.0 million, P17,073.3 million, P8,359.7 million and P9,230.0 million, respectively, of the Issuer s consolidated net income attributable to equity holders of the parent for the years ended 31 December 2013, 2014, 2015 and the six months ended 30 June 2015 and History Mr. Henry Sy, Sr., the founder of the Group, embarked upon his retailing career immediately after the Second World War when, in 1945, he established a small shoe store in Carriedo, Metro Manila. Having opened six shoe stores, Mr. Sy diversified the business into clothing and soft goods. In 1958, the first Shoe Mart store opened in Rizal Avenue, Metro Manila and, following the incorporation of Shoemart in March 1960, additional stores opened in Makati Commercial Center in 1962, in Cebu in 1965 and in Cubao in Four department stores were opened during the 1970s and, with the intention that one-stop shopping convenience be provided to customers, the new stores featured fast food centers and entertainment areas. Shoemart operated six SM Department Stores until November 2001, when five stores were transferred to SM Mart. As at June 30, 2016, SM Mart is a 65.0% owned subsidiary through SM Retail, with the remaining 35.0% held by the Sy Family. Pursuant to a restructuring of the Issuer s department store business in 2002, SM Mart took over most of Shoemart s functions in managing its department store business, such as merchandising, marketing, advertising and certain other services for the SM Department Stores as well as for its Retail Affiliates. The Group acquired its supermarket and hypermarket operations in June Shoemart was renamed SM Land, Inc. As at September 30, 2016, the Issuer, through SM Retail, operates 55 SM Stores, 47 SM Supermarkets, 147 SaveMore stores, 45 SM Hypermarkets and 34 Waltermart supermarkets. Capitalizing upon the success of the SM Department Stores and as an extension of the concept of one-stop shopping, the first shopping mall, SM City North EDSA, commenced operations in Quezon City in By January 1994, four shopping malls had been opened, including SM Megamall, the largest shopping mall in the Philippines. SM Prime was incorporated in 1994 for the primary purpose of acquiring from other members of the Group, as well as companies affiliated with the Sy Family, the shopping malls and land intended for the development of shopping malls and, henceforth, to be the Group vehicle for commercial center operations. SM Prime undertook its initial public offering on the PSE in July 1994, raising approximately P6.0 billion. SM Prime currently owns and operates, with the assistance of certain Management Companies, 58 shopping malls in the Philippines. In November 2007, SM Prime approved the acquisition from the Sy Family of three malls in the southern and western parts of China, namely Xiamen, Jinjiang and Chengdu and completed the acquisition in May SM Suzhou, SM Chongqing and SM Zibo in China opened in September 2011, December 2012 and September 2015, respectively, while SM Tianjin is still under construction. The Issuer s expansion into real estate development commenced in October 1974 with the incorporation of MRDC. MRDC was formed to develop high-rise condominiums and townhouse units in the prime district of Makati. 10

16 In November 1976, Mr. Henry Sy, Sr. acquired Acme Savings Bank, which was renamed Banco de Oro Savings and Mortgage Bank in August 1977 and then as Banco de Oro Commercial Bank in December The Bank initially provided services predominantly to suppliers of Shoemart, but has subsequently developed into a full-service commercial bank. In August 1996, the Bank was renamed Banco de Oro Universal Bank when the BSP granted approval for the Bank to operate as an expanded commercial bank. Banco De Oro undertook its initial public offering and was listed on the PSE in May 2002, raising P2.1 billion. In May 2007, the Bank merged with EPCIB and was subsequently renamed Banco De Oro Unibank, Inc. on 6 February On 04 November 2011, the Bank was renamed to BDO Unibank, Inc. as part of the company s re-branding initiatives. In 1986, the Group obtained majority ownership of SM Fund, Inc., a closed-end investment company listed on the PSE. In May 1996, the SEC approved a change of name of the company to SM Development Corporation and a change of its purpose to property holding and development. The Group has also diversified into tourism and entertainment with plans for the development of mixed-use complexes in Cebu, Tagaytay, Batangas, Baguio and Metro Manila, which include hotels, convention centers, shopping malls and leisure and entertainment facilities. On 1 August 2007, the Issuer approved to rationalize Shoemart as the holding entity for the various property projects of the Group. On 8 October 2007, the Issuer and Shoemart entered into an agreement whereby the Issuer agreed to swap its 1,823,841,965 common shares in SMDC in exchange for 372,212 common shares in Shoemart based on an independent valuation of the respective shares by Macquarie Securities (Asia) Pte Limited. On 24 January 2008, the SEC approved the valuation of the shares of stock of SMDC as consideration for the additional issue of 372,212 shares. On 2 April 2008, SM Hotels was incorporated to further focus on and develop the Group s hotel business, and rationalize the Group s hotel and convention assets under one entity. On 29 March 2010, the SEC approved the change in the corporate name of SM Hotels and Entertainment Corp. to SM Hotels and Conventions Corp. On 31 May 2013 the Group embarked on a highly transformational transaction to consolidate all of its real estate interests under SM Prime in line with the Group s vision to create a leading integrated real estate company in Asia, increase synergies and organizational efficiencies among the Group s various real estate business units and further enhance the value of the SM Group s real estate businesses. The reorganization was approved by the SEC on 10 October 2013, resulting to SM Prime becoming one of the largest real estate companies in South East Asia with total assets of P440,279.0 million as of June 30, 2016 and an aggregate land bank of more than 1,140.5 hectares. On 7 July 2016, the Company obtained the approval of the SEC for the merger of Sy Family-owned specialty stores into SM Retail, with SM Retail as the surviving entity. This enabled the Group to consolidate all its retail businesses under SM Retail, Inc. 1,476 outlets were folded into SM Retail in exchange for shares of stock in SM Retail. These include popular brands such as Watsons, Toy Kingdom, SM Appliances, Ace Hardware, Our Home, Sports Central, Kultura, Pet Express, Baby Company and other specialty retailers. The merger resulted in SMIC owning 77.3% in a larger and more diverse SM Retail group. SMIC was listed on the PSE on 22 March 2005, and as at 8 November 2016, had a market capitalization of P808,275.1million, based on a price of P per common share on such date. Strategy The Issuer s strategy is focused on growing its retail, property and financial services businesses, and maintaining or attaining market leadership in each of their respective sectors. The Issuer will continue to target the mass market in the Philippines by offering essential goods and services such as food, clothing, housing and financial services. The Issuer is responsible for setting Group policy and strategy. The Issuer establishes the financial and 11

17 operating policies for the Group and supervises and monitors the performance of its subsidiaries and associates. Key elements of the Issuer s strategy are to: maintain its leading market share in the shopping mall sector by continuing to expand the Group s mall and retail activities into major centers of population in Metro Manila and particularly in the provinces where there are opportunities for growth, and capture strategic opportunities overseas particularly China; continue to capture a significant share of retail spending in the Philippines arising from approximately US$25.8 billion for 2015 (based on BSP data) in remittances from overseas Filipino workers by providing the most attractive retail and leisure facilities to Philippine mass market consumers; continue to grow its financial services businesses, including through acquisitions by BDO, and develop further synergies between financial services and its shopping malls and the Retail Subsidiaries by providing its suppliers and retail customers their required banking facilities and services; diversify and expand the businesses of the Group (including through acquisition) in the property development, tourism and leisure sectors as the Philippines becomes a more attractive tourist destination, by leveraging the Group s strategically located land bank; integrate all land banking functions into a centralized department while retaining the highly successful culture that allowed the Group to reach its strong current land bank position, and continue acquiring land bank that is suitable for mid-to-large scale mixed-use master planned projects in fast growing areas of the Philippines; supervise a range of related businesses and investments, providing support, expertise and funding to its developing businesses and encouraging further growth in its more established businesses; and promote the independence of its various businesses in terms of executing set strategies and encouraging financial independence in terms of external funding. Strengths The Issuer believes that the key strengths of the Group are as follows: a well-established platform providing quality services from retail to real estate development to financial services to cater for the domestic consumption growth in the Philippines; its 58 years of retail experience, which has created significant goodwill among its customers and suppliers, a well-known brand and image and a reputation for providing value for customers; its leading market share positions in providing one-stop experience through shopping malls, department stores and supermarkets and the largest bank in the Philippines in terms of assets; fast growing residential development expertise that is sitting at the sweet spot of the local real estate markets, well-supported by SM-branded shopping malls nearby; prudent financial management and a strong balance sheet with stable recurring cash flows through 12

18 focusing on diverse businesses which are relatively less cyclical; its experienced management team, which has consistently focused on related businesses that promote synergies; and its overall corporate reputation in the Philippines and abroad, which has brought the Group numerous awards for corporate excellence, corporate governance and financial management. Risks of Investing Before making an investment decision, investors should carefully consider the risks associated with an investment in the Bonds. These risks include: Risks Relating to the Company The Issuer is primarily a holding company and payments under the Bonds are structurally subordinated to all liabilities of the Issuer s subsidiaries and associates Any restriction or prohibition on the Issuer s subsidiaries and associates ability to distribute dividends would have a negative effect on its financial condition and results of operations The Issuer is controlled by the Sy Family, whose interests may not be the same as those of other shareholders The Issuer s businesses have significant levels of related party transactions and are interdependent, and any material adverse change in one member of the Group could adversely affect the results of operations of other members of the Group, including SMIC The Issuer depends on members of the Sy Family as regards the management of its business The Issuer has conducted and may continue to conduct acquisitions, the impact of which could be less favorable for its activities and results than anticipated, or which could affect its financial situation Infringement of the SM intellectual property rights would have a material adverse effect on the Group s business The Group s debt leverage will be increased following the issue of the Bonds Risks Relating to the Group s Malls and Property Businesses The Philippine property market is cyclical and can be affected by domestic and global economic conditions SM Prime may face challenges of title to land SM Prime s rights and title to reclaimed land may be challenged SM Prime is exposed to general risks associated with the ownership and management of real estate SM Prime will continue to compete with other mall operators and commercial and residential developers SM Prime is exposed to risks associated with the operation of its malls and commercial businesses SM Prime faces reputational risk and operational risks relating to its residential and commercial businesses SM Prime may be subject to tax liabilities in relation to the Reorganization SM Prime s leasing operations depend on key tenants, which are affiliates of the SM Group 13

19 Malls and other commercial properties owned by SM Prime may be subject to an increase in operating and other expenses SM Prime faces risks relating to the management of its land bank SM Prime operates in a highly regulated environment and it is affected by the development and application of regulations in the Philippines Zoning restrictions and local opposition may delay or preclude construction Infringement of intellectual property rights could have a material adverse effect on SM Prime s business Land and/or real property may be subject to compulsory acquisition SM Prime faces risks inherent in joint venture structures and/or funds Construction defects and other building-related claims may be asserted against SM Prime, and SM Prime may be subject to liability for such claims SM Prime may suffer material losses in excess of insurance proceeds SM Prime faces property development risk SM Prime will continue to face certain risks related to the cancellation of sales involving its residential projects The loss of certain tax exemptions and incentives for residential home sales may increase the price of SM Prime s residential units and may lead to a reduction in sales A domestic asset price bubble could adversely affect SM Prime s business Risks Relating to the Retail Operations The success of the Retail Subsidiaries will be dependent in part on the Issuer s continued ability to satisfy consumer preferences and spending trends in the markets in which the Retail Subsidiaries operate The Retail Subsidiaries depend on their ability to retain existing suppliers and secure new suppliers Non-renewal of leases or substantial increases in rent for the Issuer s retail stores may have a material adverse effect on the Issuer The future growth of the Retail Subsidiaries will be largely driven by the effectiveness and success of their expansion strategy The Retail Subsidiaries may be subject to increasing competitive pressures There can be no assurance that the Retail Subsidiaries are fully insured against unexpected losses The Retail Subsidiaries business activities are subject to seasonality and timing The food retailing industry is highly competitive and characterized by narrow profit margins As a result of selling food products, the Group faces the risk of exposure to product liability claims and adverse publicity Risks Relating to the Banks The Philippine banking industry is highly competitive and increasing competition may result in declining margins in the banks principal businesses Philippine banks are generally exposed to higher credit risks and greater market volatility than banks in more developed countries 14

20 Philippine banks ability to assess, monitor and manage risks inherent in its business differs from the standards of its counterparts in more developed countries Philippine banks face regulatory pressure to comply with new capital, liquidity and leverage standards as well as meet prudential limits for real estate exposures Risks Relating to the Philippines Substantially all of the Group s operations and assets are based in the Philippines; a slowdown in economic growth in the Philippines could materially adversely affect its businesses Any political instability in the future may have a negative effect on the Group s financial results SM Group s businesses may be disrupted by terrorist acts, crime, natural disasters and outbreaks of infectious diseases or fears of such occurrences in Metro Manila or other parts of the Philippines Volatility in the value of the Peso against the U.S. dollar and other currencies could adversely affect the Group s businesses Corporate governance and disclosure standards in the Philippines may differ from those in more developed countries Risks Relating to the Bonds The priority of debt evidenced by a public instrument An active trading market for the Bonds may not develop The Issuer may be unable to redeem the Bonds Please refer to the section entitled Risk Factors on pages 27 to 56 of this Prospectus which, while not intended to be an exhaustive enumeration of all risks, must be considered in connection with a purchase of the Bonds. 15

21 SUMMARY FINANCIAL INFORMATION The following tables set forth the summary consolidated financial information of the Issuer as at and for the periods indicated. The selected financial information presented below as at 31 December 2013, 2014, 2015 and 30 June 2016, for the years ended 31 December 2013, 2014 and 2015 and for the six-month periods ended 30 June 2015 and 2016 have been derived from the Issuer s consolidated financial statements. The information set out below should be read in conjunction with, and is qualified in its entirety by reference to, the relevant consolidated financial statements of the Issuer, including the notes thereto, included elsewhere in this Prospectus. Consolidated Balance Sheets (in P thousands) 2013 Audited As at 31 December Audited 2015 Audited As at 30 June Unaudited ASSETS Current Assets Cash and cash equivalents 50,209,657 69,133,381 53,910,071 29,516,339 Time deposits 28,912,650 9,000,324 9,611,405 11,399,755 Investments held for trading and 1,118,980 4,190,449 1,100,915 1,245,224 sale Receivables 26,637,734 31,009,820 32,133,508 32,990,168 Merchandise inventories at cost 13,232,308 14,882,200 16,262,228 17,952,012 Other current assets 43,983,298 55,821,423 51,312,145 52,282,760 Total Current Assets 164,094, ,037, ,330, ,386,258 Noncurrent Assets Available-for-sale investments 16,499,092 19,205,044 21,175,695 23,264,246 Investments in associate 145,476, ,869, ,068,761 companies and joint ventures 138,994,366 Time deposits 27,487,478 47,579,390 53,127,769 51,068,610 Property and equipment 18,323,380 19,903,014 19,399,788 19,259,048 Investment properties 189,425, ,888, ,583, ,754,728 Land and development 25,666,930 26,629,864 27,386,708 24,410,046 Intangibles 20,255,055 22,303,203 24,707,221 24,643,605 Deferred tax assets 2,172,799 2,293,944 2,569,800 2,543,619 Other non-current assets 30,074,881 32,567,952 38,927,352 44,770,540 Total Noncurrent Assets 468,899, ,847, ,747, ,783,203 Total Assets 632,994, ,884, ,077, ,169,461 1 The Group reclassified certain consolidated balance sheet accounts as at December 31, 2013, 2014 and 2015 and consolidated statement of income accounts in 2013, 2014 and 2015 to conform to the 2016 consolidated financial statements presentation and classification. The reclassifications have no impact on the 2013, 2014 and 2015 profit or loss and equity of the Group. 2 The interim consolidated balance sheet as at June 30, 2016 and the related interim consolidated statements of income, comprehensive income, changes in equity and cash flows for the six-month periods ended June 30, 2016 and 2015 have been reviewed by the Independent Auditors of the Issuer. 16

22 (in P thousands) 2013 Audited As at 31 December Audited 2015 Audited As at 30 June Unaudited LIABILITIES AND EQUITY Current Liabilities Bank loans 27,588,259 13,892,641 9,923,215 6,694,783 Accounts payable and other current 71,664,163 72,380,725 77,546,739 66,304,799 liabilities Income tax payable 1,612,784 1,593,060 2,023,824 1,864,369 Current portion of long-term debt 34,566,619 10,669,108 25,994,800 6,677,987 Dividends payable 210, , , ,634 Total Current Liabilities 135,642,014 98,800, ,834,859 81,920,572 Noncurrent Liabilities Long-term debt net of current portion 175,589, ,113, ,167, ,081,197 Derivative liabilities 159,974 58, Deferred tax liabilities 6,970,527 6,867,925 7,434,777 7,167,258 Tenants deposits and others 14,391,388 19,095,598 20,941,307 22,252,192 Total Noncurrent Liabilities 197,111, ,135, ,543, ,500,647 Total Liabilities 332,753, ,936, ,378, ,421,219 Equity Attributable to Owners of the Parent Capital stock 7,962,723 7,963,406 8,030,554 8,030,554 Additional paid-in capital 57,799,360 71,952,082 76,399,625 76,399,625 Equity adjustments from common control (2,584,210) (1,902,933) (1,902,024) (1,902,024) transactions Cost of Parent common shares held by (25,386) (25,386) (25,386) (25,386) subsidiaries Cumulative translation adjustments 1,233, ,360 1,057, ,991 Remeasurement gain (loss) on defined (195,074) (126,530) 117, ,738 benefit asset/ obligation Net unrealized gain on available-for-sale 7,338,500 10,207,259 12,724,360 14,733,490 investments Retained earnings: Appropriated 27,000,000 27,000,000 36,000,000 36,000,000 Unappropriated 120,904, ,069, ,004, ,454,650 Total Equity Attributable to Owners of the 219,433, ,004, ,407, ,270,638 Parent Non-controlling Interests 80,807,031 92,944,295 97,291, ,477,604 Total Equity 300,240, ,948, ,699, ,748,242 Total Liabilities and Equity 632,994, ,884, ,077, ,169,461 17

23 Consolidated Statements of Income (in P thousands) For the years ended 31 December Audited 2014 Audited 2015 Audited For the six months ended 30 June Unaudited 2016 Unaudited Revenue Sales: Merchandise 180,873, ,080, ,361,636 96,728, ,080,984 Real estate 21,242,138 22,629,335 22,529,384 12,454,732 13,119,810 Rent 27,628,472 32,605,222 35,969,341 17,604,292 19,507,003 Equity in net earnings of associate 13,602,269 13,225,022 14,070,301 6,721,876 7,446,392 companies and joint ventures Cinema ticket sales, amusement and 4,945,795 5,771,529 6,427,592 3,179,958 3,270,287 others Management and service fees 1,437,561 1,452,771 1,431, , ,801 Gain (loss) on sale of available-for-sale 141,163 48,493 (5,417) (315) 2,702 investments and fair value changes on investments held for trading net Dividend income 883, , , , ,470 Others 2,826,111 3,206,768 3,418,577 1,787,267 1,840, ,580, ,615, ,877, ,245, ,087,993 Costs and Expenses Cost of sales: Merchandise 138,720, ,917, ,024,285 74,179,439 80,522,550 Real estate 12,243,534 12,529,076 12,238,872 6,775,432 7,001,812 Selling, general and administrative expenses 51,186,393 60,710,150 63,707,080 29,987,827 32,770, ,150, ,156, ,970, ,942, ,294,917 Other Income (Charges) Interest expense (11,088,046) (11,895,865) (10,460,636) (5,613,240) (5,495,528) Interest income 3,709,484 3,032,635 3,155,800 1,552,415 1,633,631 Gain (loss) on disposal of investments 546,552 2,879,746 (51,147) 3,770 26,753 and properties - net Gain (loss) on fair value changes on (997,576) (189,554) (103,991) (137,787) 33,085 derivatives net Foreign exchange gain net 59, , , ,500 51,070 (7,770,175) (5,993,958) (7,219,197) (4,015,342) (3,750,989) Income Before Income Tax 43,659,575 46,464,544 49,688,257 24,287,313 27,042,087 Provision for (benefit from) income tax Current 7,367,602 7,723,852 9,271,234 4,374,405 4,988,678 Deferred (1,947,105) (149,863) 84,136 97,471 99,299 5,420,497 7,573,989 9,355,370 4,471,876 5,087,977 Net Income 38,239,078 38,890,555 40,332,887 19,815,437 21,954,110 Attributable to: Owners of the Parent 27,445,682 28,398,584 28,455,260 13,494,480 14,986,407 Non-controlling interests 10,793,396 10,491,971 11,877,627 6,320,957 6,967,703 Basic/Diluted Earnings Per Common Share Attributable to Owners of the Parent 38,239,078 38,890,555 40,332,887 19,815,437 21,954,110 P34.85 P35.66 P35.68 P16.92 P

24 Consolidated Statements of Comprehensive Income (in P thousands) For the years ended 31 December Audited 2014 Audited 2015 Audited For the six months ended 30 June Unaudited 2016 Unaudited NET INCOME 38,239,078 38,890,555 40,332,887 19,815,437 21,954,110 OTHER COMPREHENSIVE INCOME (LOSS) Items that will be reclassified to profit or loss in subsequent periods Net unrealized gain on 2,290,960 4,243, ,704 1,417,859 1,661,724 available-for-sale investments Share in unrealized gain (loss) on (2,756,754) 435,121 (1,773,250) (1,516,770) 510,339 available-for-sale investments of associates - net Cumulative translation adjustment 892,452 (720,937) 364, ,238 (952,249) Income tax relating to items to be reclassified to profit or loss in subsequent periods (2,841,627) 112,849 (107,726) (71,216) 340,636 (2,414,969) 4,070,082 (727,344) 66,111 1,560,450 Items not to be reclassified to profit or loss in subsequent periods Re-measurement gain (loss) on (201,304) 129, , defined benefit obligation Income tax relating to items not to be reclassified to profit or loss in subsequent periods 60,391 (38,965) (99,134) - - (140,913) 90, , TOTAL COMPREHENSIVE INCOME 35,683,196 43,051,555 39,836,854 19,881,548 23,514,560 Attributable to: Owners of the Parent 23,836,811 30,969,070 31,408,020 16,889,581 16,399,777 Non-controlling interests 11,846,385 12,082,485 8,428,834 2,991,967 7,114,783 19

25 SUMMARY OF UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION The unaudited pro forma condensed consolidated financial information of the Company with the consolidation of its retail businesses under SM Retail consists of the pro forma balance sheets as at 31 December 2015 and 30 June 2016, and the pro forma consolidated statements of income and pro forma consolidated statements of comprehensive income for the years ended 31 December 2013, 2014 and 2015, and the six-month periods ended 30 June 2015 and 2016 (the Unaudited Pro Forma Financial Information ). The Unaudited Pro Forma Financial Information of the Company has been prepared for illustrative purposes only and is based on certain assumptions, after making certain adjustments. Pro Forma Consolidated Balance Sheets (in P thousands) As at 31 December 2015 Unaudited As at 30 June 2016 Unaudited Current Assets Cash and cash equivalents 58,282,731 34,174,870 Time deposits 9,611,405 11,399,755 Investments held for trading and sale 1,100,915 1,245,224 Receivables 32,080,136 32,732,342 Merchandise inventories at cost 21,589,701 24,224,483 Other current assets 52,004,810 52,937,726 Total Current Assets 174,669, ,714,400 Noncurrent Assets Available-for-sale investments 21,168,893 23,257,551 Investments in associate companies and joint ventures 170,845, ,019,274 Time deposits 53,127,769 51,068,610 Property and equipment 20,637,481 20,623,880 Investment properties 249,583, ,754,728 Land and development 27,386,708 24,410,046 Intangibles 24,712,763 24,649,147 Deferred tax assets - net 2,619,924 2,578,695 Other non-current assets 40,138,042 46,114,747 Total Noncurrent Assets 610,220, ,476,678 Total Assets 784,890, ,191,078 20

26 (in P thousands) As at 31 December 2015 Unaudited As at 30 June 2016 Unaudited Current Liabilities Bank loans 10,495,215 7,657,783 Accounts payable and other current 85,425,887 73,315,127 liabilities Income tax payable 2,464,343 2,204,281 Current portion of long-term debt 25,994,800 6,677,987 Dividends payable 2,939,680 3,097,720 Total Current Liabilities 127,319,925 92,952,898 Noncurrent Liabilities Long-term debt net of current portion 245,167, ,081,197 Deferred tax liabilities net 7,435,073 7,178,032 Tenants deposits and others 21,014,385 22,332,150 Total Noncurrent Liabilities 273,616, ,591,379 Total Liabilities 400,936, ,544,277 Equity Attributable to Owners of the Parent Capital stock 8,030,554 8,030,554 Additional paid-in capital 76,399,625 76,399,625 Equity adjustments from common control (5,006,303) (192,716) transactions Cost of Parent common shares held by (25,386) (25,386) subsidiaries Cumulative translation adjustment 1,057, ,991 Remeasurement gain on defined benefit 216, ,165 asset/ obligation Net unrealized gain on available-for-sale 12,724,360 14,733,490 investments Retained earnings: Appropriated 36,000,000 36,000,000 Unappropriated 150,453, ,207,003 Total Equity Attributable to Owners of 279,850, ,830,726 the Parent Non-controlling Interests 104,102, ,816,075 Total Equity 383,953, ,646,801 Total Liabilities and Equity 784,890, ,191,078 21

27 Pro Forma Consolidated Statements of Income (in P thousands) For the years ended 31 December 2013 Unaudited 2014 Unaudited 2015 Unaudited For the six months ended 30 June 2015 Unaudited 2016 Unaudited Revenue Sales: Merchandise 213,942, ,943, ,072, ,544, ,327,892 Real estate 21,242,138 22,629,335 22,529,384 12,454,732 13,119,810 Rent 27,458,309 30,404,826 34,784,948 16,441,077 18,165,797 Equity in net earnings of associate 13,771,959 13,411,795 14,305,878 6,844,928 7,564,470 companies and joint ventures Cinema ticket sales, amusement and 4,945,795 5,771,529 6,427,592 3,179,958 3,270,287 others Management and service fees 888, , , , ,784 Gain (loss) on sale of 141,163 48,493 (5,417) (315) 174,400 available-for-sale investments and fair value changes on investments held for trading net Dividend income 518, , , ,403 92,020 Others 3, ,391,492 4,744,813 2,333,789 2,515, ,733, ,772, ,235, ,460, ,637,642 Costs and Expenses Cost of sales: Merchandise 160,257, ,628, ,436,953 84,501,547 92,285,029 Real estate 12,243,534 12,529,076 12,238,872 6,775,432 7,001,812 Selling, general and administrative 60,274,466 68,392,806 73,012,461 33,759,229 37,057,850 expenses 232,775, ,549, ,688, ,036, ,344,691 Other Income (Charges) Interest expense (11,095,631) (11,910,293) (10,474,954) (5,620,494) (5,506,807) Interest income 3,778,295 3,096,691 3,215,016 1,578,959 1,660,993 Gain (loss) on disposal of 546,552 2,879,746 (51,147) - - investments and properties - net Gain (loss) on fair value changes on (997,576) (189,554) (103,991) (137,787) 33,085 derivatives net Foreign exchange gain net 59, , , ,985 78,086 (7,708,949) (5,944,330) (7,174,299) (3,995,337) (3,734,643) Income Before Income Tax 46,249,178 50,278,499 54,373,003 26,429,159 29,558,308 Provision for (benefit from) income tax Current 8,201,253 8,894,454 10,645,158 4,926,032 5,664,186 Deferred (1,965,263) (159,895) 70,926 92,605 99,066 6,235,990 8,734,559 10,716,084 5,018,637 5,763,252 Net Income 40,013,188 41,543,940 43,656,919 21,410,522 23,795,056 Attributable to: Owners of the Parent 26,733,299 28,167,667 28,770,509 13,753,739 15,289,593 Non-controlling interests 13,279,889 13,376,273 14,886,410 7,656,783 8,505,463 40,013,188 41,543,940 43,656,919 21,410,522 23,795,056 Basic/Diluted Earnings Per Common Share Attributable to Owners of the Parent P33.95 P35.37 P36.08 P17.25 P

28 Pro Forma Consolidated Statements of Comprehensive Income (in P thousands) For the years ended 31 December 2013 Unaudited 2014 Unaudited 2015 Unaudited For the six months ended 30 June 2015 Unaudited 2016 Unaudited NET INCOME 40,013,188 41,543,940 43,656,919 21,410,522 23,795,056 OTHER COMPREHENSIVE INCOME (LOSS) Items that will be reclassified to profit or loss in subsequent periods Net unrealized gain on 2,290,960 4,243, ,704 1,417,859 1,661,724 available-for-sale investments Share in unrealized gain (loss) on (2,756,754) 435,121 (1,773,250) (1,516,770) 510,339 available-for-sale investments of associates - net Cumulative translation adjustment 892,452 (720,937) 364, ,238 (952,249) Income tax relating to items to be reclassified to profit or loss in subsequent periods (2,841,627) 112,849 (107,726) (71,216) 340,636 (2,414,969) 4,070,082 (727,344) 66,111 1,560,450 Items not to be reclassified to profit or loss in subsequent periods Re-measurement gain (loss) on (253,673) 242, ,925 (59,670) - defined benefit obligation Income tax relating to items not to be reclassified to profit or loss in subsequent periods 76,102 (72,755) (105,577) 17,901 - (177,571) 169, ,348 (41,769) - TOTAL COMPREHENSIVE INCOME 37,420,648 45,783,785 43,175,923 21,434,864 25,355,506 Attributable to: Owners of the Parent 23,141,930 30,816,998 31,725,349 17,107,071 16,702,963 Non-controlling interests 14,278,718 14,966,787 11,450,574 4,327,793 8,652,543 23

29 SUMMARY OF THE OFFERING The following summary is qualified in its entirety by, and should be read in conjunction with, the more detailed information appearing elsewhere in this prospectus. Issuer SM Investments Corporation Issue Fixed rate bonds constituting the direct, unconditional, unsecured and unsubordinated obligations of SM Investments Corporation Issue Size P15,000,000,000 Oversubscription Option In the event of oversubscription, the Joint Issue Managers and Joint Lead Underwriters, in consultation with the Issuer, reserve the right to increase the aggregate Issue Size by up to P5,000,000,000 Manner of Offer Public offering Use of Proceeds The net proceeds of the Issue shall be used primarily to finance future investments and strategic acquisitions (see Use of Proceeds ) Issue Price or Offer Price 100% of the face value of the Bonds Form and Denomination of the Bonds The Series G Bonds shall be issued in scripless form in minimum denominations of P20,000.00, and in multiples of P10, thereafter, and traded in denominations of P10, in the secondary market Offer Period The offer of the Series G Bonds shall commence at 9:00 am on 25 November 2016 and end at 12:00 pm on 2 December 2016 Issue Date 9 December 2016 Maturity Date Series G : Seven (7) years from Issue Date 24

30 Interest Rate Series G : % per annum Interest Computation & Payment Interest on the Series G Bonds shall be calculated on a 30/360 day count basis commencing on 9 December Interest on the Series G Bonds shall be paid semi-annually in arrears on 9 June and 9 December of each year. Optional Redemption Prior to the Maturity Date of the Series G Bonds, the Issuer shall have a one-time option, but shall not be obligated, to redeem in whole and not in part only the Series G Bonds, in accordance with the following schedule: Optional Redemption Dates 10 th and 11 th interest payment dates 12 th and 13 th interest payment dates Optional Redemption Price 101.0% 100.5% The Issuer shall give no less than thirty (30) nor more than sixty (60) calendar days prior written notice of its intention to redeem the Series G Bonds on such Optional Redemption Date, which notice shall be irrevocable and binding upon the Issuer to effect such early redemption of the Series G Bonds at the Interest Payment Date stated in such notice. The amount payable to the Bondholders in respect of any such redemption shall be calculated as the sum of (i) the relevant Optional Redemption Price applied to the principal amount of the then outstanding Series G Bonds being redeemed and (ii) all accrued interest on the Series G Bonds as of the relevant Optional Redemption Date. Final Redemption The Series G Bonds shall be redeemed at 100% of face value on the Maturity Date. Trustee Philippine National Bank Trust Banking Group Registrar & Paying Agent Philippine Depository & Trust Corp. Taxation Bond Interest Interest income derived from the Bonds by Philippine citizens or resident foreign individuals is subject to income tax, which is withheld at source, at the rate of 20%. Interest on the Bonds received by non-resident foreign individuals engaged in trade or business in the Philippines is subject to a 20% final withholding tax while that received by non-resident foreign individuals not engaged in trade or business is subject to a 25% final withholding tax. Interest income received by domestic corporations and resident foreign corporations is taxed at the rate of 20%. Interest income received by non-resident foreign corporations is subject to a 30% final withholding tax. The tax 25

31 withheld constitutes a final settlement of Philippine income tax liability with respect to such interest. Bondholders who are exempt from or are not subject to final withholding tax on interest income or are covered by a lower final withholding tax rate by virtue of a tax treaty may claim such exemption or lower rate, as the case may be, by submitting the necessary documents as required by the Bureau of Internal Revenue and the Issuer. Listing The Series G Bonds are intended to be listed in the Philippine Dealing & Exchange Corp. 26

32 RISK FACTORS Investment in the Bonds involves a number of risks. The price of securities can and does fluctuate, and any individual security may experience upward or downward movements, and may even become valueless. There is an inherent risk that losses may be incurred rather than profit made as a result of buying and selling securities. Past performance is not a guide to future performance. There may be a big difference between the buying price and the selling price of these securities. An investor deals in a range of investments, each of which may carry a different level of risk. Prior to making any investment decision, prospective investors should carefully consider all of the information in this Prospectus, including the risks and uncertainties described below. The business, financial condition or results of operations of SMIC could be materially adversely affected by any of these risks. Additional considerations and uncertainties not presently known to the Issuer or which the Issuer currently deems immaterial, may also have an adverse effect on an investment in the Bonds. This risk disclosure does not purport to disclose all the risks and other significant aspects of investing in these securities. An investor should undertake his or her own research and study on the trading of securities before commencing any trading activity. He/she may request information on the securities and issuer thereof from the Commission which are available to the public. An investor should seek professional advice if he or she is uncertain of, or has not understood any aspect of the securities to invest in or the nature of risks involved in trading of securities especially those high risk securities. This section entitled Risks Factors does not purport to disclose all of the risks and other significant aspects of investing in these securities. The risks enumerated hereunder are considered to be each of equal importance. The means by which the Company plans to address the risks discussed herein are presented in the sections of this Prospectus entitled Description of the Issuer and the Group Strengths, Description of the Issuer and the Group Strategy, and Management s Discussion and Analysis of Financial Condition and Results of Operations. Risks Relating to the Company The Issuer is primarily a holding company and payments under the Bonds are structurally subordinated to all liabilities of the Issuer s subsidiaries and associates. The Issuer is primarily a holding company and its ability to make payments in respect of the Bonds or to fund payments by the Issuer depends largely upon the receipt of dividends, distributions, interest payments, management fees, or advances from its subsidiaries and associates. The ability of such companies to pay dividends and other amounts to the Issuer may be subject to their profitability and to applicable laws and restrictions on the payment of dividends and other amounts contained in relevant financing and other arrangements. Payments under the Bonds are effectively subordinated to all existing and future liabilities and obligations of each of the Issuer s subsidiaries, jointly controlled entities, and associates. Claims of creditors of such companies will have priority as to the assets of such companies over the Issuer and its creditors, including holders of the Bonds. As at 30 June 2016, the Group had aggregate indebtedness (comprising bank loans, current portion of long-term debt, and long-term debt - net of current portion) of P279,454.0 million. The Issuer, as the parent company, is actively involved in the planning and financing activities of its 27

33 subsidiaries. Also, the Issuer has majority control of these subsidiaries boards of directors, thereby allowing it to exercise significant influence in the management and policy formulation processes of these subsidiaries in terms of, among others, business strategy, profit generation and dividend declaration. Any restriction or prohibition on the Issuer s subsidiaries and associates ability to distribute dividends would have a negative effect on its financial condition and results of operations. The Issuer is a holding company that conducts all of its operations through its subsidiaries and associates. As a holding company, the Issuer s revenues are derived from, among other sources, dividends and management fees paid to the Issuer by its subsidiaries and associates. The Issuer is reliant on such sources of funds with respect to its obligations and in order to finance its subsidiaries. The ability of the Issuer s direct and indirect subsidiaries and associates to pay dividends to their shareholders (including the Issuer) is subject to applicable law and may be subject to restrictions contained in loans and/or debt instruments of such subsidiaries and may also be subject to the deduction of taxes. In addition, the declaration of dividends by Philippine banks is subject to approval by the BSP, thereby affecting the payment of dividends from BDO and China Bank to the Issuer. Any restriction or prohibition on the ability of some or all of the Issuer s subsidiaries or associates to distribute dividends or make other distributions to the Issuer, either due to regulatory restrictions, debt covenants, operating difficulties or other limitations, could have a negative effect on the Issuer s cash flow and therefore its financial condition and results of operations. As aforementioned, the Issuer, as a parent holding company, has majority control in the management and in the boards of directors of its subsidiaries. The Issuer can thus exert its influence on matters relating to these subsidiaries respective managements, compliance with applicable regulatory and contractual restrictions and dividend declaration. The Issuer is controlled by the Sy Family, whose interests may not be the same as those of other shareholders. The Sy Family currently, directly or indirectly, controls approximately 55.7% of the outstanding Shares. Accordingly, the Sy Family is able to elect members of the Board and pass shareholder resolutions which, under the By-laws, generally require a majority vote by its shareholders. In addition, members of the Sy Family hold four out of eight seats on the Board and Mr. Henry Sy, Sr., who is the Chairman, has a casting vote. Accordingly, the Sy Family exercises control over major policy decisions of the Issuer, including its overall strategic and investment decisions, dividend plans, issuances of securities, adjustments to its capital structure, mergers, liquidation or other reorganization and amendments to its Articles of Incorporation and By-laws. If the interests of the Sy Family conflict with the interests of other shareholders of the Issuer, there can be no assurance that the Sy Family would not cause the Issuer to take action in a manner which might differ from the interests of other shareholders. The Issuer has in place a corporate governance structure which is consistent with requirements set forth by Philippine regulations. Furthermore, it has three independent directors in its Board who actively participate in enforcing the governance structures mandate to protect the interests of all shareholders, including the minorities. The Issuer is also professionally managed by executives and officers with expertise in their respective fields. 28

34 The Issuer s businesses have significant levels of related party transactions and are interdependent, and any material adverse change in one member of the Group could adversely affect the results of operations of other members of the Group, including SMIC. A significant part of the business undertaken by members of the Group is conducted with other members of the Group, as well as other affiliated companies owned by the Sy Family which are not within the Group, such as the Management Companies. The operations of many members of the Group are interdependent. These transactions include those described under Related Party Transactions and the notes to the Financial Statements appearing elsewhere in this Prospectus. In addition, the Issuer expects that in the future, Group companies will continue to enter into transactions with each other as well as other companies directly or indirectly controlled by or associated with the Sy Family, including the Management Companies. These transactions may involve conflicts of interest, which, although not contrary to law, may be detrimental to the Issuer. Conflicts of interest may also arise between the Sy Family and the Issuer in a number of other areas relating to the Issuer s businesses, including: major business combinations involving the Group, including transfers of affiliated companies into the Group (see Related Party Transactions ); plans to develop the respective businesses of the Group and of other entities within the Group; and business opportunities that may be attractive to both the Sy Family and SMIC. Such interdependence may mean that any material adverse change in one member of the Group, or companies which are controlled by the Sy Family, could adversely affect the results of operations of other members of the Group, including the Issuer. In addition, certain members of the Group, such as SM Prime, have contractual arrangements with companies controlled by the Sy Family. The Issuer s policy is that transactions between Group companies and companies which are controlled by the Sy Family are undertaken on an arm s length commercial basis. While there are related party transactions which provide synergy between the various subsidiaries, these are made on arm s length commercial market terms. Each subsidiary is managed and operated independently in these transactions and each company is responsible for its results of operations. The Issuer depends on members of the Sy Family as regards the management of its business. Members of the Sy Family currently manage the business operations of various entities within the Group including its key subsidiaries. In addition, the Sy Family has a wide range of other commercial interests outside the Group, many of which are affiliated with members of the Group, including the Management Companies. There can be no assurance that such other business interests will not require significant time and commitment from the Sy Family which might reduce their time devoted to their current roles within the Issuer s business. Furthermore, as the businesses of the Group expand, there can be no assurance that the Sy Family will continue to be able to allocate the same or a similar proportion of their time or other resources to the management or supervision of such businesses. The Issuer s Chairman, Mr. Henry Sy, Sr., is the founder of the Group. Mr. Sy s daughter, Teresita T. Sy, and son, Henry T. Sy, Jr., have been appointed Vice Chairperson and Vice Chairman, respectively of the Issuer, and are involved in the strategic planning and management of the Issuer s operations. The Issuer does not hold any key management insurance for its senior executives, nor does it have any employment contracts containing restrictive covenants with respect to such executives. While Teresita T. Sy, Henry T. Sy, Jr. and other members of the Sy Family are expected to remain actively involved in the day-to-day operations and management of the Group, except for a provision in the By-laws indicating that no person shall qualify or be eligible for nomination or election to the Board if he is engaged in any business which competes with or is antagonistic to that of the Issuer, there are no legal restrictions nor any contractual commitments that 29

35 would prevent the Sy Family from competing with the Group or individual businesses within the Group. There can be no assurance that any potential conflicts of interest would be resolved in the best interests of SMIC or the Group, and even if they were, the resolution may be less favorable than if SMIC or the Group were dealing with an independent party. The unavailability of continuing services from the Sy Family may adversely affect the financial condition and results of operations of the Group. In addition, as at 30 June 2016, Mr. Henry Sy, Sr. and his wife Mrs. Felicidad T. Sy held 0.40% and 3.21% of the outstanding issued Shares, respectively, and five of their children own approximately 5.82% to 8.21% each. There can be no assurance that there will not be any transfer of interests between family members or any sale of Shares to third parties that would not alter the balance of the family holdings, thereby influencing control. The Group has professional executives and managers in each of the operating subsidiaries. In addition, it has engaged several consultants in various fields of competency. At the board of directors level, each of the publicly listed subsidiaries have respected individuals who serve as independent directors and advisors to these boards of directors. The Issuer has conducted and may continue to conduct acquisitions, the impact of which could be less favorable for its activities and results than anticipated, or which could affect its financial situation. As part of its business strategy, the Issuer has conducted and continues to carry out acquisitions of varying sizes, some of which are significant at the Group level. These acquisitions involve numerous risks, including the following: (i) the assumptions used in the underlying business plans may not prove to be accurate, in particular with respect to synergies and expected commercial demand; (ii) the Issuer may not integrate acquired businesses, technologies, products, personnel and operations effectively; (iii) the Issuer may fail to retain key employees, customers and suppliers of the companies acquired; (iv) the Issuer may be required or wish to terminate pre-existing contractual relationships, which could be costly and/or on unfavorable terms; and (v) the Issuer may increase its indebtedness to finance these acquisitions. As a result, it is possible that the expected benefits of completed or future acquisitions may not materialize within the time periods or to the extent anticipated, or affect the Issuer s financial condition. Prior to pursuing acquisition opportunities, the Issuer undertakes a comprehensive evaluation of these opportunities fit with the Group s overall business strategy. Part of this process involves, aside from determining potential synergies, a determination of the appropriate integration strategies and plans to adopt in order to effectively realize these potential benefits in efficiencies and synergies. It likewise undertakes a comprehensive due diligence evaluation of potential acquisition or investee companies in order to determine the necessary governance, strategic and operating plans to adopt in order to mitigate acquisition risks. Depending on the circumstances of the transaction, such merger and/or acquisition may require the submission of a written notification with the Philippine Competition Commission ( PCC ) in compliance with the requirements of Republic Act No (the Philippine Competition Act ). There is a risk that the notification process may delay the completion of any proposed merger/acquisition or that the PCC may find that the proposed merger/acquisition has an anti-competitive effect. Infringement of the SM intellectual property rights would have a material adverse effect on the Group s business. The Group relies on trademarks to establish and protect the SM name, logo and other SM in-house brands. The Group believes that the trademarks and its intellectual property rights are important to its success and competitive position. There can be no assurance that the actions the Group has taken will be adequate to prevent brand and product imitation by others or to prevent others from using the SM name as a violation of 30

36 its trademarks and other intellectual property rights. In addition, there can be no assurance that others will not assert rights in, or ownership of, the Group s trademarks and other intellectual property rights. The Group s business, financial condition and results of operations may be materially and adversely affected by trademark infringements or trademark disputes with others. The Group registers all its brands to protect its intellectual property rights and actively monitors the validity of these registrations. While the SM brand has goodwill, the Issuer believes that it is still good management expertise that determines the success of its business undertakings and the success of these brands. The Group s debt leverage will be increased following the issue of the Bonds. As at 30 June 2016, the Group had aggregate indebtedness (comprising bank loans, current portion of long-term debt, and long-term debt - net of current portion) of P279,454.0 million, on a consolidated basis and total equity (excluding non-controlling interest) of P292,270.6 million, resulting in a debt-equity ratio of approximately 49:51. Following the issue of the Bonds, the Group s indebtedness on a consolidated basis will increase to P294,454.0 million, and its debt-equity ratio will increase to approximately 50:50 (see Capitalization and Indebtedness ). The increase in the Group s level of outstanding debt following this Offer will increase the Group s exposure to a number of risks associated with debt financing, including the risk that cash flows from the Group s operations will be insufficient to meet required payments of principal, the risk that the repayment of the Group s foreign currency loans may be adversely affected if the peso depreciates against the US dollar, the risk that the Group will become more vulnerable to general adverse economic and industry conditions and the risk that it may not be possible to obtain refinancing on favorable terms when required or if at all. Although the Group anticipates that it will be able to repay or refinance existing debt, and any other indebtedness when it matures, there can be no assurance that it will be able to do so. The Group s resulting gross debt-equity ratio of 50:50, subsequent to the issue of the Bonds, shall remain well within its maximum permissible ratio of 80:20 as set out in the Group s debt covenants. Risks Relating to the Group s Malls and Property Businesses The Philippine property market is cyclical and can be affected by domestic and global economic conditions. SM Prime derives a substantial portion of its revenue from rents and sales relating to its portfolio of malls, residential and commercial property developments and other leisure and mixed-use properties, substantially all of which are located in the Philippines. Accordingly, SM Prime is heavily dependent on conditions in the Philippine property market. In the past, the Philippine property market has been cyclical, and property values have been affected by the supply of and demand for comparable properties, the rate of economic growth in the Philippines and political and social developments. Since the second half of 2008, the global financial markets have experienced, and may continue to experience, significant dislocations, which originated from the liquidity disruptions in the United States and the European Union credit and sub-prime residential mortgage markets. These disruptions and other events, such as rising government deficits and debt levels, the sovereign credit ratings downgrades and ensuing public deficit and debt reduction measures of the United States and certain member states of the European Union, the risk of a partial collapse of the Eurozone and slower rates of growth in the Chinese economy have had and continue to have a significant adverse effect on the global financial markets. In particular, the global financial crisis in 2008 and 2009 resulted in a generally negative effect on real estate property prices globally, including in the Philippines, and continued uncertainty and volatility in global economic conditions may result in further adverse impacts to SM Prime. These adverse effects can result in, among others, lower demand and values for real estate in the Philippines, increased difficulties on the part of tenants in meeting 31

37 their lease and other financial obligations, and greater difficulties for SM Prime in obtaining financing where necessary to fund the acquisition and development of their real estate projects. SM Prime s growth is largely dependent on its ability to construct profitable malls in new locations in the Philippines. The substantial majority of the aggregate net leasable area in these malls is dedicated to retail use, exposing SM Prime to risks relating to economic conditions in the Philippines such as trends in consumer spending, exchange rates and spending patterns of OFWs and their dependents, and the supply of, or demand from, tenants for retail space and other competing commercial malls. Declines in consumer spending and other factors that may result in lower demand for retail space could have a material adverse effect on SM Prime s ability to successfully operate and develop existing and future malls. In addition, demand for new residential projects in the Philippines has fluctuated in the past as a result of prevailing economic conditions in both the Philippines and in other countries, such as the United States (including overall growth levels and interest rates), the strength of overseas markets (as a substantial portion of demand comes from Overseas Filipino Workers ( OFWs ) and expatriate Filipinos), the political and security situation in the Philippines and other related factors. General cyclical trends in the Philippines and international property markets, as well as significant uncertainties and volatilities in the domestic, regional and global economic conditions affecting those property markets, are expected to continue, and accordingly SM Prime s results of operations may fluctuate from period to period in accordance with those fluctuations. There can be no assurance that such variances will not have a material adverse effect on the business, financial condition and results of operations of SM Prime and consequently, on the financial condition and results of operations of the Issuer. SM Prime may face challenges of title to land. While the Philippines has adopted a system of land registration which is intended to conclusively confirm land ownership, and which is binding on all persons (including the Government), it is not uncommon for third parties to claim ownership of land that has already been registered and over which a title has been issued. There have also been cases where third parties have produced false or forged title certificates over land. In particular, Quezon City, Metro Manila and the province of Cavite, have been known to experience problems with syndicates of squatters and forged or false title holders. Although SM Prime generally conducts extensive title searches before it acquires any parcel of land, from time to time it has defended itself against third parties who claim to be the rightful owners of land which has been either titled in the name of the persons selling the land to those companies or which has already been titled in those companies names. In the event a greater number of similar third-party claims are brought against SM Prime in the future or any such claims involve land that is material to SM Prime s malls, residential developments and other real estate assets, SM Prime s management may be required to devote significant time and incur significant costs in defending against such claims. If any such claims are successful, SM Prime may have to either incur additional costs to settle such third-party claims or surrender title to land that may be material in the context of SM Prime s operations. In addition, title claims made by third parties against SM Prime may have an adverse effect on its reputation. Furthermore, transfer of title in the Philippines in connection with real estate sales involves a series of registrations and filings, which can require several months to complete. As a result, SM Prime may in some instances occupy, operate or develop properties for which it has not yet completed all formalities in respect of perfecting title. There can be no assurance that third parties will not in the future challenge SM Prime s rights to properties in similar circumstances where title has not yet been perfected. SM Prime s rights and title to reclaimed land may be challenged In 2002, the Supreme Court of the Philippines promulgated a decision in the case of Francisco I. Chavez vs. Public Estates Authority and Amari Coastal Bay Development Corporation (G.R. No ) and ruled that 32

38 Government-reclaimed lands form part of the public domain and consequently, cannot be acquired by private corporations without violating the Philippine Constitution. 3 SM Prime (formerly SM Land/Shoemart) owns 60 hectares of reclaimed land along the coast of Manila Bay at the MOA complex, the acquisition of which was upheld in 1995 by the Court of Appeals, whose decision has long become final and has been executed. Title to a great majority of lots comprising the reclaimed land has since been registered under the name of SM Prime (formerly SM Land/Shoemart). SM Prime believes Shoemart acquired its reclaimed land in good faith and for value. The MOA complex is a 60 hectare master-planned bayside development in Pasay City with a total estimated land value of 58.3 billion according to CBRE as of February 28, The MOA complex is estimated to comprise 8% of the total assets of SM Prime and 7% of its total land value. The MOA complex houses the SM Mall of Asia, the Mall of Asia Arena, the MOA Arena Annex Building (that houses additional parking spaces and office levels), and the SMX Convention Center Manila, among other commercial, business and entertainment establishments. The MOA complex is also the site of the E-Com Centers, a series of modern and iconic office buildings mostly targeting technology based industries, BPO and shipping companies, as well as some of SM Prime s residential developments such as the Shell Residences and Shore Residences. The various business segments located within the MOA complex contributed an aggregate estimated P4,476 million or 7% of the revenues of SM Prime in 2013, P4,522 million or 7% of the revenues of SM Prime in 2014 and P4,852 million or 7% of the revenues of SM Prime in 2015 and approximately P1,873 million or 8%, P2,140 million or 8% and P2,380 million or 8%, in operating income, for the same period. SM Prime s mixed use development project in Cebu City, the SM Seaside City, also stands on reclaimed land of approximately 30 hectares with an acquisition cost of approximately P3,000 million. SM Prime acquired the property in good faith and for value and expects title to the property to be transferred in its name in due course. The mall in SM Seaside City is the city s largest mall, with a gross floor area of approximately 430,000 sq. m. It consists of a four-storey complex featuring a cineplex, IMAX theater, bowling center and ice skating rink. There is, however, no assurance that the title to the land where the MOA Complex and the SM Seaside City is located will not be challenged and have an adverse impact on SM Prime s right and title to the reclaimed lands. Any such challenge, whether successful or not, may adversely affect its business, financial condition and results of operations. SM Prime, however, believes that any adverse effect of such challenge to its business will not materially impact SM Prime s ability to conduct its business or significantly affect its ability to operate given that the MOA complex comprises less than 10% of its total assets. In the event that it becomes subject of such challenge or lawsuit, SM Prime will defend its rights against such claims. SM Prime is exposed to general risks associated with the ownership and management of real estate. Real estate investments are generally illiquid, limiting the ability of an owner or a developer to convert property assets into cash on short notice with the result that property assets may be required to be sold at 3 Article XII Section 3. Lands of the public domain are classified into agricultural, forest or timber, mineral lands, and national parks. Agricultural lands of the public domain may be further classified by law according to the uses to which they may be devoted. Alienable lands of the public domain shall be limited to agricultural lands. Private corporations or associations may not hold such alienable lands of the public domain except by lease, for a period not exceeding twenty-five years, renewable for not more than twenty-five years, and not to exceed one thousand hectares in area. Citizens of the Philippines may lease not more than five hundred hectares, or acquire not more than twelve hectares thereof by purchase, homestead, or grant. Taking into account the requirements of conservation, ecology, and development, and subject to the requirements of agrarian reform, the Congress shall determine, by law, the size of lands of the public domain which may be acquired, developed, held, or leased and the conditions therefor. 33

39 a discount in order to ensure a quick sale. Such illiquidity will also limit the ability of SM Prime to manage its portfolio in response to changes in economic, real estate market or other conditions. Property investment is also subject to risks incidental to the ownership and management of residential and commercial properties including, among other things: competition for tenants; oversupply of, or reduced demand for, retail, office and residential space; changes in market rents; inability to renew leases at favorable rates or at all; inability to collect rents due to insolvency of tenants, or otherwise as a result of their inability or refusal to comply with lease commitments as a result of adverse business conditions or other factors; inability to dispose of major investment properties for the values at which they are recorded; increased operating costs; the need to renovate, repair and re-let space periodically and to pay the associated costs; wars, terrorist attacks, riots, civil commotions and natural disasters; and other events beyond SM Prime s control. SM Prime s activities may also be impacted by changes in laws and governmental regulations in relation to real estate, including those governing usage, zoning, taxes and government charges. Such revisions may lead to an increase in management expenses or unforeseen capital expenditure to ensure compliance. Rights related to the relevant properties may also be restricted by legislative actions, such as revisions to the laws relating to building standards or town planning laws, or the enactment of new laws relating to government appropriation, condemnation and redevelopment. For example, several of SM Prime s properties are registered as a Philippine Economic Zone ( PEZ ), which entitles them to certain benefits for the tenants that are located there, including tax advantages. If such properties were to lose their favorable PEZ status, these benefits may be lost. Any of these events could materially and adversely affect SM Prime s businesses, financial condition and results of operations and, consequently, the financial condition and results of operations of the Issuer. SM Prime will continue to compete with other mall operators and commercial and residential developers. SM Prime competes with other developers and operators of shopping malls and other commercial properties and residential properties for tenants, sales customers and land acquisition opportunities, among others. SM Prime s malls compete with other similar malls. Increased competition could adversely affect income from, and the market values of, the malls. The income from, and market values of, the malls are largely dependent on the ability of the malls to compete against other retail malls in their area in attracting and retaining tenants. In addition, tenants at the malls face increasing competition from specialty stores, general merchandise stores, discount stores, warehouse outlets and street markets, which may affect the ability or willingness of such tenants to continue renewing their leases. Important factors that affect the ability of retail malls to attract or retain tenants include the popularity of the malls with retail customers, which is a function of the quality of the malls existing tenants and the attractiveness of the building and the surrounding area. Attracting and retaining tenants and customers often involves refitting, repairing or making improvements to mechanical and electrical systems and outward appearance. If competing malls of a similar type are built in the areas where the malls are located or similar malls in the vicinity of the malls are substantially updated and refurbished, the value and net income of the malls could be reduced. SM Prime s income from, and market values of, its residential development projects is largely dependent on these projects popularity when compared to similar projects in their areas, as well as on the ability of SM Prime to gauge correctly the market for its projects. Important factors that could affect SM Prime s ability to compete effectively include a project s relative location versus that of its competitors, particularly proximity to transportation facilities and commercial centers, as well as the quality of the housing and related facilities offered by SM Prime and the overall attractiveness of the project. SM Prime s commercial investment property business competes with a number of commercial developers. 34

40 Competition from other developers of neighboring commercial centers and office spaces may adversely affect SM Prime s ability to operate successfully its investment properties or attract and retain tenants, and continued development by these and other market participants could result in saturation of the market for office space. In addition, SM Prime s major competitors may have greater experience, financial resources and more expertise in developing commercial properties and commercial leasing operations. SM Prime s future growth and development will also depend, in part, on its ability to acquire or enter into agreements to develop additional tracts of land suitable for the types of mall, residential and commercial real estate projects that SM Prime has developed over the years. SM Prime may experience difficulty locating parcels of land of suitable size in locations and at prices acceptable to SM Prime, particularly parcels of land located in areas surrounding Metro Manila and in other urban areas throughout the Philippines. In the event SM Prime is unable to acquire suitable land at acceptable prices, or at all, its growth prospects could be limited and its business and results of operations could be adversely affected. As a result of the foregoing, historical operating results of the malls may not be indicative of future operating results and historical market values of the malls may not be indicative of future market values. A failure by SM Prime to compete effectively against other developers and operators of malls and other commercial properties and residential properties could result in a loss of market share in the relevant sectors and corresponding decreases in revenues from rentals and property sales, which would in turn negatively impact SM Prime s businesses, financial condition and results of operations and, consequently, the financial condition and results of operations of the Issuer. SM Prime is exposed to risks associated with the operation of its malls and commercial businesses. The operations of SM Prime s malls and commercial businesses are subject to risks relating to the ownership of properties for lease and the management of mall and commercial tenants. The performance of SM Prime s malls and commercial properties could be affected by a number of factors, including: the national and international economic climate; trends in the Philippine commercial and retail industry; ability to attract leading names in the retail market to SM Prime s mall and commercial developments; ability to anticipate the future technological and infrastructure needs of Business Process Outsourcing ( BPO ) tenants and effectively design properties to meet those needs; efficiency in collection, property management and tenant relations; non-renewal of expiring tenancies; amount of disposable income and consumer preference; competition for tenants; changes in market rental rates; the need to periodically renovate, repair and re-let space and the costs thereof; the quality and strategy of the management services provided; and SM Prime s ability to provide adequate security, maintenance and insurance. In particular, SM Prime s commercial development projects comprise three office buildings catering primarily to tenants operating in the BPO industry. Adverse trends in the Philippines BPO industry and competitive environment could result in the inability of existing BPO tenants to honor their lease commitments, as well as lower demand among potential BPO clients for vacant space. If SM Prime is unable to lease its mall and commercial properties in a timely manner or collect rent at profitable rates or at all, this could materially and adversely affect SM Prime s business, financial condition and results of operations, as well as the financial condition and results of operations of the Issuer. 35

41 SM Prime faces numerous risks including reputational risk and operational risks relating to its residential and commercial businesses. SM Prime s operations include the development and sale of residential properties and the development and lease of office and commercial properties. The property development business involves significant risks distinct from those involved in the ownership and operation of established properties, including the risk that SM Prime may invest significant time and money in a project that may not attract sufficient levels of demand in terms of anticipated sales or rentals at the expected take-up rate and which may not yield target returns as anticipated. In addition, obtaining required approvals and permits from various Philippine regulatory agencies may take substantially more time and resources than anticipated and construction of projects may not be completed on schedule or within budget. The time and the costs involved in completing the development and construction of projects can be adversely affected by many factors, including shortages of materials, equipment and labor, adverse weather conditions, peso depreciation, natural disasters, labor disputes with contractors and subcontractors, accidents, changes in laws or in Government priorities and other unforeseen problems or circumstances. Any of these factors could result in project delays and cost overruns, which could negatively affect SM Prime s margins. SM Prime s reputation could also be adversely affected if projects are not completed on time or if projects do not meet customers requirements. If any of SM Prime s projects experiences construction or infrastructure failures, design flaws, significant project delays, quality control issues or otherwise, this could negatively affect its brand image and its ability to pre-sell its residential development projects. This would reduce cash flow and impair its ability to meet funding requirements. Project delays, cost overruns and construction issues could also result in sales and resulting profits from a particular development not being recognized in the year in which it was originally expected to be recognized, which could adversely affect SM Prime s and the Issuer s results of operations. Further, the failure by SM Prime to complete construction of a project to its planned specifications or schedule may result in cost overruns and possible abandonment of projects by contractors, as well as lower returns. Moreover, orders of the Philippine Department of Agrarian Reform (the DAR ) allowing conversion of agricultural land for development may require a project to complete construction by a prescribed deadline. If SM Prime fails to complete construction of a project by the stated deadline, the DAR may revoke its order allowing the use of agricultural land for SM Prime s intended purpose. SM Prime may be subject to tax liabilities in relation to the Reorganization. In relation to the Reorganization, SM Prime filed certain applications with the BIR on 9 December 2013 for rulings confirming the tax treatment of the transaction in the Reorganization as a tax-free merger under Philippine tax law and regulations. As of the date of this Prospectus, the ruling request is still pending with the BIR. Previously, the BIR allowed the delegation of the authority to rule on this type of application to BIR s Assistant Commissioner, however, the new BIR administration that took over in 2010 has adopted a policy that this type of application must be signed off by the BIR Commissioner. This new policy has resulted in the delayed issuance of BIR rulings. While SM Prime and its Philippine legal counsel believe that the Reorganization is fully compliant with the requirements for tax-free status under the law and existing regulations, there can be no assurance that the requested tax rulings will be issued by the BIR in the near future, or at all. In the event that no such tax ruling is issued, the BIR could issue tax assessments in connection with the Reorganization subjecting the transfer of assets pursuant to the Reorganization to the payment of applicable taxes. Although SM Prime believes that it would have sufficient grounds to challenge an adverse tax ruling by the BIR, if SM Prime is forced to pay a tax assessment, it could be a substantial amount and could materially and adversely affect SM Prime s and the Issuer s financial condition and 36

42 business reputation. SM Prime s leasing operations depend on key tenants, which are affiliates of the SM Group. SM Prime derives a substantial portion of its rental income from affiliated and anchor tenants, most of whom are affiliates of the SM Group, to maintain sufficient foot traffic at its malls and other retail properties. There can be no assurance that, despite their longstanding and symbiotic relationship with SM Prime, certain anchor tenants would not terminate their lease, which could adversely affect SM Prime s total rental revenue, nor can there be any assurance that SM Prime would be able to locate similar, suitable replacement tenants. Furthermore, there can be no assurance that such affiliated tenants will not relocate to another space or renegotiate leases on terms more favorable to them. A partial or total loss of these tenants could have a material adverse effect on SM Prime s businesses, financial condition and results of operations and, consequently, adversely affect the financial condition and results of operations of the Issuer. Malls and other commercial properties owned by SM Prime may be subject to an increase in operating and other expenses. SM Prime s financial condition and results of operations could be adversely affected if operating and other expenses relating to malls and other commercial properties increase without a corresponding increase in revenues or tenant reimbursements (where applicable) of operating and other expenses. Factors which could increase operating and other expenses include: increases in utility expenses; increases in payroll expenses; increases in property taxes and other statutory charges; increases in the rate of inflation; changes in the rate and expense of depreciation and amortization; changes in statutory laws, regulations or Government policies that increase the cost of compliance with such laws, regulations or policies; increases in management fees or sub-contracted service costs, such as maintenance and security; increases in insurance premiums; and defects affecting the malls which need to be rectified, leading to unforeseen capital expenditure. Increased expenses resulting from the foregoing or other factors, to the extent not compensated by corresponding increases in revenues, could have a material adverse effect on SM Prime s businesses, financial condition and results of operations and, consequently, adversely affect the financial condition and results of operations of the Issuer. SM Prime faces risks relating to the management of its land bank. SM Prime will need to acquire land for replacement and expansion of land inventory within its current markets. However, it may not be possible to acquire land in suitable locations and on commercially reasonable terms. These challenges are exacerbated by the highly competitive real estate industry in Metro Manila and its surrounding areas, where SM Prime competes with other real estate companies, some of which may have more resources than SM Prime, for land acquisition and the right to participate in land reclamation projects. There can be no assurance of reaching agreement in respect of the lease or purchase of any specific property or properties. In the event that SM Prime is unable to acquire suitable land, its growth prospects could be limited. The risks inherent in purchasing and developing land increase as consumer demand for residential real estate decreases. The market value of land, subdivision lots and housing inventories can fluctuate significantly as a result of changing market conditions. There can be no assurance that measures employed 37

43 to manage land inventory risks will be successful. In the event of significant changes in economic, political or market conditions, SM Prime may have to sell subdivision lots and housing and condominium units at significantly lower margins or at a loss. Changes in economic or market conditions may also require SM Prime to defer the commencement of housing and land development projects, which would require carrying the cost of acquired but undeveloped land on-balance sheet, as well as reducing the amount of property available for sale. Any of the foregoing events would have a material adverse effect on SM Prime s business, financial condition and results of operations and, consequently, adversely affect the financial condition and results of operations of the Issuer. SM Prime operates in a highly regulated environment and it is affected by the development and application of regulations in the Philippines. The Philippines property development industry is highly regulated. The development of condominium, subdivision and other residential projects, commercial projects and land reclamation projects is subject to a wide range of government regulations, which, while varying from one locality to another, typically include zoning considerations as well as the requirement to procure a variety of environmental and construction-related permits. In addition, projects that are to be located on agricultural land, must get clearance from the DAR so that the land can be reclassified as non-agricultural land and, in certain cases, tenants occupying agricultural land may have to be relocated at a developer s expense. Presidential Decree No. 957, as amended, ( P.D. 957 ), Republic Act No. 4726, as amended, ( R.A ), Republic Act No (the Maceda Law ) and Batas Pambansa Blg. 220 ( B.P. 220 ) are the principal statutes which regulate the development and sale of real property as part of a condominium or subdivision project. P.D. 957, R.A and B.P. 220 cover subdivision projects for residential, commercial, industrial or recreational purposes and condominium projects for residential or commercial purposes. The Maceda Law governs the sale of property on installment. The Housing and Land Use Regulatory Board ( HLURB ) is the administrative agency of the Government which enforces these statutes. Regulations applicable to SM Prime s operations include among others: the suitability of the site; road access; necessary community facilities; open spaces and common areas; water supply; sewage disposal systems; electricity supply; and unit/lot sizes. Since 2008, HLURB has required all property developers in the Philippines to partake in the development of socialized housing projects. Under Section 18 of the Republic Act No. 7279, developers of subdivision projects are required to develop an area for socialized housing equivalent to at least 20% of the total subdivision area or total subdivision project cost, at the option of the developer, within the same city or municipality, whenever feasible, and in accordance with the standards set by HLURB and other existing laws. Property developers are not allowed to buy credits from property firms already involved in socialized housing development, rather, they are required to comply with the rule by participating in: a) development of settlement; b) slum upgrading or renewal of areas for priority development either through zone improvement programs or slum improvement and resettlement programs; c) joint venture projects with either local government units ( LGUs ) or any of the housing agencies; or d) participation in the community mortgage program. If SM Prime does not comply with this requirement, it may be subject to fines or other sanctions which would adversely impact its business and results of operations. All condominium and subdivision development plans are also required to be filed with and approved by the LGU with jurisdiction over the area where the project is located. Approval of development plans is conditioned on, among other things, completion of the acquisition of the project site and the developer s 38

44 financial, technical and administrative capabilities. Alterations of approved plans that affect significant areas of the project, such as infrastructure and public facilities, also require prior approval of the relevant LGU. There can be no assurance that SM Prime will be able to obtain governmental approvals for its projects or that, when given, such approvals will not be revoked. In addition, developers, owners of or dealers in real estate projects are required to obtain licenses to sell before making sales or other dispositions of condominium units, subdivision lots and housing units. Project permits and any license to sell may be suspended, cancelled or revoked by HLURB based on its own findings or upon complaint from an interested party, and there can be no assurance that SM Prime will in all circumstances receive the requisite approvals, permits or licenses or that such permits, approvals or licenses will not be cancelled or suspended. Any of the foregoing circumstances or events could affect SM Prime s ability to complete projects on time, within budget or at all, and could materially and adversely affect SM Prime s business, financial condition and results of operations and, consequently, adversely affect the financial condition and results of operations of the Issuer. Zoning restrictions and local opposition may delay or preclude construction. In order to develop a property on a particular site, the zoning of such site must permit the development of the intended type of residential, office and/or retail activities. In instances where the existing zoning is not suitable or in which the zoning has yet to be determined, SM Prime will be required to apply for the required zoning classifications. This procedure may be protracted, particularly where the bureaucracy is cumbersome and inefficient, and there can be no assurance that the process of obtaining proper zoning will be completed with sufficient speed to enable the residential, office and/or retail developments to be completed ahead of any competitor development, or at all. Opposition by local residents to zoning and/or building permit applications may also cause considerable delays. SM Prime s plans to build on reclaimed land in the future may also face public opposition. In addition, arbitrary changes to applicable zoning by the relevant authorities may jeopardize projects that have already commenced. Therefore, a failure by SM Prime to receive zoning approvals, or delays in the receipt of such zoning approvals, could result in increased costs, which could have a material adverse effect on SM Prime s businesses, financial condition and results of operations and, consequently, adversely affect the financial condition and results of operations of the Issuer. Infringement of intellectual property rights could have a material adverse effect on SM Prime s business. Upon commencement of development of new projects, SM Prime generally files applications for the registration of intellectual property rights with respect to the names of certain of its real estate products, as well as for trademarks. There can be no assurance that such applications will be approved or that the actions SM Prime has taken will be adequate to prevent third parties from using its corporate brands and logos, or from naming brands or developments using the same brands that SM Prime will use. In addition, there can be no assurance that third parties will not assert rights in, or ownership of, the trademarks and other intellectual property rights of SM Prime. SM Prime believes that the reputation and track record established under its intellectual property rights such as the SM name (which, together with other SM trademarks and logos, is owned by SMIC and its affiliated companies) is a key to future growth, and accordingly, SM Prime s business, financial condition and results of operations may be materially and adversely affected by the infringing use of the SM and related brand names by third parties, or if in any way SM Prime is restricted from using such marks. 39

45 Land and/or real property may be subject to compulsory acquisition. Under Philippine law, the Government has the power to acquire any land in the Philippines if such acquisition is for public benefit or utility or any other public interest. Accordingly, in the event that land is compulsorily acquired from SM Prime, SM Prime s businesses, financial condition and results of operations could be adversely affected. In addition, real property and/or land owned by SM Prime and located outside of the Philippines may be compulsorily acquired by the respective governments of the countries in which they are located for public use or for public interest. The owner of such real property that has been compulsorily acquired may be compensated in accordance with the laws of the respective jurisdictions, which compensation may be less than its market value. Any instance of land being compulsorily acquired from SM Prime may materially and adversely affect SM Prime s business, financial conditions and results of operations and, consequently, the financial condition and results of operations of the Issuer. SM Prime faces risks inherent in joint venture structures and/or funds. SM Prime has interests in joint venture entities and/or funds in connection with its property development and investment plans, including integrated developments. Disagreements may occur between SM Prime, on the one hand, and their joint venture partners and/or third-party fund investors, as the case may be, regarding the business and operations of the joint ventures and/or funds which may not be resolved amicably. In addition, joint venture partners and/or third-party fund investors may (i) have economic or business interests or goals that are inconsistent with those of SM Prime; (ii) take actions contrary to SM Prime s instructions, requests, policies or objectives; (iii) be unable or unwilling to fulfill their obligations; (iv) have financial difficulties; or (v) have disputes as to the scope of their responsibilities and obligations. Additionally, in light of the current economic climate, joint venture partners or third-party fund investors (i) may not be able to fulfill their respective contractual obligations (for example, they may default in making payments during future capital calls or capital raising exercises); or (ii) may experience a decline in their creditworthiness. The occurrence of any of these events may materially and adversely affect the performance of joint ventures and/or funds, which in turn may materially and adversely affect SM Prime s performance. Construction defects and other building-related claims may be asserted against SM Prime, and SM Prime may be subject to liability for such claims. Philippine law provides that property developers, such as SM Prime, warrant the structural integrity of residential developments that were designed or built by them for a period of 15 years from the date of completion of the development. SM Prime may also be held responsible for hidden (i.e. latent or non-observable) defects in a residential property sold by it when such hidden defects render the property unfit for the use for which it was intended or when its fitness for such use is diminished to the extent that the buyer would not have acquired it or would have paid a lower price had the buyer been aware of the hidden defect. This warranty may be enforced within six months from the delivery of the residential property to the buyer. In addition, Republic Act No. 6541, as amended, or the National Building Code of the Philippines (the Building Code ), which governs, among other things, the design and construction of buildings, sets certain requirements and standards with which SM Prime must comply. SM Prime or its officials may be held liable for administrative fines or criminal penalties in the case of any violation of the Building Code. 40

46 There can be no assurance that SM Prime will not be held liable for damages, the cost of repairs, and/or the expense of litigation surrounding possible claims or that claims will not arise out of uninsurable events, such as landslides or earthquakes, or circumstances not covered by SM Prime s insurance. If these damages are not covered by warranty and indemnification clauses in SM Prime s agreements with contractors, the resulting liabilities could have an adverse effect on SM Prime s business, financial condition and results of operations and, consequently, adversely affect the financial condition and results of operations of the Issuer. SM Prime may suffer material losses in excess of insurance proceeds. SM Prime s portfolio of malls, residential properties and other real estate assets could suffer physical damage caused by fire, flooding, typhoons, earthquakes or other causes, or third-party liability claims, any of which could result in losses (including loss of rent) which may not be fully compensated for by insurance. SM Prime may also be exposed to liability for damages or injuries from accidents occurring on its properties. In addition, certain types of risks and insurance cover (such as war risk and acts of terrorism) may be uninsurable or the cost of insurance may be prohibitive when compared to the risk. Should an uninsured loss or a loss in excess of insured limits occur, SM Prime could lose capital invested in the affected property as well as any anticipated future revenue from such property, and may also remain liable for any debt or other financial obligation related to such property. No assurance can be given that material losses in excess of insurance proceeds will not occur in the future. SM Prime faces property development risk. The property development business involves significant risks distinct from those involved in the ownership and operation of established properties, including the risks that Government approvals may take more time and resources to obtain than expected; that construction may not be completed on schedule or budget; and that the properties may not achieve anticipated sales, rents or occupancy levels. In addition, development projects typically require substantial capital expenditure during construction and it may take years before property projects generate cash flows. There is the risk that financing for development may not be available under favorable terms, or that construction may not be completed on schedule or within budget. The time and the costs involved in completing construction can be adversely affected by many factors, including shortages of materials, equipment and labor; adverse weather conditions; natural disasters; labor disputes with contractors and subcontractors; accidents; changes in Government priorities; and unforeseen problems or circumstances. The occurrence of any of these factors could give rise to delays in the completion of a project and result in cost overruns. This may also result in the profit on development for a particular property not being recognized in the year in which it was originally anticipated to be recognized, which could adversely affect SM Prime s profits recognized for that year. Further, the failure by SM Prime or any of its subsidiaries to complete construction of a project to its planned specifications or schedule may result in liabilities, reduced project efficiency and lower returns. No assurance can be given that such events will not occur in a manner that would adversely affect the results of operations or financial condition of SM Prime and, consequently the results of operations and financial condition of the Issuer. Furthermore, properties presently in the name of SM Prime or those acquired in the future may be subject to various lawsuits and/or claims, which, if resolved against SM Prime, will result in the loss or reduction in size of the particular property subject of the lawsuit. To mitigate these risks, SM Prime ensures that its project developments are carefully planned. SM Prime relies on the services of reputable, high quality, independent contractors for their projects and maintains good business relationships with these contractors. SM Prime adheres to the strategy of developing each project in phases to minimize exposure to such risks. Further, each company keeps within a conservative level of leverage. Although the current liquidity and depth of the Philippine credit market renders funding risk as unlikely, the companies have unutilized credit lines as buffer for unanticipated requirements. The 41

47 companies also ensure that all required governmental approvals are obtained and kept updated on any developments in regulations concerning the real estate industry. SM Prime will continue to face certain risks related to the cancellation of sales involving its residential projects. SM Prime s operations involving the development and sale of residential real estate could be adversely affected in the event that a material number of condominium unit, subdivision lot or house and lot sales are cancelled. SM Prime s transactions are subject to the Maceda Law, which applies to all transactions or contracts involving the sale or financing of real estate through installment payments paid to the developer, including residential condominium units (but excluding industrial and commercial lots). Under the Maceda Law, buyers who have paid at least two years of installments are granted a grace period of one month for every year of paid installments to cure any payment default. A buyer is given such a right only once every five years during the life of the contract and its extensions, if any. If the contract is cancelled, the buyer is entitled to receive a refund of at least 50% of the total payments made by the buyer. Buyers who have paid less than two years of installments and who default on installment payments are given a 60 day grace period to pay all unpaid installments before the sale can be cancelled, but without the right of refund. While historically SM Prime has not experienced a material number of cancellations to which the Maceda Law has applied, there can be no assurance that SM Prime will not experience a material number of cancellations in the future, particularly during slowdowns or downturns in the Philippine economy, periods when interest rates are high or similar situations or if SM Prime fails to meet the construction schedules of launched projects. In the event SM Prime does experience a material number of cancellations, it may not have enough funds on hand to pay the necessary cash refunds to buyers, or it may have to incur indebtedness in order to pay such cash refunds. In addition, particularly during an economic slowdown or downturn, there can be no assurance that SM Prime would be able to resell the same property at an acceptable price or at all. Any of the foregoing events would have a material adverse effect on SM Prime s business, financial condition and results of operations and, consequently, adversely affect the financial condition and results of operations of the Issuer. From time to time SM Prime will commence construction of a condominium project or house even before the full amount of the required down payment is made and thus, before the sale is recorded as revenue. SM Prime will therefore risk having expended cash to begin construction of the condominium project or the house before being assured that the sale will eventually be booked as revenue, particularly if the buyer is unable to complete the required down payment and SM Prime is unable to find another purchaser for such property. There can be no assurance that SM Prime will not suffer from substantial sales cancellations and that such cancellations will not materially and adversely affect SM Prime s business, financial condition and results of operations and, consequently, the financial condition and results of operations of the Issuer. The loss of certain tax exemptions and incentives for residential home sales may increase the price of SM Prime s residential units and may lead to a reduction in sales. SM Prime s customers benefits from provisions under Philippine law and regulations which exempt sales of residential lots with a gross selling price of 1,919,500 and below and sales of residential houses and lots with a gross selling price of 3,199,200 and below from the value-added tax ( VAT ) of 12.0%. However, if two or more adjacent lots, or houses and lots, are sold to one buyer from the same seller for the purpose of utilizing them as one residential area, the sale shall be exempt from VAT only if the aggregate value of the properties does not exceed the threshold prices for exemption. Adjacent lots or houses and lots sold to the same person shall be presumed to be a sale of one residential area although covered by separate titles and/or tax declarations and by separate deeds of conveyance. In the event that sales become subject to VAT, due to a change in Government policy or otherwise, the purchase prices for SM Prime s subdivision lots 42

48 and housing and condominium units will increase and this could adversely affect its sales. Because taxes such as the VAT are expected to have indirect effects on SM Prime s results of operations by affecting general levels of spending in the Philippines and the prices of subdivision lots and houses, any adverse change in the Government s VAT-exemption policy could have an adverse effect on SM Prime s results of operations and, consequently, on the results of operations of the Issuer. A domestic asset price bubble could adversely affect SM Prime s business. One of the risks inherent in any real estate property market is the possibility of an asset price bubble. This occurs when there is a gross imbalance between the supply and demand in the property market, causing an unusual increase in asset prices, followed by a drastic drop in prices when the bubble bursts. In the Philippines, the growth of the real estate sector is mainly driven by low interest rates, robust remittances from Overseas Filipino Workers, and the fast growing Business Process Outsourcing sector which is vulnerable to global economic changes. SM Prime believes that the Philippine property sector is adequately protected against a domestic asset price bubble burst. The country has a very young demographic profile benefitting from rising disposable income. It likewise has one of the fastest growing emerging economies, registering Gross Domestic Product growth rates of 7.2% in 2013, 6.1% in 2014 and 5.8% in 2015 and the growth in the property sector is largely supported by infrastructure investments from both the public and private sectors and strong macroeconomic fundamentals. There can be no assurance however, that the Philippines will achieve strong economic fundamentals in the future. Changes in the conditions of the Philippine economy could materially and adversely affect SM Prime's business, financial condition and results of operations and consequently, adversely affect the financial condition and results of operations of the Issuer. Risks Relating to the Retail Operations The success of the Retail Subsidiaries will be dependent in part on the Issuer s continued ability to satisfy consumer preferences and spending trends in the markets in which the Retail Subsidiaries operate. The success of the Retail Subsidiaries partially depends on their ability to anticipate and respond to changing consumer preferences in a timely manner. However, it is often difficult to predict changes in consumer preferences, particularly in the area of apparel where fashion trends can be subject to rapid change. SM Department Stores carry a wide selection of basic merchandise which may be less subject to fashion trends. The SM Department Stores believe they lead mass-market fashion trends in the Philippines by introducing apparel that has proved popular in places such as Hong Kong and Taiwan, as well as the United States. The SM Department Stores also tend to introduce more mainstream apparel fashion compared to that introduced by other retailers. Nevertheless, there can be no assurance that consumers in the Philippines will continue to prefer shopping in department stores over other retail formats such as specialty stores. Furthermore, the Retail Subsidiaries depend to a significant extent on Philippine spending trends. The sentiments of the Philippine retail industry, consumer preferences and spending patterns are influenced by external factors including, among others, the state of the Philippine economy and its political environment, the disposable income of Philippine consumers and the market s demographic profile. Failure to accurately predict constantly changing consumer tastes, preferences and spending patterns could adversely affect the short-term and long-term results of the Retail Subsidiaries. While the Group regularly conducts market research to forecast changes in consumer preferences, and reviews the performance and viability of its portfolio of brands to ensure continued market acceptance, there is no assurance that its efforts can prepare it adequately to meet changing consumer preferences or 43

49 spending habits. An inaccurate assessment of, or an untimely response to, changing consumer preferences could have a material adverse effect on the Issuer s financial condition and results of operations. The Group believes that its focus on quality, variety and value-for-money is its main competitive advantage. It is the objective of the SM Department Stores to maintain its leadership in the marketplace, to be at the forefront of retail technology, and to grow through effective consumer marketing and product diversification. The SM Department Stores strategies involve providing value-for-money through their wide variety of competitively priced quality merchandise, thereby achieving high sales turnover. The Group s supermarkets carry extensive lines of both local and imported food and household products sourced from a diversified group of suppliers. Furthermore, the Group continuously upgrades its retail facilities to keep up with the prevailing trends in the department store business. The Retail Subsidiaries depend on their ability to retain existing suppliers and secure new suppliers. The Retail Subsidiaries have developed close relationships with a large number of suppliers in the Philippines. However, they do not have any long-term supply agreements with any supplier. The Retail Subsidiaries seek to source their outright merchandise from a broad range of suppliers at competitive prices, and the Issuer continues to source merchandise from new suppliers to cover larger areas within its department stores and to respond to changes in consumer preference. A significant adverse change in the relationships and contract arrangements between the Retail Subsidiaries and consignors could also have a material adverse impact on the Issuer s financial condition and results of operations. The Group s suppliers are treated as partners in business. The Group ensures that its business partners receivables are settled on time, and strives to continuously maintain good and close relationships with its suppliers. At the same time, the Retail Subsidiaries are constantly in search for good and reliable suppliers. Non-renewal of leases or substantial increases in rent for the Issuer s retail stores may have a material adverse effect on the Issuer. Some of the retail space in which the Issuer s retail stores are located is leased from independent third parties. There is no assurance that each of these leases will be renewed upon expiry or on terms and conditions that are acceptable to the Issuer. If such leases cannot be extended or renewed, the Issuer will have to find other appropriate premises and this may have a material adverse effect on its business, financial condition and results of operations if the new premises are not as appropriate to the Issuer s needs as the existing leased premises. Alternatively, if the existing leases can only be renewed on less favorable terms, this will increase the Issuer s operating expenses and thus its business, financial condition and results of operations may be materially and adversely affected. The majority of the Group s retail facilities are located in its Malls owned by the Group. Those facilities located in properties not owned by the Group have renewable long-term lease contracts. The future growth of the Retail Subsidiaries will be largely driven by the effectiveness and success of their expansion strategy. The expansion strategy of the Retail Subsidiaries involves opening new stores as well as renovating and expanding existing stores. The successful implementation of such expansion plans depends upon many factors, including the Issuer s ability to: identify, negotiate, finance, obtain, lease or refurbish suitable store sites which may also be largely dependent on the expansion plans of SM Prime; integrate new stores into existing information systems and operations; hire, train and retain qualified personnel; and 44

50 manage the diversion of resources. The Issuer cannot guarantee that the Retail Subsidiaries will achieve their targets for opening new stores or for renovating or expanding existing stores, or that such stores will operate profitably when opened. Failure by the Retail Subsidiaries to implement their expansion strategy effectively could materially and adversely affect their business, financial condition and results of operations, and thereby materially and adversely affect the Issuer s financial condition and results of operations. The Group s expansion strategy involves the identification of strategic locations for the Retail Subsidiaries. Also, in each Mall owned by the Group, the Retail Subsidiaries are actively involved. In addition, the Group s strategy requires that the necessary management for expanded operations, as well as viable financing plans for these expansions, are well in place prior to any store opening. The Retail Subsidiaries may be subject to increasing competitive pressures. The Retail Subsidiaries are among the leading participants in the Philippine retail industry with a significant market share in department store and supermarket sales. There are few barriers to prevent new participants, including major international retailers or wholesalers who are ready to invest the necessary time and resources, from entering the retail industry. If an existing or new competitor in the market is successful in developing and marketing a retail concept that is comparable or more acceptable to the market, the Issuer s market share in the relevant market segment will decline and this may result in its future turnover and profitability being adversely affected. The Retail Trade Liberalization Act, approved by the Government in March 2000, liberalizes foreign ownership restrictions in the retail sector and may encourage industry consolidation and greater competition. Any increase in competition could have an adverse effect on the operations of the Retail Subsidiaries in future periods, including, for instance, slower growth in their sales, lower margins and higher expenses as they seek to compete for new business or in new markets. See Description of the Issuer and the Group - Retailing and Merchandising. The Group believes that it has a strong franchise in the retail market due to its goodwill, locations, and strategy of regularly diversifying its product mix, upgrading its stores and facilities, and maintaining a diversified group of suppliers. There can be no assurance that the Retail Subsidiaries are fully insured against unexpected losses. The operations of the Retail Subsidiaries carry an inherent risk of loss caused by fire, resulting water damage, disruptions to electricity supply, terrorist attacks and other circumstances or events affecting their stores or the properties where their stores are located. Any such event, if it were to occur, may result in loss of life or property, loss of revenues or increased costs and could potentially result in significant litigation against the Retail Subsidiaries. In line with industry practice in the Philippines, the current insurance coverage does not cover any loss of revenues that the Retail Subsidiaries may suffer as a result of any disruption to their business. Although the Retail Subsidiaries seek to maintain the most comprehensive insurance coverage that is available at commercially reasonable rates, there can be no assurance that their insurance coverage will adequately compensate them for all damage and economic losses resulting from any of the events noted above or that they will be able to procure adequate insurance coverage at commercially reasonable rates in the future. The Group s existing insurance coverage is sufficient to cover for any possible losses in the Retail Subsidiaries. The Group annually reviews its existing insurance policies to ensure adequacy of coverage. Furthermore, the locations of the retail stores are widely spread throughout the country. 45

51 The Retail Subsidiaries business activities are subject to seasonality and timing. The Retail Subsidiaries business experiences seasonal fluctuations in its turnover and operating income and generally records higher turnover in December, due to traditionally higher consumer spending around the Christmas season, and May, prior to schools opening in June. As a result of these fluctuations, comparisons of sales and operating results between different periods within a single financial year, or between different periods in different financial years, are not necessarily meaningful and cannot be relied on as indicators of the Issuer s financial and operating performance. Any seasonal fluctuations reported in the future may not match the expectations of investors. Since the Issuer s business operates largely on a seasonal cycle, if the Retail Subsidiaries business is unsuccessful in selecting the right product mix for a particular season, sales for that entire season could be significantly affected. In addition, any consequent reputational damage could have a negative impact on the Retail Subsidiaries business sales in future seasons. The Issuer s results of operations may also fluctuate significantly as a result of a number of other factors, including, but not limited to, the timing of opening of new stores, merchandise mix and the timing of advertising and promotional campaigns depending on each season. The Group believes that seasonality is typical in the retail industry. The Group therefore focuses on providing the correct product mix and maintaining its leadership in determining consumer preferences and upcoming product trends. The food retailing industry is highly competitive and characterized by narrow profit margins. The supermarket and hypermarket industry is highly competitive and characterized by narrow profit margins. The Issuer s competitors include national and regional supermarket and hypermarket chains, independent and specialty grocers, drug and convenience stores, warehouse club stores, deep discount drug stores and supercenters. Supermarket and hypermarket chains and SaveMore stores generally compete on the basis of location, quality of products, service, price, product variety and store condition. The Issuer regularly monitors its competitors prices and adjusts its prices and marketing strategy as management deems appropriate in light of existing conditions. There can be no assurance that new competitors will not enter the supermarket and hypermarket industry or that the Issuer can maintain its current market share. The Issuer s profitability could be impacted by the pricing, purchasing, financing, advertising or promotional decisions made by competitors. Narrow profit margins are typical in the supermarket and hypermarket industries. Thus, the Group continuously expands its operations to increase volume turnover and enhance economies of scale, thereby improving the profitability of its supermarket and hypermarket operations. As a result of selling food products, the Group faces the risk of exposure to product liability claims and adverse publicity. The packaging, marketing, distribution and sale of food products purchased from others entail an inherent risk of product liability, product recall and resultant adverse publicity. Such products may contain contaminants that may be inadvertently redistributed by SM Supermarkets, SM Hypermarkets and SaveMore. These contaminants may, in certain cases, result in illness, injury or death if processing at the foodservice or consumer level does not eliminate the contaminants. Even an inadvertent shipment of adulterated products is a violation of law and may lead to an increased risk of exposure to product liability claims. There can be no assurance that such claims will not be asserted against the Group or that the Group will not be obliged to perform such a recall in the future. If a product liability claim is successful, the Group s insurance may not be adequate to cover all liabilities it may incur, and it may not be able to continue to maintain such insurance, or obtain comparable insurance at a reasonable cost, if at all. If the Group does not have adequate insurance or contractual indemnification available, product liability claims relating to 46

52 defective products could have a material adverse effect on the Group s ability to successfully market its products and on the Group s business, financial condition and results of operations. In addition, even if a product liability claim is not successful or is not fully pursued, the negative publicity surrounding any assertion that the Group s products caused illness or injury could have a material adverse effect on the Group s reputation with existing and potential customers and on the Group s business, financial condition and results of operations. The Group s typical insurance coverage includes potential losses from product liability claims. In addition, the Group actively selects appropriate suppliers which are carefully evaluated as reliable in providing quality products. Risks Relating to the Banks The Philippine banking industry is highly competitive and increasing competition may result in declining margins in the banks principal businesses. BDO and China Bank are subject to significant levels of competition from many other Philippine banks and branches of international banks, including competitors which in some instances have greater financial and other capital resources, a greater market share and greater brand name recognition than the banks. The recent mergers and consolidations in the banking industry, as well as the liberalization of foreign ownership regulations in banks, have allowed the emergence of foreign and bigger local banks in the market. In addition, the formal establishment of an ASEAN economic community effective December 31, 2015 promotes freer cross-border flows of financial services (in addition to goods, capital, and manpower) among member nations. This is expected to increase the level of competition both from Philippine banks and branches of international banks. This may impact the Philippine banks operating margins, but this would also enhance the industry s overall efficiency, business opportunities and service delivery. As of June 30, 2016, according to data from the BSP, there were a total of 41 domestic and foreign commercial banks operating in the Philippines. In the future, BDO and China Bank may face increased competition from financial institutions offering a wider range of commercial banking services and products, larger lending limits, greater financial resources and stronger balance sheets than the banks. Increased competition may arise from: Other large Philippine banks and financial institutions with significant presence in Metro Manila and large country-wide branch networks; Full entry of foreign banks in the country through any of the following modes allowed under Republic Act No (approved on 15 July 2014): a) the acquisition, purchase or ownership of up to one hundred per cent (100%) of the voting stock of an existing bank; b) investment in up to one hundred per cent (100%) of the voting stock of a new banking subsidiary incorporated under Philippine law; or c) establishment of branches with full banking authority; Domestic banks entering into strategic alliances with foreign banks with significant financial and management resources; and Continued consolidation in the banking sector involving domestic and foreign banks, driven in part by the gradual removal of foreign ownership restrictions. There can be no assurance that BDO and China Bank will be able to compete effectively in the face of such increased competition. Increased competition may make it difficult for the banks to continue to increase the size of their loan portfolio and deposit base, as well as cause increased pricing competition, which could have a material adverse effect on their growth plans, margins, results of operations and financial condition and, consequently, on the financial condition and results of operations of the Issuer. 47

53 Philippine banks are generally exposed to higher credit risks and greater market volatility than banks in more developed countries. Philippine banks are subject to the credit risk that Philippine borrowers may not make timely payment of principal and interest on loans and, in particular that, upon such failure to pay, Philippine banks may not be able to enforce the security interest they may have. The credit risk of Philippine borrowers is, in many instances, higher than that of borrowers in developed countries due to: The greater uncertainty associated with the Philippine regulatory, political, legal and economic environment; The vulnerability of the Philippine economy in general to a severe global downturn as it impacts on its export sector, employment in export-oriented industries, and OFW remittances; The foreign debt of the Government and the corporate sector, relative to the gross domestic product ( GDP ) of the Philippines may rise from 26.5% as of end-2015; and Volatility of interest rates and US Dollar/Philippine Peso exchange rates. Higher credit risk has a material adverse effect on the quality of loan portfolios and exposes Philippine banks, including BDO and China Bank, to more potential losses and higher risks than banks in more developed countries. In addition, higher credit risk generally increases the cost of capital for Philippine banks compared to their international counterparts. Such losses and higher capital costs arising from this higher credit risk may have a material adverse effect on BDO's and China Bank s financial condition, liquidity and results of operations. Average non-performing loan ratios exclusive of interbank loans in the Philippine banking system were 2.9%, 2.4% and 2.2%, as at the years ended 31 December 2013, 2014 and 2015, respectively. Philippine banks ability to assess, monitor and manage risks inherent in its business differs from the standards of its counterparts in more developed countries. Philippine banks are exposed to a variety of risks, including credit risk, market risk, portfolio risk, foreign exchange risk and operational risk. The effectiveness of their risk management is limited by the quality and timeliness of available data in the Philippines in relation to factors such as the credit history of proposed borrowers and the loan exposure borrowers have with other financial institutions. In addition, the information generated by different groups within each bank, including BDO and China Bank, may be incomplete or obsolete. BDO and China Bank may have developed credit screening standards in response to such inadequacies in quality of credit information that are different from, or inferior to, the standards used by its international competitors. As a result, their ability to assess, monitor and manage risks inherent in their business would not meet the standards of their counterparts in more developed countries. If BDO and China Bank are unable to acquire or develop in the future the technology, skills set and systems available to meet such standards, it could have a material adverse effect on their ability to manage these risks and on their financial condition, liquidity and results of operations and, consequently, on the financial condition and results of operations of the Issuer. Philippine banks face regulatory pressure to comply with new capital, liquidity and leverage standards as well as meet prudential limits for real estate exposures. The BSP Monetary Board approved major revisions to the country s risk-based capital adequacy framework on 1 July 2007, to align the current framework with the Basel II standards as issued by the Basel Committee on Banking Supervision (BCBS), which is an international committee of banking supervisory authorities. Basel II standards make regulatory capital requirements more risk sensitive and reflective of all, or at least most, of the risks financial institutions are exposed to. In terms of minimum capital requirements, Basel II standards include the addition of specific capital requirements for credit derivatives, securitization exposures, counterparty risk in the trading book, and operational risk. 48

54 In December 2010, a new update to the Basel Accords, known as Basel III, was issued by the BCBS containing new standards that modify the structure of regulatory capital. The Basel III regulations include tighter definitions of Tier 1 capital and Tier 2 capital, the introduction of a leverage ratio, changes in the risk weighting of counterparty credit risk, a framework for counter-cyclical capital buffers, and short and medium-term quantitative liquidity ratios. The revised standards also distinguish further (i) Tier 1 capital, which is also referred to as Going-Concern Capital, and is composed of Common Equity and Additional Tier 1 capital; and (ii) Tier 2 capital, which is also referred to as Gone-Concern capital and establish new eligibility criteria for such capital instruments previously not implemented in regulatory capital instruments. To align with the international standards, the BSP adopted part of the Basel Committee's eligibility criteria to determine eligibility of capital instruments to be issued by Philippine banks and quasi-banks as Hybrid Tier 1 capital and Tier 2 with the issuance of BSP Circular No. 709 effective 1 January In January 2012, the BSP announced that the country s universal and commercial banks, including their subsidiary banks and quasi-banks, will be required to adopt in full the capital adequacy standards under Basel III with effect from 1 January This thus allowed local banks one full year for a parallel run of the old and new guidelines prior to the effectiveness of the new standards in 2014, marking an accelerated implementation compared to the Basel Committee's staggered timeline that stretches from January 2013 to January On 26 December 2012, the BSP issued the implementing guidelines for the adoption on 1 January 2014 of the revised capital standards under the Basel III accord for universal and commercial banks. The guidelines set new regulatory ratios for banks to meet specific minimum thresholds for Common Equity Tier 1 (CET1) capital and Tier 1 (T1) capital in addition to the Capital Adequacy Ratio (CAR). The BSP maintained the minimum CAR at 10.0% and set a minimum CET1 ratio of 6.0% and a minimum T1 ratio of 7.5%. The new guidelines also introduced a capital conservation buffer of 2.5% which shall be made up of CET1 capital. In addition, banks which issued capital instruments from 2011 will be allowed to count these instruments as Basel III-eligible until end However, capital instruments that are not eligible in any of the three components of capital will be derecognized from the determination of the regulatory capital on 1 January Further, local banks face new liquidity requirements under Basel III s new liquidity framework, namely, the Liquidity Coverage Ratio (LCR) and the Net Stable Funding Ratio (NSFR). The LCR requires banks to hold sufficient level of high-quality liquid assets to enable them to withstand a 30 day-liquidity stress scenario. Meanwhile, the NSFR requires that banks assets and activities are structurally funded with long-term and more stable funding sources. While both ratios are intended to strengthen banks ability to absorb shocks and minimize negative spillovers to the real economy, compliance with these ratios may also further increase competition among banks for deposits as well as high quality liquid assets. In March 2016, the BSP approved the Liquidity Coverage Ratio (LCR) framework that lays out an observation period from 1 July 2016 to 31 December 2017, during which banks will start reporting their LCR to the BSP while providing them an adequate transition to the new prudential standard. Beginning 1 January 2018, banks will be required to meet the LCR threshold of 90%, which will be increased to 100% beginning 1 January Basel III also introduces a leverage ratio (computed as Tier 1 capital divided by Total Exposure) to serve as a backstop measure to the risk-based capital requirements and check excessive risk-taking by banks while potentially tempering balance sheet growth. In May 2015, the BSP approved the guidelines for the implementation of the Basel III leverage ratio at a minimum of 5%, i.e., the maximum exposures that a bank can keep is 20x its Tier 1 capital. The guidelines also provide a monitoring period up to end-2016 during which sanctions will not be imposed on banks falling below the 5% minimum. Covered institutions, i.e., universal and commercial banks as well as their subsidiary banks and quasi-banks, are also required to submit periodic reports. Any adjustments to the guidelines will be issued before the requirement becomes 49

55 fully effective beginning 1 January Moreover, Basel III capital rules for banks include setting up a countercyclical capital buffer (CCB) wherein banks build up the required level of capital during boom times and draw down on the buffer in the event of an adverse turn in the cycle or during periods of stress, thus helping to absorb losses. The credit-to-gdp gap, defined as the difference between the credit-to-gdp ratio and its long-term trend, has been chosen as the guide or EWI (early warning indicator) for activating the CCB. However, some economists have raised the issue that the credit-to-gdp gap is not the best EWI for banking crises or system vulnerabilities, especially for emerging markets (including the Philippines). The countercyclical capital buffer will be phased in beginning on 1 January 2016 and will become fully effective on 1 January There are no indications as yet if the BSP will mandate the CCB for Philippine banks. As well, banks deemed as Domestic Systemically Important Banks (D-SIBs) by the BSP under Basel IIII will be imposed capital surcharge to enhance their loss absorbency and thus mitigate any adverse side effects both to the banking system and to the economy should any of the D-SIBs fail. To determine the banks systemic importance, the BSP will assess and assign weights using the indicator-based measurement approach based on the following: size, interconnectedness, substitutability, and complexity. Depending on how they score against these indicators and the buckets to which the scores correspond, the D-SIBs will have varying levels of additional loss absorbency requirements ranging from 1.0% to 2.5%. Aside from the added capital pressure, D-SIBs may be put at an undue disadvantage compared to G-SIBs (or Global Systemically Important Banks) given that this framework was patterned for regional/global banks and which may not thus be appropriate for local banks. The additional loss absorbency requirements will apply to banks identified as D-SIBs in July 2015 by the BSP using the said measurement approach. The capital surcharge will be phased in over two years beginning in 1 January 2017 before becoming fully effective on 1 January On 12 February 2016, the BSP approved the guidelines on the submission of a recovery plan by D-SIBs which shall form part of the D-SIBs Internal Capital Adequacy Assessment Process (ICAAP) submitted to the BSP every 31 March of each year. The recovery plan identifies the course of action that a D-SIB should undertake to restore its viability in cases of significant deterioration of its financial condition in different scenarios. At the latest, the recovery plan shall be activated when the D-SIB breaches the total required Common Equity Tier 1 (CET1) capital and/or the minimum liquidity ratios as may be prescribed by the BSP. As a preemptive measure, the recovery plan should use early warning indicators with specific levels (i.e., quantitative indicators supplemented by qualitative indicators) that will activate the recovery plan even before the above-said breaches happen. This preparatory mechanism, including the operational procedures, monitoring, escalation and approval process should be clearly defined in the recovery plan. In March 2014, the Basel Committee on Banking Supervision (BCBS) came out with an Exposure draft on Basel IV outlining proposed revisions to the standardized approach to credit, counterparty credit and operational risk. Global banks view the proposed Basel IV standard with unease, as this may further undermine banks profitability. Among others, the recommendations include increased capital requirements for banks to better absorb losses, restrictions on risk-weighting of assets and modifications on how banks calculate operational risk by using a standardized approach set by global regulators instead of using banks own models. In October 2014, the BSP issued new guidelines on sound credit risk management practices (BSP Circular No. 855). Among others, the BSP sets the maximum collateral value (CV) for a loan backed up by real estate to only 60% of its appraised value. Banks will still be allowed to lend more than 60% of the CV; however, the portion above 60% will be considered unsecured, thus requiring banks to set up loan loss provisions accordingly. The CV ruling should not be mistaken for the loanable value (LV), which is the loan amount extended by banks to its borrowers. The current industry practice is a loan-to-value (LTV) ratio of 70%-80%, which some banks may continue to grant provided that they have strict and consistent lending standards, adequate capital buffer and provisions. This new ruling, along with other BSP regulations intended to avert 50

56 a property bubble, could result in an overall slowdown in lending to the real estate sector as banks adjust to these rulings. BSP Circular No. 855 (Circular 855) also requires banks to develop a sound loan loss methodology that is based on expected rather than incurred losses. This means that banks will have to recognize not only credit losses that have occurred but also probable losses given existing conditions and trends, thus raising the level of provisions that banks have to set aside. Apart from this, banks should ensure that their loan loss methodology conforms to certain criteria, documented to permit a third-party review and based on an expected loss model, historical loss rates and experienced credit judgment. The Circular provides a transitory provision that gives banks six (6) months from 19 November 2014 (the effectivity date of the Circular) to perform gap analysis of current practices against the new rules, come up with an action plan duly approved by the Board of Directors and adopt the framework within two (2) years from the the Circular s effectivity date. On October 20, 2014, the Monetary Board decided to increase the minimum capital requirement for all bank categories including universal, commercial, thrift, rural and cooperative banks. This is in line with the BSP s efforts of further strengthening the banking system. Under this regulation, the minimum capital for universal and commercial banks will be tiered based on network size as indicated by the number of branches. Existing banks that will not immediately meet the new minimum cpaital requirement may avail of a five-year transition period to fully comply. Such banks will be required to submit a capital build-up program that is acceptable. Banks that fail to comply with the minimum capital requirements or fail to propose an acceptable capital build-up program face curtailment of future expansion plans. For Universal Banks, the minimum capitalization was changed from the previous P4.95 billion, which was applicable to all, to P3.0 billion for banks with Head Office only, P6.0 billion for banks with up to 10 branches, P15.0 billion for banks with 11 to 100 branches and P20.0 billion for banks with more than 100 branches. As of 31 December 2014, BDO and China Bank had sufficient capital to meet the new minimum capital requirements. To better monitor the banking industry s exposure to the property sector, the BSP in September 2012 approved the guidelines that effectively widened the scope of banks real estate exposures (REEs) to include mortgages and loans extended to the following: individuals to finance the acquisition/construction of residential real estate for own-occupancy as well as land developers and construction companies for the development of socialized and low-cost housing. Securities investments issued for purposes of financing real estate activities are also included under the new guidelines. Banks were required to submit the expanded report starting end-december Further on 27 June 2014, the BSP issued Circular No. 839 requiring banks to undergo Real Estate Stress Test (REST) while setting prudential limits for banks real estate exposures to ensure that they have adequate capital to absorb potential losses to the property sector. Universal and commercial banks (UKBs) as well as thrift banks (TBs) must meet a capital adequacy ratio (CAR) of 10% of qualifying capital after adjusting for the stress test results. Further, UKBs and their thrift bank subsidiaries are required to maintain a level of Common Equity Tier 1 (CET 1) that is at least 6% of qualifying capital after factoring in the stress scenario. In addition, banks are mandated to submit quarterly report of their real estate exposures, in line with the new REST capital requirements. Although intended to strengthen banks and thwart potential asset bubbles, the new BSP regulation may effectively temper bank lending to the commercial property and home mortgage loan sector given that banks ability to lend to these sectors depends on their exposure to the sector and the capital levels they maintain. Risks Relating to the Philippines Substantially all of the Group s operations and assets are based in the Philippines; a 51

57 slowdown in economic growth in the Philippines could materially adversely affect its businesses. Historically, the Group has derived a large majority of its revenue and operating profits from the Philippines and, as such, is highly dependent on the state of the Philippine economy. Demand for retail, commercial and residential real estate are all directly related to the strength of the Philippine economy (including its overall growth and income levels), the overall levels of business activity in the Philippines, as well as the amount of remittances received from OFWs and overseas Filipinos. Factors that may adversely affect the Philippine economy include: decreases in business, industrial, manufacturing or financial activities in the Philippines, the Southeast Asian region or globally; scarcity of credit or other financing, resulting in lower demand for products and services provided by companies in the Philippines, the Southeast Asian region or globally; exchange rate fluctuations; inflation or increases in interest rates; levels of employment, consumer confidence and income; changes in the Government or of the Government s fiscal and regulatory policies; diseases that may evolve into regional or global pandemic; natural disasters, including but not limited to tsunamis, typhoons, earthquakes, fires, floods and similar events; political instability, terrorism or military conflict in the Philippines, other countries in the region or globally; and other social, political or economic developments in or affecting the Philippines. There can be no assurance that the Philippines will achieve strong economic fundamentals in the future. Changes in the conditions of the Philippine economy could materially and adversely affect the Group s business, financial condition and results of operations. Any political instability in the future may have a negative effect on the Group s financial results. The Philippines has from time to time experienced political, social and economic instability. In May 2004, the Philippines held presidential elections as well as elections for the Senate and the House of Representatives. President Gloria Macapagal-Arroyo was elected for a second six-year term. However, certain opposition candidates questioned the election results, alleging massive fraud and disenfranchisement of voters. On 25 July 2005, the impeachment complaints that were filed by several citizens and opposition lawmakers in the House of Representatives against President Arroyo, based on the allegations of culpable violation of the Constitution, graft and corruption and betrayal of the public trust, were referred by the speaker of the House to the Committee on Justice. All impeachment complaints previously filed were ultimately dismissed; however several cases were filed with the Supreme Court questioning the constitutionality of the decision. On 24 February 2006, President Arroyo declared a state of emergency after security forces thwarted what they claimed was a plot to overthrow the President. The purported coup d etat coincided with demonstrations marking the 20th anniversary of the people power revolution that toppled former President Marcos. The President lifted the state of emergency on 03 March In November 2007, a group of military rebels together with a senator walked out of their trial in Makati City and occupied the second floor of the Manila Peninsula Hotel calling for President Arroyo to resign. They were soon joined by a few church officials and former Vice President Teofisto Guingona who appealed to the public for support. After a few hours, the mutinous group agreed to surrender to avoid bloodshed. 52

58 In December 2011, the 23 rd Chief Justice of the Supreme Court of the Philippines, Renato Corona, was impeached by the House of Representatives. The Senate, convened as an impeachment court, began the trial in January 2012 and consequently found Corona guilty of Article II of the Articles of Impeachment filed against him pertaining to his failure to disclose to the public his statement of assets, liabilities, and net worth. On 31 May 2012, the Philippine Senate impeached Renato Corona, then Chief Justice of the Supreme Court of the Philippines. The impeachment trial, which lasted several months, tried Corona on accusations of improperly issuing decisions that favored former President Arroyo, as well as failure to disclose certain properties, in violation of rules applicable to all public employees and officials. On 9 May 2016, the Philippines held its sixteenth national elections for president, vice president, members of the Senate and local government officials. Former mayor of Davao City, Rodrigo Duterte, was sworn into office on June 30, 2016 and succeeded Benigno Aquino III as the President of the Republic of the Philippines. There can be no assurance that President Duterte will continue to implement the economic, development and regulatory policies of President Aquino, including those policies that have a direct effect on the Group s assets and operations. No assurance can be given that the future political environment in the Philippines will be stable or that current or future Governments will adopt economic policies conducive to sustaining economic growth. Political instability in the Philippines could negatively affect the general economic conditions in the Philippines which could have a material impact on the financial results of the Group. In addition, such adverse factors may affect the Philippine tourism industry, which is the focus of one element of the Group s growth strategy. Historically, the Group has remained apolitical and cooperates with the country s duly constituted government. The Group supports and contributes to nation-building. SM Group s businesses may be disrupted by terrorist acts, crime, natural disasters and outbreaks of infectious diseases or fears of such occurrences in Metro Manila or other parts of the Philippines. The Philippines has been subject to a number of terrorist attacks in the past several years. The Philippine army has been in conflict with the Abu Sayyaf organization which has been responsible for kidnapping and terrorist activities in the Philippines, and is alleged to have ties to the Al-Qaeda terrorist network. There have also been sporadic bombings and prominent kidnappings and slayings of foreigners in the Philippines, including the hijacking of a tourist bus carrying Hong Kong tourists that resulted in the deaths of several passengers. The most recent terrorist activity occurred on September 2, 2016 when an explosion rocked a night market in Davao City, leading to the death of at least 14 people and injuries to over 60 people. As a result of the bombing, President Duterte has declared a state of lawlessness in the country indefinitely. There can be no assurance that the Philippines will not be subject to further acts of terrorism and violence in the future. Terrorist attacks have, in the past, had a material adverse effect on investment and confidence in, and the performance of, the Philippine economy and, in turn, the Company s business. The Company s current insurance policies do not cover terrorist attacks. Any terrorist attack or violent acts arising from, and leading to, instability and unrest, could cause interruption to parts of the Company s businesses and materially and adversely affect the Company s financial condition, results of operations and prospects. The Philippines has experienced natural disasters over the years. A number of climate experts believe that climate change is affecting the intensity and severity of these natural calamities. The potential future effects of global climate change may include longer periods of drought in some regions and an increase in the 53

59 number, duration and intensity of tropical storms in the country. Authorities may not be prepared or equipped to respond to such disasters. On 26 September 2009, Typhoon Ketsana (Ondoy) resulted in millimeters of rainfall in six hours, causing massive flooding that submerged several areas of Metro Manila and adjacent provinces. The typhoon caused 464 deaths and approximately 86 billion in property damage. On 6 August 2012, a monsoon hit Metro Manila and other nearby provinces which also caused severe flooding and landslides. Other calamities that have affected Metro Manila in recent years include unusually strong earthquakes and outbreaks of infectious diseases such as H1N1 influenza (commonly known as swine flu). Other regions of the Philippines have also experienced severe natural disasters. In December 2011, Typhoon Washi (Sendong) caused massive flooding in the southern Philippine city of Cagayan de Oro, claiming thousands of lives and displacing tens of thousands of residents. On 3 December 2012, Typhoon Bopha struck the southern island of Mindanao as a category five typhoon, triggering widespread flash flooding and landslides throughout the region. Typhoon Bopha killed over 1,000 people and caused an estimated 42 billion in property damage. In October 2013, an earthquake occurred in Central Visayas, Philippines. The magnitude of the earthquake was recorded at Mw 7.2 at the epicenter which was located six kilometers southwest of Sagbayan town, at a depth of 12 kilometers. The seismic event affected the whole Central Visayas region, particularly Bohol and Cebu. According to recent official reports by the National Disaster Risk Reduction and Management Council, 198 people were reported dead, 11 were missing, and 651 were injured as a result of the earthquake, making it the deadliest earthquake in the Philippines in 23 years. In all, more than 53,000 structures were damaged or destroyed, including commercial buildings, malls, public edifices, hotels and churches. SM Prime s Radisson Blu Cebu sustained cosmetic damages on tiles and walls, however, the structural integrity of the building has been certified by three structural engineering companies. As a result, total business lost was estimated at approximately P60 million and forecasted year end occupancy of 74% had dropped to 66%. In addition, the Central Philippines experienced a severe typhoon, Typhoon Haiyan (Yolanda), in November 2013 which caused extensive damage to infrastructure and properties, claimed 6,268 lives and displaced thousands of residents. It is not possible to predict the extent to which the Group s various businesses will be affected by any future occurrences of natural calamities such as those described above or fears that such occurrences will take place, and there can be no assurance that any disruption to its businesses will not be protracted, that property will not be damaged and that any such damage will be completely covered by insurance or at all. Any such occurrences may disrupt the operations of the Group s businesses and could materially and adversely affect their business, financial condition and results of operations. Further, any such occurrences may also destabilize the Philippine economy and business environment, which could also materially and adversely affect the Group s financial position and results of operations. Volatility in the value of the Peso against the US dollar and other currencies could adversely affect the Group s businesses. During the last decade, the Philippine economy has from time to time experienced volatility in the value of the Peso and limited availability of foreign exchange. In July 1997, the BSP announced that it would allow market forces to determine the value of the Peso. Since 30 June 1997, the Peso experienced periods of significant depreciation and declined from approximately P29.00 = US$1.00 in July 1997 to a low of P49.90 = US$1.00 for the month ended (period average) December In recent years, the Peso has generally appreciated and the exchange rate (period average) was P42.47 in 2013, P44.40 in 2014 and P45.54 in The revenues of the Group are predominantly denominated in Pesos, while certain expenses, including fixed debt obligations, are denominated in currencies other than Pesos. Certain of the Group s borrowings 54

60 are denominated in US dollars and China renminbi and accordingly the Group is exposed to fluctuations in the Peso to US dollar and other foreign currency exchange rates. A depreciation of the Peso against the US dollar and other foreign currencies will increase the amount of Peso revenue required to service foreign currency denominated debt obligations. There can be no assurance that the Peso will not depreciate further against other currencies and that such depreciation will not have an adverse effect on the Philippine economy and on the Group s businesses. In addition, changes in currency exchange rates may result in significantly higher domestic interest rates, liquidity shortages and capital or exchange controls. This could result in a reduction of economic activity, economic recession, sovereign or corporate loan defaults, lower deposits and increased cost of funds. The foregoing consequences, if they occur, would have a material adverse effect on the Group s financial condition, liquidity and results of operations. As a policy, the Group does not engage in foreign currency speculation. Furthermore, the Group minimizes foreign exchange exposure and fully hedges its foreign currency liabilities. Corporate governance and disclosure standards in the Philippines may differ from those in more developed countries. While a principal objective of the Philippine securities laws, SEC regulations and PSE disclosure rules is to promote full and fair disclosure of material corporate information, there may be less publicly available information about Philippine public companies, such as the Issuer, than is regularly made available by public companies in the United States and other countries. The Philippines securities market is generally subject to less strict regulatory oversight than securities markets in more developed countries. Improper trading activities could affect the value of securities and concerns about inadequate investor protection may limit participation by foreign investors in the Philippine securities market. Furthermore, although the Issuer complies with the requirements of the SEC and PSE with respect to corporate governance standards, these standards may differ from those applicable in other jurisdictions. For example, the Philippine Securities Regulation Code requires the Issuer to have at least two independent directors or such number of independent directors as is equal to 20% of the Board, whichever is the lower number. The Issuer currently has three independent directors. Many other jurisdictions require significantly more independent directors. As a policy, the Group adheres to international standards of corporate governance and disclosure. The Group has hired a Vice President for Corporate Governance to formulate policies and monitor compliance thereof, as well as a consultant at the Board level. The Group has received numerous awards for good corporate governance from international publications. Risks Relating to the Bonds The priority of debt evidenced by a public instrument. Under Philippine law, in the event of liquidation of a company, unsecured debt of the company (including guarantees of debt) which is evidenced by a public instrument as provided in Article 2244 of the Civil Code of the Philippines will rank ahead of unsecured debt of the company which is not so evidenced. Under Philippine law, a debt becomes evidenced by a public instrument when it has been acknowledged before a notary or any person authorized to administer oaths in the Philippines. Although the position is not clear under Philippine law, it is possible that a jurat (which is a statement of the circumstances in which an affidavit was made) may be sufficient to constitute a debt evidenced by a public instrument. So far as the Issuer is aware, none of its debt is evidenced by a public instrument and the Issuer will undertake in the Terms and Conditions of the Bonds and the Trust Indenture Agreement to use its best endeavors not to incur such debt. Any such debt evidenced by a public instrument may, by mandatory provision of law, rank 55

61 ahead of the Bonds in the event of the liquidation of the Issuer. As a policy, the Group s borrowings are clean and are not collateralized by its assets, except for debts that are required by law to be secured. An active trading market for the Bonds may not develop. The Bonds are a new issue of securities for which there is currently no trading market. Even if the Bonds are listed on the PDEx, trading in securities such as the Bonds may be subject to extreme volatility at times, in response to fluctuating interest rates, developments in local and international capital markets and the overall market for debt securities among other factors. Although the Bonds are intended to be listed on PDEx as soon as reasonably practicable, no assurance can be given that an active trading market for the Bonds will develop and, if such a market were to develop the Joint Issue Managers are under no obligations to maintain such a market. The liquidity and the market prices for the Bonds can be expected to vary with changes in market and economic conditions, the financial position and prospects of the Company and other factors that generally influence the market prices of securities. The Company has no control over this risk as active trading of the Bonds is highly dependent on the bondholders. The Group actively cooperates in efforts aimed at improving the capital markets in the Philippines. The Issuer may be unable to redeem the Bonds. At maturity, the Issuer will be required to redeem all of the Bonds. If such an event were to occur, the Issuer may not have sufficient cash in hand and may not be able to arrange financing to redeem the Bonds in time, or on acceptable terms, or at all. The ability to redeem the Bonds in such event may also be limited by the terms of other debt instruments. Failure to repay, repurchase or redeem tendered Bonds by the Issuer would constitute an event of default under the Bonds, which may also constitute a default under the terms of the other long-term debts of the Group discussed under Note 18 of the Reviewed Interim Consolidated Financial Statements for the six months ended 30 June 2016 and Note 20 of the Audited Consolidated Financial Statements for the year ended 31 December As discussed Description of the Offer Events and Consequences of Default of the Offer Supplement, the Trustee at its discretion may give notice to the Issuer that the Bonds are, and they shall immediately become, due and payable at their principal amount together with accrued interest in case: (i) any other present or future Indebtedness of the Issuer or any of its Material Subsidiaries or Subsidiaries for or in respect of moneys borrowed or raised becomes (or becomes capable of being declared) due and payable prior to its stated maturity by reason of any actual or potential default, event of default or the like (howsoever described), or (ii) any such Indebtedness is not paid when due or, as the case may be, within any applicable grace period, or (iii) the Issuer or any of its Material Subsidiaries or Subsidiaries fails to pay when due any amount payable by it under any present or future guarantee for, or indemnity in respect of, any moneys borrowed or raised provided that the aggregate amount of the relevant Indebtedness, guarantees and indemnities in respect of which one or more of the events mentioned above in this paragraph (c) have occurred equals or exceeds 20% of the Issuer s Total Consolidated Assets, among others. The Group has a very strong business franchise in the Philippines. It has a strong recurring cash flow and maintains a low debt-equity ratio and a high level of liquidity in its balance sheet. The Group believes that it has sufficient resources which will allow it to service the principal and interest of the Bonds. 56

62 USE OF PROCEEDS The net proceeds from the issue of the Series G Bonds, without the Oversubscription Option (after deduction of commissions and expenses) is approximately P14,866.4 million and is presently intended to be used by the Issuer to finance future investments and strategic acquisitions. Assuming the Oversubscription Option of up to P5,000,000, is fully exercised, the Company expects total net proceeds of approximately P19,826.4 million after fees, commissions and expenses. Net proceeds from the Offering are estimated to be at least as follows: For a P15.0 billion Issue Size Total Estimated proceeds from the sale of Bonds P15,000,000, Less: Estimated expenses Documentary Stamp Tax 75,000, SEC Registration SEC Registration Fee and Legal Research 5,618, SEC Publication Fee 100, Underwriting and Other Professional Fees Underwriting and Legal Fee 46,500, Rating Fee 4,500, Listing Application Fee 112, Listing Maintenance Fee 168, Printing Cost 300, Trustee Fees 130, Paying Agency and Registry Fees 700, Miscellaneous fees 500, ,628,125 Estimated net proceeds for P15.0 billion Issue P14,866,371, For the P5.0 billion Oversubscription Option Total Estimated proceeds from the sale of Bonds P5,000,000, Less: Estimated expenses Documentary Stamp Tax 25,000, Underwriting Fees 15,000, ,000, Estimated net proceeds for P5.0 billion Oversubscription Option P4,960,000, Total Net Proceeds (inclusive of Oversubscription Option of P5.0 billion) --- P19,826,371, Aside from the foregoing one-time costs, SMIC expects the following annual expenses related to the Series G Bonds: 1. The Issuer will be charged the first year Annual Maintenance Fee in advance upon the approval of the Listing; 2. The Issuer will pay a yearly retainer fee to the Trustee amounting to P130,000 per annum; and 3. After the Issue Date, a Paying Agency fee amounting to P100,000 is payable every interest payment date. The Registrar will charge a monthly maintenance fee based on the face value of the Bonds and the number of Bondholders. 57

63 The net proceeds of the Issue of approximately P14,866.4 million, assuming an Issue Size of P15.0 billion, or P19,826.4 million if the Oversubscription Option is exercised, shall be used to finance future investments and strategic acquisitions. The net proceeds of the Issue is expected to be disbursed with the period covering the fourth quarter of 2016 up to the end of the second quarter of Any shortfall in the net proceeds for the intended uses described above shall be funded by the Issuer from internal sources. The Issuer intends to use the net proceeds from the Offer to finance future investments in, and strategic acquisitions in its core business segments namely, the property, retail and financial services businesses. These investments may take the form of additional equity investments in the Issuer s existing subsidiaries and associates to support their expansion plans or equity investments in businesses complimentary to the core businesses of the Group. It may also invest a portion of the net proceeds in its subsidiaries and affiliates to maintain its existing effective ownership stake should the need arise. The Issuer is also considering increasing its investments in associated companies in the financial services businesses as these banks continue to build on their strong business franchise and further strengthen their capabilities to support future growth and actively respond to strategic opportunities and market challenges. The Company has identified potential investments and acquisitions that are in the early stages of evaluation. Depending on the results of the evaluation and due diligence, such potential investments and acquisitions may not materialize. The Company shall make timely and appropriate disclosures with respect to any strategic potential investments and acquisitions. The Company expects that at least seventy percent (70%) of the net proceeds will be utilized during the last quarter of 2016 until the first quarter of Any remaining proceeds of the issuance of the Series G Bonds is expected to be fully utilized by the end of the second quarter of Pending the above uses, the Company intends to invest the net proceeds from the Issue in short-term and medium-term liquid investments including but not limited to short-term government securities, bank deposits and money market placements which are expected to earn prevailing market rates. The Company undertakes that it will not use the net proceeds from the Issue for any purpose, other than as discussed above. However, the Company s plans may change, based on factors including changing macroeconomic and market conditions, or new information regarding the cost or feasibility of these plans. The Company s cost estimates may also change as these plans are developed further, and actual costs may be different from budgeted costs. For these reasons, timing and actual use of the net proceeds may vary from the foregoing discussion and the Company s management may find it necessary or advisable to reallocate the net proceeds within the categories described above, or to alter its plans, including modifying the projects described in the foregoing and/or pursuing different projects. In the event of any substantial deviation/adjustment in the planned uses of proceeds, the Company shall inform the SEC and the stockholders within 30 days prior to its utilization. 58

64 DETERMINATION OF THE OFFER PRICE The Bonds shall be issued at 100% of principal amount or face value. 59

65 PLAN OF DISTRIBUTION BDO Capital, BPI Capital Corporation, China Bank Capital and First Metro Investment Corporation, pursuant to an Issue Management and Underwriting Agreement with SMIC executed on 23 November 2016 (the Underwriting Agreement ), have agreed to act as the Joint Lead Underwriters for the Offer and as such, distribute and sell the Series G Bonds at the Offer Price, and have also committed to underwrite up to P15,000,000,000 on a firm basis, in either case subject to the satisfaction of certain conditions and in consideration for certain fees and expenses, with a P5,000,000,000 Over-subscription Option. In the event that the Over-subscription Option is not fully exercised, the unexercised portion shall be placed under shelf registration to be offered and issued over a period of three (3) years from the effective date of the registration statement of the Bonds. Each of the Joint Lead Underwriters and Paricipating Underwriter has committed to underwrite the Offer on a firm basis up to the amount indicated below: Joint Lead Underwriters BDO Capital & Investment Corporation China Bank Capital Corporation BPI Capital Corporation First Metro Investment Corporation Amount P4,500,000,000 P4,500,000,000 P2,250,000,000 P2,250,000,000 Co-Lead Underwriter SB Capital Investment Corporation Amount P1,500,000,000 The Joint Lead Underwriters shall have exclusive rights and priority to exercise the Over-subscription Option of up to Five Billion Pesos (P5,000,000,000.00). There is no arrangement for the Underwriters to return to SMIC any unsold Series G Bonds. The Underwriting Agreement may be terminated in certain circumstances prior to payment of the net proceeds of the Series G Bonds being made to SMIC. There is no arrangement as well giving the Underwriters the right to designate or nominate any member to the Board of SMIC. SMIC will pay the Joint Lead Underwriters a fee of 0.30% on the final aggregate nominal principal amount of the Bonds issued, which is inclusive of the fee to be ceded to Co-Lead Underwriters. No fees will be given to Broker-Dealers selling the Series G Bonds. The Underwriters are duly licensed by the SEC to engage in underwriting and distribution of securities to the public. The Underwriters may, from time to time, engage in transactions with and perform services in the ordinary course of business with SMIC or other members of the Group. BDO Capital is the wholly-owned investment banking subsidiary of BDO Unibank, Inc., which, in turn, is an associate of the Issuer. BDO Capital is a full-service investment house primarily involved in securities underwriting and trading, loan syndication, financial advisory, private placement of debt and equity, project finance, and direct equity investment. Incorporated in December 1998, BDO Capital commenced operations in March BPI Capital Corporation ( BPI Capital ) is the wholly-owned investment banking subsidiary of the Bank of the Philippine Islands and is duly licensed by the SEC to engage in the underwriting and distribution of securities. BPI Capital offers investment banking services in the areas of financial advisory, mergers and acquisitions, debt and equity underwriting, private placement, project finance and loan syndication. It began operations as an investment house in December

66 China Bank Capital, a subsidiary of China Banking Corporation which is an associate of the Issuer, provides a wide range of investment banking services to clients across different sectors and industries. Its primary business is to help enterprises raise capital by arranging or underwriting debt and equity transactions, such as project financing, loan syndications, bonds and notes issuances, securitizations, initial and follow-on public offerings, and private equity placements. China Bank Capital also advises clients on structuring, valuation, and execution of corporate transactions, including mergers, acquisitions, divestitures, and joint ventures. It was established and licensed as an investment house in 2015 as the spin-off of China Bank's investment banking group, which was organized in First Metro Investment Corporation ( FMIC ) is a leading investment bank in the Philippines with over fifty years of service in the development of the country s capital markets. It is the investment banking arm of the Metrobank Group, one of the largest financial conglomerates in the country. First Metro and its subsidiaries offer a wide range of services, from debt and equity underwriting to loan syndication, project finance, financial advisory, investment advisory, government securities and corporate debt trading, equity brokering, online trading, asset management, and research. First Metro has established itself as a leading bond house with key strengths in origination, structuring, and execution. SB Capital Investment Corporation ( SB Capital ) is a Philippine corporation organized in October 1995 as a wholly-owned subsidiary of Security Bank Corporation. It obtained its license to operate as an investment house in 1996 and is licensed by the SEC to engage in underwriting and distribution of securities to the public. SB Capital provides a wide range of investment banking services including financial advisory, underwriting of equity and debt securities, project finance, privatizations, mergers and acquisitions, loan syndications and corporate advisory services. SB Capital is also involved in equity trading through its wholly-owned stock brokerage subsidiary, SB Equities, Inc. Its senior executives have extensive experience in the capital markets and were involved in a lead role in a substantial number of major equity and debt issues, both locally and internationally. Except for BDO Capital and China Bank Capital which are associates of the Issuer, the other Joint Lead Underwriters, namely BPI Capital and FMIC, and the Co-Lead Underwriter, SB Capital, have no direct relations with SMIC in terms of ownership. The Underwriters have no right to designate or nominate any member of the Board of SMIC. Sale and Distribution The distribution and sale of the Series G Bonds shall be undertaken by the Underwriters who shall sell and distribute the Series G Bonds to third party buyers/investors. Nothing herein shall limit the rights of the Underwriters from purchasing the Series G Bonds for their own respective accounts. There are no persons to whom the Series G Bonds are allocated or designated. The Series G Bonds shall be offered to the public at large and without preference. The obligations of each of the Underwriters will be several, and not solidary, and nothing in the Underwriting Agreement shall be deemed to create a partnership or joint venture between and among any of the Underwriters. Unless otherwise expressly provided in the Underwriting Agreement, the failure by an Underwriter to carry out its obligations thereunder shall neither relieve the other Underwriters of their obligations under the same Underwriting Agreement, nor shall any Underwriter be responsible for the obligation of another Underwriter. Offer Period The Offer Period shall commence at 9:00 am of 25 November 2016, and end at 12:00 pm of 02 December

67 Application to Purchase Applicants may purchase the Series G Bonds during the Offer Period by submitting to the Underwriters properly completed Applications to Purchase, together with two signature cards, and the full payment of the purchase price of the Bonds in the manner provided in the said Application to Purchase. Corporate and institutional applicants must also submit, in addition to the foregoing, a copy of their SEC Certificate of Registration of Articles of Incorporation and By-Laws, Articles of Incorporation, By-Laws, and the appropriate authorization by their respective boards of directors and/or committees or bodies authorizing the purchase of the Bonds and designating the authorized signatory(ies) thereof. Individual applicants must also submit, in addition to accomplished Applications to Purchase and its required attachments, a photocopy of any one of the following valid identification cards (ID), subject to verification with the original ID: passport, driver s license, postal ID, company ID, SSS/GSIS ID and/or Senior Citizen s ID. A corporate and institutional investor who is exempt from or is not subject to withholding tax shall be required to submit the following requirements to the Registrar, subject to acceptance by the Issuer as being sufficient in form and substance: (i) certified true copy of the tax exemption certificate, ruling or opinion issued by the Bureau of Internal Revenue; (ii) a duly notarized undertaking, in the prescribed form, declaring and warranting its tax exempt status, undertaking to immediately notify the Issuer of any suspension or revocation of the duly-accepted tax exemption certificates and agreeing to indemnify and hold the Issuer free and harmless against any claims, actions, suits, and liabilities resulting from the non-withholding of the required tax; and (iii) such other documentary requirements as may be required under the applicable regulations of the relevant taxing or other authorities; provided that, all sums payable by the Issuer to tax exempt entities shall be paid in full without deductions for taxes, duties, assessments or government charges subject to the submission by the Bondholder claiming the benefit of any exemption of reasonable evidence of such exemption to the Registrar. Completed Applications to Purchase and corresponding payments must reach the Underwriters prior to the end of the Offer Period, or such earlier date as may be specified by the Underwriters. Acceptance by the Underwriters of the completed Application to Purchase shall be subject to the availability of the Series G Bonds and the acceptance by SMIC. In the event that any check payment is returned by the drawee bank for any reason whatsoever or the nominated bank account to be debited is invalid, the Application to Purchase shall be automatically canceled and any prior acceptance of the Application to Purchase shall be deemed revoked. Minimum Purchase A minimum purchase of Twenty Thousand Pesos (P20,000.00) of the Series G Bonds shall be considered for acceptance. Purchases of the Series G Bonds in excess of the minimum shall be in multiples of Ten Thousand Pesos (P10,000.00). Allotment of the Bonds If the Series G Bonds are insufficient to satisfy all Applications to Purchase, the available Series G Bonds shall be allotted in accordance with the chronological order of submission of properly completed and appropriately accomplished Applications to Purchase on a first-come, first-served basis, without prejudice and subject to SMIC s exercise of its right of rejection. Acceptance of Applications SMIC and the Joint Lead Underwriters reserve the right to accept or reject applications to purchase the 62

68 Series G Bonds, and in case of oversubscription, allocate the Series G Bonds available to the applicants in a manner they deem appropriate. Refunds If any application is rejected or accepted in part only, the application money or the appropriate portion thereof shall be returned without interest to such applicant through the relevant Underwriter with whom such application to purchase the Series G Bonds was made. Payments The Paying Agent shall open and maintain a Payment Account, which shall be operated solely and exclusively by the said Paying Agent in accordance with the Paying Agency and Registry Agreement, provided that beneficial ownership of the Payment Account shall always remain with the Bondholders. The Payment Account shall be used exclusively for the payment of the relevant interest and principal on each Payment Date. The Paying Agent shall maintain the Payment Account for six (6) months from Maturity Date or date of early redemption. Upon closure of the Payment Account, any balance remaining in such Payment Account shall be returned to the Issuer and shall be held by the Issuer in trust and for the irrevocable benefit of the Bondholders with unclaimed interest and principal payments. Purchase and Cancellation The Issuer may purchase the Series G Bonds at any time in the open market or by tender or by contract at market price without any obligation to make pro-rata purchases from all Bondholders. Bonds so purchased shall be redeemed and cancelled and may not be re-issued. Upon listing of the Series G Bonds on PDEx, the Issuer shall disclose any such transactions in accordance with the applicable PDEx disclosure rules. Secondary Market SMIC intends to list the Series G Bonds in the PDEx. SMIC may purchase the Series G Bonds at any time without any obligation to make pro-rata purchases of Series G Bonds from all Bondholders. Registry of Bondholders The Series G Bonds shall be issued in scripless form. A Master Certificate of Indebtedness representing the Series G Bonds sold in the Offer shall be issued to and registered in the name of the Trustee, on behalf of the Bondholders. Legal title to the Series G Bonds shall be shown in the Register of Bondholders to be maintained by the Registrar. Initial placement of the Bonds and subsequent transfers of interests in the Series G Bonds shall be subject to applicable prevailing Philippine selling restrictions. The names and addresses of the Bondholders and the particulars of the Series G Bonds held by them and of all transfers of Series G Bonds shall be entered into the Register of Bondholders. Transfers of ownership shall be effected through book-entry transfers in the scripless Register of Bondholders. 63

69 DESCRIPTION OF THE BONDS The detailed terms and conditions of a particular tranche of Bonds shall be set out in the relevant Offer Supplement under Description of the Offer. However, any such discussion under Description of the Offer Bonds does not purport to be a complete listing of all the rights, obligations, or privileges of the Bonds. Some rights, obligations, or privileges may be further limited or restricted by other documents. Prospective investors are enjoined to carefully review the Articles of Incorporation, By-Laws and resolutions of the Board of Directors of SMIC, the information contained in this Prospectus, the relevant Offer Supplement and other agreements relevant to the offer of a particular tranche of Bonds and to perform their own independent investigation and analysis of the Issuer and the Bonds. Prospective Bondholders must make their own appraisal of the Issuer and the offer, and must make their own independent verification of the information contained herein and the other aforementioned documents and any other investigation they may deem appropriate for the purpose of determining whether to participate in the offer of the Bonds. They must not rely solely on any statement or on the significance, adequacy or accuracy of any information contained herein. The information and data contained herein are not a substitute for the prospective investor s independent evaluation and analysis. Prospective Bondholders are likewise encouraged to consult their legal counsels and accountants in order to be better advised of the circumstances surrounding the Bonds being offered. 64

70 Legal Matters INTERESTS OF LEGAL COUNSEL AND INDEPENDENT AUDITORS All legal opinion/matters in connection with the issuance of the Bonds which are subject of this Offer shall be passed upon by Angara Abello Concepcion Regala & Cruz ( ACCRA ), for the Joint Issue Managers and Underwriters, and SMIC s Legal Affairs Division for the Company. ACCRA has no direct and indirect interest in SMIC. ACCRA may, from time to time, be engaged by SMIC to advise in its transactions and perform legal services on the same basis that ACCRA provides such services to its other clients. Independent Auditors The audited consolidated financial statements of SMIC as at 31 December 2013, 2014 and 2015 and for the years ended 31 December 2013, 2014 and 2015 have been audited by SyCip Gorres Velayo and Co. ( SGV & Co. ), independent auditors, in accordance with Philippine Standards on Auditing as set forth in their report thereon appearing elsewhere in this Prospectus. The unaudited interim condensed consolidated financial statements as at 30 June 2016 and for the six-month periods ended 30 June 2015 and 2016 have been reviewed by SGV & Co. in accordance with Philippine Standard on Review Engagements 2410, Review of Interim Financial Information Performed by the Independent Auditor of the Entity. The current Partner in charge of the examination of the Company s financial statements is Julie Christine C. Ong-Mateo. A review is substantially less in scope than an audit conducted in accordance with the Philippine Standards on Auditing. Consequently, it does not enable the independent auditors to obtain assurance that they would become aware of all significant matters that might be identified in an audit. Accordingly, they do not express an audit opinion on the unaudited interim condensed financial statements. The pro forma condensed consolidated financial information of SMIC as at 31 December 2015 and for the years ended 31 December 2015, 2014 and 2013 and as at 30 June 2016 and for the six-month periods ended 30 June 2016 and 2015 have been reviewed by SGV & Co., independent auditors, in accordance with Philippine Standard on Assurance Engagements 3000, Assurance Engagements Other than Audits or Reviews of Historical Financial Information (PSAE 3000) and Philippine Securities and Exchange Commission Memorandum Circular No. 2, Series of 2008, Guidelines on Reporting and Attestation of Pro Forma Financial Information Securities Regulation Code Rule 68, as amended, as set forth in their report thereon appearing elsewhere in this Prospectus. The Company s Audit Committee of the Board reviews and approves the scope of audit work of the independent auditors and the amount of audit fees for a given year. The financial statements will then be presented for approval by the stockholders in the annual meeting. As regards to services rendered by the external auditor other than the audit of financial statements, the scope of and amount for the same are subject to review and approval by the Audit Committee. Audit fees for each of the last two fiscal years for professional services rendered by the external auditor to the parent company (SMIC) were P1.9 million and P2.0 million for 2014 and 2015, respectively. Services rendered include the audit of year end financial statements and supplementary schedules for submission to SEC and assistance in the preparation of annual income tax returns. In 2014, SMIC paid P11.2 million to SGV & Co. for the review of its interim financial statements in connection with the Company s bond issue. There were no other professional services rendered by SGV & Co. during the period. Except for the members of SMIC s Legal Affairs Division, there is no arrangement that experts shall receive a direct or indirect interest in SMIC or was a promoter, underwriter, voting trustee, director, officer, or employee of SMIC. 65

71 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS SMIC has not had any changes in or disagreements with its independent accountants/ auditors on any matter relating to financial or accounting disclosures. 66

72 CAPITALIZATION AND INDEBTEDNESS As at 30 June 2016, the authorized capital stock of the Issuer was P12.0 billion divided into 1,190 million common shares and 10 million non-voting cumulative and redeemable preferred shares each with P10 par value per share, and its issued capital stock was P8.0 billion consisting of 803,055,405 common shares of P10 par value each. The following table sets forth the consolidated capitalization and indebtedness of the Group as at 30 June 2016 and as adjusted to give effect to the issue of the Series G Bonds (assuming the Oversubscription Option is not exercised). This table should be read in conjunction with the Issuer s unaudited condensed consolidated interim financial statements as at and for the six months ended 30 June 2016 and notes thereto, included elsewhere in this Prospectus. (in P millions) As at 30 June 2016 Actual Adjusted (Unaudited) Short-term debt Bank loans 6,695 6,695 Current portion of long-term debt 6,678 6,678 Total short-term debt 13,373 13,373 Long-term debt - net of current portion Banks and other financial institutions 266, ,081 The Bonds to be issued - 15,000 Total long-term debt - net of current portion 266, ,081 Equity Equity Attributable to Equity Owners of the Parent: Capital Stock 8,030 8,030 Additional paid-in capital 76,400 76,400 Equity adjustment from common control transactions (1,902) (1,902) Cost of Parent common shares held by subsidiaries (25) (25) Cumulative translation adjustment Re-measurement gain on defined benefit asset/obligation Net unrealized gain on available for sale investments 14,733 14,733 Retained earnings Appropriated 36,000 36,000 Unappropriated 158, ,455 Total Equity Attributable to Equity Owners of the Parent 292, ,271 Non-controlling interests 100, ,477 Total Equity 392, ,748 Total capitalization 658, ,829 Notes: (1) Adjusted amount as at 30 June 2016 includes proceeds of P15,000,000,000 principal amount of the Series G Bonds offered hereunder. (2) Total capitalization is the sum of long-term debt net of current portion and equity. 67

73 DESCRIPTION OF THE ISSUER AND THE GROUP Overview The Issuer is the holding company of the Group, one of the largest conglomerates in the Philippines. The Issuer was incorporated in the Philippines on 15 January On 03 June 2009, the SEC approved the amendment of SMIC s Articles of Incorporation for the extension of the Company s corporate life for another 50 years from 15 January Its registered office is at the 10th Floor, One E-Com Center, Harbor Drive, Mall of Asia Complex CBP-1A, Pasay City, Metro Manila, Philippines. Through its subsidiaries, associates and other investments, the Issuer operates a diversified range of businesses located in the Philippines. The Group s business activities and interests are divided into three principal business segments: Retail merchandising mainly through its department stores, supermarkets, SaveMore, hypermarkets, Waltermart and other specialty retail; Property Group composed of the following: - Shopping mall developments, where it is the leading shopping mall operator in the Philippines (SM Prime); - Real estate development and tourism (SM Prime and its subsidiaries SMDC, CDHI and HPI); - Commercial property development; - Hotels and conventions (SM Hotels); and Financial services, through its associate banks that have universal banking licenses in the Philippines (BDO and China Bank). As at 30 June 2016, the Issuer had two principal consolidated subsidiaries namely SM Prime and SM Retail, and two principal equity-accounted associates, namely BDO and China Bank, each of whose shares (except for SM Retail) are listed on the PSE, in which the Issuer had effective interests of 49.7%, 100.0%, 44.4%, and 19.9%, respectively. For the years ended 31 December 2013, 2014 and 2015, the Issuer s audited consolidated revenues were P253,580.0 million, P276,615.3 million and P295,877.7 million respectively, and its audited consolidated net income attributable to equity holders of the parent were P27,445.7 million, P28,398.6 million and P28,455.3 million, respectively. For the six-month period ended 30 June 2016, the Issuer s unaudited consolidated revenues was P151,088.0 million and its unaudited consolidated net income attributable to equity holders of the parent was P14,986.4 million. As at 31 December 2013, 2014 and 2015, the Issuer s audited consolidated total assets were P632,994.2 million, P711,884.6 million and P771,077.5 million respectively, and its audited total equity was P300,240.8 million, P349,948.4 million and P381,699.3 million respectively. As at 30 June 2016, the Issuer s unaudited consolidated total assets was P770,169.5 million and its unaudited total equity was P392,748.2 million. The principal source of consolidated revenue of the Issuer is from the Retail Group which contributed P185,641.3 million, P201,450.0 million, P215,960.3 million, P98,862.2 million and P107,217.0 million, respectively, or 73.2%, 72.8%, 73.0%, 71.0% and 71.0%, respectively, of its consolidated revenues for the 68

74 years ended 31 December 2013, 2014 and 2015 and the six months ended 30 June 2015 and Property contributed P55,981.6 million, P62,925.7million, P67,020.6 million, P34,317.6 million and P37,042.4 million or 22.1%, 22.8%, 22.6%, 24.6% and 24.5%, respectively, of the Issuer s consolidated revenues for the years ended 31 December 2013, 2014, 2015 and the six months ended 30 June 2015 and The Property Group and Retail Group contributed P15,626.9 million, P16,647.0 million, P17,073.3 million, P8,359.7 million and P9,230.0 million, respectively, of the Issuer s consolidated net income attributable to equity holders of the parent for the years ended 31 December 2013, 2014, 2015 and the six months ended 30 June 2015 and History Mr. Henry Sy, Sr., the founder of the Group, embarked upon his retailing career immediately after the Second World War when, in 1945, he established a small shoe store in Carriedo, Metro Manila. Having opened six shoe stores, Mr. Sy diversified the business into clothing and soft goods. In 1958, the first Shoemart store opened in Rizal Avenue, Metro Manila and, following the incorporation of Shoemart in March 1960, additional stores opened in Makati Commercial Centre in 1962, in Cebu in 1965 and in Cubao in Four department stores were opened during the 1970s and, with the intention that one-stop shopping convenience be provided to customers, the new stores featured fast food centers and entertainment areas. Shoemart operated six SM Department Stores until November 2001, when five stores were transferred to SM Mart. As at June 30, 2016, SM Mart is a 65.0% owned subsidiary through SM Retail, with the remaining 35.0% held by the Sy Family. Pursuant to a restructuring of the Issuer s department store business in 2002, SM Mart took over most of Shoemart s functions in managing its department store business, such as merchandising, marketing, advertising and certain other services for the SM Department Stores as well as for its Retail Affiliates. The Group acquired its supermarket and hypermarket operations in June Shoemart was renamed SM Land, Inc. As at September 30, 2016, the Issuer, through SM Retail, operates 55 SM Stores, 47 SM Supermarkets, 147 SaveMore stores, 45 SM Hypermarkets and 34 Waltermart supermarkets. Capitalizing upon the success of the SM Department Stores and as an extension of the concept of one-stop shopping, the first shopping mall, SM City North EDSA, commenced operations in Quezon City in By January 1994, four shopping malls had been opened, including SM Megamall, the largest shopping mall in the Philippines. SM Prime was incorporated in 1994 for the primary purpose of acquiring from other members of the Group, as well as companies affiliated with the Sy Family, the shopping malls and land intended for the development of shopping malls and, henceforth, to be the Group vehicle for commercial center operations. SM Prime undertook its initial public offering on the PSE in July 1994, raising approximately P6.0 billion. SM Prime currently owns and operates, with the assistance of certain Management Companies, 58 shopping malls in the Philippines. In November 2007, SM Prime approved the acquisition from the Sy Family of three malls in the southern and western parts of China, namely Xiamen, Jinjiang and Chengdu and completed the acquisition in May SM Suzhou, SM Chongqing and SM Zibo in China opened in September 2011, December 2012 and September 2015, respectively, while SM Tianjin is still under construction. The Issuer s expansion into real estate development commenced in October 1974 with the incorporation of MRDC. MRDC was formed to develop high-rise condominiums and townhouse units in the prime district of Makati. In November 1976, Mr. Henry Sy, Sr. acquired Acme Savings Bank, which was renamed Banco De Oro Savings and Mortgage Bank in August 1977 and then as Banco De Oro Commercial Bank in December The Bank initially provided services predominantly to suppliers of Shoemart, but has subsequently developed into a full-service commercial bank. In August 1996, the Bank was renamed Banco De Oro Universal Bank when the BSP granted approval for the Bank to operate as an expanded commercial bank. 69

75 BDO undertook its initial public offering and was listed on the PSE in May 2002, raising P2.1 billion. In May 2007, the Bank merged with EPCIB and was subsequently renamed Banco De Oro Unibank, Inc. on 6 February On 04 November 2011, the Bank was renamed to BDO Unibank, Inc. as part of the company s re-branding initiatives. In 1986, the Group obtained majority ownership of SM Fund, Inc., a closed-end investment company listed on the PSE. In May 1996, the SEC approved a change of name of the company to SM Development Corporation and a change of its purpose to property holding and development. The Group has also diversified into tourism and entertainment with plans for the development of mixed-use complexes in Cebu, Davao, Tagaytay, Batangas, Baguio and Metro Manila, which include hotels, convention centers, shopping malls and leisure and entertainment facilities. On 1 August 2007, the Issuer approved the rationalization of Shoemart as the holding entity for the real estate and tourism operations of the Group. On 8 October 2007, the Issuer and Shoemart entered into an agreement whereby the Issuer agreed to swap its 1,823,841,965 common shares in SMDC in exchange for 372,212 common shares in Shoemart based on an independent valuation of the respective shares by Macquarie Securities (Asia) Pte Limited. On 24 January 2008, the SEC approved the valuation of the shares of stock of SMDC as consideration for the additional issue of 372,212 shares. The share swap resulted in an increase of the Issuer s ownership in Shoemart from 64.9% to 66.9% while the effective ownership in SMDC was reduced to 43.6% from 59.4%. The shares swap also resulted in SMDC becoming a 65.0%-owned subsidiary of Shoemart. On 3 October 2008, the SEC approved the change in name of Shoemart, Inc. to SM Land, Inc. On 02 April 2008, SM Hotels was incorporated to further focus on and develop the Group s hotel business, and rationalize the Group s hotel and convention assets under one entity. On 29 March 2010, the SEC approved the change in the corporate name of SM Hotels and Entertainment Corp. to SM Hotels and Conventions Corp. On 31 May 2013, the Group embarked on a highly transformational transaction to consolidate all of its real estate interests under SM Prime, in line with the Group s vision to create a leading integrated real estate company in Asia, increase synergies and organizational efficiencies among the Group s various real estate business units, and further enhance the value of the Group s real estate businesses. The consolidation involved PSE-listed companies SMDC and HPI, various unlisted Group real estate companies including SM Land and SM Hotels and various real estate properties owned by SMIC. The Group initiated the consolidation through the simultaneous tender offers made by SM Land to acquire 100% of the outstanding issued and capital stock of SMDC and HPI which it did not yet own by exchanging SM Prime common shares owned by SM Land for SMDC and HPI common shares of the tendering shareholders. This was followed by (i) the merger of SM Land with SM Prime with the latter as the surviving entity, (ii) the issuance of new SM Prime common shares to SMIC, Mountain Bliss Resort & Development Corp. ( Mountain Bliss ) and the Sy family in exchange for shares in certain real estate companies of the Group, and (iii) the issuance of new SM Prime common shares to SMIC in exchange for key real estate properties owned by SMIC. The reorganization was approved by the SEC on 10 October 2013, resulting to SM Prime becoming one of the largest real estate companies in South East Asia with total assets of P440,279.0 million as of June 30, 2016 and an aggregate land bank of more than 1,140.5 hectares. 4 On 7 July 2016, the Company obtained the approval of the SEC for the merger of Sy Family-owned specialty stores into SM Retail, with SM Retail as the surviving entity. This enabled the Group to consolidate all its retail businesses under SM Retail, Inc. 1,476 outlets were folded into SM Retail in exchange for shares of stock in SM Retail. These include popular brands such as Watsons, Toy Kingdom, SM Appliances, Ace Hardware, Our Home, Sports Central, Kultura, Pet Express, Baby Company and other specialty retailers. The merger resulted in SMIC owning 77.3% in a larger and more diverse SM Retail group. 4 As of September 30, 2016, aggregate land bank of the Group stands at 1,127.0 hectares. 70

76 SMIC was listed on the PSE on 22 March 2005, and as at 8 November 2016, had a market capitalization of P808,275.1 million, based on a price of P per common share on such date. Strategy The Issuer s strategy is focused on growing its retail, property and financial services businesses, and maintaining or attaining market leadership in each of their respective sectors. The Issuer will continue to target the mass market in the Philippines by offering essential goods and services such as food, clothing, housing and financial services. The Issuer is responsible for setting Group policy and strategy. The Issuer establishes the financial and operating policies for the Group and supervises and monitors the performance of its subsidiaries and associates. Key elements of the Issuer s strategy are to: maintain its leading market share in the shopping mall sector by continuing to expand the Group s mall and retail activities into major centers of population in Metro Manila and particularly in the provinces, where there are opportunities for growth and capture strategic opportunities overseas particularly China; continue to capture a significant share of retail spending in the Philippines arising from approximately US$25.8 billion for 2015 (based on BSP data) in remittances from overseas Filipino workers by providing the most attractive retail and leisure facilities to Philippine mass market consumers; continue to grow its financial services businesses, including through acquisitions by BDO, and develop further synergies between financial services and its shopping malls and the Retail Subsidiaries by encouraging its suppliers and retail customers to take advantage of and utilize the financial services offered by BDO and China Bank; diversify and expand the businesses of the Group (including through acquisition) in the property development, tourism and leisure sectors as the Philippines becomes a more attractive tourist destination, by leveraging the Group s strategically located land bank; integrate all land banking functions into a centralized department while retaining the highly successful culture that allowed the Group to reach its strong current land bank position, and continue acquiring land bank that is suitable for mid-to-large scale mixed-use master planned projects in fast growing areas of the Philippines; supervise a range of related businesses and investments, providing support, expertise and funding to its developing businesses and encouraging further growth in its more established businesses; and promote the independence of its various businesses in terms of executing set strategies and encouraging financial independence in terms of external funding. Strengths The Issuer believes that the key strengths of the Group and its associates are as follows: a well-established platform providing quality services from retail to real estate development to 71

77 financial services to cater for the domestic consumption growth in the Philippines; its 58 years of retail experience, which has created significant goodwill among its customers and suppliers, a well-known brand and image and a reputation for providing value for customers; its leading market share positions in providing one-stop experience through shopping malls, department stores and supermarkets and the largest bank in the Philippines in terms of assets; fast growing residential development expertise that is sitting at the sweet spot of the local real estate markets, well-supported by SM-branded shopping malls nearby; prudent financial management and a strong balance sheet with stable recurring cash flows through focusing on diverse businesses which are relatively less cyclical; its experienced management team with a proven track record in the Philippines and abroad, which has consistently focused on related businesses that promote synergies; and its overall corporate reputation in the Philippines and abroad, which has brought the Group numerous awards for corporate excellence, corporate governance and financial management. Ownership and Corporate Structure As at the date of this Prospectus, the Sy Family holds 55.7% of the outstanding issued and paid-up share capital of the Issuer. The chart in the following page sets forth the Issuer s simplified corporate structure, organized by business segment, including its principal subsidiaries and associates and the direct ownership of each as at 30 September

78 73

79 The following table sets forth a breakdown on a consolidated basis of the Group s principal businesses in terms of total revenues, total net income attributable to equity holders of the Parent, total assets and total liabilities for the years ended 31 December 2013, 2014 and 2015 and for the six months ended 30 June 2016 save as stated otherwise: As at and for the year ended December 31 As at and for the six months ended June 30 (in P millions, except percentages) Revenues Property (1) 55, % 62, % 67, % 34, % 37, % Retail (2) 185, % 201, % 215, % 98, % 107, % Others (3) 11, % 12, % 12, % 6, % 6, % Total 253, % 276, % 295, % 139, % 151, % Net Income Attributable to Equity Holders of the Parent Property (1) 9, % 10, % 10, % 5, % 6, % (2) Retail 5, % 5, % 6, % 2, % 3, % Others (3) 11, % 11, % 11, % 5, % 5, % Total 27, % 28, % 28, % 13, % 14, % Assets (excluding deferred tax) Property (1) 358, % 408, % 448, % 419, % 453, % Retail (2) 67, % 71, % 75, % 63, % 66, % Others (3) 205, % 229, % 245, % 235, % 248, % Total 630, % 709, % 768, % 718, % 767, % Liabilities (excluding deferred tax) Property (1) 164, % 188, % 218, % 200, % 218, % Retail (2) 36, % 37, % 40, % 28, % 29, % Others (3) 124, % 129, % 123, % 122, % 122, % Total 325, % 355, % 381, % 351, % 370, % Notes: (1) Property consists of the relevant financial information of SM Prime and its subsidiaries, as well as The Net Group, Bellevue Properties, Inc. and Intercontinental Development Corporation which are subsidiaries of SMIC. (2) Retail includes the relevant financial information of SM Retail and its subsidiaries. (3) Others include the Parent financials as well as those of its other subsidiaries and equity in earnings of associates including BDO, China Bank, Atlas Consolidated Mining and Development Corp. and Belle Corporation. The following table sets forth a breakdown of the dividend income from the Issuer s principal subsidiaries and associates for the periods indicated. Under PFRS, dividend income from the Issuer s subsidiaries and associates is eliminated at consolidated level. 74

80 As at and for the year ended December 31 As at and for the six months ended June 30 (in P millions) Company Retail Subsidiaries 8, , , SM Prime 1, , , , ,301.3 China Bank BDO 3, , , , Net Group Belleshares Holdings Mountain Bliss - - 2, , MRDC - - 4, Sto. Roberto Marketing Corp Others Total 13, , , , ,239.0 Malls and Real Estate SM Prime Holdings, Inc. Introduction SM Prime Holdings, Inc. was incorporated in the Philippines and registered with the SEC on 6 January It is a leading integrated Philippine real estate company with business units focused on malls, residential, commercial, and hotels and convention centers. As at 30 June 2016, SM Prime s consolidated total assets stood at P440.3 billion, consolidated total liabilities were at P217.3 billion, with net debt-to-equity ratio (being the ratio of aggregate consolidated indebtedness net of cash and cash equivalent and investment held for trading over equity) of 38.0%. SM Prime has four business segments, namely, malls, residential, commercial and hotel and convention centers. The table below sets out each business unit s contribution to SM Prime s consolidated revenue for the years ended 31 December 2013, 2014 and 2015 and the six months ended 30 June 2015 and For the years ended 31 December Audited For the six months ended 30 June Unaudited (in P million) Malls 34,467 38,701 42,733 21,651 23,612 Residential 20,916 22,723 22,931 12,484 13,249 Commercial 2,914 2,945 3, ,127 Hotels and Convention Centers 1,670 2,005 2,446 1,026 1,300 Eliminations (173) (134) (105) (48) (56) Combined Total 59,794 66,240 71,511 35,860 39,232 As at 30 September 2016, SMIC directly and indirectly owned 49.7% of the issued share capital of SM Prime. SM Prime is listed on the PSE and had a market capitalization of P776.9 billion as at 8 November Selected Financial Information The following table sets forth selected consolidated financial information of SM Prime as at and for the periods indicated. SM Prime s fiscal year end is 31 December. 75

81 CONSOLIDATED STATEMENTS OF INCOME (in P thousands) 2013 Audited For the years ended 31 December 2014 Audited 2015 Audited For the six months ended 30 June 2015 Unaudited 2016 Unaudited Revenue 59,794,410 66,240,070 71,511,287 35,859,821 39,231,752 Costs and Expenses 35,658,865 38,553,561 40,072,460 19,649,578 21,386,585 Income from Operations 24,135,545 27,686,509 31,438,827 16,210,243 17,845,167 Other Income (Charges) (3,425,454) (4,012,373) 3,472,012 5,727,821 (1,669,006) Income Before Income Tax 20,710,091 23,674,136 34,910,839 21,938,064 16,176,161 Net Income 16,725,928 18,896,489 28,892,593 18,948,710 12,888,199 Attributable to: Equity holders of the 16,274,820 18,390,352 28,302,092 18,654,979 12,590,019 Parent Non-controlling interests 451, , , , ,180 CONSOLIDATED BALANCE SHEETS (in P thousands) 2013 Audited As at 31 December 2014 Audited 2015 Audited 2015 Unaudited As at 30 June 2016 Unaudited ASSETS Current Assets Cash and cash equivalents 27,141,506 35,245,206 25,869,908 19,590,553 17,115,406 Short-term investments 887, Investments held for trading 1,151, , , , ,464 Receivables 27,184,434 30,686,968 31,354,286 36,111,250 33,194,134 Condominium and residential 6,102,653 7,578,885 8,164,981 10,183,937 6,591,327 units for sale Land and development 13,281,246 19,571,526 19,814,615 14,173,950 24,322,178 Available-for-sale investments - 676, , , ,856 Prepaid expenses and other 9,936,120 9,289,317 11,302,871 9,666,149 11,511,030 current assets Total Current Assets 85,685, ,016,168 97,992,191 91,344,857 94,319,395 Noncurrent Assets Available-for-sale investments 23,369,074 28,994,983 19,689,781 20,918,354 21,687,741 net of current portion Property and equipment net 1,578,893 2,258,387 1,680,382 2,140,457 1,677,117 Investment properties net 171,666, ,639, ,340, ,731, ,860,671 Land and development net of 21,539,938 22,886,306 23,105,553 24,845,235 20,086,939 current portion Derivative assets 1,778,810 1,632,814 2,600,799 1,879,536 2,363,215 Deferred tax assets - net 690, , , , ,624 Investments in associates and 5,756,294 6,050,884 22,080,000 21,556,186 22,429,241 joint ventures Other noncurrent assets 23,518,416 29,711,085 35,493,223 22,653,493 36,883,016 Total Noncurrent Assets 249,898, ,823, ,836, ,512, ,959,564 Total Assets 335,583, ,840, ,828, ,857, ,278,959 76

82 (in P thousands) 2013 Audited As at 31 December 2014 Audited 2015 Audited 2015 Unaudited As at 30 June 2016 Unaudited LIABILITIES AND EQUITY Current Liabilities Loans payable 3,250,000 2,670,000 4,675,000 10,815, ,000 Accounts payable and other 45,298,216 36,378,819 38,819,156 35,372,081 37,980,121 current liabilities Current portion of long-term 7,387,260 11,006,880 25,041,044 26,323,800 6,693,206 debt Income tax payable 946, , , , ,403 Total Current Liabilities 56,882,069 50,799,205 69,490,733 73,445,503 46,451,730 Noncurrent Liabilities Long-term debt net of 95,675, ,606, ,952, ,060, ,387,983 current portion Tenants and customers 10,248,792 13,251,526 13,218,264 13,660,077 14,347,119 deposits net of current portion Liability for purchased land 1,117,809 1,170,855 2,081, ,661 2,016,005 net of current portion Deferred tax liabilities net 2,022,539 1,934,174 2,488,990 2,208,619 2,198,838 Derivative liabilities 159,974 58,705-10,132 - Other noncurrent liabilities 3,255,244 3,781,344 4,753,456 4,636,592 4,932,268 Total Noncurrent Liabilities 112,480, ,802, ,494, ,439, ,882,213 Total Liabilities 169,362, ,601, ,985, ,885, ,333,943 Equity Attributable to Equity Holders of the Parent Capital stock 33,166,300 33,166,300 33,166,300 33,166,300 33,166,300 Additional paid-in capital - net 22,303,436 39,302,194 39,304,027 39,302,194 39,304,027 Cumulative translation 1,381, ,430 1,005, , ,468 adjustment Net unrealized gain on 19,958,330 25,905,440 16,621,547 17,891,079 18,661,288 available-for-sale investments Net fair value changes on cash 429, , , ,036 (39,441) flow hedges Remeasurement gain (loss) on 771 (141,524) (50,458) (141,524) (50,458) defined benefit obligation Retained earnings: Appropriated 42,200,000 42,200,000 42,200,000 42,200,000 42,200,000 Unappropriated 47,807,664 60,921,048 83,168,103 73,520,990 89,126,392 Treasury stock (3,980,378) (3,355,530) (3,355,474) (3,355,530) (3,355,474) Total Equity Attributable to 163,266, ,087, ,488, ,914, ,778,102 Equity Holders of the Parent Non-controlling Interests 2,954,985 3,150,513 3,354,025 3,057,044 3,166,914 Total Equity 166,221, ,238, ,842, ,971, ,945,016 Total Liabilities and Equity 335,583, ,840, ,828, ,857, ,278,959 MALLS SM Prime develops, operates and maintains modern commercial shopping malls and is involved in all related businesses, such as the operation and maintenance of shopping spaces for rent, amusement centers and cinema theaters within the compound of the shopping malls. As of the date of this Prospectus, 77

83 SM Prime owns 58 malls (as listed below) covering a total GFA of approximately 7.5 million sq. m. located across the Philippine archipelago, attracting an average of approximately 4 million visitors daily. SM Prime is the leading owner and operator of shopping malls in the Philippines. SM Prime plans to continue to expand its existing malls and develop new ones, with a target of opening approximately four to five new malls in the Philippines each year for the near term, subject to market conditions. SM Prime has in the past concentrated on the development of its malls in the Metro Manila area, where it currently operates 20 malls. In addition, SM Prime currently plans to develop in the future five plots of land within Metro Manila, all of which are owned. As the Metro Manila area becomes increasingly well served by shopping malls, SM Prime s strategy is to expand its activities in the provinces, where it currently operates 38 malls and holds an additional 28 plots of land available for development, all of which are owned. SM Prime has also expanded its shopping mall operations outside of the Philippines. SM Prime owns six operational malls located in the cities of Xiamen, Jinjiang, Chengdu, Suzhou, Chongqing and Zibo in the southern and western parts of China with a total GFA of approximately 0.9 million sq. m., with one additional mall under development. SM Prime is targeting the acquisition of additional properties in China in the future as it prepares for opportunistic expansion into second and third tier cities. SM Prime plans to build one mall in China per year for the near term, subject to market conditions. The principal sources of mall revenue for SM Prime comprise rental income payable by tenants (including its retail subsidiaries) within the malls, ticket sales derived from the operations of cinemas, and fees payable for the use of SM Prime s parking facilities, bowling, ice skating and other leisure facilities. Approximately 51% of SM Prime s gross leasable space is currently leased by members of the SM Group or companies who are affiliated with the Sy family. Such tenants contributed approximately 24% ( 5.7 billion) of SM Prime s consolidated mall revenues of 23.6 billion for the six months ended 30 June SM Prime retains ownership of all of the sites on which the SM Prime malls are built, with the exception of SM Aura Premier, SM City Bacoor, SM City Manila, SM City Baguio, SM Center Valenzuela, SM Center Molino, SM City Clark, SM Center Pasig, SM City Pampanga, SM City Taytay, SM Center Muntinlupa, SM City Naga, SM City Tarlac, SM City San Pablo, SM City Calamba, SM City Bacolod, SM City Masinag, SM City Dasmariñas SM City Olongapo, SM City Consolacion, SM City General Santos and SM City San Mateo, which are held under long-term leases. SM Megamall is owned by First Asia Realty Development Corporation, a 74.2% owned subsidiary of SM Prime, with the remaining interest being held by an unaffiliated third party. The land where SM City San Lazaro is located is owned by San Lazaro Holdings Corporation, a wholly owned subsidiary. The land where SM City Baguio is built is owned by SMIC. The following is a brief discussion of each of SM Prime s current malls. Metro Manila Malls SM City North EDSA Year opened SM City North EDSA, the very first and currently the country s largest shopping mall, has a GFA of 497,912 sq. m. featuring 12 cinemas including a 3D IMAX theater with a total seating capacity of 9,343, 24-computerized synthetic lane bowling center, food court, amusement centers and multi-level carpark which provides a total capacity of 4,022 vehicles, located on a 16.1 hectare site in Diliman, Quezon City. Following the opening of The Block and renovation of The Annex, The Sky Garden was unveiled in May It is a 400-meter elevated walkway shaded by a long sketch of white canopy connecting building to another, with a park-like ambiance and green architecture. The Sky Garden includes the roof garden, water features, food and retail outlets and sky dome, a 1,000-seat amphitheater for shows and special events. The anchor tenants for SM City North EDSA are The SM Store, SM Hypermarket and SM Supermarket, Ace Hardware, and Uniqlo. 78

84 SM Megamall Year opened SM Megamall is located on a 10.5 hectare property in the Ortigas business district of Metro Manila. It stands along the main EDSA thoroughfare and is near the Metro Rail Transit. SM Megamall has two main buildings, Mega A and Mega B, with the addition of Mega Atrium in 2008, Building C in 2011 and Mega Fashion Hall in January It has a total GFA of 474,225 sq. m. It features 14 cinemas including the newly opened IMAX theatre and Director s Club with its own butler service, a fully-computerized 14-lane bowling center, an Olympic-sized ice skating rink, a mega fashion hall, event center and parking for 2,976 vehicles. The anchor tenants for SM Megamall are The SM Store, SM Supermarket, Ace Hardware, Uniqlo and Toy Kingdom. SM Mall of Asia Year opened SM Mall of Asia is located on a 19.5 hectare property overlooking Manila Bay. The mall consists of four buildings linked by elevated walkways Main Mall, the North Parking Building, the South Parking Building, and the Entertainment Center Building. The mall has a GFA of 432,891 sq. m. with parking buildings that has 3,984 spaces each that are available for vehicles. The Entertainment Building houses the country s first IMAX theatre, a special Director s Club screening room for exclusive film showings, eight state-of-the art cinemas, 32-lane bowling facility, an Olympic-sized ice skating rink, an Exploreum and fine dining restaurants and bars. In 2014, the mall opened the XD 4D cinema that is equipped with 48 pneumatic controlled seats and in-theatre effects including snow, wind, water, smell, fog and strobe lightings, leg tickler, motion seats and seat vibrators. The anchor tenants for SM Mall of Asia are The SM Store, SM Hypermarket, Forever 21 and Uniqlo. SM Aura Premier Year opened SM Aura Premier, opened in May 2013, is a state of the art civic center at the heart of Taguig City. The mall has a GFA of 198,257 sq. m. As an integrated development, SM Aura Premier incorporates office towers, a chapel, a convention center and mini-coliseum, supported by a retail podium with an upscale look and feel. The mall also has two regular cinemas, two Director s Clubs and an IMAX Theater with a total seating capacity of 921 and a food court. The anchor tenants for SM Aura Premier are The SM Store, SM Supermarket, Forever 21 and Uniqlo. SM City Fairview Year opened SM City Fairview is a two-building, four-level complex with a GFA of 188,681 sq. m. located on a 20.0 hectare site in Quezon City, Metro Manila. The mall features 12 cinemas with a seating capacity of 6,553, 20-lane bowling center, food court and amusement areas. In early 2009, the mall launched its annex, adding 28,600 sq. m. of GFA to the main mall. The anchor tenants for SM City Fairview are The SM Store, SM Hypermarket, SM Supermarket, Ace Builders Center and Teleperformance. SM Southmall Year opened SM Southmall, with a GFA of 184,552 sq. m., was the first shopping mall in the southern region of Metro Manila located Alabang-Zapote Road in Las Piñas City. As major renovations completed in 2012, SM Southmall became one of the premier malls and it features nine cinemas with a seating capacity of 7,049, including an IMAX theater, an ice skating rink, bowling center, food court and a carpark with 3,068 slots. The anchor tenants for SM Southmall are The SM Store, SM Supermarket, SM Appliance Center and Ace Hardware. SM City San Lazaro Year opened SM City San Lazaro is located at the center of a densely populated residential area with 79

85 bustling commercial activities in Sta. Cruz, Manila. The four-storey mall has a GFA of 181,593 sq. m. The mall features a food court, amusement center, six cinemas with a seating capacity of 3,274, and parking for 1,256 vehicles. The anchor tenants for SM City San Lazaro are The SM Store, SM Supermarket, SM Appliance Center and Ace Hardware. SM City Marikina Year opened SM City Marikina on Marcos Highway, Brgy. Calumpang, Marikina City has a GFA of 178,178 sq. m. Marikina is a key city for the SM Group, as its shoemakers became vital partners during its growth years in the sixties as a shoe store in Carriedo, Manila. It features a food court and eight cinemas with a 3,136 seating capacity. The anchor tenants for SM City Marikina are The SM Store, SM Supermarket and Ace Hardware. SM City Manila Year opened SM City Manila is a five-level mall with a GFA of 167,812 sq. m. The mall is located in downtown Manila next to Manila City Hall. The mall has 12 cinemas with a seating capacity of 7,555, a food court and a carpark available for 920 vehicles. It has become a major destination for shoppers, given its strategic location and easy accessibility by the Light Railway Transit and other public transportation. The anchor tenants for SM City Manila are The SM Store, SM Supermarket, SM Appliance Center and Ace Hardware. SM City Sta. Mesa Year opened SM City Sta. Mesa, located in Quezon City, Metro Manila, is a seven level complex with a GFA of 132,965 sq. m. featuring 10 cinemas with a seating capacity of 7,451, a food court, an amusement center, carpark with a total capacity of 1,052 vehicles. The anchor tenants for SM City Sta. Mesa are The SM Store, SM Supermarket, SM Appliance Center and Ace Hardware. SM City BF Parañaque Year opened SM City BF Parañaque, strategically located at the main gate of Parañaque s prime residential village, opened on November 29, 2013 which has a GFA of 125,582 sq. m. Its design and construction features three skylight domes in its main atrium to reduce the use of electricity by fully maximizing the use of sunlight, while air conditioning is automatically regulated to help ensure efficient energy consumption. The mall is the first mall to have four Director s Club cinemas equipped with electronic recliner (lazyboy type) seats that can accommodate up to 200 moviegoers and also houses two premier cinemas with 180 seats each. It provides ample parking space for 1,420 vehicles and 179 slots for motorcycles. The anchor tenants for SM City BF Parañaque are The SM Store, SM Supermarket, Ace Hardware and Uniqlo. SM City Bicutan Year opened SM City Bicutan is a two-building mall located along Doña Soledad Ave. corner West Service Road, Bicutan, Parañaque City. This mall has a GFA of 114,214 sq. m. It features a food court and four cinemas with a total seating capacity of 1,352. SM City Bicutan serves nearly half a million residents within a 3 kilometer radius. The anchor tenants for SM City Bicutan are The SM Store, SM Supermarket, Ace Hardware and SM Appliance Center. SM City Sucat Year opened SM City Sucat is a two-building mall located on a 10.1 hectare site along Dr. A. Santos Ave. (Sucat Road), Brgy. San Dionisio, Parañaque City. The mall has a GFA of 96,277 sq. m. featuring four 80

86 cinemas with total seating capacity of 1,955, a food court and carpark with 1,475 slots. The anchor tenants for SM City Sucat are The SM Store, SM Supermarket and Ace Hardware SM Center Valenzuela Year opened SM Center Valenzuela has a total GFA of 70,681 sq. m., situated in Brgy. Karuhatan, Valenzuela City. The mall caters to the bustling industrial areas that surround the property. The mall features four cinemas with a 2,172 seating capacity, 12-lane bowling center, a food court and parking for 557 vehicles. It also features the Fashion Avenue, a multi-shop style center that houses a wide array of apparel, shoes and accessory picks. The anchor tenants for SM Center Valenzuela are SM Supermarket, SM Appliance Center and Ace Hardware. SM City Novaliches Year opened SM City Novaliches, having a GFA of 60,044 sq. m., is located along Quirino Highway in Brgy. San Bartolome, Novaliches, Quezon City. Novaliches, being the largest district in the city, is growing with residential subdivisions and industrial companies. The amenities of the mall include a food court, four cinemas with 1,610 seats and parking for almost 1,206 vehicles. The anchor tenants for SM City Novaliches are The SM Store, SM Supermarket, Banco de Oro and Ace Hardware. SM Center Muntinlupa Year opened SM Center Muntinlupa is situated in Brgy. Putatan, Muntinlupa City. The two-level mall has a GFA of 57,060 sq. m. that caters the residents of Muntinlupa City and the growing municipality of San Pedro, Laguna. The mall features a food court, four cinemas with 1,582 seating capacity and an entertainment plaza for shows and events located at the center of the mall. The anchor tenants for SM Center Muntinlupa are SM Hypermarket, SM Appliance Center and Ace Hardware. SM Center Sangandaan Year opened SM Center Sangandaan, strategically located along the busy intersection of Samson Road and A. Mabini Street Sangandaan, is providing SM Prime access to the northern tip of Metro Manila, bringing a unique shopping experience closer to the highly dense cities of Malabon, Navotas and Caloocan City. It has a GFA of 43,626 with three levels of prime spaces which includes four cinema theaters with a total seating capacity of 832 and 524 parking slots. The anchor tenants for SM Center Sangandaan are SM Supermarket, Ace Hardware and Watsons. SM Center Las Piñas Year opened SM Center Las Piñas is located along the Alabang-Zapote Road in Brgy. Talon, Pamplona, Las Piñas City that has a GFA of 39,727 sq. m. SM Center Las Piñas serves customers in the western section of the city and the nearby provinces of Laguna and Cavite. The anchor tenants for SM Center Las Piñas are SM Hypermarket, Banco de Oro and Ace Hardware. 81

87 SM Center Pasig Year opened SM Center Pasig is located in Frontera Verde, Pasig City serving residents of the neighboring upscale subdivisions and customers who regularly pass through the C5 route. Its GFA is 28,829 sq. m. including its basement parking for almost 282 vehicles. The anchor tenants for SM Center Pasig are SM Hypermarket, Ace Hardware and Watsons. Cherry Foodarama Shaw Boulevard Year opened Cherry Foodarama Shaw Boulevard, located in Old Wack-wack Road, Mandaluyong City, reopened last October 2015and now looking refreshed and a bit more modernized while still keeping the classic Cherry feel. It has a GFA of 24,165 sq. m. with parking for 344 vehicles. The anchor tenants for Cherry Foodarama Shaw Boulevard is SM Supermarket. Malls Outside of Metro Manila SM Seaside City Cebu Year opened SM Seaside City Cebu, located within the SM Seaside Complex at the South Road Properties (SRP) in Cebu City, is the first of its kind in urban development in the SRP. It has a GFA of 429,971 featuring a Centerstage theater, a Large Screen cinema, two Director's Club cinemas, and 4 regular cinemas with a combined seating capacity of 1,527, a 16-lane SM Bowling and Amusement Center, and a food court flanking an olympic-size ice skating rink and parking slot for 4,525 vehicles. In addition, the mall features a rooftop Sky Park, an iconic 21 meter by 21 meter centerpiece called the "Cube", and food and retail shops, including local, national and global brands. The anchor tenants for SM Seaside City Cebu are The SM Store, SM Supermarket, Ace Hardware and Uniqlo. SM City Cebu Year opened SM City Cebu is a multi-level complex with a GFA of 273,804 sq. m. featuring eight cinemas, including a 3D IMAX theater with a total seating capacity of 6,318, a food court, a fully computerized 28-lane bowling center, a trade hall and a carpark with a 1,874 vehicle capacity located on a 13.8 hectare site in Cebu Port Center, Barrio Mabolo, Cebu City. The anchor tenants for SM City Cebu are The SM Store, SM Supermarket, Ace Hardware and Forever 21. SM City Dasmariñas Year opened SM City Dasmariñas sits on a 12.4 hectare property situated along Governor s Drive, approximately 100 meters from the Aguinaldo Highway junction in Dasmariñas, Cavite. The mall has a GFA of 201,645 sq. m. The mall features a food court and six cinemas with a seating capacity of 2,710 people. In late 2011, the mall launched its annex, adding 36,486 sq. m. of GFA to the main mall. The anchor tenants for SM City Dasmariñas are The SM Store, SM Supermarket, SM Appliance Center and Ace Hardware. SM Cabanatuan Year opened SM City Cabanatuan is strategically located along Maharlika Highway in Cabanatuan City, which is the largest city in Nueva Ecija. It has a GFA of 154,020 featuring a food court, six cinemas with a seating capacity of 1,977 and 2,077 parking slots. The four-level mall also includes two Gardens namely, the Garden Park, which provides covered shelter; and the Roof Park located at the fourth level. The anchor tenants for SM City Dasmariñas are The SM Store, SM Supermarket, Ace Hardware and SM Appliance Center. 82

88 SM Lanang Premier Year opened SM Lanang Premier is a four-level mall with a GFA of 145,174 sq. m. The mall is located at J.P. Laurel Avenue, Brgy. Lanang, Davao City. It is the largest and first premier mall development project in Mindanao. It houses the SMX Davao Convention Center. SM Lanang Premier s amenities include six cinemas and an IMAX theater, with a combined seating capacity of 2,695, a bowling center, an Exploreum, and parking for 1,660 vehicles. It also features a Skygarden with water fountains, art installations, and landscaping. The anchor tenants for SM Lanang Premier are The SM Store, SM Supermarket, Ace Hardware and Forever 21. SM City Clark Year opened The two-storey SM City Clark is located along M.A. Roxas Avenue and is approximately 80 kilometers north of Manila and 60-kilometers east of Subic Bay Freeport, within close proximity of the Clark Special Economic Zone in Pampanga. The mall has a GFA of 144,484 sq. m. which features seven cinemas with a seating capacity of 3,210. With its unique design resembling a coliseum, this mall offers tourists and shoppers a variety of retail, dining, and entertainment establishments. The anchor tenants for SM City Clark are The SM Store, SM Hypermarket, Ace Hardware and Forever 21. SM City Iloilo Year opened SM City Iloilo is a 143,595 sq. m. mall constructed on a 17.5 hectare property at the juncture of the Northwest and the Northeast of the Iloilo-Jaro West Diversion Road in Manduriao, Iloilo City. Its location is a quick drive from the airport and from the center of the city. It serves the city s residents, as well as those of the rest of Panay Island and the neighboring islands in the Visayas. SM City Iloilo has eight cinemas with a seating capacity of 4,955. The anchor tenants for SM City Iloilo are The SM Store, SM Supermarket, Ace Hardware and SM Appliance Center. SM City Lipa Year opened SM City Lipa is a two-level mall strategically located along Lipa s Ayala Highway. It occupies 10.3 hectares of land, with 141,283 sq. m. of GFA. In late 2014, an additional 34,437 sq. m. of GFA was added due to the expansion of the main mall. Lipa City features natural attractions and is a commercial, educational and industrial destination. The mall features a food court and four cinemas with 2,393 seating capacity. The anchor tenants for SM City Lipa are The SM Store, SM Supermarket and Ace Hardware. SM City Bacolod Year opened SM City Bacolod is a two-building mall located along Rizal Street, Reclamation Area, Bacolod City in Negros Occidental. It has a total land area of 17.0 hectare and has a GFA of 137,229 sq. m. In late 2014, an additional 61,999 sq. m. of GFA was added due to the expansion of the north wing of the main mall. The mall features a food court, amusement centers and four cinemas with 2,001 seating capacity. The anchor tenants for SM City Bacolod are The SM Store, SM Supermarket and Ace Hardware. SM City General Santos Year opened SM City General Santos is a three level mall located at San Miguel St., cor. Santiago Blvd., Lagao District, General Santos City. The mall has a GFA of 131,818 sq. m. featuring a food court, four cinemas with a combined seating capacity of 1,526, and parking for more than 1,407 vehicles. The anchor tenants for SM City General Santos are The SM Store, SM Supermarket and Ace Hardware. 83

89 SM City Pampanga Year opened SM City Pampanga is a 131,158 sq. m. shopping mall with three annexes, straddling the municipalities of San Fernando and Mexico in Pampanga. It features six state-of-the-art cinemas with a seating capacity of 2,603, a food court and amusement centers. The mall is strategically located at the Olongapo Gapan Road to serve the city s residents as well as those in the provinces of Bulacan, Tarlac, Bataan, Zambales and Nueva Ecija. The anchor tenants for SM City Pampanga are The SM Store, SM Supermarket, Ace Hardware and SM Appliance Center. SM City Davao Year opened SM City Davao is located on a 13.2 hectare property along Quimpo Boulevard corner Tulip and Eco Drives, Brgy. Matina, Davao City. Its location is walking distance from some of the largest schools in Mindanao such as Ateneo de Davao, University of Mindanao, Philippine Women s College and the Agro-Industrial Foundation College. The mall has a GFA of 126,425 sq. m. It has six cinemas which can accommodate 2,351 movie patrons. The anchor tenants for SM City Davao are The SM Store, SM Supermarket, Ace Hardware and SM Appliance Center. SM City Bacoor Year opened SM City Bacoor is a five level complex with a GFA of 120,202 sq. m. located in General Emilio Aguinaldo Highway corner Tirona Highway, Brgy. Habay, Bacoor City, Cavite. The shopping complex features eight cinemas with a 4,381 seating capacity, and food court and amusement areas. It is the very first SM mall in the entire Luzon region (outside Metro Manila) and the very first in the Cavite province. The anchor tenants of SM City Bacoor are The SM Store, SM Supermarket, Ace Hardware and SM Appliance Center. SM City Baguio Year opened SM City Baguio is situated along Session Road in Baguio City. Baguio City is a promising site for SM Prime to develop its presence in the northern part of Luzon. Known for its cool climate, beautiful scenery and historic culture, the city offers multifold opportunities for entrepreneurs, retailers and service oriented establishments. SM City Baguio has a GFA of 107,950 sq. m. It has four cinemas with a total seating capacity of 1,932. The anchor tenants for SM City Baguio are The SM Store, SM Supermarket and Ace Hardware. SM City Consolacion Year opened SM City Consolacion is located along the Cebu North Road, Barangay Lamac, Consolacion, Cebu. It has a GFA of 103,558 sq. m. The mall s amenities include a food court, four cinemas with a combined seating capacity of 1,475, and parking for over 707 vehicles. The anchor tenants for SM City Consolacion are The SM Store, SM Supermarket Ace Hardware and SM Appliance Center. SM City Tarlac Year opened SM City Tarlac is located along MacArthur Highway, San Roque, Tarlac City. It is the very first SM mall in the province of Tarlac. The four-level mall has a GFA of 101,369 sq. m. The mall features a food court, four cinemas with 1,872 seating capacity, and parking for over 1,122 vehicles. The anchor tenants for SM City Tarlac are The SM Store, SM Supermarket and Ace Hardware. 84

90 SM City Taytay Year opened SM City Taytay is a two-building mall located in Brgy. Dolores, Taytay, Rizal. The mall has a GFA of 98,928 sq. m. that features a food court, three cinemas with 1,180 seating capacity and a carpark for 985 vehicles. SM City Taytay is situated as a stopover for travelers, especially those coming from Laguna via the Marikina Infanta Road. The anchor tenants for SM City Taytay are The SM Store, SM Hypermarket and Ace Hardware. SM City Masinag Year opened SM City Masinag is a three-floor mall located along Brgy. Mayamot, Marcos Highway, Antipolo City. It has a GFA of 96,313 sq. m. SM City Masinag s amenities include a food court, four cinemas with a combined seating capacity of 1,144, and parking for more than 454 vehicles. The anchor tenants for SM City Masinag are The SM Store, SM Supermarket and Ace Hardware. SM City Marilao Year opened SM City Marilao is the first SM mall in the Bulacan province with a land area of 13.0 hectare and GFA of 93,910 sq. m. It is located at MacArthur Highway, Brgy. Ibayo, Marilao, Bulacan. The four-level mall features a food court, event center and four cinemas with seating capacity of 1,188. The anchor tenants for SM City Marilao are The SM Store, SM Supermarket and Ace Hardware. SM City Baliwag Year opened SM City Baliwag is located in Brgy. Pagala, Baliwag, Bulacan, approximately 40 kilometers from the EDSA Balintawak interchange of the North Luzon Expressway. It has a GFA of 91,241 sq. m. In late 2014, an additional 29,979 sq. m. of GFA was added due to the expansion of the main mall. Among the facilities included are four cinemas with a combined seating capacity of 1,232, a food court and parking for over 1,047 vehicles. The anchor tenants for SM City Baliwag are The SM Store, SM Hypermarket and Ace Hardware. SM City Cagayan De Oro Year opened SM City Cagayan De Oro sits along Mastersons Avenue corner Gran Via St., Cagayan de Oro City, Misamis Oriental. The mall has a GFA of 87,837 sq. m. It features four cinemas with a total seating capacity of 1,590 and parking for over 989 vehicles. The anchor tenants for SM City Cagayan De Oro are The SM Store, SM Supermarket and Ace Hardware. SM City Sta. Rosa Year opened SM City Sta. Rosa is the first SM mall in the Laguna province with 86,463 sq. m. of GFA. Located on a 17.1 hectare site in Barrio Tagapo, Sta. Rosa, the two-level mall is a 10-minute drive from the Mamplasan exit. SM City Sta. Rosa includes a variety of retail establishments, four cinemas with a seating capacity of 1,854 and a food court. The anchor tenants for SM City Sta. Rosa are The SM Store, SM Supermarket and Ace Hardware. SM City Batangas Year opened SM City Batangas is situated along the National Highway, Brgy. Pallocan West, Batangas City. The mall is approximately 3.7 kilometers from the Batangas International Port. SM City Batangas has a GFA of 80,350 sq. m. It has four cinemas with a seating capacity of 1,661. The anchor tenants for SM City Batangas are The SM Store, SM Supermarket and Ace Hardware. 85

91 SM City Lucena Year opened SM City Lucena is located along Maharlika Highway corner Dalahican Road, Brgy. Ibabang Dupay, Lucena City, Quezon. It is the first SM mall in the province of Quezon. This four-level mall has a GFA of 78,655 sq. m. It features four cinemas with a total seating capacity of 1,989. The anchor tenants for SM City Lucena are The SM Store, SM Supermarket and Ace Hardware. SM City Naga Year opened SM City Naga is located in Central Business District II of Brgy. Triangulo, Naga City. It is the first SM mall in the Bicol region and has a GFA of 75,651 sq. m. The mall offers a food court and four cinemas with a combined seating capacity of 1,346. The anchor tenants for SM City Naga are The SM Store, SM Supermarket and Ace Hardware. SM City San Mateo Year opened SM City San Mateo is located in Gen. Luna Avenue, Brgy. Ampid 1, San Mateo, Rizal. It is the fourth SM supermall in in Rizal Province after SM City Taytay, SM City Masinag and SM Center Angono and has a GFA of 75,623 sq. m. The mall has its disaster resilient features which include expansion joints for mitigating earthquake damage and rainwater catchment basin for prevention of flood within its perimeter and surrounding community. The mall offers a food court and four cinemas with a combined seating capacity of 1,232. The anchor tenants for SM City San Mateo are The SM Store, SM Supermarket and Ace Hardware. SM City Calamba Year opened SM City Calamba is located at National Road, Brgy. Real, Calamba City, approximately 70 meters from the intersection of Maharlika Highway and Manila South Road. The mall has a GFA of 73,632 sq. m. and features a food court and four cinemas with a combined seating capacity of 1,268. The anchor tenants for SM City Calamba are The SM Store, SM Supermarket and Ace Hardware. SM City Cauayan Year opened SM City Cauayan, the first mall in Region 2 known as Cagayan Valley, has a GFA of 70,946 sq. m. and is located along National Highway, District II, Cauayan City, Isabela. The mall serves customers from the country s second largest province Isabela as well as the nearby provinces of Cagayan, Nueva Vizcaya, and Quirino. SM City Cauayan includes a variety of retail establishments, six cinemas with a total seating capacity of 1,122. The anchor tenants for SM City Cauayan are The SM Store, SM Supermarket and SM Appliance Center. SM City Rosales Year opened SM City Rosales in Brgy. Carmen, Pangasinan stands on a 12.2 hectare lot and has a GFA of 63,330 sq. m. It is the first SM mall in the province of Pangasinan. The amenities of the mall include a food court and four cinemas with capacity of 1,704 seats. The mall contains a public transport terminal and also serves as a bus stop of various inter provincial bus lines. The anchor tenants for SM City Rosales are The SM Store, SM Hypermarket and Ace Hardware. SM City Rosario Year opened SM City Rosario is located in Brgy. Tejero in Rosario. Rosario is the site of the Cavite Economic Zone. The mall serves customers in the north and northwestern parts of Cavite and neighboring 86

92 provinces as well. It has a GFA of 60,657 sq. m. and features a food court and four cinemas with a capacity of 1,560 seats. The anchor tenants for SM Rosario are The SM Store, SM Supermarket and Ace Hardware. SM City San Pablo Year opened SM City San Pablo has a GFA of 56,609 sq. m. It is located along Maharlika Highway in Brgy. San Rafael, San Pablo City in the province of Laguna. The mall features a business center, a food court and four cinemas with seating capacity of 1,212. It also has an atrium for various events. The anchor tenants for SM City San Pablo are The SM Store, SM Supermarket and Ace Hardware. SM Center Molino Year opened SM Center Molino is located at the southern end of Molino Road, Bacoor, Cavite and has a GFA of 52,061 sq. m. SM Center Molino is the first to have the Service Lane, which comprises of different shops that offer a wide array of services situated outside the mall across the covered parking. The mall features four cinemas with 1,881 seating capacity and parking for 1,194 vehicles. The mall s anchor tenants are the SM Hypermarket, SM Appliance Center and Ace Hardware. SM Megacenter Cabanatuan Year opened SM Megacenter Cabanatuan is located in Gen. Tinio and Melencio Streets, Cabanatuan City, Nueva Ecija. The mall is re-branded to SM Megacenter Cabanatuan after acquisition of SM Prime from CHAS Realty and Development Corporation in It is the first SM supermall in Cabanatuan City and has a GFA of 49,688 sq. m. The mall offers four cinemas with a combined seating capacity of 1,607. The mall s anchor tenant is The SM Store, SM Savemore and Ace Hardware. SM City Olongapo Year opened SM City Olongapo, the very first mall in the province of Zambales, has a GFA of 44,975 sq. m. that is strategically located in Magsaysay Drive Corner Gordon Avenue in the city s Central Business District. The mall serves customers in Zambales, Bataan, and other nearby provinces. SM City Olongapo s major amenities consist of an al fresco dining area, which offers a view of Olongapo s mountain landscape, three state-of-the-art digital cinemas, with a combined seating capacity of 758, and parking for over 305 vehicles. The anchor tenants for SM City Olongapo are The SM Store, SM Supermarket and SM Appliance Center. SM City San Fernando Year opened SM City San Fernando is a seven-storey mall located at the Downtown Heritage District, Barangay Sto. Rosario, San Fernando, Pampanga. It has a GFA of 43,130 sq. m. and features a unique facade, a distinctive exterior design which complies with the architectural theme of a heritage area. The mall s amenities include three cinemas with a combined seating capacity of 1,068 and parking slots for 246 vehicles. The anchor tenants for SM City San Fernando are The SM Store, SM Supermarket and Ace Hardware. SM Center Angono Year opened SM Center Angono, located along Manila East Road and Quezon Avenue in Barangay San Isidro, Angono, Rizal, is marked as the fiftieth SM Supermall in the Philippines. It has a GFA of 41,481 sq. m. with parking slots for 188 vehicles. It serves customers in Angono and Binangonan as well as other towns in the province of Rizal such as Cardona, Teresa, Morong, Baras, Tanay, and Pililla. The anchor tenants for SM Center Angono are SM Savemore, Banco de Oro and Ace Hardware. 87

93 SM City San Jose Del Monte Year opened SM City San Jose Del Monte is strategically located along Quirino Hi-way, Tungkong Mangga, City of San Jose Del Monte, Bulacan. The City contributes to one of the fastet growing residential and commercial hubs in the Northern Gateway of Metro Manila. It has a GFA of 114,186 sq. m., four cinemas, and a multilevel basement parking with 945 parking slots. The prime spaces are allocated to local and international retail brands, well-loved food outlets and major anchor tenants such as The SM Store, SM Supermarket, SM Appliance Center and Ace Harware. SM City Trece Martires Year opened SM City Trece Martires is the fifth mall in the province of Cavite, which is the most populated province in the Philippines. It is situated on the corner of two main thoroughfares, Governor's Drive and Capitol Road, and has a GFA of 83,783 sq. m. with parking slots for 645 vehicles. It is also furnished with forefront recreation and entertainment facilities and four cinemas. Joining the opening are some of the well-chosen retail stores, food oulets and anchor tenants like The SM Store, SM Supermarket and Ace Harware. China Malls SM City Xiamen Year opened 2001 (SM City Xiamen) & 2009 (SM Xiamen Lifestyle). SM City Xiamen in Xiamen City, Fujian Province is situated on a 10.4 hectare lot and has a GFA of 238,125 sq. m. plus an open carpark for 1,085 vehicles. The anchor tenants for SM City Xiamen are Wal-Mart, The SM Store, Watsons, H&M and Uniqlo plus several junior anchors. SM City Jinjiang Year opened SM City Jinjiang in Jinjiang City, Fujian Province is situated on an 11.5 hectare lot and has a GFA of 167,830 sq. m. plus an open carpark for 1,700 vehicles. The anchor tenants for SM City Jinjiang are Wal-Mart, The SM Store and Watsons plus several junior anchors. SM City Chengdu Year opened SM City Chengdu in Chengdu City, Sichuan Province is situated on a 4.7 hectare lot and has a GFA of 166,665 sq. m. The anchor tenants for SM City Chengdu are Wal-Mart, The SM Store and Wanda Cinema plus several junior anchors. SM City Zibo Year opened SM City Zibo in Zibo City, Shandong Province is situated on a 7.2 hectare lot and has a GFA of 150,600 sq. m. plus an open carpark for 755 vehicles. The anchor tenants for SM City Zibo are The SM Store, The Spar Supermarket, Suning, Pizza Hut, Watsons, DaDi Cinema, and several junior anchors. SM City Chongqing Year opened SM City Chongqing, located in the Yubei District, Southwest China, has a GFA of 149,429 sq. m. SM City Chongqing is a one building structure with five levels. The anchor tenants are Vanguard Supermarket, The SM Store and Wanda Cinema, and several junior anchors. 88

94 SM City Suzhou Year opened SM City Suzhou in Wuzhong District, Jiangsu Province is situated on a 4.1 hectare lot and has a GFA of 72,552 sq. m. plus a carpark for 430 vehicles. The anchor tenants for SM City Suzhou are Vanguard Hypermarket, The SM Store, and Wanda Cinema, and several junior anchors. SM Prime believes that the six malls will provide a platform for it to expand in the China market. It intends to continue to develop the SM Malls in China through synergies with its existing mall operations and other management expertise. SM Prime intends to continue seeking opportunities for mall developments in second and third tier cities in China, where the mall can serve to anchor the city center. Although SM Prime is still developing its expansion plans in China, subject to the availability of suitable locations, SM Prime may initially build two new mall each year over the next five years in China. The following table sets forth certain information regarding the contribution of the SM Malls in China to SM Prime s total combined revenues and combined net income for the period stated: For the year ended 31 December For the six months ended 30 June (in P millions, except percentage of SM Prime s total) Revenue 2,980 5% 3,613 5% 3,947 6% 1,943 5% 2,097 5% Net income 717 4% 1,034 6% 1,602 6% 737 4% 386 3% Sky Ranch Sky Ranch Tagaytay Sky Ranch Tagaytay, a nearly four-hectare property, is an entertainment venue adjacent to the Taal Vista Hotel, and was developed to complement the hotel s strong presence as a well-known destination in the area. To maximize the site s premium views and distinctive natural environment, a social events venue is included which is complemented by casual, family style dining establishments, as well as a mini-amusement theme park for kids and other recreational facilities such as horseback riding. Sky Ranch Pampanga Sky Ranch Pampanga is the first amusement park and the newest destination for both local residents and tourists in the North Luzon. The park is embedded in a 10,000 square meter land of SM City Pampanga in the City of San Fernando. It has 23 different rides, including the Pampanga Eye which is said to be the tallest and biggest Ferris wheel in the Philippines at 65 meters tall and 50 meters in diameter. Department Stores and Supermarkets SM Prime also owns several department store and supermarket buildings with a total GFA of approximately 289,000 sq. m. 5 The major tenant of these buildings is the SM Retail Group. The following table sets forth certain information regarding SM Prime s department store and supermarket buildings as at 30 September 2016: 5 294,000 sq. m. as of September 30,

95 Department Store Location Gross Floor Area (sq. m.) Occupancy SM Cubao Quezon City 109,253 98% SM Makati Makati City 109, % SM Iloilo Iloilo City 26,390 97% Supermarkets (Hypermarket and Savemore) Location Gross Floor Area (sq. m.) Occupancy Adriatico Manila City 15, % Caloocan Caloocan City 14, % Novaliches Quezon City 4, % Jaro Iloilo Iloilo City 3, % Del Monte Quezon City 2, % Kamias Quezon City 2, % P. Tuazon Quezon City 2, % Pedro Gil Manila City 1, % Tandang Sora Quezon City 1, % Except for the department stores and the Adriatico and Jaro Supermarkets, SM Prime also owns the land on which the retail establishments listed in the table above are situated. SM Arena The SM Arena is a five-storey, first class multipurpose venue for sporting events, concerts, entertainment shows, and other similar events. The arena has a seating capacity of approximately 16,000 for sporting events, and a full-house capacity of 20,000. It occupies approximately two hectares of land and has a GFA of approximately 68,000 sq. m. Other Properties SM Prime acts as a landlord for the following properties leased by SM Food Retail Group: Lot Location Area (sq.m) Imelda Ave., Cainta, Rizal & Int. Imelda Ave., Rosario, Pasig City 41,000 East Service Road, Sucat, Muntinlupa City 40,000 Anabu I-B Imus, Cavite 37,000 II-A;II-B & Lot 1;Along H. Cortes Ext., Subangdaku, Mandaue City 36,000 Km. 7 McArthur Highway, Bangkal, Davao City 34,000 Quirino Highway, Talipapa, Balintawak, Quezon City 30,000 Manila Harbor Center, Tondo, Manila City 26,000 Rosario, Batangas 7,189 Malls under Construction For 2016, the Company s malls business unit is set to open one new mall, located in Pasig, as well as the expansions of SM City San Pablo and SM Center Molino. By yearend, the mall business unit will have an estimated 8.6 million square meters of GFA. 90

96 Land Bank The following table sets forth SM Prime s existing land bank owned for development of new malls as at 30 June 2016: Principal Tenants Location Gross Area 6 (sq. m.) Luzon 1,253,154 Visayas/Mindanao 367,997 Metro Manila 83,634 PRC 98,882 Total 1,803,667 SM Prime enjoys a competitive advantage due to its long-standing retail experience in establishing an appropriate mix of tenants including its associated anchor tenants. SM Prime controls the tenant mix of each of its malls, which has contributed to the profitability of the malls. The principal anchor tenants in the malls include SM Department Stores, SM Supermarkets and SM Hypermarkets. Other significant tenants include National Bookstore, KFC, Jollibee, McDonalds, Chowking, Pizza Hut, Goldilocks, Greenwich, Mang Inasal and Max s Restaurant. As at 30 June 2016, the SM Department Stores occupied in aggregate a gross area of 1,021,444 sq. m. within the malls, or 30% of total leasable area. SVI and SSMI operate the SM Supermarkets and SM Hypermarkets occupying in aggregate a gross area of 505,123 sq. m. as at 30 June 2016, or 15% of total leasable area. 7 In addition to the anchor tenants associated with SM Prime, other retail operations controlled by or in which the Sy family has a significant interest, such as Ace Hardware, SM Appliance Center, Surplus Shop, Home World, Our Home, Toy Kingdom, BDO, Kultura and Watsons, are also tenants in most of the malls. During the years ended 31 December 2013, 2014, 2015 and the six months ended 30 June 2016, approximately 33%, 33%, 31% and 35%, respectively, of the aggregate mall rental revenue received by SM Prime in respect of the malls was from members of the Group and companies affiliated with the Sy family. Out of the total increase in mall rental revenue of 12% for the year 2015, same store sales contributed 7% while new malls and expansion of existing malls contributed 5%. SM Prime believes that all the leases entered into between SM Prime and the Group or companies affiliated to the Sy family have been entered into on an arm s length basis and on commercial terms. The SM Mall of Asia also hosts some premier tenants, which specialize in higher-end merchandise, such as Mango, Zara, Marks & Spencer, Topshop and Muji. Leasing Policies The leasing policy of SM Prime in relation to each of the malls is to screen applicants carefully and to secure 6 Gross Area of land bank in Luzon was at 1,261,843 sq. m. as of September 30, 2016, boosting Total Gross Area to 1,812, 356 sq. m. 7 As at 30 September 2016, the SM Department Stores occupied in aggregate a gross area of 1,032,305 sq. m. within the malls, or 29% of total leasable area. SVI and SSMI operate the SM Supermarkets and SM Hypermarkets occupying in aggregate a gross area of 502,705 sq. m. as at 30 September 2016, or 14% of total leasable area. 91

97 an appropriate mix of tenants, both in terms of the nature of their businesses and their size. An average of less than 3% of tenants per mall did not renew their leases upon expiry or had their leases terminated early in each of the three years ended 31 December 2013, 2014, and The high demand for tenancies within the malls means that SM Prime generally has a waiting list sufficient to cover any vacancies that may arise in the malls. It is the policy of SM Prime that all leases, whether with members of the SM Group, companies affiliated with the Sy family or unrelated third parties, should be entered into on commercial terms, and SM Prime considers that the current rentals payable by tenants of the malls that are operational at present reflect prevailing market rents. SM Prime s tenancies are generally granted for a term of one year, with the exception of some of the larger tenants operating nationally, which are granted initial lease terms of two to five years, renewable on an annual basis thereafter. Sixty days notice is required of SM Prime s tenants for termination of their leases, and a six-month deposit is paid at the commencement of the lease. Upon expiry of a lease, the rental rates are adjusted to reflect the prevailing market rent. SM Prime charges rent as either a fixed rent per sq. m. or a variable rate which is a minimum per sq. m. or a base charge plus a percentage of a tenant s sales, whichever is higher. Management of the Malls Management and operation of the malls, including the provision of manpower, maintenance and engineering and security, leasing, marketing and other promotional activities, are assumed by the Management Companies. In addition, the Management Companies negotiate and handle major tenant issues for the malls, while reporting to and under the direction of SM Prime. The Management Companies also adjust the tenant mix according to instructions given by SM Prime, which is based on a variety of factors, including the target market, location of the mall, demographics, size of the retail spaces and market positioning, among others. Each of the Management Companies performs specific functions in relation to each of the malls. All operating expenses relating to the malls are charged directly to SM Prime by the Management Companies. As consideration for the services provided by the Management Companies under the management contracts between SM Prime and the Management Companies, the Management Companies are entitled to receive an annual fee which is equivalent to 5% of the annual operating income of each mall before income tax, financial charges and interest expense. The aggregate amount of such management fees for the years ended 31 December 2013, 2014, 2015 and the six months ended 30 June 2016 were 964 million, 1,079 million, 1,200 million, and 647 million, respectively, amounting to approximately 2% of total consolidated revenue in each period. The entertainment and leisure facilities within the malls, including cinemas, bowling centers and ice skating rinks, are primarily owned by SM Prime, and SM Prime pays management fees to the Management Companies for managing the operations of the entertainment and leisure facilities within the malls. Certain entertainment facilities, such as amusement rides, are operated by third parties, whereby SM Prime receives a percentage of the amusement fees. Competition SM Prime s malls compete with other shopping malls in the geographic areas in which they operate. The other major shopping mall operators in the Philippines are Robinsons Land Corporation ( RLC ) and Ayala Land, Inc. ( ALI ). As of 30 September 2015, RLC owns and operates 40 malls in the Philippines, 9 in Metro Manila and 31 in urban areas outside Metro Manila. RLC s total assets as at and for the fiscal years ended 30 September 2013, 2014, and 2015 were P74.9 billion, P85.4 billion, and P99.1 billion, respectively. ALI operates over 30 malls and retail spaces in the country. ALI s total assets as at and for the years ended 31 December 2013, 2014, and 2015 were P325.5 billion, P388.9 billion, and P442.3 billion, respectively. SM Prime believes that it is well placed to face increased competition in the shopping mall industry given the 92

98 competitive advantages it has, including, among others, the location of its existing malls, SM Prime s land bank, its balance sheet strength, a proven successful tenant mix and selection criteria, and the presence of the SM Department Stores, SM Supermarkets, SM Hypermarkets and Retail Affiliates of the Group within the malls. SM Prime believes that its experience and understanding of the retail industry has also been a contributing factor to its competitive advantage in the industry. Subsidiaries SM Prime has six wholly-owned mall related Philippine subsidiaries, namely, Premier Central, Inc., Premier Southern Corp., Consolidated Prime Dev. Corp., San Lazaro Holdings Corporation, Southernpoint Properties Corp. and CHAS Realty and Development Corp. SM Prime holds its interests in SM City Batangas and SM City Lipa, SM City Dasmariñas, SM City Clark, SM City Lanang, and SM Megacenter Cabanatuan through Premier Southern Corp., Consolidated Prime Dev. Corp., Premier Central, Inc., Southernpoint Properties Corp., and CHAS Realty and Development Corp., respectively. First Asia Realty Development Corporation is a 74.2% owned subsidiary of SM Prime, through which SM Prime holds its interest in SM Megamall. First Leisure Ventures Group, Inc. is a 50.0% owned subsidiary of SM Prime, through which SM Prime holds its interest in SM by the Bay. All malls not otherwise mentioned in this paragraph are owned directly by SM Prime. RESIDENTIAL (PRIMARY) 8 SM Prime s revenue from residential operations is derived largely from the sale of condominium units. As of 30 June 2016, residential business unit has twenty eight residential projects in the market, twenty six of which are in Metro Manila and two in Tagaytay. 9 Completed Residential Projects The following projects have completed their construction but units are still being sold by SM Prime: Chateau Elysee Chateau Elysee is a six-cluster, six-storey residential condominium project in a 4.7 hectare lot in Parañaque City, Metro Manila. This project offers one-bedroom and two-bedroom units. Cluster one, comprising 384 units, was launched in 2003 and completed in December Construction of cluster two with 384 units was completed in May Construction of cluster three with 400 units was completed in May Construction of cluster six with 504 units was completed in December Construction of cluster five, with 560 units was completed in November Construction of Cluster four with 588 units began in April 2010 and was completed in June As of 30 June 2016, 98% of the project s 2,820 units in total had been sold. Mezza Residences SM Prime s first high-rise project is the Mezza Residences ( Mezza ), which is a mixed-use development project with 38-storey four-tower condominiums and commercial retail area located across from SM City Sta. Mesa, Manila. Each tower has 400 to 800 residential units comprised of one-bedroom to four-bedroom configurations, with floor areas ranging from 21 to 67 sq. m. Mezza consists of 2,332 saleable residential units and 18 commercial units for lease with SaveMore store as the anchor tenant. As of 30 June 2016, construction of Mezza towers one to four was 100% complete and SMDC had sold 93% of the units in Mezza Unless otherwise indicated, there were no changes on the sales figures of these projects as of 30 September No changes as of 30 September SMDC had sold 94% of the units in Mezza Residences as of 30 September

99 Berkeley Residences Berkeley Residences is a 35-storey high-rise condominium project situated just across Miriam College in Quezon City. Berkeley Residences comprises 1,276 units which were completed in June 2011, of which 99% were sold as of 30 June Sea Residences Sea Residences is a 15-storey residential and commercial condominium project comprising of six buildings with 2,899 residential units and 21 commercial units, located at the Mall of Asia (MOA) Complex Pasay City. Phase One of Sea Residences comprises 1,159 units of which 99% were sold as of 30 June 2016; construction for Phase One started in January 2009 and was completed in March Phase Two comprises 870 units, of which 99% were sold as of 30 June 2016; construction for Phase Two started in November 2009 and was completed in November Phase Three of Sea Residences comprises 870 units, of which 99% were sold as of 30 June 2016; construction for Phase Three started in March 2010 and was completed in December Princeton Residences Princeton Residences is a 38-storey high-rise condominium project located along Aurora Blvd., Quezon City which was completed in March Princeton Residences comprises 1,096 units of which 97% were sold as of 30 June Sun Residences Sun Residences is a project comprising two 40-storey towers located along España Blvd., Quezon City near Welcome Rotonda. Sun Residences Tower 1 comprises 2,057 units of which 98% were sold as of 30 June Tower 2 comprises 1,982 units of which 97% were sold as of 30 June Construction of Towers 1 and 2 were completed in November 2013 and June 2014, respectively. 12 Jazz Residences Jazz Residences is a mixed use development project comprising four 41-storey towers located at N. Garcia corner Jupiter, Makati City. Towers A, B, C and D of the project consist of 5,367 units of which 97% were sold as of 30 June Construction of Tower A started in April 2010 and was completed in December 2013 while construction of Tower C started in October 2010 and was completed in May Construction of Tower D started in July 2011 and was completed in June Construction of Tower B started in July 2011 and was completed in September Blue Residences Blue Residences is a 40-storey residential condominium situated across from Ateneo De Manila University in Quezon City. Construction of Blue Residences started in October 2010 and was completed in May It comprises 1,591 units of which 91% were sold as of 30 June Grass Residences Phase 1 Grass Residences Phase 1 is a three tower 40-storey high-rise condominium project located behind SM 11 SMDC had sold 99% of the units in Princeton Residences as of 30 September SMDC had sold 99% of the units in Sun Residences Tower 2 as of 30 September SMDC had sold 94% of the units in Blue Residences as of 30 September

100 City North EDSA, Manila. Tower 1 comprises 1,988 units of which 97% were sold as at 30 June Construction of Tower 1 started in March 2008 and was completed in October Tower 2 comprises 2,025 units, of which 95% were sold as at 30 June Construction of Tower 2 started in November 2010 and was completed in May Tower 3 comprises 1,990 units, of which 99% were sold as of 30 June Construction of Tower 3 started in November 2009 and was completed in December Light Residences Light Residences is a mixed use development project with three 40-storey towers located along EDSA, Mandaluyong City. It has a total of 4,227 units, of which 97% were sold as of 30 June Construction of Phase 1, which consists of the podium and Tower 1, started in May 2010 and was completed in December Construction of Phase 2 (Tower 3) started in April 2011 and was completed in December Construction of Phase 3 (Tower 2) commenced in July 2011 and was completed in January M South Triangle M South Triangle is a four 25-storey tower condominium in South Triangle, Quezon City. Tower A started construction on January 2011 and was completed in December Tower A comprises 827 units of which 96% were sold as of 30 June Tower B started construction in April 2011 and was completed in December Tower B comprises 912 units of which 87% were sold as of 30 June Tower C comprises 778 units of which 95% were sold as of 30 June Construction of Tower C began in November 2011 and was completed in Tower D comprises of 920 units of which 66% were sold as of 30 June Construction of Tower D commenced in December 2011 and was completed in January Mezza II Residences Mezza II Residences is a 38-storey residential condominium located just beside the first Mezza Residences in Quezon City. Construction of Mezza II started in August 2011 and was completed in January It comprises 1,324 units of which 77% were sold as of 30 June Shine Residences Shine Residences is a 22-storey residential condominium located in Pasig City. Construction of Shine Residences commenced in January 2013 and was completed in December It comprises 892 units, of which 71% were sold as of 30 June Green Residences Green Residences is a 50-storey residential condominium situated on Taft Avenue, Manila near De La Salle University. Construction of Green Residences started in December 2011 was completed in December Green Residences comprises 3,378 units of which 94% were sold as of 30 June Shell Residences Shell Residences is a 16-storey residential and commercial condominium project and is located at the MOA 14 SMDC had sold 98% of the units in Grass Residences Phase 1 Tower 2 as of 30 September SMDC had sold 99% of the units in Light Residences as of 30 September SMDC had sold 99%, 98%, and 98% of the units in M South Triangle Towers A, B, and C, respectively, as of 30 September SMDC had sold 89% of the units in Mezza II Residences as of 30 September SMDC had sold 74% of the units in Shine Residences as of 30 September SMDC had sold 96% of the units in Green Residences as of 30 September

101 Complex in Pasay City. It comprises four buildings with 3,093 residential units of which 98% were sold as of 30 June Construction of Shell Residences commenced in May 2012 and was completed in December Wind Residences Wind Residences is a residential condominium development with five 20-storey towers located along Emilio Aguinaldo Highway, Tagaytay City. Towers 1 to 4 have a total of 2,874 units of which 91% were sold as of 30 June Towers 1-4 are ready for occupancy. 21 Ongoing Residential Projects Affordable Residential Projects Grass Residences Phase 2 Grass Residences Phase 2 was launched in March 2013, a two tower 43-storey high-rise condominium project located behind SM City North EDSA, Manila. Expected to be completed in 2017, Tower 4 comprises 1,960 units, of which 70% were sold as of 30 June Expected to be completed in 2019, Tower 5 comprises 1,957 units, of which 20% were sold as of 30 June Field Residences Field Residences is a residential condominium project that will ultimately consist of ten buildings located behind SM Sucat, Parañaque. Buildings 1, 2, 3, 7 and 8 of Field Residences comprise 1,974 units, of which 98% were sold as of 30 June Construction of buildings 1, 2, 8, 3 and 7 were completed in April 2010, April 2011, December 2011, December 2012 and September 2013, respectively. Building 4 comprises of 602 units, of which 73% were sold as of 30 June Building 4 is expected to be completed in Wind Residences- Tower 5 Wind Residences is a residential condominium development with five 20-storey towers located along Emilio Aguinaldo Highway, Tagaytay City. Tower 5 has a total of 650 units of which 62% were sold as of 30 June Construction of Tower 5 started in October 2013 and is expected to be completed in 3rd Qtr, Cool Wind Residences Cool Wind Residences is a residential condominium project that will consist of 6 Towers located along Emilio Aguinaldo Highway, Tagaytay City. Cool Wind Residences is a Phase 2 Project at the 15-hectare development of Wind Residences. Building 1 was launched in December 2014 with a total of 363 units, of which 84% were sold as of 30 June Construction of Building 1 will commence in January 2015 and expected to be completed in SMDC had sold 99% of the units in Shell Residences as of 30 September Construction of Tower 5 started in October 2013 and was completed in August 2016, bringing total number of units to 3,524 of which 86% had been sold as of 30 September SMDC had sold 71% and 24% of the units in Grass Residences Phase 2 Towers 4 and 5, respectively, as of 30 September SMDC had sold 99% of the units in Field Residences Buildings 1, 2, 3, 7, and 8, and 70% of Building 4 as of 30 September Construction of Tower 5 started in October 2013 and was completed in August % of its 650 units had been sold as of 30 September SMDC had sold 93% of the units in Cool Wind Residences as of 30 September

102 Breeze Residences Breeze Residences is a 38-storey residential and commercial condominium project and is located along Roxas Boulevard in Pasay City. Breeze Residences comprises 2,133 units, of which 91% were sold as of 30 June Construction of Breeze Residences commenced in June 2013 and is expected to be completed in Grace Residences Grace Residences is a residential condominium development with four towers located along Levi Mariano Avenue in Taguig City. Towers 1, 2 and 3 have a total of 2,451 units, of which 89% were sold as of 30 June Tower 4 comprises 1,128 units, of which 44% were sold as of 30 June Construction of Tower 1 started in May 2013 and was completed in October Construction of Tower 2 and 3 commenced in October 2013 and May 2014, respectively, and are expected to be completed in Construction of Tower 4 started in April 2015 and is expected to be completed in Trees Residences Trees Residences is a residential condominium development with nineteen 7-storey towers located near Quezon City. Buildings 1, 2, 3, 5, 6 and 7 ( Phase 1 Buildings ) have a total of 2,093 units, of which 80% were sold as of 30 June Construction of the Phase 1 Buildings commenced in May 2014 and are expected to be completed in Buildings 8, 9, 10, 11, 12, and 15 ( Phase 2 Buildings ) have a total of 2,139 units, of which 33% were sold as of 30 June Construction of the Phase 2 Buildings commenced in April 2015 and is expected to be completed in Shore Complex Shore Complex comprises of Shore Residences and Shore 2 Residences. Shore Residences is a residential condominium development with four towers located at the MOA Complex in Pasay City. Shore Residences comprises 5,691 units of which 87% were sold as of 30 June Construction of Shore Residences commenced on the second quarter of 2014 and is expected to be completed in Shore 2 Residences is a residential condominium development with three towers located just beside Shore Residences in Pasay City. Shore 2 Residences comprises 5,488 units of which 68% were sold as of 30 June Construction of Shore 2 Residences commenced on the last quarter of 2015 and is expected to be completed in Air Residences Air Residences is a residential condominium situated across Ayala Avenue Extension corner Yakal and Malugay Street, Barangay San Antonio, Makati City. Construction of Air Residences will commence in the second quarter of 2015 and is expected to be completed in Air Residences comprises of 3,642 units, of which 70% were sold as of 30 June Fame Residences 26 SMDC had sold 90% and 55% of the units in Grace Residences Towers 1,2, 3 and Tower 4, respectively, as of 30 September SMDC had sold 82% and 76% of the units in Trees Residences Phase 1 and 2 Buildings, respectively, as of 30 September SMDC had sold 89% and 69%of the units in Shore Complex and Shore 2 Residences, respectively, as of 30 September SMDC had sold 78% of the units in Air Residences as of 30 September

103 Fame Residences is a residential condominium project that will ultimately consist of four Towers located along EDSA and Mayflower Street, Barangay Highway Hills, Mandaluyong City Towers 1 and 2 of Fame Residences have a total of 2,552 units, of which 41% were sold as of 30 June Construction of the project commenced in November Towers 1 and 2 are expected to be completed in South Residences Phase 1 South Residences Phase 1 is a residential condominium project that will ultimately consist of four towers located near SM Southmall in Las Piñas City. Construction commenced on the second half of 2015 and is expected to be completed on the first half of South Residences Phase 1 comprises 2,010 units of which 33% were sold as of 30 June Spring Residences Spring Residences is a residential condominium development with four towers located along West Service Road, Barangay Sun Valley, Bicutan, Parañaque City. Towers 1-4 have a total of 1,655 units. Tower 1 was launched in February, 2016, of which 23% were sold as of 30 June Construction of Tower 1 will start in July, 2016 and will be completed in December, Coast Residences Coast Residences is a residential condominium project located along Roxas Boulevard, Pasay City. It is a one-tower development with 2,197 residential units, of which 20% were sold as of 30 June The project was launched last January 2016 and is expected to be completed by first quarter of S Residences S Residences is the first SMDC Premier development in the emerging MOA Complex CBD and Entertainment City that provides boutique hotel-like lobbies, exciting amenities, and suites that will perfectly fit the lifestyle of smart and stylish individuals. It s a three-tower podium development located at Lot 2, Zone 10, Central Business Park 1 A, Pasay City. The project comprising of 2,395 units, was launched last April Construction is expected to be completed in December Socialized Residential Projects Heneral Uno Heneral Uno is the first horizontal socialized housing project launched in The project is situated in 25 hectares property in General Trias, Cavite with 2,365 housing units. As of June 30, 2016, it is 99% sold with complete land development and 100% house completion. Heneral Dos Launched in 2013 is the 2nd socialized housing project named Heneral Dos. It is situated in 20 hectares property in General Trias and Trece Martirez, Cavite with a total 1,510 housing units and 30 commercial lot offerings. As of June 30, 2016, it is 94% sold with 99% land development and 80% house completion. Brisas De Tanza 30 SMDC had sold 53% of the units in Fame Residences as of 30 September SMDC had sold 40% of the units in South Residences Phase 1 as of 30 September SMDC had sold 89% of the units in Spring Residences as of 30 September SMDC had sold 58% of the units in Coast Residences as of 30 September

104 Brisas De Tanza was launched in 2015 located in Tanza, Cavite. Project gross area is 6.5 hectares with 651 predominantly socialized housing offerings. As of June 30, 2016, it is 91% sold with on-going land development at 82% and 9% house completion. Primera Subdivision Primera Subdivision is a pioneering socialized housing development in Sto. Tomas, Batangas. It was launched in 2015 with an area of 11 hectares offering 1,019 housing units. As of June 30, 2016, it is 98% sold with on-going land development at 87% and 4% house completion. PrimeraROSA Subdivision PrimeraROSA Subdivision is SM Prime s second socialized housing development in Sto. Tomas, Batangas. The first phase of the 85 hectare landholding in Barangay Sta. Teresita, Sto. Tomas, Batangas was launched last March 2016 with an initial area of 18.8 hectares offering 1,987 socialized housing units. As of June 30, 2016, it is 14% sold. Land development started late July House construction is estimated to start within the second quarter of Paseo de Heneral Dos Subdivision Paseo de Heneral Dos Subdivision is SM Prime s last socialized housing project in General Trias, Cavite. It was also launched in March 2016 with a gross area of 2.75 hectares offering the last 247 socialized units in General Trias. It is 98% sold as of June 30, 2016 with on-going land development at 69%. RESIDENTIAL (LEISURE) 34 SM Prime owns leisure and resort developments including properties located in the Tagaytay Highlands and Tagaytay Midlands golf clubs in Laguna, Tagaytay City and Batangas. In addition, SM Prime is the developer of Pico de Loro Cove, the first residential community within Hamilo Coast, a master planned coastal resort township development in Nasugbu, Batangas encompassing 13 coves and 31 kilometers of coastline. Residential Developments in Tagaytay The Horizon at Tagaytay Midlands This is a medium-density residential condominium development located inside The Tagaytay Midlands mountain resort community. The development overlooks the Tagaytay Midlands golf course, Taal Lake and Volcano in the west, Mt. Makiling in the south east and the mountain range of Batangas in the south. This has 6 buildings with 108 units of approximately 139 to 152 sq. m. each. The project was launched in 2005 and was fully completed and was 92% sold as at 30 June Pueblo Real at Tagaytay Midlands The development is adjacent to The Horizon, situated on a six hectare property and has 86 lots with an average lot size of 420 sq. m. Approximately 93% of the lots had been sold as of 30 June Unless otherwise indicated, there were no changes on the sales figures of these projects as of 30 September

105 Woodridge Place Phase 2 This is a condominium project at Tagaytay Highlands that was introduced to the market in May This project consists of two mid-rise buildings with 177 condominium residential units with areas ranging from 41 to 241 sq. m. per unit. Approximately 71% of the units had been sold as of 30 June Sierra Lago This is a lot subdivision development located at Tagaytay Midlands that was launched in November This development has 185 lots with sizes of approximately 250 to 435 sq. m. Allof the lots had been sold as of 30 June Aspen Hills This is a leisure lot development located at Tagaytay Highlands that was launched in summer of This development is situated on 27 hectare property which offers lot sizes from 300 to 800 sq. m. The surrounding village is expected to include the Meadows Community Clubhouse, the Little Ranch playground, the Sunshine Picnic Grove and Spinner s Trail. Approximately 59% of the lots had been sold as of 30 June The Hillside at Tagaytay Highlands The Hillside at Tagaytay Highlands is the first lots only subdivision in the Tagaytay Highlands complex which is located near the Sports Center, the Country Club and other recreational facilities. This property boasts of cool year-round climate, gentle rolling terrain, lush greenery and views of the mountainside and Laguna De Bay. On this 156 lot development, lot cuts range from 400 to 640 square meters. Three model units have been constructed to date. Approximately 99% of the lots had been sold as of 30 June The Woodlands Point at Tagaytay Highlands The Woodlands Point at Tagaytay Highlands is a single detached log cabin condominium community located near Fairway 15 of the Tagaytay Highlands Golf Course. HPI will develop 60 single detached log cabins carrying the homey atmosphere of North American cedar log cabin living enhanced by Western red cedar accents and elegant detailing of glass and stone. Currently, 24 log cabins have been completed all of which have been sold. The 36 log cabins will be constructed as they are sold. The Woodridge Place Phase I at Tagaytay Highlands Located in Tagaytay Highlands adjacent to The Woodridge. The Woodridge Place Phase 1 is a condominium development with the views of The Woodlands, Tagaytay Highlands Golf Course, Canlubang, Laguna De Bay and surrounding mountains. Its architectural theme is inspired by the mountain resorts of the Colorado Region. Composed of 7 mid-rise buildings. All buildings have been constructed and sold. Residential Developments in Pico de Loro Jacana Jacana is a residential condominium project located at Pico De Loro Cove, Nasugbu, Batangas. It is comprised of two buildings, building A with six floors and building B with seven floors. Construction of Jacana commenced in August 2007 and was completed in February Of the total 246 residential units, 98% were sold as of 30 June Construction of Jacana commenced in August 2007 and was completed in February

106 Myna Myna is a residential condominium project located at Pico De Loro Cove, Nasugbu, Batangas. It comprises two buildings, building A with six floors and building B with seven floors. Construction of Myna commenced in May 2008 and was completed in July Of the total 246 residential units, 99% were sold as of 30 June Construction of Myna commenced in May 2008 and was completed in June Carola Carola is a residential condominium project located at Pico De Loro Cove, Nasugbu, Batangas. It comprises two buildings, building A with six floors and building B with seven floors. Construction of Carola commenced in August 2009 and was completed in August Of the total 248 residential units, 96% were sold as of 30 June Miranda Miranda is a residential condominium project located at Pico De Loro Cove, Nasugbu, Batangas. It comprises two buildings, building A with six floors and building B with seven floors. Construction of Miranda commenced in August 2009 and was completed in June Of the total of 248 residential units, 98% were sold as of 30 June Pico de Loro Beach and Country Club Pico de Loro Beach and Country Club is a leisure facility located at Pico de Loro Cove. Costa del Hamilo, as developer, executed a deed of conveyance of the titles to the lots and buildings, and in return owns 4,000 shares, of which 34% were sold as of 30 June The beach club was completed and opened in 2009, while the country club was completed in June Land Bank for Residential (Primary) Development 36 In 2016, the residential business unit will launch projects located in Quezon City, Parañaque, Las Piñas, Pasay City, Bulacan, Laguna, Pampanga and Cavite. The Company continues to invest in properties that it believes are in prime locations across the Philippines for existing and future property development projects. It is important to the Company to have access to a steady supply of land for future projects. Potential land acquisitions are evaluated against a number of criteria, including the attractiveness of the acquisition price relative to the market and the suitability or the technical feasibility of the planned development. The Company identifies land acquisitions through active search and referrals. The table below sets forth the locations of SM Prime s residential (primary) undeveloped land inventory as of 30 June 2016: Location Area (sq. m.) Metro Manila 458,256 Outside Metro Manila 2,534, As of 30 September 2016, 97% of Carola s residential units had been sold. 36 Land Bank for Residential (Primary) Development in Metro Manila was increased to 482,998 sq. m. and Outside Metro Manila to 2,663,995 sq. m. as of 30 September 2016, bringing the Total to 3,146,993 sq. m. 101

107 Total 2,992,827 The Company believes this land bank is sufficient to sustain development and sales. Moreover, the Company s residential business unit continually seeks to increase its land bank in various parts of the Philippines for future residential development through direct acquisitions. Land Bank for Residential (Leisure) Development SM Prime owns 542 hectares of land located around the vicinity of Tagaytay Highlands International Golf Club in Tagaytay City, Cavite and Tagaytay Midlands Golf Club in Batangas. The table below sets forth the location and area of SM Prime s land bank as of 30 June 2016: COMMERCIAL SM Prime s commercial business unit is engaged in the development and leasing of office buildings in prime locations in Metro Manila, as well as the operations and management of such buildings and other property holdings. Completed Commercial Properties Mall of Asia (MOA) Complex SM Prime s flagship project is the MOA Complex in Pasay City, a 60-hectare master planned bayside development with the renowned SM Mall of Asia as its anchor development and main attraction, among other commercial, business, and entertainment establishments within the Complex. A major attraction in the Complex is the landmark 16,000-indoor seating SM Mall of Asia Arena, as well as its adjacent annex building, MOA Arena Annex Building, that houses additional parking spaces and office levels. The MOA complex is also the site of SM Prime s signature business complex, the E-Com Centers, a series of modern and iconic office buildings mostly targeting technology based industries, BPO and shipping companies. Two E-com Center Location Area 37 (sq. m.) Batangas 4,329,339 Tagaytay 940,728 Laguna 327,764 Total 5,597,831 Year opened Two E-com Center is a 15-storey office and commercial building housing BPOs and technology intensive businesses, as well as location based firms such as shipping and logistics. This iconic structure located in the MOA complex in Pasay City offers 70,832 sq. m. of office and commercial space, and premium views of Manila Bay and the Makati skyline. It is designed by Miami based Arquitectonica, with FS Lim & Associates as local architect of record. Commercial spaces are located at both the ground floor and the fourth floor podium level called the Prism Plaza. Current tenants of the building include SMDC, EXL Service, Sky Logistics/Kitchen, World Energy Corporation, OOCL Philippines, XO Minerals, Microsourcing, Stream International Global Services Philippines Inc., ACS of the Philippines, Ben Line Agencies/Simba Logistics, Klaveness, SITC, IGT, Asia Pilot Capital Holdings, Ocwen Business Solutions, Altisource Business 37 Land Bank for Residential (Leisure) Development in Batangas reduced to 4,159,808 sq. m. as of 30 September 2016, bringing down Total to 5,428,300 sq. m. 102

108 Solutions, Teletech Global, Belle Corporation, CMA CGM, Altron Logistics Inc./Enzo Express Logistics Inc./DSF Consolidated Freight Services Inc., Anscor Swire Ship Management Corporation and Esco Global. Five E-Com Center Year opened Five E-com Center, which broke ground in the first quarter of 2012, was fully constructed as of 30 June Similar to its predecessor Two E-com Center, Five E-com Center features architectural designs of Miami based firm Arquitectonica, with FS Lim & Associates as the local architect of record. The 15-level office building covers a GFA of over 129,307 sq. m. and an estimated gross leasable area (GLA) of 72,251 sq. m. Floor plates. Similar to Two E-com Center as well, Five E-com Center also features a mixed-use component on its fourth level podium. Xerox Business Services Philippines, Inc., New Oriental Club 88 Corporation, KHI Design and Technical Services, Inc., Vestas BPC Philippines, Inc., Teletech Customer Care Management (Philippines), Inc., Telstra International Philippines, Inc., Tupperware Brands Philippines, Inc., Grieg Philippines, Inc., Klaveness Shore Services, Inc., F21 Call Center Services Corporation, Regus Business Center, Flight Raja Travels Private Limited Philippine Branch, CTrade Asia Crowd, Inc., Xiamen Airlines, and ESCO are some of the office tenants, while BDO Unionbank, Inc., China Banking Corporation, Beyond Yoga, Starbucks/ Rustans Coffee Corporation, Jollibee Foods Corporation, Greenwich Pizza / Fresh & Famous Foods, Inc., St. Luke s Medical Center, Inc. and Anytime Fitness Philippines are some of the retail tenants of this building. SM Makati Cyber One Year opened SM Makati Cyber One is a 4-storey office building located along Gil Puyat Avenue with GFA of approximately 22,100 sq. m. Current tenants of the building include Perimeter E Security, ABM Global Solutions, Inc., K Force Global Solutions Inc. and Startek International Ltd. SM Makati Cyber Two Year opened SM Makati Cyber Two is a 4-storey office building with GFA of approximately 16,700 sq. m. The development is along corners of Sen. Gil J. Puyat Avenue (Buendia)/Jupiter/Zodiac Streets, Makati City. The major tenant of the building is VXI Global Holdings B.V. (Philippines). SM Prime also owns the land SM Makati Cyber Two is built upon. SM Cyber West Year opened A new standalone office building development in the SM Cyber series, SM Cyber West is a 15-level office building development located on a highly visible and prime 2,910 sq. m. owned property at the corner of EDSA and West Avenue. The building was completed in October 2014 that covers a GFA of more or less 41,799 sq. m., with approximately 26,000 sq. m. of GLA for office space. Additionally, it is linked via bridgeways to the SM City North EDSA mall as well as nearby MRT stations. Major tenants of the building include Emerson Electric Asia Ltd. ROHQ and Concentrix Daksh Services Phils. Corp. The remaining leasable area in the ground and second levels features a SaveMore supermarket and other support retail and commercial establishments. Anza Commercial Building Year opened The building is a 2-storey commercial center located at Makati Avenue corner Anza St., Makati City with a GFA of 2,177 sq. m. The development was completed in the third quarter of Burger King, Kenny Rogers and Bingo Boutique are the anchor tenants of the building. Future Commercial Developments 103

109 Three E-Com Center Three E-com Center will be a 15-storey office building with a three level parking podium and the ground level designed to cater the commercial and retail tenants. Similar to Two E-com Center and Five E-com Center, Three E-com Center will feature architectural designs of Miami based firm Arquitectonica. The GFA is expected to be approximately 114,000 sq. m. The project started to break ground last September SM Prime again pioneers development in the bay area by being the first to offer a Gold LEED certified office building with Three E-Com Center. Four E-com Center Four E-com is a 188,439 sq. m. office development located in the Mall of Asia Complex, Pasay City, Philippines. It has a full basement, 4 podium parking levels, and 11 office levels, with ancillary retail at the ground and podium levels. It is expected to open in Others Warehouses SM Prime also owns several warehouses with a total GFA of approximately 38,000 sq. m. that are strategically located in various areas that support the retail operations. Laon Laan Property The property is located at Laon Laan corner Blumentritt Streets, Sampaloc District, City of Manila. The building GFA is 1,372 sq. m, with a lot area of 1,211 sq. m. This property is currently vacant. Esplanade Seaside Terminal Also known as Jetty Terminal in MOA Complex, this was built in compliance to the sea-based mass transit of the MOA Complex master plan. The terminal provides the public a venue where one can easily book cruises and tours giving the public an avenue to a unique dining and leisure experience at the bay. Mall of Asia Arena Annex Building MOA Arena Annex Building is an 11-storey with total GFA of 95,273 sq. m. It is designed to serve the parking needs of MOA Arena with 1,469 parking slots from ground to 7th floor. The 8th to 11th floor, with approximately 30,000 sq. m., are leased out as office space. The current tenants are SM Affiliates and Teleperformance, a BPO company. Corporate Office Buildings A to F Corporate Office buildings are composed of Buildings A to F with a total GFA of 46,883 sq. m. Buildings A to E are leased to SM Affiliates while Building F is leased to Teletech Customer Care Management Corp. The Corporate Office buildings A to F were fully occupied as 30 June Tagaytay Lot Tagaytay lot is located along Gen. Emilio Aguinaldo Highway, within Barangays Mahabang Kahoy and Kaybagay, Tagaytay City with total land area of 117,992 sq. m., of which, 45,264 sq. m. was developed by 38 Corporate Office buildings A to F still fully occupied as of 30 September

110 SM Prime as The Sky Ranch and the rest of the area is vacant. Casino Building Casino Building is located along Gen. Emilio Aguinaldo Highway, within Barangays Mahabang Kahoy and Kaybagay, Tagaytay City with total GFA of 19,394 sq. m. Its only tenant is Philippine Amusement and Gaming Corp. for a 25-year lease term ending on Landbank for Commercial Development The table below sets forth the locations of land inventory as of 30 June 2016: Competition Location Area 39 (sq. m.) Luzon 424,066 Metro Manila 98,555 Visayas 360,631 Total 883,252 SM Prime s top competitors for commercial properties are ALI and Megaworld Corporation ( Megaworld ). ALI is involved in the development and lease or sale of office buildings, sale of industrial lots and lease of factory buildings, and fee-based management and operations of office buildings. Megaworld is involved in the development of mixed-use communities comprising high-end residential condominiums and commercial properties located in convenient urban locations in Metro Manila, and has launched approximately 320 residential buildings, office buildings and hotel projects. Megaworld s total assets as at and for the years ended 31 December 2014 and 2015 were P221.0 billion and P251.7 billion, respectively. SM Prime believes its commercial business unit competes primarily on the location of the properties (proximity to schools, malls and public transportation) and aggressive pricing. HOTELS AND CONVENTION CENTERS As of 30 June 2016, the hotels and convention centers business unit is composed of six hotels with 1,510 saleable rooms and four convention centers and two trade halls with 35,623 sq. m. of leasable space. 40 Hotels Completed Hotel Projects Taal Vista Hotel Taal Vista Lodge, located in Tagaytay City, was acquired by the SM Group in July The Hotel re-opened in 2003 under the new name Taal Vista Hotel with the renovated Mountain Wing (127 rooms), Lobby Lounge, and Restaurant. The Lake Wing was constructed in 2008 with 133 rooms and a 1,000-seater ballroom. In 2009, the hotel became fully operational with total inventory of 260 rooms. Radisson Blu Cebu 39 No changes as of 30 September No changes as of 30 September

111 SM Prime inaugurated the 396-room Radisson Blu Hotel in November 2010, strategically located beside SM City Cebu adjacent to the International Port Area. Radisson Blu is the first hotel managed by the Carlson Rezidor Hotel Group in the Asia Pacific Region to be classified under its Blu upscale hotel brand category. The property has been classified under the deluxe hotel category by the Department of Tourism. Its facilities include an in-house spa, fitness center, business center, 800-sq. m. swimming pool, club lounge, two ballrooms and a number of smaller meeting rooms. Pico Sands Hotel Formally opened in August 2011, Pico Sands Hotel is a 151 room tropical contemporary hotel located within Pico de Loro Cove, the maiden residential community of Hamilo Coast, the premier seaside development of the SM Group in Nasugbu, Batangas. The spacious rooms are equipped with modern facilities and captivating views of lush mountains and tranquil lagoon. Park Inn by Radisson Davao Park Inn by Radisson Davao is strategically located across the SM Lanang Premier Mall and SMX Conventions Center. The 202-room hotel was formally opened on March 22, Guests are greeted with contemporary interiors and smart design elements complementing the hotel s service philosophy Adding Color to Life. Facilities include: Restaurant, Bar and Grill (RBG), 4 meeting rooms, fitness center, swimming pool and bar. Park Inn Davao is the first next generation mid-scale Park Inn by Radisson brand to be established in the Asia Pacific region. Park Inn by Radisson Clark The 154-room Park Inn by Radisson Clark is located in Mabalacat, Pampanga, about 40 miles (60km) northwest of Metro Manila. It is conveniently located beside SM City Clark and Clark Freeport Zone. Clark Freeport Zone is a redevelopment of the former Clark Air Base, a former United States Air Force base in the Philippines. Park Inn by Radisson Clark is the leading 3-star hotel in its market with facilities that include an all-day dining restaurant with 64-seat capacity, a meeting room for 80 pax and a fitness center. Conrad Manila In March 2013, SM Prime signed with Hilton Worldwide an agreement to manage the first Conrad branded hotel in the Philippines. The 347-room Conrad Manila is located within the MOA complex with stunning views of the famed Manila Bay. The eight-storey hotel incorporates two levels of retail and entertainment facilities on the ground floor. It also has other hotel facilities as well as a 1,446 sq. m. ballroom and other function and meeting spaces. Conrad Manila formally opened on June 15, Convention Centers and Tradehalls The Company has four SMX convention centers and two trade halls. SMX convention centers are located in the MOA Complex, SM Lanang Premier, SM Aura Premier and SM City Bacolod. Trade halls are located in SM Megamall and SM City Cebu. The structure of a convention center is made up of large exhibit floors which can be divided into multiple exhibition and function halls. With its state of the art convention and exhibition facilities, it continues to host major international and local conventions and exhibitions Competition The primary competitors of SM Prime s existing hotels are the Marriot for Radisson Blu Cebu, the Anvaya for Pico Sands Hotel in Batangas and the Seda Hotel for Park Inn Davao. Once completed, the Conrad Manila is expected to compete with the Shangri-La Makati, Solaire and the Sofitel Manila. SM Prime s primary 106

112 competitors for its convention centers are the PICC Convention Center and the World Trade Center. Retailing and Merchandising SM Retail, Inc. ( SM Retail ) was incorporated in June 2002 and started operations in January 2008 and is designated as the holding company for the Group s retail and merchandising operations. On 31 July 2008, the SEC approved the increase in authorized capital stock of SM Retail from P0.1 million to P1,500.0 million. The increase was necessary to provide adequate capital to absorb the transfer of the retail merchandising operations to SM Retail. On 30 September 2008, the respective board of directors of SM Retail and the Issuer entered into an agreement pursuant to which SM Retail issued 12,836,170 shares with par value of P100 per share, in exchange for the ownership interest of SMIC over SVI, SSMI, Marketwatch, MH Holdings, Sanford, Henfels, HMS, Romer and SM Mart. This resulted in the increase in ownership interest of the Issuer over SM Retail from 99% to 100%. On 7 July 2016, the SEC approved the merger of SM Retail. Under the terms of the deal, over 1,300 retail outlets will be folded into SM Retail in exchange for shares of stock in SM Retail s expanded assets. To be merged with SM Retail s food and department stores are a wide ranging portfolio of leading local brands such as Ace Hardware, Watsons, Toy Kingdom, SM Appliances, Our Home, Baby Company, Kultura, Sports Central, Pet Express and other specialty retailers. The merger is seen to be both value and earnings accretive given the stores competitive position, synergies with SM Supermalls and strong growth potential. SM Retail organizes its retail and merchandising operations broadly into two categories: non-food retail operations and food retail operations. Non-food retail operations consist of the business of SM Department Stores conducted through the Department Store Companies (as defined below) and SM Mart. Food retail operations comprise the supermarkets, SaveMore, hypermarkets, Waltermart stores and wholesale businesses conducted through SVI, Sanford, SSMI and Waltermart, respectively. As of June 30, 2016, SM Retail had 328 stores nationwide, namely: 55 SM Stores, 47 SM Supermarkets, 147 Savemore stores, 45 SM Hypermarkets and 34 WalterMart stores. For the years ended 31 December 2013, 2014, 2015 and for the six months ended 30 June 2015 and 2016, SM Retail (through its subsidiaries) contributed approximately 73.2%, 72.8%, 73.0%, 71.0% and 71.0% of the Issuer s consolidated revenues and approximately 21.5%, 20.9%, 22.3%, 20.5% and 20.9% respectively, of its consolidated net income. SM Retail (through its subsidiaries) comprised approximately 10.7%, 10.0%, 9.8% and 8.7% respectively, of the Issuer s consolidated total assets (excluding deferred tax asset) and approximately 11.1%, 10.5%, 10.5% and 7.9% respectively, of its consolidated total liabilities (excluding deferred tax liabilities) as at 31 December 2013, 2014, 2015 and 30 June 2016, respectively. Non-food Retail Operations The SM Stores Introduction The Group s retailing business began in 1945 when Mr. Henry Sy, Sr., the founder of the Group, first established a small shoe store in Carriedo, Metro Manila. The original Shoemart, incorporated in March 1960, was the Sy Family s first major step into the retailing business. In 2001, five of the Group Stores were transferred to a subsidiary, SM Mart. Pursuant to a restructuring of 107

113 the Issuer s department store business in 2002, SM Mart took over most of Shoemart s functions in managing the SM Department Stores, such as merchandising, marketing, advertising and certain other services for the SM Department Stores and the Group s Retail Affiliates. These support services together with all in-house products such as SM Card, gift card and gift cheque were later transferred to SM Retail in January As at 30 June 2016, in addition to the five SM Department Stores that are directly owned and operated by SM Mart, the Issuer also operates 50 SM Department Stores through 14 other subsidiaries (the Department Store Companies ). 41 The Group opened two additional SM Department Stores in the first half of 2016 and will open two more in the last quarter. These new stores are SM San Jose Del Monte, SM Trece Martires, SM Molino and SM East Ortigas. The Group plans to open an average of three additional SM Department Stores for each year thereafter, subject to market conditions. As at 30 June 2016, the Issuer, through SM Retail, owned 65% of SM Mart s issued share capital while the Sy Family owns the remaining 35%. 42 SM Department Stores For 57 years, the SM Department Stores have provided quality products and services at competitive prices and the Issuer believes that it has led mass-market fashion trends to meet the ever-changing needs of the Philippine public. It is the objective of the SM Department Stores to maintain their leadership in the marketplace, to be at the forefront of retail technology and to grow through consumer marketing and product diversification. The SM Department Stores strategies involve providing value for money through the wide variety of quality merchandise sold at reasonable prices in order to achieve a high sales turnover. Sales in the SM Department Stores are cyclical and driven by seasonality. Historically, sales have peaked during the Christmas period each year, with sales in the month of December comprising approximately 18% of sales for the entire year, and in May, prior to the opening of school in June. 22 SM Department Stores are located in Metro Manila and 33 are located in the provinces. Five SM Department Stores are stand-alone stores (SM Quiapo, SM Cubao, SM Makati, SM Harrison and SM Delgado) and 50 SM Department Stores are based in the Malls. The land for the three SM Department Stores operated by the Issuer (SM Makati, SM Cubao and SM Delgado) is subleased from third parties through SM Prime, with the SM Quiapo and SM Harrison buildings also being leased. The shortest of these long-term leases expires in The remaining 50 SM Department Stores are leased from SM Prime pursuant to annual leases, apart from the SM North EDSA lease which is a 25-year term expiring in Since the opening of SM North EDSA in 1985, and partly because mall-based department stores tend to enjoy higher customer traffic than stand-alone SM Department Stores, it has been the policy of the Group to establish an SM Department Store as an Anchor Tenant in every new Mall where there is sufficient floor space. The Issuer s policy is to construct department stores in prime locations. It has opened two new SM Department Stores in the first half of The Issuer plans to open two more SM Department Stores in the last quarter of 2016, and approximately an average of three new SM Department Stores opening annually thereafter for the next few years, subject to market conditions. A periodic review of sales per store is conducted regularly and, if needed, a reduction of the selling area of a store is implemented to improve sales productivity. Each SM Department Store is renovated approximately once every seven years. Credit Card Sales 41 No changes as of 30 September No changes as of 30 September

114 As part of SM Department Stores efforts to promote the SM brand and provide its customers with additional shopping convenience, the SM Department Stores offer an SM In-house Card, a credit card for SM Department Store customers and all Retail Affiliates. The SM In-house Cards are marketed by third parties who are required to fully guarantee the obligations of the cardholders with real estate or money market placements as collateral. SM Retail is responsible for administering this credit card programme. In addition, BDO also offers its customers a similar SM In-house Card. Credit card sales attributable to the SM In-house Card and other major credit cards accounted for approximately 21% of SM Department Stores total sales for the year ended 31 December Operational and Management Support SM Retail have provided operational support to all of the SM Department Stores, as well as to other retail stores affiliated with the Sy Family, such as Home World, Supplies Station, Inc., Baby Company, Ace Hardware, Watsons, Sports Central, Toy World, Signature Lines and Kultura. Such support includes merchandising, marketing and advertising, information technology, controllership, operations and human resource services. SM Retail levies a management fee for the provision of such services. In addition, each SM Department Store pays the Issuer a management fee for advisory and consultancy services, including legal, tax and treasury services. Merchandising SM Retail undertakes the merchandising for all the SM Department Stores and the Group s Retail Affiliates, as well as managing third party store consignors ( Store Consignors ). Each SM Department Store adopts a localization strategy based on demographic model and operates between 25 to 35 departments from apparel, shoes, accessories, home furnishings, hardware, stationery supplies, music, cosmetics to native handicrafts. Part of the merchandise sold by each department is sourced by SM Retail from its pool of suppliers internally categorized as preferred, secondary and seasonal and purchased outright for SM Department Stores. Outright inventory is owned by the SM Department Stores. The SM Department Stores outright merchandise includes in-house private label brands such as SM Exclusive for Men, SM Basics and SM Smart Buys for basic staple items, Coco Cabana for Women, Gigi Amore Ladies Intimates, Salvatore Mann and Parisian for Men s and Ladies Shoes, respectively. These private label brands provide customers of the SM Department Stores with comparable quality as moderately priced alternatives to the higher priced branded items sold by Store Consignors and Major Consignors, as described below. Store Consignors are basically distributors or licensees of national and global brands manufactured or distributed by the consignors. Store Consignors are allocated selling space based on their sales per square meter productivity. The Store Consignors own the inventory and the SM Department Stores obligation to pay for the inventory arises only on sale of the goods. As at 31 December 2015, there were over 873 Store Consignors operating in the SM Department Stores. Some of the main Store Consignors include globally known brands such as Guess, Wrangler, Lee, Arrow, Triumph, Wacoal, Jockey, Nike, Adidas, Candies, Rayban, Victorinox, Samsonite, Disney and others. In addition, SM Department Stores have areas which are operated and run by Major Consignors which are affiliated to the Group. Major Consignor merchandise within the SM Department Stores consists of merchandise that is sold by the Major Consignors under their respective brand names within SM Department Stores. The Major Consignors are allocated designated areas within the SM Department Stores and essentially operate and manage their respective speciality departments within the department store. SM Retail seeks to maintain a good merchandise mix of sales made in the SM Department Stores on an outright basis, or via Store Consignors and Major Consignors to meet customers needs and wants in terms 109

115 of style, quality and price. The SM Department Stores generate gross margins based on net sales from their Store Consignors and Major Consignors. The Issuer believes that the margins charged to the Store Consignors and Major Consignors are at levels comparable to others in the retailing industry taking into account volumes achievable in the stores. In addition, Store Consignors and Major Consignors are charged store reimbursable for operational facilities provided by the SM Department Stores. In each billing cycle, Store Consignors are paid monthly, and Major Consignors are paid semi-monthly. The SM Department Stores indirectly recognizes the net sales and cost of sales of both the Store Consignors and the Major Consignors in its Financial Statements. Store Consignors and Major Consignors constitute an important part of SM Department Stores, contributing more than 80% of sales realized by the SM Department Stores as at 31 December Marketing The SM Department Stores remain the leading retailers in the Philippines, carrying a full line of merchandise. All stores carry the full fashion merchandise range from Men s, Ladies and Children s apparel and footwear, to bags, accessories, as well as cosmetics, home furnishings and toys. The SM Department Stores continue to offer a wide assortment of global and local brands along with private labels. Merchandise remains fashion forward, creating distinction/differentiation while maintaining commitment to a value-for-money proposition through competitive price points across different categories. Strategic focus remains on growth/development of in-house brands and private labels via continuous product innovations and aggressive promotional efforts, as well as strengthening of supplier base. To reinforce the SM Department Stores position as the preferred one stop shop for consumers, the SM Business Center Operations has continually adding to its menu of products and services, as well as through aggressive recruitment of new public-private partners and biller-companies. The SM Department Stores continue to strengthen their fashion image through regular roll-out of fashion collection highlights, seasonal campaigns such as summer, back-to-school, and Christmas, and fashion brand image campaigns. To cement their position further, SM Department Stores have actively participated in Philippine Fashion Week. The Group has tapped selected celebrities and media authorities as brand ambassadors to build strong affinity to its target markets. The SM Department Stores have engaged their consumers in the digital space via online tools such as Facebook, while growing their Twitter fanbase and exploring emerging sites such as Instagram and Pinterest. SM Retail has continued to augment the Department Stores value proposition through integrated drive-to-store efforts, using a variety of promotional methods including visual merchandising, multi store events and promotions, and social media engagements. Nationwide promotions across all departments are being implemented to include seasonal promotions and category highlights. Departmental campaigns bundle customer benefits with various purchase incentives. Merchandise themed sale events continue to be initiated in order to give freshness to the promotions calendar. Sale events are purposely timed to capitalise on auspicious calendar dates such as extended weekends due to local and national holidays. In parallel, the SM Department Stores have launched credit card promotions to tap the market for more affluent consumers and ease financial strain on the mass based clientele. The SM Department Stores remain committed to improve their customer reach through store openings in city neighborhoods and fast-growing provincial cities, addressing the continued growth in customer demand for convenience and accessibility. The SM Department Stores will continue to support the SM Mall s expansion strategy, with the opening of SM Trece Martires in May 2016 as the latest. In parallel, we continue to make ongoing improvements to our existing stores, with the aim of both improving aesthetics 110

116 and increasing customer convenience. Current initiatives include the development of new and exciting store designs and innovative display fixtures meant to enhance the presentation of our merchandise collections. SM Retail also continues to explore and implement new marketing efforts. SM Advantage is a dynamic and innovative loyalty program that rewards members with points every time they shop in The SM Store. SM Supermarket, SM Hypermarket, SaveMore, other SM retail establishments such as Ace Hardware, Toy Kingdom, SM Appliance Center, Kultura, Surplus Shop, Our Home, Sports Central, Baby & Co. and global brands such as Watsons, Forever 21, Uniqlo, Sfera, Uno bde 50, Crate and Barrel and The Body Shop. Members can earn points in other SM-owned establishments such Taal Vista Hotel, Radisson Blu Hotel, Park Inn by Radisson and Asia Pacific College. The points earned can be used to redeem practically anything sold in any of these retail stores. The standard redemption value of one point is P1.00. SM Advantage has likewise tied-up with non-sm establishments such as Shell, PLDT, Globe and Agoda.com to provide members with added benefits such as points earning, discounts and freebies. SM Advantage also offers members-only privileges such as exclusive sales, discounts and freebies in numerous partner establishments both inside and outside SM Malls. The program was launched in 2003 and is currently the country s biggest loyalty program with more than 9 million active members. Suppliers SM Retail coordinates and manages the sourcing of merchandise for the SM Department Stores and the Group s Retail Affiliates. The majority of the products carried by the SM Department Stores are made in the Philippines. The outright merchandise sold by SM Department Stores are directly sourced from local importers, distributors and manufacturers. Accordingly, the SM Department Stores are not directly exposed to foreign exchange risks on purchases of merchandise. The SM Department Stores source their outright merchandise from over 3,000 active suppliers. SM Retail, through its merchandising team, has over the years developed close partnership with a large number of suppliers in the Philippines. However, SM has opened its doors for new potential suppliers. SM Retail does not rely on one supplier or a small group of suppliers and, for the year ended 31 December 2015, no single supplier supplied more than 5% of SM Retail s purchase orders by value. For the year ended 31 December 2015, approximately 80% of SM Department Stores outright purchases were made on credit with an average credit period of 60 days following delivery, with the balance comprising purchases made on a cash-on-delivery basis (which entitles the SM Department Stores to a minimum of a 5% reduction in the purchase price) or a credit period of between 15 to 45 days from the date of delivery with a 2% to 5% discount. Upon the issuance of the relevant purchase order, SM Retail s suppliers generally deliver the ordered products within 30 to 45 days for new and repeat order products that need to be manufactured, and within five days for ready-made products in stock. The SM Department Stores reserve the right to return defective goods subject to an agreed minimum return amount. For the year ended 31 December 2013, less than 2% of SM Department Stores outright purchases by value were returned. SM Department Stores generally will give written notice to the relevant supplier to collect the defective item and payment for the defective item is automatically deducted by SM Department Stores when they pay for that order or their next order with the supplier, depending on when the defect is detected. 111

117 Competition The retailing industry is very competitive, and this is no different in the Department Store format. Strong Local players: Rustans, Robinsons, Landmark and the Gaisano Group in the Southern Philippines have been equally aggressive in their expansion programs in key cities nationwide. In recent years, we have also seen the entry of large Mono Branded fast fashion retailers: Zara, Forever 21, and Uniqlo that are gaining share in the apparel business. In spite of the expansion of established Department Store chains as well as the entry of foreign brands, the SM Store has maintained its market leadership in the Department store format. This can be attributed to product innovations, new brand entries, and the growth of in-house brands that make the offerings of the store unique to competition. Moreover, innovative store designs and improved customer service and amenities ensure that the SM Store is a cut above the rest of the retailers in the country. These improvements in the brand mix of The SM Store have garnered recognition from local and International Associations. Testament to this is the Best of the Best Award from Retail Asia for the past five consecutive years, and the elevation of The SM Store as a Hall of Fame Awardee. Food Retail Operations SM Supermarkets Introduction SVI was established in SVI was previously a Retail Affiliate of the Issuer, but was acquired by the Issuer from the Sy Family and a non-controlling partner with effect from June 2006 through a share-swap agreement. SVI currently operates 47 SM Supermarkets and four distribution centers. It opened its first supermarket in Ayala Center, Makati and has since expanded nationwide, with 19 branches in Metro Manila. The Issuer opened two additional supermarkets in the first half of 2016, with plans to open one to two additional supermarkets for each of the next few years thereafter, subject to market conditions. On 1 January 2010, SVI sold the 20 SaveMore Market stores to an affiliate, Sanford. The Issuer, through SM Retail, owns 100% in SVI s issued share capital. Operations The supermarkets carry an extensive line of food and household products, with over 40,000 stock-keeping units ( SKU ) on hand. Additionally, all supermarkets host other product ranges such as pharmacies, bakeries, photo shops, wine and liquor stores, Chinese delicatessens, snack and ice cream kiosks. Certain shops also carry furniture, apparel, shoes, books and a home center. As with SM Department Stores, sales in the SM Supermarkets are cyclical and driven by seasonality. SVI s 47 SM Supermarket stores are located within SM Malls. The product mix in the supermarkets is a combination of local and imported goods. However, as the majority of imported goods are purchased locally in the Philippines, there is no foreign exchange risk. Furthermore, all purchases are Peso-denominated. SVI has approximately 2,246 active suppliers. The Issuer opened two SM supermarkets in 2016, and will open one more supermarket within the year. The Issuer plans to open approximately two new supermarkets annually thereafter for the next few years, subject to market conditions. The following table sets forth the SM Supermarket that the Issuer plans to 112

118 open, its location and projected date of opening: Location of SM Supermarkets Location Projected Date of Opening East Ortigas, Pasig City Within SM Mall December 2016 Operational and Management Support SVI relies on an experienced management team to keep its advantage over its competitors. Members of senior management have combined retail experience of more than 30 years. Each supermarket is handled by a store manager who supervises a maximum of three stores. Day-to-day operations are handled directly by an assistant store manager and officer-in-charge. The store managers report directly to the operations managers who also serve as the link to the national head office support department and services. There are currently nine operations managers who are assigned to specific areas in the Philippines and report directly to two Senior Assistant Vice Presidents and one Assistant Vice President headed by a Senior Vice President for Operations. Merchandising SVI undertakes the merchandising and approves the merchandise sold by third party store consignors ( Supermarket Consignors ). The majority of the merchandise carried by each department is sourced by SVI and purchased outright from distributors and manufacturers. The SM Supermarkets outright merchandise includes in-house brands such as SM Bonus. These in-house brand products provide customers of the SM Supermarkets with quality, moderately-priced alternatives to the more expensive branded items sold by Supermarket Consignors. Approximately 7% of SM Supermarkets sales are from these in-house products. SM Supermarkets product mix is generally categorized as follows: Product As a Percentage of Total Products Sold in SM Supermarkets Fresh 28% Food 65% Dry goods 7% Total 100% Supermarket Consignor merchandise consists of branded merchandise manufactured or distributed by Supermarket Consignors. Supermarket Consignors are allocated a portion of the selling area within the relevant departments of the SM Supermarket to sell their merchandise. Supermarket Consignors are responsible for their own inventory at the store and SVI s obligation is to pay for the portion of inventory already sold. As at 31 December 2015, there were 1,278 Supermarket Consignors operating in the SM Supermarkets. SVI seeks to maintain a balanced mix of sales made in the SM Supermarkets on an outright basis, or via Supermarket Consignors. One of the main considerations for SVI when approving Supermarket Consignors items for sale in the SM Supermarkets is the products salability, handling and merchandising. This is to ensure that such items meet SM s standards in terms of pricing, design and quality. SVI charges its Supermarket Consignors a margin based on net sales. Such margin is determined according to the categories of products being sold. SVI indirectly recognizes the net sales and cost of sales of the Supermarket Consignors in its financial statements. 113

119 Supermarket Consignors constitute an important part of the business of SM Supermarkets; the percentage of outright sales and consignments sales is approximately 65% against 35% of SM Supermarket s net sales for the year ended 31 December 2015, and 66% against 34% for the six months ended 30 June Suppliers The SM Supermarkets source their outright merchandise from over 1,000 suppliers. Although SVI, through its merchandising managers, has, over the years, developed close relationships with a large number of suppliers in the Philippines, it does not have any long-term supply agreements with any supplier. This policy is to ensure that SVI is able to source merchandise from a broad range of suppliers at competitive prices. All products supplied by such suppliers are purchased by SVI pursuant to the terms of the relevant purchase order. During the year ended 31 December 2015, SVI sourced approximately 29% of its merchandise by value from its top 10 suppliers. SVI does not rely on one supplier or a small group of suppliers and, for the year ended 31 December 2015, no single supplier supplied more than 7% of SVI s purchase orders by value. For the years ended 31 December 2014 and 2015, all of SVI s outright purchases were made on credit with an average credit period of 30 days following delivery. SVI offers a credit period ranging from one to seven days from the date of delivery with a 3% to 4% discount to as long as 90 days from the date of delivery with no discount. Upon the issuance of the relevant purchase order, SVI s suppliers generally deliver the ordered products within 15 to 30 days. SVI retains the right to return defective goods subject to an agreed minimum return price. All fresh produce is delivered to the relevant SM Supermarkets by the suppliers directly. Centralized Services and Distribution Centralized services include planning and forecasting, budgeting, internal audit, site development, policy and procedures formulation, training and development, staffing and capital expenditures, technology development, risk management, central approval of purchases and disbursements and processing of store set-ups. SVI has a national distribution center network with the main center located in Sucat, Parañaque and three regional centers that service Iloilo, Cebu and Davao. The main center, which was established in 2002 at an estimated cost of P500 million, was able to address the supermarkets stock-out problem and has increased sales. This current distribution network can handle up to 100 supermarket and hypermarket sites. In 2012, an extension in the main centre in Sucat, Parañaque was built at an estimated cost of P200 million to service additional stores. In 2000, SVI implemented a SAP system that enabled it to increase efficiency and reduce costs by reducing manpower and stock levels. It also enabled SVI to decrease its store opening time frame from six months to one month due to the implementation of a standard store set-up plan and better data evaluation and prompt implementation of strategies. In addition, the SAP system facilitated faster collection of receivables. Marketing SM Supermarkets had regular as well as seasonal promotions to increase sales and provide additional shopping incentives. The initiatives include the yellow tag special, five-day sale, SWIPE promos and launch pad, among others. 43 The 66% to 34% ratio was maintained for the nine-month period ended 30 September

120 Competition SM Supermarkets competitors include national and regional supermarket chains, independent and specialty grocers, drug and convenience stores, warehouse club stores, deep discount drug stores and supercenters. Supermarket chains generally compete on the basis of location, quality of products, service, price, product variety and store condition. SM Supermarkets regularly monitors its competitors prices and adjusts its prices and marketing strategy as management deems appropriate in light of existing conditions. The other major players in the industry include Puregold, Robinson s Supermarket, Shopwise and Gaisano Supermarkets, Waltermart, SM Hypermarkets and SaveMore Markets. SaveMore Markets Introduction Sanford Marketing Corporation, formerly Sanford Investments Corp., a holding company, was registered with the SEC on September In November 2009, Sanford Investments amended its corporate name, primary purpose, articles of incorporation and principal place of business to fit its purpose to operate SaveMore Markets, a modernised neighbourhood or community store. As at 30 September 2016, Sanford operated 150 SaveMore Markets. It opened its first SaveMore Market in Taft Ave. cor. T.M. Kalaw St., Ermita in October On 1 January 2010, 20 SaveMore Markets that were previously owned by SVI, a related party, were sold to Sanford. In 2013, 2014, 2015 and for the first nine months of 2016, Sanford opened 15, 22, 24 and 15 SaveMore Markets respectively, bringing the total to 150 stores net of 9 stores that were closed. The Issuer plans to open additional SaveMore Markets annually, subject to market conditions. The Issuer, through SM Retail, owns 99.6% in Sanford s issued share capital. Operations The SaveMore Markets carry an extensive line of food and household products, with a low of 15,000 SKU on hand for small stores to a high of 30,000 SKU on hand for big stores. Additionally, all SaveMore Markets host other product ranges such as pharmacies, bakeries, photo shops, wine and liquor stores, Chinese delicatessens, snack and ice-cream kiosks. Certain shops also carry appliances, furniture, apparel, shoes, magazines and a home centre. SaveMore Markets also offer services such as foreign exchange and bills payment. As with SM Department Stores, sales in the SaveMore Markets are cyclical and driven by seasonality. Out of Sanford s 150 SaveMore Markets, 79 are mall-based (located within malls), 5 are condo-based and the remaining 66 are stand-alone as at 30 September The product mix in the SaveMore Markets is a combination of local and imported goods. However, as the majority of imported goods are purchased locally in the Philippines, there is no foreign exchange risk. Furthermore, all purchases are Peso-denominated. Sanford has approximately 2,100 active suppliers. The following table sets forth the SaveMore Markets that the Issuer plans to open, their location and projected date of opening: 115

121 Location of SaveMore Market Location Projected Date of Opening SaveMore Citimall Cotabato Cotabato City, Cotabato October 2016 SaveMore Jaen Jaen Nueva Ecija October 2016 SaveMore Isabela Cinema Laoag City, Ilocos Norte October 2016 SaveMore One Mall Valenzuela Valenzuela City, Metro Manila November 2016 SaveMore Citimall Mandalagan Mandalagan, Bacolod Negros Occ November 2016 SaveMore Lancaster Cavite City November 2016 SaveMore EPZA General Trias General Trias, Cavite November 2016 SaveMore Alapan Alapan, Imus, Cavite November 2016 Operational and Management Support Sanford relies on an experienced management team (from SVI) to maintain its market position. Members of senior management have combined retail experience of more than 30 years. Each SaveMore Markets is handled by a store manager who supervises a maximum of three stores. Day-to-day operations are handled directly by an assistant store manager and officer-in-charge. The store managers report directly to the operations managers who also serve as the link to the national head office support department and services. There are currently seven operations managers who are assigned to specific areas in the Philippines and report directly to the Senior Assistant Vice President and two Assistant Vice Presidents headed by a Senior Vice President for Operations. Merchandising Sanford undertakes the merchandising and approves the merchandise sold by third-party store consignors ( SaveMore Consignors ). The majority of the merchandise carried by each department is sourced by Sanford and purchased outright from distributors and manufacturers. The SaveMore Markets outright merchandise includes in-house brands such as SM Bonus. These in-house brand products provide customers of the SaveMore Markets with quality as moderately priced alternatives to the more expensive branded items sold by SaveMore Consignors. Approximately 9% of SaveMore Markets sales are of these in-house products. Sanford s product mix is generally categorized as follows: Product As a Percentage of Total Products Sold in SaveMore Markets Fresh 27% Food 66% Dry goods 7% Total % SaveMore Consignor merchandise consists of branded merchandise manufactured or distributed by SaveMore Consignors. SaveMore Consignors are allocated a portion of the selling area within the relevant departments of the SaveMore Market to sell their merchandise. SaveMore Consignors are responsible for their own inventory at the store and Sanford s obligation is to pay for the portion of inventory already sold. As at 30 September 2016, there were over 1,200 SaveMore Consignors operating in the SaveMore Markets. Sanford seeks to maintain a balanced mix of sales made in the SaveMore Markets on an outright basis, or via SaveMore Consignors. One of the main considerations for Sanford when approving SaveMore 116

122 Consignors items for sale is the products saleability, handling and merchandising. This is to ensure that such items meet SM s standards in terms of pricing, design and quality. Sanford charges its SaveMore Consignors a margin based on net sales. Such margin is determined according to the categories of products being sold. Sanford indirectly recognises the net sales and cost of sales of the SaveMore Consignors in its financial statements. SaveMore Consignors constitute an important part of the business of SaveMore Markets; the percentage of outright sales and consignments sales is approximately 70% against 30% of SaveMore Market s net sales for the six months ended 30 June Suppliers The SaveMore Markets source their outright merchandise from over 1,000 suppliers. Although Sanford, through SVI s merchandising managers, has, over the years, developed close relationships with a large number of suppliers in the Philippines, it does not have any long-term supply agreements with any supplier. This policy is to ensure that Sanford is able to source merchandise from a broad range of suppliers at competitive prices. All products supplied by such suppliers are purchased by Sanford pursuant to the terms of the relevant purchase order. For the six-month period ended 30 June 2016, Sanford sourced approximately 35% of its merchandise by value from its top 10 suppliers. Sanford does not rely on one supplier or a small group of suppliers and, for the six months ended 30 June 2016, no single supplier supplied more than 8% of Sanford s purchase orders by value. 45 For the six-month periods ended 30 June 2015 and 2016, all of Sanford s outright purchases were made on credit with an average credit period of 30 days following delivery. Sanford offers a credit period ranging from one to seven days from the date of delivery with a 3% to 4% discount to as long as 90 days from the date of delivery with no discount. Upon the issuance of the relevant purchase order, Sanford s suppliers generally deliver the ordered products within 15 to 30 days. Sanford retains the right to return defective goods subject to an agreed minimum return price. All fresh produce is delivered to the relevant SaveMore Markets by the suppliers directly. Centralized Services and Distribution Centralized services include planning and forecasting, budgeting, internal audit, site development, policy and procedures formulation, training and development, staffing and capital expenditures, technology development, risk management, central approval of purchases and disbursements and processing of store set-ups. Sanford shares a national distribution centre network with SVI with the main centre located in Sucat, Parañaque and three regional centres that service Iloilo, Cebu and Davao. The current distribution network can handle up to 239 supermarket and hypermarket sites. In addition, Sanford has two depots located in Araneta, Cubao and Cabanatuan to aid in the distribution of goods. In 2009, Sanford implemented a SAP system that enabled it to increase efficiency and reduce costs by reducing manpower and stock levels. It also enabled Sanford to decrease its store opening time frame from six months to one month due to the implementation of a standard store set-up plan and better data evaluation and prompt implementation of strategies. In addition, the SAP system facilitated faster collection of receivables. 44 The 70% to 30% ratio was maintained for the nine-month period ended 30 September These figures were maintained for the nine-month period ended 30 September

123 Marketing SaveMore Markets have regular as well as seasonal promotions to increase sales and provide additional shopping incentives. The initiatives include the yellow tag special, bag-a-bonus, three-day sale and special display sections known as launch pads, among others. Competition SaveMore Markets competitors include national and regional supermarket chains, independent and speciality grocers, drug and convenience stores, warehouse club stores, deep discount drug stores and super centers. Supermarket chains generally compete on the basis of location, quality of products, service, price, product variety and store condition. SaveMore Markets regularly monitors its competitors prices and adjusts its prices and marketing strategy as management deems appropriate in light of existing conditions. The other major players in the industry include Puregold, Robinson s Supermarket, Shopwise, Gaisano Supermarkets, SM Supermarkets and SM Hypermarkets. SM Hypermarkets Introduction SSMI was established in SSMI was previously a Retail Affiliate of the Issuer but was acquired by the Issuer with effect from 6 June 2006 through a share-swap agreement. SSMI operates 45 SM Hypermarkets. It opened its first hypermarket in SM City Sucat in The newest SM Hypermarket store that opened in June 2016 is located in Handumanan in Bacolod. As at 31 December 2015, the Issuer directly owns 100.0% in SSMI s issued share capital through SM Retail. Operations SM Hypermarkets provide one-stop shopping convenience specially designed to meet the growing needs of the shoppers. The hypermarkets offer a wide range of products covering groceries, health and beauty products, shoes, ready-to-wear apparel, furniture, appliances, hardware, kitchenware, toys, office supplies, bakery products, wine and liquor. They also offer services such as foreign exchange and bills payment. As with SM Department Stores, sales in the SM Hypermarkets are cyclical and driven by seasonality. All SM Hypermarkets have modern, spacious facilities, customer friendly display racks and more than 40 check-out lanes each. What makes SM Hypermarkets distinctive for consumers is that they sell food, fresh and frozen items such as those found in a conventional supermarket, as well as general merchandise products found in conventional department stores. SM Hypermarkets also offer services such as delivery services and price verifier kiosks. Out of SSMI s 45 Hypermarkets, 15 are mall-based (located within malls) and the remaining 30 are stand-alone as at 30 September The Issuer plans to open more SM Hypermarkets both within Malls and on a stand-alone basis. After opening two SM Hypermarkets in 2015, it opened one SM Hypermarket in It intends to open at least three new SM Hypermarkets annually thereafter for the next few years, subject to market conditions. The following table sets forth the SM Hypermarkets that the Issuer plans to open, their location and projected date of opening: 118

124 Location of SM Hypermarket Location Projected Date of Opening SM Center Tuguegarao Cagayan March 2017 Tagaytay Cavite 1 st Semester 2017 Paliparan, Cavite Cavite 2 nd Semester 2017 Operational and Management Support The management team of SSMI has significant local and international work experience in the hypermarkets business. Members of senior management have combined retail experience of more than 15 years. SSMI relies on an experienced management team to keep its advantage over its competitors. Each hypermarket is handled by a regional operations manager who supervises a maximum of nine stores. Day-to-day operations are handled directly by store manager and officer-in-charge. The store managers report directly to the regional operations managers and assistant vice presidents who also serve as the link to the national head office support department and services. There are currently 3 regional operations managers and 3 Assistant Vice Presidents who are assigned to specific areas in the Philippines and report directly to Senior Vice President for Operations. Merchandising SM Hypermarkets merchandise is a mix between local and imported goods. SSMI undertakes the merchandising and also approves the merchandise sold by third-party store consignors ( Hypermarket Consignors ). Part of the merchandise carried by each department is sourced by SSMI and purchased outright by the SM Hypermarkets. SM Hypermarkets outright merchandise includes in-house brands such as SM Bonus. These in-house products provide customers of the SM Hypermarkets with quality, moderately priced alternatives to the more expensive branded items sold by Hypermarket Consignors. Approximately 6% of SM Hypermarkets sales is composed of these in-house products. SM Hypermarkets product mix is generally categorized as follows: Product As a Percentage of Total Products Sold in SM Hypermarkets Fresh and Frozen 27% Food 58% Non-Food 15% Total 100% Hypermarket Consignor merchandise consists of branded merchandise manufactured or distributed by Hypermarket Consignors. Hypermarket Consignors are allocated a portion of the selling area within the relevant departments of the SM Hypermarkets to sell their merchandise. Hypermarket Consignors are responsible for their own inventory and the SSMI s obligation is to pay for the portion of inventory already sold. As at 31 December 2015, there were over 1,023 Hypermarket Consignors operating in SM Hypermarkets and increased to 1,070 Hypermarket Consignors as at 30 June SSMI seeks to maintain a balanced mix of sales made in SM Hypermarkets on an outright basis, or via Hypermarket Consignors. One of the main considerations for SSMI when approving the Hypermarket Consignors items for sale in SM Hypermarkets is the products salability, handling and merchandising. This is to ensure that such items meet SSMI s standards in terms of pricing, design and quality. SSMI charges its Hypermarket Consignors a margin based on net sales. Such margin is determined according to the categories of products being sold. SSMI indirectly recognizes the net sales and cost of sales of the Hypermarket Consignors in its financial statements. 119

125 Hypermarket Consignors constitute an important part of the business of SM Hypermarkets; the percentage of outright sales and consignments sales is approximately 63% against 37% of SM Hypermarkets net sales as at 31 December 2015, while as at 30 June 2016, the percentage of outright sales and consignments sales is approximately 64% against 36% of SM Hypermarkets net sales. 46 Suppliers The SM Hypermarkets source their outright merchandise from over 1,000 suppliers. Although SSMI, through its merchandising managers, has, over the years, developed close relationships with a large number of suppliers in the Philippines, it does not have any long-term supply arrangements with any supplier. This policy is to ensure that SSMI is able to source merchandise from a broad range of suppliers at competitive prices. All products supplied by such suppliers are purchased by SSMI pursuant to the terms of the relevant purchase order. During the year ended 31 December 2015, SSMI sourced approximately 40% of its merchandise by value from its top 10 suppliers. SSMI does not rely on one supplier or a small group of suppliers and, for the year ended 31 December 2015, no single supplier supplied more than 12% of SSMI s purchase orders by value. For the year ended 31 December 2014 and 2015, all of SSMI s outright purchases were made on credit with an average credit period of 30 days following delivery. SSMI offers a credit period ranging from one to seven days from the date of delivery with a 3% to 4% discount to as long as 90 days from the date of delivery with no discount. Upon the issuance of the relevant purchase order, SSMI s suppliers generally deliver the ordered products within 15 to 30 days. SSMI retains the right to return defective goods subject to an agreed minimum return price. All fresh produce is delivered to the relevant SM Hypermarkets by the suppliers directly. Centralized Services and Distribution Centralized services include planning and forecasting, budgeting, internal audit, site development, policy and procedures formulation, training and development, staffing and capital expenditures, technology development, risk management, central approval of purchases and disbursements and processing of store set-ups. SSMI started its crossdocking services with SVI during the fourth quarter of 2007 to serve its suppliers better through centralized receiving and distribution of merchandise. The crossdocking services are located in an offsite warehouse located in Sucat, Parañaque which it leases from SVI. The gross area leased is 11,763 square meters. In addition, SSMI also leases a warehouse near its crossdocking facilities from SVI for the purpose of storing its value pack items. The gross area leased is 804 square meters. In October 2007, SSMI implemented a SAP system that enabled it to increase efficiency and reduce costs by reducing manpower and stock levels. It also enabled SSMI to decrease its store opening time frame from six months to one month due to the implementation of a standard store set-up plan and better data evaluation and prompt implementation of strategies. In addition, the SAP system facilitated faster collection of receivables. Marketing SM Hypermarkets have regular as well as seasonal promotions to increase sales and provide additional shopping incentives. The initiatives include the mailer items, Shop N Win, value packs, Scratch & Win, 46 The 64% to 36% ratio was maintained for the nine-month period ended 30 September

126 and three-day sales among others. Competition SM Hypermarkets competitors include national and regional supermarket chains, independent and speciality grocers, drug and convenience stores, warehouse club stores, deep discount drug stores and supercentres. Hypermarket chains generally compete on the basis of location, quality of products, service, price, product variety and store condition. SM Hypermarkets regularly monitor their competitors prices and adjust their prices and marketing strategy as management deems appropriate in light of existing conditions. Other local players in the hypermarket format include Puregold, Robinsons, Shopwise, S&R, SM Supermarket and SaveMore Markets. Financial Services BDO Unibank, Inc. BDO Unibank, Inc. is a universal bank which provides a wide range of corporate and retail banking services. These services include traditional loan and deposit products, as well as treasury, trust banking, investment banking, private banking, cash management, leasing and finance, remittance, insurance, retail cash cards and credit cards. The Bank grew through a series of mergers and acquisitions, the largest of which was the merger between Banco de Oro Universal Bank, Inc. and EPCIB, which took effect on May 31, As at December 31, 2013, the Bank ranked as the number one bank in the Philippines in terms of total assets, gross customer loans, deposits, capital and total trust funds under management. Its consolidated total resources stood at P2.2 trillion while total equity stood at P211.1 billion as of June 30, The Bank s principal markets are the top-tier corporate market, the middle-market banking segment (consisting of medium-sized corporations and small- and medium-size enterprises ( SMEs )) and the retail/consumer market. The Bank s customers are based primarily in the Philippines and include large multinational corporations with local operations. As of June 30, 2016, the Bank had an operating network of 943 domestic branches and one foreign branch (in Hong Kong), with 130 more domestic branch licenses for deployment. Its network also includes 108 ONB branches 27 overseas remittance and representative offices, 3,372 automated teller machines ( ATMs ) and 245 cash accept machines ( CAMs ). The Group is the Bank s largest shareholder group, with an equity interest of approximately 54.6% of the Bank s issued share capital. 48 As of 8 November 2016, the Bank had a market capitalization on the PSE of approximately P408.7 billion. The Bank has a Baa2 rating for its long-term local currency bank deposits from Moody s Investor Services. The Bank also has an Issuer/Debt Rating (long-term) of BBB- from Fitch Ratings. Business Strategies The Bank continues to build on its strong business franchise to maintain leadership positions across most 47 Total capital funds stood at P215.4 billion as of September 30, As of September 30, 2016, the Bank had a network of 1,084 operating domestic branches (including 115 ONB branches) and one foreign branch (in Hong Kong) with 105 more domestic branch licenses for deployment. Its network includes 28 overseas remittance offices and 3,524 ATMs (including 206 ONB ATMs) and 265 CAMs. As of September 30, 2016, the SM Group was the Bank s largest shareholder group, with an effective common equity interest, along with other affiliated companies, of approximately 54.57% of the Bank s issued common shares. 121

127 business lines, as well as further strengthen its capabilities to support future growth and actively respond to strategic opportunities and market challenges. Over the long-term, the Bank aims to be the preferred bank in every market it serves and create shareholder value through superior returns. The key elements of the Bank s strategy are as follows: Diversified and sustainable earnings stream The Bank seeks to continue to grow its diversified and sustainable earnings stream generated from its core lending and deposit-generating activities, accrual and trading income from its investment portfolio and fee income from service-based businesses. The Bank will continue to pursue focused loan growth to achieve a more balanced loan portfolio and more effectively manage its concentration risk. While the Bank believes it already maintains a diversified loan portfolio across various market segments, it intends to increase lending to the more profitable and growing consumer and middle-market segments. In addition, to minimize the volatility of the Bank s income sources, the Bank has gradually built its non-interest earnings by generating increased income from its fee-generating services including, among others, asset/wealth management, electronic banking, insurance, credit cards and investment banking. Continue to expand distribution network to improve access to customers and reduce funding costs The Bank plans to continue to build its branch network across the Philippines, to further improve access to its customers and more efficiently serve their needs. Through its expanding branch network, the Bank intends to continue offering one-stop banking services where customers can avail of a host of lending, deposit, investment products, and other financial services including access to a wide range of loan products, foreign exchange, insurance and trust services, in addition to more traditional deposit services. Prudent balance sheet management The Bank will continue to implement a prudent and effective risk management culture while also seeking to maintain a strong capital position, high asset quality and a healthy balance sheet. The Bank has adopted a conservative provisioning strategy even as its asset quality has remained stable despite steady loan growth. The Bank believes this approach will insulate the Bank against any downturns in the financial sector or in the domestic or global economies. In addition, the Bank intends to actively reduce its non-performing assets through various methods that include retail sales and joint property development, strengthening of its broker/employee network, and attractive payment and pricing terms. Further develop operating systems, branch infrastructure and advertising efforts The Bank has made, and intends to continue to make, strategic investments in increasing productive capacity to maintain its strong and modern operating infrastructure, allowing the Bank to more easily accommodate future growth, ensure business continuity and enhance efficiency. The Bank expects these investments to generally be in the areas of office and network expansion, IT, operations and risk management. The Bank also intends to maintain its extensive branding campaign to further create customer awareness and market visibility, thus enhancing the potential of its extensive distribution platform across varying media outlets. Accordingly, the Bank intends to implement continuing branch renovations and modernization upgrades to corporate offices consistent with the Bank s enhanced image and branding. Complement organic growth with mergers/acquisitions To complement its organic growth and branch expansion, the Bank intends to consider opportunities for 122

128 strategic mergers and acquisitions as they arise to further expand its market coverage and tap emerging and potential businesses. Due to certain BSP regulations and restrictions on grants of new branching licenses, the Bank intends to focus on potential acquisitions on an opportunistic basis as an alternative means of expanding its coverage. Competitive Strengths The Bank believes it has the following competitive strengths compared to its peers: Leading brand name and banking franchise in the Philippines; Diversified business model providing full-service operations; Customer-centric culture complemented by strategic distribution platform; Scalable infrastructure platform for sustained growth; Strong and experienced management team; and Synergies with its controlling shareholder group. Selected Financial Information The following table sets forth selected consolidated financial information of the Bank as at and for the periods indicated: (in P millions) For the years ended 31 December For the six months ended 30 June Resources 1,672,778 1,863,649 2,031,254 2,155,609 Loans and other receivables net 922,553 1,212,930 1,382,752 1,417,546 Deposit liabilities 1,345,333 1,492,282 1,663,853 1,771,643 Equity 164, , , ,136 Net income 22,646 22,828 25,055 13,248 China Bank China Banking Corporation (China Bank), stock symbol CHIB, is the first privately-owned commercial bank in the Philippines, which catered initially to the needs of Chinese-Filipino businessmen. Established in 1920, it played a key role in post-world War II reconstruction and economic recovery through its support to businesses and entrepreneurs in critical industries. It was listed in the local stock exchange in 1927, became the first bank in Southeast Asia to process deposit accounts on-line in 1969, the first Philippine bank to offer phone banking in 1991, and acquired its universal banking license in the same year. Over the years, China Bank has been involved with strategic alliances to expand and strengthen its operations. China Bank is now one of the largest private domestic universal banks in the Philippines in terms of capital base, assets and market value, and is one of the best-governed publicly-listed companies in the country. China Bank provides a complete range of banking products and services to corporate, commercial, and retail customers. It also offers bancassurance and insurance brokerage through its subsidiaries, China Bank Manulife Life Assurance Corporation (MCBLife) and China Bank Insurance Brokerage, Inc., 123

129 respectively; investment banking through China Bank Capital; and various products and services for the retail and SME (small and medium enterprises) markets through China Bank Savings, Inc. (CBS). Driven by its mission to be a catalyst of wealth creation for its customers, China Bank is continually expanding its geographic footprint and product offerings. It began an aggressive branch network expansion program in 2006 and has since more than tripled its number of branches from 148 in 2006 to 524 as of June 30, 2016 (including 162 CBS branches). 49 This wide branch network is complemented by electronic banking channels ATM, online and phone banking supported by a customer contact center that provide secure and reliable 24/7 banking service. With nearly a century of solid financials, strong commitment to personal, quality service, significant contribution to the country s financial landscape, and an enduring legacy of successful partnerships with generations of clients trusting the Bank with their wealth and future, China Bank remains to be one of the most respected, trusted, stable and profitable financial institutions in the country. China Bank was recognized at the Corporate Governance Asia s 6th Asian Excellence Awards as the Best Investor Relations Company Philippines, Asia s Best CEO (Investor Relations) - Philippines for President and CEO Ricardo R. Chua, and Best Investor Relations Professional - Philippines for SVP for Investor and Corporate Relations Head Alexander C. Escucha. The Bank likewise was recognized at the 2016 Triple A Asia Infrastructure Awards presented by The Asset Magazine, gaining the Most Innovative Deal and the Best Power Deal awards for the P31.97 billion Therma Visayas Project Financing Deal and the P42.15 billion San Buenaventura Power Project Financing Deal, respectively. China Bank is a recipient of the following: Bell Award for Corporate Governance for the 4 th straight year by PSE. It is the only bank among awardees in the publicly-listed company category and the only one to have won in all Bell Awards in 4 consecutive years; Gold award for Outstanding company from Institute of Corporate Directors (ICD); and Asia s Outstanding Company on Corporate Governance given by Corporate Governance Asia, ranked among the top 50 publicly-listed companies in the ASEAN Corporate Governance Scorecard Country Reports and Assessments China Bank s credit rating was recently upgraded by international ratings agency Fitch Ratings to BB+ from BB, with a Stable outlook. The Fitch Ratings upgrade was based on the expectation that the bank will maintain broadly-steady asset quality, adequate capital buffers and stable funding and liquidity profiles as it grows and potentially gains market share. For 2016, China Bank s goals remain the same: acquire customers, deepen relationships, and strive to be the best bank for its customers. The Bank will continue to maximize value from network expansion through the selection of strategic locations for new branches and business centers to improve market coverage, and develop a more proactive sales structure for the branch and a more team-oriented relationship management. It will grow its revenues at across all fronts by continuing to generate loans from high growth industries such as power, light and water, infrastructure, BPOs, logistics/warehousing among others defend its niche in the commercial/middle/sme segment and continue to energize growth of consumer loans. The Bank will also continue to diversify and expand fee-based businesses bancassurance, investment banking, private banking, cash management and trust services. With the merger of China Bank Savings & Plantersbank, the Bank has put in place a bigger business footprint with improved coverage of the SME and consumer segments. To achieve this, the savings bank will expand market share by creating customized products for different client segments such as teachers loans, putting up regional business centers, implementing an integrated digital banking 49 China Bank had a total of 526 branches as of 30 September

130 strategy, as well as building and strengthening relationships with emerging SMEs. Others Belle Corporation Belle Corporation ("Belle") was incorporated in 1973 as Belle Mining and Oil Exploration, Incorporated ( Belle Resources ) and, in 1977, was listed on the Philippine Stock Exchange. In 1989, Belle Resources developed a golf club named Tagaytay Highlands International Golf Club, Incorporated ( Tagaytay Highlands ), which became its initial foray into the property development sector. In 1994, Belle Resources changed its name to Belle Corporation to underscore the shift in its principal activity. In early 2001, Belle decided to spin-off some of its property development assets. The spin-off involved the transfer of approximately 534 hectares of undeveloped land, 70 developed subdivision lots and 25 finished residential units into a newly formed subsidiary, Highlands Prime, Incorporated ( Highlands Prime ). Highlands Prime was registered with the Securities and Exchange Commission on February 15, 2001, and its shares became listed on the Philippine Stock Exchange on April 23, 2002, at which time Belle sold approximately 64% of its interest in Highlands Prime to investors. In August 2013, Belle exchanged its 809 million shares in Highlands Prime for approximately 109 million shares in SM Prime Holdings, Inc. ( SMPH ), pursuant to the tender offer with SM Land, Inc. for the shares of Highlands Prime and SM Development Corp. As of August 31, 2016, Belle has sold approximately 42.5 million of its SMPH shares and holds about 66.7 million shares. On April 14, 2011, Belle acquired all the shares of PremiumLeisure & Amusement, Inc. ( PLAI ) through the issuance of 2.7 billion new common shares. PLAI is a grantee by Philippine Amusement and Gaming Corporation ( PAGCOR ) of a Certificate of Affiliation and Provisional License (the License ) to operate integrated resorts, including casinos, in the vicinity of the Bagong Nayong Pilipino Manila Bay Entertainment City ( Entertainment City or PAGCOR City ). PLAI s License runs concurrent with the PAGCOR s Congressional Franchise, which expires in 2033 unless renewed for another 25 years by the Philippine Congress. Belle started construction of the foundation and structure of the integrated resorts in 2010 on 6.2 hectares of land along the entrance of the Entertainment City. In October 2012, Belle and PLAI entered into a Cooperation Agreement with MELCO Crown Entertainment Limited and its Philippine affiliates (collectively, MCE ). The Cooperation Agreement placed Belle as a co-licensee and the owner of the land and buildings and MCE as a co-licensee, developer and operator of all facilities within the integrated resort, which was subsequently branded as City of Dreams Manila. City of Dreams Manila had its soft opening on December 14, 2014 and its Grand Launch on February 2, Belle, PLAI and MCE fully complied with the all PAGCOR requirements under the License as of the date of the soft opening and, in May 2015, City of Dreams Manila became the first integrated resort in Entertainment City to have its License converted from Provisional to Regular status by PAGCOR. As of the date of this Prospectus, SMIC beneficially owns 28% of Belle. Atlas Consolidated Mining & Development Corporation Atlas Consolidated Mining & Development Corporation ( Atlas Mining ) is a company primarily engaged in metallic mineral exploration and mining. It operates the Toledo copper mine in the province of Cebu through its wholly-owned subsidiary Carmen Copper Corporation ("Carmen Copper"). The Toledo copper mine is one of the Philippines' largest copper mines, thus making Carmen Copper a principal producer and exporter of copper concentrate in the country. To optimize its operations and its expanded beneficiation 125

131 plant, Carmen Copper is pursuing the development and commercial distribution of marketable by-products from its copper concentrate processing such as magnetite and pyrite. Atlas Mining also has a stake in the nickel laterite mining project of Berong Nickel Corporation ("Berong Nickel") in Palawan. Berong Nickel has been engaged in the direct shipping of nickel laterite ore since As of the date of this Prospectus, SMIC beneficially owns 29% of Atlas Mining. The Net Group The Net Group includes ten legal entities namely, 19-1 Property Holdings Inc., Crescent Park 19-1 Property Holdings Inc., 18-2 Property Holdings Inc., Crescent Park 18-2 Property Holdings Inc., 6-3 Property Holdings Inc., Crescent Park 6-3 Property Holdings Inc., 6-24 Property Holdings, Inc., Crescent Park 6-24 Property Holdings Inc., Property Holdings Inc., and Crescent Park Property Holdings, Inc. The portfolio assets are strategically located within the E-square Zone, the largest and only PEZA certified IT park in Bonifacio Global City (BGC), Taguig. The Net Group consists of Grade A Philippine Economic Zone Authority (PEZA) registered office buildings and land. The gross lot area is 13,300 square meters while the gross leasable area is 147,000 square meters, more or less. The occupancy rate as of December 31, 2015 is at 99.15%. Started in 1999, The Net Group is made up of boutique IT office buildings constructed on prime lots and economic zones, making them the ideal choice for multinationals looking to establish their headquarters in the Philippines. Its tenant base includes top tier local and multinational companies such as JPMorgan Chase & Co., Deutsche Bank, QBE, Oracle, Fujitsu, Quisumbing Torres, Ericsson, GoPro, Anthem Solutions, Intel, and GE. As of the date of this Prospectus, SMIC beneficially owns 90% of the Net Group. Insurance, Environment, Health and Safety The Group s insurance arrangements are effected through BDO Insurance Brokers, Inc. (as broker). The Issuer believes that each of its subsidiaries is adequately insured, both in terms of the insured risks and the amount which is covered. The Issuer s commercial all risks insurance policy is underwritten by Prudential Guarantee Assurance Company and Generali Pilipinas Insurance Company. These insurance companies are supported by a panel of reinsurers whose minimum rating from Standard & Poor s Rating Services, a division of The McGraw-Hill Companies, is A. The Issuer s policy covers any potential loss of property. Loss of revenue under the loss of rent coverage resulting from fire, water damage and acts of God including earthquake, typhoon and flood is provided for SM Prime as a mall operator. Retail Affiliates operating inside the Malls do not have their own loss of revenue/business interruption insurance cover. In addition, the comprehensive general liability insurance coverage extends to third-party liability, including loss of life and its corresponding litigation expenses. The Issuer is, and, so far as it is aware, each of its principal subsidiaries is, in material compliance with all applicable environmental, health and safety regulations. 126

132 Legal Proceedings The Issuer and the Group may be subject to various legal proceedings and claims that arise in the ordinary course of business. Legal proceedings that are considered to be material by the Company and its subsidiaries are those involving amounts equivalent to at least 5% of the Company s and its subsidiaries earnings before income tax. SM Prime As of the date of this Prospectus, SM Prime, a principal subsidiary of the Company, is a party to the certain material legal/quasi-judicial cases set out below. In the event that any of these legal cases are decided against SM Prime, it may have an adverse effect on the financial condition and results of operations of SM Prime and, consequently, on the financial condition and results of operations of the Issuer. Cordillera Global Network vs. Paje et al.; Adajar vs. Paje et al., SC- GR No (Appealing the CA Decision in CA-GR No ; RTC Decision in Civil Case Nos R and 7595-R) This is a civil case filed by Cordillera Global Network, et al. ( Oppositors ) against SM Investments Corporation, SM Prime Holdings, Inc. and Shopping Center Management Corporation, together with officials of the Department of Environment and Natural Resources and Department of Public Works and Highways. The Oppositors assailed the expansion of SM City Baguio, specifically, the removal of trees. A Temporary Environmental Protection Order ( TEPO ) was issued which prevented the removal of the affected trees. After a trial on the merits, the Regional Trial Court ( RTC ), in a Decision dated 3 December 2012, upheld the validity of the government issuances and permits, dismissed the cases, and dissolved the TEPO. The RTC Decision was appealed to the Court of Appeals ( CA ). In a Decision dated 12 December 2014, the CA affirmed the RTC Decision. The CA Decision was then appealed to the Supreme Court ( SC ) through a Petition for Review dated 23 February On 24 March 2015, the SC issued a Temporary Restraining Order ( TRO ). As a result, while the affected trees had been removed, the construction works have been stopped. In a Resolution dated 19 April 2016, the SC clarified that the TRO is limited to the cutting of trees in Luneta Hill and consequently, construction works have resumed. The parties have filed their respective Memoranda and the appeal is pending resolution by the SC. SM Prime Holdings, Inc. vs. Maranon, Jr. et al. G.R. No This is a civil case filed by the Company in connection with its acquisition of the Capitol Property in Bacolod. The Company filed a Petition for Certiorari with Application for Temporary Restraining Order and Preliminary Injunction. It maintains that it legally won the second bidding for the Capitol Property. However, since SM Prime was being required to waive its right to question the proceedings during the second bidding before it can participate in a third round of bidding, it was constrained to file this case. The Regional Trial Court of Bacolod denied the Petition. SM Prime filed a Motion for Reconsideration but the same was also denied by the RTC. SM Prime filed a Notice of Appeal and recently received a Notice from the RTC that the records have been transmitted to the Court of Appeals for proper disposition. The appeal with the Court of Appeals is docketed as CA-G.R. CEB-SP No It was raffled to the Special 20th Division of the Court of Appeals Cebu City Station. After submission of the respective memoranda, the Court of Appeals declared the case submitted for decision in its Resolution dated April 29, In its Decision dated 28 August 2015, the Court of Appeals denied SM Prime s Appeal. On 16 October 2015, SM Prime filed a Motion for Reconsideration. However, in its Resolution dated 8 April 2016, the Court of 127

133 Appeals, denied SM Prime s Motion for Reconsideration. SM Prime has filed a Petition for Review under Rule 45 of the Rules of Court with the Supreme Court. In a Resolution dated 3 August 2016, the Supreme Court directed the Respondents to file their Comment to the Petition. SM Prime Holdings, Inc. vs. Maranon, Jr. et al. Civil Case No The Company filed a civil case with the Regional Trial Court of Bacolod for the Declaration of Nullity of the Deed of Conditional Sale and Contract of Lease between the Province of Bacolod and Ayala Land, Inc. over the Capitol Property. The RTC has ordered Defendants to file their Answer. SM Prime has received a Joint Answer with Counterclaim of Defendants Province and Sangguniang Panlalawigan, but is still awaiting that of Ayala Land, Inc. SM Prime shall file its Reply to the Answers by the Defendants. Defendant Province of Negros Occidental filed a Motion for Conduct of Hearing on Affirmative Defenses. In an Order dated June 11, 2015, said motion is pending resolution. Other than the JDR which was set on August 14, 2015, no setting has been made pending the resolution of the Province s motion. On 3 December 2015, SM Prime, through counsel, received the RTC s Resolution dated 13 November 2015 giving the parties sixty (60) days from receipt of the said Resolution to file their respective memoranda on the affirmative defenses raised by the Public Defendants. SM Prime and the Defendants already filed their respective memoranda. Thus, the Defendant s Motion raising Affirmative Defenses are now pending resolution. Film Development Council of the Philippines vs. SM Prime Holdings, Inc., Civil Case No SM Prime is a defendant in the civil case filed by the Film Development Council of the Philippines ( FDCP ) before the RTC Pasig questioning SM Prime s remittance of amusement tax withheld to Cebu City instead of the FDCP. While the said case was pending, Cebu City questioned the FDCP Law by filing a Petition for Declaratory Relief before the RTC Cebu. Considering this, the RTC Pasig dismissed the case filed by FDCP and held that the RTC Cebu was in a better position to determine the issues. FDCP thereafter filed a Petition for Certiorari in the Supreme Court to assail the dismissal of the case by the RTC Pasig, which Petition was denied by the Supreme Court with finality. Meanwhile, the RTC Cebu has rendered a decision declaring Sections 13 and 14 of the FDCP Law unconstitutional for having violated the local fiscal autonomy provisions of the 1987 Constitution, which ruling was affirmed by the Supreme Court in a decision promulgated on 16 June In sum, the Supreme Court ordered that: 1. All amusement taxes remitted to the FDCP prior to the date of finality of the decision shall remain legal and valid. 2. Amusement taxes due to FDCP but unremitted up to the finality of this decision shall be remitted to FDCP within 30 days from the date of finality of the decision. 3. After the finality of this decision, amusement taxes previously covered by the FDCP Law must be remitted to the appropriate local government units. As the Supreme Court decision has not yet attained finality, both FDCP and Cebu City filed their respective Motions for Reconsideration. No Order from the Supreme Court since then. SM Prime Holdings, Inc. vs. Light Rail Transit Authority and Department of Transportation and Communications Civil Case No. R-PSY The Company filed a case with the Regional Trial Court of Pasay for Specific Performance with Damages, asking the Department of Transportation and Communications ( DOTC ) and the Light Rail Transit Authority ( LRTA ) to honor the terms of the Memorandum of Agreement dated 29 September 2009, 128

134 regarding the construction of the Common Station across SM City North EDSA. The Company s prayer for a Temporary Restraining Order was denied. SM Prime received LRTA s Answers but is still awaiting DOTC s Answer. SM Prime filed an Amended Complaint which removed the application for temporary restraining order and preliminary injunction. Proceedings are currently suspended pending negotiations among the parties. SM Prime Holdings, Inc. vs. Light Rail Transit Authority and Department of Transportation and Communications G.R. No SM Prime filed a special civil action for Injunction praying that the DOTC and LRTA be prevented from transferring the location of the Common Station from SM City North EDSA to Trinoma. On 30 July 2014, the Supreme Court issued a continuing temporary restraining order enjoining respondents from proceeding to transfer the Common Station to Trinoma. The Supreme Court gave Respondents 10 days to file their Comment. Bases Conversion and Development Authority vs. City of Taguig, SM Prime Holdings, Inc. and LICA Management, Inc. Civil Case No The Bases Conversion and Development Authority ( BCDA ) filed an action for rescission of contract and declaration of lease agreements as null and void with a prayer for TRO and damages with the RTC Makati. The RTC Makati has dismissed the Petition for improper venue. The BCDA filed a Motion for Reconsideration which has been denied by the RTC. Metropolitan Waterworks and Sewerage System v. SM Prime Holdings, Inc. Case No. R-QZN CV Metropolitan Waterworks and Sewerage System ( MWSS ) filed an action for the nullification of the Contract of Lease it executed in 2010 with SM Prime Holdings, Inc. over a 14,170 square meter parcel of land in Balara, Quezon City with a prayer for attorney s fees in the amount of P500,000. SM Prime filed a counterclaim for specific performance and damages in the total amount of P4.5 million. Mediation between the parties failed due to MWSS s non-appearance during the proceedings. SM Prime then filed a Motion to Dismiss which was denied. Judicial Dispute Resolution was terminated during the 21 September 2016 conference in view of MWSS s manifestation that it is not amenable to settle the case. The case is set to be re-raffled on 26 September In addition to the foregoing legal proceedings, SM Prime is subject to certain legal matters which are set out below. SM Aura Premier SM Aura Premier is located on a property in Taguig City which the Company leases from the city government of Taguig. The property is covered by five Transfer Certificates of Title, all of which are registered under the name of the city government of Taguig. These titles were legally and validly conveyed by the Bases Conversion Development Authority ( BCDA ) to Taguig City without any restrictions whatsoever, as and by way of a compromise of a previous territory dispute. The property was removed from the coverage of R.A. 7227, as amended by R.A All five titles are clean and do not carry any annotations. 129

135 As part of the development of SM Aura Premier, the Company incorporated several and substantial civic center components including, among others, a 4,000 sq. m. space for national government and local government offices, a park in the form of a roof garden which is accessible to the public at all hours, a sq. m. chapel, and a 4, sq. m. trade hall. Taguig City has filed a Petition for Injunction against the BCDA docketed as Civil Case No TG pending before RTC Pasig City, Branch 266. Bonifacio South On 17 October 2012, the Corporation filed a Petition for Certiorari, Prohibition and Mandamus under Rule 65 of the Rules of Court, with application for a Temporary Restraining Order ( TRO ) and writ of preliminary injunction (the Petition ). The Petition seeks to stop Respondents Bases Conversion and Development Authority ( BCDA ) and its President and Chief Executive Officer Arnel Paciano Casanova ( Casanova ) from enforcing the Supplemental Notice No. 5 (the Notice ). The Notice declared the supposed termination of the Competitive Challenge for the privatization and development of the Bonifacio South Pointe Property (the Property ). The Corporation is the Original Proponent for the development of this Property, whose proposal was accepted by the BCDA. The Supreme Court promulgated its Decision dated 13 August 2014 granting the Petition and ordered the respondents to conduct and complete the Competitive Challenge. BCDA filed a Motion for Reconsideration on September 26, In a Resolution dated March 18, 2015, the Supreme Court denied BCDA s Motion for Reconsideration with finality. In the same Resolution, the Supreme Court ordered the issuance of an Entry of Judgment, and expressly ruled that no further pleadings, motions, letters or other communications shall be entertained. Accordingly, an Entry of Judgment was issued. This notwithstanding, BCDA filed a Second Motion for Reconsideration dated April 28, 2015, which was denied by the Supreme Court in a Resolution dated September 7, On 7 December 2015, BCDA still defied the Supreme Court s final and executory Decision and filed its Third Motion for Reconsideration. BCDA s Third Motion for Reconsideration was denied by the Supreme Court in a Resolution dated 7 March BDO As of the date of this Prospectus, BDO, an associate of the Company, is a party to the following legal/quasi-judicial cases: 130

136 Banco De Oro, Bank of Commerce, et. al., vs. Republic of the Philippines, Commissioner of Internal Revenue, Bureau of Internal Revenue, Secretary of Finance, Department of Finance, The National Treasurer and Bureau of Treasury Case No. G.R. No On October 18, 2001, the Bureau of Treasury (BTr), through an auction, offered ten-year zero coupon treasury bonds, called the PEACe Bonds, to Government Securities Eligible Dealers. Rizal Commercial Banking Corporation (RCBC) won the bid in the same year and was awarded approximately P35 billion worth of government bonds. The PEACe Bonds were subsequently purchased by investors, including BDO Unibank, who relied in good faith on representations that the same are not subject to 20% Final Withholding Tax (20% FWT). On July 16, 2004, the Commissioner of Internal Revenue (the Commissioner) ruled that the mere issuance of government debt instruments and securities is deemed as falling within the coverage of deposit substitute irrespective of the number of lenders at the time of origination. Accordingly, government debt instruments and securities are not exempt from taxes. On October 7, 2011, or nearly ten years after the auction, the Commissioner upon the request of the Secretary of Finance, issued a ruling stating that the PEACe Bonds are not exempt from the 20% FWT. October 16, 2011, eight banks that purchased the PEACe Bonds filed a case in the Supreme Court to enjoin the BTr and BIR from withholding or collecting the 20% FWT, upon payment at maturity, as well as from enforcing the 2011 ruling. On October 17, 2011, the BIR issued a second ruling stating that the 20% FWT should be imposed upon all subsequent holders of the PEACe Bonds. On October 18, 2011, the Supreme Court unanimously resolved, and issued a temporary restraining order (TRO) which enjoined the government from implementing 2011 rulings that the PEACe Bonds were subject to 20% FWT. The Supreme Court instructed that the disputed amount should be placed in escrow by the petitioning banks. On October 27, 2011, RCBC and RCBC Capital, and the Caucus of Development NGO Networks (Code NGO) as the original purchasers of the PEACe Bonds filed a Motion for Leave of Court to Intervene, which was granted by the Supreme Court on November 15, On November 15, 2011, the Supreme Court required the Government to show cause why they failed to comply with the October 18, 2011 TRO and, required them to comply with said TRO within 10 days from notice, which would cause the return of the funds to the petitioning banks, for the latter to place in escrow. While the Motion for Leave of Court to Intervene was granted by the Supreme Court as early as November 22, 2011, the Government filed its Comment on the Petitions-in-Intervention only on February 14, 2012, while the Petitioners-in-Intervention filed their respective Replies only on May 16, 2012 and June 6, The Supreme Court then issued a resolution dated June 19, 2012 noting the filing of pleadings and granting the Petitioners-in-Intervention s motions for extension. On November 27, 2012, the Petitioning Banks filed a Manifestation With Urgent Reiterative Motion [To Direct Respondents to Comply with the Temporary Restraining Order] dated November 27, 2012 ( Manifestation/Reiterative Motion ), praying that the Supreme Court issue a resolution directing the Respondents to release to the Petitioners within a reasonable period the disputed 20% FWT to 131

137 Petitioners to enable them to comply with the Honorable Court s condition that the 20% final withholding tax on interest income therefrom shall be withheld by the banks and placed in escrow pending resolution of the subject petition. On February 7, 2013, the Petitioners received Respondents Motion asking for a period of thirty (30) days from February 4, 2013, or until March 6, 2013, to file their Comment (as directed by the Supreme Court) on the Manifestation/Reiterative Motion. In its Resolution dated February 12, 2013, the Supreme Court granted Respondents Motion. On April 17, 2013, the Petitioners received Respondents Comment (On Petitioners Manifestation with Urgent Reiterative Motion to Direct Respondents to Comply with the Temporary Restraining Order) dated April 11, On June 5, 2013, the Petitioners filed a Reply to said Comment. By Resolutions dated June 10, 2013 and July 9, 2013, respectively, the Supreme Court admitted the Petitioners-Intervenors RCBC and RCBC Capital s Reply and Petitioners Reply. On January 13, 2015, the Supreme Court En Banc promulgated its Decision nullifying BIR Ruling Nos and DA , and ordering the Bureau of Treasury to immediately release and pay to the bondholders the amount corresponding to the 20% final withholding tax that it withheld on October 18, On March 16, 2015, Intervenors RCBC and RCBC Capital Corporation filed their Motion for Clarification and/or Partial Reconsideration. On April 13, 2015, the Respondents filed their Motion for Reconsideration and Clarification. On April 21, 2015, the Supreme Court en banc issued a Resolution requiring the Petitioners to file a Comment on the Motions filed by the Intervenors and the Respondents. On July 6, 2015, the Petitioners filed a Consolidated Comment on Respondents Motion for Reconsideration and Clarification, and Intervenors Motion for Clarification and/or Partial Reconsideration (Petitioners Consolidated Comment). On July 28, 2015, the Supreme Court en banc issued a Resolution noting the Petitioner s Consolidated Comment, noting the Intervenors Comment on the Respondents' Motion for Reconsideration and Clarification (Intervenors Comment), and requiring the Office of the Solicitor General (OSG), on behalf of the Respondents, to file a Reply to the Petitioners Consolidated Comment and Intervenors Comment (Respondents Reply) within ten days from receipt of Notice of Resolution. On October 29, 2015, Petitioners received the Respondents Reply dated October 19, 2015 and filed an Urgent Reiterative Motion [To Direct Respondents to Comply with the Temporary Restraining Order] dated October 22, 2015 which is still pending before the Supreme Court En Banc. As of January 19, 2016, Petitioners are still awaiting the Supreme Court s Resolution on the Respondents Motion for Reconsideration and Clarification dated March 13, 2015, and RCBC and RCAP s Motion for Clarification and/or Partial Reconsideration dated March 16, Likewise, petitioners are still awaiting the Supreme Court s Resolution on our Urgent Reiterative Motion. On August 16, 2016, the Supreme Court promulgated a Resolution on the motions for reconsideration and clarification filed by the Office of the Solicitor General and petitioners-intervenors Rizal Commercial Banking Corporation and RCBC Capital Corporation of the Decision of the Supreme Court dated 13 January The Resolution provides: WHEREFORE, respondents Motion for Reconsideration and Clarification is DENIED, and petitioners-intervenors RCBC and RCBC Capital Corporation s Motion for Clarification and/or Partial Reconsideration is PARTLY GRANTED. 132

138 Respondent Bureau of Treasury is hereby ORDERED to immediately release and pay the bondholders the amount of P4,966,207,796.41, representing the 20% final withholding tax on the PEACe Bonds, with legal interest of 6% per annum from October 19, 2011 until full payment. Asia United Bank, BDO Unibank, Inc., et. al. vs. The Department of Finance, through the Secretary of Finance, and the Bureau of Internal Revenue, through the Commissioner of Internal Revenue Civil Case No On March 15, 2011, the BIR issued Revenue Regulations No (RR ) regarding the alleged violation relating to the proper allocation of costs and expenses amongst income earnings of banks and other financial institutions for income tax reporting purposes. RR essentially prescribed the method of allocation of cost and expenses such that when computing the amount allowable as deduction from regular banking unit operations, all costs and expenses should first be allocated between the regular banking unit and FCDU/expanded FCDU or offshore banking unit. On April 6, 2015, nineteen banks (Petitioners) filed a Petition for Declaratory Relief with Application for Temporary Restraining Order and/or Preliminary Injunction, with the Regional Trial Court of Makati. BDO Unibank, Inc. and BDO Private are among the Petitioners in Civil Case No assailing the validity of RR In the Petition, the Petitioners claimed that there is no provision in the National Internal Revenue Code which justifies the issuance of RR and that the scope of RR unduly expands the power of the BIR to allocate a taxpayer's costs and expenses. The Petitioners also claimed that RR limits their rights to claim ordinary and necessary expenses as deductions. On April 8, 2015, the Regional Trial Court of Makati issued a temporary restraining order, enjoining the BIR from enforcing RR Also, on April 27, 2015, the Regional Trial Court of Makati issued a Writ of Preliminary Injunction also enjoining the BIR from enforcing, carrying out, or implementing in any way or manner RR against the Petitioners, including the issuance of Preliminary Assessment Notice or Final Assessment Notice, as the case may be, based on the revenue regulations, pending litigation, unless sooner dissolved. On May 29, 2015, the BIR filed a Consolidated Comment with Motion to Dismiss the Petition for Declaratory Relief, and a Supplemental Motion for Reconsideration on July 7, On August 5, 2015, the Petitioners filed their Comment on the BIR s Supplemental Motion for Reconsideration. The Petitioners also filed their Consolidated Reply to the Consolidated Comments of Respondents BIR and Department of Finance. To date, RTC Makati has not yet resolved Respondent BIR s Supplemental Motion for Reconsideration, dated June 20, 2015, which seeks the reconsideration of RTC Makati s Confirmatory Order of the coverage of the issued Writ of Preliminary Injunction. As of September 7, 2015, RTC Makati issued an Order allowing Development Bank of the Philippines (DBP) and United Overseas Bank of the Philippines (UOBP) to intervene in the case. As of January 19, 2015, RTC Makati has not yet resolved UOBP s application for the issuance of a Writ of Preliminary Injunction. On October 19, 2015, Land Bank of the Philippines (LBP) filed a Motion for Leave to Admit LBP s Petition-in-Intervention. As of January 19, 2016, RTC Makati has not yet resolved LBP s Motion to Intervene. On November 10, 2015, RTC Makati granted DBP s application for the issuance of a Writ of Preliminary Injunction. The case remains pending as of September 30,

139 Others The BDO Unibank Group is also a defendant in various cases pending in courts for alleged claims against BDO Unibank Group, the outcomes of which are not fully determinable at present. As of June 30, 2016, management believes that, liabilities or losses, if any, arising from these claims would not have a material effect on the financial position and results of operations of BDO Unibank Group and will be recognized if and when a final resolution by the courts is made on each claim. Aside from the matters above-mentioned, neither SMIC nor any of its subsidiaries is engaged in or subject to any litigation or arbitration proceedings nor, to the knowledge of the Directors, any threatened claims, which is material in the context of the Offer or which, if determined adversely against SMIC or its subsidiaries, would have a material adverse effect on its results of operations or financial position. As of the date of this Prospectus, SMIC and its principal subsidiaries are not involved in any material legal proceedings involving bankruptcy, receivership or similar proceedings. Investments and Property The Issuer s current assets, consisting of cash and cash equivalents, time deposits, investments held for trading and sale, receivables, merchandise inventories, and other current assets, amounted to P184,037.6 million, P164,330.3 million and P145,386.3 million as at 31 December 2014, 2015 and 30 June 2016, respectively. As at 31 December 2014, 2015 and 30 June 2016, the Issuer s investments in shares of stock of associates and joint ventures amounted to P145,476.2 million, P169,869.4 million and P176,068.8 million, respectively. These investments pertain to investments in shares of stock of associates and joint ventures such as BDO, China Bank, Belle Corporation, Atlas Consolidated Mining and Development Corporation, Sodexo Benefits and Rewards Services Philippines, Inc., Fast Retailing Philippines, Inc., CityMall Commercial Centers, Inc., Premium Leisure Corp., OCLP Holdings, Inc., Fei Hua Real Estate Company and Waltermart Malls. The Issuer s investment properties amounted to P211,888.4 million, P249,583.5 million and P258,754.7 million as at 31 December 2014, 2015 and 30 June 2016, respectively. These investments consist mainly of land, shopping malls and improvements. The carrying amount of the Issuer s consolidated property and equipment was P19,903.0 million, P19,399.8 million and P19,259.0 million as at 31 December 2014, 2015 and 30 June 2016, respectively. These consist of store and office land, buildings and improvements, furniture and fixtures, software, data processing and wide area network equipment, and real property. The Issuer s consolidated non-current time deposits amounted to P47,579.4 million and P53,127.8 million and P51,068.6 million as at 31 December 2014, 2015 and 30 June 2016, respectively. The Issuer leases from SM Prime the land on which its offices in SM Mall of Asia Complex are located. The lease covers four parcels of land with a total area of 11,703 square meters. Intellectual Property The Issuer owns the trademarks SM, SM Shoemart and Shoemart, which are all registered with the Philippine Intellectual Property Office ( IPO ) for use in connection with goods and services. 134

140 The Issuer has granted the use of trademarks to certain affiliates such as Premier Southern Corporation, Consolidated Prime Dev. Corporation and First Asia Realty Development Corporation pursuant to the Memorandum of Agreements executed with them. These agreements, which are due to expire in 2020, do not provide for payment of monetary consideration to the Issuer for the use of the trademarks. The details of the trademarks owned by the Issuer are set out below. TRADEMARK Registration/ Registration Application No. valid until Status SHOEMART registered SM SHOEMART registered SM registered SM SHOEMART registered SM AND DEVICE registered SM SHOEMART AND DEVICE registered SM INSIDE A CIRCLE registered SM INVESTMENTS CORPORATION registered SM MALL OF ASIA COMPLEX AND LOGO registered MALL OF ASIA ARENA Pending Application registered Capital Expenditure The Group has made, and expects to continue to make, substantial capital expenditures in connection with the construction of new Malls, opening of new stores, development of SM Mall of Asia Complex, Hamilo Coast and its residential developments. The following table sets forth the Group s total capital expenditure for the periods indicated: As at 31 December As at 30 June (in P millions) Capital Expenditure 51,780 59,038 64,779 22,293 For the years ended 31 December 2013, 2014 and 2015 and for the six months ended 30 June 2016, out of the P51,780.4 million, P59,037.9 million, P64,779.0 million and P22,293 million, respectively, that the Issuer incurred for capital expenditure on a consolidated basis, P25,867.6 million, P32,393.6 million, P35,916.7 million and P12,158.6 million, respectively, was invested in the construction of shopping malls. The Retail Subsidiaries incurred capital expenditure of approximately P3,913.9 million in 2015 and P1,748.2 million for the first six months of 2016 related to opening new stores for department stores, supermarkets, SaveMore and hypermarkets. SM Prime incurred capital expenditure (excluding China operations) of approximately P59,336.9 million in 2015 and P21,217.9 million for the first six months of 2016 related to construction of shopping malls and land banking activities, project development costs of condominium buildings and resort facilities, and hotel development costs. Capital expenditures of BDO for 2015 are expected to be minimal as the major investments in information technology, office renovation and branch expansion have already been completed in previous years. 135

141 In aggregate, the Group expected to incur capital expenditure of P69,292.7 million in 2016 to finance projects related to property development, banking, retail, tourism and leisure and general investments, subject to the overall performance of the Philippine economy. Approximately 74% of these capital expenditures shall be financed from internally generated funds, while approximately 26% shall be financed from borrowings. Government Regulations and Authorizations The Issuer possesses, and each of its principal subsidiaries possesses, all Government authorizations and approvals necessary to conduct their respective businesses and the Issuer is, and each of its principal subsidiaries is, in material compliance with such authorizations and approvals. Employees As at 30 September 2016, the Issuer had 358 regular employees and the Group (excluding the Issuer) had approximately 64,720 regular employees. The employees are classified as follows: No. of Employees Rank and file 44,185 Junior/ mid-level managers 17,862 Senior executive officers 2,673 The Issuer expects to have 366 regular employees within the next twelve months. The Issuer and certain of its subsidiaries have a funded non-contributory pension plan covering all full-time employees considered as having regular employment status. As at 30 June 2016, defined benefit liability amounted to P217.8 million. In addition, healthcare benefits are also provided to the Issuer s employees and those of its subsidiaries. As at 30 September 2016, the Retail Subsidiaries had more than approximately 24,507 regular employees. The SM Department Stores hire seasonal employees when there is an increase in business, which is generally during the Christmas season and in May, prior to school opening in June. The Retail Subsidiaries have a retirement plan covering all regular employees, which was launched in In addition, healthcare benefits are also provided to regular employees of the Retail Subsidiaries. Approximately 1,804 employees in Retail are members of Bargaining Units. The latest bargaining agreement for such employees was signed in June 2012 for a term of five years. The Issuer considers its relations with the Retail Subsidiaries employees to be generally good, and there have been no instances of major strikes, lockouts or other disruptive labour disputes within the last five years. The Issuer is not aware of any impending strikes, lockouts or other disruptive labour disputes. The average age of SMIC s officers and employees is 36 years and the average tenure of SMIC s employees is five years. The mandatory retirement age for the Issuer s employees is 60. Related Party Transactions The Issuer and certain of its subsidiaries, associates and affiliates currently have contractual arrangements with each other. The principal ongoing related party transactions within the Group as 136

142 at 30 June 2015 are summarized below. Related party transactions SMIC Receives management fees from SM Mart, SM Department Stores, SVI and SSMI and certain Retail Affiliates for the provision of management services including tax, legal and treasury services Leases from SM Prime the land for its corporate headquarters at SM Mall of Asia Complex in the Manila Bay area SMIC and a number of its subsidiaries maintain banking facilities with BDO, including deposits and loans Receives rental income from subsidiaries with respect to rental of offices at the head office Pays management fees, based on a percentage of rent revenue, to one of the Management Companies owned by members of the Sy Family for management of the head office SM Prime Receives rental income, based on a percentage of net sales, pursuant to the leases of SM Department Stores in the Malls Receives rental income, based on a percentage of net sales, from SM Supermarkets, SM Hypermarkets and certain other Retail Affiliates Pays management fees, based on a percentage of operating income, to Management Companies for management of each of the major revenue streams generated by the Malls SM Retail Department Store Companies Receives a percentage of net sales from SM Mart and SM Department Stores for operational support and services, including for credit cards. Such operational support includes merchandising, marketing and advertising, information technology, controllership, operations and human resource services Pays SMIC management fees for, among other matters, tax and legal services as well as the right to use certain intellectual property rights SM Department Stores pay SM Prime a percentage of net sales for the department store space rented in the Malls Pay SM Retail a percentage of net sales for operational support and services BDO and China Bank Receives fee income and interest for the provision of banking services including loans to Group companies, affiliates of the 137

143 Group and their suppliers and pays interest on deposits. DOSRI loans amounted to P72,673.7 million, P54,054.2 million, P34,706.5 million and P42,790.3 as at 31 December 2013, 2014 and 2015 and 30 June 2016, respectively Pays dividends on preferred shares to SM Prime Retail Affiliates Pay SMIC a percentage of net sales as management fees Pay SM Prime a variable percentage of net sales as rent SM Supermarkets/Hypermarkets Pay SMIC a percentage of net sales as management fees Specific details of these transactions are set forth below: Pay SM Prime a variable percentage of net sales as rent SMIC and SM Prime have existing lease agreements for office and commercial space with related companies. Total rent revenues amounted to P4,534.7 million, P4,575.1 million, P4,534.3 million and P2,436.8 million for the years ended 31 December 2013, 2014 and 2015 and for the six months ended 30 June 2016, respectively, and related rent receivable amounted to P2,594.4 million, P1,890.3 million, P1,077.4 million and P859.8 million as at 31 December 2013, 2014, 2015 and 30 June 2016, respectively. The Group pays management fees to Shopping Center Management Corporation and SM Lifestyle Entertainment for the management of the office and mall premises. Total management fees for the years ended 31 December 2013, 2014 and 2015 and for the six months ended 30 June 2016 amounted to P976.4 million, P1,111.4 million, P1,058.8 million and P578.3 million, respectively. SMIC, SM Land and SM Retail receive management fees from related companies for providing management and consultancy services. As consideration for the services provided, the Issuer receives annual management fees based on a certain percentage of the related companies net income as defined in the management contracts. Total management fees earned amounted to P309.3 million, P461.3 million, P368.0 million and P199.4 million for the years ended 31 December 2013, 2014 and 2015 and for the six months ended 30 June 2016, respectively. Accrued management fees receivable amounted to P54.5 million, P227.8 million, P255.5 million and P177.9 million as at 31 December 2013, 2014, 2015 and 30 June 2016, respectively. The Group has certain bank accounts and cash placements that are maintained with BDO and China Bank, and earns interest based on prevailing market interest rates. Cash placements with BDO and China Bank and investment in debt securities of BDO and China Bank amounted to P99,621.6 million, P117,113.3 million, P106,498.3 million and P83,527.2 million as at 31 December 2013, 2014, 2015 and 30 June Related accrued interest receivable amounted to P798.7 million, P441.5 million, P406.3 million and P413.9 million as at 31 December 2013, 2014, 2015 and 30 June 2016, respectively. The Group, in the normal course of business, had outstanding advances amounting to P1,334.1 million, P1,194.1 million, P1,350.6 million and P959.5 million as at 31 December 2013, 2014, 2015 and 30 June 2016, respectively, due from related companies. Amounts due to related companies amounted to P2,091.3 million, P1,601.7 million, P2,444.4 million and P712.4 million as at

144 December 2013, 2014, 2015 and 30 June 2016, respectively. The Issuer considers each of its subsidiaries and associates to be responsible for its own profits or losses and that each such corporation is independent of the Sy Family, and accordingly requires that any contractual arrangements referred to above should be entered into on an arm s length basis. In particular, all loans by BDO to related parties are within the statutory limits required by the BSP and are on an arm s length basis. See Note 22 Related Party Transactions to the consolidated financial statements as at and for the year ended 31 December 2014 and 2015, respectively, included in this Prospectus. Material Contracts As of the date of this Prospectus, the Company is not a party to any material contracts, except for contracts entered into in the ordinary course of business. 139

145 RECENT DEVELOPMENTS AND PROSPECTS SM Retail At the start of 2016, SMIC initiated a corporate restructuring exercise to consolidate the retail business of the Group and the Sy Family under SM Retail. The consolidation was approved by the Board of Directors of SMIC on 29 February 2016 and ratified by the stockholders. This was subsequently approved by the SEC on 7 July 2016, enabling the Group to consolidate all its retail businesses under SM Retail, Inc. 1,476 outlets were folded into SM Retail in exchange for shares of stock in SM Retail. These include popular brands such as Watsons, Toy Kingdom, SM Appliances, Ace Hardware, Our Home, Sports Central, Kultura, Pet Express, Baby Company and other specialty retailers. The consolidation was achieved through the merger of various retail holding companies owned by the Group and the Sy Family into SM Retail via a share-for-share swap, where the stockholders of these retail companies received new SM Retail shares in exchange for their shareholdings in these retail holding companies. SMIC s stake in SM Retail became 77.3% as a result of the merger. The retail holding companies which were merged with SM Retail are set out below. Forsyth Equity Holdings, Inc. HFS Corporation Morrison Corporation San Mateo Bros., Inc. Tangiers Resources Corp. These retail holding companies have ownership in the following retail businesses: ACE Hardware Philippines, Inc. Homeworld Shopping Corporation International Toyworld, Inc. Nursery Care Corporation Kultura Store, Inc. Star Appliance Center, Inc. CK Fashion Collection Corporation Signature Lines, Inc. Supplies Station, Inc. Sports Central (Manila), Inc. H & B, Inc. Fitness Health & Beauty Holdings Corp. On 15 September 2016, SM Retail filed with the Law Division of the Bureau of Internal Revenue (BIR) a written request for confirmation that the mergers effected between SM Retail and the various retail holding companies qualifies as a tax-free merger under Section 40(C)(2) and 40(C)(6)(b)of the National Internal Revenue Code (Tax Code), as amended. To date, the request for confirmatory ruling is still pending with the BIR Law Division. SM Retail has complied fully with all the documentary requirements set forth by the BIR. SM Retail does not anticipate an adverse ruling from the BIR given that the merger between SM Retail and the various retail holding companies qualifies as a tax-free merger based on the pertinent provisions of the Tax Code, BIR issuances, established jurisprudence and previous BIR rulings. 140

146 On 29 February 2016, SM Retail filed with the Philippine Competition Commission ( PCC ) a written notification of the proposed mergers effected between SM Retail and the various retail companies, in compliance with the requirements of the Republic Act (RA) No (Philippine Competition Act). On June 20, 2016, the PCC replied that the merger is not subject to the compulsory notification requirement under Section 17 of RA No and relevant PCC Memorandum Circulars. BDO The Bangko Sentral ng Pilipinas, in its letter dated March 27, 2015 to the Bank, approved on March 16, 2015 the Bank s acquisition of One Network Bank, Inc. The acquisition was completed on July 20, 2015, after the Bank acquired 99.59% of the outstanding capital stock of ONB. On June 17, 2016, TPG Growth III SF Pte. Ltd. ( TPG Growth ), the middle market and growth equity investment platform of TPG Capital, announced an agreement with the Bank to acquire a 40% stake in ONB with the Bank retaining approximately 60% ownership. The transaction is subject to closing conditions and regulatory approval. On June 29, 2015, the Bank signed a definitive agreement with Nomura Holdings, Inc. ( Nomura ) for a joint investment in PCIB Securities, Inc. ( PCIB Securities ), a securities dealer and broker wholly owned by the Bank. The deal was successfully closed on January 27, 2016 with the Bank owning a 51% stake and Nomura holding the remaining 49%. The joint venture, which will initially provide online trading services for local stocks to individual investors, was renamed BDO Nomura Securities, Inc. On January 28, 2016, the Bank entered into a joint venture with Mitsubishi Motors Philippines Corporation ( MMPC ), Sojitz Corporation ( SJC ) and JACCS Co., Ltd. ( JACCS ) to provide financing services to individual and corporate buyers of Mitsubishi Motors vehicles. The investment was made through the Bank s subsidiary, BDO Leasing and Finance, Inc. which will own 40% of the joint venture company with SJC, MMPC and JACCS holding another 60%. On June 13, 2016, the Bank signed an agreeement accepting the offer of SB Cards Corporation to sell the rights as exclusive issuer and acquirer of Diners Club International credit cards in the Philippines. On June 30, 2016, the Bank secured final regulatory approval to acquire full interest in Generali Pilipinas Holdings Cormpany, Inc. ( GPHC ), the joint venture vehicle created out of the insurance partnership forged between the Bank and Generali of Italy ( Generali Group ) in March GPHC is the parent firm of life insurer Generali Pilipinas Life Assurance Company ( GPLAC ) and Generali Pilipinas Insurance Company ( GPIC ) which is engaged in non-life insurance. GPLAC was renamed BDO Life Assurance Company, Inc. On July 12, 2016, the Bank disclosed that the Securities and Exchange Commission (SEC) approved the merger of Bank subsidiaries BDO Capital, BDO Elite Savings Bank, Inc. and Banco De Oro Savings Bank, Inc. with BDO Capital as the surviving corporation. 141

147 MANAGEMENT S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Prospective investors should read the following discussion and analysis of the Issuer s consolidated financial position and financial performance together with (i) the report of independent auditors, (ii) the audited consolidated financial statements as at and for the years ended of 31 December 2013, 2014 and 2015 and the notes thereto, and (iii) the unaudited interim condensed consolidated financial statements as at 30 June 2016 and for the six-month periods ended 30 June 2015 and Overview The Issuer is the holding company of the Group, one of the largest conglomerates in the Philippines. The Issuer was incorporated in the Philippines on 15 January On 29 April 2009, the Company s shareholders approved the amendment of SMIC s Articles of Incorporation, extending the Company s corporate life for another 50 years from 15 January Its registered office is at the 10th Floor, One E-Com Center, Harbor Drive, Mall of Asia Complex, CBP-1A, Pasay City, Metro Manila, Philippines. Through its subsidiaries, associates and other investments, the Issuer operates a diversified range of businesses located in the Philippines. The Group s business activities and interests are divided into three principal business sectors: Retail merchandising through its department stores, supermarkets, SaveMore, hypermarkets, Waltermart and other specialty retail; Property group composed of the following: - Shopping mall developments, where it is the leading shopping mall operator in the Philippines (SM Prime); - Real estate development and tourism (SM Prime and its subsidiaries SMDC, CDHI and HPI); - Commercial property development; - Hotels and conventions (SM Hotels); and Financial services, through its associate banks that have universal banking licenses in the Philippines (BDO and China Bank). Basis of Preparation The consolidated financial statements of the Group have been prepared on the historical cost basis, except for derivative financial instruments, investments held for trading and available-for-sale (AFS) investments, which have all been measured at fair value. The consolidated financial statements are presented in Philippine peso, which is the Group s functional and presentation currency under Philippine Financial Reporting Standards (PFRS). All values are rounded to the nearest thousand, except when otherwise indicated. Statement of Compliance The accompanying consolidated financial statements as at 31 December 2013, 2014 and 2015 and for each of the three years in the period ended 31 December 2013, 2014 and 2015 have been prepared in compliance with the PFRS. The accompanying unaudited interim condensed consolidated financial statements as at 30 June 2016 and for the six-month periods ended 30 June 2015 and 2016 have been prepared in accordance with PAS 34, Interim Financial Reporting. 142

148 Changes in Accounting Policies The accounting policies adopted are consistent with those of the previous financial year, except for the adoption of the following amendments to standards and improvements, starting January 1, The adoption did not have any significant impact on the Group s consolidated financial statements. PFRS 10, Consolidated Financial Statements, and PAS 28, Investments in Associates and Joint Ventures Investment Entities: Applying the Consolidation Exception (Amendments) PAS 27, Separate Financial Statements - Equity Method in Separate Financial Statements (Amendments) PFRS 11, Joint Arrangements - Accounting for Acquisitions of Interests (Amendments) PAS 1, Presentation of Financial Statements Disclosure Initiative (Amendments) PFRS 14, Regulatory Deferral Accounts PAS 16, Property, Plant and Equipment, and PAS 41, Agriculture - Bearer Plants (Amendments) PAS 16, Property, Plant and Equipment, and PAS 38, Intangible Assets - Clarification of Acceptable Methods of Depreciation and Amortization (Amendments) Annual Improvements to PFRSs ( cycle) The Annual Improvements to PFRSs ( cycle) are effective for annual periods beginning on or after January 1, 2016 and are not expected to have a material impact on the Group. They include: o PFRS 5, Non-current Assets Held for Sale and Discontinued Operations Changes in Methods of Disposal o PFRS 7, Financial Instruments: Disclosures Servicing Contracts o PFRS 7 - Applicability of the Amendments to PFRS 7 to Condensed Interim Financial Statements o o PAS 19, Employee Benefits Regional Market Issue Regarding Discount Rate PAS 34, Interim Financial Reporting Disclosure of Information elsewhere in the interim financial report Financial Performance Six months ended 30 June 2016 vs. six months ended 30 June 2015 The Group reported revenues of P151.1 billion and net income attributable to owners of the Parent of P15.0 billion in This represents an 8.5% growth in revenues and 11.1% growth in net income attributable to owners of the Parent. Income from operations increased by 8.8% to P30.8 billion from P28.3 billion in Operating margin and net margin is at 20.4% and 9.9%, respectively. The Non-Food and Food Groups comprised 39% and 61%, respectively, of merchandise sales in 2016 and As of June 30, 2016, SM Retail had 328 stores nationwide, namely: 55 SM Stores, 47 SM Supermarkets, 147 Savemore stores, 45 SM Hypermarkets and 34 WalterMart stores. Real estate sales increased by 5.3% to P13.1 billion from P12.5 billion in 2015 due primarily to higher construction accomplishments of projects launched from 2013 to 2015 namely, Shore Residences in Pasay, Grass Residences in Quezon City and Air Residences in Makati, and increase in sales take-up of Ready-for-Occupancy (RFO) projects namely Princeton Residences, M Place Residences and Mezza II Residences in Quezon City and Jazz Residences in Makati City. 143

149 Rent revenue, derived mainly from the mall operations of SM Prime Holdings, Inc. (SM Prime), increased by 10.8% to P19.5 billion from P17.6 billion in The increase in rent revenue is rimarily due to the new malls which opened in 2015 and 2016, namely, SM Seaside City Cebu, SM City Cabanatuan, SM City San Mateo, SM San Jose Del Monte and SM Trece Martires as well as the expansion of shopping spaces in SM Center Sangandaan and SM City Iloilo. In addition, retail podiums of Light, Shine, Shell and Green Residences opened in 2015 and Excluding the new malls and expansions, same-store rental growth is at 7%. Rentals from commercial operations also increased due to the opening of SM Cyber West and Five E-com Center as well as the expansion of SM Aura office tower in Rentals from hotels and convention centers also contributed to the increase due to improvement in average room and occupancy rates and the opening of Park Inn Clark in December As of June 30, 2016, SM Prime had 58 malls in the Philippines and 6 malls in China. Equity in net earnings of associate companies and joint ventures increased by 10.8% to P7.4 billion from P6.7 billion in 2015 due mainly to the 12.9% net income growth of BDO. Operating expenses increased by 9.3% to P32.8 billion from P30.0 billion in 2015 due mainly to additional operating expenses associated with new or renovated retail stores and malls and new real estate projects. Other charges (net) decreased by 6.6% to P3.8 billion from P4.0 billion in Other charges consist mainly of interest expense which decreased by 2.1% to P5.5 billion from P5.6 billion in Provision for income tax increased by 13.8% to P5.1 billion from P4.5 billion in 2015 due to higher taxable income. The effective income tax rate is 18.8% in 2016 and 18.4% in Net income attributable to non-controlling interests increased by 10.2% to P7.0 billion in 2016 from P6.3 billion in 2015 due to the increase in net income of certain partly-owned subsidiaries. Year ended 31 December 2015 vs. year ended 31 December 2014 The Group reported a net income attributable to equity holders of the Parent of P28.4 billion and revenues of P295.9 billion in This represents a 0.2% increase in net income attributable to equity holders of the Parent and 7.0% growth in revenues. Income from operations increased by 8.5% to P56.9 billion from P52.5 billion in Operating margin and net margin is at 19.2% and 9.6%, respectively. Merchandise sales, which grew by 7.2% to P211.4 billion from P197.1 billion in 2014, accounts for 71.4% of total revenues in The increase is attributable to the opening of new stores in 2015 as follows: SM Department SM SM Supermarkets SaveMore Stores Stores Hypermarkets 1 SM San Mateo San Mateo SaveMore Salawag Lapu-Lapu 2 SM Cabanatuan Cabanatuan SaveMore San Cherry Fernando, La Union Congressional 3 SM Cebu SRP Cherry Shaw SaveMore M. Alvarez Sangandaan SaveMore Talavera Seaside Cebu SaveMore Light Residences SaveMore Binalonan SaveMore Muzon SaveMore Naga, Cebu - 144

150 SM Department SM SM SaveMore Stores Stores Supermarkets Hypermarkets SaveMore Echague, Isabela SaveMore CityMall - Consolacion SaveMore Banlic SaveMore Subic SaveMore Dinalupihan SaveMore Nasugbu SaveMore Sorsogon SaveMore Silay SaveMore CityMall Imus SaveMore My Place - South Triangle SaveMore La Trinidad SaveMore Citywalk SaveMore Binangonan SaveMore Alaminos, - Pangasinan SaveMore Sta. Ana SaveMore Cabuyao - The Non-Food and Food Group comprised 40% and 60%, respectively, of merchandise sales in 2015 and As of December 31, 2015, SM Retail had 310 stores nationwide, namely: 53 SM Stores, 45 SM Supermarkets, 136 Savemore stores, 44 SM Hypermarkets and 32 WalterMart stores. Real estate sales slightly decreased to P22.5 billion from P22.6 billion in 2014 or 0.4% due primarily to lower revenue recognized from larger projects launched in 2010 and 2011 as these were mostly completed in The bulk of revenues to be recognized for projects launched in 2013 and 2014, which enjoyed brisk sales, will begin in 2016 when actual construction begins. The actual construction of a project usually starts within 12 to 18 months from launch date and revenue is recognized based on percentage of completion. Real estate gross margin improved from 44.6% in 2014 to 45.7% in This is attributable to efficient management and tighter monitoring and control of construction costs. Rent revenues, derived mainly from the mall operations of SM Prime Holdings, Inc. (SM Prime), increased by 10.3% to P36.0 billion from P32.6 billion in The increase in rent revenues is primarily due to the new malls which opened in 2013, 2014 and 2015, namely, SM Aura Premier in Taguig, SM City BF Parañaque and SM City Cauayan in Isabela province as well as the expansion of shopping spaces in Mega Fashion Hall in SM Megamall in Mandaluyong, SM Center Angono and SM City San Mateo in Rizal province, and SM City Bacolod in Negros Occidental province for a total gross floor area (GFA) addition of 728,000 square meters. Excluding the new malls and expansions, same-store rental growth is 7%. Rent from commercial operations also increased due to the opening of SM Cyber West and Five ECom Center with an average occupancy rate of 98%. Rentals from hotels and convention centers also contributed to the increase due to improvement in average room rates and occupancy rates. As of December 31, 2015, SM Prime has 56 malls in the Philippines with total GFA of 7.3 million square meters and 6 malls in China with total GFA of 0.9 million square meters. 145

151 Cinema and event ticket sales and amusement revenues increased by 11.4% to P6.4 billion from P5.8 billion in 2014 due to blockbuster movies shown in 2015 and increase in amusement revenues due mainly to the opening of Sky Ranch Pampanga. Equity in net earnings of associate companies and joint ventures increased by 6.4% to P14.1 billion from P13.2 billion in This is attributable mainly to the 9.7% increase in net income of BDO. Gain (loss) on sale of available-for-sale (AFS) investments and fair value changes on investments held for trading -net decreased by 111.2% to a loss of P5.4 million in 2015 from a gain of P48.5 million in 2014 due primarily to the gain on sale of AFS investments in Dividend income increased by 13.4% to P0.7 billion in 2015 from P0.6 billion in 2014 due to higher dividends received from certain investees. Other revenues, which comprise mainly of income for promotional activities highlighting products, commission from bills payment, prepaid cards and show tickets, advertising income and sponsorship revenues, food and beverage income of the Hotel Group increased by 6.6% to P3.4 billion in 2015 from P3.2 billion in Operating expenses increased by 4.9% to P63.7 billion from P60.7 billion in 2014 due mainly to additional operating expenses associated with new or renovated retail stores and malls and new real estate projects. Other charges (net) increased by 20.4% to P7.2 billion from P6.0 billion in Interest expense decreased by 12.1% to P10.5 billion from P11.9 billion in 2014 due mainly to loan payments during the year and capitalized interest taken up on new loans availed of for capital expenditure requirements. Interest income increased by 4.1% to P3.2 billion from P3.0 billion in 2014 due to higher average balance of temporary investments. Gain on disposal of investments and properties - net decreased by 101.8% to a loss of P51.1 million from a gain of P2.9 billion in 2014 resulting mainly from the sale of the Group s 2% stake in BDO in Loss on fair value changes on derivatives decreased by 45.1% to P0.1 billion from P0.2 billion in This fair value change pertains mainly to the US$250.0 million convertible bonds of SMIC which was fully settled in April Foreign exchange gain - net increased by 34.5% to P240.8 million from P179.1 million in This is due mainly to the favorable PHP to USD foreign exchange rate, that is, from PHP44.72:USD1.00 in 2014 to PHP47.06:USD1.00 in Provision for income tax increased by 23.5% to P9.4 billion from P7.6 billion in 2014 due to increase in taxable income as well as expiration of income tax holiday incentives on a number of residential projects. The effective income tax rate is 18.8% in 2015 and 16.3% in Non-controlling interest increased by 13.2% to P11.9 billion in 2015 from P10.5 billion in 2014 due to the increase in net income of certain partly-owned subsidiaries. Year ended 31 December 2014 vs. year ended 31 December 2013 The Group reported a net income attributable to equity holders of the Parent of P28.4 billion and revenues of P276.6 billion in This represents a 3.5% increase in net income attributable to equity holders of the Parent and 9.1% growth in revenues. Income from operations increased by 2.0% to P52.5 billion from P51.4 billion in Operating margin and net margin is at 19.0% and 10.3%, respectively. Merchandise sales, which grew by 9.0% from P180.9 billion in 2013, accounts for 71.2% or P197.1 billion of the total revenues in The increase is attributable to the opening of the following new stores in 2014: 146

152 SM Department SM SM SaveMore Stores Stores Supermarkets Hypermarkets 1 SM Cauayan Cauayan SaveMore Nunez Daet 2 SM Mega Center - SaveMore San Pedro Sun Residences SaveMore Sta. Cruz Rosario SaveMore Candon SaveMore Francis Market SaveMore Agora Lucena SaveMore Solano SaveMore Tumauini SaveMore Cyberwest SaveMore San Nicolas SaveMore Camiling SaveMore Guagua SaveMore Angono SaveMore Bayombong SaveMore Santiago SaveMore Roxas Isabela SaveMore Tacloban SaveMore Calumpang - Gensan SaveMore Fortune Town SaveMore San Fernando - Pampanga SaveMore Cabiao SaveMore Francis Market - The Non-Food and Food Group comprised 40% and 60%, respectively, of merchandise sales in 2014 and 41% and 59%, respectively, of merchandise sales in As of December 31, 2014, SM Retail had 269 stores nationwide, namely: 50 SM Stores, 40 SM Supermarkets, 113 SaveMore stores, 42 SM Hypermarkets and 24 WalterMart stores. Real estate sales increased by 6.5% to P22.6 billion from P21.2 billion in 2013 due to higher construction accomplishments of projects and increase in number of units sold in Grace Residences in Taguig, Shell Residences, Shore Residences and Breeze Residences in Pasay, Green Residences in Manila, Shine Residences in Pasig, and Grass Residences Phase2 and Trees Residences in Quezon City. Real estate gross margin improved from 42.4% in 2013 to 44.6% in This is attributable to efficient management and the reigning-in of construction costs. Rent revenues, derived mainly from the mall operations of SM Prime Holdings, Inc. (SM Prime), increased by 18.0% to P32.6 billion from P27.6 billion in The increase in rent revenues is primarily due to the new malls which opened in 2013 and 2014, namely, SM Aura Premier in Taguig, SM City BF Parañaque and SM City Cauayan in Isabela province, as well as the expansion of shopping spaces in Mega Fashion Hall in SM Megamall in Mandaluyong and SM Center Angono in Rizal province. The expanded mall gross floor area is now 6.5 million square meters, an increase of 0.3 million square meters from yearend Excluding the new malls and expansions, same-store rental growth is at 7%. As of December 31, 2014, SM Prime had 50 malls in the Philippines and 5 malls in China. 147

153 Cinema ticket sales and amusement revenues increased by 16.7% to P5.8 billion from P4.9 billion in 2013 due to the opening of additional digital cinemas in the new/expanded malls and the showing of international and local blockbuster movies. Strong patronage of amusement rides and additional recreational facilities also contributed to the increase. Equity in net earnings of associates and joint ventures decreased by 2.8% to P13.2 billion from P13.6 billion in This is attributable mainly to BDO s exceptional trading gains in early Gain on sale of available-for-sale investments and fair value changes on investments held for trading - net decreased by 65.6% to P48.5 million in 2014 from P141.2 million in 2013 due primarily to the gain on sale of available-for-sale investments in Dividend income decreased by 32.6% to P0.6 billion in 2014 from P0.9 billion in 2013 due to decrease in dividends received from certain investees. Other revenues, which comprise mainly of income for the promotional activities highlighting products, commission from bills payment, prepaid cards and show tickets, advertising income and sponsorship revenues slightly increased by 13.5% to P3.2 billion in 2014 from P2.8 billion in Operating expenses increased by 18.6% to P60.7 billion from P51.2 billion in 2013 due mainly to additional operating expenses associated with the construction of new, and/or, expansion of malls, new retail stores, store renovations and current real estate projects. Other charges (net) decreased by 22.9% to P6.0 billion from P7.8 billion in Interest expense increased by 7.3% to P11.9 billion from P11.1 billion in 2013 due mainly to loan availments during the year. Interest income decreased by 18.2% to P3.0 billion from P3.7 billion in 2013 due to lower average balance of temporary investments. Gain on disposal of investments and properties - net increased by 426.9% to P2.9 billion from P0.5 billion in 2013 resulting mainly from the sale of the Group s 2% stake in BDO. Loss on fair value changes on derivatives - net decreased by 81.0% to P0.2 billion from P1.0 billion in This fair value change pertains mainly to the US$250.0 million convertible bonds of SMIC. Foreign Exchange Gain and Others increased by 201.4% to P179.1 million from P59.4 million in This is due mainly to the favorable PHP to USD foreign exchange rate, that is, from PHP44.40:USD1.00 in 2013 to PHP44.72:USD1.00 in Provision for income tax increased by 39.7% to P7.6 billion from P5.4 billion in 2013 resulting mainly from the SM Property group restructuring transaction in 2013, higher taxable income in 2014 as well as expiration of certain income tax holiday incentives on certain residential projects of SM Prime in The effective income tax rate is 16.3% in 2014 and 12.4% in Non-controlling interests decreased by 2.8% to P10.5 billion in 2014 from P10.8 billion in Year ended 31 December 2013 vs. year ended 31 December 2012 Consolidated revenues grew by 13.1% to P253.6 billion, as against last year s P224.2 billion. Income from operations increased by 9.7% to P51.4 billion from last year s P46.9 billion. Operating income margin and net profit margin is at 20.3% and 10.8%, respectively. Net income attributable to equity holders of the Parent for the year ended December 31, 2013 increased by 11.2% to P27.4 billion compared to P24.7 billion of the same period last year. Retail Sales accounts for 71.3% or P180.9 billion of the total revenues for the year. Consolidated Retail sales grew by 13.8% from P158.9 billion to P180.9 billion for the year ended December 31, The increase is attributable to the acquisition of Waltermart stores in 2013 as well as the opening of the following new stores in 2013: 148

154 SM Department SM SM SaveMore Stores Stores Supermarkets Hypermarkets 1 SM Aura Aura SaveMore Zabarte Jazz 2 SM BF Parañaque BF Parañaque SaveMore Bajada Plaza FTI SaveMore Parola Cainta SaveMore TM Centerpoint SaveMore Acacia SaveMore Project 8-7 SaveMore Sta. Maria - - Ilocos SaveMore ARCC Bacoor SaveMore Pili SaveMore San Ildefonso SaveMore Marulas SaveMore Free Choice SaveMore Star J SaveMore Lumina SaveMore Meridien - Of the P180.9 billion and P158.9 billion retail sales in 2013 and 2012, respectively, the non-food group and food group contributed 40.6% and 59.4%, respectively in 2013 and 43.8% and 56.2%, respectively in As of December 31, 2013, SM Retail had 241 stores nationwide, namely: 48 SM Stores, 39 SM Supermarkets, 93 Savemore stores, 39 SM Hypermarkets and 22 WalterMart storessm Investm. Real estate sales for the year ended December 31, 2013, derived mainly from SM Development Corporation, amounted to P21.2 billion or a decrease of 5.6% compared to last year of P22.5 billion. The decrease in real estate sales is primarily due to lower sales take up of projects in 2013 compared to last year. This is attributable to project launches in 2010 and 2011 which were more blockbusters namely, Shell, Green and Jazz compared to launches in 2012 of Breeze and Grace. Projects launched in the last quarter of 2013, namely: Grass Phase 2, Shore and Trees are expected to contribute significantly to revenues starting in Rent revenue for the year ended December 31, 2013, derived mainly from mall operations of SM Prime Holdings, Inc. (SM Prime) increased by 11.9% to P27.6 billion in 2013 from P24.7 billion in SM Prime is the country s leading shopping mall developer and operator which owns 48 malls in the Philippines with a total gross floor area of 6.2 million sqm and five malls in China with a total gross floor area of 0.8 square meters as at December 31, The increase in rental revenues is primarily due to the full-year effect of new malls opened in 2012 namely SM City Olongapo, SM City Consolacion, SM City San Fernando, SM City General Santos, SM Lanang Premier, and the opening in 2013 of SM Aura Premier and SM BF Paranaque. Excluding the new malls and expansions, rental revenues grew by 7.0%. The full year recognition of revenues from TwoE-Com, which began operations in mid-2012 and is now 98% occupied, also helped push up rental revenues from commercial operations. For the year 2013, cinema ticket sales and amusement revenues increased by 2.5% to P4.9 billion in 2013 from P4.8 billion in 2012 largely due to opening of additional digital cinemas at the new malls, opening of new amusement rides in SM by the Bay and the Sky Ranch in Tagaytay. Amusement revenues is mainly composed of amusement income from rides, bowling and ice skating operations including the SM Science Discovery Center and the SM Storyland. 149

155 Equity in net earnings of associates increased by 50.4% to P13.6 billion in 2013 from P9.0 billion in 2012, primarily due to the 56% increase in the net income of BDO to P22.6 billion, in an environment marked by high system liquidity and volatility in the capital markets. BDO s primary commercial banking businesses continued its robust growth with net interest income leading the way with a 20% rise, customer loans expanding 19% and an upsurge of 44% on total deposits led by steady growth in low-cost deposits as well as the inflow of maturing Special Deposit Accounts (SDA) funds from the Bangko Sentral ng Pilipinas (BSP). Further, non-interest income increased by 30% on the double digit expansion in both fee based income and trading and foreign exchange gains. BDO s continued branch expansion enabled it to keep cost of funds tempered with low cost deposits growing over 20%. With the Philippine economy expected to sustain its growth momentum in 2014, BDO is fully equipped to realize the promising growth opportunities in its customer segments by capitalizing on its established business franchise and wide distribution network. Gain on sale of available-for-sale investments and fair value changes on investments held for trading increased to P141.2 million in 2013 from P2.1 million in 2012 primarily due to the gain on sale of available-for-sale investments of the Group in Dividend income increased by P0.3 billion or 40.6% in 2013 to P0.9 billion from P0.6 billion in 2012 due to increase in dividends received from investees. Management and service fees, which is computed based on percentage of sales, increased by P0.3 billion or 29.2% from P1.1 billion in 2012 to P1.4 billion in 2013 mainly due to increase in sales of retail affiliates. Other revenues, which comprise mainly of income for the promotional activities highlighting products, commission from bills payment, prepaid cards and show tickets, advertising income and sponsorship revenues increased by 11.3% to P2.8 billion from P2.5 billion in Total cost and expenses went up by 14.0% to P202.2 billion from P117.3 billion for the year ended December 31, 2013 compared to Retail cost of sales increased by 17.7% from P117.9 billion to P138.7 billion mainly due to the increase in retail sales. Real estate cost of sales decreased by 13.3% from P14.1 billion to P12.2 billion due primarily to lower recognized real estate costs in line with lower recognized real estate sales in 2013 and tighter cost controls during project engineering and stricter monitoring of project costs which resulted to improved gross margins. Selling, general and administrative expenses increased by 12.9% from P45.3 billion in 2012 to P51.2 billion in The increase is primarily associated with mall expansions, new malls, department stores, supermarkets, hypermarkets, SaveMore and Waltermart stores, as well as store renovations and current real estate projects. Other charges of P7.8 billion in 2013 increased by 31.0% or P1.8 billion from last year s P5.9 billion. Gain on disposal of investments and properties decreased by 58.0% to P0.5 billion in 2013 from P1.3 billion in 2012 due mainly to the deferred gain on Belle-PLAI share swap that was realized in Loss on fair value changes on derivatives decreased by 28.9% to P1.0 billion in 2013 from P1.4 billion in 2012 resulting mainly from the fair value changes of the embedded derivatives related to the US$250.0 million convertible bonds of SMIC in 2013 (refer to Note 20 of the consolidated financial statements). Interest expense increased by 2.6% or P0.3 billion to P11.1 billion in 2013 from P10.8 billion in Interest income decreased by 16.0% to P3.7 billion in 2013 from P4.4 billion in 2012 due mainly from the decrease in interest rates and lower average balance of temporary investments in 2013 compared to Foreign exchange gains decreased by 89.5% from P565.1 million in 2012 to P59.4 million in 2013 due mainly to the increase in foreign exchange rate to P44.40:US$1.00 in 2013 from P41.05:US$1.00 in Provision for income tax decreased by 17.2% to P5.4 billion for the year 2013 from P6.5 billion in 2012 resulting mainly from the SM Property group restructuring transaction. Non-controlling interest increased by 11.0% to P10.8 billion in 2013 from P9.7 billion in 2012 due to the increase in net income of certain subsidiaries. 150

156 Financial Condition 30 June 2016 vs. 31 December 2015 Total assets decreased by 0.1% to P770.2 billion from P771.1 billion in On the other hand, total liabilities decreased by 3.1% to P377.4 billion from P389.4 billion in Current Assets Current assets decreased by 11.5% to P145.4 billion from P164.3 billion in Cash and cash equivalents decreased by 45.2% to P29.5 billion from P53.9 billion in 2015 due mainly to dividend payments of SMIC and SM Prime at P8.5 billion and P6.6 billion, respectively, as well as payment of trade payables, debt servicing, capital expenditures and additional loan to an associate company. Time deposits increased by 18.6% to P11.4 billion from P9.6 billion in 2015 due mainly to reclassification of maturing deposits from noncurrent to current. Investments held for trading and sale increased by 13.1% to P1.2 billion from P1.1 billion in 2015 due mainly to reclassification of maturing available-for-sale (AFS) investments from noncurrent to current, partially offset by maturity of certain investment in bonds. Receivables increased by 2.7% to P33.0 billion from P32.1 billion in The increase pertains mostly to Receivables from real estate buyers. Merchandise inventories increased by 10.4% to P18.0 billion from P16.3 billion in Other current assets increased by 1.9% to P52.3 billion from P51.3 billion in Noncurrent Assets Noncurrent assets increased by 3.0% to P624.8 billion from P606.7 billion in AFS investments increased by 9.9% to P23.3 billion from P21.2 billion in 2015 due mainly to the increase in market value of certain AFS investments. Investments in associate companies and joint ventures increased by 3.6% to P176.1 billion from P169.9 billion in The increase represents the equity in net earnings of associates for the first half of 2016 partially offset by dividends received from these associate companies. Time deposits decreased by 3.9% to P51.1 billion from P53.1 billion in 2015 due mainly to the reclassification of maturing time deposits to current. Property and equipment decreased by 0.7% to P19.3 billion from P19.4 billion in Investment properties increased by 3.7% to P258.8 billion from P249.6 billion in 2015 due mainly to ongoing new mall projects located in Cagayan de Oro, Puerto Princesa, and Olangapo in the Philippines and Tianjin in China; expansions and renovations of SM Mall of Asia and SM City Baguio; and ongoing projects of the commercial and hotel groups namely Three E-Com Center, Four E-Com Center, and Conrad Manila. 151

157 Land and development decreased by 10.9% to P24.4 billion from P27.4 billion in 2015 due mainly to reclassification to current of launched projects. Deferred tax assets decreased by 1.0% to P2.5 billion from P2.6 billion in Other noncurrent assets increased by 15.0% to P44.8 billion from P38.9 billion in The increase mainly represents additional loans to an associate company and higher receivable from real estate buyers. Deposits and Advance Rentals, included under Other Noncurrent Assets, mainly pertains to deposits to lessors which will be applied for future rentals and are not re-measured at amortized cost. Current Liabilities Current liabilities decreased by 29.3% to P81.9 billion from P115.8 billion in Bank loans decreased by 32.5% to P6.7 billion from P9.9 billion in 2015 due mainly to loan payments. The bank loans of the Group are not covered by any financial covenants. Current portion of long-term debt decreased by 74.3% to P6.7 billion from P26.0 billion in 2015 due mainly to payments of matured debts. Accounts payable and other current liabilities decreased by 14.5% to P66.3 billion from P77.5 billion in 2015 due to settlement of payables mainly for trade transactions. Dividends payable increased by 9.3% to P0.4 billion from P0.3 billion in This mainly represents dividends due to minority stockholders of certain subsidiaries. Income tax payable decreased by 7.9% to P1.9 billion from P2.0 billion in Noncurrent Liabilities Noncurrent Liabilities increased by 8.0% to P295.5 billion from P273.5 billion in Long-term debt - net of current portion increased by 8.5% to P266.1 billion from P245.2 billion in 2015 due mainly to new availments. Tenants deposits and others increased by 6.3% to P22.3 billion from P20.9 billion in The increase is attributable to new malls and expansions as well as increase in customers deposits from residential buyers. Tenants deposits mainly pertain to security deposits from tenants which will not be applied to future rentals but refundable at the end of the lease term and measured at amortized cost. Deferred tax liabilities decreased by 3.6% to P7.2 billion from P7.4 billion in 2015 due mainly to higher collections on real estate sales. Equity Total equity increased by 2.9% to P392.7 billion from P381.7 billion in The increase pertains mainly to the first half 2016 net income attributable to owners of the parent of P15.0 billion partially offset by dividends of P8.5 billion. 31 December 2015 vs. 31 December 2014 Total assets increased by 8.3% to P771.1 billion from P711.9 billion in Likewise, total liabilities increased by 7.6% to P389.4 billion from P361.9 billion in

158 Current Assets Current assets decreased by 10.7% to P164.3 billion from P184.0 billion in Cash and cash equivalents decreased by 22.0% to P53.9 billion from P69.1 billion in 2014 due mainly to new investments in associates, capital expenditures, and payment of dividends. Time deposits and short-term investments increased by 6.8% to P9.6 billion from P9.0 billion in 2014 resulting mainly from the effect of restatement due to change in foreign exchange rates. The terms and conditions related to temporary investments and time deposits used as collateral for certain bank loans and bank credit lines are disclosed in Notes 7, 8 and 29 of the Issuer s audited consolidated financial statements. The Bank Loans provided in Note 18 of the Issuer s audited consolidated financial statements do not impose any financial covenants (i.e. minimum current ratio) to the Company. Investments held for trading and sale decreased by 73.7% to P1.1 billion from P4.2 billion in 2014 due mainly to available-for-sale (AFS) investments which matured during the period and the reclassification of a certain investment to investments in associate companies and joint ventures. Receivables increased by 3.6% to P32.1 billion from P31.0 billion in 2014 due mainly to the increase in receivable from real estate buyers resulting from higher construction accomplishments of sold units and increase in receivable from tenants. Merchandise inventories increased by 9.3% to P16.3 billion from P14.9 billion in The increase is mainly attributable to the Food Group. Other current assets decreased by 8.1% to P51.3 billion from P55.8 billion in 2014 due to the collection of receivable from sale of a portion of the Group s stake in an associate in 2014, partly offset by the increase in condominium units for sale due to completion of condominium towers M South Triangle, Jazz, Mezza II and Shell Residences and increase in advances and deposits. Noncurrent Assets Noncurrent assets increased by 14.9% to P606.7 billion from P527.8 billion in AFS investments increased by 10.3% to P21.2 billion from P19.2 billion in 2014 due mainly to increase in market value of certain AFS investments and new AFS investments. Investments in associate companies and joint ventures increased by 16.8% to P169.9 billion from P145.5 billion in 2014 due mainly to new investments plus one year equity in net earnings of associate companies and joint ventures, net of dividend income. Time deposits increased by 11.7% to P53.1 billion from P47.6 billion in The increase pertains to the proceeds of certain AFS bonds which matured during the period and effect of restatement due to change in foreign exchange rates. Property and equipment decreased by 2.5% to P19.4 billion from P19.9 billion in Investment properties increased by 17.8% to P249.6 billion from P211.9 billion in The increase mainly represents mall-related investments in land and buildings located in Cagayan de Oro, Cavite City, and Bulacan in the Philippines and Tianjin in China and the ongoing expansions of SM Mall of Asia; landbanking; and, construction costs incurred for ongoing projects of the Commercial and Hotel groups namely, Three E-com Center and Conrad Manila. 153

159 Land and development increased by 2.8% to P27.4 billion from P26.6 billion in 2014 due mainly to landbanking and construction accomplishments during the period. Intangibles increased by 10.8% to P24.7 billion from P22.3 billion in 2014 due mainly to trademarks resulting from a new acquisition. The new Trademarks are amortized on a straight-line basis over its useful life of 20 years. The amortization in 2015 amounted to P6.7 million. Deferred tax assets increased by 12.0% to P2.6 billion from P2.3 billion in 2014 due mainly to NOLCO, accrued leases and unrealized foreign exchange losses. Other noncurrent assets increased by 19.5% to P38.9 billion from P32.6 billion in 2014 due mainly to additional bonds and deposits for real estate acquisitions, increase in derivative assets and deferred input VAT, and a new long-term note. Bonds and deposits for real estate acquisitions are recorded under Deposits and Advance Rentals. This account mainly pertains to deposits to lessors which will be applied for future rentals and are not re-measured at amortized cost. Current Liabilities Current liabilities increased by 17.2% to P115.8 billion from P98.8 billion in Bank loans decreased by 28.6% to P9.9 billion from P13.9 billion in 2014 resulting from net payments during the period. The bank loans of the Group are not covered by any financial covenants. Current portion of long-term debt increased by 143.6% to P26.0 billion from P10.7 billion in 2014 due mainly to reclassification of maturing debts from noncurrent to current. Accounts payable and other current liabilities increased by 7.1% to P77.5 billion from P72.4 billion in 2014 mainly from higher business volume. Income tax payable increased by 27.0% to P2.0 billion in 2015 from P1.6 billion in 2014 due mainly to higher taxable income in Noncurrent Liabilities Noncurrent liabilities increased by 4.0% to P273.5 billion from P263.1 billion in Long-term debt - net of current portion increased by 3.4% to P245.2 billion from P237.1 billion in 2014 due mainly to new loan availments and bond issuances to fund capital expenditures and for working capital requirements. Tenants deposits and others increased by 9.3% to P20.9 billion from P19.2 billion in The increase pertains mainly to SM Prime s customers deposits and deferred output VAT. Tenants deposits mainly pertain to security deposits from tenants which will not be applied to future rentals but refundable at the end of the lease term and measured at amortized cost. Deferred tax liabilities increased by 8.3% to P7.4 billion from P6.9 billion in 2014 due mainly to unrealized gross profit on sale of real estate for tax purposes. Equity Total equity increased by 9.1% to P381.7 billion from P350.0 billion in Equity attributable to owners of the parent increased by 10.7% to P284.4 billion from P257.0 billion in This increase resulted mainly from (a) additional paid-in capital which increased by 6.2% to P

160 billion from P72.0 billion in 2014 due to the conversion of US$ bonds to SMIC common shares (b) net unrealized gain on AFS investments which increased by 24.7% to P12.7 billion from P10.2 billion in 2014 due mainly to the appreciation in market value of AFS investments of subsidiaries and associates, (c) Re-measurement gain (loss) on defined benefit asset/obligation which increased by P0.2 billion as a result of valuation of the Group s retirement plan, and (d) Cumulative translation adjustment relating to the translation of the financial accounts of SM China malls from China Yuan Renminbi to Philippine Peso which increased by 22.1% to P1.1 billion from P0.9 billion in Non-controlling interests increased by 4.7% to P97.3 billion from P92.9 billion in 2014 due mainly to the increase in net assets of certain subsidiaries that are not wholly owned. 31 December 2014 vs. 31 December 2013 Total assets increased by 12.5% to P711.9 billion from P633.0 billion in Likewise, total liabilities increased by 8.8% to P361.9 billion from P332.8 billion in Current Assets Current assets increased by 12.2% to P184.0 billion from P164.1 billion in Cash and cash equivalents increased by 37.7% to P69.1 billion from P50.2 billion in The increase represents the loan proceeds from availments and share sale proceeds from SM Prime s top-up placement in Time Deposits and Short-term Investments decreased by 68.9% to P9.0 billion from P28.9 billion in 2013 due to maturity of certain Short-term deposits, a portion of which was used to pay off maturing bonds and/or reinvested in Long-term time deposits. Investments held for trading and sale increased by 274.5% to P4.2 billion from P1.1 billion in 2013 due mainly to new available-for-sale (AFS) investments and reclassification of maturing noncurrent AFS investments. Receivables increased by 16.4% to P31.0 billion from P26.6 billion in 2013 due mainly to the P3.8 billion increase in receivable from real estate buyers resulting from higher construction accomplishments of sold units as well as new sales for the period and P0.6 billion increase in receivable from tenants. Merchandise inventories increased by 12.5% to P14.9 billion from P13.2 billion in The increase is mainly attributable to the Food Group. Other current assets increased by 26.9% to P55.8 billion from P44.0 billion in 2013 due mainly to the receivable resulting from the sale of the Group s 2% stake in BDO. Noncurrent Assets Noncurrent assets increased by 12.6% to P527.8 billion from P468.9 billion in AFS investments increased by 16.4% to P19.2 billion from P16.5 billion in 2013 due mainly to increase in market value of certain AFS investments and new AFS investments. Investments in associates and joint ventures increased by 4.7% to P145.5 billion from P139.0 billion in 2013 mainly due to the 12-month equity in net earnings of associates and joint ventures, net of dividend income received from these associates and sale of 2% stake in BDO. 155

161 Time deposits increased by 73.1% to P47.6 billion from P27.5 billion in 2013 due mainly to the reinvestment of matured deposits from short-term to long-term. Property and equipment increased by 8.6% to P19.9 billion from P18.3 billion in 2013 due mainly from new stores in Investment properties increased by 11.9% to P211.9 billion from P189.4 billion in The increase mainly represents mall-related investments in land and buildings located in Cebu City, Cabanatuan, and San Mateo in the Philippines and Zibo and Tianjin in China; landbanking; and construction costs incurred for ongoing projects of the commercial and the hotel group namely, Five E-com and Conrad Manila. Land and development slightly increased by 3.8% to P26.6 billion from P25.7 billion in 2013 due mainly to reclassification of certain land and development project costs from noncurrent to current. Deferred tax assets slightly increased by 5.6% to P2.3 billion from P2.2 billion in 2013 due to higher NOLCO from SM Prime. Other noncurrent assets increased by 8.3% to P32.6 billion from P30.1 billion in The increase mainly represents the reclassification of deposits for land acquisitions to current portion of land and development and reclassification of a portion of the receivable from real estate buyers to current. Current Liabilities Current liabilities decreased by 27.2% to P98.8 billion from P135.6 billion in 2013 due mainly to net payments in Bank loans decreased by 49.6% to P13.9 billion from P27.6 billion in Current portion of long-term debt decreased by 69.1% to P10.7 billion from P34.6 billion in Accounts payable and other current liabilities increased by 1.0% to P72.4 billion from P71.7 billion in Dividends payable increased by 26.0% to P0.3 billion from P0.2 billion in This mainly represents dividends due to minority stockholders of certain subsidiaries. Noncurrent Liabilities Noncurrent liabilities increased by 33.5% to P263.1 billion from P197.1 billion in Long-term debt - net of current portion increased by 35.0% to P237.1 billion from P175.6 billion to in 2013 due mainly to SMIC s and SMPH s bond issuances and loan availments in 2014 obtained to fund capital expenditures and for working capital requirements. Tenants deposits and others increased by 32.0% to P19.2 billion from P14.6 billion in The increase is coming mainly from SM Prime and the Net Group relating to their leasable spaces. Deferred tax liabilities decreased by 1.5% to P6.9 billion from P7.0 billion in Equity Total equity increased by 16.6% to P350.0 billion from P300.2 billion in

162 Equity attributable to owners of the parent increased by 17.1% P257.0 billion from P219.4 billion in This increase resulted mainly from (a) Additional paid-in capital which increased by 24.5% to P72.0 billion from P57.8 billion in 2013 due mainly to the recognition of equity reserve arising from the US$400 million top-up placement of SM Prime in November 2014 (b) Net unrealized gain on AFS investments which increased by 39.1% to P10.2 billion from P7.3 billion in 2013 due mainly to the appreciation in market value of AFS investments of subsidiaries and associates, (c) Equity adjustments from common control transactions which decreased by P0.7 billion relative to the adjustment in valuation for the acquisition of a subsidiary, and (d) Re-measurement loss on defined benefit asset/obligation which decreased by P68.5 million as a result of valuation of the Group s retirement plan. These are partially offset by the 29.7% decrease in cumulative translation adjustment relating to the translation of the financial accounts of SM China malls from China Yuan Renminbi to Philippine Peso from P1.2 billion to P0.9 billion in Non-controlling interests increased by 15.0% to P92.9 billion from P80.8 billion in 2013 due mainly to the increase in net assets of certain subsidiaries that are not wholly owned. 31 December 2013 vs. 31 December 2012 Consolidated total assets as at December 31, 2013 amounted to P633.0 billion, higher by 12.7% from P561.8 billion in previous year. On the other hand, consolidated total liabilities grew by 10.9% to P332.8 billion in 2013 from P300.2 billion in previous year. Total current assets increased by 12.5% to P164.1 billion as at December 31, 2013 from P145.9 billion as at last year. Cash and cash equivalents decreased by 17.3% to P50.2 billion in 2013 from P60.7 billion in 2012 while time deposits and short term investments decreased by 0.6% to P28.9 billion in 2013 from P29.1 billion in 2012 due mainly to payment of bank loans, capital expenditures and new investments. Investments held for trading and sale decreased by 60.8% to P1.1 billion in 2013 from P2.9 billion in 2012 due to maturity of certain investments in bonds. Receivables increased by 62.8% to P26.6 billion from P16.4 billion due primarily to increase in receivable from tenants and real estate buyers. Other current assets increased by 87.5% to P44.0 billion in 2013 from P23.4 billion in 2012 resulting mainly from the reclassification to current from non-current of ongoing land and development projects of the property group and increase in condominium units for sale, input tax and other prepayments. Total consolidated noncurrent assets amounted to P468.9 billion as at December 31, 2013, an increase of 12.7% from last year s P415.9 billion. Investments in shares of stock of associates and joint ventures increased by 8.2% or P10.6 billion to P139.0 billion from P128.4 billion due mainly to additional investments in shares of stock of associates and joint ventures and equity share in bank s net income. The increase in investment properties and property and equipment by 28.8% or P42.3 billion and 6.6% or P1.1 billion, respectively, arose from new mall constructions and new store openings. Deferred tax assets increased by 238.4% to P2.2 billion in 2013 from P0.6 billion in 2012 resulting mainly from the SM Property Group restructuring transaction. Other noncurrent assets decreased by 1.8% to P30.1 billion from P30.6 billion while intangibles increased by 31.9% to P20.3 billion from P15.4 billion resulting mainly from goodwill recognized from business combinations. These were partially offset by the decrease in investments available for sale by 2.4% and by the decrease in land and development by P4.5 billion or 15% to P25.7 billion in 2013 from P30.2 billion in 2012 due mainly from the reclassification of ongoing projects to current portion. The 6.6% or P1.9 billion decrease in time deposits represents reclassification to current portion of maturing time deposits. Total consolidated current liabilities increased by 26.0% to P135.6 billion as at December 31, 2013 mainly due to increase in accounts payable and other current liabilities by 18.6% to P71.7 billion in 2013 from P60.4 billion in 2012 mainly arising from trade transactions, payables to mall and residential contractors and suppliers related to ongoing projects and accrued operating expenses. Bank loans decreased by 13.2% or P4.2 billion to P27.6 billion in 2013 from P31.8 billion in 2012 due to settlement of loans. See note 18 to the audited consolidated financial statements for further discussion regarding bank loans. Income tax payable 157

163 increased by 9.4% to P1.6 billion in 2013 from P1.5 billion in 2012 due mainly to higher taxable income in The 149.4% or P20.7 billion increase in current portion of long-term debt is due mainly to the reclassification from Long-term debt of loans which will mature in See Note 20 to the audited consolidated financial statements for further discussion regarding long-term debt. The 116.1% increase in dividends payable represents dividends to minority stockholders of certain subsidiaries. Total noncurrent liabilities increased by 2.4% or P4.6 billion to P197.1 billion in 2013 from P192.5 billion in Long-term debt net of current portion increased by P1.1 billion or 0.6% to P175.6 billion in 2013 from P174.5 billion in See Note 20 to the audited consolidated financial statements for further discussion regarding long-term debt. The P2.4 billion or 53.4% increase in deferred tax liabilities arose from capitalized borrowing costs, unrealized gross profit on sale of real estate, fair value gain on investment property, unrealized foreign exchange gains and accrued rental income. Tenants deposits and others increased by 8.1% to P14.6 billion in 2013 from P13.5 billion in 2012 due mainly to new malls and expansions and new condominium projects of the real estate group. The Group s average borrowing cost for its long-term debt is 5.2% in 2013 and 6.0% in The loan agreements provide certain restrictions and requirements principally with respect to the maintenance of the following loan covenants: Maintain Current Ratio of not less than 0.50:1. Maintain Debt-Equity Ratio of not more than 75:25. Sy Family maintains 51% equity ownership in SMIC, directly and indirectly. No changes in the material subsidiaries of SMIC. As at December 31, 2013 and 2012, the Group is in compliance with the terms of its loan covenants. Total equity amounted to P300.2 billion as at December 31, 2013, while total equity attributable to equity holders of the parent amounted to P219.4 billion. Additional paid-in capital increased by P14.9 billion or 34.9% to P57.8 billion in 2013 from P42.9 billion in 2012 due mainly to the conversion of US$ bonds to SMIC shares amounting to P8.4 billion and top-up placement amounting to P6.4 billion. The P0.3 billion increase in Equity adjustments from common control transactions resulted from the SM Property Group restructuring transaction. The P1.0 billion increase in cumulative translation adjustment is related to the translation of the financial accounts of SM China malls from China Yuan Renminbi to Philippine peso and from unrealized mark-to-market gains on cross currency swap transactions designated as a cash flow hedge. Cost of common shares held by a subsidiary decreased to P25.4 million from P125.9 million due mainly to the disposal by subsidiaries of parent common shares during the year. The P4.4 billion decrease in net unrealized gain on available-for-sale investments resulted from the decrease in the market value of AFS investments of bank associates. The P0.2 billion remeasurement loss on defined benefit asset/obligation is the result of the valuation of the Group s retirement plan. Non-controlling interest increased by 9.8% to P80.8 billion in 2013 from P73.6 billion in 2012 due mainly to increase in net assets of certain subsidiaries. See Note 21 to the audited consolidated financial statements for further discussion regarding the equity. 158

164 Key Performance Indicators The following are the major financial ratios of the Issuer for the years ended December 31, 2013, 2014 and 2015 and for the six months ended June 30, 2016: Year ended December 31 Six months ended June Current Ratio Asset to Equity Debt-Equity Ratio: On Gross Basis 52:48 50:50 50:50 49:51 On Net Basis 36:64 34:66 36:64 39:61 Return on Equity 13.0% 12.0% 10.3% 10.5% Revenue Growth 13.1% 9.1% 7.0% 8.5% Net Income to Revenue 10.8% 10.3% 9.6% 9.9% Net Income Growth 11.2% 3.5% 0.2% 11.1% EBITDA (in P billions) P60.9 P63.4 P68.3 P36.8 Interest Cover 5.5x 5.3x 6.5x 6.7x The manner by which the Company calculates the foregoing indicators is as follows: 1. Current Ratio Current Assets Current Liabilities 2. Asset to Equity Ratio Total Assets Total Equity 3. Debt Equity Ratio Gross Basis Net Basis Total Interest Bearing Debt Total Equity Attributable to Equity Holders of the Parent + Total Interest Bearing Debt Total Interest Bearing Debt less cash and cash equivalents (excluding cash on hand), time deposits, investment in bonds held for trading and available for sale Total Equity Attributable to Equity Holders of the Parent + Total Interest Bearing Debt less cash and cash equivalents (excluding cash on hand), time deposits, investments in bonds held for trading and available for sale 4. Return on Equity Net Income Attributable to Equity Holders of the Parent Average Equity Attributable to Equity Holders of the Parent 5. Net Income to Revenue Net Income Attributable to Equity Holders of the Parent Total Revenues 6. Revenue Growth Total Revenues (Current Period) - 1 Total Revenues (Prior Period) 159

165 7. Net Income Growth Net Income Attributable to Equity Holders of the Parent (Current Period) - 1 Net Income Attributable to Equity Holders of the Parent (Prior Period) 8. EBITDA Income from operations + Depreciation & Amortization 9. Interest Cover EBITDA Interest expense 160

166 MANAGEMENT S DISCUSSION AND ANALYSIS OF PRO FORMA FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion on the review of pro forma financial results for the six months ended 30 June 2015 and 2016 and for the years ended 31 December 2013, 2014 and 2015 should be read in conjunction with the Company s pro forma condensed consolidated financial information and notes thereto contained elsewhere in this Prospectus and the section entitled Summary Financial Information Summary of Unaudited Pro Forma Consolidated Financial Information. The Company s pro forma condensed consolidated financial information as of 31 December 2015 and 30 June 2016 and for the years ended 31 December 2013, 2014 and 2015 and for the six months ended 30 June 2015 and 2016 were derived from: (a) the historical consolidated financial statements of the Company as at 31 December 2015 and for the years ended 31 December 2013, 2014 and 2015, and as at 30 June 2016 and for the six-month periods ended 30 June 2015 and 2016, and (b) certain pro forma adjustments based on the Group s assumptions to show what the historical financial information might have been had the consolidation of the Group s retail businesses into SM Retail occurred at an earlier date. This discussion contains forward-looking statements and reflects the current views of the Company with respect to future events and financial performance. Actual results may differ materially from those anticipated in these forward-looking statements. The pro forma financial statements included in this Prospectus and on which the discussions in this section are based should not be considered indicative of actual results. PRO FORMA RESULTS OF OPERATIONS Six months ended 30 June 2016 vs. six months ended 30 June 2015 Six months ended 30 June (in P billions) 2016 Restated (Unaudited) 2015 Restated (Unaudited) % Change Revenue Costs and Expenses Income from Operations Other Charges Provision for Income Tax Net Income Attributable to Non-controlling Interests Net Income Attributable to Equity Holders of the Parent The Group reported revenues of P169.6 billion and Net Income Attributable to Owners of the Parent of P15.3 billion in This represents a 9.1% growth in Revenues and 11.2% growth in Net Income Attributable to Owners of the Parent. Income from Operations increased by 9.4% to P33.3 billion from P30.4 billion in Operating Margin and Net Margin is at 19.6% and 9.0%, respectively. The Non-Food and Food Group comprised 49% and 51%, respectively, of merchandise sales in 2016 and As of June 30, 2016, SM Retail had 1,804 stores nationwide, namely: 55 SM Stores, 47 SM Supermarkets, 147 Savemore stores, 45 SM Hypermarkets, 34 WalterMart stores and 1,476 Specialty stores. 161

167 Real Estate Sales increased by 5.3% to P13.1 billion from P12.5 billion in 2015 due primarily to higher construction accomplishments of projects launched from 2013 to 2015 namely, Shore Residences in Pasay, Grass Residences in Quezon City and Air Residences in Makati, and increase in sales take-up of Ready-for-Occupancy (RFO) projects namely Princeton Residences, M Place Residences and Mezza II Residences in Quezon City and Jazz Residences in Makati City. Rent Revenue, derived mainly from the mall operations of SM Prime Holdings, Inc. (SM Prime), increased by 10.5% to P18.2 billion from P16.4 billion in The increase in Rent Revenue is primarily due to the new malls which opened in 2015 and 2016, namely, SM Seaside City Cebu, SM City Cabanatuan, SM City San Mateo, SM San Jose Del Monte and SM Trece Martires as well as the expansion of shopping spaces in SM Center Sangandaan and SM City Iloilo. In addition, retail podiums of Light, Shine, Shell and Green Residences opened in 2015 and Excluding the new malls and expansions, same-store rental growth is at 7%. Rentals from commercial operations also increased due to the opening of SM Cyber West and Five E-com Center as well as the expansion of SM Aura office tower in Rentals from hotels and convention centers also contributed to the increase due to improvement in average room and occupancy rates and the opening of Park Inn Clark in December As of June 30, 2016, SM Prime had 58 malls in the Philippines and 6 malls in China. Equity in Net Earnings of Associate Companies and Joint Ventures increased by 10.5% to P7.6 billion from P6.8 billion in 2015 due mainly to the 12.9% net income growth of BDO. Selling, General and Administrative Expenses increased by 9.8% to P37.1 billion from P33.8 billion in 2015 due mainly to additional operating expenses associated with new or renovated retail stores and malls and new real estate projects. Other Charges (net) decreased by 6.5% to P3.7 billion from P4.0 billion in Other Charges consist mainly of Interest Expense which decreased by 2.0% to P5.5 billion from P5.6 billion in Provision for Income Tax increased by 14.8% to P5.8 billion from P5.0 billion in 2015 due to higher taxable income. The effective income tax rate is 19.5% in 2016 and 19.0% in Non-controlling Interests increased by 11.1% to P8.5 billion in 2016 from P7.6 billion in 2015 due to the increase in net income of certain partly-owned subsidiaries. Year ended 31 December 2015 vs. year ended 31 December 2014 Year ended 31 December (in P billions) 2015 Restated (Unaudited) 2014 Restated (Unaudited) % Change Revenue Costs and Expenses Income from Operations Other Income (Charges) (7.2) (5.9) 20.7 Provision for Income Tax Net Income Attributable to Non-controlling Interests Net Income Attributable to Equity Holders of the Parent

168 The Group reported a Net Income Attributable to Equity Holders of the Parent of P28.8 billion and Revenues of P332.2 billion in This represents a 2.1% increase in Net Income Attributable to Equity Holders of the Parent and 7.6% growth in Revenues. Income from Operations increased by 9.5% to P61.5 billion from P56.2 billion in Operating Margin and Net Margin is at 18.5% and 8.7%, respectively. Merchandise Sales, which grew by 7.4% to P248.1 billion from P230.9 billion in 2014, accounts for 74.6% of total revenues in The increase is attributable to the opening of 148 Specialty stores and the following new stores in 2015: SM Department SM SM SaveMore Stores Stores Supermarkets Hypermarkets 1 SM San Mateo San Mateo SaveMore Salawag Lapu-Lapu 2 SM Cabanatuan Cabanatuan SaveMore San Fernando, Cherry La Union Congressional 3 SM Cebu SRP Cherry Shaw SaveMore M. Alvarez Sangandaan SaveMore Talavera Seaside Cebu SaveMore Light Residences SaveMore Binalonan SaveMore Muzon SaveMore Naga, Cebu SaveMore Echague, Isabela SaveMore CityMall - Consolacion SaveMore Banlic SaveMore Subic SaveMore Dinalupihan SaveMore Nasugbu SaveMore Sorsogon SaveMore Silay SaveMore CityMall Imus SaveMore My Place - South Triangle SaveMore La Trinidad SaveMore Citywalk SaveMore Binangonan SaveMore Alaminos, - Pangasinan SaveMore Sta. Ana SaveMore Cabuyao - The Non-Food and Food Group comprised 49% and 51%, respectively, of merchandise sales in 2015 and As of December 31, 2015, SM Retail had 1,729 stores nationwide, namely: 53 SM Stores, 45 SM Supermarkets, 136 Savemore stores, 44 SM Hypermarkets, 32 WalterMart stores and 1,419 Specialty stores. Real Estate Sales slightly decreased to P22.5 billion from P22.6 billion in 2014 or 0.4% due primarily to 163

169 lower revenue recognized from larger projects launched in 2010 and 2011 as these were mostly completed in The bulk of revenues to be recognized for projects launched in 2013 and 2014, which enjoyed brisk sales, will begin in 2016 when actual construction begins. The actual construction of a project usually starts within 12 to 18 months from launch date and revenue is recognized based on percentage of completion. Real Estate Gross Margin improved from 44.6% in 2014 to 45.7% in This is attributable to efficient management and tighter monitoring and control of construction costs. Rent Revenues, derived mainly from the mall operations of SM Prime Holdings, Inc. (SM Prime), increased by 14.4% to P34.8 billion from P30.4 billion in The increase in Rent Revenues is primarily due to the new malls which opened in 2013, 2014 and 2015, namely, SM Aura Premier in Taguig, SM City BF Parañaque and SM City Cauayan in Isabela province as well as the expansion of shopping spaces in Mega Fashion Hall in SM Megamall in Mandaluyong, SM Center Angono and SM City San Mateo in Rizal province, and SM City Bacolod in Negros Occidental province for a total gross floor area (GFA) addition of 728,000 square meters. Excluding the new malls and expansions, same-store rental growth is 7%. Rent from commercial operations also increased due to the opening of SM Cyber West and Five E-Com Center with an average occupancy rate of 98%. Rentals from hotels and convention centers also contributed to the increase due to improvement in average room rates and occupancy rates. As of December 31, 2015, SM Prime has 56 malls in the Philippines with total GFA of 7.3 million square meters and 6 malls in China with total GFA of 0.9 million square meters. Cinema and Event Ticket Sales and Amusement Revenues increased by 11.4 % to P6.4 billion from P5.8 billion in 2014 due to blockbuster movies shown in 2015 and increase in amusement revenues due mainly to the opening of Sky Ranch Pampanga. Equity in Net Earnings of Associate Companies and Joint Ventures increased by 6.7% to P14.3 billion from P13.4 billion in This is attributable mainly to the 9.7% increase in net income of BDO. Gain (Loss) on Sale of Available-for-sale (AFS) Investments and Fair Value Changes on Investments Held for Trading -net decreased by 111.2% to loss of P5.4 million in 2015 from gain of P48.5 million in 2014 due primarily to the gain on sale of AFS investments in Dividend Income increased by 96.3 % to P0.6 billion in 2015 from P0.3 billion in 2014 due to higher dividends received from certain investees. Other Revenues, which comprise mainly of income for promotional activities highlighting products, commission from bills payment, prepaid cards and show tickets, advertising income and sponsorship revenues, food and beverage income of the Hotel Group increased by 8.0% to P4.7 billion in 2015 from P4.4 billion in Selling, General and Administrative Expenses increased by 6.8% to P73.0 billion from P68.4 billion in 2014 due mainly to additional operating expenses associated with new or renovated retail stores and malls and new real estate projects. Other Charges (net) increased by 20.7% to P7.2 billion from P5.9 billion in Interest Expense decreased by 12.1% to P10.5 billion from P11.9 billion in 2014 due mainly to loan payments during the year and capitalized interest taken up on new loans availed of for capital expenditure requirements. Interest Income increased by 3.8% to P3.2 billion from P3.1 billion in 2014 due to higher average balance of temporary investments. Gain on Disposal of Investments and Properties - net decreased by 101.8% to loss of P51.1 million from gain of P2.9 billion in 2014 resulting mainly from the sale of the Group s 2% stake in BDO in Loss on Fair Value Changes on Derivatives decreased by 45.1% to P0.1 billion from P0.2 billion in This fair value change pertains mainly to the US$250.0 million convertible bonds of SMIC 164

170 which was fully settled in April Foreign Exchange Gain - net increased by 34.5% to P240.8 million from P179.1 million in This is due mainly to the favorable PHP to USD foreign exchange rate, that is, from PHP44.72:USD1.00 in 2014 to PHP47.06:USD1.00 in Provision for Income Tax increased by 22.7% to P10.7 billion from P8.7 billion in 2014 due to increase in taxable income as well as expiration of income tax holiday incentives on a number of residential projects. The effective income tax rate is 19.7% in 2015 and 17.4% in Non-controlling interest increased by 11.3% to P14.9 billion in 2015 from P13.4 billion in 2014 due to the increase in net income of certain partly-owned subsidiaries. Year ended 31 December 2014 vs. year ended 31 December 2013 Year ended 31 December (in P billions) 2014 Restated 2013 Restated % Change Revenue Costs and Expenses Income from Operations Other Income (Charges) (5.9) (7.7) Provision for Income Tax Net Income Attributable to Non-controlling Interests Net Income Attributable to Equity Holders of the Parent The Group reported a Net Income Attributable to Equity Holders of the Parent of P28.2 billion and Revenues of P308.8 billion in This represents a 5.4% increase in Net Income Attributable to Equity Holders of the Parent and 7.7% growth in Revenues. Income from Operations increased by 4.2% to P56.2 billion from P53.9 billion in Operating Margin and Net Margin is at 18.2% and 9.1%, respectively. Merchandise Sales, which grew by 7.9% to P230.9 billion from P213.9 billion in 2013, accounts for 74.8% of the total revenues in The increase is attributable to the opening of 138 Specialty stores and of the following new stores in 2014: SM Department SM SM SaveMore Stores Stores Supermarkets Hypermarkets 1 SM Cauayan Cauayan SaveMore Nunez Daet 2 SM Mega Center - SaveMore San Pedro Sun Residences SaveMore Sta. Cruz Rosario SaveMore Candon SaveMore Francis Market SaveMore Agora Lucena SaveMore Solano SaveMore Tumauini SaveMore Cyberwest SaveMore San Nicolas SaveMore Camiling SaveMore Guagua SaveMore Angono 2-165

171 SM Department SM SM SaveMore Stores Stores Supermarkets Hypermarkets SaveMore Bayombong SaveMore Santiago SaveMore Roxas Isabela SaveMore Tacloban SaveMore Calumpang - Gensan SaveMore Fortune Town SaveMore San Fernando - Pampanga SaveMore Cabiao SaveMore Francis Market - The Non-Food and Food Group comprised 49% and 51%, respectively, of merchandise sales in 2014 and 50% and 50%, respectively, of merchandise sales in As of December 31, 2014, SM Retail had 1,551 stores nationwide, namely: 50 SM Stores, 40 SM Supermarkets, 113 SaveMore stores, 42 SM Hypermarkets and 24 WalterMart stores and 1,282 Specialty stores. Real Estate Sales increased by 6.5% to P22.6 billion from P21.2 billion in 2013 due to higher construction accomplishments of projects and increase in number of units sold in Grace Residences in Taguig, Shell Residences, Shore Residences and Breeze Residences in Pasay, Green Residences in Manila, Shine Residences in Pasig, and Grass Residences Phase2 and Trees Residences in Quezon City. Real Estate Gross Margin improved from 42.4% in 2013 to 44.6% in This is attributable to efficient management and the reigning-in of construction costs. Rent Revenues, derived mainly from the mall operations of SM Prime, increased by 10.7% to P30.4 billion from P27.5 billion in The increase in Rent Revenues is primarily due to the new malls which opened in 2013 and 2014, namely, SM Aura Premier in Taguig, SM City BF Parañaque and SM City Cauayan in Isabela province, as well as the expansion of shopping spaces in Mega Fashion Hall in SM Megamall in Mandaluyong and SM Center Angono in Rizal province. The expanded mall gross floor area is now 6.5 million square meters, an increase of 0.3 million square meters from yearend Excluding the new malls and expansions, same-store rental growth is at 7%. As of December 31, 2014, SM Prime had 50 malls in the Philippines and 5 malls in China. Cinema Ticket Sales and Amusement Revenues increased by 16.7% to P5.8 billion from P4.9 billion in 2013 due to the opening of additional digital cinemas in the new/expanded malls and the showing of international and local blockbuster movies. Strong patronage of amusement rides and additional recreational facilities also contributed to the increase. Equity in Net Earnings of Associates and Joint Ventures decreased by 2.6% to P13.4 billion from P13.8 billion in This is attributable mainly to BDO s exceptional trading gains in early Gain on Sale of Available-for-sale Investments and Fair Value Changes on Investments Held for Trading - net decreased by 65.6% to P0.05 billion in 2014 from P0.14 billion in 2013 due primarily to the gain on sale of available-for-sale investments in Dividend Income decreased by 43.4% to P0.3 billion in 2014 from P0.5 billion in 2013 due to decrease in dividends received from certain investees. 166

172 Other Revenues, which comprise mainly of income for the promotional activities highlighting products, commission from bills payment, prepaid cards and show tickets, advertising income and sponsorship revenues slightly increased by 14.8% to P4.4 billion in 2014 from P3.8 billion in Selling, General and Administrative Expenses increased by 13.5% to P68.4 billion from P60.3 billion in 2013 due mainly to additional operating expenses associated with the construction of new, and/or, expansion of malls, new retail stores, store renovations and current real estate projects. Other Charges (net) decreased by 22.9% to P5.9 billion from P7.7 billion in Interest Expense increased by 7.3% to P11.9 billion from P11.1 billion in 2013 due mainly to loan availments during the year. Interest Income decreased by 18.0% to P3.1 billion from P3.8 billion in 2013 due to lower average balance of temporary investments. Gain on disposal of investments and properties - net increased by 426.9% to P2.9 billion from P0.5 billion in 2013 resulting mainly from the sale of the Group s 2% stake in BDO. Loss on Fair Value Changes on Derivatives - net decreased by 81.0% to P0.2 billion from P1.0 billion in This fair value change pertains mainly to the US$250.0 million convertible bonds of SMIC. Foreign Exchange Gain and Others increased by 201.4% to P179.1 million from P59.4 million in This is due mainly to the favorable PHP to USD foreign exchange rate, that is, from PHP44.40:USD1.00 in 2013 to PHP44.72:USD1.00 in Provision for Income Tax increased by 40.1% to P8.7 billion from P6.2 billion in 2013 resulting mainly from the SM Property group restructuring transaction in 2013, higher taxable income in 2014 as well as expiration of certain income tax holiday incentives on certain residential projects of SM Prime in The effective income tax rate is 17.4% in 2014 and 13.5% in Non-controlling Interests increased by 0.7% to P13.4 billion in 2014 from P13.3 billion in PRO FORMA FINANCIAL CONDITION 30 June 2016 vs. 31 December 2015 (in P billions) As at 30 Jun 2016 Restated (Unaudited) As at 31 Dec 2015 Restated (Unaudited) % Change Current Assets Noncurrent Assets Total Assets Current Liabilities Noncurrent Liabilities Total Liabilities Stockholders Equity Total Liabilities and Equity Total Assets amounted to P785.2 billion in 2016 and P784.9 billion in 2015 with a flat growth rate. On the other hand, total Liabilities decreased by 3.1% to P388.6 billion from P400.9 billion in Current Assets Current Assets decreased by 10.3% to P156.7 billion from P174.7 billion in

173 Cash and Cash Equivalents decreased by 41.4% to P34.2 billion from P58.3 billion in 2015 due mainly to dividend payments of SMIC and SM Prime at P8.5 billion and P6.6 billion, respectively, as well as payment of trade payables, debt servicing, capital expenditures and additional loan to an associate company. Time Deposits increased by 18.6% to P11.4 billion from P9.6 billion in 2015 due mainly to reclassification of maturing deposits from noncurrent to current. Investments Held for Trading and Sale increased by 13.1% to P1.2 billion from P1.1 billion in 2015 due mainly to reclassification of maturing available-for-sale (AFS) investments from noncurrent to current, partially offset by maturity of certain investment in bonds. Receivables increased by 2.0% to P32.7 billion from P32.1 billion in The increase pertains mostly to Receivables from real estate buyers. Merchandise Inventories increased by 12.2% to P24.2 billion from P21.6 billion in Other Current Assets increased by 1.8% to P52.9 billion from P52.0 billion in Noncurrent Assets Noncurrent Assets increased by 3.0% to P628.5 billion from P610.2 billion in AFS Investments increased by 9.9% to P23.3 billion from P21.2 billion in 2015 due mainly to the increase in market value of certain AFS investments. Investments in Associate Companies and Joint Ventures increased by 3.6% to P177.0 billion from P170.8 billion in The increase represents the equity in net earnings of associates for the first half of 2016 partially offset by dividends received from these associate companies. Time Deposits decreased by 3.9% to P51.1 billion from P53.1 billion in 2015 due mainly to the reclassification of maturing time deposits to current. Property and Equipment remained at P20.6 billion in 2016 and Investment Properties increased by 3.7% to P258.8 billion from P249.6 billion in 2015 due mainly to ongoing new mall projects located in Cagayan de Oro, Puerto Princesa, and Olangapo in the Philippines and Tianjin in China; expansions and renovations of SM Mall of Asia and SM City Baguio; and ongoing projects of the commercial and hotel groups namely Three E-Com Center, Four E-Com Center, and Conrad Manila. Land and Development decreased by 10.9% to P24.4 billion from P27.4 billion in 2015 due mainly to reclassification to current of launched projects. Deferred Tax Assets remained at P2.6 billion in 2016 and Other Noncurrent Assets increased by 14.9% to P46.1 billion from P40.1 billion in The increase mainly represents additional loans to an associate company and higher Receivable from real estate buyers. Current Liabilities Current Liabilities decreased by 27.0% to P93.0 billion from P127.3 billion in Bank Loans decreased by 27.0% to P7.7 billion from P10.5 billion in 2015 due mainly to loan payments. 168

174 Current Portion of Long-term Debt decreased by 74.3% to P6.7 billion from P26.0 billion in 2015 due mainly to payments of matured debts. Accounts Payable and Other Current Liabilities decreased by 14.2% to P73.3 billion from P85.4 billion in 2015 due to settlement of payables mainly for trade transactions. Dividends Payable increased by 5.4% to P3.1 billion from P2.9 billion in This mainly represents dividends due to minority stockholders of certain subsidiaries. Income Tax Payable decreased by 10.6% to P2.2 billion from P2.5 billion in Noncurrent Liabilities Noncurrent Liabilities increased by 8.0% to P295.6 billion from P273.6 billion in Long-term Debt - Net of Current Portion increased by 8.5% to P266.1 billion from P245.2 billion in 2015 due mainly to new availments. Tenants Deposits and Others increased by 6.3% to P22.3 billion from P21.0 billion in The increase is attributable to new malls and expansions as well as increase in customers deposits from residential buyers. Deferred Tax Liabilities decreased by 3.5% to P7.2 billion from P7.4 billion in 2015 due mainly to higher collections on real estate sales. Equity Total Equity increased by 3.3% to P396.6 billion from P384.0 billion in The increase pertains mainly to the first half 2016 net income attributable to owners of the parent of P15.3 billion partially offset by dividends of P8.5 billion. 31 December 2015 vs. 31 December 2014 As at 31 December (in P billions) 2015 Restated (Unaudited) 2014 Restated (Unaudited) % Change Current Assets Noncurrent Assets Total Assets Current Liabilities Noncurrent Liabilities Total Liabilities Stockholders Equity Total Liabilities and Stockholders Equity Total Assets increased by 8.3% to P784.9 billion from P724.6 billion in Likewise, Total Liabilities increased by 7.4% to P400.9 billion from P373.4 billion in Current Assets Current Assets decreased by 9.9% to P174.7 billion from P193.8 billion in

175 Cash and Cash Equivalents decreased by 20.6% to P58.3 billion from P73.4 billion in 2014 due mainly to new investments in associates, capital expenditures, and payment of dividends. Time Deposits and Short-term Investments increased by 6.8% to P9.6 billion from P9.0 billion in 2014 resulting mainly from the effect of restatement due to change in foreign exchange rates. Investments Held for Trading and Sale decreased by 73.7% to P1.1 billion from P4.2 billion in 2014 due mainly to available-for-sale (AFS) investments which matured during the period and the reclassification of a certain investment to Investments in associate companies and joint ventures. Receivables increased by 3.7% to P32.1 billion from P30.9 billion in 2014 due mainly to the increase in Receivable from Real Estate Buyers resulting from higher construction accomplishments of sold units and increase in Receivable from Tenants. Merchandise Inventories increased by 11.0% to P21.6 billion from P19.4 billion in The increase is mainly attributable to the Food Group. Other Current Assets decreased by 8.5% to P52.0 billion from P56.9 billion in 2014 due to the collection of receivable from sale of a portion of the Group s stake in an associate in 2014, partly offset by the increase in condominium units for sale due to completion of condominium towers M South Triangle, Jazz, Mezza II and Shell Residences and increase in Advances and Deposits. Noncurrent Assets Noncurrent Assets increased by 15.0% to P610.2 billion from P530.8 billion in AFS Investments increased by 10.5% to P21.2 billion from P19.2 billion in 2014 due mainly to increase in market value of certain AFS investments and new AFS investments. Investments in Associate Companies and Joint Ventures increased by 16.9% to P170.8 billion from P146.2 billion in 2014 due mainly to new investments plus one year Equity in Net Earnings of Associate Companies and Joint Ventures, net of Dividend Income. Time Deposits increased by 11.7% to P53.1 billion from P47.6 billion in The increase pertains to the proceeds of certain AFS bonds which matured during the period and effect of restatement due to change in foreign exchange rates. Property and Equipment decreased by 2.0% to P20.6 billion from P21.1 billion in Investment Properties increased by 17.8% to P249.6 billion from P211.9 billion in The increase mainly represents mall-related investments in land and buildings located in Cagayan de Oro, Cavite City, and Bulacan in the Philippines and Tianjin in China and the ongoing expansions of SM Mall of Asia; landbanking; and, construction costs incurred for ongoing projects of the Commercial and Hotel groups namely, Three E-com Center and Conrad Manila. Land and Development increased by 2.8% to P27.4 billion from P26.6 billion in 2014 due mainly to landbanking and construction accomplishments during the period. Intangibles increased by 10.8% to P24.7 billion from P22.3 billion in 2014 due mainly to Trademarks resulting from a new acquisition. Deferred Tax Assets increased by 12.8% to P2.6 billion from P2.3 billion in 2014 due mainly to NOLCO, Accrued leases and Unrealized foreign exchange losses. 170

176 Other Noncurrent Assets increased by 19.0% to P40.1 billion from P33.7 billion in 2014 due mainly to additional bonds and deposits for real estate acquisitions, increase in Derivative Assets and Deferred Input VAT, and a new long-term note. Current Liabilities Current Liabilities increased by 15.5% to P127.3 billion from P110.3 billion in Bank Loans decreased by 27.1% to P10.5 billion from P14.4 billion in 2014 resulting from net payments during the period. Current Portion of Long-term Debt increased by 143.6% to P26.0 billion from P10.7 billion in 2014 due mainly to reclassification of maturing debts from noncurrent to current. Accounts Payable and Other Current Liabilities increased by 7.3% to P85.4 billion from P79.6 billion in 2014 mainly from higher business volume. Dividends Payable decreased by 20.0% to P2.9 billion from P3.7 billion in This represents dividends due to minority stockholders of certain subsidiaries. Income Tax Payable increased by 27.8% to P2.5 billion in 2015 from P1.9 billion in 2014 due mainly to higher taxable income in Noncurrent Liabilities Noncurrent Liabilities increased by 4.0% to P273.6 billion from P263.1 billion in Long-term Debt - Net of Current Portion increased by 3.4% to P245.2 billion from P237.1 billion in 2014 due mainly to new loan availments and bond issuances to fund capital expenditures and for working capital requirements. Tenants Deposits and Others increased by 9.7% to P21.0 billion from P19.1 billion in The increase pertains mainly to SM Prime s customers deposits and deferred output vat. Deferred Tax Liabilities increased by 9.5% to P7.4 billion from P6.8 billion in 2014 due mainly to unrealized gross profit on sale of real estate for tax purposes. Noncurrent Derivative Liability is nil in 2015 and P58.7 million in All outstanding interest rate swaps matured in Equity Total Equity increased by 9.3% to P384.0 billion from P351.2 billion in Equity Attributable to Owners of the Parent increased by 11.2% to P279.9 billion from P251.8 billion in This increase resulted mainly from (a) Additional Paid-in Capital which increased by 6.2% to P76.4 billion from P72.0 billion in 2014 due to the conversion of US$ bonds to SMIC common shares (b) Net Unrealized Gain on AFS Investments which increased by 24.7% to P12.7 billion from P10.2 billion in 2014 due mainly to the appreciation in market value of AFS investments of subsidiaries and associates, (c) Re-measurement gain on defined benefit asset/obligation which increased by P0.2 billion as a result of valuation of the Group s retirement plan, and (d) Cumulative Translation Adjustment relating to the 171

177 translation of the financial accounts of SM China malls from China Yuan Renminbi to Philippine Peso which increased by 22.1% to P1.1 billion from P0.9 billion in Non-controlling Interests increased by 4.6% to P104.1 billion from P99.5 billion in 2014 due mainly to the increase in net assets of certain subsidiaries that are not wholly owned. Key Performance Indicators The following are the major pro forma financial ratios of the Issuer for the years ended December 31, 2014 and 2015 and for the six months ended June 30, 2016: As at 31 December As at 30 June Current Ratio Asset to Equity Debt-Equity Ratio: On Gross Basis 51:49 50:50 49:51 On Net Basis 34:66 36:64 38:62 Return on Equity 11.9% 10.8% 10.6% Revenue Growth 7.6% 7.6% 9.1% Net Income to Revenue 9.1% 8.7% 9.0% Net Income Growth 5.4% 2.1% 11.2% EBITDA (in P billions) P67.6 P73.4 P39.5 Interest Cover 5.7x 7.0x 7.2x The manner by which the Company calculates the foregoing indicators is as follows: 1. Current Ratio Current Assets Current Liabilities 2. Asset to Equity Ratio Total Assets Total Stockholders Equity 3. Debt Equity Ratio Gross Basis Net Basis Total Interest Bearing Debt Total Equity Attributable to Equity Holders of the Parent + Total Interest Bearing Debt Total Interest Bearing Debt less cash and cash equivalents (excluding cash on hand), time deposits, investment in bonds held for trading and available for sale Total Equity Attributable to Equity Holders of the Parent + Total Interest Bearing Debt less cash and cash equivalents (excluding cash on hand), time deposits, investments in bonds held for trading and available for sale 4. Return on Equity Net Income Attributable to Equity Holders of the Parent Average Equity Attributable to Equity Holders of the Parent 172

178 5. Net Income to Revenue Net Income Attributable to Equity Holders of the Parent Total Revenues 6. Revenue Growth Total Revenues (Current Period) - 1 Total Revenues (Prior Period) 7. Net Income Growth Net Income Attributable to Equity Holders of the Parent (Current Period) - 1 Net Income Attributable to Equity Holders of the Parent (Prior Period) 8. EBITDA Income from operations + Depreciation & Amortization 9. Interest Cover EBITDA Interest expense Expansion Plans / Prospects for the Future Malls For the rest of 2016, SM Prime will open 2 new malls in the Philippines namely, Cherry SM Congressional in Quezon City and SM City East Ortigas in Pasig City and complete the expansion of SM Center Molino and SM City San Pablo. By year end, SM Prime will have 60 malls in the Philippines and 6 in China with an estimated combined gross floor area of 8.6 million square meters. Residential For 2016, SMDC will launch about 6,000 to 8,000 units in the cities of Tagaytay, Quezon City, and Pasay City and economic housing in the provinces of Bulacan, Cavite and Cabanatuan. Commercial The construction of Three E-com Center and Four E-com Center are ongoing. These projects are scheduled for completion in 2017 and 2019, respectively. For the rest of 2016, the Retail Group will be opening 2 SM Stores, 7 SaveMore stores, 6 Waltermart stores and 70 specialty stores. The above expenditures will be funded through internally generated sources and other capital raising initiatives such as bond issuances and loan availments. The Company has no known direct or contingent financial obligation that is material to the Company, including any default or acceleration of an obligation. There were no contingent liabilities or assets in the Company s balance sheet. The Company has no off-balance sheet transactions, arrangements, obligations during the reporting year as at balance sheet date. There are no known trends, events, material changes, seasonal aspects or uncertainties that are expected to affect the Company s continuing operations. There are no known trends or any known demands, commitments, events or uncertainties that will result in or that are reasonably likely to result in the Issuer s liquidity increasing or decreasing in any material way. The Issuer does not anticipate having any cash flow or liquidity problems within the next twelve months. 173

179 There are no significant elements of income or loss arising outside of the Issuer s continuing operations. The Issuer is not in default or breach of any note, loan, lease or other indebtedness or financing arrangement. There are no significant amounts of the Issuer s trade payables that have not been paid within the stated trade terms. 174

180 DESCRIPTION OF PROPERTIES The Issuer s principally owned properties consist of land and buildings. The land improvements, buildings, equipment, owned by the Issuer have a net book value of P5.91 billion as at 31 December The locations and general descriptions of these properties are described below. Property One E-com Center office building Land and improvements Land and improvements Location Pasay City Asinan, Paranaque Baguio City In addition, the Issuer leases the land on which the One E-com Center office building is located from its subsidiary, SM Prime. There are no mortgages, liens or encumbrances over any of the properties owned by the Company. 175

181 BOARD OF DIRECTORS AND MANAGEMENT OF THE ISSUER Directors and Executive Officers The following table sets forth the persons who served as a Director and/or executive officer of SMIC as at the date of this Prospectus: Name Position Citizenship Age Henry Sy, Sr. Chairman Filipino 91 Teresita T. Sy Vice Chairperson Filipino 65 Henry T. Sy, Jr. Vice Chairman Filipino 62 Harley T. Sy Director and President Filipino 57 Jose T. Sio Director, Executive Vice President and CFO Filipino 76 Ah Doo Lim Independent Director Singaporean 66 Joseph R. Higdon Independent Director American 74 Tomasa H. Lipana Independent Director Filipino 67 Frederic C. DyBuncio Executive Vice President Filipino 56 Grace F. Roque Treasurer and Senior Vice President Filipino 65 Franklin C. Gomez Senior Vice President Filipino 47 Marianne Malate-Guerrero Senior Vice President Filipino 51 Elizabeth Anne C. Uychaco Senior Vice President Filipino 60 Cecilia Reyes-Patricio Senior Vice President Filipino 58 Corazon Pilar P. Guidote Senior Vice President Filipino 55 Wilson H. Go Senior Vice President Filipino 53 Marcelo C. Fernando, Jr. Senior Vice President Filipino 56 Elmer B. Serrano Corporate Secretary Filipino 48 Corazon I. Morando Compliance Officer and Adviser to the Board Filipino 75 Management Board of Directors The Directors of the Issuer are elected at the annual stockholders meeting to hold office until the next succeeding annual meeting and until their respective successors have been appointed or elected and qualified. The following describes the background and business experience of the Issuer s Directors and Executive Officers during the last five years: Henry Sy, Sr. is the Chairman of the Board of Directors of SMIC. He is the founder of the SM Group and is currently Chairman of SM Prime, SM Development, Highlands Prime Inc., BDO Unibank, Inc. and Honorary Chairman of China Banking Corporation. Mr. Sy opened the first ShoeMart store in 1958 which has since evolved into a dynamic group of companies with five lines of businesses - shopping malls, retail, financial 176

182 services, real estate development and tourism, hotels and conventions. The directorships held by Mr. Henry Sy, Sr. in other publicly-listed companies are set out below. Position Chairman Emeritus Chairman Emeritus Honorary Chairman Company SM Prime Holdings, Inc. BDO Unibank, Inc. China Banking Corporation Teresita T. Sy is the Vice Chairperson of SMIC. She has varied experiences in retail merchandising, mall development and banking businesses. A graduate of Assumption College, she was actively involved in ShoeMart s development. At present, she is the Chairperson of BDO Unibank, Inc. She also holds board positions in several companies within the SM Group. The directorship held by Ms. Teresita T. Sy in other publicly-listed companies is set out below. Position Chairperson Company BDO Unibank, Inc. Henry T. Sy, Jr. is the Vice Chairman of SMIC and Chairman of SM Prime Holdings, Inc. and SM Development Corporation. He is also the Vice Chairman President of Highlands Prime, Inc. He is likewise the President of National Grid Corporation of the Philippines. He is responsible for the real estate acquisitions and development activities of the SM Group which include the identification, evaluation and negotiation for potential sites as well as the input of design ideas. He graduated with a Management degree from De La Salle University. The directorship held by Mr. Henry T. Sy, Jr. in other publicly-listed companies is set out below. Position Chairman Company SM Prime Holdings, Inc. Harley T. Sy is the President of SMIC. He is a Director of China Banking Corporation and other companies within the SM Group and Adviser to the Board of Directors of BDO Private Bank, Inc. He is the Vice Chairman of the Retail Group of SM Retail, Inc. He holds a degree in Bachelor of Science, Major in Finance from De La Salle University. The directorship held by Mr. Harley T. Sy in other publicly-listed companies is set out below. Position Director Company China Banking Corporation Jose T. Sio is the Executive Vice President and Chief Finance Officer of SMIC. He is also a Director of China Banking Corporation, Belle Corporation and Atlas Consolidated Mining and Development Corporation. Mr. Sio is also Adviser to the Board of Directors of BDO Unibank, Inc. and Premium Leisure Corporation. Mr. Sio holds a master s degree in Business Administration from New York University, is a certified public accountant and was formerly a senior partner at Sycip Gorres Velayo & Co. Mr. Sio was voted as CFO of the Year in 2009 by Financial Executives of the Philippines (FINEX). He was also awarded as Best CFO (Philippines) in various years by several Hong Kong-based business publications. The directorships held by Mr. Jose T. Sio in other publicly-listed companies are set out below. Position Director Director Director Company China Banking Corporation Belle Corporation Atlas Consolidated Mining and Development Corporation Ah Doo Lim, a Singaporean, is an Independent Director of SMIC. He is currently an Independent Director and Member of the Audit Committee of ST Engineering Ltd., one of the largest companies listed on the Singapore Exchange, and of ARA-CWT Trust Management (Cache) Ltd., GP Industries Ltd., GDS Holdings 177

183 Limited and U Mobile Sdn Bhd. He is also a Director of Sembcorp Marine Ltd., a world leading offshore rig builder, and of Bracell Limited (formerly known as Sateri Holdings Limited), a world leader in the specialty cellulose industry. He obtained a degree in Engineering from Queen Mary College, University of London in 1971, and a Master s Degree in Business Administration from Cranfield School of Management, England in The directorships held by Mr. Ah Doo Lim in other publicly-listed companies are set out below. Position Independent Director Independent Director Independent Director Independent Director Director Director Company ST Engineering Ltd. ARA-CWT Trust Management (Cache) Ltd. GP Industries Ltd. GDS Holdings Ltd. Sembcorp Marine Ltd. Bracell Limited Joseph R. Higdon, an American, is an Independent Director of SMIC. Until his retirement, he was a Senior Vice-President of Capital Research and Management Company, a United States investment company. He joined Capital Research in 1974 and worked there until He analyzed Philippine Stocks from 1989 until He was a US Peace Corps volunteer in the Philippines from 1962 to He is also an Independent Director of International Container Terminal Services, Inc. and Security Bank Corporation. For six years until 2012, he served as a member of the Advisory Board for the Coca-Cola Bottling Company, Philippines. The directorships held by Mr. Joseph R. Higdon in other publicly-listed companies are set out below. Position Independent Director Independent Director Company International Container Terminal Services, Inc. Security Bank Corporation Tomasa H. Lipana is a former Chairman and Senior Partner of Isla Lipana & Co., the Philippine member firm of PricewaterhouseCoopers. She is an independent director and Audit Committee Chairperson of Flexo Manufacturing Corporation, Goldilocks Bakeshop, Inc., PhilExim/Trade and Development Corporation, and QBE Seaboard Insurance, Philippines, Inc. She is also a Trustee of the Canadian Chamber of Commerce of the Philippines, and Sikat Solar Challenge Foundation, Inc. She also served as Independent Director and Audit Committee Chairperson of Inter-Asia Development Bank. She is a fellow of the Institute of Corporate Directors. Mrs. Lipana took up Executive Education/Management Development Programs at Harvard Business School, University of Western Ontario, and Asian Institute of Management. She received the Outstanding CPA in Public Practice Award from the Philippine Institute of Certified Public Accountants and Outstanding Alumna Award from the University of the East where she graduated Cum Laude. She was also a CPA Board placer. Period of Directorship: Name Henry Sy, Sr. Teresita T. Sy Henry T. Sy, Jr. Harley T. Sy Jose T. Sio Ah Doo Lim Joseph R. Higdon Tomasa H. Lipana Period Served 1960 present 1979 present 1979 present 1993 present 2005 present 2008 present 2010 present present 178

184 Executive Officers Frederic C. DyBuncio is Executive Vice President, Investments Portfolio of SMIC. Prior to joining SMIC, he was a career banker who spent over 20 years with JPMorgan Chase and its predecessor institutions. During his stint in the banking industry, he was assigned to various managerial/executive positions where he gained substantial professional experience in the areas of credit, relationship management and origination, investment banking, capital markets, and general management. He has worked and lived in several major cities including New York, Seoul, Bangkok, Hong Kong and Manila. He obtained his undergraduate degree in Business Management from the Ateneo de Manila University, and his master s degree in Business Administration from the Asian Institute of Management. Grace F. Roque is the Treasurer of SMIC. She is also the Director of Metro Manila Shopping Mecca and Mercantile Stores Group, Inc. She is also the Treasurer and Director of HFS Corporation, Mindanao Shoppers Daily Destination Corp. and SM Arena Complex Corp. She holds a Bachelor Degree in Economics from Maryknoll College and a Masters in Business Administration Degree from the University of the Philippines. Franklin C. Gomez is Senior Vice President for Finance of SMIC. Prior to joining SMIC in 2013, he spent over 20 years at Unilever where he held several senior positions, his last being Finance Director and Chief Financial Officer of Unilever Indonesia since May His previous senior posts in the same company include Chief Financial Officer at Unilever Philippines; Innovation and Learning Director at the Finance Excellence Centre in London; and Finance Director of Selecta Wall s Ice Cream, Philippines. Mr. Gomez holds a Bachelor of Arts in Economics and Bachelor of Science in Commerce Major in Accountancy from De La Salle University, Manila. Marianne Malate-Guerrero, is Senior Vice President, Legal Department Head, Alternate Compliance Officer and Assistant Corporate Secretary of SMIC. She is also Assistant Corporate Secretary of SM Prime Holdings, Inc. She formerly worked as Senior Vice President and Legal Department Head of United Overseas Bank Philippines. Previous to that, she was Vice President and Legal Officer of Solidbank Corporation. She began her practice with the law firm of Castillo Laman Tan & Pantaleon Law office. She graduated from the Ateneo School of Law in Elizabeth Anne C. Uychaco, is Senior Vice President, Corporate Services of SMIC. She is also the Vice Chairperson and Board Director of Belle Corporation, and Board Director of Megawide Construction Corporation, Republic Glass Holdings Corp. and Generali Pilipinas Holding Company, Inc. She was formerly Senior Vice President and Chief Marketing Officer of Philippine American Life Insurance Company and Board Director of Philam Call Center. Prior to that, she was Vice President of Globe Telecom, Inc., Kuok Philippine Properties, Inc. and Transnational Diversified Corp. Ms. Uychaco graduated from St. Scholastica s College in 1978 with a Bachelor of Arts Degree. She obtained a Master s Degree in Business Economics from the University of Asia and Pacific in 1988 and a Master s Degree in Business Administration from the Ateneo Business School in Cecilia Reyes-Patricio is the Senior Vice President, Corporate Tax Department of SMIC. Prior to joining SMIC in 1988, she was a financial and tax auditor at SyCip, Gorres Velayo & Co. She holds a Master of Science degree (with highest honors) in Commerce, Major in Taxation, from the Manuel Luis Quezon University. A Certified Public Accountant, she graduated Magna Cum Laude with a Bachelor of Science degree in Business Administration from the University of the East. Corazon P. Guidote is Senior Vice President for Investor Relations of SMIC. She was formerly a Presidential Consultant for Investor Relations and Executive Director of the Investor Relations Office of the Republic of the Philippines. Prior to government service, she was a Director and Chief Operating Officer of ABN AMRO Asia Securities Philippines, Group Vice President for Corporate Communications and Investor Relations at Metro Pacific Corporation, and Managing Director of Citibank Securities, Philippines, Inc. and 179

185 UBS Securities Phils., Inc. Ms. Guidote also served as Equities Research Head in Peregrine Securities, Inc., Barclays de Zoete Wedd (BZW), and Vickers da Costa. A Certified Public Accountant, Ms. Guidote is a Bachelor of Science graduate of the University of Santo Tomas. She holds a Masters Degree in Applied Business Economics degree from the University of Asia and the Pacific and is a Chevening Fellow of the United Kingdom Foreign and Commonwealth Office. She is also a fellow at the Institute of Corporate Directors. Wilson H. Go is Senior Vice President of Information Technology of SMIC. He is also the President of LearningLitz, Inc. and of the Blue Genes. Prior to joining the company, Mr. Go held numerous senior level positions with IBM, which expanse a period of 30 years. His past designations include Country Manager Global Technology Services, ASEAN Corporate Development Executive, and Asia Pacific Intellectual Property Licensing Business Development Executive, to name a few. Mr. Go holds a master s degree in Business Economics from the University of Asia and the Pacific and a Bachelor s degree in Commerce, Major in Accounting from De La Salle University, and is also a Certified Public Accountant. Marcelo C. Fernando, Jr. is Senior Vice President for Group Treasury of SMIC. He joined the company last August 5, Prior to joining the company, he spent a combined 31 years in the banking industry, 29 of them with Citibank, N.A. His banking experience was mainly in the Markets business which was involved in the sales, trading and structuring of currencies, fixed income, money markets and commodities products and their derivatives. He was also responsible for liquidity management and balance sheet funding and gapping activities as Country Treasurer in the Philippines and during his posting in Thailand. Mr. Fernando also had regional responsibilities as Citibank s Markets Head for the ASEAN cluster which covered Indonesia, Malaysia, Philippines, Thailand and Vietnam. He obtained his Bachelor of Arts degree in Economics from the University of the Philippines, Diliman (Cum Laude), and graduated with Distinction from the Masters in Business Management program of the Asian Institute of Management. Elmer B. Serrano is the Corporate Secretary and Compliance Officer of SMIC and Corporate Secretary of SM Prime since November He is Name Partner of the law firm of Martinez Vergara Gonzalez & Serrano and has been practicing corporate law for over two decades. Atty. Serrano is currently the Corporate Information Officer of BDO Unibank, Inc. He is also the Corporate Secretary of Premium Leisure Corporation, Premium Leisure Amusement Incorporation, Crown Equities, Inc., and Corporation Secretary of subsidiaries of BDO Unibank, Inc. namely, BDO Capital & Investment Corporation, BDO Securities Corporation, BDO Insurance Brokers, Inc., and Averon Holding Corporation. He was a director of OCLP Holdings, Inc. until November He is a graduate of the Ateneo Law School and holds a degree of B.S. Legal Management from the Ateneo de Manila University. Corazon I. Morando is the Compliance Officer and is an Adviser to the Board of SMIC. She is also the Vice President and Corporate Secretary of China Banking Corporation. She ensures the continuous development of her competence, having attended various trainings, which include seminars on non-bank financial intermediaries, anti-money laundering, and corporate governance. In 2014, she was named as - Asian Company Secretary of the Year by the Corporate Governance Asia in Hongkong, recognizing her vital role in promoting and upholding corporate governance in the Bank. Atty. Morando was formerly a Director of the Legal Department of the Securities and Exchange Commission of the Philippines. She holds a Bachelor of Laws degree from the University of the Philippines, and took up graduate studies under the MBA-Senior Executive Program from the Ateneo de Manila University. 180

186 Period of Officership: Name Frederic C. DyBuncio Grace F. Roque Franklin C. Gomez Marianne Malate-Guerrero Elizabeth Anne C. Uychaco Cecilia Reyes-Patricio Corazon P. Guidote Wilson H. Go Marcelo C. Fernando, Jr. Elmer B. Serrano Corazon I. Morando Period Served present 2010 present 2013 present 2006 present 2009 present 2010 present 2011 present 2015 present 2015 present 2014 present 2005 present Involvement in Legal Proceedings The Issuer is not aware of any of the following events having occurred during the past five years up to the date of this Offering Circular that are material to an evaluation of the ability or integrity of any director, nominee for election as Director, executive officer, underwriter or controlling person of the Issuer: (a) any bankruptcy petition filed by or against any business of which such person was a general partner or executive officer either at the time of the bankruptcy or within two years prior to that time; (b) any conviction by final judgement, including the nature of the offense, in a criminal proceeding, domestic or foreign, or being subject to a pending criminal proceeding, domestic or foreign, excluding traffic violations and other minor offenses; (c) being subject to any order, judgement or decree, not subsequently reversed, suspended or vacated, of any court of competent jurisdiction, domestic or foreign, permanently or temporarily enjoining, barring, suspending or otherwise limiting his involvement in any type of business, securities, commodities or banking activities; (d) being found by a domestic or foreign court of competent jurisdiction (in a civil action), the SEC or comparable foreign body, or a domestic or foreign exchange or other organized trading market or self-regulatory organization, to have violated a securities or commodities law or regulation, and the judgement has not been reversed, suspended or vacated; and (e) a securities or commodities law or regulation, and the judgement has not been reversed, suspended or vacated. Corporate Governance The Issuer s platform of governance remains rooted in its Manual on Corporate Governance and its Code of Ethics. The Manual on Corporate Governance (the Governance Manual ), institutionalizes the principles of good corporate governance throughout the organization. It lays down the Issuer s compliance system and identifies the responsibilities of the Board and management in relation to good corporate governance. The Governance Manual also provides for the Issuer s policies on disclosure and transparency, 181

187 the conduct of communication and training programs on corporate governance, the rights of shareholders, and the protection of the interests of non-controlling shareholders. Under the Governance Manual, it is the Board s responsibility to foster the long term success of the Issuer and secure its sustained competitiveness in a manner consistent with its fiduciary responsibility, which it shall exercise with the highest standards of corporate governance, in the best interests of the Issuer, its shareholders and other various stakeholders.as of 30 September 2016, the Issuer remains in compliance with and has no deviation from its Governance Manual. The Code of Ethics (the Code ) serves as a guiding principle for the Issuer s directors, officers and employees in the performance of their duties and responsibilities, and in their business transactions with investors, creditors, customers, contractors, suppliers, regulators, and the public. The Code also reflects the Issuer s mission, vision and values statement. To fortify the Code and enhance its ethical practices, the Issuer adopted policies on acceptance of gifts, insider trading, conflicts of interest and related-party transactions, to name a few. The Issuer continues to align itself with corporate governance best practices through the continuous review and development of its policies and programs. In line with this, the Issuer adopted a whistleblowing policy, referred to as the Policy on Accountability, Integrity and Vigilance (PAIV), which aims to create an environment where concerns and issues, made in good faith, may be raised freely to, for and within the organization. The Issuer s commitment to the principles of good corporate governance emanate from its Board of Directors. The Board embodies the core values of the Issuer and maintain that the highest standards of corporate governance and integrity permeate throughout the organization. In line with best practice, the roles of the Chairman of the Board and the President are held by separate individuals whose respective responsibilities are provided for by the Issuer s By-Laws and Governance Manual. The Governance Manual also provides that an independent director must be independent of Management, substantial shareholdings and material relations, whether it be business or otherwise, which could be reasonably perceived to impede their independent judgment. The Issuer s Board is composed of eight (8) directors, three (3) of whom are non-executive independent directors. The Issuer s independent directors, namely, Mr. Ah Doo Lim, a Singaporean, Mr. Joseph R. Higdon, an American and Ms. Tomasa H. Lipana, meet the diversity criteria set by the Governance Manual. The Board is supported in its corporate governance functions by four (4) committees: the Nomination Committee, the Audit Committee, the Compensation and Remuneration Committee, and the Risk Management Committee. The Board Committees have adopted charters which identify their respective compositions, roles and responsibilities, and may be viewed and downloaded via the Issuer s website. The Nomination Committee s primary responsibility is the review and evaluation of the qualifications of candidates nominated to the Board, as well as those nominated to positions that require Board approval under the Issuer s By-Laws. Likewise, the Committee assesses the Board s effectiveness in directing the process of renewing and replacing Board members. The Committee also facilitates the annual performance evaluation of the Issuer s Board as a whole, individual directors, Board Committees and President. It is composed entirely of independent directors, namely, Mr. Ah Doo Lim, Ms. Tomasa H. Lipana, and Mr. Joseph R. Higdon, the Committee Chairman. It is the role of the Audit Committee to directly interface with the internal and external auditors in the conduct of their duties and responsibilities. The Committee s mandate includes the review of the Issuer s financial reports, and subsequent recommendation to the Board for approval. The Committee also ensures that the Board is taking appropriate corrective action in addressing control and compliance functions with regulatory agencies. Furthermore, the Committee reviews the Issuer s internal control system, audit plans, auditing processes and related party transactions. The Audit Committee is composed of three (3) directors, namely, Ms. Teresita T. Sy-Coson, a non-executive director, and two (2) independent directors in Mr. Ah Doo Lim, and Ms. Tomasa H. Lipana, who also serves as the Committee Chairperson. 182

188 The Compensation and Remuneration Committee is tasked with the oversight of policies on salaries and benefits, as well as promotions and other forms of career advancement. The Committee also ensures that a formal and transparent process is used to determine the remuneration of key personnel, consistent with the Issuer s core values, strategy and control environment. The Committee is composed of three (3) directors, namely, Mr. Jose T. Sio, Ms.Tomasa H. Lipana, and Ms. Teresita T. Sy-Coson, the Committee Chairperson. Under its Charter, the Risk Management Committee is tasked to review and assess the effectiveness of the Issuer s risk management system in the mitigation of financial and non-financial risks, specifically in the areas of credit, market, liquidity, operational and legal. The Committee also oversees the policies and procedures relating to the identification, analysis, management, monitoring and reporting of the aforementioned risks. The Committee is composed of three (3) directors, all of whom are independent directors of the Issuer. With direction from its Board and steadfast determination provided from its Management, the Issuer continues to develop its corporate governance culture and strive towards keeping pace with global best practice. Executive Compensation For the year ended 31 December 2015, the Board of Directors received a total of =P93.0 million as compensation and allowances. The Chairman of the Board receives P20, per diem for each board meeting. All the other directors receive P10, Aside from the aforementioned compensation, these officers do not receive any other form of remuneration. Aggregate compensation paid to SMIC s Chief Executive Officer and senior executive officers as a group for the last two fiscal years and the estimate for the ensuing year are as follows: Compensation of Executive Officers and Directors (In P millions) Name Principal Position Year Salary Bonus Harley T. Sy President Jose T. Sio Executive Vice President & CFO Frederic C. Executive Vice DyBuncio President Investments Portfolio Elizabeth Anne Senior Vice President C. Uychaco Corporate Services Franklin C. Senior Vice President - Gomez Finance President and 4 most highly compensated executive officers All other officers and Directors as a group unnamed Total 2016 (estimated) (estimated) (estimated) Other Annual Compensation Other Arrangements 183

189 There are no standard or other arrangements pursuant to which the directors of the Issuer are compensated, or are to be compensated, directly or indirectly, by the Issuer for services rendered by such directors as of the date of this Prospectus. There are no employment contracts between the Issuer and any named executive officer. There is no compensatory plan nor arrangement with respect to an executive officer which shall result or will result from the resignation, retirement or any other termination of such executive officer s employment with the Company, or from a change-in-control of the Company, or a change in an executive officer s responsibilities following a change-in-control of the Company. Warrants and Options Outstanding As of the date of this Prospectus, there are no outstanding warrants or options in respect of the Issuer s shares held by the Issuer s President, named executive officers and all directors and officers as a group. Significant Employees The Issuer has no individual employee who is not an executive officer but who is expected to make a significant contribution to the business. Family Relationships Mr. Henry Sy, Sr. is the father of Teresita T. Sy, Elizabeth T. Sy, Henry T. Sy, Jr., Hans T. Sy, Herbert T. Sy and Harley T. Sy. All other directors and officers are not related either by consanguinity or affinity. There are no other family relationships known to the registrant other than the ones disclosed herein. 184

190 MARKET PRICE OF AND DIVIDENDS ON THE ISSUER S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Holders of the Issuer s Common Shares As at 30 September 2016, the following are the top 20 stockholders of the Issuer. Stockholder Name No. of shares % to Total 1 PCD Nominee Corp. (Non-Filipino) 396,102, % 2 PCD Nominee Corp. (Filipino) 107,168, % 3 Hans T. Sy 98,940, % 4 Herbert T. Sy 98,940, % 5 Harley T. Sy 87,792, % 6 Henry T. Sy, Jr. 87,690, % 7 Teresita T. Sy 85,628, % 8 Elizabeth T. Sy 70,084, % 9 Syntrix Holdings, Inc. 46,875, % 10 Felicidad T. Sy 38,283, % 11 Sysmart Corporation 28,925, % 12 Henry Sy Foundation, Inc. 22,500, % 13 Tansmart Holdings, Inc. 22,500, % 14 Felicidad T. Sy Foundation, Inc. 11,250, % 15 Susana Fong 452, % 16 Value Plus, Inc. 152, % 17 Alberto S. Yao 78, % 18 Belle Corporation 48, % 19 Hector Yap Dimacali 39, % 20 Hans Sy FAO Wonderfoods Corp. 39, % As at 30 September 2016, the Issuer has 1,248 shareholders of its common shares. The foreign ownership level in the Issuer is 32.90%. Dividends and Dividend Policy As at 30 June 2016, there are no restrictions that would limit the ability of the Issuer to pay dividends 185

191 to the common stockholders, except with respect to P158.6 billion, representing accumulated equity in net earnings of subsidiaries, associate companies and joint ventures. These earnings are not available for dividend distribution until such time that the Issuer receives the dividends from the subsidiaries. On April 27, 2016, the Board approved the declaration of cash dividends of 106.3% of the par value or P10.63 per share for a total amount of P8,536.5 million in favor of stockholders on record as at May 12, This was paid on May 26, On the same date, the Board approved the declaration of 50% stock dividends in favor of stockholders on record as of August 3, The stock dividends were issued on August 18, On April 29, 2015, the Board approved the declaration of cash dividends of 106.1% of the par value or P10.61 per share for a total amount of P8,520.4 million in favor of stockholders on record as at May 14, This was paid on June 9, On April 30, 2014, the Board approved the declaration of cash dividends of 103.4% of the par value or P10.34 per share for a total amount of P8,233.5 million in favor of stockholders on record as at May 30, This was paid on June 26, On April 25, 2013, the Board approved the declaration of cash dividends of 118.0% of the par value or P11.80 per share for a total amount of P7,423.0 million in favor of stockholders on record as at May 24, This was paid on June 20, On the same date, the Board approved the declaration of 25% stock dividends in favor of stockholders on record to be fixed by the SEC. On June 24, 2013 and July 12, 2013, SEC approved the issuance of 157,000,000 and 629,986 shares as stock dividends to stockholders on record as at July 8, The stock dividends were issued on August 1, The amount of dividend declaration annually by SMIC and its subsidiaries depend on the net income, cash availability and the investment projects as approved by the Board of Directors of SMIC and each of the subsidiaries. Market Price of Issuer s Common Equity The registrant s common equity is principally traded at the Philippine Stock Exchange. The high and low sales prices for each period are indicated in the table below (in P) High Low High Low High Low 1st Quarter nd Quarter 1, rd Quarter th Quarter The total number of stockholders as at 30 September 2016 was 1,248. Market price of the Issuer s Shares as at 26 October 2016 was P per share. This closing price already reflects the impact of the 50% stock dividend which was issued by the Company on August 18,

192 Recent Sales of Unregistered or Exempt Securities The following securities were issued as exempt from the registration requirements of the Securities Regulation Code (SRC) and therefore have not been registered with the SEC: (a) On June 10, 2014, SMIC issued US$350 million senior bonds which bear a fixed interest rate of 4.875% per annum, payable semi-annually in arrears. The bonds will mature on June 10, The bonds, which was listed in the Singapore Stock Exchange, are considered exempt security pursuant to 10.1 (l) of RA No The underwriter is Citigroup Global Markets Limited and Standard Chartered Bank and the total underwriting fees and expenses amounted to US$1.749 million. (b) On October 17, 2012, SMIC issued US$500 million senior bonds which bear a fixed interest rate of 4.250% per annum, payable semi-annually in arrears. The bonds will mature on October 17, The bonds, which was listed in the Singapore Stock Exchange, are considered exempt security pursuant to Section 10.1 (k) and 10.1 (l) of RA No The underwriter is Citibank N.A. London and the total underwriting fees and expenses amounted to US$2.5 million. (c) On February 15, 2012, SMIC issued a US$250.0 million Convertible Bonds due on February 15, The Convertible Bonds, which was listed in the Singapore Stock Exchange, are considered exempt security pursuant to Section 10(g) of R.A. No The lead underwriter is Citibank N.A. London and the total underwriting fees and expenses amounted to US$3.125 million. The bonds were fully converted into SMIC common shares as of April 9, (d) On October 13, 2010, SMIC issued US$400 million bonds which bear a fixed interest rate of 5.5% per annum, payable semi-annually in arrears. The bonds will mature on October 13, Of this amount, US$82.9 million and US$130.8 million were exchanged from the existing US$350 million 6.75% bonds due 2013 and US$500 million 6.00% bonds due 2014, respectively. The balance of US$186.3 million represents the new money component. The bonds, which were listed in the Singapore Stock Exchange, are considered as exempt pursuant to Section 10 (1) of RA No The underwriters are Citi, HSBC and BDO and the total underwriting fees and expenses amounted to US$1.7 million. SMIC retired/cancelled US$7.1 million bonds on March 25, The outstanding balance of the bonds amounted to US$392.9 million. Security Ownership of Certain Beneficial Owners and Management Security Ownership of Certain Record and Beneficial Owners As at 30 September 2016, the following are the owners of the Issuer s common stock in excess of 5% of total outstanding shares: 187

193 Title of Class Common Stock Common Stock Common Stock Common Stock Common Stock Common Stock Name & address of record owner & relationship with Issuer PCD Nominee Corp. (Non- Filipino) PCD Nominee Corp. (Filipino) Hans T. Sy (Shareholder of Issuer) No. 11 Harvard Road, Forbes Park, Makati City Herbert T. Sy (Shareholder of Issuer) No. 63 Cambridge Circle, Forbes Park, Makati City Harley T. Sy (Director and President) No. 63 Cambridge Circle, Forbes Park, Makati City Henry T. Sy, Jr. (Director and Vice Chairperson) No. 63 Cambridge Circle, Forbes Park, Makati City Name of beneficial owner & relationship with record owner Citizenship No. of shares held Percent Various clients 1 Foreign 396,102, % Various clients 1 Filipino 107,168, % Same as the record owner Same as the record owner Same as the record owner Same as the record owner Filipino 98,940, % Filipino 98,940, % Filipino 87,792, % Filipino 87,690, % 188

194 Title of Class Name & address of record owner & relationship with Issuer Name of beneficial owner & relationship with record owner Citizenship No. of shares held Percent Common Stock Teresita T. Sy (Director and Vice Chairperson) No. 63 Cambridge Circle, Forbes Park, Makati City Same as the record owner Filipino 85,628, % Common Stock Elizabeth T. Sy (Shareholder of Issuer) No. 63 Cambridge Circle, Forbes Park, Makati City Same as the record owner Filipino 70,084, % (1) The Issuer has no information as to the beneficial owners of the shares of stocks held by PCD Nominee Corp. The clients of PCD Nominee Corp. have the power to decide how their shares are to be voted. Security Ownership of Management As at 30 September 2016, the following are the number of Shares owned of record by the Issuer s directors and key executive officers: Title of Class Name of Beneficial Owner Citizenship Amount and Nature of Beneficial Ownership (d) Direct; (i) Indirect Percent of Class Common Stock Harley T. Sy Filipino 87,792,438 (d) 7.29% Common Stock Henry T. Sy, Jr. Filipino 87,690,675 (d) 7.28% Common Stock Teresita T. Sy Filipino 85,628,175 (d) 7.11% Common Stock Henry Sy, Sr. Filipino 4,773,825 (i) 0.40% Common Stock Corazon P. Guidote Filipino 3,187 (i) 0.00% Common Stock Wilson H. Go Filipino 243 (i) 0.00% Common Stock Ah Doo Lim Singaporean 187 (d) 0.00% Common Stock Joseph R. Higdon American 187 (d) 0.00% Common Stock Tomasa H. Lipana Filipino 150 (d) 0.00% 189

195 Title of Class Name of Beneficial Owner Citizens hip Amount and Nature of Beneficial Ownership (d) Direct; (i) Indirect Percent of Class Common Stock Cecilia Reyes-Patricio Filipino 130 (d) 0.00% Common Stock Jose T. Sio Filipino 21 (d) 0.00% Common Stock Grace F. Roque Filipino 0 Nil Common Stock Frederic C. DyBuncio Filipino 0 Nil Common Stock Franklin C. Gomez Filipino 0 Nil Common Stock Elizabeth Anne C. Uychaoco Filipino 0 Nil Common Stock Marianne M. Guerrero Filipino 0 Nil Common Stock Marcelo C. Fernando Filipino 0 Nil Common Stock Elmer B. Serrano Filipino 0 Nil Directors and Executive Officers as a group 265,889, % Voting Trust Holders of 5% or More There are no persons holding more than 5% of a class of shares under a voting trust or any similar agreements. Change in Control No change in control in the Issuer has occurred since the beginning of its last fiscal year. Warrants and Options As of the date of this Prospectus, there are no existing or planned stock options / stock warrant offerings. 190

196 DESCRIPTION OF DEBT The Company is subject to covenants under agreements evidencing or governing its outstanding indebtedness, including but not limited to those set forth in loan agreements with local banks and financial institutions. Under these loans, the Company undertook to maintain a Current Ratio of not less than 0.3:1 and Debt-Equity Ratio not exceeding 80:20. The Company does not believe that these covenants will impose constraints on its ability to finance its capital expenditure program or, more generally, to develop its business and enhance its financial performance. The Company is in full compliance with the covenants required by the creditors. 191

197 TAXATION The statements herein regarding taxation are based on the laws in force as of the date of this Prospectus and are subject to any changes in law occurring after such date, which changes could be made on a retroactive basis. The following summary does not purport to be a comprehensive description of all of the tax considerations that may be relevant to a decision to purchase, own or dispose of the Bonds and does not purport to deal with the tax consequences applicable to all categories of investors, some of which (such as dealers in securities or commodities) may be subject to special rules. Prospective purchasers of the Bonds are advised to consult their own tax advisers concerning the overall tax consequences of their ownership of the Bonds. Philippine Taxation As used in this section, the term non-resident alien means an individual whose residence is not within the Philippines and who is not a citizen of the Philippines. A non-resident alien who is actually within the Philippines for an aggregate period of more than 180 days during any calendar year is considered a non-resident alien doing business in the Philippines ; however, a non-resident alien who is actually within the Philippines for an aggregate period of 180 days or less during any calendar year may be considered a non-resident alien not engaged in trade or business within the Philippines. A non-resident foreign corporation is a foreign corporation not engaged in trade or business within the Philippines. TAXATION OF INTEREST The Tax Code provides that interest-bearing obligations of Philippine residents are Philippine sourced income subject to Philippine income tax. Interest income derived by Philippine citizens and alien resident individuals from the Bonds is thus subject to income tax, which is withheld at source, at the rate of 20% based on the gross amount of interest. Generally, interest on the Bonds received by non-resident aliens engaged in trade or business in the Philippines is subject to a 20% final withholding tax while that received by non-resident aliens not engaged in trade or business is subject to a final withholding tax rate of 25%. Interest income received by domestic corporations and resident foreign corporations from the Bonds is subject to a final withholding tax rate of 20%. Interest income received by non-resident foreign corporations from the Bonds is subject to a 30% final withholding tax. The foregoing rates are subject to further reduction by any applicable tax treaties in force between the Philippines and the country of residence of the non-resident owner. Most tax treaties to which the Philippines is a party generally provide for a reduced tax rate of 10% to 15% in cases where the interest which arises in the Philippines is paid to a resident of the other contracting state. However, most tax treaties also provide that reduced withholding tax rates shall not apply if the recipient of the interest who is a resident of the other contracting state, carries on business in the Philippines through a permanent establishment and the holding of the relevant interest-bearing instrument is effectively connected with such permanent establishment. TAX-EXEMPT STATUS OR ENTITLEMENT TO PREFERENTIAL TAX RATE Bondholders who are exempt from or are not subject to final withholding tax on interest income or entitled to be taxed at a preferential rate may claim such exemption or avail of such preferential rate by submitting the necessary documents. Said Bondholder shall submit the following requirements: (i) certified true copy of the tax exemption certificate, ruling or opinion issued by the BIR, confirming the exemption or preferential rate; (ii) with respect to tax treaty relief, a certified true copy of the ruling issued by the International Tax Affairs Division of the BIR, confirming that the preferential tax treatment sought by the Bondholder is applicable; (iii) a duly notarized undertaking to immediately notify the Issuer, the Registrar and the Paying Agent of any suspension or revocation of the tax exemption certificate, certificate, ruling or 192

198 opinion issued by the BIR, executed using the prescribed form, with a declaration and warranty of its tax exempt status or entitlement to a preferential tax rate, and an agreement to indemnify and hold the Issuer, the Registrar and the Paying Agent free and harmless against any claims, actions, suits, and liabilities resulting from the non-withholding or incorrect withholding of the required tax; and (iv) such other documentary requirements as may be required under the applicable regulations of the relevant taxing or other authorities; provided, that the Issuer, the Registrar and the Paying Agent shall have the exclusive discretion to decide whether the documents submitted are sufficient for purposes of applying the exemption or the reduced rate being claimed by the Bondholder on the interest payments to such Bondholder; provided further that, all sums payable by the Issuer to tax-exempt entities shall be paid in full without deductions for taxes, duties, assessments, or government charges, subject to the submission by the Bondholder claiming the benefit of any exemption of the required documents and of additional reasonable evidence of such tax-exempt status to the Registrar. The foregoing requirements shall be submitted, (i) in respect of an initial issuance of Bonds, to the underwriters or selling agents who shall then forward the same with the Application to Purchase to the Registrar; or (ii) in respect of a transfer from a Bondholder to a purchaser, to the Registrar within three days from settlement date. VALUE-ADDED TAX Gross receipts arising from the sale of the Bonds in the Philippines by dealers in securities shall be subject to a 12% value-added tax. GROSS RECEIPTS TAX Bank and non-bank financial intermediaries performing quasi-banking functions are subject to gross receipts tax on gross receipts derived from sources within the Philippines in accordance with the following schedule: On interest, commissions and discounts from lending activities as well as income from financial leasing, on the basis of remaining maturities of instruments from which such receipts are derived: Maturity period is five years or less 5% Maturity period is more than five years 1% Non-bank financial intermediaries not performing quasi-banking functions doing business in the Philippines are likewise subject to gross receipts tax. Gross receipts of such entities derived from sources within the Philippines from interests, commissions and discounts from lending activities are taxed in accordance with the following schedule based on the remaining maturities of the instruments from which such receipts are derived: Maturity period is five years or less 5% Maturity period is more than five years 1% In case the maturity period of the instruments held by banks, non-bank financial intermediaries performing quasi-banking functions and non-bank financial intermediaries not performing quasi-banking functions is shortened through pre-termination, then the maturity period shall be reckoned to end as of the date of pretermination for purposes of classifying the transaction and the correct rate shall be applied accordingly. Net trading gains realized within the taxable year on the sale or disposition of the Bonds by banks and nonbank financial intermediaries performing quasi-banking functions shall be taxed at 7%. 193

199 DOCUMENTARY STAMP TAX A documentary stamp tax is imposed upon the issuance of debt instruments issued by Philippine companies, such as the Bonds, at the rate of P1.00 for each P200, or fractional part thereof, of the issue price of such debt instruments; provided that, for debt instruments with terms of less than one year, the documentary stamp tax to be collected shall be of a proportional amount in accordance with the ratio of its term in number of days to 365 days. The documentary stamp tax is collectible wherever the document is made, signed, issued, accepted, or transferred, when the obligation or right arises from Philippine sources, or the property is situated in the Philippines. Any applicable documentary stamp taxes on the original issue shall be paid by the Issuer for its own account. TAXATION ON SALE OR OTHER DISPOSITION OF THE BONDS Income Tax Any gain realized from the sale, exchange or retirement of bonds will, as a rule, form part of the gross income of the sellers, for purposes of computing the relevant taxable income subject to the regular rates of 5% to 32%, 25%, or 30%, as the case may be. If the bonds are sold by a seller, who is an individual and who is not a dealer in securities, who has held the bonds for a period of more than 12 months prior to the sale, only 50% of any capital gain will be recognized and included in the sellers gross taxable income. However, under the Tax Code, any gain realized from the sale, exchange or retirement of bonds, debentures and other certificates of indebtedness with an original maturity date of more than five years (as measured from the date of issuance of such bonds, debentures or other certificates of indebtedness) shall not be subject to income tax. Moreover, any gain arising from such sale, regardless of the original maturity date of the bonds, may be exempt from income tax pursuant to various income tax treaties to which the Philippines is a party, and subject to procedures prescribed by the Bureau of Internal Revenue for the availment of tax treaty benefits. Estate and Donor s Tax The transfer by a deceased person, whether a Philippine resident or a non-philippine resident, to his heirs of the Bonds shall be subject to an estate tax which is levied on the net estate of the deceased at progressive rates ranging from 5% to 20%, if the net estate is over P200,000. A Bondholder shall be subject to donor s tax based on the net gift on the transfer of the Bonds by gift at either (i) 30%, where the donee or beneficiary is a stranger, or (ii) at progressive rates ranging from 2% to 15% if the net gifts made during the calendar year exceed P100,000 and where the donee or beneficiary is not a stranger. For this purpose, a stranger is a person who is not a: (a) brother, sister (whether by whole or half-blood), spouse, ancestor or lineal descendant; or (b) relative by consanguinity in the collateral line within the fourth degree of relationship. The estate or donor s taxes payable in the Philippines may be credited with the amount of any estate or donor's taxes imposed by the authority of a foreign country, subject to limitations on the amount to be credited, and the tax status of the donor. The estate tax and the donor s tax, in respect of the Bonds, shall not be collected (a) if the deceased, at the time of death, or the donor, at the time of the donation, was a citizen and resident of a foreign country which, at the time of his death or donation, did not impose a transfer tax of any character in respect of intangible personal property of citizens of the Philippines not residing in that foreign country; or (b) if the 194

200 laws of the foreign country of which the deceased or donor was a citizen and resident, at the time of his death or donation, allows a similar exemption from transfer or death taxes of every character or description in respect of intangible personal property owned by citizens of the Philippines not residing in the foreign country. In case the Bonds are transferred for less than an adequate and full consideration in money or money's worth, the amount by which the fair market value of the Bonds exceeded the value of the consideration may be deemed a gift and may be subject to donor s taxes. Documentary Stamp Tax No documentary stamp tax is imposed on the subsequent sale or disposition of the Bonds, trading the Bonds in a secondary market or through an exchange. However, if the transfer constitutes a renewal of the Bonds, documentary stamp tax is payable anew. 195

201 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS OF THE ISSUER Unaudited Interim Condensed Consolidated Financial Statements as at 30 June 2016 and for the six months ended 30 June 2015 and 2016 for the Group and the Issuer Independent Auditors Report SM Investments Corporation and Subsidiaries Consolidated Interim Balance Sheet as at 30 June 2016 SM Investments Corporation and Subsidiaries Consolidated Interim Statements of Income for the six months ended 30 June 2015 and 2016 SM Investments Corporation and Subsidiaries Consolidated Interim Statements of Comprehensive Income for the six months ended 30 June 2015 and 2016 SM Investments Corporation and Subsidiaries Consolidated Interim Statements of Changes in Equity for the six months ended 30 June 2015 and 2016 SM Investments Corporation and Subsidiaries Consolidated Interim Statements of Cash Flows for the six months ended 30 June 2015 and 2016 SM Investments Corporation and Subsidiaries Notes to Interim Financial Statements Audited Financial Statements as at and for the years ended 31 December 2015, 2014 and 2013 for the Group and the Issuer Independent Auditors Report SM Investments Corporation and Subsidiaries Consolidated Balance Sheets as at 31 December 2015 and 2014 SM Investments Corporation and Subsidiaries Consolidated Statements of Income for the years ended 31 December 2015, 2014 and 2013 SM Investments Corporation and Subsidiaries Consolidated Statements of Comprehensive Income for the years ended 31 December 2015, 2014 and 2013 SM Investments Corporation and Subsidiaries Consolidated Statements of Changes in Equity for the years ended 31 December 2015, 2014 and 2013 SM Investments Corporation and Subsidiaries Consolidated Statements of Cash Flows for the years ended 31 December 2015, 2014 and 2013 SM Investments Corporation and Subsidiaries Notes to Financial Statements Pro Forma Condensed Consolidated Financial Statements as at and for the six months ended 30 June 2016 and for the years ended 31 December 2015 amd 2014 and for the Group and the Issuer Independent Auditors Report SM Investments Corporation and Subsidiaries Consolidated Pro forma Balance Sheet as at 30 June 2016 and 31 December

202 SM Investments Corporation and Subsidiaries Consolidated Pro forma Statements of Income for t he six months ended 30 June 2016 and 2015 and for the ye a r s e n d e d 3 1 D e c e m b e r , a nd SM Investments Corporation and Subsidiaries Consolidated Pro forma Statements of Comprehensive Income for the six months ended 30 June 2016 and 2015 and for the years ended 31 December 2015, 2014 and 2013 SM Investments Corporation and Subsidiaries Consolidated Pro forma Statements of Changes in Equity for the six months ended 30 June 2016 and for the year ended 31 December 2015 SM Investments Corporation and Subsidiaries Consolidated Pro forma Statements of Cash Flows for the six months ended 30 June 2016 and for the year ended 31 December 2015 SM Investments Corporation and Subsidiaries Notes to Pro forma Financial Statements 197

203 SyCip Gorres Velayo & Co Ayala Avenue 1226 Makati City Philippines Tel: (632) Fax: (632) ey.com/ph BOA/PRC Reg. No. 0001, December 14, 2015, valid until December 31, 2018 SEC Accreditation No FR-4 (Group A), November 10, 2015, valid until November 9, 2018 INDEPENDENT AUDITORS REPORT The Stockholders and the Board of Directors SM Investments Corporation 10th Floor, One E-Com Center Harbor Drive, Mall of Asia Complex CBP-1A, Pasay City 1300 We have audited the accompanying consolidated financial statements of SM Investments Corporation and Subsidiaries, which comprise the consolidated balance sheets as at December 31, 2015 and 2014, and the consolidated statements of income, statements of comprehensive income, statements of changes in equity and statements of cash flows for each of the three years in the period ended December 31, 2015, and a summary of significant accounting policies and other explanatory information. Management s Responsibility for the Consolidated Financial Statements Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with Philippine Financial Reporting Standards, and for such internal control as management determines is necessary to enable the preparation of the consolidated financial statements that are free from material misstatement, whether due to fraud or error. Auditors Responsibility Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with Philippine Standards on Auditing. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditor s judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. A member firm of Ernst & Young Global Limited *SGVFS015746*

204 - 2 - Opinion In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of SM Investments Corporation and Subsidiaries as at December 31, 2015 and 2014, and their financial performance and their cash flows for each of the three years in the period ended December 31, 2015 in accordance with Philippine Financial Reporting Standards. SYCIP GORRES VELAYO & CO. Belinda T. Beng Hui Partner CPA Certificate No SEC Accreditation No AR-1 (Group A), March 25, 2013, valid until March 24, 2016 Tax Identification No BIR Accreditation No , June 26, 2015, valid until June 25, 2018 PTR No , January 4, 2016, Makati City February 29, 2016 A member firm of Ernst & Young Global Limited *SGVFS015746*

205 STATEMENT OF MANAGEMENT S RESPONSIBILITY FOR FINANCIAL STATEMENTS The management of SM Investments Corporation and Subsidiaries (the Group) is responsible for the preparation and fair presentation of the consolidated financial statements as at December 31, 2015 and 2014 and for each of the three years in the period ended December 31, 2015, including the additional components attached therein, in accordance with the Philippine Financial Reporting Standards. This responsibility includes designing and implementing internal controls relevant to the preparation and fair presentation of the consolidated financial statements that are free from material misstatement, whether due to fraud or error, selecting and applying appropriate accounting policies, and making accounting estimates that are reasonable in the circumstances. The Board of Directors reviews and approves the consolidated financial statements and submits the same to the stockholders. SyCip Gorres Velayo & Co., the independent auditors, appointed by the stockholders has examined the consolidated financial statements of SM Investments Corporation and Subsidiaries in accordance with the Philippine Standards on Auditing, and in its report to the stockholders, has expressed its opinion on the fairness of presentation upon completion of such examination. TERESITA T. SY HARLEY T. SY JOSE T. SIO Vice Chairperson of the Board President Chief Financial Officer Signed this 29th day of February 2016.

206 REPUBLIC OF THE PHILIPPINES ) MAKATI CITY ) SUBSCRIBED AND SWORN to before this at Makati City, affiants exhibiting to me their Community Tax Certificates, as follows: NAMES PASSPORT NO. DATE OF ISSUE PLACE OF ISSUE TERESITA T. SY EB December 10, 2013 Manila HARLEY T. SY EB November 12, 2011 Manila JOSE T. SIO EB April 11, 2012 Manila

207 SM INVESTMENTS CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Amounts in Thousands) December ASSETS Current Assets Cash and cash equivalents (Notes 7 and 29) P=53,910,071 P=69,133,381 Time deposits (Notes 8 and 29) 9,611,405 9,000,324 Investments held for trading and sale (Notes 9 and 29) 1,100,915 4,190,449 Receivables (Notes 10, 29 and 30) 32,133,508 31,009,820 Merchandise inventories - at cost (Note 23) 16,262,228 14,882,200 Other current assets (Notes 11 and 29) 51,312,145 55,821,423 Total Current Assets 164,330, ,037,597 Noncurrent Assets Available-for-sale investments (Notes 12 and 29) 21,175,695 19,205,044 Investments in associate companies and joint ventures (Note 13) 169,869, ,476,174 Time deposits (Notes 8 and 29) 53,127,769 47,579,390 Property and equipment (Note 14) 19,399,788 19,903,014 Investment properties (Note 15) 249,583, ,888,427 Land and development (Note 16) 27,386,708 26,629,864 Intangibles (Note 17) 24,707,221 22,303,203 Deferred tax assets (Note 27) 2,569,800 2,293,944 Other noncurrent assets (Notes 17 and 29) 38,927,352 32,567,952 Total Noncurrent Assets 606,747, ,847,012 P=771,077,498 P=711,884,609 LIABILITIES AND EQUITY Current Liabilities Bank loans (Notes 18, 22 and 29) P=9,923,215 P=13,892,641 Accounts payable and other current liabilities (Notes 19 and 29) 73,123,426 69,861,065 Income tax payable 2,023,824 1,593,060 Current portion of long-term debt (Notes 20, 22, 29 and 30) 25,994,800 10,669,108 Dividends payable (Note 29) 346, ,882 Total Current Liabilities 111,411,546 96,280,756 Noncurrent Liabilities Long-term debt - net of current portion (Notes 20, 22, 29 and 30) 245,167, ,113,555 Derivative liabilities (Notes 29 and 30) 58,705 Deferred tax liabilities (Note 27) 7,434,777 6,867,925 Tenants deposits and others (Notes 17, 26, 28, 29 and 30) 25,364,620 21,615,259 Total Noncurrent Liabilities 277,966, ,655,444 Total Liabilities 389,378, ,936,200 Equity Attributable to Owners of the Parent Capital stock (Note 21) 8,030,554 7,963,406 Additional paid-in capital (Note 21) 76,399,625 71,952,082 Equity adjustments from common control transactions (Note 21) (1,902,024) (1,902,933) Cost of Parent common shares held by subsidiaries (Note 21) (25,386) (25,386) Cumulative translation adjustment 1,057, ,360 Re-measurement gain (loss) on defined benefit asset/obligation (Note 26) 117,738 (126,530) Net unrealized gain on available-for-sale investments (Notes 12 and 13) 12,724,360 10,207,259 Retained earnings (Note 21): Appropriated 36,000,000 27,000,000 Unappropriated 152,004, ,069,856 Total Equity Attributable to Owners of the Parent 284,407, ,004,114 Non-controlling Interests 97,291,958 92,944,295 Total Equity 381,699, ,948,409 P=771,077,498 P=711,884,609 See accompanying Notes to Consolidated Financial Statements. *SGVFS015746*

208 SM INVESTMENTS CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (Amounts in Thousands Except Per Share Data) Years Ended December REVENUE Sales: Merchandise P=211,361,636 P=197,080,971 P=180,873,042 Real estate 22,529,384 22,629,335 21,242,138 Rent (Notes 15, 22 and 28) 35,969,341 32,605,222 27,628,472 Equity in net earnings of associate companies and joint ventures (Note 13) 14,070,301 13,225,022 13,602,269 Cinema ticket sales, amusement and others 6,427,592 5,771,529 4,945,795 Management and service fees (Note 22) 1,431,211 1,452,771 1,437,561 Gain (loss) on sale of available-for-sale investments and fair value changes on investments held for trading - net (Notes 9 and 12) (5,417) 48, ,163 Dividend income (Note 22) 675, , ,494 Others 3,418,577 3,206,768 2,826, ,877, ,615, ,580,045 COST AND EXPENSES Cost of sales: Merchandise (Note 23) 163,024, ,917, ,720,368 Real estate (Note 16) 12,238,872 12,529,076 12,243,534 Selling, general and administrative expenses (Note 24) 63,707,080 60,710,150 51,186, ,970, ,156, ,150,295 OTHER INCOME (CHARGES) Interest expense (Notes 22 and 25) (10,460,636) (11,895,865) (11,088,046) Interest income (Notes 22 and 25) 3,155,800 3,032,635 3,709,484 Gain (loss) on disposal of investments and properties - net (Notes 13 and 15) (51,147) 2,879, ,552 Loss on fair value changes on derivatives - net (Note 30) (103,991) (189,554) (997,576) Foreign exchange gain - net (Note 29) 240, ,080 59,411 (7,219,197) (5,993,958) (7,770,175) INCOME BEFORE INCOME TAX 49,688,257 46,464,544 43,659,575 PROVISION FOR (BENEFIT FROM) INCOME TAX (Note 27) Current 9,271,234 7,723,852 7,367,602 Deferred 84,136 (149,863) (1,947,105) 9,355,370 7,573,989 5,420,497 NET INCOME P=40,332,887 P=38,890,555 P=38,239,078 Attributable to Owners of the Parent (Note 31) P=28,455,260 P=28,398,584 P=27,445,682 Non-controlling interests 11,877,627 10,491,971 10,793,396 P=40,332,887 P=38,890,555 P=38,239,078 Basic/Diluted Earnings Per Common Share Attributable to Owners of the Parent (Note 31) P=35.68 P=35.66 P=34.85 See accompanying Notes to Consolidated Financial Statements. *SGVFS015746*

209 SM INVESTMENTS CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Amounts in Thousands) Years Ended December NET INCOME P=40,332,887 P=38,890,555 P=38,239,078 OTHER COMPREHENSIVE INCOME (LOSS) Items that will be reclassified to profit or loss in subsequent periods Net unrealized gain on available-for-sale investments (Note 12) 788,704 4,243,049 2,290,960 Share in unrealized gain (loss) on available-for-sale investments of associates - net (Notes 12 and 13) (1,773,250) 435,121 (2,756,754) Cumulative translation adjustment 364,928 (720,937) 892,452 Income tax relating to items to be reclassified to profit or loss in subsequent periods (107,726) 112,849 (2,841,627) (727,344) 4,070,082 (2,414,969) Items not to be reclassified to profit or loss in subsequent periods Re-measurement gain (loss) on defined benefit obligation (Note 26) 330, ,883 (201,304) Income tax relating to items not to be reclassified to profit or loss in subsequent periods (99,134) (38,965) 60, ,311 90,918 (140,913) TOTAL COMPREHENSIVE INCOME P=39,836,854 P=43,051,555 P=35,683,196 Attributable to Owners of the Parent P=31,408,020 P=30,969,070 P=23,836,811 Non-controlling interests 8,428,834 12,082,485 11,846,385 P=39,836,854 P=43,051,555 P=35,683,196 See accompanying Notes to Consolidated Financial Statements. *SGVFS015746*

210 SM INVESTMENTS CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY (Amounts in Thousands Except Per Share Data) Capital Stock Additional Paid-in Capital Equity Adjustments from Common Control Transactions Cost of Parent Common Shares Held by Subsidiaries Equity Attributable to Owners of the Parent Cumulative Translation Adjustment Net Unrealized Gain on Availablefor-Sale Investments Re-measurement Gain (Loss) on Defined Benefit Asset/ Obligation Appropriated Retained Earnings Unappropriated Retained Earnings Total Non-controlling Interests Balance at December 31, 2014 P=7,963,406 P=71,952,082 (P=1,902,933) (P=25,386) P=866,360 P=10,207,259 (P=126,530) P=27,000,000 P=141,069,856 P=257,004,114 P=92,944,295 P=349,948,409 Net income 28,455,260 28,455,260 11,877,627 40,332,887 Other comprehensive income 191,391 2,517, ,268 2,952,760 (3,448,793) (496,033) Total comprehensive income 191,391 2,517, ,268 28,455,260 31,408,020 8,428,834 39,836,854 Issuance of Parent common shares (Note 21) 67,148 4,833,081 4,900,229 4,900,229 Reversal of appropriation (Note 21) (18,000,000) 18,000,000 Appropriation during the year 27,000,000 (27,000,000) Cash dividends - P=10.61 per share (Note 21) (8,520,406) (8,520,406) (8,520,406) Decrease in previous year s non-controlling interests (303,245) (303,245) Common control transactions (Note 5) Acquisition of non-controlling interests (385,538) (385,538) (385,538) Cash dividends paid to non-controlling shareholders (3,777,926) (3,777,926) Balance at December 31, 2015 P=8,030,554 P=76,399,625 (P=1,902,024) (P=25,386) P=1,057,751 P=12,724,360 P=117,738 P=36,000,000 P=152,004,710 P=284,407,328 P=97,291,958 P=381,699,286 Total Equity Balance at December 31, 2013 P=7,962,723 P=57,799,360 (P=2,584,210) (P=25,386) P=1,233,177 P=7,338,500 (P=195,074) P=27,000,000 P=120,904,727 P=219,433,817 P=80,807,031 P=300,240,848 Net income 28,398,584 28,398,584 10,491,971 38,890,555 Other comprehensive income (366,817) 2,868,759 68,544 2,570,486 1,590,514 4,161,000 Total comprehensive income (366,817) 2,868,759 68,544 28,398,584 30,969,070 12,082,485 43,051,555 Issuance of Parent common shares (Note 21) ,194 47,877 47,877 Cash dividends - P=10.34 per share (Note 21) (8,233,455) (8,233,455) (8,233,455) Decrease in previous year s non-controlling interests (728,799) (728,799) Common control transactions (Note 5) 681, , ,277 Re-issuance by a subsidiary of treasury shares to non-controlling shareholders (Note 21) 14,105,528 14,105,528 3,540,159 17,645,687 Cash dividends paid to non-controlling shareholders (2,756,581) (2,756,581) Balance at December 31, 2014 P=7,963,406 P=71,952,082 (P=1,902,933) (P=25,386) P=866,360 P=10,207,259 (P=126,530) P=27,000,000 P=141,069,856 P=257,004,114 P=92,944,295 P=349,948,409 Balance at December 31, 2012 P=6,229,746 P=42,858,920 (P=2,332,796) (P=125,906) P=266,915 P=11,718,559 P= P=35,000,000 P=94,458,694 P=188,074,132 P=73,570,846 P=261,644,978 Net income 27,445,682 27,445,682 10,793,396 38,239,078 Other comprehensive income 966,262 (4,380,059) (195,074) (3,608,871) 1,052,989 (2,555,882) Total comprehensive income 966,262 (4,380,059) (195,074) 27,445,682 23,836,811 11,846,385 35,683,196 Issuance of Parent common shares (Note 21) 156,404 14,802,328 14,958,732 14,958,732 Disposal of Parent common shares held by subsidiaries (Note 21) 138, , , ,632 Cash dividends - P=11.80 per share (Note 21) (7,423,076) (7,423,076) (7,423,076) Stock dividends (Note 21) 1,576,573 (1,576,573) Reversal of appropriation (Note 21) (8,000,000) 8,000,000 Increase in previous year s non-controlling interests 1,830,497 1,830,497 Common control transactions (Notes 5 and 21) (251,414) (251,414) (2,083,843) (2,335,257) Cash dividends paid to non-controlling shareholders (4,356,854) (4,356,854) Balance at December 31, 2013 P=7,962,723 P=57,799,360 (P=2,584,210) (P=25,386) P=1,233,177 P=7,338,500 (P=195,074) P=27,000,000 P=120,904,727 P=219,433,817 P=80,807,031 P=300,240,848 See accompanying Notes to Consolidated Financial Statements. *SGVFS015746*

211 SM INVESTMENTS CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Amounts in Thousands) Years Ended December CASH FLOWS FROM OPERATING ACTIVITIES Income before income tax P=49,688,257 P=46,464,544 P=43,659,575 Adjustments for: Equity in net earnings of associate companies and joint ventures (Note 13) (14,070,301) (13,225,022) (13,602,269) Interest expense (Note 25) 10,460,636 11,895,865 11,088,046 Depreciation and amortization (Notes 14, 15 and 24) 11,362,639 10,907,625 9,513,584 Interest income (Note 25) (3,155,800) (3,032,635) (3,709,484) Loss (gain) on disposal of investments and properties - net (Notes 13 and 15) 51,147 (2,879,746) (546,552) Dividend income (675,066) (595,204) (883,494) Unrealized foreign exchange loss 196, ,836 1,213,565 Loss on fair value changes on derivatives - net (Note 30) 103, , ,576 Loss (gain) on available-for-sale investments and fair value changes on investments held for trading - net (Notes 12 and 30) 5,417 (48,493) (141,163) Provision (reversal) of impairment loss (Notes 10, 13 and 15) 478,869 (288,547) (1,018,156) Income before working capital changes 54,446,178 49,812,777 46,571,228 Decrease (increase) in: Land and development (13,361,520) (21,724,031) (20,763,530) Other current assets 10,995,306 (3,599,889) (6,220,848) Merchandise inventories (1,380,028) (1,649,892) 870,608 Receivables 1,000,248 (513,876) (2,268,025) Increase (decrease) in: Accounts payable and other current liabilities 11,252,775 (1,112,518) 16,109,852 Tenants deposits and others 3,953,160 3,645,973 3,600,244 Defined benefit liability (Note 26) 191, , ,011 Net cash generated from operations 67,097,233 24,982,011 38,025,540 Income tax paid (8,840,875) (7,737,385) (7,220,176) Net cash provided by operating activities 58,256,358 17,244,626 30,805,364 CASH FLOWS FROM INVESTING ACTIVITIES Proceeds from sale of: Available-for-sale and held for trading investments 51,350 2,246,972 1,646,038 Held for trade investments 35,000 Property and equipment 23, , ,196 Investment properties 4, ,890 8,596 Shares of stock of associate companies 7,448,221 1,108,036 Additions to: Investment properties (Note 15) (46,874,389) (32,791,017) (25,885,092) Investments in associate companies and joint ventures (Note 13) (15,546,154) (1,925,455) (5,492,653) Property and equipment (Note 14) (4,543,157) (4,522,820) (5,131,795) Trademarks (Note 17) (2,404,018) Available-for-sale and held for trading investments (1,242,195) (3,089,078) Decrease (increase) in: Time deposits (3,264,204) 252,851 5,572,971 Other noncurrent assets 1,037,522 7,953,799 4,817,513 Dividends received 6,197,671 4,996,065 4,758,493 Interest received 3,084,147 3,518,976 3,924,505 Acquisition of non-controlling interests in a subsidiary (442,500) Acquisition of subsidiaries, net of cash acquired (Note 5) (16,750,597) Net cash used in investing activities (63,882,639) (15,540,078) (31,049,789) (Forward) *SGVFS015746*

212 - 2 - Years Ended December CASH FLOWS FROM FINANCING ACTIVITIES Availments of: Long-term debt P=32,888,435 P=84,040,740 P=66,196,550 Bank loans 19,298,894 10,862,833 60,249,390 Payments of: Long-term debt (14,241,354) (47,795,955) (47,783,598) Bank loans (23,268,320) (24,568,200) (70,185,745) Interest (11,983,766) (12,138,889) (11,753,597) Dividends (12,216,934) (10,935,343) (13,243,597) Re-issuance by a subsidiary of treasury shares to non-controlling shareholders (Note 21) 17,645,687 Proceeds from issuance of new common shares (Note 21) 6,424,666 Disposal of Parent common shares held by subsidiaries (Note 21) 100,520 Net cash provided by (used in) financing activities (9,523,045) 17,110,873 (9,995,411) NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (15,149,326) 18,815,421 (10,239,836) EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS (73,984) 108,303 (265,227) CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 69,133,381 50,209,657 60,714,720 CASH AND CASH EQUIVALENTS AT END OF YEAR P=53,910,071 P=69,133,381 P=50,209,657 See accompanying Notes to Consolidated Financial Statements. *SGVFS015746*

213 SM INVESTMENTS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. Corporate Information SM Investments Corporation (SMIC or Parent Company) was incorporated in the Philippines on January 15, On June 3, 2009, the Philippine Securities and Exchange Commission (SEC) approved the amendment of SMIC s articles of incorporation for the extension of the Parent Company s corporate life for another 50 years from January 15, Its registered office address is 10th Floor, One E-Com Center, Harbor Drive, Mall of Asia Complex, CBP-1A, Pasay City The Parent Company and its subsidiaries (collectively referred to as the Group), and its associates and joint ventures are involved primarily in the property, retail and financial services and other businesses. The Parent Company s shares of stock are publicly traded in the Philippine Stock Exchange (PSE). The accompanying consolidated financial statements were authorized for issue by the Board of Directors (BOD) as approved and recommended for approval by the Audit Committee on February 29, Basis of Preparation and Statement of Compliance Basis of Preparation The consolidated financial statements of the Group have been prepared on a historical cost basis, except for derivative financial instruments, investments held for trading and available-for-sale (AFS) investments which have been measured at fair value. The consolidated financial statements are presented in Philippine Peso, which is the Parent Company s functional and presentation currency under Philippine Financial Reporting Standards (PFRS). All values are rounded to the nearest thousands except when otherwise indicated. Statement of Compliance The consolidated financial statements have been prepared in compliance with PFRS. Basis of Consolidation The Group is considered to have control over an investee, if and only if, the Group has: Power over the investee (i.e. existing rights that give it the current ability to direct the relevant activities of the investee); Exposure, or rights, to variable returns from its involvement with the investee; and, The ability to use its power over the investee to affect its returns. When the Group has less than a majority of the voting or similar rights of an investee, the Group considers all relevant facts and circumstances in assessing whether it has power over an investee, including: The contractual arrangement with the other vote holders of the investee; Rights arising from other contractual arrangements; and, The Group s voting rights and potential voting rights. *SGVFS015746*

214 - 2 - The Group re-assesses whether or not it controls an investee if facts and circumstances indicate that there are changes to one or more of the three elements of control. Consolidation of a subsidiary begins when the Group obtains control over the subsidiary and ceases when the Group loses control of the subsidiary. Assets, liabilities, income and expenses of a subsidiary acquired or disposed of during the year are included or excluded in the consolidated financial statements from the date the Group gains control until the date the Group ceases to control the subsidiary. Profit or loss and each component of other comprehensive income (OCI) are attributed to the equity holders of the parent of the Group and to the non-controlling interests, even if this results in the non-controlling interests having a deficit balance. When necessary, adjustments are made to the financial statements of subsidiaries to bring their accounting policies in line with the Group s accounting policies. All intra-group assets and liabilities, equity, income, expenses and cash flows relating to transactions between members of the Group are eliminated in full on consolidation. A change in the ownership interest of a subsidiary, without loss of control, is accounted for as an equity transaction. If the Group loses control over a subsidiary, it: Derecognizes the assets (including goodwill) and liabilities of the subsidiary; Derecognizes the carrying amount of any non-controlling interests; Derecognizes the cumulative translation adjustments recorded in equity; Recognizes the fair value of the consideration received; Recognizes the fair value of any investment retained; Recognizes any surplus or deficit in profit or loss; and, Reclassifies the Parent Company s share of components previously recognized in OCI to profit or loss or retained earnings, as appropriate. The consolidated financial statements include the accounts of the Parent Company and the subsidiaries listed below: Percentage of Ownership Company Principal Activities Direct Indirect Direct Indirect Property SM Prime Holdings, Inc. (SM Prime) and Subsidiaries Real estate development SM Development Corporation (SMDC) and Subsidiaries Real estate development Magenta Legacy, Inc. Real estate development Associated Development Corporation Real estate development Highlands Prime, Inc. (HPI) Real estate development Summerhills Home Development Corp. Real estate development CHAS Realty and Development Corporation (CHAS) and Subsidiaries Real estate development Costa del Hamilo, Inc. (Costa) and Subsidiaries Real estate development Prime Metro Estate, Inc. (PMI) and Subsidiary Real estate development Rappel Holdings, Inc. and Subsidiaries Real estate development SM Arena Complex Corporation (SM Arena) Conventions SM Hotels and Conventions Corp. and Subsidiaries Hotel and conventions Tagaytay Resort Development Corporation Real estate development MOA Esplanade Port, Inc. Port terminal operations 100 Mountain Bliss Resort and Development Corporation and Subsidiary Real estate development Intercontinental Development Corporation (ICDC) Real estate development Prime Central, Inc. and Subsidiaries Real estate development Bellevue Properties, Inc. Real estate development *SGVFS015746*

215 - 3 - Percentage of Ownership Company Principal Activities Direct Indirect Direct Indirect Net Group Real estate development Nagtahan Property Holdings, Inc. (formerly AD Farming) Real estate development Retail SM Retail, Inc. (SM Retail) and Subsidiaries Retail Others Primebridge Holdings, Inc. (Primebridge) Investment Asia Pacific Computer Technology Center, Inc. Education Multi-Realty Development Corporation (MRDC) Investment Henfels Investments Corp. Investment Belleshares Holdings, Inc. and Subsidiaries (formerly SM Commercial Properties, Inc.) Investment Sto. Roberto Marketing Corp. Investment The principal place of business and country of incorporation of the subsidiaries listed above is in the Philippines. Material Partly-owned Subsidiary The non-controlling interests of SM Prime is material to the Group. Non-controlling shareholders hold 50% of SM Prime as at December 31, 2015 and The summarized financial information of SM Prime follows: Financial Position December (In Thousands) Current assets P=97,992,191 P=104,016,168 Noncurrent assets 335,836, ,823,991 Total assets 433,828, ,840,159 Current liabilities 69,490,733 50,799,205 Noncurrent liabilities 148,494, ,802,751 Total liabilities 217,985, ,601,956 Total equity P=215,842,847 P=202,238,203 Attributable to: Owners of the Parent P=212,488,822 P=199,087,690 Non-controlling interests 3,354,025 3,150,513 P=215,842,847 P=202,238,203 *SGVFS015746*

216 - 4 - Statements of Income Years Ended December (In Thousands) Revenue P=71,511,287 P=66,240,070 P=59,794,410 Costs and expenses 40,072,460 38,553,561 35,658,865 Other income (charges) 3,472,012 (4,012,373) (3,425,454) Income before income tax 34,910,839 23,674,136 20,710,091 Provision for income tax 6,018,246 4,777,647 3,984,163 Net income P=28,892,593 P=18,896,489 P=16,725,928 Attributable to: Owners of the Parent P=28,302,092 P=18,390,352 P=16,274,820 Non-controlling interests 590, , ,108 28,892,593 18,896,489 16,725,928 Other comprehensive income (8,847,601) 5,083,311 1,441,681 Total comprehensive income P=20,044,992 P=23,979,800 P=18,167,609 Attributable to: Owners of the Parent P=19,454,280 P=23,474,512 P=17,717,168 Non-controlling interests 590, , ,441 Total comprehensive income P=20,044,992 P=23,979,800 P=18,167,609 Dividends paid to non-controlling interests (P=387,200) (P=309,760) (P=329,760) Summarized Consolidated Statements of Cash Flows Years Ended December (In Thousands) Net cash inflow from operating activities P=31,938,138 P=6,751,379 P=23,541,574 Net cash outflow from investing activities (55,230,236) (29,388,619) (30,365,993) Net cash inflow from financing activities 14,015,494 30,750,446 12,636,372 Effect of exchange rate changes on cash and cash equivalents (98,694) (9,506) 30,187 Net increase in cash and cash equivalents (P=9,375,298) P=8,103,700 P=5,842, Summary of Significant Accounting Policies, Changes and Improvements The significant accounting policies adopted in the preparation of the consolidated financial statements are summarized below. Cash and Cash Equivalents Cash includes cash on hand and in banks. Cash equivalents are short-term, highly liquid investments that are readily convertible to known amounts of cash with original maturities of three months or less and are subject to an insignificant risk of change in value. Time Deposits Time deposits are cash placements with original maturities of more than three months but less than one year. Time deposits with maturities of more than twelve months after the reporting period are presented under noncurrent assets. *SGVFS015746*

217 - 5 - Determination of Fair Value Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The fair value measurement is based on the presumption that the transaction to sell the asset or transfer the liability takes place either: in the principal market for the asset or liability, or in the absence of a principal market, in the most advantageous market for the asset or liability. The fair value of an asset or a liability is measured using the assumptions that market participants would use when pricing the asset or liability, assuming that the market participants act in their best economic interest. Assets and liabilities for which fair value is measured or disclosed in the consolidated financial statements are categorized within the fair value hierarchy, described as follows, based on the lowest level input that is significant to the fair value measurement as a whole: Level 1 - Quoted (unadjusted) market prices in active markets for identical assets or liabilities; Level 2 - Valuation techniques for which the lowest level input that is significant to the fair value measurement is directly or indirectly observable; and, Level 3 - Valuation techniques for which the lowest level input that is significant to the fair value measurement is unobservable. For assets and liabilities that are recognized in the consolidated financial statements on a recurring basis, the Group determines whether transfers have occurred between Levels in the hierarchy by re-assessing categorization (based on the lowest level input that is significant to the fair value measurement as a whole) at the end of each reporting period. The Group determines the policies and procedures for both recurring and non-recurring fair value measurements. For the purpose of fair value disclosures, the Group has determined classes of assets and liabilities on the basis of the nature, characteristics and risks of the asset or liability and the level of the fair value hierarchy. The Group recognizes transfers into and transfers out of fair value hierarchy levels by re-assessing categorization (based on the lowest level input that is significant to the fair value measurement as a whole) as at the date of the event or change in circumstances that caused the transfer. Financial Instruments Date of Recognition The Group recognizes a financial asset or a financial liability in the consolidated balance sheet when it becomes a party to the contractual provisions of the instrument. Purchases or sales of financial assets, recognition and de-recognition, as applicable, that require delivery of assets within the time frame established by regulation or convention in the market place are recognized on the settlement date. Derivatives are recognized on a trade date basis. Initial Recognition of Financial Instruments Financial instruments are recognized initially at fair value, which is the fair value of the consideration given (in case of an asset) or received (in case of a liability). The initial measurement of financial instruments, except for those classified as fair value through profit or loss (FVPL), includes transaction cost. *SGVFS015746*

218 - 6 - Subsequent to initial recognition, the Group classifies its financial instruments in the following categories: financial assets and financial liabilities at FVPL, loans and receivables, held-to-maturity (HTM) investments, AFS investments and other financial liabilities. The classification depends on the purpose for which the instruments are acquired and whether they are quoted in an active market. Management determines the classification at initial recognition and, where allowed and appropriate, re-evaluates this classification at every reporting date. Day 1 Difference Where the transaction price in a non-active market is different from the fair value of other observable current market transactions in the same instrument or based on a valuation technique whose variables include only data from observable market, the Group recognizes the difference between the transaction price and fair value (a Day 1 difference) in the consolidated statement of income unless it qualifies for recognition as some other type of asset or liability. In cases where use is made of data which is not observable, the difference between the transaction price and model value is only recognized in the consolidated statement of income when the inputs become observable or when the instrument is derecognized. For each transaction, the Group determines the appropriate method of recognizing the Day 1 difference amount. Financial Assets and Liabilities at FVPL Financial assets and liabilities at FVPL include financial assets and liabilities held for trading and financial assets and liabilities designated upon initial recognition as at FVPL. Financial assets and liabilities are classified as held for trading if they are acquired for the purpose of selling or repurchasing in the near term. Gains or losses on investments held for trading are recognized in the consolidated statement of income under Gain (loss) on sale of available-for-sale investments and fair value changes on investments held for trading - net account. Interest income earned on investment held for trading are recognized in Interest income account in the consolidated statement of income. Financial assets and liabilities may be designated by management at initial recognition as FVPL when any of the following criteria is met: the designation eliminates or significantly reduces the inconsistent treatment that would otherwise arise from measuring the assets and liabilities or recognizing gains or losses on a different basis; or, the assets and liabilities are part of a group of financial assets, financial liabilities or both which are managed and their performance are evaluated on a fair value basis, in accordance with a documented risk management or investment strategy; or, the financial instrument contains an embedded derivative, unless the embedded derivative does not significantly modify the cash flows or it is clear, with little or no analysis, that it would not be separately recorded. The Group s investments held for trading and derivative assets are classified as financial assets at FVPL, while the Group s derivative liabilities arising from issuance of convertible bonds and derivative financial instruments with negative fair values are also included as financial liabilities at FVPL. Loans and Receivables Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. They are not entered into with the intention of immediate or short-term resale and are not designated as AFS investments or financial assets at FVPL. *SGVFS015746*

219 - 7 - After initial measurement, loans and receivables are subsequently measured at amortized cost using the effective interest method, less allowance for impairment. Amortized cost is calculated by taking into account any discount or premium on acquisition and fees that are an integral part of the effective interest rate. Gains and losses are recognized in the consolidated statement of income when the loans and receivables are derecognized and impaired, as well as through the amortization process. Loans and receivables are included under current assets if realizability or collectibility is within twelve months after the reporting period. Otherwise, these are classified as noncurrent assets. The Group s cash and cash equivalents, time deposits, receivables (including noncurrent portion of receivables from real estate buyers), advances and other receivables (included under Other current assets account), long-term notes (included under Other noncurrent assets account) are classified under this category. AFS Investments AFS investments are non-derivative financial assets that are designated under this category or are not classified in any of the other categories. These are purchased and held indefinitely, and may be sold in response to liquidity requirements or changes in market conditions. Subsequent to initial recognition, AFS investments are carried at fair value in the consolidated balance sheet. Changes in the fair value of such assets are reported as net unrealized gain or loss on AFS investments in the consolidated statement of comprehensive income under Net unrealized gain (loss) on available-for-sale investments account until the investment is derecognized or the investment is determined to be impaired. On de-recognition or impairment, the cumulative gain or loss previously reported in consolidated statement of comprehensive income is transferred to the consolidated statement of income. Interest earned on holding AFS investments are recognized in the consolidated statement of income using the effective interest method. Assets under this category are classified as current if expected to be disposed of within 12 months after the reporting period. Otherwise, they are classified as noncurrent. The Group s investments in shares of stock, bonds and corporate notes, redeemable preferred shares and club shares are classified under this category. The current portion is included under Investments held for trading and sale account in the consolidated balance sheet. Other Financial Liabilities This category pertains to financial liabilities that are not held for trading or not designated as at FVPL upon the inception of the liability. These include liabilities arising from operations or borrowings. Other financial liabilities are recognized initially at fair value and are subsequently carried at amortized cost, taking into account the impact of applying the effective interest method of amortization (or accretion) for any related premium, discount and any directly attributable transaction costs. Gains and losses on other financial liabilities are recognized in the consolidated statement of income when the liabilities are derecognized, as well as through the amortization process. The Group s bank loans, accounts payable and other current liabilities, dividends payable, long-term debt and tenants deposits and others are classified under this category. *SGVFS015746*

220 - 8 - Classification of Financial Instruments between Liability and Equity A financial instrument is classified as liability if it provides for a contractual obligation to: deliver cash or another financial asset to another entity; or, exchange financial assets or financial liabilities with another entity under conditions that are potentially unfavorable to the Group; or, satisfy the obligation other than by the exchange of a fixed amount of cash or another financial asset for a fixed number of own equity shares. If the Group does not have an unconditional right to avoid delivering cash or another financial asset to settle its contractual obligation, the obligation meets the definition of a financial liability. The components of issued financial instruments that contain both liability and equity elements are accounted for separately, with the equity component being assigned the residual amount, after deducting from the instrument, as a whole, the amount separately determined as the fair value of the liability component on the date of issue. Debt Issue Cost Debt issue cost is presented as a reduction in long-term debt and amortized over the term of the related borrowings using the effective interest method. Derivative Financial Instruments The Group uses derivative financial instruments such as long-term cross-currency swaps, foreign currency call options, interest rate swaps, options and non-deliverable forwards to hedge the risks associated with foreign currency and interest rate fluctuations. Derivative financial instruments, including bifurcated embedded derivatives, are initially recognized at fair value on the date on which the derivative contract is entered into and are subsequently re-measured at fair value. Derivatives are carried as assets when the fair value is positive and as liabilities when the fair value is negative. Cash Flow Hedges Cash flow hedges are hedges of the exposure to variability in cash flows that is attributable to a particular risk associated with a recognized asset, liability or a highly probable forecast transaction and could affect the consolidated statement of income. Changes in the fair value of a hedging instrument that qualifies as a highly effective cash flow hedge are recognized as Cumulative translation adjustment account in the consolidated statement of comprehensive income, whereas any hedge ineffectiveness is immediately recognized in the consolidated statement of income under Loss on fair value changes on derivatives - net account. Amounts taken to equity are transferred to the consolidated statement of income when the hedged transaction affects profit or loss, such as when the hedged financial income or financial expense is recognized. However, if an entity expects that all or a portion of a loss recognized in OCI will not be recovered in one or more future periods, it shall reclassify from equity to profit or loss as a reclassification adjustment the amount that is not expected to be recovered. Hedge accounting is discontinued prospectively when the hedge ceases to be highly effective. When hedge accounting is discontinued, the cumulative gains or losses on the hedging instrument that has been reported as Cumulative translation adjustment is retained in the OCI until the hedged transaction impacts the consolidated statement of income. When the forecasted transaction is no longer expected to occur, any net cumulative gains or losses previously reported in the consolidated statement of comprehensive income is recognized immediately in the consolidated statement of income. *SGVFS015746*

221 - 9 - Other Derivative Instruments Not Accounted for as Hedges Certain freestanding derivative instruments that provide economic hedges under the Group s policies either do not qualify for hedge accounting or are not designated as accounting hedges. Changes in the fair values of derivative instruments not designated as hedges are recognized immediately under Loss on fair value changes on derivatives - net account in the consolidated statement of income. Derivatives are carried as assets when the fair value is positive and as liabilities when the fair value is negative. Embedded Derivative An embedded derivative is a component of a hybrid (combined) instrument that also includes a non-derivative host contract with the effect that some of the cash flows of the combined instrument vary, in a way similar to a stand-alone derivative. The Group assesses whether embedded derivatives are required to be separated from host contracts when the Group first becomes a party to the contract. An embedded derivative is separated from the host contract and accounted for as a derivative if all of the following conditions are met: a) the economic characteristics and risks of the embedded derivative are not closely related to the economic characteristics and risks of the host contract; b) a separate instrument with the same terms as the embedded derivative would meet the definition of a derivative; and c) the hybrid or combined instrument is not recognized as at FVPL. Subsequent reassessment is prohibited unless there is a change in the terms of the contract that significantly modifies the cash flows that otherwise would be required under the contract, in which case, a reassessment is required. The Group determines whether a modification to cash flows is significant by considering the extent to which the expected future cash flows associated with the embedded derivative, the host contract or both, have changed and whether the change is significant relative to the previously expected cash flows on the contract. Options arising from the Group s long-term note (recorded under Noncurrent Assets ) and convertible bonds payable are the Group s bifurcated embedded derivatives. De-recognition of Financial Assets and Liabilities Financial Assets. A financial asset is derecognized when: the rights to receive cash flows from the asset have expired; the Group retains the right to receive cash flows from the asset, but has assumed an obligation to pay them in full without material delay to a third party under a pass-through arrangement; or, the Group has transferred its rights to receive cash flows from the asset and either (a) has transferred substantially all the risks and rewards of the asset, or (b) has neither transferred nor retained substantially all the risks and rewards of the asset, but has transferred control of the asset. When the Group has transferred its rights to receive cash flows from an asset and has neither transferred nor retained substantially all the risks and rewards of the asset, the asset is recognized to the extent of the Group s continuing involvement in the asset. Continuing involvement that takes the form of a guarantee over the transferred asset is measured at the lower of original carrying amount of the asset and the maximum amount of consideration that the Group could be required to repay. Financial Liabilities. A financial liability is derecognized when the obligation under the liability is discharged or cancelled or has expired. *SGVFS015746*

222 When an existing financial liability is replaced by another from the same lender on substantially different terms, or the terms of an existing liability are substantially modified, such modification is treated as a de-recognition of the original liability and the recognition of a new liability, and the difference in the respective carrying amounts is recognized in profit or loss. Impairment of Financial Assets The Group assesses at each reporting period whether a financial asset or a group of financial assets is impaired. A financial asset or a group of financial assets is deemed to be impaired, if and only if, there is objective evidence of impairment as a result of one or more events that occurred after the initial recognition of the asset (an incurred loss event) and that loss event has an impact on the estimated future cash flows of the financial asset or a group of financial assets that can be reliably estimated. Objective evidence of impairment may include indications that the borrower or a group of borrowers is experiencing significant financial difficulty, default or delinquency in interest or principal payments, the probability that they will enter bankruptcy or other financial reorganization and where observable data indicate that there is measurable decrease in the estimated future cash flows, such as changes in arrears or economic conditions that correlate with defaults. Financial Assets Carried at Amortized Cost. The Group first assesses whether objective evidence of impairment exists for financial assets that are individually significant, and individually or collectively for financial assets that are not individually significant. If it is determined that no objective evidence of impairment exists for an individually assessed financial asset, whether significant or not, the asset is included in a group of financial assets with similar credit risk characteristics and that group of financial assets is collectively assessed for impairment. Assets that are individually assessed for impairment and for which an impairment loss is or continues to be recognized are not included in the collective impairment assessment. If there is objective evidence that an impairment loss on loans and receivables carried at amortized cost has been incurred, the amount of the loss is measured as the difference between the asset s carrying amount and the present value of estimated future cash flows (excluding future credit losses that have not been incurred) discounted at the financial asset s original effective interest rate (i.e., the effective interest rate computed at initial recognition). The carrying amount of the impaired asset shall be reduced through the use of an allowance account. The amount of the loss shall be recognized in the consolidated statement of income. Interest income continues to be accrued on the reduced carrying amount based on the original effective interest rate of the asset. Loans and receivables together with the associated allowance are written off when there is no realistic prospect of future recovery and all collateral, if any, has been realized or has been transferred to the Group. If in a subsequent period, the amount of the impairment loss increases or decreases because of an event occurring after the impairment was recognized, the previously recognized impairment loss is increased or decreased by adjusting the allowance account. If a future write off is later recovered, the recovery is recognized in the consolidated statement of income to the extent of the carrying amount that would have been determined had no impairment loss been recognized. Financial Assets Carried at Cost. If there is objective evidence that an impairment loss has been incurred in an unquoted equity instrument that is not carried at fair value because its fair value cannot be reliably measured, or on a derivative asset that is linked to and must be settled by delivery of such an unquoted equity instrument, the amount of the loss is measured as the difference between the asset s carrying amount and the present value of estimated future cash flows discounted at the current market rate of return for a similar financial asset. *SGVFS015746*

223 AFS Investments. The Group assesses at each reporting period whether there is objective evidence that an investment or a group of investments is impaired. In the case of equity investments classified as AFS investments, an objective evidence of impairment would include a significant or prolonged decline in the fair value of the investments below its cost. Significant decline in fair value is evaluated against the original cost of the investment, while prolonged decline is assessed against the periods in which the fair value has been below its original cost. Where there is evidence of impairment, the cumulative loss, measured as the difference between the acquisition cost and the current fair value, less any impairment loss on that financial asset previously recognized in the consolidated statement of income, is removed from the consolidated statement of comprehensive income and recognized in the consolidated statement of income. Impairment losses on equity investments are not reversed through the consolidated statement of income; increases in fair value after impairment are recognized directly in the consolidated statement of comprehensive income. In the case of debt instruments classified as AFS investments, impairment is assessed based on the same criteria as financial assets carried at amortized cost. Future interest income is based on the reduced carrying amount of the asset and is accrued based on the rate of interest used to discount future cash flows for the purpose of measuring impairment loss. Such accrual is recorded as part of Interest income account in the consolidated statement of income. If in subsequent years, the fair value of a debt instrument should increase and the increase can be objectively related to an event occurring after the impairment loss was recognized in the consolidated statement of income, the impairment loss is reversed through the consolidated statement of income. Offsetting Financial Instruments Financial assets and financial liabilities are offset and the net amount is reported in the consolidated balance sheet if, and only if, there is a currently enforceable legal right to offset the recognized amounts and there is an intention to settle on a net basis, or to realize the asset and settle the liability simultaneously. Merchandise Inventories Merchandise inventories are valued at the lower of cost and net realizable value. Cost, which includes all costs directly attributable to acquisition, such as purchase price and transport costs, is primarily determined using the weighted average method. Net realizable value is the estimated selling price in the ordinary course of business, less estimated costs necessary to make the sale. Land and Development and Condominium and Residential Units for Sale Land and development and condominium and residential units for sale are stated at the lower of cost and net realizable value. Cost includes those costs incurred for development and improvement of the properties. Net realizable value is the selling price in the ordinary course of business less costs to complete and the estimated cost to make the sale. Land and development includes properties held for future development and properties being constructed for sale in the ordinary course of business, rather than to be held for rental or capital appreciation. Cost incurred for the development and improvement of the properties includes the following: Land cost; Amounts paid to contractors for construction and development; and, Borrowing costs, planning and design costs, costs of site preparation, professional fees, property transfer taxes, construction overheads and other related costs. *SGVFS015746*

224 Investments in Associate Companies and Joint Ventures An associate is an entity over which the Group has significant influence. Significant influence is the power to participate in the financial and operating policy decisions of the investee, but is not control or joint control over those policies. A joint venture is a joint arrangement whereby the parties that have joint control of the arrangement have rights to the net assets of the joint venture. Joint control is the contractually agreed sharing of control of an arrangement, which exists only when decisions about the relevant activities require unanimous consent of the parties sharing control. The considerations made in determining significant influence or joint control is similar to those necessary to determine control over subsidiaries. The Group s investments in associate companies and joint ventures are accounted for under the equity method of accounting. Under the equity method, investment in associate companies and joint ventures is carried in the consolidated balance sheet at cost plus post-acquisition changes in the Group s share in net assets of the associate or joint venture. On acquisition of the investment, any difference between the cost of the investment and the investor s share in the net fair value of the associate s or joint venture s identifiable assets, liabilities and contingent liabilities is accounted for as follows: a. goodwill relating to an associate or joint venture is included in the carrying amount of the investment. However, amortization of that goodwill is not permitted and is therefore not included in the determination of the Group s share in the associate s or joint venture s profits or losses; and, b. any excess of the Group s share in the net fair value of the associate s and joint venture s identifiable assets, liabilities and contingent liabilities over the cost of the investment is included as income in the determination of the investor's share of the associate's or joint venture s profit or loss in the period in which the investment is acquired. The consolidated statement of income reflects the share in the results of operations of the associate or joint venture. Where there has been a change recognized directly in the equity of the associate or joint venture, the Group recognizes its share in any changes and discloses this in the consolidated statement of comprehensive income. Profits and losses resulting from transactions between the Group and the associate or joint venture are eliminated to the extent of the Group s interest in the associate or joint venture. Appropriate adjustments to the investor s share of the associate s or joint venture s profit or loss after acquisition are made to account for the depreciation of the depreciable assets based on their fair values at the acquisition date and for impairment losses recognized by the associate or joint venture, such as for goodwill or property, plant and equipment. After application of the equity method, the Group determines whether it is necessary to recognize any impairment loss with respect to the Group s net investment in the associate companies and joint ventures. At each reporting date, the Group determines whether there is objective evidence that the investment in the associate companies and joint ventures is impaired. If there is such evidence, the Group calculates the amount of impairment as the difference between the recoverable amount of the associate companies and joint ventures and its carrying value, then, recognizes the loss in the statement of income. *SGVFS015746*

225 Upon loss of significant influence over the associate or joint control over the joint venture, the Group measures and recognizes any retained investment at its fair value. Any difference between the carrying amount of the associate companies and joint ventures upon loss of significant influence or joint control and the fair value of the retained investment and proceeds from disposal is recognized in profit or loss. Property and Equipment Property and equipment, except land, is stated at cost less accumulated depreciation and amortization and any accumulated impairment in value. Land is stated at cost less any impairment in value. The initial cost of property and equipment consists of its purchase price, including import duties, taxes and any directly attributable costs necessary in bringing the asset to its working condition and location for its intended use. Cost also includes any related asset retirement obligation and related interest incurred during the construction. Major repairs are capitalized as part of property and equipment only when it is probable that future economic benefits associated with the item will flow to the Group and the cost of the items can be measured reliably. All other repairs and maintenance are charged against current operations as incurred. Depreciation and amortization are calculated on a straight-line basis over the following estimated useful lives of the assets: Buildings and improvements Store equipment and improvements Data processing equipment Furniture, fixtures and office equipment Machinery and equipment Leasehold improvements Transportation equipment 5 25 years 5 10 years 5 years 3 10 years 5 10 years 5 10 years or term of the lease, whichever is shorter 5 10 years The residual values, useful lives and method of depreciation and amortization of the assets are reviewed and adjusted, if appropriate, at the end of each reporting period. The carrying values of the assets are reviewed for impairment when events or changes in circumstances indicate that the carrying values may not be recoverable. Fully depreciated assets are retained in the accounts until they are no longer in use and no further depreciation and amortization is credited or charged to current operations. When property and equipment are retired or otherwise disposed of, the cost and related accumulated depreciation and amortization and accumulated provision for impairment losses are removed from the accounts and any resulting gain or loss is charged to profit or loss. Investment Properties Investment properties include property that are held to earn rentals and for capital appreciation and property under construction or re-development. Investment properties, except land, are measured at cost, less accumulated depreciation and amortization and accumulated impairment in value. Land is stated at cost less any impairment in value. *SGVFS015746*

226 Expenditures incurred after the investment property has been put in operation such as repairs and maintenance costs are charged to current operations. Depreciation and amortization are calculated on a straight-line basis over the following estimated useful lives of the assets: Land improvements Buildings and improvements Building equipment, furniture and others Building and leasehold improvements 3 5 years years 3 15 years 5 years or term of the lease, whichever is shorter The residual values, useful lives and method of depreciation and amortization of the assets are reviewed and adjusted, if appropriate, at the end of each reporting period. Investment property is derecognized when disposed or permanently withdrawn from use and no future economic benefit is expected from its disposal. Any gains or losses on the retirement or disposal of an investment property are charged to profit or loss. Transfers are made to (from) investment property when there is a change in use evidenced by ending (commencement) of owner-occupation, or, commencement of an operating lease to another party (commencement of development with a view to sell). For a transfer from investment property to owner-occupied property or inventories, the cost of property for subsequent accounting is its carrying value at the date of change in use. If the property occupied by the Group as an owner-occupied property becomes an investment property, the Group accounts for such property in accordance with the policy stated under property and equipment up to the date of change in use. Construction in Progress Construction in progress represents structures under construction and is stated at cost. This includes cost of construction and other direct costs. Cost also includes interest on borrowed funds incurred during the construction period. Construction in progress is not depreciated until such time that the relevant assets are completed and are ready for use. Tenants Deposits Tenants deposits are measured at amortized cost. Tenants deposits refer to security deposits received from various tenants upon inception of the respective lease contracts on the Group s investment properties. At the termination of the lease contracts, the deposits received by the Group are returned to tenants, reduced by unpaid rental fees, penalties and/or deductions from repairs of damaged leased properties, if any. The related lease contracts usually have a term of more than twelve months. Property Acquisitions, Business Combinations and Acquisitions of Non-controlling Interests Property Acquisitions and Business Combinations. When property is acquired through corporate acquisitions or otherwise, management considers the substance of the assets and activities of the acquired entity in determining whether the acquisition represents an acquisition of a business. When such an acquisition is not judged to be an acquisition of a business, it is not treated as a business combination. Rather, the cost to acquire the entity is allocated between the identifiable assets and liabilities of the entity based on their relative fair values at the acquisition date. *SGVFS015746*

227 Accordingly, no goodwill or additional deferred tax arises. Otherwise, the acquisition is accounted for as a business combination. Business combinations are accounted for using the acquisition method except for business combinations under common control in which an accounting similar to pooling of interest method is used. Business combinations under common control are those in which all of the combining entities or businesses are controlled by the same party or parties both before and after the business combination, and that control is not transitory. Under the acquisition method, the cost of an acquisition is measured as the aggregate of the consideration transferred, measured at acquisition date fair value and the amount of any non-controlling interest in the acquiree. For each business combination, the acquirer measures the non-controlling interest in the acquiree either at fair value or at the proportionate share of the acquiree s identifiable net assets. Transaction costs incurred are expensed and included in Selling, general and administrative expenses account in the consolidated statement of income. For accounting similar to pooling of interest method, the assets, liabilities and equity of the acquired companies for the reporting period in which the common control business combinations occur, and for any comparative periods presented, are included in the consolidated financial statements of the Group at their carrying amounts as if the combinations had occurred from the date when the acquired companies first became under the control of the Group. The excess of the cost of business combinations over the net carrying amounts of the assets and liabilities of the acquired companies is recognized under Equity adjustments from common control transactions account in the equity section of the consolidated balance sheet. When the Group acquires a business, it assesses the financial assets and liabilities assumed for appropriate classification and designation in accordance with the contractual terms, economic circumstances and pertinent conditions as at the acquisition date. This includes the separation of embedded derivatives in host contracts by the acquiree. If the business combination is achieved in stages, the acquisition date fair value of the acquirer s previously held equity interest in the acquiree is re-measured at its acquisition date fair value and any resulting gain or loss is recognized in profit or loss. It is then considered in the determination of goodwill. Any contingent consideration to be transferred by the acquirer will be recognized at fair value at the acquisition date. Subsequent changes to the fair value of the contingent consideration which is deemed to be an asset or liability, will be recognized in accordance with Philippine Accounting Standard (PAS) 39, Financial Instruments: Recognition and Measurement either in profit or loss or as a change to OCI. If the contingent consideration is classified as equity, it should not be re-measured and subsequent settlement is accounted for within equity. Acquisitions of Non-controlling Interests. Changes in the Parent Company s ownership interest in a subsidiary that do not result in a loss of control are accounted for as equity transactions (i.e., transactions with owners in their capacity as owners). In such circumstances, the carrying amounts of the controlling and non-controlling interests shall be adjusted to reflect the changes in their relative interests in the subsidiary. Any difference between the amount by which the non-controlling interests are adjusted and the fair value of the consideration paid shall be recognized directly in equity. *SGVFS015746*

228 Goodwill Initial Measurement of Goodwill or Gain on a Bargain Purchase. Goodwill is initially measured by the Group at cost being the excess of the aggregate of the consideration transferred and the amount recognized for non-controlling interest over the net identifiable assets acquired and liabilities assumed. If this consideration is lower than the fair value of the net assets of the subsidiary acquired, the difference is recognized in profit or loss as gain on a bargain purchase. Subsequent Measurement of Goodwill. Following initial recognition, goodwill is measured at cost less any accumulated impairment losses. Impairment Testing of Goodwill. For the purpose of impairment testing, goodwill acquired in a business combination is, from the acquisition date, allocated to each of the Group s cash-generating units (CGU), or groups of CGUs, that are expected to benefit from the synergies of the combination, irrespective of whether other assets or liabilities of the acquiree are assigned to those units or groups of units. Each unit or group of units to which the goodwill is allocated: represents the lowest level within the Group at which the goodwill is monitored for internal management purposes; and, is not larger than an operating segment as defined in PFRS 8, Operating Segments, before aggregation. Frequency of Impairment Testing. Irrespective of whether there is any indication of impairment, the Group tests goodwill acquired in a business combination for impairment at least annually. Allocation of Impairment Loss. An impairment loss is recognized for a CGU if the recoverable amount of the unit or group of units is less than the carrying amount of the unit or group of units. The impairment loss is allocated to reduce the carrying amount of the assets of the unit or group of units first to reduce the carrying amount of goodwill allocated to the CGU or group of units and then to the other assets of the unit or group of units pro rata on the basis of the carrying amount of each asset in the unit or group of units. Measurement Period. If the initial accounting for a business combination is incomplete by the end of the reporting period in which the combination occurs, the Group reports in its consolidated financial statements provisional amounts for the items for which the accounting is incomplete. The measurement period ends as soon as the Group receives the information it was seeking about facts and circumstances that existed as of the acquisition date or learns that more information is not obtainable. The measurement period shall not exceed one year from the acquisition date. Intangible Assets The cost of trademarks and brand names acquired in a business combination is the fair value as at the date of acquisition. The Group assessed the useful life of the trademarks and brand names to be indefinite because based on an analysis of all of the relevant factors, there is no foreseeable limit to the period over which the asset is expected to generate cash inflows for the Group. Trademarks and brand names with indefinite useful lives are not amortized but are tested for impairment annually either individually or at the cash generating unit level. The useful life of an intangible asset is reviewed annually to determine whether the indefinite life assessment continues to be supportable. If not, the change in the useful life assessment from indefinite to finite is made on a prospective basis. The cost of trademarks acquired as an asset is its acquisition cost and amortized over useful life. *SGVFS015746*

229 Gains or losses arising from de-recognition of an intangible asset are measured as the difference between the net disposal proceeds and the carrying amount of the asset at the date of disposal and are recognized in profit or loss when the asset is derecognized. Other Noncurrent Assets Other noncurrent assets include land use rights which are amortized over its useful life of years. Impairment of Nonfinancial Assets The carrying values (property and equipment, investment properties and investments in associate companies and joint ventures, intangibles with definite useful life and other noncurrent assets) are reviewed for impairment when events or changes in circumstances indicate that the carrying value may not be recoverable. If any such indication exists, and if the carrying value exceeds the estimated recoverable amount, the assets or CGUs are written-down to their recoverable amounts. The recoverable amount of the asset is the greater of fair value less costs to sell or value in use. The fair value less costs to sell is the amount obtainable from the sale of an asset in an arm s length transaction between knowledgeable, willing parties, less costs of disposal. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. For an asset that does not generate largely independent cash inflows, the recoverable amount is determined for the CGU to which the asset belongs. Impairment losses are recognized in the consolidated statement of income in those expense categories consistent with the function of the impaired asset. An assessment is made at each reporting date as to whether there is any indication that previously recognized impairment loss may no longer exist or may have decreased. If such indication exists, the recoverable amount is estimated. A previously recognized impairment loss is reversed only if there has been a change in the estimates used to determine the asset s recoverable amount since the last impairment loss was recognized. If that is the case, the carrying amount of the asset is increased to its recoverable amount. That increased amount cannot exceed the carrying amount that would have been determined, net of depreciation and amortization, had no impairment loss been recognized for the asset in prior years. Such reversal is recognized in the consolidated statement of income. After such a reversal, the depreciation or amortization charge is adjusted in future periods to allocate the asset s revised carrying amount, less any residual value, on a systematic basis over its remaining useful life. Capital Stock Capital stock is measured at par value for all shares issued. Incremental costs incurred directly attributable to the issuance of new shares are shown in equity as deduction from proceeds, net of tax. Proceeds and/or fair value of considerations received in excess of par value, if any, are recognized as additional paid-in capital. Revenue and Cost Recognition Revenue is recognized when it is probable that the economic benefits associated with the transaction will flow to the Group and the amount of the revenue can be reliably measured. Revenue is measured at the fair value of the consideration received or receivable, excluding discounts, rebates and sales taxes or duties. The Group assesses its revenue arrangements against specific criteria to determine if it is acting as a principal or as an agent. The Group has concluded that it is acting as principal in majority of its revenue arrangements. *SGVFS015746*

230 Sale of Merchandise Inventories. Revenue is recognized when the significant risks and rewards of ownership of the goods have passed to the buyer, which is normally upon delivery. Sales returns and sales discounts are deducted from sales to arrive at sales shown in the consolidated statement of income. Sale of goods under consignment arrangements with suppliers is recognized as revenue upon billing, delivery and transfer of goods to customers. Sale of Real Estate. The Group assesses whether it is probable that the economic benefits will flow to the Group when the sales prices are collectible. Collectibility of the sales price is demonstrated by the buyer s commitment to pay, which is supported by the buyer s initial and continuous investments that motivates the buyer to honor its obligation. Collectibility is also assessed by considering factors such as collections, credit standing of the buyer and location of the property. Revenue from sales of completed real estate projects is accounted for using the full accrual method. In accordance with Philippine Interpretations Committee Q&A No , the percentage-of-completion (POC) method is used to recognize income from sales of projects where the Group has material obligations under the sales contract to complete the project after the property is sold, the equitable interest has been transferred to the buyer, construction is beyond preliminary stage (i.e., engineering, design work, construction contracts execution, site clearance and preparation, excavation and the building foundation are finished), and the costs incurred or to be incurred can be measured reliably. Under this method, revenue is recognized as the related obligations are fulfilled, measured principally on the basis of the estimated completion of a physical proportion of the contract work. Any excess of collections over the recognized receivables are included in the Tenants deposits and others account in the consolidated balance sheet. If any of the criteria under the full accrual or POC method is not met, the deposit method is applied until all the conditions for recording a sale are met. Pending recognition of sale, cash received from buyers are presented under the Tenants deposits and others account in the consolidated balance sheet. Cost of real estate sales is recognized consistent with the revenue recognition method applied. Cost of condominium and residential units sold before the completion of the development is determined on the basis of the acquisition cost of the land plus its full development costs, which include estimated costs for future development works. The cost of inventory recognized in the consolidated statement of income upon sale is determined with reference to the specific costs incurred on the property, allocated to saleable area based on relative size and takes into account the POC used for revenue recognition purposes. Revenue from construction contracts are recognized using the POC method, measured principally on the basis of the estimated physical completion of the contract work. Expected losses on contracts are recognized immediately when it is probable that the total contract costs will exceed total contract revenue. Changes in the estimated cost to complete the condominium project which affects cost of real estate sold and gross profit are recognized in the year in which changes are determined. Rent. Revenue is recognized on a straight-line basis over the lease term or based on the terms of the lease as applicable. *SGVFS015746*

231 Sale of Cinema and Amusement Tickets. Revenue is recognized upon receipt of cash from the customer which coincides with the rendering of services. Gain on Sale of Investments in Associate Companies and Joint Ventures and Available-for-Sale Investments. Revenue is recognized upon delivery of the securities to and confirmation of the sale by the broker. Dividend. Revenue is recognized when the Group s right as a shareholder to receive the payment is established. Management and Service Fees. Revenue and expense is recognized when earned and incurred, respectively, in accordance with the terms of the agreements. Interest. Revenue is recognized as the interest accrues, taking into account the effective yield on the asset. Selling, General, Administrative and Other Expenses. Costs and expenses are recognized as incurred. Pension Benefits The net defined benefit liability or asset is the aggregate of the present value of the defined benefit obligation at the end of the reporting period reduced by the fair value of plan assets, adjusted for any effect of limiting a net defined benefit asset to the asset ceiling. The asset ceiling is the present value of any economic benefits available in the form of refunds from the plan or reductions in future contributions to the plan. The cost of providing benefits under the defined benefit plans is actuarially determined using the projected unit credit method. Defined benefit costs comprise the following: Service cost; Net interest on the net defined benefit liability or asset; and, Re-measurements of net defined benefit liability or asset. Service costs which include current service costs, past service costs and gains or losses on non-routine settlements are recognized as expense in profit or loss. Past service costs are recognized on the earlier of the date of the plan amendment or curtailment, and the date the Group recognizes restructuring-related costs. Net interest on the net defined benefit liability or asset is the change during the period in the net defined benefit liability or asset that arises from the passage of time which is determined by applying the discount rate based on government bonds to the net defined benefit liability or asset. Net interest on the net defined benefit liability or asset is recognized as expense or income in profit or loss. Re-measurements comprising actuarial gains and losses, return on plan assets and any change in the effect of the asset ceiling (excluding net interest on defined benefit liability) are recognized immediately in OCI in the period in which they arise. Re-measurements are not reclassified to profit or loss in subsequent periods. *SGVFS015746*

232 Plan assets are assets that are held by a long-term employee benefit fund. Plan assets are not available to the creditors of the Group, nor can they be paid directly to the Group. Fair value of plan assets is based on market price information. When no market price is available, the fair value of plan assets is estimated by discounting expected future cash flows using a discount rate that reflects both the risk associated with the plan assets and the maturity or expected disposal date of those assets (or, if they have no maturity, the expected period until the settlement of the related obligations). If the fair value of the plan assets is higher than the present value of the defined benefit obligation, the measurement of the resulting defined benefit asset is limited to the present value of economic benefits available in the form of refunds from the plan or reductions in future contributions to the plan. Foreign Currency-denominated Transactions Transactions in foreign currencies are initially recorded in the functional currency rate at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies are restated at the functional currency rate of exchange as at reporting date. Nonmonetary items denominated in foreign currency are translated using the exchange rates as at the date of initial recognition. All differences are recognized in profit or loss. Foreign Currency Translation The assets and liabilities of foreign operations are translated into Philippine peso at the rate of exchange as at reporting date and their respective statements of income are translated at the weighted average rates for the year. The exchange differences arising on the translation are included in the consolidated statement of comprehensive income and are presented within the Cumulative translation adjustment account in the consolidated statement of changes in equity. On disposal of a foreign entity, the deferred cumulative amount of exchange differences recognized in equity relating to that particular foreign operation is recognized in profit or loss. Leases The determination of whether an arrangement is, or contains a lease is based on the substance of the arrangement and requires an assessment of whether the fulfillment of the arrangement is dependent on the use of a specific asset or assets and the arrangement conveys a right to use the asset. Group as Lessee. Finance leases, which transfer to the Group substantially all the risks and benefits incidental to ownership of the leased item, are capitalized at the inception of the lease at the fair value of the leased property or, if lower, at the present value of the minimum lease payments. Lease payments are apportioned between the finance charges and reduction of the lease liability so as to achieve a constant rate of interest on the remaining balance of the liability. Finance charges are reflected in the consolidated statement of income. Capitalized lease assets are depreciated over the shorter of the estimated useful life of the asset and the lease term, if there is no reasonable certainty that the Group will obtain ownership by the end of the lease term. Leases which do not transfer to the Group substantially all the risks and benefits of ownership of the asset are classified as operating leases. Operating lease payments are recognized as expense in the consolidated statement of income on a straight-line basis over the lease term. Associated costs, such as maintenance and insurance, are expensed as incurred. *SGVFS015746*

233 Group as Lessor. Leases where the Group does not transfer substantially all the risks and benefits of ownership of the asset are classified as operating leases. Lease income from operating leases is recognized as income on a straight-line basis over the lease term. Initial direct costs incurred in negotiating an operating lease are added to the carrying amount of the leased asset and recognized over the lease term on the same basis as rental income. Contingent rents are recognized as revenue in the period in which they are earned. Provisions Provisions are recognized when the Group has a present obligation (legal or constructive) as a result of a past event, it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation, and a reliable estimate can be made of the amount of the obligation. If the effect of the time value of money is material, provisions are determined by discounting the expected future cash flows at a pre-tax rate that reflects current market assessments of the time value of money and, where appropriate, the risks specific to the liability. Where discounting is used, the increase in the provision due to the passage of time is recognized as interest expense. Where the Group expects a provision to be reimbursed, the reimbursement is recognized as a separate asset but only when the receipt of the reimbursement is virtually certain. Borrowing Cost Borrowing cost is capitalized as part of the cost of the asset if they are directly attributable to the acquisition or construction of a qualifying asset. Capitalization of borrowing cost commences when the activities to prepare the asset are in progress and expenditures and borrowing cost is being incurred. Borrowing cost is capitalized until the assets are substantially ready for their intended use. Borrowing cost is capitalized when it is probable that they will result in future economic benefits to the Group. All other borrowing costs are expensed as incurred. For borrowing associated with a specific asset, the actual rate on that borrowing is used. Otherwise, a weighted average cost of borrowings is used. Taxes Current Tax. Current tax assets and liabilities for the current and prior periods are measured at the amount expected to be recovered from or paid to the taxation authorities. The tax rates and tax laws used to compute the amount are those that are enacted or substantively enacted as at the end of the reporting period. Deferred Tax. Deferred tax assets are recognized for all deductible temporary differences and carryforward benefits of excess Minimum Corporate Income Tax (MCIT) and Net Operating Loss Carryover (NOLCO), to the extent that it is probable that taxable profit will be available against which the deductible temporary differences and the carryforward benefits of excess MCIT and NOLCO can be utilized, except: where the deferred tax asset relating to the deductible temporary difference arises from the initial recognition of an asset or liability in a transaction that is not a business combination and, at the time of the transaction, affects neither the accounting profit nor taxable profit or loss; and, with respect to deductible temporary differences associated with investments in subsidiaries, associates and interests in joint ventures, deferred tax assets are recognized only to the extent that it is probable that the temporary differences will reverse in the foreseeable future and taxable profit will be available against which the temporary differences can be utilized. *SGVFS015746*

234 The carrying amount of deferred tax assets is reviewed at the end of each reporting period and reduced to the extent that it is no longer probable that sufficient taxable profit will be available to allow all or part of the deferred income tax assets to be utilized. Unrecognized deferred tax assets are reassessed at the end of each reporting period and are recognized to the extent that it has become probable that future taxable profit will allow the deferred tax assets to be recovered. Deferred tax assets and liabilities are measured at the tax rates that are expected to apply to the period the asset is realized or the liability is settled, based on tax rates and tax laws that have been enacted or substantively enacted as at reporting date. Income tax relating to items recognized directly in the consolidated statement of comprehensive income is recognized in the consolidated statement of comprehensive income and not in the consolidated statement of income. Deferred tax assets and deferred tax liabilities are offset, if a legally enforceable right exists to offset current tax assets against current tax liabilities and the deferred taxes relate to the same taxable entity and the same taxation authority. Value-added Tax (VAT). Revenue, expenses and assets are recognized net of the amount of VAT, except: where the tax incurred on a purchase of assets or services is not recoverable from the taxation authority, in which case the tax is recognized as part of the cost of acquisition of the asset or as part of the expense item as applicable; and, for receivables and payables that are stated with the amount of tax included. The net amount of VAT recoverable from, or payable to, the taxation authority is included as part of Other current assets or Accounts payable and other current liabilities accounts in the consolidated balance sheet. Business Segments The Group is organized and managed separately according to the nature of business. The three major operating businesses of the Group are property, retail and financial services and others. These operating businesses are the basis upon which the Group reports its segment information in the consolidated financial statements. Basic/Diluted Earnings Per Common Share (EPS) Basic EPS is computed by dividing the net income for the period attributable to owners of the Parent by the weighted-average number of issued and outstanding common shares during the period, with retroactive adjustment for any stock dividends declared. For the purpose of computing diluted EPS, the net income for the period attributable to owners of the Parent and the weighted-average number of issued and outstanding common shares are adjusted for the effects of all dilutive potential ordinary shares. Contingencies Contingent liabilities are not recognized in the consolidated financial statements. They are disclosed unless the possibility of an outflow of resources embodying economic benefits is remote. Contingent assets are not recognized in the consolidated financial statements but are disclosed when an inflow of economic benefits is probable. *SGVFS015746*

235 Events after the Reporting Period Post year-end events that provide additional information about the Group s financial position at the end of the reporting period (adjusting events) are reflected in the consolidated financial statements. Post year-end events that are not adjusting events are disclosed in the notes to the consolidated financial statements when material. Cha nges in Accounting Policies and Disclosures The accounting policies adopted are consistent with those of the previous year except for the adoption of the following amendments to standards and improvements, starting January 1, The adoption did not have any significant impact on the Group s consolidated financial statements. Amendments to PAS 19, Defined Benefit Plans: Employee Contributions Annual Improvements to PFRSs Cycle PFRS 2, Share-based Payment Definition of Vesting Condition PFRS 3, Business Combinations Accounting for Contingent Consideration in a Business Combination PFRS 8, Operating Segments Aggregation of Operating Segments and Reconciliation of the Total of the Reportable Segments Assets to the Entity s Assets PAS 16, Property, Plant and Equipment, and PAS 38, Intangible Assets Revaluation Method Proportionate Restatement of Accumulated Depreciation and Amortization PAS 24, Related Party Disclosures Key Management Personnel Annual Improvements to PFRSs Cycle PFRS 3, Business Combinations Scope Exceptions for Joint Arrangements PFRS 13, Fair Value Measurement Portfolio Exception PAS 40, Investment Property Future Changes in Accounting Policies The following are the new standards, amendments and improvements to PFRS that were issued but are not yet effective as at December 31, The Group intends to adopt the applicable standards, interpretations, amendments and improvements when these become effective. Deferred Philippine Interpretation IFRIC 15, Agreements for the Construction of Real Estate This interpretation covers accounting for revenue and associated expenses by entities that undertake the construction of real estate directly or through subcontractors. The interpretation requires that revenue on construction of real estate be recognized only upon completion, except when such contract qualifies as construction contract to be accounted for under PAS 11, Construction Contracts, or involves rendering of services in which case revenue is recognized based on stage of completion. Contracts involving provision of services with the construction materials and where the risks and reward of ownership are transferred to the buyer on a continuous basis will also be accounted for based on stage of completion. The SEC and the Financial Reporting Standards Council (FRSC) have deferred the effectivity of this interpretation until the final Revenue standard is issued by the International Accounting Standards Board (IASB) and an evaluation of the requirements of the final Revenue standard against the practices of the Philippine real estate industry is completed. Adoption of the interpretation when it becomes effective may result to a change in revenue and cost recognition from percentage of completion method to completed contract method. *SGVFS015746*

236 Effective January 1, 2016 PFRS 10, Consolidated Financial Statements, and PAS 28, Investments in Associates and Joint Ventures Investment Entities: Applying the Consolidation Exception (Amendments) These amendments clarify that the exemption in PFRS 10 from presenting consolidated financial statements applies to a parent entity that is a subsidiary of an investment entity that measures all of its subsidiaries at fair value and that only a subsidiary of an investment entity that is not an investment entity itself and that provides support services to the investment entity parent is consolidated. The amendments also allow an investor (that is not an investment entity and has an investment entity associate or joint venture), when applying the equity method, to retain the fair value measurement applied by the investment entity associate or joint venture to its interests in subsidiaries. These amendments are effective for annual periods beginning on or after January 1, These amendments are not applicable to the Group since none of the entities within the Group is an investment entity nor does the Group have investment entity associates or joint venture. PAS 27, Separate Financial Statements - Equity Method in Separate Financial Statements (Amendments) The amendments will allow entities to use the equity method to account for investments in subsidiaries, joint ventures and associates in their separate financial statements.. Entities already applying PFRS and electing to change to the equity method in its separate financial statements will have to apply that change retrospectively. The amendments are effective for annual periods beginning on or after January 1, 2016, with early adoption permitted. These amendments will not have any impact on the Group s consolidated financial statements. PFRS 11, Joint Arrangements - Accounting for Acquisitions of Interests (Amendments) The amendments to PFRS 11 require a joint operator that is accounting for the acquisition of an interest in a joint operation, in which the activity of the joint operation constitutes a business (as defined by PFRS 3), to apply the relevant PFRS 3 principles for business combinations accounting. The amendments also clarify that a previously held interest in a joint operation is not re-measured on the acquisition of an additional interest in the same joint operation while joint control is retained. In addition, a scope exclusion has been added to PFRS 11 to specify that the amendments do not apply when the parties sharing joint control, including the reporting entity, are under common control of the same ultimate controlling party. The amendments apply to both the acquisition of the initial interest in a joint operation and the acquisition of any additional interests in the same joint operation and are prospectively effective for annual periods beginning on or after January 1, 2016, with early adoption permitted. These amendments are not expected to have any impact to the Group. PAS 1, Presentation of Financial Statements Disclosure Initiative (Amendments) The amendments are intended to assist entities in applying judgment when meeting the presentation and disclosure requirements in PFRS. They clarify the following: That entities shall not reduce the understandability of their financial statements by either obscuring material information with immaterial information; or aggregating material items that have different natures or functions; *SGVFS015746*

237 That specific line items in the statement of income and OCI and the statement of financial position may be disaggregated; That entities have flexibility as to the order in which they present the notes to financial statements; and, That the share of OCI of associate and joint ventures accounted for using the equity method must be presented in aggregate as a single line item, and classified between those items that will or will not be subsequently reclassified to profit or loss. Early application is permitted and entities do not need to disclose that fact as the amendments are considered to be clarifications that do not affect an entity s accounting policies or accounting estimates. The Group is currently assessing the impact of these amendments on its consolidated financial statements. PFRS 14, Regulatory Deferral Accounts PFRS 14 is an optional standard that allows an entity, whose activities are subject to rateregulation, to continue applying most of its existing accounting policies for regulatory deferral account balances upon its first-time adoption of PFRS. Entities that adopt PFRS 14 must present the regulatory deferral accounts as separate line items on the balance sheet and present movements in these account balances as separate line items in the statement of income and other comprehensive income. The standard requires disclosures on the nature of, and risks associated with, the entity s rate-regulation and the effects of that rate-regulation on its financial statements. PFRS 14 is effective for annual periods beginning on or after January 1, Since the Group is an existing PFRS preparer, this standard would not apply. PAS 16, Property, Plant and Equipment, and PAS 41, Agriculture - Bearer Plants (Amendments) The amendments change the accounting requirements for biological assets that meet the definition of bearer plants. Under the amendments, biological assets that meet the definition of bearer plants will no longer be within the scope of PAS 41. Instead, PAS 16 will apply. After initial recognition, bearer plants will be measured under PAS 16 at accumulated cost (before maturity) and using either the cost model or revaluation model (after maturity). The amendments also require that produce that grows on bearer plants will remain in the scope of PAS 41 measured at fair value less costs to sell. For government grants related to bearer plants, PAS 20, Accounting for Government Grants and Disclosure of Government Assistance, will apply. The amendments are retrospectively effective for annual periods beginning on or after January 1, 2016, with early adoption permitted. These amendments are not expected to have any impact to the Group as the Group does not have any bearer plants. PAS 16, Property, Plant and Equipment, and PAS 38, Intangible Assets - Clarification of Acceptable Methods of Depreciation and Amortization (Amendments) The amendments clarify the principle in PAS 16 and PAS 38 that revenue reflects a pattern of economic benefits that are generated from operating a business (of which the asset is part) rather than the economic benefits that are consumed through use of the asset. As a result, a revenue-based method cannot be used to depreciate property, plant and equipment and may only be used in very limited circumstances to amortize intangible assets. The amendments are effective prospectively for annual periods beginning on or after January 1, 2016, with early adoption permitted. These amendments are not expected to have any impact to the Group given that the Group has not used a revenue-based method to depreciate its noncurrent assets. *SGVFS015746*

238 Annual Improvements to PFRSs ( cycle) The Annual Improvements to PFRSs ( cycle) are effective for annual periods beginning on or after January 1, 2016 and are not expected to have a material impact on the Group. They include: PFRS 5, Non-current Assets Held for Sale and Discontinued Operations Changes in Methods of Disposal The amendment is applied prospectively and clarifies that changing from a disposal through sale to a disposal through distribution to owners and vice-versa should not be considered to be a new plan of disposal, rather it is a continuation of the original plan. There is, therefore, no interruption of the application of the requirements in PFRS 5. The amendment also clarifies that changing the disposal method does not change the date of classification. PFRS 7, Financial Instruments: Disclosures Servicing Contracts PFRS 7 requires an entity to provide disclosures for any continuing involvement in a transferred asset that is derecognized in its entirety. The amendment clarifies that a servicing contract that includes a fee can constitute continuing involvement in a financial asset. An entity must assess the nature of the fee and arrangement against the guidance for continuing involvement in PFRS 7 in order to assess whether the disclosures are required. The amendment is to be applied such that the assessment of which servicing contracts constitute continuing involvement will need to be done retrospectively. However, comparative disclosures are not required to be provided for any period beginning before the annual period in which the entity first applies the amendments. PFRS 7 - Applicability of the Amendments to PFRS 7 to Condensed Interim Financial Statements This amendment is applied retrospectively and clarifies that the disclosures on offsetting of financial assets and financial liabilities are not required in the condensed interim financial report unless they provide a significant update to the information reported in the most recent annual report. PAS 19, Employee Benefits Regional Market Issue Regarding Discount Rate This amendment is applied prospectively and clarifies that market depth of high quality corporate bonds is assessed based on the currency in which the obligation is denominated, rather than the country where the obligation is located. When there is no deep market for high quality corporate bonds in that currency, government bond rates must be used. PAS 34, Interim Financial Reporting Disclosure of Information elsewhere in the interim financial report The amendment is applied retrospectively and clarifies that the required interim disclosures must either be in the interim financial statements or incorporated by crossreference between the interim financial statements and wherever they are included within the greater interim financial report (e.g., in the management commentary or risk report). *SGVFS015746*

239 Effective January 1, 2018 PFRS 9, Financial Instruments In July 2014, the IASB issued the final version of IFRS 9, Financial Instruments. The new standard (renamed as PFRS 9) reflects all phases of the financial instruments project and replaces PAS 39 and all previous versions of PFRS 9. The standard introduces new requirements for classification and measurement, impairment, and hedge accounting. PFRS 9 is effective for annual periods beginning on or after January 1, 2018, with early application permitted. Retrospective application is required, but providing comparative information is not compulsory. For hedge accounting, the requirements are generally applied prospectively, with some limited exceptions. Early application of previous versions of PFRS 9 (2009, 2010 and 2013) is permitted if the date of initial application is before February 1, The Group did not early adopt PFRS 9. The adoption of PFRS 9 will have an effect on the classification and measurement of the Group s financial assets and impairment methodology for financial assets, but will have no impact on the classification and measurement of the Group s financial liabilities. The adoption will also have an effect on the Group s application of hedge accounting and on the amount of its credit losses. The Group is currently assessing the impact of adopting this standard. Standards issued by the IASB but not yet adopted locally by SEC and FRSC International Financial Reporting Standard (IFRS) 15, Revenue from Contracts with Customers IFRS 15 was issued in May 2014 by the IASB and establishes a new five-step model that will apply to revenue arising from contracts with customers. Under IFRS 15, revenue is recognized at an amount that reflects the consideration to which an entity expects to be entitled in exchange for transferring goods or services to a customer. The principles in IFRS 15 provide a more structured approach to measuring and recognizing revenue. The new revenue standard is applicable to all entities and will supersede all current revenue recognition requirements under IFRS. Either a full or modified retrospective application is required for annual periods beginning on or after January 1, Early adoption is permitted. The Group is currently assessing the impact of IFRS 15 and plans to adopt the new standard on the required effective date once adopted locally. IFRS 16, Leases On January 13, 2016, the IASB issued its new standard, IFRS 16, Leases, which replaces International Accounting Standards (IAS) 17, the current leases standard, and the related Interpretations. Under the new standard, lessees will no longer classify their leases as either operating or finance leases in accordance with IAS 17. Rather, lessees will apply the single-asset model. Under this model, lessees will recognize the assets and related liabilities for most leases on their balance sheets, and subsequently, will depreciate the lease assets and recognize interest on the lease liabilities in their profit or loss. Leases with a term of 12 months or less or for which the underlying asset is of low value are exempted from these requirements. *SGVFS015746*

240 The accounting by lessors is substantially unchanged as the new standard carries forward the principles of lessor accounting under IAS 17. Lessors, however, will be required to disclose more information in their financial statements, particularly on the risk exposure to residual value. The new standard is effective for annual periods beginning on or after January 1, Entities may early adopt IFRS 16 but only if they have also adopted IFRS 15, Revenue from Contracts with Customers. When adopting IFRS 16, an entity is permitted to use either a full retrospective or a modified retrospective approach, with options to use certain transition reliefs. The Group is currently assessing the impact of IFRS 16 and plans to adopt the new standard on the required effective date once adopted locally. 4. Significant Accounting Judgments, Estimates and Assumptions The preparation of the consolidated financial statements requires management to make judgments, estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. These judgments, estimates and assumptions are based upon management s evaluation of relevant facts and circumstances as at reporting date. Judgments In the process of applying the Group s accounting policies, management has made the following judgments, apart from those involving estimations, which have the most significant effect on the amounts recognized in the consolidated financial statements: Revenue Recognition on Real Estate. The Group s process of selecting an appropriate revenue recognition method for a particular real estate sales transaction requires certain judgments based on the buyer s commitment on the sale which may be ascertained through the significance of the buyer s initial investment and completion of development. The buyer s commitment is evaluated based on collections, credit standing of the buyer and location of the property. The completion of development is determined based on engineer s judgments and estimates on the physical portion of contract work done and the completion of development beyond the preliminary stage. Property Acquisitions and Business Combinations. The Group acquires subsidiaries which own real estate. At the time of acquisition, the Group considers whether the acquisition represents an acquisition of a business or a group of assets and liabilities. The Group accounts for an acquisition as a business combination if it acquires an integrated set of business processes in addition to the real estate property. The consideration is made to the extent that the significant business processes are acquired and the additional services to be provided by the subsidiary. When the acquisition of subsidiary does not constitute a business, it is accounted for as an acquisition of a group of assets and liabilities. The purchase price of the acquisition is allocated to the assets and liabilities acquired based upon their relative fair values at the date of acquisition, no goodwill or deferred tax is recognized. Consignment Arrangements on Retail Segment. The retail segment of the Group has entered into various consignment arrangements with suppliers. Under these arrangements, the Group bears significant risks and rewards associated with the sale of goods. Management has determined that it is acting as principal in these sales transactions. Accordingly, sales revenue is recognized at gross amount upon actual sales to customers. The related inventory stocks supplied under these arrangements are only payable to suppliers when actually sold. *SGVFS015746*

241 Operating Lease Commitments - Group as Lessor. Management has determined that the Group retains all the significant risks and rewards of ownership of the properties and thus, accounts for the contracts as operating leases. The ownership of the asset is not transferred to the lessee by the end of the lease term, the lessee has no option to purchase the asset at a price that is expected to be sufficiently lower than the fair value at the date the option is exercisable, and, the lease term is not for the major part of the asset s economic life. Operating Lease Commitments - Group as Lessee. Management has determined that all the significant risks and benefits of ownership of these properties remain with the lessor and thus, accounts for these leases as operating leases. Assessing Significant Influence over Associates. Management assessed that the Group has significant influence over all its associates by virtue of the Group s more than 20% voting power in the investee, representation on the board of directors, and participation in policy-making processes of the associates. Assessing Joint Control of an Arrangement and the Type of Arrangement. Management assessed that the Group has joint control of Waltermart Mall by virtue of a contractual agreement with other shareholders. Waltermart Mall is a joint venture arrangement as it is a separate legal entity and its stockholders have rights to its net assets. Impairment of AFS Investments - Significant or Prolonged Decline in Fair Value. Management determines that a decline in fair value of greater than 20% of cost is considered to be a significant decline and a decline for a period of longer than 12 months is considered to be a prolonged decline. The determination of what is significant or prolonged requires judgment and includes an evaluation of price volatility. In addition, impairment may be appropriate when there is evidence of deterioration in the financial health of the investee, industry and sector performance. Assessing of Control or Significant Influence of Investees SM Prime. SMIC has 50% ownership interest in SMPH. Management assessed that SMIC has control of SM Prime as SMIC holds significantly more voting rights than any other vote holder or organized group of vote holders, and the other shareholdings are widely dispersed giving SMIC the power to direct relevant activities of SM Prime. Net Group. Management assessed that SMIC has control of these land-holding companies as the contracting parties intend to align the voting interest in the land-holding companies to reflect the economic interest in these subsidiaries. On June 27, 2014, the Board of Directors and stockholders of the land-holding companies approved the amendment of the Articles of Incorporation to reclassify all its voting preferred shares to common shares resulting in the alignment of SMIC s voting and economic interests. The amendment was approved by the SEC on various dates in 2015 (see Note 5). In addition, SMIC has secured its interest in the land by virtue of its long-term leases on both the buildings and land (see Note 5). BDO Unibank, Inc. (BDO). The Group has 44% ownership interest in BDO. Management assessed that the Group does not have control of BDO as the Group s voting rights are not sufficient to give it power to direct the relevant activities of BDO (see Note 13). *SGVFS015746*

242 Premium Leisure Corp. (PLC). The Group has 3% ownership interest in PLC. PLC is a subsidiary of Belle Corporation (Belle). In 2015, Management assessed that the Group has also significant influence over PLC through its associate, Belle. Estimates and Assumptions The key assumptions concerning the future and other sources of estimation uncertainty at the reporting date that have a significant risk of causing material adjustments to the carrying amounts of assets and liabilities within the next financial year are discussed below. Revenue and Cost Recognition. The Group s revenue from real estate and construction contracts recognized based on the POC are measured principally on the basis of the estimated completion of a physical proportion of the contract work. Impairment of Receivables. The Group maintains an amount of allowance for impairment loss considered adequate to provide for potential uncollectible receivables. The allowance is evaluated on the basis of factors that affect the collectibility of the accounts including the length of the Group s relationship with the customers and counterparties, average age of accounts and collection experience. The Group performs a regular review of the age and status of these accounts, designed to identify accounts with objective evidence of impairment and to provide the appropriate allowance for doubtful accounts. The review is accomplished using a combination of specific and collective assessment. The amount and timing of recorded expenses for any period would differ if the Group made different judgments or utilized different methodologies. See Note 10 for related balances. Impairment of AFS Investments - Calculation of Impairment Losses. The computation for the impairment of AFS debt instruments requires an estimation of the present value of the expected future cash flows and the selection of an appropriate discount rate. In the case of AFS equity instruments, the Group expands its analysis to consider changes in the investee s industry and sector performance, legal and regulatory framework, changes in technology and other factors that affect the recoverability of the Group s investments. See Note 12 for related balances. Net Realizable Value of Merchandise Inventories, Condominium and Residential Units for Sale, and Land and Development. The Group writes down merchandise inventories, condominium and residential units for sale, and land and development to net realizable value, through the use of an allowance account, whenever the net realizable value of the assets become lower than cost due to damage, physical deterioration, obsolescence, changes in price levels or other causes. See Notes 16 and 23 for related balances. Estimates of net realizable value are based on the most reliable evidence available at the time the estimates are made of the amount the assets are expected to be realized. These estimates take into consideration fluctuations of price or cost directly relating to events occurring after the reporting date to the extent that such events confirm conditions existing at the reporting date. The allowance account is reviewed on a regular basis to reflect the accurate valuation in the financial records. In 2015 and 2014, the Group assessed that the net realizable value of merchandise inventories, condominium and residential units for sale and land and land development are higher than cost, hence, the Group did not recognize any losses on write-down. *SGVFS015746*

243 Estimated Useful Lives of Property and Equipment and Investment Properties. The useful life of each of the Group s property and equipment and investment properties is estimated based on the period over which the asset is expected to be available for use. Such estimation is based on a collective assessment of industry practice, internal technical evaluation and experience with similar assets. The estimated useful life of each asset is reviewed periodically and updated if expectations differ from previous estimates due to physical wear and tear, technical or commercial obsolescence and legal or other limitations on the use of the asset. It is possible, however, that future financial performance could be materially affected by changes in the amounts and timing of recorded expenses brought about by changes in the factors mentioned above. See Notes 14 and 15 for related balances. Impairment of Investments in Associate Companies and Joint Ventures. Impairment review of investments in associate companies and joint ventures is performed when events or changes in circumstances indicate that the carrying value may not be recoverable. This requires management to make an estimate of the expected future cash flows from the investments and to choose a suitable discount rate in order to calculate the present value of those cash flows. See Note 13 for related balances. Impairment of Goodwill and Trademarks and Brand Names with Indefinite Useful Lives. Impairment exists when the carrying value of an asset or CGU exceeds its recoverable amount, which is the higher of its fair value less costs of disposal and its value in use. Fair value less costs of disposal calculation is based on available data from binding sales transactions, conducted at arm s length, for similar assets or observable market prices less incremental costs for disposing of the asset. The value in use calculations is based on a discounted cash flow model. The cash flows are derived from the budget for the next three years and do not include restructuring activities that the Group is not yet committed to or significant future investments that will enhance the assets. The recoverable amount is most sensitive to the pre-tax discount rates used for the discounted cash flow model as well as the expected future cash inflows and the growth rate used for extrapolation purposes. See Note 17 for related balances. Impairment of Other Nonfinancial Assets. The Group assesses at each reporting date whether there is an indication that an item of property and equipment and investment properties may be impaired. This assessment requires the determination of future cash flows expected to be generated from the continued use and ultimate disposition of such assets. Future events could cause the Group to conclude that these assets are impaired. Any resulting impairment loss could have a material impact on the financial position and performance of the Group. The preparation of the estimated future cash flows involves judgments and estimations. While the Group believes that its assumptions are appropriate and reasonable, significant changes in these assumptions may materially affect the Group s assessment of recoverable values and may lead to future additional impairment charges. See Notes 14 and 15 for related balances. Purchase Price Allocation in Business Combinations. The acquisition method requires extensive use of accounting estimates and judgments to allocate the purchase price to the fair market values of the acquiree s identifiable assets and liabilities at acquisition date. It also requires the acquirer to recognize goodwill. The Group s acquisitions have resulted in goodwill and separate recognition of trademarks and brand names with indefinite lives. See Note 5 for related balances. *SGVFS015746*

244 Realizability of Deferred Tax Assets. The carrying amount of deferred tax assets is reviewed at the end of each reporting period and reduced to the extent that it is no longer probable that sufficient taxable profit will be available to allow all or part of the deferred tax assets to be utilized. The Group s assessment on the recognition of deferred tax assets on deductible temporary differences and carryforward benefits of excess MCIT and NOLCO is based on the projected taxable income in future periods. Based on the projection, not all deductible temporary differences and carryforward benefits of excess MCIT and NOLCO will be realized. Consequently, only a portion of the Group s deferred tax assets was recognized. See Note 27 for related balances. Present Value of Defined Benefit Obligation. The present value of the pension obligations depends on a number of factors including the discount rate and rate of salary increase, among others. The Group determines the appropriate discount rate at the reporting date. In determining the discount rate the Group considers the interest rates on government bonds that are denominated in the currency in which the benefits will be paid, and that have terms to maturity approximating the terms of the related pension liability. Other key assumptions for pension obligations are based on current market conditions. While it is believed that the Group s assumptions are reasonable and appropriate, significant differences in actual experience or significant changes in assumptions may materially affect the Group s pension and other pension obligations. See Note 26 for related balances. Fair Value of Financial Assets and Liabilities. The significant components of fair value measurement were determined using verifiable objective evidence (i.e., foreign exchange rates, interest rates and volatility rates). The amount of changes in fair value would differ if the Group utilized different valuation methodologies and assumptions. Any changes in the fair value of these financial assets and liabilities would directly affect profit or loss and OCI. See Note 30 for related balances. Contingencies. The Group is currently involved in legal and administrative proceedings. The Group s estimate of the probable costs for the resolution of these proceedings has been developed in consultation with outside legal counsel handling defense in these matters and is based upon an analysis of potential results. The Group currently does not believe that these proceedings will have a material adverse effect on its financial position and performance. It is possible, however, that future financial performance could be materially affected by changes in the estimates or in the effectiveness of strategies relating to these proceedings. No accruals were made in relation to these proceedings. 5. Corporate Restructuring and Significant Acquisitions Corporate Restructuring In 2013, SM Prime initiated a corporate restructuring exercise to consolidate all of the Group s real estate subsidiaries and real estate assets under one single listed entity which is SM Prime (collectively, the SM Property Group ). The overall objective is to bring to the equities market the most comprehensive and integrated Philippine property company that will engage the investor community in the long-term growth potential not just of the Philippine property sector, but also of the consumer and tourism sectors. *SGVFS015746*

245 Following are the significant corporate restructuring transactions of the SM Property Group: a. SM Land Inc. s Tender Offers for SMDC and HPI b. Merger of SM Prime and SM Land c. Acquisition of unlisted real estate companies and real estate assets from SMIC and the Sy Family. The impact to SMIC of the SM Property Group corporate restructuring is as follows: SMDC, SM Land, SM Prime and Unlisted Real Estate Companies. The corporate restructuring resulted in changes in SMIC s ownership interest in these subsidiaries only without loss of control. The related transaction costs of P=1,862.1 million was recorded under the Equity adjustments from common control transactions account in the equity section of the 2013 consolidated balance sheet. HPI. The increase in ownership interest of HPI from 27% to 51% resulted in acquisition of control. HPI is ultimately controlled by the Sy Family, hence, the transaction was accounted for as a step acquisition of an associate under common control. HPI was consolidated beginning The related transaction costs of P=38.1 million was recognized as an expense under Selling, general and administrative expenses account of the 2013 consolidated statement of income. The difference of P=1,610.7 million between the carrying value of the net assets disposed to non-controlling interests and the carrying value of the net assets acquired from non-controlling interests was recorded as part of the Equity adjustments from common control transactions account in the equity section of the 2013 consolidated balance sheet. Acquisitions Net Group. On December 2, 2013, SMIC entered into a Shareholders Agreement and Share Purchase Agreement for the acquisition of 90% ownership interest in the following companies (see Note 4): 6-24 Property Holdings, Inc Property Holdings, Inc Property Holdings, Inc Property Holdings, Inc. 6-3 Property Holdings, Inc. Crescent Park 6-24 Property Holdings, Inc. Crescent Park Property Holdings, Inc. Crescent Park 19-1 Property Holdings, Inc. Crescent Park 18-2 Property Holdings, Inc. Crescent Park 6-3 Property Holdings, Inc. As a result of the acquisition, the Net Group became a partially-owned subsidiary of SMIC. The primary reason for acquiring the Net Group was to expand the Group s commercial development operations across major commercial business districts. *SGVFS015746*

246 In 2014, the fair values of the identifiable assets and liabilities were finalized as follows: Fair Values (As at Acquisition Date) (In Thousands) Cash and cash equivalents P=822,890 Receivables 116,397 Other current assets 184,912 Property and equipment (Note 14) 2,936 Investment properties (Note 15) 16,761,000 Total identifiable assets 17,888,135 Less: Trade payables and other current liabilities 652,212 Bank loans 4,923,509 Deferred tax liabilities 2,323,661 Total identifiable liabilities 7,899,382 Total identifiable net assets at fair value 9,988,753 Non-controlling interest measured at proportionate share of the fair value (998,875) Goodwill arising from acquisition 3,696,369 Purchase consideration P=12,686,247 The Net Group s receivables comprise mainly of lease receivables from tenants amounting to P=116.4 million which was the carrying value as at acquisition date. None of the receivables have been impaired and it is expected that the full contractual amounts can be collected. Waltermart Supermarket, Inc. (WSI). In January and May 2013, SM Retail acquired a total of 193,800,000 shares of WSI equivalent to 51% ownership interest for P=3,570.0 million. WSI is mainly engaged in the business of trading goods and merchandise. As a result of the acquisition, WSI became a partially-owned subsidiary of the Group. The primary reason for acquiring WSI was to expand the Group s market share through the pre-existing stores of WSI. In 2014, the fair values of the identifiable assets and liabilities were finalized as follows: Fair Values (As at Acquisition Date) (In Thousands) Cash and cash equivalents P=552,991 Receivables 187,710 Inventories 700,154 Property and equipment (Note 14) 425,511 Investment properties (Note 15) 182,774 Other current and noncurrent assets 181,047 Total identifiable assets 2,230,187 Less: Trade payables and other current liabilities 1,604,293 Other liabilities 3,606 Total identifiable liabilities 1,607,899 Total identifiable net assets at fair value 622,288 Non-controlling interest measured at proportionate share of the fair value (304,921) Goodwill arising from acquisition 3,252,633 Purchase consideration P=3,570,000 *SGVFS015746*

247 WSI s receivables comprise mainly of trade receivables amounting to P=187.7 million which was the carrying value as at acquisition date. None of the receivables have been impaired and it is expected that the full contractual amounts can be collected. CHAS. In January 2013, SM Prime entered into a Binding Share Purchases Agreement for the acquisition of 100% interest in CHAS for a total purchase consideration of P=1,685.0 million. CHAS is engaged in the business of shopping mall operations which owns Cabanatuan Megacenter in Nueva Ecija. SM Prime acquired CHAS to expand its market share through the pre-existing mall of CHAS. In December 2013, SM Prime completed its acquisition of 100% interest in CHAS. Total identifiable assets acquired amounted to P=1,834.0 million, which mainly consist of investment properties amounting to P=1,385.0 million and cash and other assets amounting to P=449.0 million. Total identifiable liabilities assumed amounted to P=149.0 million, which mainly consist of accounts payable and other current liabilities. The resulting identifiable net assets acquired amounted to P=1,685.0 million. No goodwill is recognized upon completion of the acquisition. The fair value of acquired receivables amounting to P=37.0 million (included in Receivables ) approximates their carrying value. No impairment loss was provided on these receivables. SMIC s consolidated revenue and net income would have increased by P=80.0 million and decreased by P=105.0 million, respectively, in 2013 had the acquisition of CHAS taken place on January 1, Total revenue and net income of CHAS included in the consolidated financial statements for 2013 are immaterial. Net cash outflow from the acquisition of CHAS amounted to P=2,238.0 million, inclusive of advances made to CHAS prior to the acquisition amounting to P=665.0 million and net of cash acquired from CHAS amounting to P=112.0 million. 6. Segment Information The Group has identified three reportable operating segments as follows: property, retail, and financial services and others. The property segment is involved in mall, residential and commercial development and hotels and convention centers operations. The mall segment develops, conducts, operates and maintains the business of modern commercial shopping centers and all businesses related thereto such as the conduct, operation and maintenance of shopping center spaces for rent, amusement centers, or cinema theaters within the compound of the shopping centers. Residential and commercial segments are involved in the development and transformation of major residential, commercial, entertainment and tourism districts through sustained capital investments in buildings and infrastructure. The hotels and convention centers segment engages in and carries on the business of hotels and convention centers and operates and maintains any and all services and facilities incident thereto. The retail segment is engaged in the retail/wholesale trading of merchandise, such as dry goods, wearing apparels, food and other merchandise. *SGVFS015746*

248 The financial services and others segment primarily includes the Parent Company which engages in asset management and capital investments, and associates which are involved in financial services. The BOD (Chief Operating Decision Maker) monitors the operating results of its business units separately for the purpose of making decisions about resource allocation and performance assessment. Segment performance is evaluated based on operating profit or loss and is measured consistently with the operating profit or loss in the consolidated financial statements. Operating Segment Financial Data 2015 Property Retail Financial Services and Others Eliminations Consolidated (In Thousands) Revenue: External customers P=67,435,872 P=214,595,656 P=13,846,163 P= P=295,877,691 Inter-segment 16,035,202 62,609 26,126,817 (42,224,628) P=83,471,074 P=214,658,265 P=39,972,980 (P=42,224,628) P=295,877,691 Segment results: Income before income tax P=36,806,850 P=10,244,553 P=20,296,619 (P=17,659,765) P=49,688,257 Provision for income tax (6,228,772) (3,043,204) (83,394) (9,355,370) Net income P=30,578,078 P=7,201,349 P=20,213,225 (P=17,659,765) P=40,332,887 Net income attributable to: Owners of the Parent P=29,989,697 P=6,827,606 P=20,213,225 (P=28,575,268) P=28,455,260 Non-controlling interests 588, ,743 10,915,503 11,877, Property Retail Financial Services and Others Eliminations Consolidated (In Thousands) Revenue: External customers P=62,644,074 P=200,028,416 P=13,942,825 P= P=276,615,315 Inter-segment 7,493,808 75,500 14,327,200 (21,896,508) P=70,137,882 P=200,103,916 P=28,270,025 (P=21,896,508) P=276,615,315 Segment results: Income before income tax P=25,127,676 P=8,721,887 P=13,906,050 (P=1,291,069) P=46,464,544 Provision for income tax (4,886,808) (2,590,050) (101,865) 4,734 (7,573,989) Net income P=20,240,868 P=6,131,837 P=13,804,185 (P=1,286,335) P=38,890,555 Net income attributable to: Owners of the Parent P=19,725,253 P=5,858,974 P=13,804,185 (P=10,989,828) P=28,398,584 Non-controlling interests 515, ,863 9,703,493 10,491, Property Retail Financial Services and Others Eliminations Consolidated (In Thousands) Revenue: External customers P=56,396,305 P=183,606,666 P=13,577,074 P= P=253,580,045 Inter-segment 6,004, ,556 16,101,800 (22,224,127) P=62,401,076 P=183,724,222 P=29,678,874 (P=22,224,127) P=253,580,045 Segment results: Income before income tax P=23,672,023 P=8,551,740 P=12,331,124 (P=895,312) P=43,659,575 Provision for income tax (3,991,614) (2,446,033) 289, ,065 (5,420,497) Net income P=19,680,409 P=6,105,707 P=12,620,209 (P=167,247) P=38,239,078 Net income attributable to: Owners of the Parent P=19,229,302 P=5,748,921 P=12,620,209 (P=10,152,750) P=27,445,682 Non-controlling interests 451, ,786 9,985,503 10,793,396 *SGVFS015746*

249 Cash and Cash Equivalents This account consists of: (In Thousands) Cash on hand and in banks (Note 22) P=9,790,556 P=9,428,922 Temporary investments (Note 22) 44,119,515 59,704,459 P=53,910,071 P=69,133,381 Cash in banks earn interest at the respective bank deposit rates. Temporary investments are made for varying periods of up to three months depending on the immediate cash requirements of the Group. These investments earn interest at prevailing rates (see Note 25). Temporary investments amounting to P=583.9 million and P=52.0 million as at December 31, 2015 and 2014, are used as collateral for certain loans (see Note 18). 8. Time Deposits This account consists of: (In Thousands) Time deposits: Not pledged (Note 22) P=62,739,174 P=54,622,914 Pledged (Notes 20 and 22) 1,956,800 62,739,174 56,579,714 Less current portion 9,611,405 9,000,324 Noncurrent portion P=53,127,769 P=47,579,390 The time deposits as at December 31, 2015 and 2014 bear annual interest ranging from 1.0% to 4.9%. Time deposits with maturities of up to 12 months, amounting to P=4,562.0 million and P=2,412.0 million as at December 31, 2015 and 2014, respectively, are used as collateral for some bank credit lines. Interest earned from time deposits is disclosed in Note 25. *SGVFS015746*

250 Investments Held for Trading and Sale This account consists of: (In Thousands) Investments held for trading - Bonds P=279,359 P=307,835 AFS investments (Note 12): Bonds and corporate notes 179, ,742 Shares of stock: Listed 642,274 2,890,592 Unlisted 5, ,556 3,882,614 P=1,100,915 P=4,190,449 The Group recognized a loss of P=0.7 million, gain of P=2.1 million and a loss of P=18.2 million from fair value adjustments of investments held for trading in 2015, 2014 and 2013, respectively. The amounts are included under Gain (loss) on sale of available-for-sale investments and fair value changes on investments held for trading - net account in the consolidated statements of income. Interest earned on investments held for trading and sale is disclosed in Note Receivables This account consists of: (In Thousands) Trade: Real estate buyers P=30,942,212 P=30,642,764 Third-party tenants 5,981,548 4,597,101 Related-party tenants (Note 22) 1,077,357 1,890,274 Due from related parties (Note 22) 1,350,612 1,194,099 Management and service fees (Note 22) 580, ,967 Dividends (Note 22) 525, ,032 Total 40,457,988 39,716,237 Less allowance for impairment loss 361, ,834 40,096,123 39,351,403 Less noncurrent portion of receivables from real estate buyers (Note 17) 7,962,615 8,341,583 Current portion P=32,133,508 P=31,009,820 The terms and conditions follow: Trade receivables from tenants and management and service fee receivables are noninterestbearing and are normally collectible on 30- to 90-day terms. Receivables from real estate buyers pertain mainly to sale of condominiums and residential units at various terms of payment. *SGVFS015746*

251 Dividends receivables are noninterest-bearing and are normally collectible within the next financial year. The terms and conditions relating to due from related parties are discussed in Note 22. The movements in allowance for impairment loss follow: (In Thousands) Balance at beginning of year P=364,834 P=334,891 Provision for the year (Note 24) 5,956 30,200 Write offs (8,925) Reversal of provision (257) Balance at end of year P=361,865 P=364,834 The allowance for impairment loss pertains mostly to receivables from real estate buyers and tenants. The aging analysis of receivables follow: Neither Past Due nor Impaired December 31, 2015 Past Due but not Impaired Over 120 Days Days Days Impaired Total (In Thousands) Trade: Real estate buyers: Current P=18,922,263 P=1,245,857 P=416,929 P=2,035,744 P=358,804 P=22,979,597 Noncurrent 7,962,615 7,962,615 Third-party tenants 5,971,383 1,354 5,750 3,061 5,981,548 Related-party tenants 1,070,557 1,225 5,575 1,077,357 Due from related parties 1,350,612 1,350,612 Management and service fees 580, ,591 Dividends 525, ,668 Receivables before allowance for impairment loss P=36,383,689 P=1,248,436 P=428,254 P=2,035,744 P=361,865 P=40,457,988 Neither Past Due nor Impaired December 31, 2014 Past Due but not Impaired Days (In Thousands) Days Over 120 Days Impaired Total Trade: Real estate buyers: Current P=18,299,467 P=1,072,161 P=317,632 P=2,259,074 P=352,847 P=22,301,181 Noncurrent 8,341,583 8,341,583 Third-party tenants 4,433,330 3, ,316 11,987 4,597,101 Related-party tenants 1,890,274 1,890,274 Due from related parties 1,194,099 1,194,099 Management and service fees 516, ,967 Dividends 875, ,032 Receivables before allowance for impairment loss P=35,550,752 P=1,075,629 P=465,948 P=2,259,074 P=364,834 P=39,716,237 Receivables, other than those identified as impaired, are assessed by the Group s management as good and collectible. *SGVFS015746*

252 Other Current Assets This account consists of: (In Thousands) Land and development (Note 16) P=19,814,615 P=19,571,526 Condominium and residential units for sale (Note 16) 8,294,523 7,600,260 Prepaid taxes and other prepayments 7,611,911 6,839,583 Advances and deposits 5,825,915 4,421,476 Input tax 2,951,332 2,995,345 Non-trade receivables 2,259,735 10,994,304 Receivable from banks and credit cards 1,911,701 1,625,671 Notes receivable (Note 22) 981,435 Accrued interest receivable (Note 22) 545, ,422 Escrow fund (Notes 17 and 22) 437, ,778 Advances for project development 16,467 Others 678, ,591 P=51,312,145 P=55,821,423 Prepaid taxes and other prepayments consist of creditable tax certificates received by the Group and prepayments for insurance, real property taxes, rent, and other expenses which are normally utilized within the next financial period. Advances and deposits pertain to downpayments made to suppliers or contractors to cover preliminary expenses of the contractors in construction projects. The amounts are noninterestbearing and are recouped upon every progress billing payment depending on the percentage of accomplishment. Non-trade receivables include interest-bearing advances to third parties which are normally collectible within the next financial year. Interest earned from advances to third parties is disclosed as part of Others in Note 25. Receivable from banks and credit cards are noninterest-bearing and are normally collectible on 30- to 90-day terms. Notes receivable pertains to the loan extended by the Parent Company to Atlas Consolidated Mining and Development Corporation (Atlas) on September 17, 2015 amounting to P=981.4 million. The loan bears interest at 5.0%, payable quarterly, and is renewable for 90- day periods for a maximum of five years at the option of the Parent Company. Interest earned from notes receivable is disclosed as part of Others in Note 25. Accrued interest receivable relates mostly to time deposits and are normally collected within the next financial year. Escrow fund pertains to amounts deposited in the account of an escrow agent as required by the Housing and Land Use Regulatory Board (HLURB) in connection with SMDC s temporary license to sell properties for specific projects prior to HLURB s issuance of a license to sell and certificate of registration. Under this temporary license to sell, all payments, inclusive of down payments, reservation and monthly amortization, among others, made by buyers within the selling period shall be deposited in the escrow account. Interest earned from the cash in escrow amounted to P=24.0 million, P=7.0 million and P=5.0 million in 2015, 2014 and 2013, respectively is disclosed as part of Others in Note 25. *SGVFS015746*

253 Advances for project development mostly pertain to advances for the acquisition of land for future development. 12. Available-for-Sale Investments This account consists of: (In Thousands) Shares of stock: Listed P=17,048,942 P=17,379,067 Unlisted 99,467 99,467 Bonds and corporate notes 4,866,562 5,626,784 Club shares 13,530 13,590 22,028,501 23,118,908 Less allowance for impairment loss 31,250 31,250 21,997,251 23,087,658 Less current portion (Note 9) 821,556 3,882,614 Noncurrent portion P=21,175,695 P=19,205,044 Unlisted shares of stock of the Group pertain to stocks of private corporations. These are classified as AFS investments and are carried at cost since fair value cannot be reliably estimated due to lack of reliable estimates of future cash flows and discount rates necessary to calculate the fair value. There is currently no market for these investments and the Group intends to hold them for the long-term. Investments in bonds and corporate notes as at December 31, 2015 and 2014 bear fixed interest rates ranging from 3.9% to 7.5%. These investments will mature on various dates beginning February 2015 to October The fair values of these investments as at December 31, 2015 and 2014 amounted to US$103.4 million (P=4,866.5 million) and US$125.8 million (P=5,626.8 million), respectively. The movements in net unrealized gain on AFS investments and share in unrealized gain of associates attributable to the owners of the Parent which are recognized in OCI for the years ended December 31, 2015 and 2014 follow: (In Thousands) Balance at beginning of year P=10,207,259 P=7,338,500 Share in net unrealized gain (loss) on AFS investments of associates (Note 13) (1,675,726) 322,170 Gain due to changes in fair value of AFS investments 4,192,860 2,595,964 Transferred to profit or loss (33) (49,375) Balance at end of year P=12,724,360 P=10,207,259 Gain on disposal of AFS investments recognized under Gain (loss) on sale of available-for-sale investments and fair value changes on investments held for trading - net account in the consolidated statements of income amounted to P=0.6 million, P=46.3 million and P=150.9 million for the years ended December 31, 2015, 2014 and 2013, respectively. The amounts are exclusive of non-controlling interests. Interest earned from AFS investments is disclosed in Note 25. *SGVFS015746*

254 Investments in Associate Companies and Joint Ventures The movements in this account follow: (In Thousands) Cost: Balance at beginning of year P=95,151,355 P=96,600,517 Additions 15,546,154 1,925,455 Reclassification (Note 12) 1,719,035 Disposals (3,374,617) Balance at end of year 112,416,544 95,151,355 Accumulated equity in net earnings: Balance at beginning of year 50,334,664 42,393,849 Equity in net earnings 14,070,301 13,225,022 Dividends received (5,173,241) (4,509,077) Accumulated equity in net earnings of investments sold (1,210,251) Balance at end of year 59,231,724 49,899,543 Share in net unrealized gain (loss) on AFS investments of associates (1,773,250) 435,121 57,458,474 50,334,664 Translation adjustment (5,627) (9,845) P=169,869,391 P=145,476,174 There were no impairment losses for investments in associate companies and joint ventures in 2015 and The associate companies and joint ventures of the Group follow: Percentage of Ownership December 31, 2015 December 31, 2014 Company Gross Effective Gross Effective Principal Activities Associates BDO Unibank, Inc. and Subsidiaries (BDO) Financial services China Banking Corporation and Subsidiaries (China Bank) Financial services Belle and Subsidiaries Real estate development and tourism Atlas and Subsidiaries Mining Sodexo Benefits and Rewards Services Philippines Inc. (formerly Sodexo Motivation Solutions Philippines, Inc) Retail Fast Retailing Philippines, Inc Retail CityMall Commercial Centers, Inc. (CityMall) Real estate development and tourism PLC 3 3 Gaming OCLP Holdings, Inc. (OHI) Real estate development Fei Hua Real Estate Company (FHREC) Real estate development Joint Venture Waltermart Mall Shopping mall development *SGVFS015746*

255 CityMall On February 17, 2014, SMIC signed an Investment and Shareholders Agreement for the acquisition of 34.0% ownership interest in CityMall for an initial investment of P=0.34 million. The remaining 66.0% of the outstanding capital is held by DoubleDragon Properties Corp. On April 25, 2014, SMIC, in response to a capital call, invested an additional P=103.0 million equivalent to 1.0 million shares in CityMall. China Bank In March 2014, China Bank had a stock rights offering which entitled each eligible stockholder to subscribe to one common share for every common shares held as at record date, at an offer price of P=49.50 per rights share. As at May 5, 2014, the Group has fully exercised its rights share and paid P=1,804.8 million equivalent to 36.5 million China Bank shares. In May 2015 and 2014, China Bank declared stock dividends equivalent to 8% of its outstanding capital stock which increased the number of common shares held by the Group by 31.0 million and 28.7 million, respectively. The said shares were issued on September 9, 2015 and October 15, 2014, respectively. Belle On various dates in 2013, the Group sold 20.2 million Belle shares and recognized P=10.8 million of deferred gain. The remaining balance of deferred gain as at December 31, 2015 and 2014 amounted P=1,065.7 million. BDO In 2014, MRDC sold 71.6 million BDO shares for P=7,403.7 million at P=104.0 per share resulting to a gain on sale of P=2,863.4 million which is included under Gain (loss) on disposal of investments and properties - net account in the consolidated statement of income. SMIC s equity interest in BDO was reduced by 1% as a result of BDO s issuance of 64.5 million shares relative to its acquisition of One Network Bank on July 20, Atlas In 2015 and 2014 Primebridge acquired 7.4 million and 2.2 million shares of Atlas for a total consideration of P=64.2 million and P=25.7 million, respectively. OHI On May 7, 2015, SMPH acquired 39.96% collective ownership interest in OHI, through acquisition of 100% interest in six (6) holding entities, for a total consideration of P=15,433.0 million, which approximates the proportionate share of SMPH in the fair values of the identifiable net assets of OHI. OHI owns strategic residential, commercial and landbank areas in key cities in Metro Manila. FHREC The carrying value of investment in FHREC, a company incorporated in China, amounted to P=1,109.0 million and P=749.0 million as at December 31, 2015 and December 31, 2014, with cumulative equity in net earnings amounting to P=832.0 million and P=473.0 million as at December 31, 2015 and 2014, respectively. *SGVFS015746*

256 PLC At various dates in 2014, the Company acquired a total of 1,041.8 million shares of PLC which is equivalent to 3.29% of the outstanding common stock, at an average price of P=1.65 a share for a total cost of P=1,719.0 million. The investment in PLC was classified under the Available-for-sale investments account in the consolidated balance sheet in In 2015, the investment in PLC was reclassified to Investments in associate companies and joint ventures account in the consolidated balance sheet. WalterMart Mall The carrying value of investment in WalterMart Mall amounted to P=5,501.0 million and P=5,302.0 million as at December 31, 2015 and December 31, 2014, respectively, with cumulative equity in net earnings amounting to P=386.0 million and P=187.0 million as at December 31, 2015 and December 31, 2014, respectively. The condensed financial information of the Group s material associate, BDO, and the reconciliation of its net assets to the carrying amounts in the consolidated financial statements follow: (In Millions) Total assets P=2,031,254 P=1,863,649 Total liabilities (1,831,641) (1,683,980) Total equity 199, ,669 Proportion of the Group s ownership 46% 47% 91,822 84,444 Goodwill and others 14,120 21,134 Carrying amount of the investment P=105,942 P=105, (In Millions) Interest income P=72,127 P=63,583 P=56,606 Interest expense (15,166) (12,358) (13,440) Other expenses - net (31,906) (28,397) (20,520) Net income P=25,055 P=22,828 P=22,646 Share in net income P=11,553 P=11,002 P=10,676 Other comprehensive income (loss) (P=3,830) P=390 (P=4,766) Total comprehensive income 21,225 23,218 17,880 Share in comprehensive income P=9,867 P=11,122 P=8,381 *SGVFS015746*

257 The aggregate information of associates and joint ventures that are not individually material follows: (In Millions) Share in net income P=2,517 P=2,223 P=2,926 Share in other comprehensive income (loss) (87) 315 (327) Share in total comprehensive income P=2,430 P=2,538 P=2,599 As at December 31, the fair values of investments in associate companies and joint ventures which are listed in the PSE are as follows: (In Thousands) BDO P=188,408,619 P=196,965,081 China Bank 15,557,433 18,199,904 Belle 9,720,256 16,334,039 Atlas 2,492,329 6,148,415 PLC 666,777 2,219,117 *SGVFS015746*

258 Property and Equipment The movements in this account follow: Buildings and Improvements Store Equipment and Improvements Data Processing Equipment Furniture, Fixtures and Office Equipment Machinery and Equipment (In Thousands) Leasehold Improvements Transportation Equipment Construction in Progress Total Cost Balance as at December 31, 2013 P=4,405,866 P=11,039,017 P=4,623,449 P=4,614,627 P=3,651,578 P=7,703,423 P=686,694 P=1,327,354 P=38,052,008 Additions 1,041, , , , , ,759 52, ,692 4,522,820 Reclassifications 5,714,488 (8,595,757) 140, , ,524 3,600,135 19,500 (776,085) 1,003,319 Disposals/retirements (108,430) (4,953) (30,884) (33,948) (58,338) (158,692) (2,764) (141,458) (539,467) Balance as at December 31, ,053,405 2,703,364 5,075,569 5,825,770 4,411,577 11,946, ,867 1,266,503 43,038,680 Additions 800, , , , , , , ,878 4,543,157 Reclassifications (289,467) (867,136) (21,409) (414,655) 1,016,637 37,516 8,723 (887,056) (1,416,847) Disposals/retirements (41,571) (41,964) (581,556) (46,750) (51,510) (11,200) (6,365) (6,506) (787,422) Balance as at December 31, 2015 P=11,523,239 P=1,946,600 P=5,123,412 P=5,975,191 P=6,119,089 P=12,725,201 P=860,017 P=1,104,819 P=45,377,568 Accumulated Depreciation and Amortization Balance as at December 31, 2013 P=1,330,044 P=7,187,710 P=3,198,418 P=2,639,827 P=2,307,582 P=2,678,397 P=386,650 P= P=19,728,628 Depreciation and amortization (Note 24) 815, , , , ,333 1,334,214 (239,563) 4,289,237 Reclassifications 826,353 (6,086,373) (78,738) 40,402 38,734 4,341, ,930 (611,715) Disposals/retirements (78,543) (3,021) (16,759) (27,022) (50,086) (92,407) (2,646) (270,484) Balance as at December 31, ,893,140 1,668,968 3,711,879 3,317,564 2,831,563 8,262, ,371 23,135,666 Depreciation and amortization (Note 24) 847, , , , ,372 1,236,659 68,713 4,171,047 Reclassifications (256,195) (496,178) (83,987) (350,202) 456,284 (167,450) 15,590 (882,138) Disposals/retirements (19,623) (41,725) (314,281) (21,546) (35,086) (9,925) (4,609) (446,795) Balance as at December 31, 2015 P=3,464,366 P=1,346,002 P=3,902,027 P=3,515,722 P=3,898,133 P=9,321,465 P=530,065 P= P=25,977,780 Net Book Value As at December 31, 2015 P=8,058,873 P=600,598 P=1,221,385 P=2,459,469 P=2,220,956 P=3,403,736 P=329,952 P=1,104,819 P=19,399,788 As at December 31, ,160,265 1,034,396 1,363,690 2,508,206 1,580,014 3,684, ,496 1,266,503 19,903,014 As at December 31, 2015 and 2014, the Group has no idle property and equipment and the cost of fully depreciated property and equipment still in use amounted to P=12,069.7 million and P=11,242.2 million, respectively. *SGVFS015746*

259 Investment Properties The movements in this account follow: Land and Improvements Buildings and Improvements Building Equipment, Furniture and Others (In Thousands) Construction in Progress Cost Balance as at December 31, 2013 P=35,057,104 P=135,231,202 P=28,763,306 P=26,330,118 P=225,381,730 Additions 5,560,322 8,069,580 1,738,300 17,422,815 32,791,017 Reclassifications 6,057,326 4,054,655 (5,291,038) (4,789,397) 31,546 Translation adjustment (107,095) (299,725) (37,595) (155,710) (600,125) Disposals (122,231) (47,621) (169,852) Balance as at December 31, ,567, ,933,481 25,125,352 38,807, ,434,316 Additions 18,590,095 16,989,356 1,814,237 9,480,701 46,874,389 Reclassifications 335,349 14,738,719 2,229,377 (16,059,390) 1,244,055 Translation adjustment 64,091 99,036 12,795 72, ,664 Disposals (311,144) (2,833,882) (87,659) (6,071) (3,238,756) Balance as at December 31, 2015 P=65,246,048 P=175,926,710 P=29,094,102 P=32,295,808 P=302,562,668 Total Accumulated Depreciation, Amortization and Impairment Loss Balance as at December 31, 2013 P=389,725 P=24,623,465 P=12,480,507 P=123,564 P=37,617,261 Depreciation and amortization (Note 24) 304,954 4,411,548 1,901,886 6,618,388 Reclassifications 1,006, ,670 (276,046) 1,661,268 Translation adjustment (9,031) (43,422) (15,047) (67,500) Reversal of impairment loss (199,708) (199,708) Disposals (49,968) (33,852) (83,820) Balance as at December 31, ,492,584 29,872,293 14,057, ,564 45,545,889 Depreciation and amortization (Note 24) 229,824 4,681,811 2,279,957 7,191,592 Reclassifications (18,722) 398, , ,661 Translation adjustment 4,041 16,752 18,563 39,356 Reversal of impairment loss (123,564) (123,564) Disposals (41,085) (360,637) (98,046) (499,768) Balance as at December 31, 2015 P=1,666,642 P=34,608,274 P=16,704,250 P= P=52,979,166 Net Book Value As at December 31, 2015 P=63,579,406 P=141,318,436 P=12,389,852 P=32,295,808 P=249,583,502 As at December 31, ,075, ,061,188 11,067,904 38,684, ,888,427 As at December 31, 2015 and 2014, the allowance for impairment loss on land and improvements, and construction in progress amounted to P=600.0 million and P=723.6 million, respectively. Allowance for impairment loss amounting to P=123.6 million was written off and P=199.7 million was reversed in 2015 and 2014, respectively (see Note 24). Portions of investment properties located in China with carrying value of P=193.0 million and with estimated fair value of P=2,169.0 million as at December 31, 2015, were mortgaged as collaterals to secure the domestic borrowings in China (see Note 20). Rent income from investment properties, which is primarily attributable to SM Prime, amounted to P=35,969.3 million, P=32,605.2 million and P=27,628.5 million for the years ended December 31, 2015, 2014 and 2013, respectively. Consolidated direct operating expenses from investment properties which generate income amounted to P=26,680.1 million, P=20,249.6 million and P=17,075.0 million for the years ended December 31, 2015, 2014 and 2013, respectively. *SGVFS015746*

260 Construction in progress includes shopping mall complex under construction amounting to P=24,307.0 million and P=30,870.0 million, and landbanking and commercial building constructions amounting to P=7,658.0 million and P=7,746.0 million as at December 31, 2015 and 2014, respectively. In 2015, shopping mall complex under construction mainly pertains to cost of land amounting to P=3,291 million, and costs incurred for the development of SM Trece Martires, SM San Jose Del Monte, and the ongoing expansions and renovations of SM Mall of Asia, SM City Fairview, SM City Sucat and SM Xiamen. In 2014, shopping mall complex under construction mainly pertains to cost of land amounting to P=6,576 million and costs incurred for the development of SM Seaside City Cebu, SM City Cabanatuan, SM Center San Mateo, SM Tianjin and SM Zibo and the ongoing expansions and renovations of SM Mall of Asia, SM City Sta. Rosa, SM City Iloilo, SM City Taytay and SM City San Lazaro. Construction contracts with various contractors related to the construction of the above-mentioned projects amounted to P=108,759.0 million and P=81,977.0 million as at December 31, 2015 and 2014, respectively, inclusive of overhead, cost of labor and materials and all other costs necessary for the proper execution of the works. The outstanding contracts are valued at P=31,099.0 million and P=17,272.0 million as at December 31, 2015 and 2014, respectively. Interest capitalized to the construction of investment properties amounted to P=2,039.0 million, P=51.0 million and P=77.0 million in 2015, 2014 and 2013, respectively. Capitalization rates used range from 2.06% to 6.07% and 4.61% to 5.99% for the years ended December 31, 2015 and 2014, respectively. In 2015, foreign exchange loss amounting to P=642.0 million were also capitalized to the construction of investment property. The fair value of investment properties amounting to P=572,921.2 million and P=571,848.0 million as at December 31, 2015 and 2014, respectively, was determined by accredited independent appraisers with appropriate qualifications and recent experience in the valuation of similar properties in the relevant locations. The fair value represents the price that would be received to sell the investment properties in an orderly transaction between market participants at the measurement date. While appraisal was not done for all investment properties as at December 31, 2015 and 2014, the Group believes that there were no conditions present in 2015 and 2014 that would significantly reduce the fair value of investment properties from that determined on the most recent valuation. The significant assumptions used in the valuations follow: Discount rate 10.0% 12.0% Capitalization rate 7.4% 8.5% Average growth rate 5.0% In conducting the appraisal, the independent appraisers used either the Sales Comparison/ Market Data Approach or the Income Approach. The Sales Comparison/ Market Data Approach is a method of comparing prices paid for comparable properties sold or offered for sale in the market against the subject property. The Income Approach is based on the premise that the value of a property is directly related to the income it generates. The fair value disclosures of the investment properties are categorized under Level 3 as these were based on unobservable inputs. *SGVFS015746*

261 Land and Development and Condominium and Residential Units for Sale This account consists of: (In Thousands) Condominium and residential units for sale (Note 11) P=8,294,523 P=7,600,260 Land and development: Current portion (Note 11) 19,814,615 19,571,526 Noncurrent portion 27,386,708 26,629,864 P=55,495,846 P=53,801,650 Condominium and Residential Units for Sale Condominium and residential units for sale pertain to completed projects of SMDC, HPI, Costa and ICDC (In Thousands) Balance at beginning of year P=7,600,260 P=6,213,523 Transfer from land and development 6,149,228 4,153,333 Recognized as costs of real estate sold (5,638,864) (2,766,596) Adjustment to cost 183,899 Balance at end of year P=8,294,523 P=7,600,260 The condominium and residential units for sale are stated at cost. There is no allowance for inventory write-down as at December 31, 2015 and Land and Development Land and development include land and cost of ongoing condominium projects (In Thousands) Balance at beginning of year P=46,201,390 P=38,209,713 Development cost incurred 11,827,278 14,840,948 Recognized as costs of real estate sold (6,600,008) (9,579,931) Transfer to condominium and residential units for sale (6,149,228) (4,153,333) Land acquisition 1,534,242 6,883,083 Borrowing cost capitalized 407, ,462 Transfer to property and equipment and others (Notes 14 and 15) (19,900) (689,552) Balance at end of year 47,201,323 46,201,390 Less current portion (Note 11) 19,814,615 19,571,526 Noncurrent portion P=27,386,708 P=26,629,864 The average rates used to determine the amount of borrowing cost eligible for capitalization ranged from 2.0% to 5.2% in 2015 and 3.9% to 4.9% in *SGVFS015746*

262 SMDC Land and development costs attributable to SMDC pertain to the ongoing residential condominium projects. Estimated cost to complete the projects amounted to P=23,440.0 million and P=31,912.0 million as at December 31, 2015 and 2014, respectively. Costa Costa s land and development projects located at Hamilo Coast in Nasugbu, Batangas, consist of condominium buildings and macro-infrastructure. Estimated liability pertaining to ongoing macro-infrastructure projects amounted to P=219.0 million and P=290.0 million as at December 31, 2015 and 2014, respectively. As at December 31, 2015 and 2014, the development of macro-infrastructure is still ongoing. HPI Estimated cost to complete HPI s ongoing projects amounted to P=831.0 million and P=1,181.0 million as at December 31, 2015 and 2014 respectively. ICDC Land and development costs attributable to ICDC pertain to the ongoing Susana Heights Subdivision project. Estimated cost to complete the project amounted to P=581.3 million and P=759.5 million as at December 31, 2015 and 2014, respectively. Land and development are stated at cost. There is no allowance for inventory write-down as at December 31, 2015 and Intangibles and Other Noncurrent Assets Intangible Assets This account consists of: (In Thousands) Goodwill P=16,270,060 P=16,270,060 Less accumulated impairment loss 91,619 91,619 Net book value 16,178,441 16,178,441 Trademarks and brand names 8,528,780 6,124,762 P=24,707,221 P=22,303,203 Goodwill is allocated to SM Prime, Supervalue, Inc. (SVI), Super Shopping Market, Inc. (SSMI), PMI, the Net Group and WSI and others as separate CGUs. Trademarks and brand names pertain to that of: a. the supermarket and hypermarket business of the Group which was acquired in a business combination in 2006 and assessed to have an indefinite life and was valued using the Relieffrom-Royalty Method. The royalty rate was 3.5%, which was the prevailing royalty rate in 2006 in the retail assorted category where the two entities fall. b. the rights, title and interest in the trademark of Cherry Foodarama, Inc. which was accounted for as an acquisition of an asset in 2015 and assessed to have a definite useful life of 20 years. *SGVFS015746*

263 The recoverable amount of goodwill, trademarks and brand names have been determined based on value-in-use calculations using the cash flow projections from the financial budgets approved by senior management covering a three-year period and fair value less costs of disposal calculations of the underlying net assets of the CGUs. Value-in-use. The calculations of value-in-use is most sensitive to the following assumptions: Revenue. Revenue forecasts are management s best estimates considering factors such as index growth to market, customer projections and economic factors. Pre-tax discount rates. Discount rates reflect the current market assessment of the risks to each cash generating unit and are estimated based on the average percentage of weighted average cost of capital for the industry. The rates are further adjusted to reflect the market assessment of any risk specific to the CGU for which future estimates of cash flows have not been adjusted. Pre-tax discount rates applied to cash flow projections ranged from 12.89% to 13.25% and 13.55% to 13.66% as at December 31, 2015 and 2014, respectively. Management assessed that no reasonably possible change in pre-tax discount rates and future cash inflows would cause the carrying value of goodwill, trademarks and brand names in 2015 and 2014 to materially exceed its recoverable amount. Fair value less cost of disposal. The fair values of the assets and liabilities of the CGUs were determined by independent appraisers and in reference to the available market price for quoted instruments. Management assessed that no reasonably possible change in the fair values would cause the carrying value of goodwill in 2015 and 2014 to materially exceed its recoverable amount. Other Noncurrent Assets This account consists of: (In Thousands) Deposits and advance rentals P=10,867,776 P=7,859,051 Land use rights 9,563,565 9,541,287 Receivables from real estate buyers (Note 10) 7,962,615 8,341,583 Derivative assets (Notes 29 and 30) 3,964,807 2,555,708 Deferred input VAT 3,287,375 2,042,045 Long-term note (Notes 22 and 30) 927,000 Defined benefit asset (Note 26) 553, ,160 Escrow fund (Note 22) 132, ,460 Advances for project development 44,935 48,270 Others 1,623,276 1,486,388 P=38,927,352 P=32,567,952 Deposits and advance rentals substantially pertain to the lease agreements entered into by SM Prime for certain parcels of land where some of its malls are constructed. The lease agreements provide that the security deposits will be applied to future rentals. Consequently, the said deposits and advance rentals are not re-measured at amortized cost. *SGVFS015746*

264 Included under Land use rights account are real estate properties with lot area of 89,378 and 212,119 square meters and with carrying values of P=361.0 million and P=488.0 million as at December 31, 2015 and 2014, respectively. These properties were appraised in August 2007 to have a fair value of P=12,830.0 million and P13,531.0 million, respectively. These properties are planned for residential development in accordance with the cooperative contracts entered into by SM Prime with Grand China International Limited (Grand China) and Oriental Land Development Limited (Oriental Land) on March 15, The value of these properties is not part of the consideration amounting to P=10,827.0 million that was paid by SM Prime to Grand China and Oriental Land. Accordingly, the assets were recorded at carrying values under Other noncurrent assets account and a corresponding liability equivalent to the same amount shown as part of Tenants deposits and others account in the consolidated balance sheets. Long term note pertain to the loan agreement the Parent Company entered into with Atlas on June 9, 2015, amounting to P=927.0 million, which bear a fixed interest rate of 4.0%, payable semi-annually in arrears. The loan will mature on June 9, The loan contains multiple embedded derivatives such as conversion, call and put options (see Note 30). Interest earned from this note is disclosed in Note 25. Escrow fund pertains mainly to funds deposited by the Parent Company in the account of an escrow agent as required by the SEC in connection with the corporate restructuring in Escrow fund in 2015 and 2014 also include deposits made by SMDC for payments of liability arising from acquisition of land (see Note 11). 18. Bank Loans This account consists of: (In Thousands) Parent Company - U.S. dollar-denominated loans P= P=1,341,600 Subsidiaries - Peso-denominated loans 9,923,215 12,551,041 P=9,923,215 P=13,892,641 The unsecured U.S. dollar-denominated loans amounting to nil and US$30.0 million with peso equivalent of nil and P=1,341.6 million as at December 31, 2015 and 2014, respectively, bear fixed interest rates ranging from 1.08% to 1.79%. The peso-denominated loans bear annual interest rates ranging from 2.00% to 4.15% and 2.00% to 4.40% in 2015 and 2014, respectively. A portion of the bank loans is secured by temporary investments as disclosed in Note 7. These loans have maturities of less than one year (see Note 29). Interest on bank loans is disclosed in Note 25. *SGVFS015746*

265 Accounts Payable and Other Current Liabilities This account consists of: (In Thousands) Trade P=43,599,678 P=40,797,521 Accrued expenses 12,149,516 8,373,934 Nontrade 3,674,874 6,158,423 Payable to government agencies 3,544,674 3,584,158 Payable arising from acquisition of land 3,188,749 3,603,261 Due to related parties (Note 22) 2,444,429 1,601,703 Accrued interest (Note 22) 1,870,031 1,606,536 Derivative liabilities (Notes 29 and 30) 1,092,382 Gift checks redeemable and others 2,651,475 3,043,147 P=73,123,426 P=69,861,065 The terms and conditions of the above liabilities follow: Trade payables primarily consist of liabilities to suppliers and contractors, which are noninterest-bearing and are normally settled on 30-to 60-day terms. Accrued expenses pertain to accrual for selling, general and administrative expenses which are normally settled within the next financial year. Nontrade payables, accrued interest and others are expected to be settled within the next financial year. Payable to government agencies mainly consists of output tax which is normally settled within the next financial year. Payable arising from acquisition of land is expected to be settled within the next financial year. The terms and conditions relating to due to related parties is discussed in Note 22. Gift checks are redeemable at face value. *SGVFS015746*

266 Long-term Debt This account consists of: Availment Maturity Interest rate/term Security (In Thousands) Parent Company U.S. dollar-denominated: Fixed rate bonds US$350.0 million senior bonds June 10, 2014 June 10, 2024 Fixed 4.88%; semi-annual Unsecured P=16,471,000 P=15,652,000 US$500.0 million senior bonds October 17, 2012 October 17, 2019 Fixed 4.25%; semi-annual Unsecured 23,530,000 22,360,000 US$400.0 million exchanged bonds October 13, 2010 October 13, 2017 Fixed 5.50%; semi-annual Unsecured 18,277,891 17,258,109 Convertible bonds US$250.0 million convertible bonds February 15, 2012 February 15, 2017 Fixed 1.625%; semi-annual Unsecured 3,695,290 US$300.0 million five-year term loans June 19, 2013; May 15, 2018 Floating six-month LIBOR + margin; Unsecured 14,118,000 13,416,000 July 2, 2013 semi-annual Peso-denominated: Seven-year and ten-year retail bonds Series C Bonds July 16, 2012 July 16, 2019 Fixed 6.00%; semi-annual Unsecured 4,648,460 4,648,460 Series D Bonds July 16, 2012 July 16, 2022 Fixed 6.94%; semi-annual Unsecured 7,683,810 7,683,810 Series E Bonds May 19, 2014 May 19, 2021 Fixed 5.30%; semi-annual Unsecured 11,669,620 11,669,620 Series F Bonds May 19, 2014 May 19, 2024 Fixed 5.61%; semi-annual Unsecured 3,330,380 3,330,380 Five-year and seven-year retail bonds Series B Bonds June 25, 2009 June 25, 2016 Fixed 9.10%; semi-annual Unsecured 1,000,000 1,000,000 Other peso bank loans April 23, June 30, 2014 Subsidiaries U.S. dollar-denominated: Five-year term loans May 6, April 23, 2014 Two-year, three-year and five-year bilateral loans November 30, December 7, 2012 January 14, June 23, 2024 March 21, April 14, 2019 November 30, August 30, 2017 Fixed 4.39%-5.4% and PDST-R2 + margin: semi-annual and quarterly Unsecured 19,000,300 20,195,650 LIBOR + spread; semi-annual Unsecured 50,354,200 43,825,600 LIBOR + spread; semi-annual Unsecured 2,353,000 4,472,000 Other U.S. dollar loans November 20, 2013 September 17, 2018 LIBOR + spread; semi-annual Unsecured 1,176,500 1,118,000 (Forward) *SGVFS015746*

267 Availment Maturity Interest rate/term Security (In Thousands) China Yuan Renminbi-denominated: Five-year loan July 28, 2015 December 31, 2019 CBC rate less 10%; quarterly Secured P=32,249 P= Peso-denominated: Five-year, seven-year and ten-year retail bonds September 1, November 25, 2015 March 1, November 25, 2025 Fixed 4.51%-5.74%; quarterly Unsecured 38,324,206 18,273,240 Fixed rate term loans December 27, December 28, 2015 December 23, June 25, 2023 Fixed 3.22%-5.94%; semi-annual and quarterly Unsecured 21,443,500 22,823,000 July 12, July 31, 2014 July 12, July 31, 2021 Fixed 5.25%-5.27%; quarterly Secured 2,893,044 3,000,000 Five-year and ten-year notes June 19, 2012 June 20, June 19, 2022 Fixed 5.91%-6.74%; PDST-R2 + margin; quarterly Unsecured 7,226,500 7,301,000 Five-year, seven-year and ten-year notes January 12, 2012 January 13, January 12, 2022 Fixed 5.86%-6.10%; PDST-R2 + margin; quarterly Unsecured 4,229,200 4,272,800 Five-year, seven-year and ten-year corporate notes December 20, December 21, 2015 December 21, December 21, 2022 Fixed 5.50%-6.65%; PDST-R2 + margin; quarterly Unsecured 6,520,000 6,528,000 Four-year and five-year floating rate notes March 18, December 1, 2015 March 19, December 31, 2020 PDST-R2 + margin; quarterly Unsecured 8,000,000 6,150,000 Corporate notes June 3, June 28, 2014 Five-year bilateral loans February 2, October 24, 2011 Other bank loans August 15, June 8, 2015 June 3, June 3, 2023 February 2, October 24, 2016 June 24, June 8, 2020 Fixed 5.25%-5.88%; semi-annual Unsecured 8,683,100 8,691,800 Fixed 5.00%; PDST-R2 + margin; quarterly Unsecured 500, ,800 Fixed 5.00%-9.75%; PDST-R2 + margin; semi-annual and quarterly Unsecured 1,525,000 1,985, ,989, ,888,839 Less debt issue cost 1,827,891 2,106, ,162, ,782,663 Less current portion 25,994,800 10,669,108 P=245,167,269 P=237,113,555 *SGVFS015746*

268 Parent Company Fixed Rate Bonds US$400.0 million Exchanged Bonds This issuance is comprised of US$186.3 million, additional bonds, US$82.9 million, and US$130.8 million exchanged bonds from the existing US$350.0 million 6.75% bonds due 2013 and US$500.0 million 6.00% bonds due 2014, respectively. The exchange was not accounted for as an extinguishment but merely a modification of terms because the terms of the exchanged bonds are not substantially different from the existing bonds (i.e., the difference between the present value of the cash flows of the exchanged bonds and the present value of the remaining cash flows of the existing bonds discounted using the original effective interest rate did not exceed 10%). The carrying amount of the bonds amounted to P=18,277.9 million and P=17,258.1 million as at December 31, 2015 and 2014, respectively. Convertible Bonds US$250.0 million Convertible Bonds The convertible bonds have a yield-to-maturity of 2.875% at inception and are due on its maturity at %. The bonds contain multiple embedded derivatives which were bifurcated at inception (see Note 30). Conversion option - Unless previously redeemed, converted or purchased and cancelled, the holder has the right to convert its outstanding bonds for the Parent Company s common shares at any time, on or after June 15, 2012 until the close of business on February 5, 2017, at an initial conversion price of P= per share translated into U.S. dollars at a fixed conversion rate of P= to US$1.00. Effective July 8, 2013, the new conversion price is P= after giving effect to the 25% stock dividends declared on April 25, If a bondholder exercises his conversion option, the Parent Company can choose either to settle the bonds in cash or issue common shares. At various dates in 2015 and 2014, the bondholders of US$98.2 million (P=3,695.3 million) and US$1.0 million (P=37.6 million) opted to convert their holdings into 6,714,759 and 68,378 of SMIC s shares, respectively (see Note 21). As of April 9, 2015, the remaining US$98.2 million was fully converted in SMIC shares. Put option - entitles the bondholders to require the Parent Company to redeem all or some of its bonds on February 15, 2015 (put date) at %. Call option - gives to the Parent Company the right to redeem the Bonds, in whole but not in part at their early redemption amount on the date fixed for redemption, provided, however, that no such redemption may be made unless the closing price of the shares of the Parent Company (translated into U.S. dollars at the prevailing rate) for each of the 30 consecutive trading days, the last of which occurs no more than five days prior to redemption notice, was at least 130% of the applicable early redemption amount divided by the conversion ratio. US$300.0 million Five-year U.S. Dollar Term Loans Portion of the loan amounting to US$180.0 million is hedged against interest rate and foreign exchange risks using cross-currency swap contracts (see Notes 29 and 30). *SGVFS015746*

269 Seven-year and Ten-year Retail Bonds Series C Bonds At various dates in 2014, the Parent Company redeemed P=375.0 million of the P=5,023.5 million bonds. Series D Bonds At various dates in 2014, the Parent Company redeemed P=375.0 million of the P=8,058.8 million bonds. Other Peso Bank Loans On April 14, 2015, the Company prepaid P=290.0 million of the P=3,000.0 million five-year term loan. The outstanding balance as at December 31, 2015 and 2014 amounted to P=2,710.0 million and P=3,000.0 million, respectively. In June 2014, the Company obtained two seven-year term loans amounting to P=1,600.0 million and P=1,650.0 million. The annual principal repayment of P=1.0 million commenced on the 12 th month from issue date, with the last installment payment to be made at maturity date. On March 6, 2015, the Company prepaid P=900.0 million of the P=1,650.0 million seven-year term loan. The outstanding balance as at December 31, 2015 and 2014 amounted to P=2,349.0 million and P=3,250.0 million, respectively. In August 2013, the Company obtained a seven-year term loan amounting to P=2,000.0 million. The annual principal repayment of P=2.0 million commenced on the 12 th month from issue date, with the last installment payment to be made at maturity date. The outstanding balance as at December 31, 2015 and 2014 amounted to P=1,996.0 million and P=1,998.0 million, respectively. In April 2013, the Company obtained seven-year and ten-year term loans amounting to P=2,250.0 million and P=100.0 million, respectively. The annual principal repayment of P=2.25 million and P=0.10 million, respectively, commenced on the 12 th month from issue date, with the last installment payment to be made at maturity date. The outstanding balance as at December 31, 2015 amounted to P=2,245.5 million and P=99.8 million, respectively and December 31, 2014 amounted to P=2,247.8 million and P=99.9 million, respectively. Subsidiaries U.S. Dollar-denominated Five-Year Term Loans US$300.0 million syndicated loan obtained on various dates in The loan bears interest based on the London Inter-Bank Offered Rate (LIBOR) plus spread, with a bullet maturity on March 25, A portion of the loan amounting to US$150.0 million is hedged against interest rate and foreign exchange risks using cross-currency swap contracts (see Notes 29 and 30). US$200.0 million syndicated loan obtained on January 29, The loan bears interest based on LIBOR plus spread, with a bullet maturity on January 29, This loan is hedged against interest rate and foreign exchange risks using cross-currency swap contracts (see Notes 29 and 30). *SGVFS015746*

270 US$90.0 million loan obtained on January 15, The loan bears interest based on LIBOR plus spread with a bullet maturity on April 14, China Yuan Renminbi-denominated Five-Year Loan This represents a 5.0 million out of million loan facility obtained on July 28, 2015 to finance the construction of shopping malls. The loan is payable in quarterly installments until December The loan has a floating rate with quarterly re-pricing at the prevailing rate dictated by People s Bank of China. The loan bears interest at 5.00% in 2015 and is secured by a portion of investment properties in China. Philippine Peso-denominated Five-Year and Ten-Year Retail Bonds P=20.0 billion fixed rate bonds issued on November 25, The issue consists of the fiveyear and three months Series D Bonds amounting to P=17,969.0 million with a fixed interest rate of % due on February 25, 2021 and ten-year Series E Bonds amounting to P=2,031.0 million with a fixed interest rate of % due on November 25, Philippine Peso-denominated Five-Year, Seven-Year and Ten-Year Retail Bonds P=20.0 billion fixed rate bonds issued on September 1, The issue consists of five-year and six months Series A Bonds amounting to P=15,036.0 million with a fixed interest rate of 5.10% due on March 1, 2020, seven-year Series B Bonds amounting to P=2,362.0 million with a fixed interest rate of 5.20% due on September 1, 2021, and ten-year Series C Bonds amounting to P=2,602.0 million with a fixed interest rate of 5.74% due on September 1, Debt Issue Cost The movements in unamortized debt issue cost follow: (In Thousands) Balance at beginning of year P=2,106,176 P=1,801,733 Amortization (Notes 22 and 25) (546,246) (549,840) Additions 316, ,860 Conversions (38,464) (480) Prepayments (Notes 22 and 25) (10,460) (97) Balance at end of year P=1,827,891 P=2,106,176 Repayment Schedule The repayment schedule of long-term debt as at December 31, 2015 follows: Gross Loan Debt Issue Cost Net (In Thousands) 2016 P=26,025,559 (P=30,759) P=25,994, ,393,419 (111,923) 27,281, ,724,494 (467,663) 43,256, ,043,827 (460,209) 55,583, ,415,866 (143,068) 29,272, ,906,543 (285,323) 40,621, ,927,170 (70,501) 18,856,669 (Forward) *SGVFS015746*

271 Gross Loan Debt Issue Cost Net 2023 P=4,518,960 (P=22,357) P=4,496, ,003,080 (218,802) 23,784, ,031,042 (17,286) 2,013,756 P=272,989,960 (P=1,827,891) P=271,162,069 Covenants The long-term debts of the Group contain certain covenants including adherence to financial ratios. The Parent Company s loan covenants include adherence with financial ratios namely, (1) debt-to-equity ratio not to exceed 80:20, and, (2) current ratio at a minimum of 0.30, and, certain restrictions with respect to material change in ownership or control. As at December 31, 2015 and 2014, the Group is in compliance with the terms of its debt covenants. 21. Equity Capital Stock a. Common stock Number of Shares Authorized - P=10 par value per share 1,190,000,000 1,190,000,000 Issued and subscribed: Balance at beginning of year 796,340, ,272,268 Issuances 6,714,759 68,378 Balance at end of year 803,055, ,340,646 On various dates in 2015 and 2014, additional 6,714,759 common shares and 68,378 common shares, respectively, were issued as a result of conversion of the Parent Company s convertible bonds (see Note 20). The excess of the conversion price over par value totaling P=4,833.1 million and P=47.2 million in 2015 and 2014, respectively, are presented under Additional paid-in capital account in the consolidated balance sheets. As at December and 2014, the Parent Company is compliant with the minimum public float as required by the PSE. Information on the Parent Company s registration of securities under the Securities Regulation Code follows: Date of SEC Approval Authorized Shares Number of Shares Issued Issue/Offer Price March 22, ,000,000 P=250 November 6, ,000, June 14, ,000, April 25, ,023, October 4, 2010 to March 13, 2012 Conversion of convertible bonds 2,851, September 24, ,100, *SGVFS015746*

272 Authorized Shares Number of Shares Issued Issue/Offer Price Date of SEC Approval January 23, 2013 to July 5, 2013 Conversion of convertible bonds 7,651,851 P=781 June 14, ,000, June 24, ,000, July 12, , July 18, 2013 to November 1, 2013 Conversion of convertible bonds 738, August 1, ,250, August 27, 2014 Conversion of convertible bonds 68, January 15, 2015 to April 9, 2015 Conversion of convertible bonds 6,714, The Parent Company declared stock dividends in 2013 and The total number of shareholders of the Parent Company is 1,243 and 1,237 as at December 31, 2015 and 2014, respectively. b. Redeemable preferred shares Number of shares Authorized - P=10 par value per share 10,000,000 10,000,000 There are no issued and subscribed preferred shares as at December 31, 2015 and Additional Paid-in Capital (In Thousands) Paid in subscription in excess of par value P=57,555,394 P=57,555,394 Equity reserve from reissuance of common shares of a subsidiary 14,105,528 14,105,528 Conversion of convertible bonds 4,880,275 47,194 Acquisition of non-controlling interests (385,538) Disposal of Parent common shares held by subsidiaries 243, ,966 P=76,399,625 P=71,952,082 On November 27, 2014, SM Prime reissued 1,060 million common shares held in treasury to its non-controlling shareholders for a total consideration of P=17,645.7 million which resulted to an increase in Non-controlling interests of P=3,540.2 million and an increase in Additional paid-in capital of P=14,105.5 million as at December 31, *SGVFS015746*

273 Cost of Parent Common Shares Held by Subsidiaries Details of the cost of common shares held by subsidiaries follow: Shares held by subsidiaries Average cost Cost of common shares held by subsidiaries (In Millions) Selling price per share Gain on disposal (In Millions) As at December 31, ,491 P=320.8 P=263.2 Sale by SM Land and MRDC (430,000) (137.3) P=753.3 P=184.5 As at December 31, , Stock dividends (25%) 97,623 Sale by SM Land (389,612) (100.5) As at December 31, 2013, 2014 and ,502 P=257.7 P=25.4 Equity Adjustments from Common Control Transactions Equity adjustments from common control transactions mainly pertains to the acquisition of various SM China Companies by SM Prime in 2007 and various service companies by SM Retail in These acquisitions were considered as business reorganizations of companies under common control. Thus, the acquisitions were accounted for similar to the pooling of interest method. In 2013, the Group executed a corporate restructuring to consolidate the Group s real estate subsidiaries and real estate assets in SM Prime. At the consolidated level, all transactions with the subsidiaries were considered as equity transactions. Retained Earnings a. Appropriated Following are the appropriations approved by the BOD: Date of BOD Approval Amount (In Thousands) Initial appropriation November 5, 2003 P=5,000,000 Additional appropriation December 14, ,000,000 Reversal of appropriation April 25, 2013 (8,000,000) Reversal of appropriation November 4, 2015 (18,000,000) Additional appropriation November 4, ,000,000 Retained earnings appropriated as at December 31, 2015 is intended for the payment of certain long-term debts and new investments as follows: Timeline Amount (In Thousands) Debt servicing US$400.0 million 2017 P=18,800,000 US$180.0 million ,200,000 New investments ,000,000 P=36,000,000 *SGVFS015746*

274 b. Unappropriated The Parent Company s dividend declarations in 2015 and 2014 follow: Declaration Date Record Date Payment Date Cash Dividend per Share Total Cash Dividends (In Thousands) April 29, 2015 May 14, 2015 June 9, 2015 P=10.61 P=8,520,418 April 30, 2014 May 30, 2014 June 26, ,233,455 The balance of retained earnings includes the accumulated equity in net earnings of subsidiaries, associates and joint ventures amounting to P=147,055.7 million and P=137,756.2 million as at December 31, 2015 and 2014, respectively. Such amounts are not available for distribution until such time that the Parent Company receives the dividends from the respective subsidiaries, associates and joint ventures. 22. Related Party Disclosures Parties are considered to be related if one party has the ability, directly and indirectly, to control the other party or exercise significant influence over the other party in making financial and operating decisions. Parties are also considered to be related if they are subject to common control. The significant transactions with related parties follow: a. Rent The Group has existing lease agreements for office and commercial spaces with related companies (retail and banking group and other related parties under common stockholders). b. Management and Service Fees The Group pays management fees to Shopping Center Management Corporation and SM Lifestyle Entertainment, Inc. (related parties under common stockholders) for the management of certain office and mall premises. SMIC and SM Retail also receive management and service fees from retail entities under common stockholders for management, consultancy, manpower and other services. c. Dividend Income The Group earns dividend income from certain related parties under common stockholders. d. Cash Placements and Loans The Group has certain bank accounts and cash placements as well as bank loans and debts with BDO and China Bank. Such accounts earn interest based on prevailing market interest rates. *SGVFS015746*

275 e. Others The Group, in the normal course of business, has outstanding receivables from and payables to related companies which are unsecured and normally settled in cash. The related party transactions and outstanding balances as at and for the years ended December 31, 2015, 2014 and 2013 follow: Banking Group Cash placement and investment in debt securities Transaction Amount Outstanding Amount Terms Conditions (In Thousands) P= P= P= P=106,498,300 P=117,113,342 Interest-bearing 0.75% to 4.90% Unsecured; no impairment Interest receivable 396, ,604 Interest-bearing Unsecured; Interest income 2,407,497 2,474,837 3,041, % to 4.90% no impairment Interest bearing debt 8,361,170 13,298,618 Interest-bearing 1.08% to 10.00% Unsecured Interest payable 30,330 38,903 Interest-bearing Unsecured Interest expense 592,922 1,211, , % to 10.00% Rent receivable 181, ,459 Noninterest-bearing Unsecured; Rent income 679, ,757 82,929 no impairment Management fee receivable 29,405 31,437 Noninterest-bearing Unsecured; no impairment Management fee income 6,533 7,412 Service fee receivable 129,418 81,682 Noninterest-bearing Unsecured; Service fee income no impairment Escrow fund 567, ,778 Interest-bearing 1.3% to 1.4% Unsecured; no impairment Retail and Other Entities Rent receivable 896,132 1,708,815 Noninterest-bearing Unsecured; Rent income 3,854,572 3,959,364 4,451,749 no impairment Management fee receivable 226, ,378 Noninterest-bearing Unsecured; no impairment Management fee income 361, , ,310 Management fee payable 117, ,775 Noninterest-bearing Unsecured Management fee expense 1,058,753 1,111, ,415 Service fee receivable 149, ,515 Noninterest-bearing Unsecured; Service fee income 655, , ,260 no impairment Dividend receivable 487, ,103 Noninterest-bearing Unsecured; Dividend income 486, , ,384 no impairment Due from related parties 1,350,612 1,194,099 Noninterest-bearing Unsecured; no impairment Due to related parties 2,444,429 1,601,703 Noninterest-bearing Unsecured Interest receivable Interest income 53,882 15,699 9,467 4,868 Interest-bearing 4.0% to 6.5% Notes receivable/ 1,908,435 Interest-bearing Long-term note 4.0% to 5.0% Unsecured; no impairment Unsecured; no impairment Terms and Conditions of Transactions with Related Parties For the years ended December 31, 2015 and 2014, the Group did not make any provision for impairment loss relating to amounts owed by related parties. There have been no guarantees provided or received for any related party receivables or payables. Compensation of Key Management Personnel of the Group The aggregate compensation and benefits related to key management personnel of the Group for the years ended December 31, 2015, 2014 and 2013 consist of short-term employee benefits amounting to P=1,126.3 million, P=938.2 million and P=777.3 million, respectively, and post-employment benefits amounting to P=144.5 million, P=109.0 million and P=88.7 million, respectively. *SGVFS015746*

276 Cost of Merchandise Sales This account consists of: (In Thousands) Merchandise inventories at beginning of year P=14,882,200 P=13,232,308 P=13,402,762 Purchases 164,404, ,567, ,549,914 Total goods available for sale 179,286, ,799, ,952,676 Less merchandise inventories at end of year 16,262,228 14,882,200 13,232,308 P=163,024,285 P=150,917,587 P=138,720, Selling, General and Administrative Expenses This account consists of: (In Thousands) Personnel cost (Note 22) P=13,450,135 P=12,503,274 P=11,411,522 Depreciation and amortization (Notes 14 and 15) 11,362,639 10,907,625 9,513,584 Utilities 8,867,695 9,038,332 8,126,266 Rent (Note 28) 5,799,964 5,467,674 5,252,339 Taxes and licenses 5,325,168 5,036,077 4,531,029 Marketing and selling 3,367,895 3,451,654 3,364,195 Outside services 4,040,577 3,512,760 3,020,899 Repairs and maintenance 1,929,521 1,733,961 1,218,771 Supplies 1,489,353 1,342,047 1,073,044 Management fees (Note 22) 1,324,253 1,195,192 1,063,859 Transportation and travel 703, , ,028 Insurance 661, , ,183 Provision (reversal) of impairment loss and others (Notes 10, 13 and 15) 478,869 (288,547) (1,018,156) Pension expense (benefit) (Note 26) 447, ,568 (92,085) Entertainment, representation and amusement 357, , ,013 Professional fees 280, , ,985 Donations 255, , ,605 Data processing 242, , ,183 Communications 210, , ,854 Others 3,110,727 3,760,272 1,606,275 P=63,707,080 P=60,710,150 P=51,186,393 *SGVFS015746*

277 Interest Income and Interest Expense The sources of interest income and interest expense follow: (In Thousands) Interest income on: Time deposits (Note 8) P=2,058,413 P=2,059,817 P=2,245,719 Cash in banks and temporary investments (Note 7) 617, , ,152 AFS investments (Notes 9 and 12) 326, , ,427 Investments held for trading (Note 9) 17,998 25,790 28,310 Others (Notes 11 and 17) 135,277 82, ,876 P=3,155,800 P=3,032,635 P=3,709,484 Interest expense on: Long-term debt (Note 20) P=9,231,248 P=11,069,673 P=6,951,247 Bank loans (Note 18) 640, ,023 3,960,390 Others (Note 30) 588, , ,409 P=10,460,636 P=11,895,865 P=11,088, Pension Benefits The Group has funded defined benefit pension plans covering all regular and permanent employees. Net benefit expense (included under Selling, general and administrative expenses ) (In Thousands) Net benefit expense: Current service cost P=469,351 P=405,822 P=350,898 Net interest income (21,613) (28,952) (39,409) Others (302) (403,574) P=447,738 P=376,568 (P=92,085) *SGVFS015746*

278 Changes in the net defined benefit liability and asset a. Net Defined Benefit Liability The movements in the subsidiaries pension plan which resulted in a defined benefit liability as at December 31, 2015, 2014 and 2013 follow: Present value of Defined Benefit Obligation Amount not Recognized due to Asset Limit/ Fair Value Unrecognized of Plan Assets Actuarial Loss (In Thousands) Defined Benefit Liability (Asset) At December 31, 2013 P=1,395,264 P=1,240,943 P= P=154,321 Net benefit expense (Note 24): Current service cost 103, ,343 Net interest cost 58,595 55, ,765 Others (302) (302) 161,636 55, ,806 Re-measurements in other comprehensive income: Return on plan assets (excluding amount included in net interest) 25,866 (25,866) Actuarial changes arising from: Changes in financial assumptions 89,724 89,724 Changes in demographic assumptions (19,707) (19,707) Experience adjustment 79,270 79,270 Others (13,772) (13,772) 149,287 25,866 (13,772) 109,649 Reclassifications from defined benefit assets (462,424) (389,293) (73,131) Actual contributions 114,978 (114,978) Benefits paid (29,424) (29,424) Transfer from related parties 8,158 8,158 Other adjustments 17,155 3,320 13,745 27,580 At December 31, ,239,652 1,030, ,247 Net benefit expense (Note 24): Current service cost 107, ,871 Net interest cost 41,778 35,879 5,899 Actuarial loss 149,649 35, ,770 Re-measurements in other comprehensive income: Return on plan assets (excluding amount included in net interest) (36,087) 36,087 Actuarial changes arising from: Changes in financial assumptions (114,876) (114,876) Changes in demographic assumptions (32,083) (32,083) Experience adjustment 17,774 17,774 Others (24) (24) (129,185) (36,087) (24) (93,122) Reclassifications from defined benefit assets (322,307) (248,023) (74,284) Actual contributions 44,493 (44,493) Benefits paid (17,620) (17,620) Transfer from (to) related parties (1,458) (665) (793) Other adjustments 15, ,570 At December 31, 2015 P=934,277 P=808,382 P= P=125,895 *SGVFS015746*

279 b. Net Defined Benefit Asset The movements in the subsidiaries pension plan which resulted in a defined benefit asset as at December 31, 2014, 2013 and 2012 follow: Present value of Defined Benefit Obligation Amount not recognized due to asset limit/ Fair Value Unrecognized of Plan Assets actuarial loss (In Thousands) Defined Benefit Liability (Asset) At December 31, 2013 P=2,640,893 P=3,343,406 P=86,531 (P=615,982) Net benefit expense (Note 24): Current service cost 302, ,479 Net interest income 195, ,299 5,467 (31,717) 497, ,299 5, ,762 Re-measurements in other comprehensive income: Return on plan assets (excluding amount included in net interest) 124,890 (124,890) Actuarial changes arising from: Changes in financial assumptions (130,985) (130,985) Changes in demographic assumptions Experience adjustment 54,138 54,138 Others (38,009) (38,009) (76,633) 124,890 (38,009) (239,532) Reclassifications to defined benefit assets 462, ,294 73,132 Actual contributions 48,199 (48,199) Benefits paid (123,046) (123,046) Transfer to the plan (6,455) (6,455) Amount not recognized due to asset limit 52,647 52,647 Other adjustments (1,749) (1,749) (53,988) (53,988) At December 31, ,393,030 4,006,838 52,648 (561,160) Net benefit expense (Note 24): Current service cost 361, ,480 Net interest income 171, , (27,512) 533, , ,968 Re-measurements in other comprehensive income: Return on plan assets (excluding amount included in net interest) (199,283) 199,283 Actuarial changes arising from: Changes in financial assumptions (296,263) (296,263) Changes in demographic assumptions (6,143) (6,143) Experience adjustment (102,260) (102,260) Others (31,940) (31,940) (404,666) (199,283) (31,940) (237,323) Reclassifications from defined benefit liabilities 322, ,023 74,284 Actual contributions 152,304 (152,304) Benefits paid (141,716) (141,716) Transfer to the plan 5,985 5,985 Amount not recognized due to asset limit 5,470 5,470 Other adjustments (4,656) (21,134) (16,478) At December 31, 2015 P=3,708,207 P=4,267,069 P=5,319 (P=553,543) *SGVFS015746*

280 The principal assumptions used in determining the pension obligations of the Group follow: Discount rate 4% 6% 4% 6% Future salary increases 3% 10% 3% 10% The assets of the Pension Plan are held by a trustee bank, BDO, a related party. The investing decisions of the Plan are made by the Board of Trustees of the Pension Plan. The carrying amounts, which approximate the estimated fair values of the Plan assets follow: (In Thousands) Cash and cash equivalents P=629,915 P=251,447 Investment in debt and other securities 1,009, ,725 Investment in common trust funds 1,652,236 1,968,692 Investment in equity securities 189, ,087 Investment in government securities 1,558,279 1,651,825 Others 35,375 35,467 P=5,075,451 P=5,037,243 Cash and cash equivalents include regular savings and time deposits; Investments in debt and other securities, consisting of both short-term and long-term corporate loans, notes and bonds, bear interest ranging from 4.38% to 6.80% have maturities from June 2019 to April 2025 in 2015 and 2014; Investment in common trust funds consists of unit investment trust fund placements; Investment in equity securities consists of listed and unlisted equity securities; Investments in government securities consist of retail treasury bonds that bear interest ranging from 2.13% to 8.75% and 3.50% to 10.69% have maturities from January 2016 to November 2032 and February 2015 to October 2037 in 2015 and 2014, respectively; and Others pertain to accrued interest income on cash deposits and debt securities held by the Plan. The outstanding balances and transactions of the Pension Plan with the trustee bank, as at and for the years ended December 31, 2015 and 2014, follow: (In Thousands) Balances: Cash and cash equivalents P=316,280 P=160,743 Investment in common trust funds 1,652,236 1,968,692 Transactions: Interest income from cash and cash equivalents 2,130 2,209 Gains from investment in common trust funds 1,251,183 1,341,211 The Group expects to contribute about P=193.3 million to its Pension Plan in *SGVFS015746*

281 The sensitivity analysis below has been determined based on reasonably possible changes of each significant assumption on the defined benefit obligation as at December 31, 2015, assuming all other assumptions were held constant: Increase (Decrease) in Basis Points Increase (Decrease) in Defined Benefit Obligation (In Thousands) Discount rates 50 (P=372,326) (50) 378,862 Future salary increases ,675 (100) (676,500) No attrition of rates 3,828,513 The average duration of the Group s defined benefit obligation is 6 to 32 years and 7 to 32 years as at December 31, 2015 and 2014, respectively. The maturity analysis of the undiscounted benefit payments follows: (In Thousands) Less than 1 year to 5 years P=988,076 P=1,026,703 More than 5 years to 10 years 2,040,795 1,860,607 More than 10 years to 15 years 3,771,582 3,327,144 More than 15 years to 20 years 9,035,566 8,085,777 More than 20 years 169,082, ,975,720 The Group has no specific matching strategies between the Plan assets and the defined benefit obligation. 27. Income Tax The details of the Group s deferred tax assets and liabilities follow: (In Thousands) Deferred tax assets: Excess of fair values over cost of investment properties P=1,166,570 P=1,186,890 Accrued leases 477, ,286 NOLCO 461, ,460 Deferred rent expense 228, ,274 Provision for doubtful accounts and others 149, ,027 Unamortized past service cost and defined benefit liability 65, ,160 MCIT 20,645 26,847 P=2,569,800 P=2,293,944 *SGVFS015746*

282 (In Thousands) Deferred tax liabilities: Appraisal increment on investment property P=2,399,330 P=2,417,479 Trademarks and brand names 1,879,000 1,879,000 Capitalized interest 1,396,868 1,217,246 Unrealized gross profit on sale of real estate 1,217, ,069 Accrued/deferred rent income 180, ,333 Unamortized past service cost and defined benefit asset 147, ,970 Others 213, ,828 P=7,434,777 P=6,867,925 The components of deductible temporary differences of certain balance sheet items and the carryforward benefits of unused MCIT and NOLCO, which pertain to the Parent Company, for which no deferred tax assets have been recognized in the consolidated balance sheets, follow: (In Thousands) NOLCO P=6,723,420 P=3,506,043 Net unrealized foreign exchange loss 708, ,763 Allowance for impairment losses 506, ,975 MCIT 151,029 78,596 Past service cost 131,883 89,424 Non-refundable advance rentals 32,864 25,886 Defined benefit liability 68,669 P=8,254,728 P=4,856,356 NOLCO and MCIT amounting to P=106.5 million and P=86.4 million were applied in 2015 and 2014, respectively. The reconciliation between the statutory tax rates and the Group s effective tax rates on income before income tax follow: Statutory income tax rate 30% 30% 30% Deduct income tax effects of reconciling items: Equity in net earnings of associate companies and joint ventures (9) (9) (9) Interest income subjected to final tax (2) (2) (3) Change in unrecognized deferred tax assets 1 (2) (3) Dividend income exempt from tax (1) Others (1) (1) (2) Effective income tax rates 19% 16% 12% *SGVFS015746*

283 Lease Agreements The Group s lease agreements with its tenants are generally granted for a term of one to twentyfive years. Tenants likewise pay a fixed monthly rent which is calculated by reference to a fixed sum per square meter of area leased except for a few tenants which pay either a fixed monthly rent or a percentage of gross sales, whichever is higher. Upon inception of the lease agreement, tenants are required to pay certain amounts of deposits (see Notes 29 and 30). The future minimum lease receivables under the non-cancellable operating leases of the Group as at December 31 follow: (In Millions) Within one year P=3,812 P=3,385 After one year but not more than five years 8,551 8,616 More than five years 5,008 1,939 P=17,371 P=13,940 The Group also leases certain parcels of land where some of its malls are situated. The terms of the lease are for periods ranging from fifteen to fifty years, renewable for the same period under the same terms and conditions. Rental payments are generally computed based on a certain percentage of the gross rental income or a certain fixed amount, whichever is higher. The future minimum lease payables under the non-cancellable operating leases of the Group as at December 31 follow: (In Millions) Within one year P=717 P=744 After one year but not more than five years 3,190 3,138 More than five years 25,737 25,867 P=29,644 P=29,749 Tenants deposits amounted to P=14,014.7 million and P=14,032.0 million as at December 31, 2015 and 2014, respectively. 29. Financial Risk Management Objectives and Policies The Group s principal financial instruments, other than derivatives, consists of bank loans, long-term debt, AFS investments, investments held for trading, time deposits, cash and cash equivalents, non-trade receivables, advances and deposits, receivable from banks and credit card, accrued interest receivable, and advances for project development. The main purpose of these financial instruments is to finance the Group s operations. The Group has other financial assets and liabilities such as receivables and accounts payable and other current liabilities, which arise directly from its operations. *SGVFS015746*

284 The Group also enters into derivative transactions, principally, cross-currency swaps, interest rate swaps, foreign currency call options, non-deliverable forwards and foreign currency range options. The purpose is to manage the interest rate and foreign currency risks arising from the Group s operations and its sources of finance. The main risks arising from the Group s financial instruments are as follows: Interest rate risk. Fixed rate financial instruments are subject to fair value interest rate risk while floating rate financial instruments are subject to cash flow interest rate risk. Repricing of floating rate financial instruments is mostly done at intervals of three months or six months. Foreign currency risk. The Group s exposure to foreign currency risk arises as the Parent Company and SM Prime have significant investments and debt issuances which are denominated in U.S. dollars and China Yuan Renminbi. Liquidity risk. Liquidity risk arises from the possibility that the Group may encounter difficulties in raising funds to meet commitments from financial instruments. Credit risk. Refers to the risk that a borrower will default on any type of debt by failing to make required payments. Equity price risk. The Group s exposure to equity price risk pertains to its investments in quoted equity shares which are classified as AFS investments in the consolidated balance sheets. Equity price risk arises from the changes in the levels of equity indices and the value of individual stocks traded in the stock exchange. The BOD reviews and approves policies for managing each of these risks. The Group s accounting policies in relation to derivatives are set out in Note 3. Interest Rate Risk The Group s exposure to market risk for changes in interest rates relates primarily to the Group s long-term debt obligations (see Note 20). The Group maintains a conservative financing strategy and has preference for longer tenor credit with fixed interest rate that matches the nature of its investments. To manage this mix in a costefficient manner, the Group enters into interest rate swaps and cross-currency swaps in which the Group agrees to exchange, at specified intervals, the difference between fixed and variable interest amounts calculated by reference to an agreed notional amount. The interest rate swaps economically hedge the underlying debt obligations. The cross-currency swaps were designated by the Group under cash flow hedge accounting (see Note 30). As at December 31, 2015 and 2014, after taking into account the effect of the swaps, approximately 74% and 68% of the Group s borrowings are kept at fixed interest rates. *SGVFS015746*

285 Interest Rate Risk Sensitivity Analysis. The following table demonstrates the sensitivity to a reasonably possible change in interest rates, with all other variables held constant, of the Group s income before income tax and equity after income tax, through the impact of floating rate financial liabilities and debt securities classified as FVPL and AFS investments, respectively. Increase (Decrease) in Basis Points Effect on Income Before Tax (In Millions) Effect on Equity After Income Tax (P=612.1) (P=161.7) 50 (306.1) (81.2) (100) (50) (P=727.2) (P=220.4) 50 (363.1) (117.6) (100) (50) Fixed rate debts, although subject to fair value interest rate risk, are not included in the sensitivity analysis as these are carried at amortized costs. The assumed movement in basis points for interest rate sensitivity analysis is based on currently observable market environment. Foreign Currency Risk The Group aims to reduce foreign currency risks by employing on-balance sheet hedges and derivatives such as foreign currency swap contracts, foreign cross-currency swaps, foreign currency call options, non-deliverable forwards and foreign currency range options. The Group s foreign currency-denominated financial assets and liabilities and their peso equivalents follow: US$ RMB PhP= US$ RMB PhP= (In Thousands) Current assets: Cash and cash equivalents $3,364 P=158,297 $8,913 P=398,607 Time deposits 204,000 9,600, ,000 8,988,720 Receivables 9,099 4,960,777 36,379,086 9,498 4,414,798 32,240,051 AFS investments 3, ,282 22, ,742 Noncurrent assets: AFS investments 104,874 4,935, ,110 4,879,403 Time deposits 1,038,628 48,877,817 1,031,407 46,124,510 Derivative assets 19, ,544 19, ,721 Total foreign currency-denominated financial assets 1,383,357 4,960, ,051,623 1,401,575 4,414,798 94,493,754 Current liabilities: Bank loans 30,000 1,341,600 Current portion of long-term debt 270,000 1,110 12,714,244 50,000 2,236,000 Accounts payable and other current liabilities 9, ,280 35,097 1,569,553 Noncurrent liabilities: Long-term debt - net of current portion 1,880,502 3,340 88,520,607 2,135,949 95,519,632 Derivative liabilities 1,313 58,705 Total foreign currency-denominated financial liabilities 2,160,453 4, ,703,131 2,252, ,725,490 Net foreign currency-denominated financial assets (liabilities) ($777,096) 4,956,327 (P=651,508) ($850,784) 4,414,798 (P=6,231,736) *SGVFS015746*

286 As at December 31, 2015 and 2014, approximately 44.6% and 46.7% respectively, of the Group s total consolidated bank loans and long-term debt were denominated in U.S. dollars. Thus, appreciation of the Philippine peso against the U.S. dollar will decrease both the principal amount of the foreign currency-denominated debt and interest expense on the Group s debt in Philippine peso terms. The Group has recognized in its consolidated statements of income, net foreign exchange gain of P=240.8 million, P=179.1 million and P=59.4 million on its net foreign currency-denominated assets and liabilities for the years ended December 31, 2015, 2014 and 2013, respectively. This resulted from the movements of the closing rates of U.S. dollar against the Philippine peso and China Yuan Renminbi as shown in the table below: China Yuan Renminbi to U.S. dollar RMB RMB Philippine Peso to U.S. dollar P=47.06 P=44.72 Foreign Currency Risk Sensitivity Analysis. The following table demonstrates the sensitivity to a reasonably possible change in exchange rate of U.S. Dollar to Philippine Peso and U.S. Dollar to China Yuan Renminbi of financial assets and liabilities, with all other variables held constant: Appreciation (Depreciation) of P= US$-denominated Effect on Income Before Tax (In Millions) RMB-denominated Appreciation (Depreciation) of $ Effect on Income Before Tax (In Millions) (P=1,165.6) 1.50 ($1,144.9) 1.00 (777.1) 1.00 (763.3) (1.50) 1,165.6 (1.50) 1,144.9 (1.00) (1.00) (P=1,276.2) 1.50 ($1,067.1) 1.00 (850.8) 1.00 (711.4) (1.50) 1,276.2 (1.50) 1,067.1 (1.00) (1.00) Liquidity Risk The Group seeks to manage its liquidity profile to be able to finance capital expenditures and service maturing debts. To cover its financing requirements, the Group intends to use internally generated funds and proceeds from debt and equity issues and sales of certain assets. The Group also has readily available credit facilities with banks and related parties to meet its long-term financial liabilities. As part of its liquidity risk management program, the Group regularly evaluates its projected and actual cash flow information and continuously assesses conditions in the financial markets for opportunities to pursue fund-raising initiatives. These initiatives may include bank loans, export credit agency-guaranteed facilities, debt capital and equity market issues. *SGVFS015746*

287 The Group s financial assets, which have maturities of less than 12 months, and used to meet its short-term liquidity needs, include the following: (In Thousands) Cash and cash equivalents P=53,910,071 P=69,133,381 Current portion of time deposits 9,611,405 9,000,324 Investments held for trading - bonds 279, ,835 Current portion of AFS investments - Bonds and corporate notes 179, ,742 The maturity profile of the Group s financial liabilities follow: On Demand 2015 Less than 1 Year 2 to 5 Years (In Thousands) More than 5 Years Total Bank loans P= P=9,923,215 P= P= P=9,923,215 Accounts payable and other current liabilities * 69,578,752 69,578,752 Long-term debt (including current portion) ** 33,073, ,142,322 88,156, ,372,635 Dividends payable 346, ,281 Tenants deposits ** 49,722 13,710, ,170 14,028,643 Other noncurrent liabilities *** 3,420,984 3,420,984 P= P=112,971,665 P=222,274,057 P=88,424,788 P=423,670,510 On Demand 2014 Less than 1 Year 2 to 5 Years (In Thousands) More than 5 Years Total Bank loans P= P=13,892,641 P= P= P=13,892,641 Accounts payable and other current liabilities * 65,184,525 65,184,525 Long-term debt (including current portion) ** 15,266, ,584, ,127, ,978,562 Derivative liabilities: ** Interest rate swaps 58,705 58,705 Multiple derivatives on convertible bonds 1,092,382 1,092,382 Dividends payable 264, ,882 Tenants deposits ** 13,815, ,840 14,063,382 Other noncurrent liabilities *** 3,208,432 3,208,432 P= P=95,700,904 P=185,667,312 P=120,375,295 P=401,743,511 *** Excluding payable to government agencies of P=3,544.7 million and P=3,584.2 million at December 31, 2015 and 2014, respectively, which are not considered as financial liabilities. *** Based on estimated future cash flows. ***Excluding nonfinancial liabilities amounting to P=1,412.0 million and P=573.0 million at December 31, 2015 and 2014, respectively. Credit Risk The Group trades only with recognized and creditworthy related and third parties. It is the Group s policy that all customers who wish to trade on credit terms are subject to credit verification procedures. In addition, receivable balances are monitored on a regular basis which aims to reduce the Group s exposure to bad debts at a minimum level. Given the Group s diverse base of customers, it is not exposed to large concentrations of credit risk. With respect to credit risk arising from the other financial assets of the Group which consist of cash and cash equivalents, time deposits, investments held for trading, AFS investments and certain derivative instruments, the Group s exposure to credit risk arises from default of the counterparty, with a maximum exposure equal to the carrying amount of these instruments, *SGVFS015746*

288 without considering the effects of collateral. Since the Group trades only with recognized related and third parties, there is no requirement for collateral. Receivable from sale of real estate has minimal credit risk and is effectively collateralized by the respective units sold since title to the real estate properties are not transferred to the buyers until full payment is made. As at December 31, 2015 and 2014, the financial assets, except for certain receivables and AFS investments, are generally viewed by management as good and collectible considering the credit history of the counterparties. Past due or impaired financial assets are very minimal in relation to the Group s total financial assets. Credit Quality of Financial Assets The credit quality of financial assets is managed by the Group using high quality and standard quality as internal credit ratings. High Quality. This pertains to a counterparty who is not expected to default in settling its obligations, thus credit risk exposure is minimal. This normally includes large prime financial institutions, companies and government agencies. Standard Quality. Other financial assets not belonging to high quality financial assets are included in this category. The credit analysis of the Group s financial assets follows: High Quality Standard High Standard Quality Total Quality Quality (In Thousands) Cash and cash equivalents (excluding cash on hand) P=52,769,650 P= P=52,769,650 P=67,964,569 P= P=67,964,569 Time deposits including noncurrent portion 62,739,174 62,739,174 56,579,714 56,579,714 Investments held for trading - Bonds 279, , , ,835 AFS investments 21,993,333 3,918 21,997,251 23,083,740 3,918 23,087,658 Receivables - net (including noncurrent portion of receivables from real estate buyers) 29,341,750 7,041,939 36,383,689 29,227,148 6,323,604 35,550,752 Advances and other receivables - net (includes non-trade receivables, advances and deposits, receivable from banks and credit card, notes receivable, accrued interest receivable, and advances for project development under Other current assets account in the consolidated balance sheet) 11,523,861 11,523,861 17,531,340 17,531,340 Escrow fund (including noncurrent portion) 570, , , ,238 Long-term note (included under Other noncurrent assets account in the consolidated balance sheet) 927, ,000 Derivative assets (included under Other noncurrent assets account in the consolidated balance sheet) 3,964,807 3,964,807 2,555,708 2,555,708 P=184,109,033 P=7,045,857 P=191,154,890 P=198,050,292 P=6,327,522 P=204,377,814 Total *SGVFS015746*

289 Equity Price Risk Management monitors the equity securities in its investment portfolio based on market expectations. Material equity investments within the portfolio are managed on an individual basis and all buy and sell decisions are approved by management. The effect on equity after income tax of a possible change in equity indices with all other variables held constant is as follows: Change in Equity Price Effect on Equity After Income Tax (In Millions) % P=2, % (2,268.7) % 3, % (3,055.5) Capital Management The primary objective of the Group s capital management is to ensure that it maintains a strong credit rating and healthy capital ratios in order to support its business and maximize shareholder value. The Group manages its capital structure and makes adjustments to it, in light of changes in economic conditions. To maintain or adjust the capital structure, the Group may adjust the dividend payment to shareholders, pay-off existing debts, return capital to shareholders or issue new shares. The Group monitors its capital gearing by measuring the following ratios and maintaining them at not lower than 50:50. Net interest-bearing debt divided by total capital plus net interest-bearing debt Interest-bearing debt divided by total capital plus interest-bearing debt. Net Interest-bearing Debt to Total Capital plus Net Interest-bearing Debt (In Thousands) Bank loans P=9,923,215 P=13,892,641 Long-term debt (current and noncurrent) 271,162, ,782,663 Less: Cash and cash equivalents (excluding cash on hand) (52,769,650) (67,964,569) Time deposits (current and noncurrent) (62,739,174) (56,579,714) AFS investments (bonds and corporate notes) (4,866,562) (5,626,784) Investments held for trading - bonds (279,359) (307,835) Long-term notes (current and noncurrent) (1,908,435) Total net interest-bearing debt (a) 158,522, ,196,402 Total equity attributable to owners of the Parent 284,493, ,004,114 Total net interest-bearing debt and equity attributable to owners of the Parent (b) P=443,015,609 P=388,200,516 Gearing ratio - net (a/b) 36% 34% *SGVFS015746*

290 Interest-bearing Debt to Total Capital plus Interest-bearing Debt (In Thousands) Bank loans P=9,923,215 P=13,892,641 Long-term debt 271,162, ,782,663 Total interest-bearing debt (a) 281,085, ,675,304 Total equity attributable to owners of the Parent 284,493, ,004,114 Total interest-bearing debt and equity attributable to owners of the Parent (b) P=565,578,789 P=518,679,418 Gearing ratio - gross (a/b) 50% 50% 30. Financial Instruments Fair Values The carrying values and estimated fair values of the Group s financial assets and liabilities, by category and by class, except for those with carrying amounts that are reasonable approximations of fair values follow: 2015 Carrying Value Fair value Quoted Prices in Active Markets (Level 1) Significant Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) (In Thousands) Assets Measured at Fair Value Financial assets at FVPL - Derivative assets P=3,964,807 P=3,964,807 P= P=3,964,807 P= Assets for which Fair Values are Disclosed Loans and receivables: Time deposits - noncurrent portion 53,127,769 57,332,807 57,332,807 Receivables - net (including noncurrent portion of receivables from real estate buyers) 40,096,123 39,967,000 39,967,000 Long-term notes (included under Other noncurrent assets account in the consolidated balance sheet) 927, , ,801 94,150,892 98,240,608 98,240,608 P=98,115,699 P=102,205,415 P= P=3,964,807 P=98,240,608 Liabilities for which Fair Values are Disclosed Other Financial Liabilities: Long-term debt (noncurrent portion and net of unamortized debt issue cost) P=245,167,269 P=265,886,763 P= P= P=265,886,763 Tenants deposits and others* 25,238,728 23,649,743 23,649, ,405, ,536, ,536,506 P=270,405,997 P=289,536,506 P= P= P=289,536,506 *Excluding nonfinancial liabilities amounting to P=1,412.0 million as at December 31, 2015 *SGVFS015746*

291 Carrying Value Fair value 2014 Quoted Prices in Active Markets (Level 1) Significant Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) (In Thousands) Assets Measured at Fair Value Financial assets at FVPL - Derivative assets P=2,555,708 P=2,555,708 P= P=2,555,708 P= Assets for which Fair Values are Disclosed Loans and receivables: Time deposits - noncurrent portion 47,579,390 51,735,721 51,735,721 Receivables - net (including noncurrent portion of receivables from real estate buyers) 39,351,403 39,264,893 39,264,893 86,930,793 91,000,614 91,000,614 P=89,486,501 P=93,556,322 P= P=2,555,708 P=91,000,614 Liabilities Measured at Fair Value Financial Liabilities at FVPL - Derivative liabilities (current and noncurrent) P=1,151,087 P=1,151,087 P= P=58,705 P=1,092,382 Liabilities for which Fair Values are Disclosed Other Financial Liabilities: Long-term debt (noncurrent portion and net of unamortized debt issue cost) 237,113, ,583, ,583,840 Tenants deposits and others* 21,406,013 20,646,657 20,646, ,519, ,230, ,230,497 P=259,670,655 P=280,381,584 P= P=58,705 P=280,322,879 *Excluding nonfinancial liabilities amounting to P=573.0 million as at December 31, 2014 There were no transfers between Level 1 and Level 2 fair value measurements and no transfers into and out of Level 3 fair value measurements as at December 31, 2015 and The estimated fair value of the following financial instruments is based on the discounted value of future cash flows using the prevailing interest rates. Discount rates used follow: Noncurrent portion of time deposits 0.91% 2.07% 0.28% 2.25% Noncurrent portion of receivables from real estate buyers 4.50% 5.20% Long-term notes included under Other noncurrent assets account 2.01% 3.51% Tenants deposits 2.12% 4.54% 2.44% 5.22% Long-term Debt. Fair value is based on the following: Debt Type Fixed Rate Loans Fair Value Assumptions Estimated fair value is based on the discounted value of future cash flows using the applicable rates for similar types of loans. Discount rates used range from 0.37% to 5.59% and 0.26% to 5.32% as at December 31, 2015 and 2014, respectively. *SGVFS015746*

292 Debt Type Variable Rate Loans Fair Value Assumptions For variable rate loans that re-price every three months, the carrying value approximates the fair value because of recent and regular repricing based on current market rates. For variable rate loans that re-price every six months, the fair value is determined by discounting the principal amount plus the next interest payment amount using the prevailing market rate for the period up to the next repricing date. Discount rates used were 1.95% to 4.00% and 1.70% to 4.00% as at December 31, 2015 and 2014, respectively. Derivative Assets and Liabilities. The fair values of the interest rate swaps, cross-currency swaps, and non-deliverable forwards are based on quotes obtained from counterparties classified under Level 2 of the fair value hierarchy. The fair values of the embedded options relating to the Parent Company s convertible bonds were classified under Level 3 because the credit spread used as input to the fair value calculation of the options which were assessed by the Group as having a significant impact to its fair values. The fair values of the embedded options were computed using the indirect method of valuing multiple embedded derivatives. This valuation method compares the fair value of the option-free bond against the fair value of the bond as quoted in the market. The difference of the fair values is assigned as the value of the embedded derivatives. Significant Unobservable Inputs to Valuation Range USD risk-free rate % Credit spread % To assess the impact of the credit spreads used, the Group performed a sensitivity analysis using an increase (decrease) assumption in the credit spreads, the result of which is shown below: Increase (Decrease) in Credit Spread Net Effect on Fair Values of Option (In Thousands) bps (P=88,977) (100) bps 91,303 The rollforward analysis of the fair value changes of this financial instrument follows: (In Thousands) Balance at beginning of year (P=1,092,382) (P=845,429) Fair value changes (151,020) (257,680) Conversions 1,243,402 10,727 Balance at end of year P= (P=1,092,382) Derivative Financial Instruments To address the Group s exposure to market risk for changes in interest rates arising primarily from its long-term floating rate debt obligations and to manage its foreign exchange risks, the Group entered into various derivative transactions such as cross-currency swaps, interest rate swaps, foreign currency call options, non-deliverable forwards and foreign currency range options. The Company also has embedded derivatives from the Parent Company s long-term note (recorded under Noncurrent Assets account) and convertible bonds. *SGVFS015746*

293 Cross-currency Swaps Options arising from Convertible Bonds Parent SM Prime Total Foreign Currency Swap Non-deliverable Forwards (In Thousands) Cross-currency Swaps Interest Rate Swaps Non-deliverable Forwards Balance as at December 31, 2013 P=864,677 (P=845,429) P= P= P=1,668,399 (P=49,562) P= P=1,638,085 Fair value changes: Interest expense (225,249) (37,423) (262,672) Foreign currency exchange loss (12,597) (12,597) Cumulative translation adjustments 58,217 (66,067) (7,850) Gain (loss) on fair value changes of derivatives (245,083) 32,190 2,000 21,340 13,612 (175,941) Transferred to additional paid-in capital 10,727 10,727 Fair value of settled derivatives (32,190) (2,000) 225,249 37,422 (13,612) 214,869 Balance as at December 31, ,894 (1,092,382) 1,602,332 (28,223) 1,404,621 Fair value changes: Interest expense (187,210) (59,189) (246,399) Foreign currency exchange gain Cumulative translation adjustments 441, ,467 1,439,581 Gain (loss) on fair value changes of derivatives (151,173) 6,491 28,223 13,694 (102,765) Transferred to additional paid-in capital 1,243,402 1,243,402 Fair value of settled derivatives (6,491) 187,210 59,189 (13,694) 226,214 Balance as at December 31, 2015 P=1,364,008 P= P= P= P=2,600,799 P= P= P=3,964,807 Derivative assets P=1,364,008 P= P= P= P=2,600,799 P= P= P=3,964,807 Derivative liabilities Balance as at December 31, 2015 P=1,364,008 P= P= P= P=2,600,799 P= P= P=3,964,807 *SGVFS015746*

294 Derivative Instruments Accounted for as Cash Flow Hedges Cross-currency Swaps. In 2013, the Parent Company and SM Prime entered into cross-currency swap transactions to hedge both the foreign currency and interest rate exposures on its U.S. dollar-denominated five-year term loans (the hedged loans) (see Note 20). Under the floating-to-fixed cross-currency swaps, the hedged U.S. dollar-denominated loans have been converted into Philippine peso-denominated loans. Details of the floating-to-fixed cross-currency swaps are as follows: Swap the face amount of the loans at US$ for their agreed Philippine peso equivalents with the counterparty banks and exchange, at maturity date, the principal amount originally swapped. Pay fixed interest at the Philippine peso notional amount and receive floating interest on the US$ notional amount, on a semi-annual basis, simultaneous with interest payments on the hedged loans. As the terms of the swaps have been negotiated to match the terms of the hedged loans, the hedges were assessed to be highly effective. No ineffectiveness was recognized in the consolidated statements of income for the years ended December 31, 2015 and Details of the hedged loans follow: Outstanding Principal Balance Interest Rate Maturity (In Thousands) (In US$) (In PhP=) Parent - Unsecured loans US$180,000 P=8,470,800 6-month US LIBOR % May 15, 2018 SM Prime: Unsecured loan 200,000 9,412,000 6-month US LIBOR % January 29, 2018 Unsecured loan 150,000 7,059,000 6-month US LIBOR % March 25, 2018 The Group s outstanding cross-currency swaps as at December 31, 2015 follow: Notional Amount Receive Pay US$:P= Rate Maturity Fair Value (In Thousands) (In Thousands) (In US$) (In PhP=) Parent: Floating-to-Fixed US$50,000 P=2,059,250 6M US LIBOR bps 4.05% P=41.19 May 15, 2018 P=380,667 Floating-to-Fixed 60,000 2,478,000 6M US LIBOR bps 4.03% May 15, ,005 Floating-to-Fixed 70,000 2,888,200 6M US LIBOR bps 3.98% May 15, ,336 SM Prime: Floating-to-Fixed 150,000 6,100,500 6M US LIBOR bps 3.70% January 29, ,162,002 Floating-to-Fixed 50,000 2,033,500 6M US LIBOR bps 3.70% January 29, ,570 Floating-to-Fixed 50,000 2,055,000 6M US LIBOR bps 3.90% March 23, ,959 Floating-to-Fixed 50,000 2,055,000 6M US LIBOR bps 3.90% March 23, ,859 Floating-to-Fixed 50,000 2,055,000 6M US LIBOR bps 3.90% March 23, ,409 Other Derivative Instruments Not Designated as Accounting Hedges Options Arising from Long-term Note. The Parent Company entered into a loan agreement with Atlas. The loan contains multiple embedded derivatives such as conversion, call and put options. The conversion option pertains to the right of the Parent Company to convert the loan into common shares of Atlas at the conversion price of P=8.29 per share at any time beginning July 21, 2015 until June 2, The call option pertains to the right of Atlas to *SGVFS015746*

295 early redeem the loan, in whole but not in part, on or after December 9, 2016 subject to the conditions stated in the loan agreement. On the other hand, the put option pertains to the right of the Parent Company to require Atlas to redeem all or some of the loan at their prepayment amount on the date fixed for prepayment beginning June 9, As at December 31, 2015, all outstanding embedded derivatives have nil values. The Group s interest rate swaps presented by maturity profile follow: Year Interest Outstanding Notional Amount Aggregate Fair Value Obtained Maturity Payment <1 year Receive Pay (In Thousands) (In Thousands) Floating-to-Fixed 2013 June 2015 Quarterly P=349,440 3MPDST-R2 3.65% 4.95% P= (P=1,882) 2011 March 2015 Semi-annual $145,000 6 months LIBOR + margin 2.91% 3.28% (37,535) 2010 November 2015 Semi-annual $30,000 6 months LIBOR + margin 3.18% (19,288) Fixed-to-Floating 2010 June 2015 Quarterly P=1,570, % 7.36% 3MPDST-R2 P= P=30,482 Interest Rate Swaps. In 2013, SM Prime entered into two floating-to-fixed Philippine peso interest rate swap agreements with a notional amount of P=175.0 million each to offset the cash flows of the two fixed-to-floating Philippine peso interest rate swaps entered into in The loans bear interest based on LIBOR plus spread, with bullet maturity on March 25, 2018 and January 24, 2018, respectively (see Note 20). Fair value change from the matured swap recognized in the consolidated statement of income amounted to P=2.0 million gain in In 2011, SMPH entered into floating-to-fixed US$ interest rate swap agreements with aggregate notional amount of US$145 million. Under the agreements, SMPH effectively converts the floating rate U.S. dollar-denominated term loan into fixed rate loan with semi-annual payment intervals up to March 21, 2015 (see Note 20). Fair value change from the matured swap recognized in the consolidated statement of income amounted to P=38 million gain in In 2010, SM Prime entered into the following interest rate swap agreements: A US$ interest rate swap agreement with a nominal amount of US$30.0 million. Under the agreement, SM Prime effectively converts the floating rate U.S. dollar-denominated five-year bilateral unsecured loan into a fixed rate loan with semi-annual payment terms up to November 2015 (see Note 20). Fair value change from the matured swap recognized in the consolidated statement of income amounted to P=19 million gain in Two Philippine peso interest rate swap agreements with a notional amount of P=1,000.0 million each, with amortization of P=10.0 million every anniversary. The consolidated net cash flow of the two swaps effectively converts the Philippine peso-denominated five-year inverse floating rate notes into floating rate notes with quarterly payment terms up to June 2015 (see Note 20). Fair value change from the matured swap recognized in the consolidated statement of income amounted to P=31 million loss in US$250.0 million Convertible Bonds. The Parent Company s convertible bonds contain multiple embedded derivatives which were bifurcated and accounted for as a single compound derivative (see Note 20). Non-deliverable Forwards. In 2015 and 2014, the Parent Company and SM Prime entered into sell P= and buy US$ forward contracts. It also entered into sell US$ and buy P= with the same aggregate notional amount. *SGVFS015746*

296 EPS Computation (In Thousands Except for Per Share Data) Net income attributable to owners of the Parent for basic earnings (a) P=28,455,260 P=28,398,584 P=27,445,682 Effect on net income of convertible bonds, net of tax Net income attributable to common equity holders of the Parent adjusted for the effect of dilution (b) P=28,455,260 P=28,398,584 P=27,445,682 Weighted Average Number of Common Shares Outstanding Weighted average number of common shares outstanding for the year, after retroactive effect of stock dividends declared in 2013 (c) 797, , ,457 Dilutive effect of convertible bonds Weighted average number of common shares outstanding for the period adjusted for the effect of dilution (d) 797, , ,457 Basic EPS (a/c) P=35.68 P=35.66 P=34.85 Diluted EPS (b/d) P=35.68 P=35.66 P=34.85 The effect of the convertible bonds on net income and on the number of shares in 2014 and 2013 were not considered due to its antidilutive effect, which if included, will result to an EPS of P=35.77 and P=36.34 in 2014 and 2013, respectively. As at April 9, 2015, the remaining 6.7 million convertible shares was fully converted to SMIC shares, hence, basic and diluted EPS as at December 31, 2015 is the same. 32. Non-cash Transactions The Group s principal non-cash transaction under financing activities pertains to the conversion of the Parent Company s convertible bonds into common shares. Details of the conversion option of the convertible bonds and the conversions are in Note Reclassifications of Accounts The Group made reclassification of certain consolidated balance sheet accounts as at December 31, 2014 and consolidated statement of income accounts in 2014 and 2013 to conform to the 2015 consolidated financial statements presentation and classification. The reclassifications were made to properly present advances and deposits from other current assets to other noncurrent assets, and land use rights from investment properties to other noncurrent assets. The reclassifications have no impact on the 2014 and 2013 profit or loss as well as the December 31, 2014 equity of the Group. A third balance sheet as at the beginning of the preceding period is not presented because the reclassifications do not have material impact on the consolidated balance sheets as at December 31, 2014 and January 1, *SGVFS015746*

297 Events After the Reporting Period On January 8 and February 9, 2016, the Parent Company extended two five-year term loans to Atlas amounting to P=705.4 million and P=1,346.3 million, respectively. These unsecured loans bear interest at 5.0% and are payable quarterly. On February 29, 2016, the BOD of the Parent Company approved the merger of SM Retail with certain related entities namely, Forsyth Equity Holdings, Inc., HFS Corporation, Morrison Corporation, San Mateo Bros., Inc. and Tangiers Resources Corporation, with SM Retail as the surviving entity. These related companies own various retail businesses. *SGVFS015746*

298 SyCip Gorres Velayo & Co Ayala Avenue 1226 Makati City Philippines Tel: (632) Fax: (632) ey.com/ph BOA/PRC Reg. No. 0001, December 14, 2015, valid until December 31, 2018 SEC Accreditation No FR-4 (Group A), November 10, 2015, valid until November 9, 2018 INDEPENDENT AUDITORS REPORT ON SUPPLEMENTARY SCHEDULES The Stockholders and the Board of Directors SM Investments Corporation 10th Floor, One E-Com Center Harbor Drive, Mall of Asia Complex CBP-1A, Pasay City 1300 We have audited in accordance with Philippine Standards on Auditing, the consolidated financial statements of SM Investments Corporation and Subsidiaries as at December 31, 2015 and 2014 and for each of the three years in the period ended December 31, 2015, included in this Form 17-A, and have issued our report thereon dated February 29, Our audits were made for the purpose of forming an opinion on the basic financial statements taken as a whole. The schedules listed in the Index to Consolidated Financial Statements and Supplementary Schedules are the responsibility of the Company s management. These schedules are presented for purposes of complying with Securities Regulation Code Rule 68, As Amended (2011) and are not part of the basic financial statements. These schedules have been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, fairly state, in all material respects, the information required to be set forth therein in relation to the basic financial statements taken as a whole. SYCIP GORRES VELAYO & CO. Belinda T. Beng Hui Partner CPA Certificate No SEC Accreditation No AR-1 (Group A), March 25, 2013, valid until March 24, 2016 Tax Identification No BIR Accreditation No , June 26, 2015, valid until June 25, 2018 PTR No , January 4, 2016, Makati City February 29, 2016 A member firm of Ernst & Young Global Limited *SGVFS015746*

299 SM INVESTMENTS CORPORATION AND SUBSIDIARIES SCHEDULE A FINANCIAL ASSETS AS AT DECEMBER 31, 2015 (Amounts in Thousands, Except Shares Data) Name of Issuing Entity and Description of Each Issue Number of Shares or Principal Amount of Bonds and Notes Amount Shown in the Balance Sheet Value Based on Market Quotations at Balance Sheet Date Interest and Dividend Income Received and Accrued Temporary investments: BDO Unibank, Inc. P=34,453,415 P= P=380,178 China Banking Corporation 3,163,228 25,932 Others 6,502, ,503 44,119, ,613 Time deposits current and short-term investments 9,611, ,969 Investments held for trading and sale: Bonds and Corporate Notes: Peso Bonds P=30,000 31,282 31,282 2,691 Dollar Bonds $8, , ,359 23,977 Shares of Stocks: Common shares: Shang Properties, Inc. 189,550,548 shares 593, ,293 31,587 Republic Glass Holdings Corporation 14,714,000 shares 38,256 38,256 PICOP Resources, Inc. 40,000,000 shares 8,200 8,200 Export and Industry Bank, Inc. 7,829,000 shares 2,036 2,036 Benguet Corporation 88,919 shares ,100,915 1,100,915 58,255 Total Marketable Securities P=54,831,835 P=1,100,915 P=946,

300 Name of Issuing Entity and Description of Each Issue Available-for-sale investments noncurrent: Shares of Stocks Listed: Number of Shares or Principal Amount of Bonds and Notes Amount Shown in the Balance Sheet Value Based on Market Quotations at Balance Sheet Date Interest and Dividend Income Received and Accrued Ayala Corporation 20,987,551 shares P=15,866,589 P=15,866,589 P=143,069 Manila Electric Company 58,925 shares 7,525 7,525 Philippine Long Distance Telephone Company 292,611 shares 2,896 2, Philippine Bank of Communications 13,431 shares Prime Media Holdings, Inc. 500,000 shares The Philippine Stock Exchange, Inc. 1,922,750 shares 528, ,756 13,500 Unlisted: Morrison Corporation 104,500 shares 10, ,400 Allfirst Equity Holdings, Inc. 95,000 shares 9,500 86,165 Forsyth Equity Holdings, Inc. 95,000 shares 9,500 30,780 Tangiers Resources Corp. 95,000 shares 9, ,730 San Mateo Bros., Inc. 85,500 shares 8, ,305 HFS Corporation 59,300 shares 16,799 49,499 Heavenly Garden Development Corp. 25,000 shares 2,500 SM Insurance Brokers Services, Inc. 129,390 shares 150 Mutual Development Center, Inc. 4,633 shares 1,259 Others ,474,885 16,406, ,479 (Forward)

301 Name of Issuing Entity and Description of Each Issue Bonds and corporate notes - Number of Shares or Principal Amount of Bonds and Notes Amount Shown in the Balance Sheet Value Based on Market Quotations at Balance Sheet Date Interest and Dividend Income Received and Accrued Corporate Bonds $99,602 P=4,687,280 P=4,687,280 P=317,988 4,687,280 4,687, ,988 Club Shares Cebu Golf & Country Club 1 share 5,000 5,000 Baguio Country Club 1 share 1,750 1,750 Country Club of Tagaytay Highlands 1 share Mimosa Golf & Country Club, Inc. 1 share Camp John Hay 2 shares Subic Bay Yacht Club 1 share Splendido Taal Golf Club 1 share Calatagan Golf Club 1 share Cresta del Mar 3 shares Ridge Resort 1 share Tagaytay Midlands Golf Club 11 shares 5,280 5,280 13,530 13,530 21,175,695 21,107, ,467 Time Deposits noncurrent 53,127,769 1,762,444 Total Noncurrent Financial Assets P=53,127,769 P=21,093,948 P=2,723,

302 SM INVESTMENTS CORPORATION AND SUBSIDIARIES SCHEDULE C AMOUNTS RECEIVABLE FROM RELATED PARTIES WHICH ARE ELIMINATED DURING THE CONSOLIDATION OF FINANCIAL STATEMENTS AS AT DECEMBER 31, 2015 (Amounts in Thousands) Name and Designation of Debtor Balance at beginning of period Additions Amounts collected Amounts written off Current Not current Balance at end of period Accounts receivable tenants Sanford Marketing Corporation P=29,106 P=362,439 P=323,424 P= P=68,121 P= P=68,121 Mainstream Business, Inc. 69, , ,119 83,919 83,919 Market Strategic Firm, Inc. 74, , ,291 83,328 83,328 Major Shopping Management Corporation 32, , ,128 51,194 51,194 Metro Main Star Asia Corp. 53, , ,101 55,632 55,632 Meridien Business Leader, Inc. 176, ,681 49,757 49,757 Madison Shopping Plaza, Inc. 64, , ,199 66,096 66,096 Multi Stores Corporation 12, , ,809 24,580 24,580 Mandurriao Star, Inc. 69, , ,486 81,367 81,367 Metro Manila Shopping Mecca Corp. 47, , ,265 55,298 55,298 Mercantile Stores Group, Inc. 74, , ,517 81,845 81,845 Mindanao Shopping Destination Corp. 16,117 70,377 67,072 19,422 19,422 Manila Southern Associates, Inc. 62, , ,629 68,786 68,786 My ShoppingLane Cebu Corp. 4,616 26,061 12,274 18,403 18,403 Mindanao Shoppers Daily Destination Corp. 5,098 67,380 53,074 19,404 19,404 (Forward)

303 Name and Designation of Debtor Balance at beginning of period Additions Amounts collected Amounts written off Current Not current Balance at end of period SM Mart, Inc. P= 92,327 P= 526,013 P= 521,749 P= P= 96,591 P= P= 96,591 Supervalue, Inc. 330,453 2,625,831 2,540, , ,722 Super Shopping Market, Inc. 221,741 1,748,307 1,730, , ,925 SM Retail, Inc. 14,238 58,299 71, Accessories_Management Corp. 88 2,139 1, CF_Mgt. Corp LF_Mgt. Corp Shoemart, Inc. (formerly LTBG_Mgmt. Corp.) 431 4,712 3,809 1,334 1,334 MF_Mgt. Corp MCLG_Mgmt. Corp Forever Agape and Glory, Inc. 194, ,025 27,937 27,937 Costa del Hamilo, Inc ,289 5, Summerhills Home Development Corp. 3,920 3,920 SM Development Corporation Manila Southcoast Development Corp SM Prime Holdings, Inc ,009 70,471 SM Hotels and Conventions Corp ,412 6, Highlands Prime, Inc. 5,476 5,476 Intercontinental Development Corp. 1,720 1,720 SM Investments Corporation 7,480 48,344 54,654 1,170 1,170 P=1,286,194 P=8,609,438 P=8,281,752 P= P=1,613,880 P= P=1,613,

304 Name and Designation of Debtor Balance at beginning of period Additions Amounts collected Amounts written off Current Not current Balance at end of period Due from related parties Belleshares Holdings, Inc. (formerly SM Commercial Properties, Inc.) P=930,930 P= P=412,353 P= P=518,577 P= P=518,577 Intercontinental Development Corporation 544, , , ,000 Mountain Bliss Resort and Development Corp. 2,659, ,379 3,183,785 3,183,785 SM Prime Holdings, Inc. 2,839,534 2,839,534 Multi Realty Development Corporation 10,108,839 10,108,839 10,108,839 Tagaytay Resort Development Corporation 26,705 26,705 26,705 Sto. Roberto Marketing Corp. 12,500 12,500 12,500 SM Investments Corporation 2,371 2,371 P=17,124,881 P=524,379 P=3,373,854 P= P=14,275,406 P= P=14,275,406 Accounts receivable management fees Sanford Marketing Corporation P=1,094 P=180,899 P=180,499 P= P=1,494 P= P=1,494 Mainstream Business, Inc. 78,239 78,239 Market Strategic Firm, Inc. 73,975 73,975 Major Shopping Management Corporation 58,121 58,121 Metro Main Star Asia Corp. 47,895 47,895 Meridien Business Leader, Inc. 38,852 38,852 Madison Shopping Plaza, Inc. 55,087 55,087 Multi Stores Corporation 35,797 35,797 (Forward)

305 Name and Designation of Debtor Balance at beginning of period Additions Amounts collected Amounts written off Current Not current Balance at end of period Mandurriao Star, Inc. P= P=68,485 P=68,485 P= P= P= P= Metro Manila Shopping Mecca Corp. 51,078 51,078 Mercantile Stores Group, Inc. 71,635 71,635 Mindanao Shopping Destination Corp. 15,523 15,523 Manila Southern Associates, Inc. 55,422 55,422 SM Mart, Inc. 138, ,211 Supervalue, Inc , ,371 1,268 1,268 Super Shopping Market, Inc. 165, , Belleshares Holdings, Inc. (formerly SM Commercial Properties, Inc.) 6,862 6,862 6,862 P=1,303 P=1,366,999 P=1,358,283 P= P=10,019 P= P=10,019 Dividends receivable Multi-Realty Development Corporation P=718,182 P= 4,681,819 P= 4,581,819 P= P= 818,182 P= P= 818,182 SM Retail, Inc 1,131, , , ,751 Mainstream Business, Inc. 269, , , , ,996 Major Shopping Management Corp. 188, , , , ,996 Madison Shopping Plaza, Inc. 49, ,996 49, , ,996 Mandurriao Star, Inc. 119, , , , ,997 Mercantile Stores Group, Inc. 178, , , , ,189 Manila Southern Associates, Inc. 60, ,998 60, , ,998 (Forward)

306 Name and Designation of Debtor Balance at beginning of period Additions Amounts collected Amounts written off Current Not current Balance at end of period Market Strategic Firm, Inc. P=189,999 P=259,998 P=189,999 P= P=259,998 P= P=259,998 Metro Main Star Asia Corp. 59, ,598 59, , ,598 Multi Stores Corporation 164, , , , ,996 Metro Manila Shopping Mecca Corp. 99, ,998 99, , ,998 Mindanao Shopping Destination Corp. 14,999 14,999 14,999 14,999 14,999 Meridien Business Leader, Inc. 19, ,297 19, , ,297 Accessories_Management Corp , ,999 8,999 CF_Mgt Corp. 10,999 3,000 10,999 3,000 3,000 LF_Mgt Corp. 9,999 7,999 9,999 7,999 7,999 MF_Mgt. Corp. 6,999 6,999 6,999 MCLG_Mgmt. Corp. 1,000 1,000 1,000 1,000 1,000 Hyperhome Corp. 5,000 8,499 5,000 8,499 8,499 Sanford Marketing Corporation 597, , , , ,194 Supervalue, Inc. 2,099,997 2,199,997 2,099,997 2,199,997 2,199,997 Super Shopping Market, Inc. 799,996 1,099, ,996 1,099,999 1,099,999 Waltermart Supermarket, Inc. 51,000 51,000 51,000 51,000 51,000 SM Mart, Inc. 71,500 71,500 71,500 MH Holdings, Inc. 44,818 44,818 Forever Agape and Glory, Inc. 45,000 45,000 SM Prime Holdings, Inc. 3,014,228 3,014,228 (Forward)

307 Name and Designation of Debtor Balance at beginning of period Additions Amounts collected Amounts written off Current Not current Balance at end of period Belleshares Holdings, Inc. (formerly SM Commercial Properties, Inc.) P= P=1,014,750 P=292,050 P= P=722,700 P= P=722,700 Mountain Bliss Resort and Development Corp. 2,500,000 2,500,000 Sto Roberto Marketing Corporation 410, , , ,000 Net Group 90, , ,759 P=5,800,631 P=19,125,600 P=16,093,354 P= P=8,832,877 P= P=8,832,

308 SM INVESTMENTS CORPORATION AND SUBSIDIARIES SCHEDULE D - INTANGIBLE ASSETS Other Assets AS AT DECEMBER 31, 2015 (Amounts in Thousands) Description Beginning Balance Additions at Cost Charged to Cost and Expenses Other changes Additions (Deductions) Charged to Other Accounts Ending Balance Goodwill P=16,178,441 P= P= P= P= P=16,178,441 Trademarks and brand names 6,124,762 2,404,018 8,528,780 Total P=22,303,203 P=2,404,018 P= P= P= P=24,707,

309 SM INVESTMENTS CORPORATION AND SUBSIDIARIES SCHEDULE H - CAPITAL STOCK AS AT DECEMBER 31, 2015 Title of Issue Number of Shares Authorized Number of Shares Outstanding Number of Shares Reserved for Options, Warrants, Conversions, and Other Rights Affiliates Number of Shares Held by Directors, Officers and Principal Stockholders Others Common Stock 1,190,000, ,055,405 50,664, ,642, ,748,

310 SM INVESTMENTS CORPORATION AND SUBSIDIARIES COMPUTATION OF PUBLIC OWNERSHIP AS AT DECEMBER 31, 2015 "% to total I/O shares" Number of Shares Total Number of Shares Issued and Outstanding (I/O) 803,055,405 Directors: Henry Sy, Sr. Indirect 0.40% 3,182,550 Teresita T. Sy Direct 6.93% 55,635,450 Indirect 0.18% 1,450,000 Henry Sy, Jr. Direct 7.28% 58,460,450 Harley T. Sy Direct 6.93% 55,628,292 Indirect 0.36% 2,900,000 Jose T. Sio Direct 0.00% 14 Vicente S. Perez, Jr. Direct 0.00% 14 Ah Doo Lim Indirect 0.00% 125 Joseph R. Higdon Indirect 0.00% 125 Subtotal 22.08% 177,257,020 (Forward)

311 "% to total I/O shares" Number of Shares Total Officers - Corazon P. Guidote Indirect 0.00% 2,125 Wilson H. Go Indirect 0.00% 162 Subtotal 0.00% 2,287 Principal Stockholders: Felicidad T. Sy Direct 3.18% 25,522,060 Indirect 0.03% 208,113 Hans T. Sy Direct 8.03% 64,510,450 Indirect 0.18% 1,459,071 Herbert T. Sy Direct 8.21% 65,960,450 Elizabeth T. Sy Direct 5.64% 45,272,988 Indirect 0.18% 1,450,000 Subtotal 25.45% 204,383,132 Affiliates: Multi-Realty Development Corporation Direct 0.00% 1,099 SM Prime Holdings, Inc. Indirect 0.01% 97,403 Belle Corporation Direct 0.00% 32,585 (Forward)

312 "% to total I/O shares" Number of Shares Total Syntrix Holdings, Inc. Direct 3.89% 31,250,000 Sysmart Corporation Direct 2.40% 19,283,830 Subtotal 6.30% 50,664,917 Total Shares held by Directors, Officers, Principal Stockholders and Affiliates 53.83% 432,307,356 Total Number of Shares Owned by the Public 46.17% 370,748,

313 SM INVESTMENTS CORPORATION AND SUBSIDIARIES FINANCIAL RATIOS - KEY PERFORMANCE INDICATORS AS AT DECEMBER 31, 2015 AND i. Current ratio Current assets 1.47 : : 1 Current liabilities ii. Debt-to-equity ratio Total interest-bearing debt 50 : : 50 Total equity attributable to equity holders of the parent + Total interest-bearing debt Net debt-to-equity ratio Total interest-bearing debt less cash and cash equivalents (excluding cash on hand), time deposits, investments in bonds held for trading and availablefor-sale, long-term notes 36 : : 66 Total equity attributable to equity holders of the parent + Total interest-bearing debt less cash and cash equivalents (excluding cash on hand), time deposits, investments in bonds held for trading and available-for-sale, long-term notes iii. Asset to equity ratio Total assets Total equity iv. Interest rate coverage ratio Income from operations + Depreciation and amortization Interest expense v. Return on assets Net income attributable to equity holders of the parent 3.8% 4.2% Average assets Return on equity Net income attributable to equity holders of the parent Average equity attributable to equity holders of the parent 10.3% 12.0%

314 RECONCILIATION OF RETAINED EARNINGS AVAILABLE FOR DIVIDEND DECLARATION As at December 31, 2015 (Amounts in Thousands) SM Investments Corporation 10th Floor, One E-Com Center, Harbor Drive, Mall of Asia Complex, CBP-1A, Pasay City 1300 Unappropriated Retained Earnings, December 31, 2014 Adjustments to beginning unappropriated Retained Earnings: Rental income from straight-line amortization in excess of rental collections (P=365,904) P=14,303,776 Actuarial loss at January 1, 2013 recorded as retirement expense 48,548 (317,356) Unappropriated Retained Earnings, as adjusted to available for dividend distribution, beginning 13,986,420 Net income during the period closed to Retained Earnings 19,127,814 Less: Rental income from straight-line amortization in excess of rental collections 12,383 Net income actually earned/realized during the period 19,115,431 Add (Less): Cash dividends declared during the period (8,520,418) Appropriations of Retained Earnings during the period (27,000,000) Reversals of appropriations 18,000,000 Unappropriated Retained Earnings, as adjusted to available for dividend distribution, ending P=15,581,

315 SM INVESTMENTS CORPORATION AND SUBSIDIARIES CONGLOMERATE MAP AS AT DECEMBER 31, 2015 SM Retail, Inc. (100%) SM Prime Holdings, Inc. (49.7%) Multi-Realty Development Corporation (90.9%) Sto. Roberto Marketing Corp. (100%) Intercontinental Development Corporation (99.7%) ANNEX 1 ANNEX 2 Legend: SMIC Subsidiary Subsidiaries of SMIC Subsidiary Associates Associate of SMIC Subsidiary Note: % Refers to Effective Ownership BDO Unibank, Inc. (44.4%) China Banking Corporation (19.9%) SM INVESTMENTS CORPORATION Primebridge Holdings, Inc. (98.2%) Sodexo Benefits and Rewards Services Phils., Inc. (formerly Sodexo Motivation Solutions Philippines, Inc.) (40.0%) SMIC Atlas Consolidated Mining and Development Corporation (29.3%) Henfels Investments Corp. (99.0%) Belleshares Holdings, Inc. (99.0%) Belle Corporation (28.0%) Mountain Bliss Resort and Development Corporation (100.0%) Manila Southcoast Dev't Corp. (99.9%) Bellevue Properties, Inc. (62.0%) Asia Pacific Computer Technology Center, Inc. (51.8%) Nagtahan Property Holdings, Inc. (formerly AD Farming) (99.7%) Net Group (90.0%) ANNEX 3 CityMall Commercial Centers, Inc. (34.0%) -103-

316 SM INVESTMENTS CORPORATION AND SUBSIDIARIES CONGLOMERATE MAP ANNEX 1 AS AT DECEMBER 31, 2015 SM INVESTMENTS CORPORATION SM Retail, Inc. (100.0%) Supervalue, Inc. (100.0%) Sanford Marketing Corp. (99.6%) Super Shopping Market, Inc. (100.0%) Hyperhome Corp. (100.0%) Hyperfashion Corp. (100.0%) Waltermart Supermarket, Inc. (51.0%) HMS Development Corp. (99.0%) Marketwatch Investments Co., Inc. (99.5%) MH Holdings, Inc. (99.6%) Isabela Real Estate Development Corp. (100.0%) Index Living Mall (Philippines), Inc. (70.0%) Fast Retailing Philippines, Inc. (25.0%) Forever Agape and Glory, Inc. (60.0%) Mainstream Business, Inc. (100.0%) Market Strategic Firm, Inc. (100.0%) Major Shopping Management Corp. (90.0%) Metro Main Star Asia Corp. (99.0%) Meridien Business Leader, Inc. (99.0%) Manila Southern Associates, Inc. (100.0%) Madison Shopping Plaza, Inc. (100.0%) Multi Stores Corporation (75.0%) Mandurriao Star, Inc. (100.0%) SM Mart, Inc. (65.0%) Uptrend Fashion Design Corp. (100.0%) Metro Manila Shopping Mecca Corp. (100.0%) Mercantile Stores Group, Inc. (99.0%) Mindanao Shoppers Daily Destination Corp. (75.0%) My ShoppingLane Cebu Corporation (75.0%) Mindanao Shopping Destination Corp. (75.0%) LF_Mgt. Corp. (100.0%) Accessories Management Corp. (100.0%) CF_ Mgt. Corp. (100.0%) MCLG Mgmt. Corp. (100.0%) MF_ Mgt. Corp. (100.0%) Shoemart Inc. (formerly LTBG_Mgmt) (100.0%) Russfield Holdings Corp. (100.0%) Artisana Indochine Inc. (70.0%) Liteshoes Corporation (100.0%) 150 Accessories, Inc. (Uno De 50) (100.0%) Alfamart Trading Philippines, Inc. (55.0%) Alfametro Marketing, Inc. (100.0%) Modern Body Luxe Stores (100.0%) Premium Fashion Retail Designs Inc. (100.0%) EZ Footwear Investments, Inc. (70.0%) Legend: SMIC Subsidiary Subsidiaries of SM Retail Associate of SM Retail Walk EZ Retail Corp. (63.0%) Note: % Refers to Effective Ownership Annex

317 SM INVESTMENTS CORPORATION AND SUBSIDIARIES CONGLOMERATE MAP ANNEX 2 AS AT DECEMBER 31, 2015 SM INVESTMENTS CORPORATION SM Prime Holdings, Inc. (49.7%) MALLS RESIDENTIAL COMMERCIAL HOTELS AND CONVENTION Premier Central, Inc. (49.7%) Springfield Global Enterprises Limited (49.7%) Waltermart Ventures, Inc. (25.3%) Magenta Legacy, Inc. (49.7%) SM Development Corporation (49.5%) Summerhills Home Development Corp. (49.6%) Costa del Hamilo, Inc. (49.7%) Highlands Prime, Inc. (49.6%) SM Hotels and Conventions Corp. (49.7%) Premier Southern Corp. (49.7%) Consolidated Prime Dev. Corp. (49.7%) Southernpoint Properties Corp. (49.7%) Affluent Capital Enterprises Limited and Subdiaries (49.7%) Willin Sales, Inc. (25.3%) Willimson, Inc. (25.3%) Associated Development Corporation (49.7%) Tagaytay Resort Development Corporation (49.7%) SM Synergy Properties Holdings Corporation (49.5%) SM Residences Corp. (49.5%) Lascona Land Company, Inc. (49.5%) Metro South Davao Property Corporation (49.5%) Pico de Loro Beach and Country Club (43.3%) Bellavita Asset Holdings Corporation (44.7%) Hotel Specialist (Tagaytay), Inc. (45.0%) Hotel Specialist (Cebu), Inc. (49.6%) Legend: First Asia Realty Development Corporation (36.9%) San Lazaro Holdings Corporation (49.7%) First Leisure Ventures Group Inc. (24.9%) CHAS Realty and Development Corporation and Subsidiaries (49.7%) Mega Make Enterprises Limited and Subsidiaries (49.7%) SM Land (China) Limited and Subsidiaries (49.7%) Simply Prestige Limited and Subsidiaries (49.7%) Winsome Development Corp. (25.3%) WM Development, Inc. (25.3%) Fei Hua Real Estate Company (24.9%) OLCP Holdings, Inc. (19.9%) Prime Metro Estate, Inc. and Subsidiary (69.8%) Vantagem Ventures, Inc. (69.8%) Rappel Holdings Inc., and Subsidiaries (49.7%) SM Arena Complex Corporation (49.7%) Match Point International Tennis Events Pte. Ltd. (12.4%) MOA Esplanade Port, Inc. (49.7%) Landfactors Incorporated (49.5%) Vancouver Lands, Inc. (49.5%) Twenty Two Forty One Properties, Inc. (49.5%) 102 E. De Los Santos Realty Co., Inc. (49.5%) Union-Madison Realty Company, Inc. (49.5%) SM Property Management, Inc. (49.5%) Guadix Land Corporation (49.5%) SMDC HK Limited (49.5%) SMDC International (UK) Ltd. (49.5) SMDC International (USA) Inc. (49.5%) SMDC International (Italy) SRL (49.5%) Hotel Specialist (Manila), Inc. (49.6%) Hotel Specialist (Pico de Loro), Inc. (49.7%) Hotel Specialist (Davao), Inc. (49.6%) SMX Convention Specialist Corp. (49.6%) SMIC Subsidiary Subsidiaries of SM Prime Joint Venture of SM Prime Associate of SM Prime Note: % Refers to Effective Ownership Annex

318 SM INVESTMENTS CORPORATION AND SUBSIDIARIES CONGLOMERATE MAP ANNEX 3 AS AT DECEMBER 31, 2015 Crescent Park Property Holdings, Inc. (90.0%) Legend: SMIC Subsidiary Note: % Refers to Effective Ownership Property Holdings, Inc. (90.0%) Crescent Park 6-24 Property Holdings, Inc. (90.0%) 6-24 Property Holdings, Inc. (90.0%) SM INVESTMENTS CORPORATION Net Group (90.0%) Crescent Park 18-2 Property Holdings, Inc. (90.0%) 18-2 Property Holdings, Inc. (90.0%) Crescent Park 6-3 Property Holdings, Inc. (90.0%) 6-3 Property Holdings, Inc. (90.0%) Crescent Park 19-1 Property Holdings, Inc. (90%) 19-1 Property Holdings, Inc. (90.0%) Annex

319 SM INVESTMENTS CORPORATION AND SUBSIDIARIES List of Philippine Financial Reporting Standards (PFRSs) and Interpretations Effective as at December 31, 2015 PHILIPPINE FINANCIAL REPORTING STANDARDS AND INTERPRETATIONS Effective as at December 31, 2015 Framework for the Preparation and Presentation of Financial Statements Conceptual Framework Phase A: Objectives and qualitative characteristics PFRSs Practice Statement Management Commentary Philippine Financial Reporting Standards PFRS 1 (Revised) First-time Adoption of Philippine Financial Reporting Standards Amendments to PFRS 1 and PAS 27: Cost of an Investment in a Subsidiary, Jointly Controlled Entity or Associate Amendments to PFRS 1: Additional Exemptions for First-time Adopters Amendment to PFRS 1: Limited Exemption from Comparative PFRS 7 Disclosures for First-time Adopters Amendments to PFRS 1: Severe Hyperinflation and Removal of Fixed Date for First-time Adopters Amendments to PFRS 1: Government Loans Amendments to PFRS 1: Borrowing Costs Amendment to PFRS 1: Meaning of Effective PFRSs Adopted p Not Adopted Not Applicable PFRS 2 Share-based Payment p PFRS 3 (Revised) Amendments to PFRS 2: Vesting Conditions and Cancellations Amendments to PFRS 2: Group Cash-settled Sharebased Payment Transactions Amendment to PFRS 2: Definition of Vesting Condition Business Combinations Amendment to PFRS 3: Accounting for Contingent Consideration in a Business Combination Amendment to PFRS 3: Scope Exceptions for Joint Arrangements PFRS 4 Insurance Contracts p PFRS 5 Amendments to PAS 39 and PFRS 4: Financial Guarantee Contracts Non-current Assets Held for Sale and Discontinued Operations Amendments to PFRS 5: Changes in Methods of Disposals* p p p Not Early Adopted PFRS 6 Exploration for and Evaluation of Mineral Resources p p p p p p p p p p p p p p p

320 PHILIPPINE FINANCIAL REPORTING STANDARDS AND INTERPRETATIONS Effective as at December 31, Adopted PFRS 7 Financial Instruments: Disclosures p Amendments to PAS 39 and PFRS 7: Reclassification of Financial Assets Amendments to PAS 39 and PFRS 7: Reclassification of Financial Assets - Effective Date and Transition Amendments to PFRS 7: Improving Disclosures about Financial Instruments Amendments to PFRS 7: Disclosures - Transfers of Financial Assets Amendments to PFRS 7: Disclosures Offsetting Financial Assets and Financial Liabilities Amendments to PFRS 7: Mandatory Effective Date of PFRS 9 and Transition Disclosures Amendments to PFRS 7: Disclosures Servicing Contracts* Amendments to PFRS 7: Applicability of the Amendments to PFRS 7 to Condensed Interim Financial Statements* PFRS 8 Operating Segments p Amendments to PFRS 8: Aggregation of Operating Segments and Reconciliation of the Total of the Reportable Segments Assets to the Entity s Assets p p p p p p Not Adopted Not Early Adopted Not Early Adopted PFRS 9 Financial Instruments * Not Early Adopted Amendments to PFRS 9: Mandatory Effective Date of PFRS 9 and Transition Disclosures* Amendments to PFRS 9: Hedge accounting and amendments to PFRS 9 and PAS 39 (2013 version)* Amendments to PFRS 9 (2014 version)* PFRS 10 Consolidated Financial Statements p Amendments to PFRS 10, PFRS 12 and PAS 27: Investment Entities Amendments to PFRS 10 and PAS 28: Sale or Contribution of Assets between an Investor and its Associate or Joint Venture* Amendments to PFRS 10 and PAS 28: Applying the Consolidation Exception* PFRS 11 Joint Arrangements p Amendments to PFRS 11: Accounting for Acquisitions of Interests in Joint Operations* PFRS 12 Disclosure of Interests in Other Entities p Amendments to PFRS 10, PFRS 12 and PAS 27: Investment Entities PFRS 13 Fair Value Measurement p Amendment to PFRS 13: Short-term Receivables and Payables Amendment to PFRS 13: Portfolio Exception p p p Not Early Adopted Not Early Adopted Not Early Adopted Not Early Adopted Not Early Adopted Not Early Adopted Not Applicable p p

321 PHILIPPINE FINANCIAL REPORTING STANDARDS AND INTERPRETATIONS Effective as at December 31, Adopted Not Adopted PFRS 14 Regulatory Deferral Accounts* Not Early Adopted Philippine Accounting Standards PAS 1 (Revised) Presentation of Financial Statements Amendment to PAS 1: Capital Disclosures Amendments to PAS 32 and PAS 1: Puttable Financial Instruments and Obligations Arising on Liquidation Amendments to PAS 1: Presentation of Items of Other Comprehensive Income Amendments to PAS 1: Clarification of the Requirements for Comparative Information Amendments to PAS 1: Disclosure Initiative* PAS 2 Inventories p PAS 7 Statement of Cash Flows p PAS 8 Accounting Policies, Changes in Accounting Estimates and Errors PAS 10 Events after the Reporting Period p PAS 11 Construction Contracts p PAS 12 Income Taxes p Amendment to PAS 12 - Deferred Tax: Recovery of Underlying Assets PAS 16 Property, Plant and Equipment p Amendments to PAS 16: Classification of servicing equipment Amendment to PAS 16 and PAS 38: Revaluation Method Proportionate Restatement of Accumulated Depreciation/Amortization Amendments to PAS 16 and PAS 38: Clarification of Acceptable Methods of Depreciation and Amortization* Amendments to PAS 16 and PAS 41: Bearer Plants* PAS 17 Leases p PAS 18 Revenue p PAS 19 Employee Benefits p PAS 19 (Amended) PAS 20 Amendments to PAS 19: Actuarial Gains and Losses, Group Plans and Disclosures Employee Benefits Amendments to PAS 19: Defined Benefit Plans: Employee Contribution Amendments to PAS 19: Regional Market Issue Regarding Discount Rate* Accounting for Government Grants and Disclosure of Government Assistance PAS 21 The Effects of Changes in Foreign Exchange Rates p Amendment: Net Investment in a Foreign Operation p p p p p p p p p Not Early Adopted Not Early Adopted Not Early Adopted Not Early Adopted Not Applicable p p p p p

322 PHILIPPINE FINANCIAL REPORTING STANDARDS AND INTERPRETATIONS Effective as at December 31, 2015 PAS 23 (Revised) PAS 24 (Revised) Borrowing Costs Related Party Disclosures Amendments to PAS 24: Key Management Personnel Adopted p p Not Adopted Not Applicable PAS 26 Accounting and Reporting by Retirement Benefit Plans p PAS 27 Consolidated and Separate Financial Statements p PAS 27 (Amended) Separate Financial Statements Amendments to PFRS 10, PFRS 12 and PAS 27: Investment Entities Amendments to PAS 27: Equity Method in Separate Financial Statements* PAS 28 Investments in Associates p PAS 28 (Amended) Investments in Associates and Joint Ventures Amendments to PFRS 10 and PAS 28: Sale or Contribution of Assets between an Investor and its Associate or Joint Venture* Amendments to PFRS 10 and PAS 28: Applying the Consolidation Exception* p p p Not Early Adopted Not Early Adopted Not Early Adopted PAS 29 Financial Reporting in Hyperinflationary Economies p PAS 31 Interests in Joint Ventures p PAS 32 Financial Instruments: Presentation p Amendments to PAS 32 and PAS 1: Puttable Financial Instruments and Obligations Arising on Liquidation Amendment to PAS 32: Classification of Rights Issues Amendments to PAS 32: Offsetting Financial Assets and Financial Liabilities Amendments to PAS 32: Tax effect of distribution to holders of equity instruments PAS 33 Earnings per Share p PAS 34 Interim Financial Reporting p Amendments to PAS 34: Interim financial reporting and segment information for total assets and liabilities Amendments to PAS 34: Disclosure of Information Elsewhere in the Interim Financial Report * PAS 36 Impairment of Assets p PAS 37 Amendments to PAS 36: Recoverable Amount Disclosures for Non-Financial Assets Provisions, Contingent Liabilities and Contingent Assets PAS 38 Intangible Assets p Amendments to PAS 16 and PAS 38: Revaluation Method Proportionate Restatement of Accumulated Amortization p p p p p p p Not Early Adopted p p

323 PHILIPPINE FINANCIAL REPORTING STANDARDS AND INTERPRETATIONS Effective as at December 31, 2015 Amendments to PAS 16 and PAS 38: Clarification of Acceptable Methods of Depreciation and Amortization* Adopted PAS 39 Financial Instruments: Recognition and Measurement p Amendments to PAS 39: Transition and Initial Recognition of Financial Assets and Financial Liabilities Amendments to PAS 39: Cash Flow Hedge Accounting of Forecast Intragroup Transactions Amendments to PAS 39: The Fair Value Option Amendments to PAS 39 and PFRS 4: Financial Guarantee Contracts Amendments to PAS 39 and PFRS 7: Reclassification of Financial Assets Amendments to PAS 39 and PFRS 7: Reclassification of Financial Assets Effective Date and Transition Amendments to Philippine Interpretation IFRIC 9 and PAS 39: Embedded Derivatives Amendment to PAS 39: Eligible Hedged Items Amendments to PAS 39: Novation of Derivatives and Continuation of Hedge Accounting PAS 40 Investment Property p Amendments to PAS 40: Clarifying the Interrelationship between PFRS 3 and PAS 40 when Classifying Property as Investment Property or Owner- Occupied Property p p p p p p p p p p Not Adopted Not Early Adopted Not Applicable PAS 41 Agriculture p Philippine Interpretations IFRIC 1 IFRIC 2 Amendments to PAS 16 and PAS 41: Bearer Plants* Changes in Existing Decommissioning, Restoration and Similar Liabilities Members Share in Co-operative Entities and Similar Instruments IFRIC 4 Determining Whether an Arrangement Contains a Lease p IFRIC 5 IFRIC 6 Rights to Interests arising from Decommissioning, Restoration and Environmental Rehabilitation Funds Liabilities arising from Participating in a Specific Market - Waste Electrical and Electronic Equipment IFRIC 7 Applying the Restatement Approach under PAS 29 Financial Reporting in Hyperinflationary Economies Not Early Adopted IFRIC 8 Scope of PFRS 2 p IFRIC 9 Reassessment of Embedded Derivatives p Amendments to Philippine Interpretation IFRIC 9 and PAS 39: Embedded Derivatives IFRIC 10 Interim Financial Reporting and Impairment p IFRIC 11 PFRS 2- Group and Treasury Share Transactions p p p p p p p

324 PHILIPPINE FINANCIAL REPORTING STANDARDS AND INTERPRETATIONS Effective as at December 31, 2015 Adopted Not Adopted Not Applicable IFRIC 12 Service Concession Arrangements p IFRIC 13 Customer Loyalty Programmes p IFRIC 14 The Limit on a Defined Benefit Asset, Minimum Funding Requirements and their Interaction Amendments to Philippine Interpretations IFRIC- 14, Prepayments of a Minimum Funding Requirement IFRIC 15 Agreements for the Construction of Real Estate* Not Early Adopted IFRIC 16 Hedges of a Net Investment in a Foreign Operation p IFRIC 17 Distributions of Non-cash Assets to Owners p IFRIC 18 Transfers of Assets from Customers p IFRIC 19 IFRIC 20 Extinguishing Financial Liabilities with Equity Instruments Stripping Costs in the Production Phase of a Surface Mine IFRIC 21 Levies p SIC-7 Introduction of the Euro p SIC-10 Government Assistance - No Specific Relation to Operating Activities SIC-12 Consolidation - Special Purpose Entities p SIC-13 Amendment to SIC - 12: Scope of SIC 12 Jointly Controlled Entities - Non-Monetary Contributions by Venturers SIC-15 Operating Leases Incentives p SIC-25 SIC-27 Income Taxes - Changes in the Tax Status of an Entity or its Shareholders Evaluating the Substance of Transactions Involving the Legal Form of a Lease SIC-29 Service Concession Arrangements: Disclosures p SIC-31 Revenue - Barter Transactions Involving Advertising Services SIC-32 Intangible Assets - Web Site Costs p p p p p p p p p p p * Standards and interpretations which will become effective subsequent to December 31, 2015 Note: Standards and interpretations tagged as Not Applicable are those standards and interpretations which were adopted but the entity has no significant covered transaction as at and for the year ended December 31,

325 SM Investments Corporation and Subsidiaries Interim Condensed Consolidated Financial Statements As at June 30, 2016 and for the Six-Month Periods Ended June 30, 2016 and 2015 (with Comparative Audited Consolidated Balance Sheet as at December 31, 2015) and Report on Review of Interim Condensed Consolidated Financial Statements

326 SyCip Gorres Velayo & Co Ayala Avenue 1226 Makati City Philippines Tel: (632) Fax: (632) ey.com/ph BOA/PRC Reg. No. 0001, December 14, 2015, valid until December 31, 2018 SEC Accreditation No FR-4 (Group A), November 10, 2015, valid until November 9, 2018 REPORT ON REVIEW OF INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS The Stockholders and the Board of Directors SM Investments Corporation Introduction We have reviewed the accompanying interim condensed consolidated financial statements of SM Investments Corporation and its subsidiaries, which comprise the interim consolidated balance sheet as at June 30, 2016 and the related interim consolidated statements of income, comprehensive income, changes in equity and cash flows for six-month periods ended June 30, 2016 and 2015, and other explanatory information. Management is responsible for the preparation and presentation of these interim condensed consolidated financial statements in accordance with Philippine Accounting Standard (PAS) 34, Interim Financial Reporting. Our responsibility is to express a conclusion on these interim condensed consolidated financial statements based on our review. Scope of Review We conducted our review in accordance with Philippine Standard on Review Engagements 2410, Review of Interim Financial Information Performed by the Independent Auditor of the Entity. A review of interim financial information consists of making inquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. A review is substantially less in scope than an audit conducted in accordance with Philippine Standards on Auditing. Consequently, it does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion. Conclusion Based on our review, nothing has come to our attention that causes us to believe that the accompanying interim condensed consolidated financial statements are not prepared, in all material respects, in accordance with PAS 34, Interim Financial Reporting. SYCIP GORRES VELAYO & CO. Julie Christine O. Mateo Partner CPA Certificate No SEC Accreditation No AR-2 (Group A), May 1, 2015, valid until April 30, 2018 Tax Identification No BIR Accreditation No , February 27, 2015, valid until February 26, 2018 PTR No , January 4, 2016, Makati City September 21, 2016 A member firm of Ernst & Young Global Limited *SGVFS019980*