Winners and losers of Duterte s foreign policy

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1 Winners and losers of Duterte s foreign policy During his visit to China last week, President Duterte showed his intent on strengthening the Philippines ties with China. At the same time, the President said he wanted to separate military and economic ties with the U.S. From an economic perspective, it makes good sense for the Philippines to strengthen its ties with China given the rapidly growing the size of China s ODI (CAGR of 25.1% from only US$20 Bil in 2006 to around US$120 Bil in 2014). China also has one of the biggest and fastest growing tourism markets. In 2015, outbound tourists from China reached almost 120Mil, up by a CAGR of 14.2% from only 70.2 Mil in Moreover, the number of tourists coming from China to the Philippines increased by a CAGR of 19.2% during the past four years. In fact, China is now the Philippines third largest visitor market, accounting 12.0% of total tourist arrivals during the first eight months of The value of Philippine exports to China have also grown at a CAGR of 4.2% during the past 10 years making it our third largest export market with a 10.9% share in On the other hand, the U.S. is the Philippines second largest source of tourists and our second biggest export market. However, the growth in the number of tourists and value of exports has been quite slow relative to China. The faster growth of our exposure to China vs. the U.S. is not surprising given the Philippines closer proximity to China which makes travel time much shorter and costs much cheaper. Growth potential is also huge given the Philippines small share of China s outbound tourist market relative to other ASEAN members. Although China is not a significant investor in the Philippines, there is also significant room to growth given the small size of China s ODI to the country relative to other ASEAN members. The more serious consequence of separating economic ties with the U.S. is a possible slowdown in the growth of the BPO sector which generated around US$22 Bil in revenues and provided 1.1 Mil jobs in Among the listed companies, gaming companies BLOOM, MCP and RWM stand to benefit the most from stronger ties with China as the growing number of tourists from China should boost gaming revenues. CEB should also benefit from the growing number of Chinese tourists as this would lead to higher passenger volumes. Retail companies SM and SSI which focus on discretionary products should also benefit given growing tourism spending. Property companies with significant exposure to office leasing (ALI, RLC, MEG and FLI) stand to hurt the most from a possible slowdown in the growth of the BPO sector. However, investors should not be overly pessimistic given that these property companies also have a large exposure to mall leasing and hotel businesses. In fact, ALI, and RLC have larger exposure to the mall leasing and hotel businesses compared to the office leasing business. Moreover, based on our discussion with the property companies, none of them are seeing any back outs or slowdown in demand for office properties from BPOs despite the president s rhetoric against the U.S. April Lynn Tan, CFA VP & Head of Research april.tan@colfinancial.com of the COL Financial website as these may be subject to tampering or unauthorized alterations.

2 What to expect from stronger ties with China, weaker ties with the U.S. During his visit to China last week, President Duterte showed his intent on strengthening the Philippines ties with China. At the same time, the President said he wanted to separate military and economic ties with the U.S. From an economic perspective, it makes good sense for us to strengthen our ties with China. During the past few years, China has been rapidly growing the size of its overseas direct investments (ODI). Based on Ministry of Commerce of the People s Republic of China (MOFCOM) data and Banco Bilbao Vizcaya Argentina (BBVA) estimates, China s ODI increased by a CAGR of 25.1% from only US$20 Bil in 2006 to around US$120 Bil in China also has one of the biggest and fastest growing tourism markets. In 2015, outbound tourists from China reached almost 120Mil, up by a CAGR of 14.2% from only 70.2 Mil in 2011, according to data from the China National Tourism Administration and China Tourism Academy. Admittedly, the U.S. is the Philippines biggest sources of foreign direct investments (12.6% share in 2015) which reached US$726.7 Mil. The U.S. is also the Philippines second largest source of tourists (14.5% share in 2015) and our second biggest export market (15.3% share in 2015). However, notwithstanding the Philippines close relations with the U.S., the growth in the number of tourists and value of exports has been quite slow. During the past four years, the number of tourists from the U.S. coming to the Philippines increased by a CAGR of 5.7%. Meanwhile, the value of Philippine exports to the U.S. has increased by a CAGR of only 2.0% during the past 10 years. Although our relations with China are not that strong, the number of tourists coming from China, and the value of Philippine exports to China, have been growing at a much faster pace. During the past four years, the number of Philippine tourists coming from China increased by a CAGR of 19.2%. In fact, during the first eight months of 2016, Chinese tourist arrivals jumped by 50.3% to 484,567. As a result, China is now the Philippines third largest visitor market, accounting 12.0% of total tourist arrivals during the period. Meanwhile, the value of Philippine exports to China has increased by a CAGR of 4.2% during the past 10 years, making it our third largest export market last year with a 10.9% share. In some respects, the faster growth in the number of tourists and value of exports coming from China is not surprising given the Philippines proximity to China vs. the U.S. This makes travel time much shorter and costs much cheaper. Aside from our close proximity to China, growth potential is huge given the Philippines small share of China s outbound tourist market relative to other ASEAN members. Note that aside from Brunei and Myanmar, the Philippines had the smallest share of Chinese outbound tourists among ASEAN member countries in

3 Exhibit 1: 2015 Chinese Tourist Arrivals in ASEAN Countries (in Mil) Source: Various tourism boards, newspaper articles Although China is not a significant investor in the Philippines, there is also significant room to growth given the small size of China s ODI to the country relative to other ASEAN members. Exhibit 2: 2013 Chinese ODI in ASEAN Countries (in US$Bil) Source: MOFCOM, BBVA The more serious consequence of separating economic ties with the U.S. is a possible slowdown in the growth of the BPO sector which generated around US$22 Bil in revenues and provided 1.1 Mil jobs in While there is no official data on the number of U.S. based BPO firms in the country, the number should be significant considering the names of the largest BPO firms in the Philippines and the requirement of most BPO firms for applicants to be proficient in the English language. Note that seven out of the top 10 BPO centers in the Philippines (based on their 2012 revenues) have headquarters based in the U.S. 3

4 Exhibit 3: Top 10 BPOs in the Philippines (based on 2012 revenues) PhpBil Headquarters Accenture 28.1 Ireland Convergys U.S.A. JPMorgan Chase U.S.A. 24/7 Customer Philippines 7.71 U.S.A. Telephilippines 7.24 France Teletech 6.98 U.S.A. Sutherland Global Svcs U.S.A. Stream International 6.74 U.S.A. Sitel Philippines 6.36 U.S.A. Deutsche Knowledge Svcs Germany Source: DOLE However, President Duterte clarified that he is not severing diplomatic ties with the U.S. He merely wants to implement policies that would prioritize the best interest of Filipinos (without taking into consideration how it would affect the U.S.). In fact, Department of Information and Communications Technology Secretary Rodolfo A. Salalima was quoted as saying that all business investments, contracts and commitments, local and international, in the country will be honored by the Philippine government, consistent with the non-impairment and due process clauses in the Philippine Constitution and existing laws of the land. Trade and Industry Secretary Ramon Lopez was also quoted as saying that in terms of economic [ties], we are not stopping trade, investment with America The President specifically mentioned his desire to strengthen further the ties with China and the ASEAN region which we have trading with for centuries. But we definitely won t stop the trade and investment activities with the West, specifically the US. Hopefully, even with the President s rhetoric, U.S. based BPO firms will not be discouraged from expanding their operations or locating in the Philippines. Winners and losers of Duterte s foreign policy Among the listed companies, gaming companies (casinos) stand to benefit the most from stronger ties with China as the growing number of tourists from China should boost gaming revenues. All three listed casino companies would benefit (RWM, MCP and BLOOM), although BLOOM and MCP stand to benefit more as the two are more geared towards servicing the VIP market. During 1H16, revenues from VIP players accounted for 49.5% of BLOOM s gaming revenues and 43.1% of MCP s gaming revenues. It only accounted for 36.6% of RWM s gaming revenues. CEB should also benefit from the growing number of Chinese tourists as this would lead to higher passenger volumes. However, its ability to capitalize on the strong demand would be limited in the short term given that the airport in Manila is already operating at full capacity. Retail companies which focus on discretionary products should also benefit given growing tourism spending. These include SM and SSI. 4

5 On the other hand, property companies focused on office rentals stand to hurt the most from a possible slowdown in growth of the BPO sector given the Philippines separation of ties with the U.S. Property companies with significant exposure to office leasing include ALI, RLC, MEG and FLI. However, investors should not be overly pessimistic given that these property companies also have a large exposure to mall leasing and hotel businesses. The growing number of Chinese tourists should lead to greater foot traffic for their malls and higher occupancy for their hotels. In fact, ALI, and RLC have larger exposure to the mall leasing and hotel businesses compared to the office leasing business. Moreover, based on our discussion with property companies, none of them are seeing any back outs or slowdown in demand for office properties from BPOs despite the president s rhetoric against the U.S. Exhibit 4: Property Companies NAV Breakdown Residential Investment Properties Retail Offices Hotels Future Dev't Landbank Others ALI 13.90% 17.00% 6.10% 1.40% 35.50% 42.60% 1.40% SMPH 3.30% 86.40% 2.40% 0.50% 14.50% 4.40% RLC 9.30% 55.10% 14.00% 3.90% 10.60% 19.40% 1.30% MEG 19% 34% 34% 10% FLI 31.00% 37.00% 63.00% 0.00% VLL 33.10% 33.80% 48.90% Source: Listed companies, COL estimates 5

6 Important Rating Definitions BUY Stocks that have a BUY rating have attractive fundamentals and valuations based on our analysis. We expect the share price to outperform the market in the next six to 12 months. HOLD Stocks that have a HOLD rating have either 1) attractive fundamentals but expensive valuations 2) attractive valuations but near-term earnings outlook might be poor or vulnerable to numerous risks. Given the said factors, the share price of the stock may perform merely in line or underperform in the market in the next six to twelve months. SELL We dislike both the valuations and fundamentals of stocks with a SELL rating. We expect the share price to underperform in the next six to12 months. Important Disclaimer Securities recommended, offered or sold by COL Financial Group, Inc. are subject to investment risks, including the possible loss of the principal amount invested. Although information has been obtained from and is based upon sources we believe to be reliable, we do not guarantee its accuracy and said information may be incomplete or condensed. All opinions and estimates constitute the judgment of COL s Equity Research Department as of the date of the report and are subject to change without prior notice. This report is for informational purposes only and is not intended as an offer or solicitation for the purchase or sale of a security. COL Financial and/or its employees not involved in the preparation of this report may have investments in securities of derivatives of the companies mentioned in this report and may trade them in ways different from those discussed in this report. COL Research Team April Lynn Tan, CFA VP & Head of Research april.tan@colfinancial.com Charles William Ang, CFA George Ching Richard Lañeda, CFA Deputy Head of Research Senior Research Manager Senior Research Manager charles.ang@colfinancial.com george.ching@colfinancial.com richard.laneda@colfinancial.com Frances Rolfa Nicolas Andy Dela Cruz Justin Richmond Cheng Research Analyst Research Analyst Research Analyst rolfa.nicolas@colfinancial.com andy.delacruz@colfinancial.com justin.cheng@colfinancial.com Kyle Velasco Research Analyst kyle.velasco@colfinancial.com Contact COL Financial Group, Inc D East Tower, Philippine Stock Exchange Centre, Exchange Road, Ortigas Center, Pasig City 1605 Philippines Tel No Fax No Website: 6