strategy its more fun investing
TRANSCRIPT
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Its More Fun Investing in the Philippines
Philippine stock
market managed to
perform well despiteall the bad news that
came out of the US,
Europe and China.
PSEi, 18.5%
S&P500,
8.4%
Euro Stoxx 50,-5.6%
SH Comp,-1.4%
80
90
100
110
120
130
Jan
Feb
Mar
Apr
May
Jun
Jul
Comparative Performance (YTD)
Source: Bloomberg
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Philippine Economy: So Far So Good
2007 2008 2009 2010 2011 5-yr Ave 1Q12
Philippines 6.6 4.2 1.1 7.7 3.9 4.7 6.4
US 1.9 -0.3 -3.5 3.0 1.7 0.6 2.0
Euro zone 0.6 -0.6 -0.6 0.5 0.2 0.0 0.0
China 11.4 9.2 8.5 10.4 9.3 9.8 8.1
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Philippine Economy: So Far So Good
1Q GDP Growth Drivers
Consumer Spending +6.6%
Government Spending +24.0%
Exports +7.9%
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Outlook Remains Favorable
Consumer spending growth to remain resilient
Government ready and willing to spend
PPP projects gaining momentum
Mining industry ensuring sustainable growth
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Consumer Spending
Growth to Remain Resilient
OFW remittances and BPO revenues continue to increase. . .
1,4752,420
3,257
4,875
6,061
7,200
9,000
11,000
0
2,000
4,000
6,000
8,000
10,000
12,000
20042005200620072008200920102011
BPO Revenues (US$ Mil)
14.2%
10.1%12.8%
25.0%
19.4%
13.2%13.7%
5.6%8.2%7.2%
5.3%
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
30.0%
0.0
5.0
10.0
15.0
20.0
25.0
20022003200420052006200720082009201020112012
Source: BPAPSource: BSP
OFW Remittances (US$Bil)
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Consumer Spending
Growth to Remain Resilient
. . . thanks to the significant
wage differential
Daily Minimum Wages (in US$)Cambodia 2.03
Vietnam 2.20
Indonesia 2.93
China 3.99
Thailand 6.92
Philippines 9.36
Taiwan 19.69
Hong Kong 28.87
South Korea 30.71
Japan 64.86
New Zealand 66.53
Australia 123.71
Source: DOLE
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Consumer Spending
Growth to Remain Resilient
Favorable Demographics
Population
Growth1.9%
Median Age 22.9
Age % of Population
0 15 34.6%
16 65 61.1%
Above 65 4.3%
10.0 5.0 0.0 5.0 10.0
0
10
20
30
40
50
60
70
80
Age-Sex Population Pyramid (in Millions)
Young and growing population to ensure continuous
growth in consumer spending
Female
MaleSource: CIA World Fact Book
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Consumer Spending
Growth to Remain Resilient
Falling commodity
prices to givespending power aboost
400
450
500
550
600
Jul-11 Nov-11 Mar-12 Jul-12
CRB Commodity Index
Source: Bloomberg
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Government Ready and Willing to Spend
Government Finances
improving 64.665.7
72.5
77.7 78.2
71.4
63.9
55.857 57.3
55.4
50.9 50.548.6
40
45
50
55
60
65
70
75
80
85
2000200120022003200420052006200720082009201020112012F2013F
Debt to GDP
Source: DBM
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Government Ready and Willing to Spend
Department of Budget and Management already releasedPhp1.36 Tril or 74.9% of the 2012 National Budget as of
June 30, 2012
2012 Target YTD ending May
Value
(PhpBil)% Growth % of GDP
Value
(PhpBil)% Growth
Revenue 1,560.0 14.8% 14.2% 654.6 11.6%
Expenditures 1,839.0 18.1% 17.0% 668.4 13.1%
Budget Deficit (279.1) 41.1% (2.6%) (22.8) NA
Budgeted & Actual Spending for 2012
Source: DBM
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Government Ready and Willing to Spend
Government expenditure set to increase by another 10.5% in2013, with infrastructure spending up by 20.8%
Value (PhpBil) % Growth
Total Spending 2,006.0 10.5%
Infrastructure 409.8 20.8%
Economic & Social Services 1,209.3 14.9%
Debt Services 333.9 0.2%
2013 Budget Highlights
Source: DBM
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Government Ready and Willing to Spend
Strong likelihood of
another earlyenactment of the
budget in 2013.
Budget Preparation1. Budget Call
2. Stakeholder Engagement
3. Technical Budget Hearings
4. Executive Review
5. Consolidation, Validation andConfirmation
6. Presentation to President and Cabinet
7. The Presidents Budget
Budget Legislation
1. House Deliberations
2. Senate Deliberations
3. Bicameral Deliberations
4. Ratification and Enrollment
5. Veto Message
6. Enactment
Budget Preparation & Legislation Flow Chart
We are Here
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PPP Projects Gaining Momentum
PPP Process Flow Chart
Step 1: Business Case/Feasibility Study Preparation
Step 2: Project Review & Evaluation
NEDA-ICC Approval
Step 3: For Publication of Invitation to Pre-Qualify & Bid
Step 4: Bidder Due Diligence
Step 5: Award of Project
* Step 3 to 5 will take 6 months based on government estimates
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PPP Projects Gaining Momentum
PPP Projects with High Probability of Award in 2H12
Project Value (PhpBil)
School Infrastructure Project 10.04
LRT Line 1 South Extension and
Operation & Maintenance 9.20
NAIA Expressway Project (Phase II) 15.77
NLEX-SLEX Connector Road 20.18
55.19Source: PPP Center, COL Estimates
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PPP Projects Gaining MomentumOther PPP Projects
Project Value (PhpBil)
CALA Expressway (Cavite & Laguna Side) 19.69Modernization of Philippine Orthopedic Center 5.52
Vaccine Self-Sufficiency Project (Phase II) 0.45
LRT Line 2 East Extension and Operation & Maintenance 11.90
Operation & Maintenance of the Laguindingan Airport 1.80
New Bohol (Panglao) Airport Development 8.00
Mactan-Cebu Int'l Airport Passenger Terminal Bldg. 10.15Automatic Fare Collection System 1.80
Integrated Transport System NA
New Centennial Water Supply Source Project 25.00
O&M of Angat Hydro-Electric Power Plant 1.60
Balara Water Hub 20.00
Grains Central Project 1.25Establishment of Cold Chain Systems Covering Strategic Areas in the
Phil.5.30
Logistics Support on the Agri-Fishery Products 0.03
O&M of the Puerto Princesa Airport NA
Cebu Bus Rapid Transit Demonstration Project NA
Improvement/Rehabilitation of the Quirino Highway NA
Source: PPP Center, COL Estimates 112.49
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PPP Projects Gaining Momentum
Value (PhpBil) % of GDP
2011 2.00 0.0%
2012E 55.19 0.5%
2013E 112.49 1.0%
Potential Value of PPP Project Awards
Source: PPP Center, COL Estimates
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Mining Industry
Ensuring Sustainable Growth
Huge potential of the mining industry
9 Mil ha. out of 30 Mil ha. have high mineral potential
Mineral reserves estimated at US$1.0Tril
Aquino Government targeting US$12Bil worth of investmentsin the next 5 years (vs. US$4.4Bil worth of investments from
2004-2011)
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Mining Industry
Ensuring Sustainable Growth
Negatives:
Delays and Higher Costs
No mining permits will be
awarded until law onrevenue sharing scheme is
passed
Government share in
revenues to increase from
2% to 5%-7%
Abandoned ores and wastes
will now be bid out
Executive Order 79: Positives Outweigh Negatives
Positives:
Sustainability is Ensured
Better legislation and
reduction of red tape toattract more investments
Government tax revenues to
increase
Environmental protection
emphasized
Incentives for investments in
higher value added
processes
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Abundance of Favorable Developments
S&P upgraded Philippines credit rating just one notchlower than investment grade
Bank lending grows 14.7% in May
Power consumption up 8.5% in 2Q12
Exports up 19.7% in May
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We are Still in the Early Stages
No signs of excessive borrowings yet
58%
31%
0%
10%
20%
30%
40%
50%
60%
70%
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
May-12
Loans to GDPHouse Debt to GDP
Malaysia 75.9
South Korea 67.8
Taiwan 64.2
Hong Kong 60.3Singapore 49.9
Thailand 26.2
China 18.7
Indonesia 13.6
India 9.1Sri Lanka 8.3
Philippines 5.6
Source: CEIC, COL estimatesSource: NSCB, BSP, COL estimates
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We are Still in the Early Stages
Regional Investments-to-
GDP Ratio
Country Inv-to-GDPPhilippines 22%
India 31%
Indonesia 32%
Malaysia 20%
Thailand 26%Vietnam 39%
17%
0%
5%
10%
15%
20%
25%
30%Investments to GDP (%)
Investments: Still a long way to go
Source: Bloomberg, BSP, NSCB, COL
estimates
Source: NSCB, COL estimates
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But it wont be a Smooth Ride Up
Serious problems overseas
Valuations are not attractive
Share placements to sap liquidity
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Serious Problems Overseas
US Europe China
Debt ceilingSignificant differences in the economic
condition of member economiesWeak exports
Fiscal cliff No flexibility in monetary policyHousing
bubble
Poor access to capital markets Overinvestment
Harsh austerity measures have to be
implemented to avail of bailout funds
No meaningful structural reforms have
yet to be implemented
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Valuations are not Attractive
PSEi currently trading at the high end of its historical
trading range
0
5
10
15
20
25
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Forward PE Band
16.3
14.2
12.1
Source: PSE, COL Estimates
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Valuations are not Attractive
PSEi is also expensive
relative to foreign markets
Trailing
PE
Forward
PE
Philippines 17.8 16.2
Thailand 15.3 12.7
Vietnam 11.0 10.0
Malaysia 15.5 15.0
Indonesia 17.9 14.3
S&P 13.8 13.2
Brazil 11.4 10.1
Russia 5.0 5.3
India 16.4 15.0
China 11.7 9.7
Source: Bloomberg,
COL estimates
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Share Placements to Sap Liquidity
Date Company Value (PhpBil)
June BDO 43.5
June URC 7.4
July ALI 13.6
July AC 6.5
July PGOLD 6.5
Total 77.5
Recent Share Placements
Source: PSE
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Strategy
Stay invested
Fundamentals will eventually catch up with valuations
Pullbacks are opportunities to buy more
Philippine economy is resilient to developments overseas
Share placements are only short-term drags, as proceeds
enable companies to fund expansion
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Fundamentals to Catch Up with Valuations
Scenario Analysis: When will PSEi reach 10,000?
Assumptions Scenario 1 Scenario 2 Scenario 3
PSEi EPS Growth 10% 12% 15%
Forward P/E 14X 16X 18XYears to PSEi
10,0008 5.5 3.5
Implied CAGR 8.7% 12.9% 20.9%
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Proceeds of Share Placements
to Fund Expansion
Share Placements
CompanyType of Share
OfferingUse of Proceeds
BDO Rights offering Address CAR problems, to grow loan portfolio
URC Treasury shares For potential acquisition and general corporatepurposes
ALI Primary sharesTo fund its expansion program including land
banking & the planned acquisition of a stake in
Ortigas family's OCLP Holdings Inc.
AC Treasury sharesHelp fund investments of up to US$1 Bil over the
next 5 years in transport, infrastructure & power
generation sectors
PGOLD Secondary shares NA
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Model Portfolio: Maintaining Growth Bias;
Adding BDO and SMPH
FV Buy Date Buy PriceCurrent
Price
Current
Return
Buy Below
Price
Growth Stocks
MBT 108.00 5-Jan-12 70.70 95.30 34.8% 94.00
BDO 80.50 25-Jul-12 61.25 61.25 - 70.00
MPI 4.70 5-Jan-12 3.66 4.12 12.6% 4.08
AC 467.70 5-Jan-12 333.00 415.00 24.6% 407.00AGI 14.90 5-Jan-12 10.66 11.52 8.1% 12.80
ALI 22.00 5-Jan-12 15.30 19.94 30.3% 19.12
EEI 8.68 30-Mar-12 6.07 6.86 13.0% 7.55
PGOLD 29.00 11-Jun-12 24.60 25.90 5.3% 25.22
SMPH 16.00 25-Jul-12 13.26 13.26 - 13.90Dividend Plays
BPI 80.00 5-Jan-12 56.60 72.00 27.2% 69.50
RLC 19.90 5-Jan-12 11.58 18.80 62.3% 17.30
MWC 29.00 5-Jan-12 21.50 25.25 17.4% 25.20
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Summary:
Its More Fun Investing in the Philippines
The Philippine stock market has done well so far this year. It
should continue to do well in the future due to its resilient
consumers, the governments ability and willingness to spend,
and the growing momentum of PPP projects among otherthings.
There are also no signs of a bubble yet given the absence ofexcessive borrowings and investments.
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Summary:
Its More Fun Investing in the Philippines
It wont be a smooth ride up however due to serious problems
prevailing overseas, expensive valuations, and numerous share
placements that are sapping liquidity.
Nevertheless, investors should stay invested.
Fundamentals should eventually catch up with expensive
valuations, allowing share prices to continue going up.
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Summary:
Its More Fun Investing in the Philippines
Meanwhile, pullbacks brought about by developments overseas andshare placements are opportunities to buy more stocks. We are
confident that the Philippines will remain resilient to developments
overseas, while share placements allow companies to raise funds to
finance their expansion plans.
Given our favorable view on growth, our model portfolio is
comprised mostly of growth stocks (MBT, MPI, AC, AGI, ALI, EEI and
PGOLD).
We also have some high dividend yielding stocks in our portfolio.
These stocks will continue to be in favor given the low interest rate
environment (BPI, RLC and MWC).
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Summary:
Its More Fun Investing in the Philippines
We also added BDO and SMPH in our model portfolio.
BDOs stronger capital base should enable it to resume the
rapid growth of its lending portfolio and allow profitability to
reach new highs starting 2015. Valuations are also attractive.
SMPH should be a major beneficiary of the favorable growthoutlook for consumer spending in the country given its dominant
leadership position in the mall leasing business.
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