CHP: Play on infrastructure growth

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Stocks in Focus: CHP: Play on infrastructure growth Initiating coverage with a BUY rating with FV estimate of Php9.30/sh. We are initiating coverage on Cemex Holdings Philippines, Inc.

1 Stocks in Focus: CHP: Play on infrastructure growth Initiating coverage with a BUY rating with FV estimate of Php9.30/sh. We are initiating coverage on Cemex Holdings Philippines, Inc. (CHP) with a BUY recommendation and FV estimate of Php9.3/sh based on the DCF method. Although the company reported a weaker than expected 4Q16 earnings, we believe that its medium to long term prospects remain bright. The favorable economic outlook of the country coupled with the government s aggressive plans in developing public infrastructure bodes well for CHP. Moreover, its capacity expansion is timely to support the growing demand for cement, and its recent refinancing is expected to improve earnings and lessen FX exposure. We also believe that the market has already priced in the disappointing 4Q16 earnings and the expected slowdown in 1H17 as the stock already declined by 32% since the FY16 results came out. (as of Apr 12, 2017) INDICES Close Points % YTD% PSEi 7, All Shares 4, Financials 1, Holding Firms 7, Industrial 11, Mining & Oil 12, Property 3, Services 1, Dow Jones 20, S&P 500 2, Nasdaq 5, Top Stories: MCP: Raising FV estimate on better than expected FY16 performance SSI: Operating profits improve in 4Q; FY16 profits down amidst write-offs Other News: ABS: ABS to complete two sound stages in 4Q17 FLI: FLI unit to issue up to Php5.0Bil in bonds INDEX GAINERS Ticker Company Price % AGI Alliance Global Inc SMPH SM Prime Hldgs Inc MEG Megaworld Corporation PCOR Petron Corporation SECB Security Bank Corp Market Summary: The PSEi advanced on Wednesday, gaining points or 0.37% to close at 7, Index gainers led decliners 19 to 10, while 1 issue remained unchanged. Meanwhile, sectoral performance was mixed with Industrial (+0.95%) leading the three gainers and Mining & Oil (-0.55%) leading the three decliners. Significant index gainers were AGI (+3.32%), SMPH (+2.37%), MEG (+2.27%), PCOR (+2.21%), and SECB (+1.88%). On the other hand, significant index decliners were FGEN (-2.33%), MBT (-2.31%), and ALI (-1.13%). Value turnover decreased to Php6.2Bil from Php7.1Bil the previous session. Foreigners continued to be net buyers, accumulating Php109Mil worth of shares. INDEX LOSERS Ticker Company Price % FGEN First Gen Corporation MBT Metrobank ALI Ayala Land Inc SCC Semirara Mining GLO Globe Telecom Inc 2, TOP 5 MOST ACTIVE STOCKS Ticker Company Turnover SM SM Investments Corp 293,025,200 BDO BDO Unibank Inc 276,808,000 ALI Ayala Land Inc 254,073,800 TEL PLDT Inc 198,886,700 GLO Globe Telecom Inc 196,926,700 of the COL Financial website as these may be subject to tampering or unauthorized alterations.

Although the company reported a weaker than expected 4Q16 earnings, we believe that its medium to long term prospects remain bright.

2 Stocks in Focus: Frances Rolfa Nicolas Research Analyst Stock Data Ticker Rating Target Price CHP BUY Php9.30 CHP: Play on infrastructure growth We are initiating coverage on Cemex Holdings Philippines, Inc. (CHP) with a BUY recommendation and FV estimate of Php9.3/sh based on the DCF method. Although the company reported a weaker than expected 4Q16 earnings, we believe that its medium to long term prospects remain bright. The favorable economic outlook of the country coupled with the government s aggressive plans in developing public infrastructure bodes well for CHP. Beneficiary of the growing construction industry. CHP is poised to benefit from the Philippines growing construction industry due to the country s strong GDP growth. Also, we expect construction to continue to expand following the government s commitment to build more infrastructure projects. The government dubbed the next six years as the golden age of infrastructure with the implementation of projects ranging from road networks, airport and seaport modernization, and transit systems. Capacity expansion to meet rising demand. CHP is well positioned to take advantage of the growing cement demand in the country. According to the Cement Industry Report, cement demand is estimated to grow at a CAGR of 8.4% from or from 24.4Mil ton to 33.9Mil ton. CHP is expanding its production capacity in its Solid plant in Rizal by 1.5Mil ton, bringing the company s total capacity to 7.2Mil ton by 4Q19. This is expected to increase the company s market share, specifically in Luzon, which accounts for 65% of total country demand. Short term weak earnings, medium to long term prospects remain favorable. CHP registered a Php7.2Mil pro forma loss in 4Q16 primarily due to low sales volume and sales price during the quarter. Sales volume declined by 8% while sales price declined by 5% because of lower cement demand and intensified market competition among local players and import traders. According to CHP, they expect the slow pace of public construction to continue until 1H17. Nevertheless, we believe public construction will pick up during the second half and the succeeding years. Despite the slow volume growth in 2017, we forecast net income to double compared to last year mainly due to the elimination of FX and lower interest expense. We then forecast net income to grow at a CAGR of 10.0% from Relatively cheap valuation. Our FV estimate on CHP is Php9.3/sh based on the DCF method with WACC of 8.7% and a terminal growth rate of 3.0%. This implies a 21% upside to the current price of Php7.63/sh. Moreover, CHP is attractively valued relative to its peers. It currently trades at a 2017E P/E of 14.4X, which is below the median 2017E P/E of 16.3X of its regional peers. Its 2017 EV/EBITDA of 9.2X is also lower compared to the median 2017 EV/ EBITDA of 10.0X of its regional peers. 2

3 Top Stories: Richard Lañeda, CFA Senior Research Manager Stock Data Ticker Rating Target Price MCP BUY Php7.95 MCP: Raising FV estimate on better than expected FY16 performance Almost broke even in 4Q16. MCP reported a net income of Php17 Mil in 4Q16. However, excluding foreign exchange gains, they still reported a core net loss of Php102 Mil but this is significantly lower than the Php3 Bil net loss in 4Q15 and the Php264 Mil loss in 3Q15. Improvement was brought about by higher casino revenues. For the full year 2016, MPI s core net loss narrowed 80.3% to Php1.8 Bil, outperforming COL and consensus estimates. Higher than expected gaming revenues and lower than expected license fees, employee benefits expense, and payment to Philippines parties were the reasons for MCP s better than expected performance. Raising estimate in light of better than expected performance. We are raising our gross gaming revenue estimate for MCP in light of the better than expected performance in Our channel check also show that gross gaming revenues during the first two months grew more than 40% y/y, indicating that the strong revenues we saw in 2H16 was sustained early this year. We raise our GGR estimate for 2017 and 2018 by 5% and 1.5% respectively and we also lower our promotional allowance estimate by 30.9% and 22.7% for 2017 and 2018 respectively. Net impact on net gaming revenues estimate is an increase of 11.2% for 2017 and 7.6% increase in EBITDA forecast for 2017and 2018 was raised by 31.5% and 21.3% respectively, while our net loss forecast significantly narrowed to Php1.12 Bil for 2017 and Php869 Mil for FV estimate raised to Php7.95. Following the increase in our revenue, EBITDA, and income estimates, we also raise our FV estimate to Php7.95. Our fair value estimate is the average of our DCF-based fair value estimate of Php8.01 and target multiple-based estimate of Php7.89. We use a WACC of 11.11% and a terminal growth rate of 2% for our DCF-based fair value estimate. For our relative valuation, we target a 10X 2017 EV/EBITDA for MCP. We maintain our BUY rating on MCP as we see the company as one of the main beneficiaries of the growing gaming industry. At the current price of Php6.70, the upside potential to our fair value estimate is still significant at 18.7% Richard Lañeda, CFA Senior Research Manager Stock Data Ticker Rating Target Price AGI BUY Php

4 Justin Richmond Cheng Research Analyst Stock Data Ticker Rating Target Price SSI N/A N/A SSI: Operating profits improve in 4Q; FY16 profits down amidst write-offs 4Q16 net income down on one-time expenses. SSI booked a net loss of Php74Mil in the fourth quarter amidst several one-time expenses. This brought full year 2016 profits down 71.4% y/y to Php232Mil, below consensus estimates representing 42% of full year forecasts. The one-time expenses incurred by the company were mostly from its rationalization of underperforming stores. In particular, write-offs booked for the year amounted to Php143Mil for store closures, Php112Mil related to the divestment of Wellworth operating assets last March 2016, Php61Mil for Family Mart store and inventory write-offs, and Php77Mil from the expiry of operating loss carryovers. Excluding the write-offs made in 2016, SSI s profits for 4Q16 amounted to Php186Mil, up 66% y/y. This was brought about by lower JV losses net of write-offs at Php113Mil from Php228Mil in 2015 as well as improvements on the operating level. SSI s operating profits expanded by 29% y/y in 4Q mostly as a result of lower rent and personnel costs following its store closures. Operating expenses for the quarter were down 9.2% y/y. Meanwhile, full year operating profits were lower 29.5% y/y but were above consensus expectations representing 107% of their full year forecasts. Exhibit 1: Results Summary in PhpMil 4Q15 4Q16 % Change % Change Source: SSI, Bloomberg % of FY16E Consensus Net Sales 5,637 5, ,421 18, % Gross Profit 3,061 2, ,324 9, % Gross Margin (%) 54.3% 49.9% % 49.6% - - Operating Income ,770 1, % Operating Margin (%) 5.5% 7.0% % 6.8% - - Net Income 109 (74) % Net Margin (%) 1.9% -1.3% - 4.7% 1.3% - - Operating profits up 29.3% y/y in 4Q on lower operating expenses. SSI s operating income was up 29.3% y/y in 4Q16 as its ongoing store rationalization led to lower operating costs. Operating expenses for the fourth quarter were down 9.2% y/y as SSI incurred less rent (9.9% less) and personnel costs (38.1% less). These two amounted to a total of Php1.1Bil in 4Q16 and accounted for 45% of total operating expenses during the quarter. Since underperforming stores were closed, the foregone revenues were more than offset by lower expenses. Although full year operating profits were still down 29.5% y/y, this was already an improvement compared to 9M16 figures which were 42.1% lower y/y. Operating profits outperformed consensus forecasts accounting for 107% of full year estimates. Steady growth in revenues amidst closures. SSI booked net sales of Php5.8Bil in 4Q16, higher by 3.0% compared to 4Q15. This brought FY16 figure up 5.9% y/y to Php18.4Bil. Growth in sales was driven by same-store sales growth (1.7% for FY16) as well as new store openings (~5,500 sqm) for the year. This was amidst SSI s store rationalization program where it closed 142 stores in 2016 spanning 13,800 sqm to end the year with a store network of 708 stores from 792 the previous year. Store closures were mostly located in the provinces like Cagayan de Oro, General Santos City, and Bacolod among others. In addition, Desigual, Cache Cache, Fruits and Passion, and some footwear brands were examples of brands that underperformed in several areas and were closed in On a per store basis, most segments continued to grow steadily with SSI s Others segment expanding the fastest at 13.2% in

5 followed by the Luxury & Bridge Segment at 8.2%. Meanwhile, its Casual segment continued to underperform with sales dropping nearly 10% in 4Q alone and 2.9% for the year. This was as a result of GAP stores continually experiencing pressure and cannibalization from SSI s Old Navy brand. Exhibit 2: Revenue Breakdown in PhpMil 4Q15 4Q16 % Change % Change Luxury & Bridge 1,193 1, ,556 3, Casual ,695 2, Fast Fashion 1,923 2, ,232 6, Footwear, Accessories & Luggage ,533 2, Others ,405 2, Total 5,637 5, ,421 18, Source: SSI, Bloomberg FY16 gross margins meet management s guidance. FY16 gross margins of SSI stood at 49.6% for 2016 within management s guidance of a normalized level between 49-50%. Note that historically, SSI s gross margins averaged around 55-56%; however, heavy discounting and promotional activities had caused the 390 bps contraction in Nevertheless, management cited that competition has become more rational as the major players have lessened on their heavy discounting. With this, management expects to be less promotional in 2017 compared to the previous year and this should allow it to sustain its margins for the year. Inventory levels improve in SSI s inventory levels stood at 378 days in end 2016, 20 days lower than the inventory days during end 2015 as well as the 421 days recorded as of 9M16. This was amidst a decline in inventory value of Php633Mil. This brings management much closer to its target of lowering days inventory to 300 to 360 days by end Management noted that no write-offs related to inventory were made as the one-time expenses on store closures were for leasehold improvements that were not fully depreciated. Furthermore, any remaining inventory for stores closed were channeled through its existing branches in other malls. Store rationalization to continue in Management intends to continue closing the remaining unprofitable stores in 2017 and estimates to close an additional 12,000 sqm of stores. Store closures would persist this year as management decided to ride out the leases of certain stores rather than immediately closing them in 2016 and incurring several penalties. Meanwhile, SSI guided that they would open about 2,000sqm of stores for As mentioned in our previous report, based on discussions with management SSI s topline would likely experience a decline, but SSI is expected to continue seeing improvements in the operating level from lower expenses. Furthermore, bottom line figures should also experience some uplift as write-offs for 2017 are expected to be much less than the previous year. Note that similar to last year, management plans on booking majority of the write-offs towards the end of Consensus currently has a HOLD rating on SSI with a FV estimate of Php2.53/sh. 5

6 Other News: Research Analysts Frances Rolfa Nicolas Andy Dela Cruz Justin Richmond Cheng Kyle Velasco John Martin Luciano ABS: ABS to complete two sound stages in 4Q17 ABS Chief Financial Officer Aldrin Cerrado said that the two sound stages located in Bulacan would be completed by the last quarter of the year. The sound stages will be used for the production of shows and are expected to generate 10-15% savings in production cost. The company spent Php300Mil to Php350Mil for each of the sound stages. (source: PhilStar) FLI: FLI unit to issue up to Php5.0Bil in bonds Cyberzone Properties Inc., a subsidiary of Filinvest Land Inc., is planning to raise up to Php5.0Bil i from the sale of five to 10 year bonds. The offering will have an oversubscription option of Php1.0Bil. Proceeds will be used to partly fund capital expenditure requirements for current and new buildings. Moreover, the bond was assigned a PRS Aaa credit rating with a stable outlook. (source: PhilStar) 6

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8 Calendar of Events MARCH S M T W TH F S Daily Notes I Philipine Equity Research Key Events Holiday MAR 1 ALI Ex-date Php0.24 Cash Dividend MAR 2 FEU: EX-date Php10.00 Cash Dividend MAR 9 BDO: Ex-date Php0.30 Cash Dividend BEL: Ex-date Php0.095 Cash Dividend ALCO: Ex-date Php0.012 Cash Dividend PX: Ex-date Php0.04 Cash Dividend MAR 22 MER: Ex-date Php9.30 Cash Dividend MAR 27 MPI: Ex-date Php0.068 Cash Dividend MAR 3 ABS: Ex-date Php1.04 Cash Dividend MAR 10 MWC: Ex-date Php Cash Dividend MAR 30 COL: Annual Shareholders Meeting MAR 6 ANS: Ex-date Php0.20 Cash Dividend MBT: Ex-date Php1.00 Cash Dividend TUGS: Annual Shareholders Meeting MAR 7 BLFI: Ex-date Php0.20 Cash Dividend PLC: Ex-date Php0.281 Cash Dividend MAR 8 PRC: Ex-date Php0.08 Cash Dividend MAR 14 PHEN: Ex-date Php0.04 Cash Dividend MAR 15 EDC: Ex-date Php0.14 Cash Dividend PNX: Annual Shareholders Meeting MAR 16 AP: Ex-date Php1.36 Cash Dividend AEV: Ex-date Php1.33 Cash Dividend TEL: Ex-date Php28.00 Cash Dividend DTEL: Ex-date Php28.00 Cash Dividend 8

9 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 John Martin Luciano Research Analyst john.luciano@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: 9

BUY. Upgrading forecasts on improved core income outlook. China Banking Corporation TUE 09 JAN 2018

BUY. Upgrading forecasts on improved core income outlook. China Banking Corporation TUE 09 JAN 2018 China Banking Corporation Upgrading forecasts on improved core income outlook Steady growth in core income to continue. CHIB is expecting steady growth in its core income to continue going forward. Net