1

DEFYING GRAVITY:

Philippine Market

Outlook & Strategy

January 2015

RCBC Securities Research

0632-894-9000 ext 9983, 1322 & 1361

Economic overview

The economy could have done better in 2014 if not for weak government spending, which may have been due to the spotlight on the pork barrel scandal and the Disbursement Acceleration Program. The bright spots were, among others, decelerating inflation, sustained growth in OFW remittances, higher-than-expected export growth, and comfortable fiscal & external balance positions.

2013A 2014F Interim 2014A Ytd actual vs target

Real GDP growth (%) 7.2 6.5-7.51 5.8 (9M) Below

Inflation (%) 3.0 3-51 4.1(Jan-Dec) On track

Average Peso-dollar rate 42.446 42.00 – 45.002 44.39(Jan-Dec) On track

Budget Surplus (Deficit), Phpbn

(164.1) (266.2)1 (26.8) (Jan-Nov)

Below target

Budget Deficit/GDP (%) 1.4% 2.3%1 .2% Below target

OFW remittances, % change yoy/ $bn

$22.97bn +5%/$24.11bn1 +5.8%/$22bn (Jan-Nov)

On track

Exports, % change yoy/$bn $56.7bn +6%/$60.1bn1 +10%/$56.9bn (Jan–Nov)

Above

BOP Surplus (Deficit), $bn $5.08bn $3.0bn ($2.9bn) (Jan-Dec)

Below

Gross International Reserves, $bn 1

$83.7bn $92bn2 $79.8bn (December)

Below

1Official government forecasts. 2Government assumption Green font means positive variance, red means negative variance and black means neutral.

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We expect the economy to do better in 2015, with government spending coming from a low base, export growth being sustained and low oil prices boosting consumers’ purchasing power. Crude oil price of $50/barrel is estimated to result in $6bn of savings from oil imports, 2.3% of GDP.

2015F*

Real GDP growth (%) 7-8

Inflation (%) 3-5

BSP overnight borrowing 4.0 – 4.5

BSP overnight lending 6.0 – 6.5

Average Peso-dollar rate 45.00

Budget Surplus (Deficit), Phpbn (283.7)

Budget surplus (Deficit)/GDP (%) 2

(2.0)

*Government targets except for BSP overnight lending and borrowing and the average peso-dollar rate which are RSEC forecasts.

Market outlook: Economy

6.5 6.4 6.2 5.8

6.6 6.4

7.4

6.8 6.3

5.8 6.3 6.5

4.5

5.2 5.3

0

1

2

3

4

5

6

7

8

2014 2015 2016

Emerging and Developing Asia Philippines China India ASEAN 5

Market outlook: Economy

Using IMF forecasts, Philippine GDP growth will start to overtake China’s by 2016 (Although India would be leading GDP growth by then).

Economic risk issues

• GDP growth disappoints:

• Agricultural production may remain weak if farmlands damaged by typhoon Haiyan do not recover quickly enough plus threat from El Nino although expected to be moderate.

• Infrastructure spending & investments fail to catch up.

• Sharp movements in the peso-dollar rate.

• Local interest rates rise more-than-expected.

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Market overview

Philippine market has risen 324% since the low in 2009

Philippines is the 6th best performing market in the past 12 months, up 27% in USD terms. Ytd it is up 3%.

2014 Leaders

Rank Stock % gain

1 Nickel Asia +213.2% Mining

2 D&L Industries +164.4% Consumer

3 Marcventures +127.1% Mining

4 First Gen +95.3% Power & energy

5 Universal Robina +73.3% Consumer

6 JG Summit +71.2% Holding Firm

7 BDO +60.1% Banking

8 Trans-Asia +59.3% Power & energy

9 Energy Development +53.8% Power & energy

10 Semirara Mining +47.9% Mining

Top performers were nickel miners and power producers.

2014 Laggards

Rank Stock % loss

1 Atlas Mining -29.8% Mining

2 Petron -24.1% Power & energy

3 LT Group -21.4% Holding Firm

4 Travellers -20.2% Gaming

5 Unionbank -12.7% Banking

6 Pure Foods -12.6% Consumer

7 Alliance Global -12.6% Holding Firm

8 Pepsi-Cola -8.7% Consumer

9 PNB -7.2% Banking

10 Philex Mining -3.4% Mining

Worst performers came from various sectors. Magnitude of losses much less than size of gains.

Ytd Leaders

Rank Stock % gain

1 Philex +22.9% Mining

2 Megaworld +13.2% Property

3 Metro Pacific +12.6% Holding Firm

4 Manila Water +12.2% Utilities

5 LT Group +9.6% Holding Firm

6 Metrobank +9.5% Banking

7 SM Prime +9.2% Property

8 Filinvest Land +9.2% Property

9 SSI +8.8% Consumer

10 Trans-Asia +8.5% Power & energy

Ytd Laggards

Rank Stock % loss

1 Vista Land -10.6% Property

2 Marcventures -9.4% Mining

3 Travellers -8.7% Gaming

4 Nickel Asia -8.6% Mining

5 Petron -5.8% Power & energy

6 DMCI Holdings -5.1% Holding Firm

7 D&L Industries -4.0% Consumer

8 PNB -3.5% Banking

9 Security Bank -2.6% Banking

10 Pepsi-Cola -2.2% Consumer

Market outlook: Valuation

Performance and Valuation of Selected Markets (Source: Bloomberg, RSEC)

ytd % change

(US$ terms)

2015 PE (x)

Median PE (since 2001)

PSEi +4.19% 19.5 14.8

New York (DJIA) -1.73% 15.7 17.0

Paris (CAC 40) -0.75% 14.2 13.5

Frankfurt (DAX 30) -0.29% 13.2 15.4

London (FTSE 100) -1.58% 14.6 16.9

Tokyo (Nikkei 225) +0.66% 18.6 38.4

Hong Kong (Hang Seng) +3.20% 11.2 14.5

Jakarta (JCI) -0.73% 15.1 16.6

Thailand SET +3.39% 14.5 12.9

*RSEC estimates. Other indexes based on Bloomberg data.

Philippine market is more expensive compared with its historical valuation and with other markets.

High PE of 35x in 2001

Market started to trade above 15x since the 1Q’12.

Market outlook: Valuation But market has been expensive since 1Q 2012 and that hasn’t stopped it from rising further.

• Economic growth is likely to remain generally robust, with a bias to the upside if government spending picks up. Inflation is softening and interest rates are not likely to rise sharply in the next 12 months.

• We see sustained growth in corporate earnings -- 14% this year from an estimated 10% last year.

• The market has been trading above its historical average PE of 15x in the past two years, but domestic liquidity and foreign buying have continued and will continue to prop up the market.

• Stimulus measures in Europe and especially Japan would attract funds into the region and benefit Phils. in two ways

Direct inflows of foreign money; and

Foreign inflows into peer markets will bring down Phils.’ relative valuation, justifying additional buying into the Phil. market.

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Market risk factors

• GDP and corporate earnings disappoint;

• Interest rates in the US and the Philippines rise by more-than-expected.

• Investors may start worrying about the 2016 presidential elections beginning in the 2H this year.

• Geopolitical risks from China, Islamic State, Russia and anywhere else would increase risk aversion.

Potential market drivers

Market outlook: summary

Note on the 2016 presidential elections

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2016 Presidentiables

Jejomar “Jojo” Binay Manuel “Mar” Roxas Grace Poe Miriam Defensor-Santiago

Francis “Chiz” Escudero

• Currently Vice-President

• Has been Mayor of Makati City, the country’s premier financial & commercial city, for a cumulative 21 years.

• Has announced intent to run for president under the United Nationalist Alliance (UNA), a coalition between his party and the party of ex-President Joseph Estrada.

• Has managed to cultivate an image of being pro-poor.

• Ex-Senator, party-mate of President Pnoy Aquino (Liberal Party)

• Secretary of the Interior and Local Government

• Expected to be LP’s candidate in 2016, but has been trailing in surveys.

• Ex-investment banker but has failed to get support from the masses because of his family’s wealthy background.

• First-time Senator in 2013, but garnered the most votes.

• Adopted daughter of ex-action star Fernando Poe Jr., who ran for president vs ex-President Gloria Macapagal Arroyo in 2004 and was widely-believed to have been robbed of his votes. Fernando Poe Jr. died in December 2004.

• Has declared her disinterest to run for president in 2016 but is considered to be a possible strong candidate vs Binay.

• Senator for a cumulative 18 years and ran for president against ex-President Fidel Ramos in 1992.

• Has created an image of being an anti-corruption advocate.

• Her penchant to use colorful language and for publicity has either earned her loyal fans or rabid haters.

• Has recently been suffering from health issues.

• Senator since 2007, son of an ex-congressman. Independent.

• Practicing lawyer and former law professor.

• Wanted to be in politics since an early age but was advised by his parents to finish his law studies first before pursuing politics.

• His forthcoming marriage to an actress could raise top-of-mind awareness for him among the mass voters.

Philippine presidential elections are personality-centric, i.e., candidates win on the basis of their personal popularity and not on the strength of their political platforms.

Note on the 2016 presidential elections

Pulse Asia survey, Sept. 8-15

Rank Presidentiables % of votes

1 Jojo Binay 31%

2 Mar Roxas 13%

3 Miriam Defensor-Santiago 11%

4 Grace Poe/Joseph Estrada 10%

5 Francis Escudero 5%

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Pulse Asia survey, March 19-26

Rank Presidentiables % of votes

1 Jojo Binay 40%

2 Grace Poe 15%

3 Miriam Defensor-Santiago 10%

4 Francis Escudero 9%

5 Mar Roxas 6%

Binay has been leading other presidentiables by a wide margin in a series of independent surveys since the beginning of 2014.. However, his score has deteriorated following allegations of corruption in the construction of a Makati City Hall parking building and a public school building.

Year before a presidential election

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The market has not behaved consistently in the year before a presidential election, but upturn right after a presidential election year has been more evident.

Note on the 2016 presidential elections

9M corporate earnings were up only 2%, but because the aggregate amount was pulled down by banks, which had abnormally high trading gains a year ago. Holding cos. with bank subsidiaries were also affected. Ex-banks, earnings were up 7%. Of 46 companies below, 29 reported earnings that matched or surpassed expectations.

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Company 9M2014 9M2013 % changeAbove/below or in

line w/ forecast

BANKS 55,005 65,726 -16%

BDO 16,800 18,260 -8% Above

BPI 12,800 15,800 -19% Below

METROBANK 10,277 14,250 -28% Below

PNB 3,700 5,900 -37% Below

SECURITY BANK 6,428 4,166 54% Above

UNIONBANK 5,000 7,350 -32% In line

PROPERTY 42,226 36,773 15%

AYALA LAND 10,789 8,602 25% In line

FILINVEST LAND 2,842 2,390 19% Below

MEGAWORLD 7,419 6,553 13% Above

ROBINSONS LAND 3,880 3,740 4% In line

SM PRIME HOLDINGS 13,500 12,054 12% Below

VISTA LAND 3,796 3,434 12% In line

HOLDING COMPANIES 87,912 88,433 -1%

ABOITIZ EQUITY 13,876 16,431 -16% below

ALLIANCE GLOBAL 11,400 11,500 -1% In line

AYALA CORP. 14,053 10,432 35% In line

DMCI HOLDINGS 7,540 8,039 -6% below

JG SUMMIT 15,020 10,964 37% In line

LT GROUP 1,467 7,047 -79% Below

METRO PACIFIC 6,462 5,614 15% In line

SM INVESTMENTS 18,094 18,406 -2% In line

(Phpmn)

Comparative 9M 2014 & 2013 Core Net Income

Company 9M2014 9M2013 % changeAbove/below or in

line w/ forecast

CONSUMER 26,722 24,273 10%

D&L INDUSTRIES 1,293 1,043 24% In line

EMPERADOR 4,600 4,500 2% In line

JOLLIBEE FOODS 3,600 3,077 17% In line

PEPSI-COLA 619 784 -21% Above

PURGOLD 3,010 2,640 14% Above

ROBINSONS RETAIL 2,300 1,729 33% In line

PURE FOODS 2,700 2,700 0% In line

UNIVERSAL ROBINA 8,600 7,800 11% In line

TELCOMS 40,139 38,312 5%

GLOBE TELECOM 11,578 9,526 22% Above

PHIL. LONG DISTANCE 28,561 28,786 -1% Below

POWER 46,076 45,366 2%

ABOITIZ POWER 13,411 15,804 -15% Below

ENERGY DEVELOPMENT 7,812 5,825 34% Above

FIRST GEN 7,308 5,306 38% Above

MERALCO 14,286 13,558 5% In line

PETRON 3,200 4,400 -26% Below

TRANS-ASIA 59 473 -87% Below

MINING 14,265 11,676 22%

ATLAS MINING 1,011 2,102 -52% Below

MARCVENTURES 677 988 -32% In line

NICKEL ASIA 7,765 1,740 346% Above

PHILEX 901 1,479 -39% Below

SEMIRARA MINING 3,911 5,367 -27% Below

OTHERS 18,026 13,403 34%

EEI 496 622 -20% Below

BLOOMBERRY 3,299 -868 n/a Above

TRAVELLERS 4,013 3,575 12% Below

ICTSI 5,669 5,781 -2% In line

MANILA WATER 4,549 4,293 6% In line

BASKET 330,371 323,962 2%

Comparative 9M 2014 & 2013 Core Net Income

(Phpmn)

Full year 2014 earnings estimated to have grown by 10%, 2015 forecasted to grow by 14%.

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2013A 2014F 2015F 2013A 2014F 2015F

BANKS 85,727 85,110 96,595 13% -1% 13%

BDO 22,608 22,346 24,593 58% -1% 10%

BPI 18,811 18,082 21,045 15% -4% 16%

METROBANK 11,660 11,964 15,551 -3% 3% 30%

PNB 5,123 4,995 6,003 9% -3% 20%

RCBC 5,321 5,728 6,052 -14% 8% 6%

SECURITY BANK 5,012 7,520 6,059 -33% 50% -19%

UNIONBANK 9,029 6,620 7,304 19% -27% 10%

EAST-WEST BANK 2,056 2,319 3,322 13% 13% 43%

PHIL. BUSINESS BANK 1,004 382 627 53% -62% 64%

CHINA BANK 5,103 5,154 6,038 2% 1% 17%

PROPERTY 51,080 59,409 67,581 31% 16% 14%

AYALA LAND 11,741 14,136 14,925 30% 20% 6%

FILINVEST LAND 3,918 4,227 4,863 14% 8% 15%

MEGAWORLD 8,207 9,417 12,184 13% 15% 29%

ROBINSONS LAND 4,560 4,981 5,368 8% 9% 8%

SM PRIME HOLDINGS 17,551 20,802 23,773 67% 19% 14%

VISTA LAND 5,103 5,846 6,468 17% 15% 11%

HOLDING COMPANIES 113,170 129,926 145,272 2% 15% 12%

AYALA CORP. 12,778 18,265 20,112 21% 43% 10%

ABOITIZ EQUITY 21,020 20,639 22,746 -10% -2% 10%

ALLIANCE GLOBAL 13,566 15,802 18,313 -2% 16% 16%

DMCI HOLDINGS 10,583 11,838 13,108 9% 12% 11%

JG SUMMIT 13,887 20,600 23,088 35% 48% 12%

LT GROUP 7,408 6,713 6,562 -38% -9% -2%

METRO PACIFIC 7,229 8,736 9,542 10% 21% 9%

SM INVESTMENTS 26,699 27,333 31,802 10% 2% 16%

% Change

Company

Net Income (Pmn) 2013A 2014F 2015F 2013A 2014F 2015F

CONSUMER 33,539 38,153 43,473 32% 14% 14%

D&L INDUSTRIES 1,433 1,840 2,397 56% 28% 30%

EMPERADOR 5,831 6,759 7,528 17% 16% 11%

JOLLIBEE FOODS 4,641 5,295 6,134 24% 14% 16%

PEPSI-COLA 903 732 786 7% -19% 7%

PUREGOLD 3,959 4,305 4,751 46% 9% 10%

ROBINSONS RETAIL 2,720 3,393 4,030 123% 25% 19%

PURE FOODS 3,702 3,631 3,863 -9% -2% 6%

SSI 593 1,018 1,348 na 72% 32%

UNIVERSAL ROBINA 9,757 11,180 12,636 39% 15% 13%

TELECOMS 50,334 51,588 55,813 7% 2% 8%

GLOBE TELECOM 11,617 13,505 14,405 13% 16% 7%

PHIL. LONG DISTANCE 38,717 38,083 41,408 5% -2% 9%

POWER 56,093 55,552 66,404 -5% -1% 20%

ABOITIZ POWER 20,124 16,240 17,769 -15% -19% 9%

ENERGY DEVELOPMENT 6,565 10,958 11,500 -23% 67% 5%

FIRST GEN 6,561 7,945 9,802 -13% 21% 23%

MERALCO 17,023 18,614 18,158 4% 9% -2%

PETRON 5,247 1,017 8,186 139% -81% 705%

TRANS-ASIA 573 778 989 22% 36% 27%

MINING 14,813 21,025 27,148 15% 42% 29%

ATLAS MINING 2,456 4,252 5,155 -3% 73% 21%

MARCVENTURES 1,255 1,088 988 813% -13% -9%

NICKEL ASIA 2,054 6,067 8,970 -7% 195% 48%

PHILEX 1,508 1,486 2,325 -11% -1% 56%

SEMIRARA MINING 7,540 8,132 9,710 19% 8% 19%

OTHERS 15,862 23,911 26,753 -13% 51% 12%

EEI 887 1,005 1,093 -9% 13% 9%

BLOOM (1,502) 4,509 6,092 118% na 35%

TRAVELLERS 3,433 5,429 6,594 -49% 58% 21%

ICTSI 7,292 7,590 7,939 24% 4% 5%

MANILA WATER 5,752 5,378 5,036 6% -7% -6%

BASKET 420,617 464,673 529,040 8% 10% 14%

% Change

Company

Net Income (Pmn)

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Company (Bloomberg Ticker)

Price (Php,

01/20)

Target price (Php)

Total return

(%)

Market cap

(Phpmn)

Net Income (Phpmn) PE (x) ROE (%)

’14E ’15F ‘16F ’15F ’15F

MEGAWORLD (MEG.PM) 5.30 6.50 23.5 169,646 9,417 12,184 15,551 13.9 10.6

VISTA LAND (VLL.PM) 6.44 7.60 19.6 54,989 5,846 6,468 7,255 8.5 11.6

ALLIANCE GLOBAL (AGI.PM) 23.05 28.90 27.3 236,720 15,802 18,313 21,534 12.9 13.3

METRO PACIFIC (MPI.PM) 5.18 6.04 18.4 134,830 8,736 9,542 10,721 14.5 10.8

EMPERADOR (EMP.PM) 10.40 13.20 29.8 156,000 6,759 7,528 8,326 20.8 21.9

PUREGOLD (PGOLD..PM) 40.50 46.40 15.3 112,039 4,305 4,751 5,187 23.5 26.4

PLDT (TEL.PM) 2,950.00 3,236.00 16.1 637,365 38,083 41,408 44,882 15.4 61.9

ENERGY DEV. CORP. (EDC.PM)

8.59 11.20 32.8 161,063 10,958 11,500 15,012 11.9 31.0

FIRST GEN (FGEN.PM) 26.00 33.30 30.5 87,452 7,945 9,802 11,223 10.0 40.1

MERALCO (MER.PM) 271.00 311.00 19.6 305,490 18,614 18,158 19,570 16.8 22.3

Market outlook: stock recommendations

• Property companies will continue to benefit from rising income and low interest rates. Any interest rate hike is expected to be minimal if any. We like MEG because it is the largest BPO landlord and is the biggest land owner in Fort Bonifacio.

• We expect robust consumer spending to continue, driven by consumer confidence, OFW remittances and BPO income. Among consumer stocks, we like EMP and PGOLD which have both lagged the sector and are therefore relatively cheap.

• We like PLDT (TEL) since at its current price it offers the highest dividend yield (6.2%) and we expect its market share to recover following its “Free Mobile Internet” promo.

• Power companies EDC and FGEN are recovering strongly after technical issues in 2013 and their capacity expansion programs have started to come on stream..

• Meralco (MER) was also left behind in last year’s rally despite its defensive quality and sustained profitability.

• Companies positioned in infrastructure building would also enjoy opportunities from the increasing momentum of launching infrastructure projects. MPI is our favored infrastructure play.

• We also like holding company Alliance Global because of its associate companies EMP, MEG and RWM and because it has lagged the market.

• Banks will be weighed down by capital raising requirements for Basel III and for domestic systematically important banks (DSIBs), cap on real estate lending and the ASEAN integration, among others.

• Gaming stocks are being hit by China’s effort to curb corruption among its officials, which has already adversely affected Macau’s gaming revenues.

• Considering our target prices for PSEi stocks, we expect the PSEi to hit 7,800 in the next 12 months.

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Market outlook: stock recommendations

Stock Recommendations

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Megaworld Corp. (MEG, Php5.02): Real estate industry innovation leader

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• Pioneered the live-work-play concept of township developments where

residential condominiums, office buildings and retail complex are put together in

one community. Residential projects are focused on the mid to high income

market (72% - above Php3mn/unit) vs low-end (28% - Php800K-3mn).

• Pioneer in BPO office space leasing. Office and commercial leasing operations

now account for 17% of revenues from only 7% in 2007. Rental income forecasted

to grow by 30% in 2014, 28% in 2015 and 22% in 2016.

• Access to around 3,100 hectares of prime land bank through acquisition of 80.4%

stake in Global-Estate Resorts, Inc. (GERI)

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• The 34.5 hectare JUSMAG property, acquired by MEG in 2010 and which it is currently developing into McKinley West, was acquired by the company for Php31,111/sqm.

• If revalued at Php500,000/sqm, based on the most recent lot sale in the vicinity, and assuming developable area of only 60%, this would add Php97bn to MEG's NAV, equivalent to Php3.30 per share. On this basis, MEG's FV would be around Php7.78/share.

• Has the largest land bank in Fort Bonifacio at 105 has.

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Uptown Bonifacio Total Leasable Area (sqm) Year of Completion Tower 1 31,998 2014

Tower 2 31,998 2014 Tower 3 42,257 2015

Alliance Global Tower 53,060 2016

Uptown Bonifacio Campus A & B 40,000 2016 TOTAL 199,313

McKinley West Total Leasable Area (sqm) Year of Completion BPO Building A 40,000 2015 BPO Building B 40,000 2016

BPO Building C 40,000 2017 TOTAL 120,000

Mactan Newtown Total Leasable Area (sqm) Year of Completion

Two World Center 7,274 2014 8 Newtown Boulevard offices 27,545 2014

Pacific World Tower 9,770 2015 Manchester Office Tower A 12,134 2016

BPO Building B 10,000 2017 TOTAL 66,723

More office spaces from new townships in key growth areas of the country are in the pipeline, with benefits to be reaped within the next few years.

Vista Land & Lifescapes (VLL, Php6.30): Leader in horizontal projects

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• Has the widest nationwide presence among homebuilders.

• Aims to increase its exposure in the critically underserved yet massive low-cost and socialized segments of the housing market. The socialized segment alone is estimated to be worth at least Php50bn.

• Derives 94% of its revenues from horizontal developments (majority of buyers are first time owners) which require less commitment in terms of resources and limit downside risks as initial capital would only be for development of land (road and utilities infrastructure) as units are constructed only when sold.

• Shorter construction period of 6-8 months (starts when 10% of purchase has been paid). In a little over a year, VLL can book sales as revenues. If the purchase is bank-financed (65% of sales), the company would also be able to get the full cash payment.

• One of the cheapest property companies in the Philippines – 2nd lowest PE (8.5x) & PBR (0.9x).

AGI: Indirect play on domestic consumption

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Given the hefty valuation of the consumer sector (2015 PE of 24.5x), AGI’s 12-month forward PE of 12.9x is a cheaper alternative to consumer stocks. The company’s alcoholic beverage unit, Emperador Distillers (EDI), and the franchise holder of McDonald’s in the Philippines, Golden Arches Development Corp.(GADC), account for roughly 40% of AGI’s earnings.

At the same time, the company benefits from OFW remittances and robust BPO revenues through its property company Megaworld, which contribute 30% to earnings.

Iits gaming subsidiary, Travellers International (RWM), is on constant expansion mode and would practically double its gaming capacity by 2017.

Our TP price of Php28.90 is based on our estimate of the company’s sum-of-the-parts value per share discounted by 22%.

.

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EDI and GADC account for 42% of our 2015 earnings estimate

EMP had already surpassed MEG’s earnings contribution beginning 2012.

1,641 2,394 5,080 5,343 6,195

7,545 4,080 3,340

4,580 5,081 6,120

7,934

-

2,419

3,470 1,178

2,761

2,898

372

318

340 383

330

374

816

3,138

434 1,581

1,348

183

-

5,000

10,000

15,000

20,000

2010 2011 2012 2013F 2014F 2015F

Tho

usa

nd

s

EMP MEG Travellers GADC Others

40% EDI

42% MEG

15% Travellers

2% GADC

1% Others

Metro Pacific Investments:

Tariff resolution just icing on operational strength

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Water – We expect earnings growth on the strength of Maynilad’s NRW reduction program.

Toll roads – No toll rate increase projected for the rest of the year as the toll segment still awaits the delayed approval of its proposed tariff hike. We still forecast the segment’s value to build up as strong traffic growth still spurred 9M toll revenues to rise by 4% yoy.

Power – Meralco’s fourth 4-yr. rate rebasing period starts on July 1, 2015 and regulatory headwinds point to possibility of a downward adjustment. However, we expect MER’s growing customer base and expansion to power generation to offset possible reduction in distribution charges.

Hospital group – 3,000 bed capacity in 3-5 years. GIC acquired a 14.4% stake for Php3.7bn.

As of end-9M2014, Maynilad’s NRW dropped to 34.1% from 38.3% a year ago (Manila Water’s NRW is already at 12%)

Maynilad continues to be the biggest contributor to earnings at 49%, followed by Meralco and MPTC at 38% and 25%, respectively

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3.18

1.59

2.48

0.40

Water

Toll road

Power (equity in net earnings)

Hospital group

66% 64% 60% 54%

48% 44%

39% 34%

29% 24%

2007 2008 2009 2010 2011 2012 2013 2014F 2015F 2016F

9M 2014 core net income contribution (Php bn)

Emperador, Inc. (EMP, Php10.70)

Acquisition of Whyte & Mackay opens opportunities

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Started operations only in 1990, Emperador has taken over the distilled spirits market in the Philippines (market share of 50.4% as of FY2013), leapfrogging over former market leaders San Miguel Corp.’s Ginebra San Miguel and LT Group Inc.’s Tanduay Distillers (49.6% combined market share).

Emperador’s performance is attributable to the successful launch of Emperador Light in 2010 – a brandy with lower alcohol content (27.5% vs Emperador Brandy’s 36%). As of 2013, Emperador Light accounted for 90-95% of EMP’s total volume sales.

In 2013, the national liquor sales volume dropped by 5.4% due to an increase in the excise tax. However, EMP’s sales volume grew 6% to 33.1mn cases.

Emperador Light was the #2 best selling brand in overall distilled spirits in terms of volume in 2013, after Jinro soju

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Whyte & Mackay acquisition Last May 12, 2014, Emperador entered into an agreement with United Spirits

(Great Britain) Limited to acquire 100% of Whyte & Mackay Group Limited (W&M) and its subsidiaries for an enterprise value of £430mn or roughly Php32bn.

W&M is the fifth largest Scotch Whisky manufacturer in the world, allowing Emperador to penetrate an underdeveloped product category in the Philippines.

W&M owns two of the fastest growing single malt brands, The Dalmore and Jura. W&M has a production capacity of 50mn liters of alcohol annually across five

distilleries and one bottling plant in Scotland. The added facilities will more than double EMP’s current capacity of 40-41mn cases per annum.

The acquisition will give EMP access to a distribution network spanning 50 countries mainly in Europe and North America.

The acquisition was completed last Oct. 31, 2014 and we estimate W&M to contribute roughly Php317.3mn or 4.7% to the bottom-line in 2014. Further, we estimate a full-year net income contribution of Php1.34bn in 2015 and Php1.42bn in 2016, 18% and 17% of total net income during those respective years.

PGOLD: A compelling growth story

Formed in 1998 as a supermarket retail company catering to the class C & D markets; it

has since then branched out into several areas in Luzon and has begun entering the Visayas and Mindanao markets.

Puregold stores come mainly in three formats – hypermarkets, supermarkets, and discount stores.

Expanding through organic growth and acquisitions – now serves the Class A & B markets through S&R Membership shopping.

• PGOLD is expanding through organic growth… Opened 22 new Puregold stores in the first nine months of 2014 Total store count at 233 (225 Puregold, 8 S&R) Plans to spend Php18.5bn to open 125 Puregold stores and 10 S&R membership stores

from 2015 to 2019 or 25 Puregold and 2 S&R stores per year.

• … and through deals/acquisitions Acquired S&R Membership Shopping in 2012 for Php16.5bn. (6 stores) Bought the Gant Group of companies in 2012 for Php760mn – owner of the 19 Parco

Supermarkets. Company E Corporation was acquired in January 2013, adding 15 new stores to PGOLD’s

portfolio. Investing up to Php2.5bn to open 500 Lawson convenience stores by 2020. Plans to acquire the Co family’s Puregold–Duty Free stores in the Clark and Subic Bay

freeports. The two duty free shops generate sales of about Php2.4bn a year.

35

Phil. Long Distance Telephone :

Attractive dividend play at the current price

36

6.2% dividend yield at current price is the highest in the market. Globe’s Free FB promo was able to take 3 per cent points in market share away from

PLDT in late 2013-early 2014. PLDT responded with its “Free Mobile Internet” promo. PLDT’s response was inevitable if it was to protect its market share. At the same time,

the promo would encourage mobile internet usage and hence will be beneficial in the long-run.

We expect PLDT’s “Free Mobile Internet” promo to reverse its eroding market share and restore it to 65%, the level as of end-2013.

PLDT lost subscribers after Globe’s successful “Free FB” promo. This promo ran from Oct. 2013-April 2014.

On Sept. 26, PLDT responded with a “Free Mobile Internet” promo that would run until Jan. 5, 2015.

Following that, Globe revived its “Free FB” promo to run until Nov. 30, 2014.

We expect PLDT to recover its lost market share because if its more far-reaching promo.

Number of cellular subscribers

3Q’13 4Q’13 1Q’14 2Q’14

PLDT 72,498,270 70,045,627 70,495,472 68,897,106

Globe 36,516,711 38,475,130 40,749,094 42,717,758

Total 100,014,981 108,520,757 111,244,566 111,614,864

Cellular sub market share (%)

3Q’13 4Q’13 1Q’14 2Q’14

PLDT 67% 65% 63% 62%

Globe 33% 35% 37% 38%

Total 100% 100% 100% 100%

Justification for PLDT’s Free Mobile Internet promo:

• Of its 72mn cellular subscribers, 20mn own smartphones but only 1/3 of them connect

to the internet. The promo is intended to encourage these non-users to try mobile

internet and transform them into habitual users.

Estimated impact of converting PLDT’s smart phone owners not using mobile internet into habitual users

PLDT’s cellular subs who own smart phones 20,000,000

Smart phone owners who use mobile internet 6,600,000

1H 2014 mobile internet revenues (Phpmn) 3,726

Estimated revenue/user/month (Php) 94.09

Potential mobile internet users, i.e., existing smart phone owners who don’t use mobile internet

13,400,000

Potential full year mobile internet revenues from existing non-users (Phpmn)

15,115

% increment to 2013 revenues 9.0%

Energy Development Corp. (EDC , Php8.03) Reaping the fruits of growth projects

39

• Second largest vertically integrated geothermal company in the world with 1,150 MWs of

geothermal, 132 MWs of hydro, and 150 MWs of wind power in its generation portfolio.

• Both units of Bacman plants are now operating at a rated capacity of 55 MWs each. The

40MW Nasulo plant has been operating since July last year.

• The 150MW Burgos wind farm was successfully commissioned in October and just awaits

a certificate of compliance under the Feed-in-Tariff program from the Energy Regulatory

Commission. Burgos may generate up to Php2bn in annual sales.

• We forecast 2015 net income to rise by 23% yoy to Php13.5bn with the full-year earnings

contribution of Bacman and Nasulo as well as the phased commissioning of the Burgos

wind farm.

40

Up to 241 MWs from more growth projects

Project Capacity

(MW)

Target start of

operations

No. Negros 6 3Q2015

Bac-Man III 30 2016

Botong-Rangas 40 2017

Mindanao 3 50 2017

Labo 25 Beyond 2018

Kayabon 50 Beyond 2018

Dauin 40 Beyond 2018

First Gen Corporation (FGEN, Php26.75):

Strong performance from gas and geothermal plants

41

FGEN owns 50.06% of EDC plus 1,500MW natural-gas plants and a 133.6MW hydro plant.

For 2015, we forecast FGEN’s earnings to reach Php9.8bn, up 27% yoy driven by:

a.) the full year operations of Sta. Rita and San Lorenzo at full capacity,

.b.) new earnings contribution from the 100MW Avion plant which we assume will start

commercial operations in 1Q2015, and

c.) EDC’s earnings rising 23% yoy to Php13.5bn.

b

42

FGEN is the Philippines’ leading clean and renewable energy company with over 2 GWs of total net attributable capacity

Project %

ownership

Net

attributable

capacity

Sales

volume

(GWh)

9M2014

Sales

volume

(GWh)

9M2013

1,000 MW Sta. Rita 100% 1,000.0 4,597.0 5,434.0

500 MW San Lorenzo 100% 500.0 2,658.0 2,395.0

1.6 MW FG Bukidnon 100% 1.6 9.0 9.0

1,159.4MW Geothermal

plants under EDC

50% 580.4 5,650.2 5,221.5

Total 2,082.0 12,914.2 13,059.5

43

FGEN’s capacity expansion plans

Project Location Target start

of

operations

414MW San Gabriel

expansion

Batangas March 2015

97MW Avion plant Batangas April 2015

30 MW Puyo Agusan del Norte Late 2017

23MW Bubunawan Bukidnon Late 2017

39MW Tagoloan Bukidnon Late 2017

900MW San Gabriel

expansion

Batangas 2018

44

Philippines’ largest power distributor (55% of total electricity)

Generation arm to develop total capacity of up to 3,000 MWs (28%-owned PacificLight Power’s 800MW plant started operations in January while 22%-owned Global Business Power Corporation has started the operation of its 82MW coal-fired power plant in September)

Manila Electric Power Co. (MER, Php261.40):

Upward integration to power generation

Project Description % MER Equity Commissioning

150MW coal plant

expansion in Panay

Global Business Power Corp. 22% 3Q 2016

455MW coal plant in

Mauban, Quezon

San Buenaventura Power Ltd., in

partnership w/ Electricity Generating

Public Co. of Thailand

51% 2018

600MW coal-fired plant

in Subic

RP Energy, in partnership with Aboitiz

Power and Taiwan Cogeneration

47% Existing permits declared

invalid; motion for

reconsideration filed

Power generation projects

Meralco’s power generation line-up

Additional notes

The PSE expects at least 10 companies to undertake IPOs/FOOs this year.

Company Size Timetable

Global Ferronickel Up to Php27bn March 2015

Pro-Friends Php7.7bn 1H 2015

Crown Asia Chemicals Corp. Php200mn -

Gweilo Corp. Php66mn -

Green Power Panay Philippines Inc. Php290mn -

Prospective IPOs in 2015

Comparative valuation of gaming stocks (based on DCF)

Price (1/20)

TP Mkt cap (Phpmn)

Mkt cap at TP (Phpmn)

Expected return

RWM 7.49 10.00 118,012 187,495 +33.5%

BLOOM 12.30 14.60 135,706 161,082 +18.7%

City of Dreams

BEL 4.68 5.78 49,416 61,031 +23.5%

PLC 1.96 1.40 61,989 44,278 -28.5%

MCP 12.52 10.45 61,491 51,325 -16.5%

LR 11.20 19.60 13,440 23,520 +75.0%

Addendum: valuation summary

Valuation summary: Banking Forecasts and Valuation

Banks Recom Price (Php)

TP (Php)

Total Return

(%)

Net Income (Phpbn)

PE 2015

PBR 2015

ROE (%)

Div. Yield (%)

2015 2016

Ave. 14.3 1.6 12.5 1.4%

BDO Sell

111.50 106.00 -3.0% 24,593 27,966 18.3 2.1 13.5 1.1%

BPI Hold 92.95 96.00 5.2% 21,045 24,108 17.3 2.4 14.6 1.9%

METRO Buy 2 90.90 100.00 11.7% 15,551 16,073 16.6 1.6 10.6 1.5%

PNB Buy 1 77.20 93.00 20.5% 6,003 6,413 16.0 1.0 6.7 0.0%

SECB Buy 1

148.00 170.00 16.2% 6,059 6,723 14.7 1.7 12.4 1.4%

UBP Buy 1 67.55 84.00 27.5% 7,304 8,250 9.8 1.3 17.4 3.1%

EW Buy 1 25.00 31.10 24.4% 3,322 5,960 8.5 1.1 14.2 0.0%

CHIB Buy 2 46.95 50.37 9.4% 6,038 6,918 13.3 1.4 10.6 2.1%

Valuation summary: Property Forecasts and Valuation

Property Recom Price (Php)

TP (Php)

Total Return

(%)

Net Income (Phpbn)

PE 2015

PBR 2015

ROE (%)

Div. Yield (%)

2015 2016

Ave. 17.6 2.1 11.6 1.7%

ALI BUY 2 34.55 36.20 6.0 14,925 15,590 32.9 4.3 13.6 1.4%

FLI BUY 1 1.67 2.02 24.5 4,863 5,819 8.4 0.7 9.9 3.2%

MEG BUY1 5.30 6.50 23.5 12,184 15,551 13.9 1.4 10.6 0.7%

RLC HOLD 26.50 26.50 1.4 5,368 6,160 20.2 1.9 9.8 1.4%

SMPH BUY2 18.60 19.90 8.3 23,773 24,066 21.9 3.1 14.2 1.3%

VLL BUY1 6.44 7.60 19.6 6,468 7,255 8.5 0.9 11.6 2.0%

Valuation summary: Consumer Forecasts and Valuation

Recom Price (Php)

TP (Php)

Total Return

(%)

Net Income (Phpmn)

PE 2015

PBR 2015

ROE (%)

Div. Yield (%) 2015 2016

Ave. 24.5 4.3 20.1 1.4

DNL BUY 2 16.00 16.70 5.6 2,397 2,894 23.9 4.9 28.3 1.3

EMP BUY 1 10.40 13.20 29.8 7,528 8,326 20.8 4.4 21.9 3.2

JFC SELL 212.00 200.00 -4.9 6,134 7,035 36.9 7.4 31.5 0.8

PIP BUY 1 4.02 5.20 31.1 786 838 19.1 1.8 9.6 1.5

PGOLD BUY 1 40.50 46.40 15.3 4,751 5,187 23.5 5.6 26.4 0.7

RRHI HOLD 77.50 78.50 1.9 4,030 4,535 26.6 2.4 10.3 0.7

PF BUY 1 206.00 239.00 18.3 3,863 4,069 8.9 1.5 17.5 2.3

SSI HOLD 10.78 11.10 3.6 1,348 1,556 26.3 3.4 13.7 0.6

URC HOLD 197.90 206.00 5.6 12,636 14,335 34.2 7.2 22.1 1.5

Forecasts and Valuation

Holding Recom Price (Php)

TP (Php)

Total Return

(%)

Net Income (Phpmn)

PE 2015

PBR 2015

ROE (%)

Div. Yield (%) 2015 2016

Ave. 17.7 2.1 12.9 1.6

AC HOLD 701 729.00 4.7 20,112 21,680 21.5 2.5 12.3 0.7

AEV SELL 54.40 52.20 -1.2 22,746 22,179 13.2 2.3 14.3 2.7

AGI BUY 1 23.05 28.90 27.3 18,313 21,534 12.9 1.8 13.3 2.2

DMC SELL 14.9 13.9 -3.7 13,108 15,755 15.1 3.2 21.9 3.6

JGS SELL 70.05 66.10 -5.3% 23,088 26,158 21.3 2.2 11.0 0.5

LTG SELL 13.30 11.87 -9.5% 6,562 7,289 21.8 1.2 5.8 1.1

MPI BUY 1 5.18 6.04 18.4 9,542 10,721 14.5 1.0 10.8 0.9

SM HOLD 857.50 880.00 3.9% 31,802 33,531 21.5 2.6 13.8 1.4

Valuation summary: Holding

Valuation summary: Power & Energy

Forecasts and Valuation

Firm Recom Price (Php)

TP (Php)

Total Return

(%)

Net Income (Phpmn)

PE 2015

PBR 2015

ROE (%)

Div. Yield (%) 2015 2016

Ave. 14.5 2.8 24.7 2.9

AP SELL 42.20 39.80 -1.8 17,769 19,396 17.5 3.1 18.9 3.2

EDC BUY 1 8.59 11.20 32.8 13,500 15,012 11.9 2.9 31.0 3.2

FGEN BUY 1 26.00 33.30 30.5 9,802 11,223 10.0 4.0 46.1 3.0

MER BUY 1 271.00 311.00 19.6 18,158 19,570 16.8 3.7 22.3 5.0

PCOR BUY 1 9.99 13.00 31.1 8,186 12,967 18.5 1.9 17.5 1.0

TA Buy 1 2.42 3.08 29.1 989 1,045 12.1 1.4 12.2 1.7

Valuation summary: Telecoms

Forecasts and Valuation

Telcos Recom Price (Php)

TP (Php)

Total Return

(%)

Net Income (Phpbn)

PE 2015

PBR 2015

ROE (%)

Div. Yield (%) 2015 2016

Ave. 15.7 5.1 48.7 5.6

GLOBE Buy 2 1,740 1,829 9.5% 14,405 14,508 16.1 5.5 35.4 5.0%

PLDT Buy 1 2,950 3,236 16.1% 41,408 44,882 15.4 4.7 61.9 6.2%

Valuation summary: Mining Forecasts and Valuation

Firm Recom Price (Php)

TP (Php)

Total Return

(%)

Net Income (Phpmn)

PE 2015

PBR 2015

ROE (%)

Div. Yield (%) 2015 2016

Ave. 12.7 2.8 27.7 3.1

AT BUY 1 9.98 19.10 94.5 5,155 4,360 4.0 1.1 32.6 3.9

MARC BUY 2 6.07 6.60 13.2 988 911 11.2 2.9 28.0 4.9

NIKL BUY 2 29.00 35.30 22.4 8,970 10,892 12.3 2.7 30.8 3.1

PX BUY 1 9.40 14.60 56.0 2,325 2,187 20.0 2.0 10.1 0.3

SCC SELL 144.00 135.00 -3.4 9,710 13,481 15.8 5.4 36.9 3.3

Valuation summary: Others Forecasts and Valuation

Firm Recom Price (Php)

TP (Php)

Total Return

(%)

Net Income (Phpmn)

PE 2015

PBR 2015

ROE (%)

Div. Yield (%)

2015 2016

BLOOM BUY1 12.30 14.60 18.7 6,092 7,457 22.4 4.2 29.8 0.0

RWM BUY1 7.49 10.00 33.5 6,594 7,290 17.8 2.7 16.1 0.1

ICT SELL 116.30 104.00 -9.8 7,939 9,296 30.0 3.5 12.3 0.8

MWC SELL 32.55 25.00 -20.6 5,036 4,728 14.7 1.8 13.0 2.2

End of Presentation Thank you!

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