APRIL LYNN TAN, CFA VP & HEAD OF RESEARCH

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

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2012 2013 2014 2015 2016 2017 2018 2019 2020

PSEi 10,000

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

Deflation rather than inflation is now a bigger concern. . .

. . . Reducing pressure for central banks to raise interest rates

20

40

60

80

100

120

Jan-

13

Mar

-13

May

-13

Jul-1

3

Sep

-13

Nov

-13

Jan-

14

Mar

-14

May

-14

Jul-1

4

Sep

-14

Nov

-14

Jan-

15

Crude oil

-2.0-1.00.01.02.03.04.05.06.07.0

Inflation

US Europe Japan China


Source: Bloomberg Source: Bloomberg

Domestic factors ensuring low interest rates • Strong government finances • Strong external account

position • Ratings upgrade • Banks awash with cash

0.00

1.00

2.00

3.00

4.00

5.00

6.00

7.00

8.00

9.00

1/4/2010 1/4/2011 1/4/2012 1/4/2013 1/4/2014

Philippines 10-Year T-Bond Yield


Source: BSP, Bloomberg

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%

Due to low interest rates, stocks remain the most attractive peso asset class even though valuations seem expensive compared to

historical averages

*The PSEi’s earnings yield based on 7,400

Source: BSP, Bloomberg, COL Estimates

Stocks Remain the Most Attractive Peso Asset Class Available

Spread between the PSEi’s earnings yield and the 10-yr bond rate remains positive despite the PSEi’s above average P/E

Source: Bloomberg, COL Estimates

0.02.04.06.08.0

10.012.014.0

Earnings Yield vs 10 Year Bond Rate

Earnings Yield 10 Year

-6.0

-4.0

-2.0

0.0

2.0

4.0

6.0

Spread

Spread Average

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 -7.2 0.5 4.6 -0.2 4.7 Brazil -2.9 0.2 11.6 0.9 10.5 UK -2.7 3.0 13.9 2.6 13.6 Europe 1.2 0.8 14.4 1.1 13.1 Japan 7.1 0.3 19.2 1.0 17.0 US 11.4 2.3 17.3 3.0 16.2 Thailand 15.3 0.8 16.2 4.0 13.8 Indonesia 22.3 5.1 17.3 5.4 14.7 Philippines 22.8 6.0 20.3 6.1 17.6 India 29.9 5.5 17.5 6.3 14.5 China 52.9 7.4 13.0 7.0 11.6 Source: Bloomberg

Consumer Spending has Always Been Resilient. . .

Consumer Spending Growth under Different Administrations

1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014

Cory Aquino Ave:4.2%

Ramos Ave:3.6%

Estrada Ave:4.5%

Arroyo Ave:4.3%

PNoy Ave:5.6%

. . . And is Expected to Stay Resilient

To Benefit from Falling Oil Price

Impact of US$10 Decline in Oil Price on the Economy

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% ?

Reforms Expected to Endure Beyond Current Administration

End 2015 PSEi Target Raised from 7,800 to 8,300

Fundamental factors coupled with falling US bond rates warrant a reduction in risk free rate assumption from 5.0% to 4.5%

0.0

1.0

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US vs PH 10 year yield

US 10 Year PH 10 Year Spread

(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

• 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

(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



• 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

• 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


• 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%



• 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

• 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)



• 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

• 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

Sector Top Picks FV Buy Below Price

Consumer DNL 17.80 15.48

CIC 53.20 46.26

GTCAP 1,340.00 1,165.22

Power EDC 9.90 8.61

FGEN 38.40 33.39

AP 46.10 40.09

Airlines CEB 156.00 135.65

Banks MBT 112.00 97.39

Properties SMPH 22.20 19.30

Conglomerates AC 855.00 743.48

Summary of Stock Picks

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 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.

APRIL LYNN TAN, CFA VP & HEAD OF RESEARCH · (bottom up picks/power plays), MBT (value play), SMPH...

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