APRIL LYNN TAN, CFA VP & HEAD OF RESEARCH

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Lewis Robinson
6 years ago
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1 APRIL LYNN TAN, CFA VP & HEAD OF RESEARCH

2 Stay the Course! PSEi on track to hit 10,000 by 2020 at the latest PSEi 10,000 10, ,

3 2015: Liquidity will be the Main Driver of the Stock Market

4 2015: Liquidity will be the Main Driver of the Stock Market Deflation rather than inflation is now a bigger concern... Inflation Crude oil Jan-13 Mar-13 May-13 Jul-13 Sep-13 Nov-13 Jan-14 Mar-14 May-14 Jul-14 Sep-14 Nov-14 Jan-15 Source: Bloomberg US Europe Japan China Source: Bloomberg... Reducing pressure for central banks to raise interest rates

5 2015: Liquidity will be the Main Driver of the Stock Market Philippines 10-Year T-Bond Yield Domestic factors ensuring low interest rates Strong government finances Strong external account position Ratings upgrade Banks awash with cash /4/2010 1/4/2011 1/4/2012 1/4/2013 1/4/2014 Source: BSP, Bloomberg

6 Stocks Remain the Most Attractive Peso Asset Class Available Comparative Yield of Different Asset Class Stocks* Time Deposit SDA 10-Yr-T-Bond 5.6% 1.4% 2.5% 3.6% *The PSEi s earnings yield based on 7,400 Source: BSP, Bloomberg, COL Estimates Due to low interest rates, stocks remain the most attractive peso asset class even though valuations seem expensive compared to historical averages

7 Stocks Remain the Most Attractive Peso Asset Class Available Earnings Yield vs 10 Year Bond Rate Spread Earnings Yield 10 Year Spread Average Source: Bloomberg, COL Estimates Spread between the PSEi s earnings yield and the 10-yr bond rate remains positive despite the PSEi s above average P/E

8 Growth more Important than Valuation Presently Comparison of Stock Market Returns, GDP Growth and P/E Ratio COUNTRY 2014 Return (%) 2014 GDP Growth 2014 PE 2015 GDP Growth 2015 PE Russia Brazil UK Europe Japan US Thailand Indonesia Philippines India China Source: Bloomberg

9 Consumer Spending has Always Been Resilient... Consumer Spending Growth under Different Administrations Cory Aquino Ave:4.2% Ramos Ave:3.6% Estrada Ave:4.5% Arroyo Ave:4.3% PNoy Ave:5.6%

10 ... And is Expected to Stay Resilient

11 To Benefit from Falling Oil Price Impact of US$10 Decline in Oil Price on the Economy

12 Government Spending Usually Picks up a Year Before a Presidential Term Ends Comparison of Government Spending Growth President Spending Growth Term Average Last Year of Term Cory Aquino 4.0% -1.9% FVR 3.7% 4.0% Estrada/GMA -1.1% 3.6% GMA 5.5% 10.9% PNoy 6.7%?

13 Reforms Expected to Endure Beyond Current Administration

14 End 2015 PSEi Target Raised from 7,800 to 8, US vs PH 10 year yield Fundamental factors coupled with falling US bond rates warrant a reduction in risk free rate assumption from 5.0% to 4.5% US 10 Year PH 10 Year Spread

15 (FV: PHP17.80, BUY BELOW: PHP15.48) Manufactures raw materials used by consumer companies Focus on specialized products makes it less vulnerable to competition Consolidation of Chemrez to be value accretive (FV: PHP53.20, BUY BELOW: PHP46.26) Market leader in air-conditioning and refrigeration To benefit from growing demand due to large untapped market and Filipinos increasing affluence, improving margins, and contribution from new businesses Attractive valuations

16 (FV: PHP1,340, BUY BELOW: PHP1,165) Holding company for Ty family s stake in Metrobank, Toyota Motors Philippines (TMP), Federal Land and Global Business Power TMP - A major beneficiary of growing motorization of the Philippines and the weak yen TMP now accounts for 30% of net income and 44% of NAV

17 (FV: PHP9.90, BUY BELOW: PHP8.61) Pure play on renewable energy More than 80% of capacity secured with LT take-or-pay contracts Completed rehabilitation of Bacman to fuel a 27% increase in revenues and a 32% growth in net income in 2015 (FV: PHP38.40, BUY BELOW: PHP33.39) A cheaper way to own EDC Power generation capacity of Sta Rita and San Lorenzo gas plants fully secured Avion and San Gabriel plant projects to boost attributable power generation capacity by 23.5% in 2016 Share placement no longer a concern after FGEN raised Php7.5 Bil from share sale

18 (FV: PHP46.10, BUY BELOW: PHP40.09) Largest power distributor in VisMin Also has a growing power generation portfolio which includes several renewable energy plants 89% of power generation capacity contracted Profits expected to rebound by 13% in 2015 as new plant starts operations Attractive dividend yield of 2.5%

19 (FV: PHP156.00, BUY BELOW: PHP135.65) Market leader for domestic travel with a 64% market share A major beneficiary of industry consolidation and falling oil prices Removal of the fuel surcharge and Php52 Mil fine for the holiday incident to have minimal impact on profits Core profits to more than double to ~Php6 Bil in 2015 (FV: PHP112.00, BUY BELOW: PHP97.39) Second largest bank (assets and deposits) Trading at only 1.5X P/BV vs. 2.0X P/BV for BDO and 2.4X P/BV for BPI Steep discount unwarranted even with concerns of capital raising, larger than normal exposure to bonds, weaker ability to generate non-interest income Loan portfolio +21%, ROE 12.8% (as of end September)

20 (FV: PHP22.20, BUY BELOW: PHP19.38) Despite being one of the biggest residential property developers, it is still predominantly a Philippine mall operator (70% of operating income, 64% of NAV) making it a good proxy for consumer spending Possibility of a share placement no longer a concern as the company already raised Php18.0 Bil through the sale of 1.06 Bil treasury shares last November (FV: PHP855.00, BUY BELOW: PHP743.48) Among the oldest and most diversified holding companies in the country with a reputation of excellence given its investments in market leaders BPI, ALI, GLO, and MWC Diversification into power and infrastructure to help drive LT growth and increase defensive sources of income and cash flow

21 Summary of Stock Picks Sector Top Picks FV Buy Below Price Consumer DNL CIC GTCAP 1, , Power EDC FGEN AP Airlines CEB Banks MBT Properties SMPH Conglomerates AC

23 We believe that the market will continue to move higher in 2015, bringing the PSEi well on its way to meet our goal of 10,000 by 2020 at the latest. The most important reason why the stock market will continue to go up is ample liquidity, both globally and domestically. The resulting drop in interest rates makes stocks more attractive compared to other liquid investments despite the PSEi s relatively expensive valuation from a historical perspective. Other reasons why we expect the market to continue going up is the Philippines above average economic growth outlook for this year and beyond, the favorable impact of falling oil prices on consumer spending, and expectations that reforms to address shortcomings in the country will endure beyond the current administration.

Given our view that liquidity will continue to drive the stock market higher, we increased our end 2015 target for the PSEi to 8,300 from 7,800 after we factored in a lower risk free rate assumption

24 Given our view that liquidity will continue to drive the stock market higher, we increased our end 2015 target for the PSEi to 8,300 from 7,800 after we factored in a lower risk free rate assumption of 4.5% vs. 5.0% previously. Our top picks for 2015 include DNL, CIC, GTCAP (consumer plays/play on weak yen), AP, EDC, FGEN (bottom up picks/power plays), MBT (value play), SMPH (consumer play proxy), CEB (oil play) and AC (bottom up pick/ power and infra play). Risks for 2015 include the uneven appreciation in share prices, volatility, and share placements.

Lock in gains on MER; switch from RRHI to DNL

Lock in gains on MER; switch from RRHI to DNL Since we last wrote our COLing the Shots report, the market rallied to as high as 8,605.15, but eventually corrected to its current level of 8,343.23. We think