APRIL LYNN TAN, CFA

VP & HEAD OF RESEARCH

Stay the Course!

PSEi on track to hit 10,000 by 2020 at the latest
PSEi 10,000
11000

10,000

10000
9000

7,500

8000
7000
6000
5000
4000
3000
2012

2013

2014

2015

2016

2017

2018

2019

2020

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

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

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

Crude oil

7.0
6.0
5.0
4.0
3.0
2.0
1.0
0.0
-1.0
-2.0

120
100
80
60
40

US
Europe
Source: Bloomberg

Japan

China
Source: Bloomberg

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

Jan-15

Nov-14

Sep-14

Jul-14

May-14

Mar-14

Jan-14

Nov-13

Sep-13

Jul-13

May-13

Mar-13

Jan-13

20

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

Philippines 10-Year T-Bond Yield

9.00
8.00

Domestic factors ensuring

low interest rates

7.00
6.00

Strong government finances

Strong external account
position
Ratings upgrade
Banks awash with cash

5.00
4.00
3.00
2.00
1.00
0.00
1/4/2010

1/4/2011

1/4/2012

Source: BSP, Bloomberg

1/4/2013

1/4/2014

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 PSEis 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

Stocks Remain the

Most Attractive Peso Asset Class Available
Earnings Yield vs
10 Year Bond Rate

Spread

14.0

6.0

12.0

4.0

10.0

2.0

8.0

0.0

6.0
4.0

-2.0

2.0

-4.0

0.0

-6.0

Earnings Yield

10 Year

Spread

Average

Source: Bloomberg, COL Estimates

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

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

-7.2
-2.9
-2.7
1.2
7.1
11.4
15.3
22.3
22.8
29.9
52.9

0.5
0.2
3.0
0.8
0.3
2.3
0.8
5.1
6.0
5.5
7.4

4.6
11.6
13.9
14.4
19.2
17.3
16.2
17.3
20.3
17.5
13.0

-0.2
0.9
2.6
1.1
1.0
3.0
4.0
5.4
6.1
6.3
7.0

4.7
10.5
13.6
13.1
17.0
16.2
13.8
14.7
17.6
14.5
11.6

Russia
Brazil
UK
Europe
Japan
US
Thailand
Indonesia
Philippines
India
China
Source: Bloomberg

Consumer Spending has Always Been Resilient. . .

Consumer Spending Growth under Different Administrations

Cory Aquino
Ave:4.2%
1986

1988

1990

Ramos
Ave:3.6%
1992

1994

1996

Estrada
Ave:4.5%
1998

2000

Arroyo
Ave:4.3%
2002

2004

2006

PNoy
Ave:5.6%
2008

2010

2012

2014

. . . 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

US vs PH 10 year yield
6.0
5.0

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

4.0
3.0
2.0
1.0
0.0

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

(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

(FV: PHP1,340, BUY BELOW: PHP1,165)

Holding company for Ty familys 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

(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

(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%

(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)

(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

Summary of Stock Picks

Sector

Top Picks

FV

Buy Below Price

DNL

17.80

15.48

CIC

53.20

46.26

GTCAP

1,340.00

1,165.22

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

SMPH

22.20

19.30

AC

855.00

743.48

Consumer

Power

Properties
Conglomerates

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 PSEis 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.