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Philippine perspectives

EQUITY STRATEGY

Risks become reality Global Markets Research


16 April 2018
Equities far removed from January rally; investors
should continue to look for safety in growth Anchor themes
Accelerating inflation and the QE
Headwinds trigger shakeout: stick to straightforward growth stories unwind provide headwinds for
The PCOMP has retraced 12% from an all-time high of 9,058 in January, as Philippine equities. We maintain
rising UST yields trigger global portfolio rebalancing away from riskier assets. our "look for safety in growth"
Uncertainties associated with a potential US-China trade war and accelerating stock-picking strategy. The
domestic inflation (complicated by market confusion on timing and scale market correction provides an
opportunity to increase exposure
of BSP’s policy response) further weigh on investor sentiment. We lower our in our favoured banks and
12-month bottom-up determined PCOMP fair value from 9,300 to 8,900 with property sectors.
the view that outperformance would be concentrated on quality growth names
(Buy ratings comprise just 39% of market cap under coverage). Our favoured Research analysts
Philippine Research Team
sectors remain banks and property – straightforward beneficiaries of what is
still a very robust domestic macro story. We remain cautious on utilities and Abigail Chiw, CFA - BDO-NS
+632 878 4590
telecoms (bond proxies face valuation headwinds with rates headed higher)
Thomas Earll Huang - BDO-NS
and keep our non-consensus bearish view on consumer stocks (rising input +632 878 4968
costs plus premium multiples mean scope for de-rating). Dante Tinga Jr - BDO-NS
+632 878 4969
Risk analysis: inflation still our biggest fundamental concern
Angelo Torres - BDO-NS
Headline y-y CPI rose to a higher-than-expected 4.8% in March from 4.5% in +632 878 4967
February, and the Nomura Economics team is now forecasting FY18/FY19F Genevieve Hazel Yap - BDO-NS
headline CPI (2006 base) y-y growth of 5.0%/3.8%. The Philippines is a net +632 878 4966
food and energy importer and is historically poorly positioned in a rising ASEAN Transport/Logistics
commodity price environment. Rising inflation also has non-linear effects
Ahmad Maghfur Usman - NSM
(dampened consumer sentiment, increased political risk, etc) that are easy to ahmad.maghfurusman@nomura.com
underestimate, in our view. We are less concerned about external shocks – +603 2027 6892
the Nomura Economics team rates the Philippines as having “medium Asia Telecoms
vulnerability” and our 42-company stock coverage shows overseas earnings Gopa Kumar - NSL
exposure is limited. gopa.kumar@nomura.com
+65 6433 6961
Domestic catalysts needed to buoy investor sentiment ASEAN Strategy
Relative to benchmark, we estimate that foreign exposure to Philippine stocks
Chetan Seth, CFA - NIHK
has fallen back to post-GFC (2009–2012) levels. Key catalysts that may buoy chetan.seth1@nomura.com
investor sentiment include: 1) firm monetary policy (we forecast a 25bp BSP +852 2252 6154
hike at each of the next three monetary board meetings, in May, June and EM Economics
August) which should help ease near-term inflation and currency concerns; Euben Paracuelles - NSL
and 2) successful follow-through on planned tax reform and euben.paracuelles@nomura.com
increased infrastructure spending. We believe 2018 is critical for policy +65 6433 6956
implementation, as 2019 is a mid-term election year. BDO Unibank, Inc. and BDO Nomura Securities, Inc
(formerly PCIB Securities, Inc) are the distributors of this
Fig. 1: Top picks – concentrate on banks and property going forward report in the Philippines. No part of this material may be (i)
(PHP unless otherwise stated) copied, photocopied, or duplicated in any form, by any
BBG Mkt Cap Avg TO Target Price Upside/ means; or (ii) redistributed without the prior written consent
of BDO Unibank, Inc. and BDO Nomura Securities. Inc.
Code Rating (USD mn) (USD mn) Price 4/11/2018 Downside Nomura has authorized BDO Unibank, Inc. and BDO
MBT PM Buy 6,280 6.2 119.30 81.95 45.6% Nomura Securities. Inc (formerly PCIB Securities, Inc) to re-
distribute this report in the Philippines.
ALI PM Buy 11,484 11.3 53.70 40.50 32.6%
SMPH PM Buy 18,492 5.9 43.00 33.30 29.1% The "BDO-NS" (which stands for "BDO Nomura
Securities, Inc.") placed next to an analyst’s name on the
BPI PM Buy 9,000 4.8 133.00 103.80 28.1% front page of a research report indicates that the analyst
MEG PM Buy 2,856 2.5 5.70 4.60 23.9% is employed by BDO Unibank Inc. ("BDO Unibank") who
has been seconded to BDO-NS, to provide research
Source: Bloomberg, Nomura estimates. Note: Share prices are as of 11 April 2018. assistance services to NSL under an agreement
between BDO Unibank, NSL and BDO-NS. BDO-NS is
a Philippines securities dealer, which is a joint venture
between BDO Unibank and the Nomura Group.

See Appendix A-1 for analyst certification, important disclosures and the status of non-US analysts.
Nomura | Philippine perspectives 16 April 2018

Risks become reality


The Nomura Economics team continues to have a positive outlook for the Philippine
economy (see Asia Insights 11 April 2018 ). Nonetheless, our strategy view needs to be
anchored on the reality of accelerating inflation, which we believe to be the major
headwind for Philippine equities. Our top picks have become even more concentrated
among bank and property stocks, which we believe can offer above-trend earnings
growth in the current environment.

Continue to look for safety in growth


The market has retraced 12% from all-time highs achieved just last January. External
shocks related to potential trade wars, a QE unwinding, and accelerating inflation weigh
on investor sentiment. Note that:
• We estimate the PCOMP to be trading at 17.2x forward earnings at current levels. This
still represents a premium versus the 10-year historical average of 16.3x but is
nonetheless well off the 12-month highs of 20.5x (Fig. 2).
• The market correction coincided with the acceleration of headline inflation above the
upper end of the Bangko Sentral ng Pilipinas (BSP) target range of 2-4%. We believe
inflation to be the biggest risk to a positive outlook for Philippine stocks. We are
relatively less concerned about external shocks related to protectionism/slowing global
trade as well as a QE unwinding.
• We continue to suggest our “look for safety in growth” investing strategy (see Philippine
perspectives, 31 January 2018 ), doubling down on property and bank stocks after the
recent correction. From a risk-reward perspective, stocks such as ALI, SMPH, and MBT
look attractive as they are straightforward proxies for the robust Philippine domestic
macro story and are relatively resilient to risks of accelerating inflation.
Fig. 2: PH equity valuations above historical average but well Fig. 3: Inflation has breached the upper end of BSP headline
below recent highs CPI target range – rate hikes forthcoming?
PCOMP 12-month forward PERx
25
%y-o-y inflation target range Nomura
Headline inflation forecast
6

20 5

15 3

2
10
1

0
5
-1
Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan-18 Jan-19

Source: Bloomberg, Nomura estimates Source: CEIC, Nomura Global Economics

Fig. 4: Top picks dominated by banks and property stocks


(PHP unless otherwise stated)
BBG Mkt Cap Avg TO Target Price Upside/
Code Rating (USD mn) (USD mn) Price 4/11/2018 Downside
MBT PM Buy 6,280 6.2 119.30 81.95 45.6%
ALI PM Buy 11,484 11.3 53.70 40.50 32.6%
SMPH PM Buy 18,492 5.9 43.00 33.30 29.1%
BPI PM Buy 9,000 4.8 133.00 103.80 28.1%
MEG PM Buy 2,856 2.5 5.70 4.60 23.9%
Source: Bloomberg, Nomura estimates. Note: Share prices are as of 11 April 2018.

2
Nomura | Philippine perspectives 16 April 2018

What has changed


The market correction coincided with heightened concerns related to: 1) a potential US-
China trade war; 2) ongoing QE unwinding; and 3) accelerating domestic headline CPI
(as well as confusion within the market regarding the BSP’s commitment to inflation
targeting). It should be emphasised, however, that the Nomura Economics team has
maintained its GDP growth forecasts despite adjusting inflation, FX, and CAD estimates.
Rising inflation represents a fundamental concern. The Philippines is a net food and
energy importer and is historically poorly positioned in a rising commodity price
environment. The Nomura Economics team raised the already-above-consensus
FY18/FY19F headline CPI (2006 base) forecast from 4.3%/3.1% to 5.0%/3.8% and is
now forecasting a more significant weakening in the PHP as well as 75bp aggregate rate
hikes for the year (vs 100bp previously). The Nomura Economics team is also widening
forecasts of the current account deficits (CAD) to 1.7% of GDP and 2.2% in 2018-19.
Unlike inflation worries, however, we do not see this as a major concern as the CAD
widening mainly reflects a continued pickup in investment spending and net FDI inflows
are likely to fully offset the deficit.
What has not changed? FY18/19F GDP forecasts have been maintained at 6.9%/71%,
supporting our view of an acceleration in corporate earnings growth (FY18-19F core EPS
growth of 12-14% y-y) over the near-to-medium term despite inflation headwinds.

Fig. 5: Past six months: Concerns regarding inflation and external shocks have increased
What has changed vs what has not changed
What has changed? What has not changed?
QE unwind underway: bond yields rising, incremental post GFC liquidity
Overall domestic macro backdrop remains healthy
being withdrawn
Domestic liquidity remains plentiful; government, corporate and
Markets reacting to risk of US vs China trade war
household debt levels remain low
Domestic inflation accelerating: Feb and March headline CPI (2006 Y-o-Y corporate EPS growth albeit increasingly subject to dilutive cash
base) well above upper end of BSP target range raising and rising input costs stronger in 2018F vs 2017 (12% vs 7%)

BSP mixed signals on inflation targetting confusing investors Tax reform and infrastructure rollout continue to face execution risks

Corporate cash raising bunching up Regulatory risk creating overhang on valuations for certain sectors

Source: Nomura research

Fig. 6: Inflation forecasts raised, expectations for policy hikes lowered, GDP forecasts intact
Summary of Philippine Economic forecasts
% y-o-y growth unless otherwise stated 1Q17 2Q17 3Q17 4Q17 1Q18 2Q18 3Q18 4Q18 2016 2017 2018 2019
Real GDP (sa, % q-o-q, annualized) 5.5 7.9 6.9 6.2 5.6 8.6 6.4 8.3
Real GDP 6.4 6.7 7.0 6.6 6.7 6.8 6.7 7.2 6.9 6.7 6.9 7.1
Private consumption 5.8 5.9 5.3 6.1 6.3 6.6 6.7 6.6 7.0 5.8 6.6 6.8
Government consumption 0.1 7.1 8.3 14.3 16.6 14.4 13.7 10.0 8.4 7.3 13.7 12.0
Gross fixed capital formation 14.7 9.4 8.0 9.3 8.9 11.8 13.4 16.1 25.2 10.3 12.6 25.5
Exports (goods & services) 20.3 20.4 17.7 18.6 15.5 17.9 15.0 6.5 10.7 19.2 14.0 5.5
Imports (goods & services) 18.6 18.7 15.8 17.5 17.9 19.6 19.8 9.9 18.5 17.6 16.9 14.4
Contribution to GDP growth (% points)
Domestic final sales 8.3 7.2 6.7 8.3 8.9 9.2 9.8 10.4 11.7 7.6 9.6 13.7
Inventories -1.0 -0.4 0.1 -0.3 1.0 -0.5 1.0 -0.4 -0.2 -0.4 0.2 0.2
Net trade (goods & services) -0.9 -0.1 0.2 -1.4 -3.2 -1.9 -4.1 -2.7 -4.5 -0.6 -2.9 -6.8
Unemployment rate (nsa, %) 6.6 5.7 5.6 5.0 5.2 5.2 5.2 5.2 5.5 5.7 5.2 5.0
Consumer prices (2006=100) 3.2 3.1 3.1 3.3 4.4 5.0 5.4 5.1 1.8 3.2 5.0 3.8
Exports 16.3 12.7 8.4 1.6 -3.5 1.7 3.1 13.0 -2.4 9.5 3.5 5.5
Imports 15.1 5.1 3.9 17.0 12.0 13.6 21.0 11.8 18.3 10.2 14.5 10.4
Merchandise trade balance (USDbn) -6.5 -6.5 -6.1 -10.7 -9.7 -9.2 -10.3 -11.8 -26.7 -29.8 -41.1 -48.5
Current account balance (USDbn) -0.5 -0.1 0.6 -3.3 -2.1 -2.0 -1.0 -0.7 -1.0 -2.5 -5.8 -8.5
Current account balance (% of GDP) -0.7 -0.1 0.7 -3.8 -2.7 -2.4 -1.2 -0.7 -0.3 -0.8 -1.7 -2.2
Fiscal balance (% of GDP) -2.4 -2.2 -2.7 -3.0
Reverse repo rate (%) 3.00 3.00 3.00 3.00 3.00 3.50 3.75 3.75 3.00 3.00 3.75 3.75
Exchange rate (USD/PHP) 50.2 50.5 51.1 49.9 52.2 52.6 53.0 52.0 49.8 49.9 52.0 50.0
Source: CEIC, Nomura Global Economics

3
Nomura | Philippine perspectives 16 April 2018

Risk analysis
With only 8% of corporate earnings coming from overseas, our Philippine corporate
coverage should be relatively resilient to external shocks related to protectionism or a US
vs China trade war. Similarly, fundamental concerns related to rising yields and a QE
unwinding are limited although rising rates nonetheless represent valuation headwinds.
Nomura’s emerging markets (EM) economists (see EM Snapback, 22 March 2018)
broke down countries into high-, medium- (includes the Philippines) and low-vulnerability
groups after analysing balance of payments risk and domestic credit risk in the context of
a tightening US monetary policy and rising protectionism, exacerbated by the large build-
up in foreign portfolio positioning.

Fig. 7: What are the headwinds facing Philippine equities?

Key macro risks Implications/Assessment of Impact

1) Philippine export exposure (as a % of GDP) low relative to other EM countries; 2) Philippine
overall export exposure to US equivalent to 5.2% of GDP in 2016, 3) as a % of source country
#1 Rising protectionism; potential
GDP, Philippines' value-added in China's gross exports at 2.5% in 2016; 4) Export exposure
Trade War between US and China
among Philippine publicly listed companies is limited, and 5) the deflationary impact of a global
economic slowdown as a result of protectionism may be less negative for Philippines vs EM.

1) Global investors have less reason to own EM and Philippine assets, 2) rising rates provide
valuation headwinds for Philippine stocks, 3) the Philippine economy has sufficient buffers (low
#2 Global QE unwind; rising global
foreign debt exposure, adequate FX reserves, high GDP growth) to mitigate capital market
yields
volatility associated with a QE unwind, and 4) Philippine equities do not look particularly
overowned by foreign investors.

1) Historically, Philippine economy is poorly positioned in a rising commodity price environment, 2)


#3 Accelerating domestic inflation beyond putting pressure on profit margins, rising inflation has numerous adverse non-linear
effects, and 3) uncertainties regarding BSP policy response may amplify risks related to inflation.

Source: Nomura Research

Fig. 8: Nomura EM economics team’s view on where the vulnerabilities lie

Note: Values in brackets refer to the 5-year USD sovereign CDS spreads of the country as of 21 March 2018, expressed in
basis points. Within each grouping there is no ranking, the countries are simply ordered alphabetically. Source: Nomura
Economics research.

4
Nomura | Philippine perspectives 16 April 2018

Risk #1: Global slowdown, US protectionism/trade war with


China
Private consumption, rather than exports, has been the traditional driver of growth in the
Philippines. As a result, exports as % of GDP is much lower than in other EM countries
(Fig. 9). Note, however, that, in a full-blown US protectionism/US-China trade war
scenario, the Philippines’ exposure is not negligible (see Asia Special Report: The
impact of US trade protectionism, centring on China, 23 March 2017).
The Nomura Economics team estimates that the Philippines’ ultimate export exposure to
the US is equivalent to roughly 5% of Philippine GDP based on 2016 data. In a US-
China trade war scenario, it is also worth looking at foreign value-added component in
China’s gross exports. For the Philippines, using 2016 data, these exports come around
to a figure equivalent to 2-2.5% of Philippine GDP (Fig. 11).

Fig. 9: Philippines exposure to exports is relatively limited


Export exposure of Philippines versus other countries (% of source country GDP)
160
140
120
100
80
60
40
20
0
Hong Kong
Singapore

Saudi Arabia

Sweden

S. Africa
Mexico

Turkey

Japan
Netherlands

Colombia
Germany

Canada

Chile
Spain
Norway

Brazil
Czech Rep.
Hungary

Taiwan
Thailand
Switzerland

Romania

France
Poland

Austria

Greece

India
Korea

Argentina
Denmark

Finland

Australia

China

Indonesia
Italy

Russia

US
Malaysia

Philippines

UK
Ireland

Source: CEIC, Nomura Global Economics.

Fig. 10: Philippines’ ultimate exposure to the US equivalent Fig. 11: Philippines’ value-added share in China gross
to roughly 5% of Philippine GDP (2016 data) exports equivalent to approximately 2.3% of GDP (2016 data)
Exposure of Philippine exports to US (% source country GDP)
25.0% Value-added in China's gross exports in 2016 (% source country GDP)
7.0%
20.0%
6.0%

15.0% 5.0%

4.0%
10.0%
3.0%
5.0% 2.0%

1.0%
0.0%
0.0%

Source: UN Comtrade, Eurostat, OECD-WTO TiVA database, IMF, CEIC and Nomura
Source: UN Comtrade, Eurostat, OECD-WTO TiVA database, IMF, CEIC and Nomura

In terms of export exposure of listed companies, however, the direct impact of external
shocks due to protectionism and trade wars is fairly limited (see Fig. 12). Furthermore,
within our coverage, it is probably only port operator ICTSI (ICT PM, Neutral) which
faces significant risk in such a scenario given the nature of the company’s business
model. Most other Philippine companies with export exposure are consumer, airline, and
utility companies (Fig. 13). Intuitively, the limited export exposure of Philippine
corporates may result in the relative outperformance of Philippine stocks vs the rest of
EM in a slowing global growth environment.

5
Nomura | Philippine perspectives 16 April 2018

Fig. 12: Listed companies have limited direct export Fig. 13: ICT probably most exposed to a slowdown in global
exposure (FY18F earnings estimates) trade; no other stock gets bulk of earnings from overseas
% of 2018F core profits from outside Philippines

8% GLO
MWC
JFC
CNPF
JGS
PCOR
DNL
TEL
92% URC
SCC
CEB
EMP
ICT
Earnings from PH Earnings from outside PH 0% 20% 40% 60% 80% 100%

Source: Nomura research estimates Source: Nomura research estimates

Risk #2: QE unwinding, rise in global rates


Just as QE was successful in pushing global investors into riskier, higher-yielding EM
assets (Fig. 14), the unwinding of QE (see Fig. 15) will have the opposite effect, but
potentially in a more non-linear fashion because of the large build-up of EM debt and
investor complacency created by the unusually long period of very low rates (see In an
EM Snapback, where do the risks lie, 23 March 2018).

Fig. 14: Investors less likely to invest in risky assets Fig. 15: Capital inflows into Asia driven by QE
EM sovereign ratings and investor bond allocations Change in G4 central bank assets, EM FX reserves, Asia capital Inflows
USD bn, 4q rolling sum Change in EM FX reserves
Change in G4 central bank assets
3500 Total gross inflows into Asia ex-Japan
3000 Forecast
2500
2000
1500
1000
500
0
-500
-1000

Source: IIF, EPFR, Nomura Global Economics Source: Macrobond, Bloomberg, CEIC, and Nomura Global Economics

In the context of the Philippines, however, low levels of external debt, adequate
reserves, strong domestic driven growth, and comfortable gearing levels throughout the
economy (Fig. 16 and Fig. 19) help provide buffers versus a QE unwinding. Furthermore,
while the current account deficits is widening, we do not see this as a major concern as
the CAD widening mainly reflects a continued pickup in investment spending.

6
Nomura | Philippine perspectives 16 April 2018

Fig. 16: Fiscal prudence and ample reserves provide buffer Fig. 17: Net FDIs offsetting current account deficit
Philippines external debt (US$bn) and total reserves (months of imports) Net FDI, Current Account, and Basic Balance trends
External debt Import cover (RHS) USD bn
90.0 16.0 5
80.0 14.0 4
70.0 3
12.0
60.0 2
10.0
50.0 1
8.0
40.0 0
6.0
30.0 -1
4.0 -2
20.0

10.0 2.0 -3

0.0 0.0 -4
1995 1998 2001 2004 2007 2010 2013 2016 Dec-05 Dec-07 Dec-09 Dec-11 Dec-13 Dec-15 Dec-17
Net FDI Current Account Basic Balance

Source: CEIC, BSP. Nomura Global Economics Source: CEIC

Fig. 18: Philippine GDP growth continues to be above trend Fig. 19: Leverage in the system still relatively low
2018F Nomura Economics Team GDP growth (%) forecasts Credit as % of GDP by sector
400
8.0% General government Households Non-financial corporations

7.0% 350

94
6.0% 300
232

5.0% 250
62

77
121

104

73
4.0% 200

104
166
88

3.0%

67
150

79
62

59

50
216

2.0%
67

11 50
100

70
92

9 40
43

71
119

1.0%
112

106

104

28 10 23
50
74

68
53
46

42

42
32
0.0%
-
Philippines Asia Pacific EM Global DM HK JP SG UK EU US CN KR MY TH IN PH ID

Source: Nomura estimates Source: BIS, CEIC, World Bank, Nomura estimates

Would the QE unwinding lead to a massive exit from Philippine stocks? It is worth
pointing out that average daily turnover in Philippine stocks is already down significantly
over the past two years (Fig. 20). We attribute this to a decline in foreign participation in
Philippine equities. From a massive overweight in 2013 to 2015, Fig. 21 indicates that
foreign ownership in Philippine stocks is already back to benchmark levels last seen
during the years immediately after the Global Financial Crisis (GFC).
Admittedly, however, the rise in bond yields related to a QE unwinding would result in
valuation headwinds for Philippine equities. Fig. 22 shows that the spread between
earnings yields and real bond yields is more than 1SD below mean (see ASEAN
Strategy, 19 March 2018). Furthermore, with policy rates set to go up, there could be
further pressure on valuation multiples. In our view, the valuation headwinds triggered by
rising rates suggests sticking to a growth-oriented stock-picking strategy.

7
Nomura | Philippine perspectives 16 April 2018

Fig. 20: PSE turnover down and turnover velocity sluggish Fig. 21: Philippine equities no longer over-owned
Investor positioning relative to benchmark
2.50% Philippines

2.00%

1.50%

1.00%

0.50%

0.00%

-0.50%

-1.00%

-1.50%

Jan-05
Jul-05
Jan-06
Jul-06
Jan-07
Jul-07
Jan-08
Jul-08
Jan-09
Jul-09
Jan-10
Jul-10
Jan-11
Jul-11
Jan-12
Jul-12
Jan-13
Jul-13
Jan-14
Jul-14
Jan-15
Jul-15
Jan-16
Jul-16
Jan-17
Jul-17
Jan-18
Source: Bloomberg, CEIC, Nomura research. Source: Bloomberg, EPFR, Datastream, Nomura research.

Fig. 22: Rise in yields present valuation headwinds for Philippine equities
Implied ERP (Ie Forward Earnings yields less Real Bond yields)
12

10

6
+ 1 SD
4 Avg
- 1 SD
2

-2

-4
Jul-07

Jul-14
Jan-04
Aug-04
Mar-05
Oct-05

Feb-08
Sep-08
Apr-09

Jun-10
Jan-11
Aug-11
Mar-12
Oct-12

Feb-15
Sep-15
Apr-16

Jun-17
Jan-18
Dec-06

Nov-09

Dec-13

Nov-16
May-06

May-13

Phils-Implied ERP Real basis

Source: IBES, Datastream, Nomura research

8
Nomura | Philippine perspectives 16 April 2018

Risk #3: Inflation is biggest near-term risk, in our view


Within EM, the Nomura Economics team believes the Philippine economy is clearly
disadvantaged in a rising commodity price environment (see Oil price moves: A big EM
differentiator, 09 November 2017). While the Philippines – a net food and energy
importer – benefitted from the commodity and oil price plunge in 2014, a reversal of the
trend would have adverse effects for the economy (see Fig. 23). Note that:
• Earnings revision trends for the Philippines have been among the worst in ASEAN (Fig.
24), likely due to the absence of resource companies or exporters that can benefit from
a rising commodity price/higher global growth environment.
• The clear correlation between oil and commodity prices also translates to
underperformance of Philippine equities relative to EM when oil prices rise (Fig. 25
and Fig. 26). The resulting monetary policy response to raise rates (Fig. 27) further
amplifies the negative impact of rising inflation.
• Rising inflation has non-linear effects – increased political and regulatory risk as well as
dampened consumer sentiment (Fig. 28 and Fig. 29). For the Philippines’ GDP to
maintain a high-growth trajectory, any slowdown in domestic consumption would need
to be offset by a pickup in investment or government spending (Fig. 30). In such a
scenario, delivery of catalysts for investments becomes even more critical.

Fig. 23: Philippines among countries to suffer most from higher commodity prices
Gauging relative exposure to oil and commodity prices

Source: UN Comtrade, IMF, CEIC and Nomura Global Economics estimates

Fig. 24: Philippine earnings trends lag ASEAN Fig. 25: Clear correlation between oil and commodity prices
Indexed 12mth forward EPS (relative to MSCI ASEAN$) Brent crude price vs CRB commodity price index
100

98

96

94

92

90

88

86

84
Jul-17
Jul-17
Dec-16
Jan-17
Feb-17

Sep-17
Sep-17
Mar-17
Mar-17
Apr-17
May-17
May-17
Jun-17

Aug-17

Oct-17
Nov-17
Dec-17
Dec-17
Jan-18
Feb-18
Feb-18

MSCI PHILIPPINES relative to MSCI SOUTH EAST ASIA

Source: MSCI, Datastream, Nomura research Source: Bloomberg and Nomura Global Economics

9
Nomura | Philippine perspectives 16 April 2018

Fig. 26: Philippines underperforms EM when oil prices rise Fig. 27: At some point, CPI rise to trigger BSP response
PCOMP vs MSCI (%); Brent Oil futures (US$/bbl) Philippine CPI y-y vs BSP Policy rate (%)
PCOMP vs MSCI EM (%) Crude Oil Futures US$/bbl 5.0
1.8 160

1.6 140 4.0


1.4
120

1.2
3.0
100
1
80 2.0
0.8
60
0.6
1.0
40
0.4

0.2 20 0.0
1Q17 2Q17 3Q17 4Q17 1Q18
0 0
Consumer prices (2006 = 100) (%) Reverse repo rate (%)

Source: Bloomberg, Nomura research Source: CEIC, Nomura research

Fig. 28: Consumers already expecting prices to go up further Fig. 29: Rising prices weigh on consumer sentiment
BSP index of expected changes in prices over the next 12 months BSP consumer sentiment survey

CES: Nxt 12 Mos: Diffusion Index (DI)
 50.0
 40.0
 30.0
 20.0 24.0 
 10.0
 ‐
 (10.0)
 (20.0)
 (30.0)
 (40.0)
 (50.0)
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Source: CEIC, Nomura Global Economics Source: CEIC, Nomura Global Economics

Fig. 30: Consumption slowdown would need to be offset by investments


Percentage point contribution to GDP growth
Consumption Investment Government
15.0 Net Exports GDP

10.0

5.0

0.0

-5.0

-10.0
1Q 2010
2Q 2010
3Q 2010
4Q 2010
1Q 2011
2Q 2011
3Q 2011
4Q 2011
1Q 2012
2Q 2012
3Q 2012
4Q 2012
1Q 2013
2Q 2013
3Q 2013
4Q 2013
1Q 2014
2Q 2014
3Q 2014
4Q 2014
1Q 2015
2Q 2015
3Q 2015
4Q 2015
1Q 2016
2Q 2016
3Q 2016
4Q 2016
1Q 2017
2Q 2017
3Q 2017
4Q 2017

Source: CEIC, Nomura Global Economics

10
Nomura | Philippine perspectives 16 April 2018

Can domestic catalysts provide support?


Key catalysts that may buoy investor sentiment include: 1) firm monetary policy (we
forecast a 25bp BSP hike at each of the next three monetary board meetings, in May,
June and August, which should help ease near-term inflation and currency concerns;
and 2) successful follow-through on planned tax reform and increased infrastructure
spending. We believe 2018 is critical for policy implementation as 2019 is a mid-term
election year.

Monetary policy needs to begin inflation targeting


Headline CPI had been accelerating since the start of the year and there continue to be
upside risks to the Nomura Economics team’s inflation forecast. The impact of “Package
1” of the tax reform has yet to fully play out and core inflation should remain supported
as the output gap turns more positive (see Philippines: inflation picked up further in
March, 5 April 2018). The BSP, however, has appeared tentative about engaging in the
path towards rate hikes (Philippines: BSP still staying put, 22 March, 2018) which may
impact on BSP’s inflation-fighting credibility. Note that:
• We see rising inflation as the major near-term risk for Philippine equities. Historically,
with the Philippine economy a net food and energy importer, Philippine stocks
underperform EM in a rising commodity price environment. Inflation puts pressure as
margins and possibly dampening consumer spending. As a result, lack of monetary
policy clarity could therefore weigh on investor sentiment on Philippine stocks.
• The BSP’s decision so far this year to leave policy rates unchanged should be viewed
in the context of the Nomura Economics team’s upbeat outlook for the world economy
with expectations that inflation and monetary policy would now normalise a little bit
more rapidly relative to previous forecasts (see Global Economic Outlook Monthly, 13
March 2018 ). Specifically, on monetary policy, the Nomura economics team expects
the Federal Reserve to raise short-term rates 4 times this year and twice more in 2019
(vs previous expectations of three hikes in 2018 and just once in 2019).
• We expect the BSP to raise policy rates by 25bp each in the May, June, and August
monetary board meetings for a total 75bp in rate hikes this year. Despite policy rates
being left unchanged in March, the BSP noted that “inflation expectations have started
to rise and will therefore need to be monitored closely in the coming months” (BSP
preview, 20 March 2018). The BSP’s own 1Q18 survey of consumer expectations of
changes in prices climbed substantially so far this year and also suggested a
geographical broadening of inflation expectations (see Asia Chart Alert, 28 March
2018).

Fig. 31: US Fed appears more aggressive in raising rates than BSP
Policy rates (%) at year end
4.00

3.00

2.00

1.00

0.00
2017A 2018F 2019F

US Fed BSP

Source: Nomura Global Economics

11
Nomura | Philippine perspectives 16 April 2018

Clarity on Tax Reform Package 2 and 2 plus


Package 1A already enacted into law as of 19 December 2017 (Fig. 32). Package 1A of
Tax Reform (see Philippines: TRAIN arrives, 14 January 2018 )primarily involved
increased excise taxes on petrol, coal, tobacco, alcohol, sugar-sweetened beverages
and automobiles in order to raise funds for infrastructure spending as well as offset
revenue losses from the multi-year reduction in personal income taxes. The Philippines’
Department of Finance (DOF) expects to raise PHP89.9bn on a full-year basis excluding
the impact of administrative improvements and tax simplification that they believe should
improve compliance. The DOF said Package 1B comprises the estate tax amnesty
program, a general tax amnesty program, and amendments to the bank secrecy law and
automatic exchange of information. Package 1B is expected to raise an additional
revenue of PHP38.9bn in Year One (revenue forecasts are based on the low end of the
National Economic and Development Authority’s [NEDA] GDP forecast). DOF is
optimistic that Package 1B would be enacted into law within 1H18.

Fig. 32: Tax Reform: So far, package 1A enacted into law


Breakdown of Tax Reform Package (amounts in PHPbn)
Gov't Revenue Estimated
Package Summary: Objective (s) Components Impact Net Revenues Timetable
PIT and consumption. Shift burden of  Reduction of personal income tax ‐
tax from salary workers to consumers,  Increase excise taxes on petrol and coal +
increase disposeable income, raise  Ad valorem tax on automobiles + Signed into law Dec 
   1A revenues for government's  89.9
New excise tax on sweetened beverages + 2017
infrastructure program Increase cigarrete excise tax +
Removal of NGCP VAT exemption +
Estate tax amnesty. Address funding  Estate tax amnesty program +
shortfall due to dilution of Package 1A General tax amnesty Expected to be 
+
   1B 38.9 enacted into law 
Amendments to the bank secrecy law +
1H18
Adjust motor vehicle users charge +
CIT and incentives. Improve  Reduction of corporate income tax rates ‐ Expected to be 
2 investment climate, collection  Fiscal incentives rationalization + TBD enacted into law in 
efficiency, revenue productivity 2018
Revisit "sin" tax. Raise revenues for  Revisit alcohol, mining, and coal tax regim + Expected to be 
2 plus government's infrastructure program No VAT exemption for gaming, local coal + TBD enacted into law in 
2018
Property tax. Raise revenues for  Centralize and increase valuation + For submission to 
3 TBD
government's infrastructure program Reduce estate and donor tax ‐ Congress in 2018
Capital income tax. Raise revenues for  Harmonize capital income tax rates ‐ TBD For submission to 
4
government's infrastructure program Reduce tax levy on peso interest income ‐ Congress in 2018
Source: Department of Finance, Nomura Global Economics

Enactment of package 1A provided tailwinds for the market’s December to January rally
as we believe it managed to achieve the twin objectives of improving the investment
climate (additional tax revenues to be used for addressing infrastructure bottlenecks)
while sustaining robust domestic consumption via cut in personal income taxes (private
consumption still accounts for over 70% of GDP).
In turn, Package 2 and 2 plus involves lowering the corporate income tax (CIT) rate and
rationalizing fiscal incentives. The DOF argues that, despite high CIT, tax revenue
efficiency is poor (Fig. 33 and Fig. 34) and a rationalisation of incentives is needed to
widen the tax base, plug leakages, and ensure that tax breaks are given in a
“performance based, targeted, time-bound, and transparent” manner.

12
Nomura | Philippine perspectives 16 April 2018

Fig. 33: Philippines’ relatively high CIT Fig. 34: Tax revenue efficiency poor
Comparison of corporate income tax rates (%) Tax revenues as % of GDP
35% 8.0% 7.3%
30%
30% 7.0% 6.5%
6.1%
25% 24% 24% 6.0%
25%
20% 20% 20% 5.0%
20% 17%
4.0% 3.7% 3.5% 3.5%
15% 2.7%
3.0% 2.4%
10%
2.0% 1.3%
5% 1.0%
0% 0.0%
Philippines

Indonesia

Lao PDR

Malaysia

Cambodia

Thailand

Vietnam

Singapore

Vietnam

Malaysia

Thailand

Philippines

Singapore

China

Indonesia

Lao PDR

Cambodia
Source: CEIC, Department of Finance, Nomura research Source: CEIC, Department of Finance, Nomura research

In our view, however, it is unclear at this point as to whether the DOF-proposed Package
2 and 2 plus will have positive near-term impact on equity markets. Note that:
• The DOF-proposed version of Package 2 is meant to be revenue-neutral. As a result,
assuming the DOF version is enacted into law, package 2 is unlikely to raise additional
revenues for infrastructure spending.
• Package 2 also proposes the lowering of corporate income tax (CIT) rate from the
current 30% to 25% by 2022 but the CIT cuts will only begin in 2020 and only after the
government’s tax base has been expanded by the rationalisation of tax incentives. As a
result, corporates are unlikely to see immediate benefits from Package 2.
• The DOF seeks the rationalisation of tax incentives in order to minimise revenue losses
while limiting the granting of incentives to industries that genuinely need and deserve
them. Authority to grant or cancel incentives would be centralised under the DOF who
will act as chair of the Fiscal Incentives Review Board (FIRB). The process of transition
from the old to a new regime of “tax incentives consolidated into a single omnibus
incentives law” remains unclear, however. Perhaps, more importantly, volatility in tax
regimes may undermine regulatory stability as well as overall investor sentiment
towards the Philippines.
At this point, we believe it is difficult to speculate on the impact of Package 2 on
individual companies. While DOF is targeting enactment of Package 2 and 2 plus into
law this year. The version to be passed by Congress will likely be subject to numerous
(possibly major) changes, as was the case with Package 1. It is worth pointing out that it
is critical that the bulk of DOF’s tax reform proposals are enacted into law this year,
given that 2019 is a mid-term election year and with President Duterte constitutionally
prohibited from seeking a second term in the 2022 presidential elections.

Follow-through on infrastructure roll-out


One of the objectives of tax reform is to raise sufficient funds for the government’s “build,
build, build” program. Inability of tax reform to raise target revenues may result in fewer
projects getting built or a widening of the fiscal deficit if the government opts not to scale
back its infrastructure program and spend the target minimum of 6% of GDP despite the
revenue shortfall. The government may opt to adopt more PPP funding mode but this
seems inconsistent with pronouncements to rely on Official Development Assistance
(ODA) loans for funding. With regard to going with the ODA rather than PPP as a funding
mode, it is worth mentioning that the companies in the construction space have yet to be
significantly impacted by the “build, build, build” program while private sector
concessionaires in existing PPPs are experiencing a re-emergence of regulatory risk.

13
Nomura | Philippine perspectives 16 April 2018

Sector and stock selection


The Nomura Economics team maintains its positive growth outlook for the Philippines
(see Asia Insights, 11 April 2018). Despite a possible moderation in exports, 2018F and
2019F GDP growth forecasts remain at 6.9% and 7.1%, respectively, with domestic
demand still healthy. Neither is the widening current account deficit a source of concern
as investment spending and net FDI inflows are likely to fully offset the deficit. Given the
solid Philippine macroeconomic backdrop, our top picks are concentrated among
straightforward growth stories in the banking and property sectors as we believe these
companies can deliver healthy earnings growth notwithstanding external (potential for
trade war, QE unwinding) and internal (rising inflation) stresses and as well as
uncertainties associated with domestic (monetary policy, tax reform and infrastructure)
catalysts.

Stress test: balance sheets sound; consumer sector profits


may be impacted by FX and inflation, however
Outside of the telecom sector, which continues to have elevated capex spends, we see
limited balance-sheet-related risks to stocks under coverage. We expect rising inflation
and FX volatility to have a possible adverse impact on consumer stocks’ profitability,
however.

Fig. 35: Corporate stress test: balance sheets generally sound but consumer (food producers) profits most at risk
Analysis of company leverage and earnings exposure to macro volatility
2018F Leverage Earnings Risk Exposure?
External
Company D:Ex Risk? FX Inflation Shocks Comments
AEV PM 1.60 No Bulk of earnings from power
AP PM 1.50 No Revenues mostly contracted; predictable cash flows
AGI PM 0.80 No Inflation sensitive EMP more than offset by MEG
AC PM 2.40 No Majority of debt is fixed rate; bulk of earnings from property, banks and utilities.
ALI PM 0.89 No Property sector healthy; Top developers manage prices and costs on a per project basis
BPI PM NA No Rising rates might actually drive NIM improvement
CEB PM 1.04 No X X Capex and loans in USD but bulk of earnings in PHP; oil price volatility also a risk
CHP PM 0.75 Yes X X In technical breach of loan covenants; margins under pressure from competition and costs
CNPF PM 0.18 No X X Sells to price sensitive market; exposed to cost-revenue FX mismatch
DNL PM 0.53 No X Pricing lags may occur; costs not fully passed through to customer
DMC PM 0.40 No X SCC accounts for bulk of earnings but construction sub exposed to inflation risk
EMP PM 0.60 No X Bulk of PH customer base is price sensitive
FLI PM 0.99 No Property sector healthy; Top developers manage prices and costs on a per project basis
GLO PM 1.93 Yes X Most of capex in USD
GTCAP PM 0.59 No X Historically, margins of TMP exposed to FX risk
ICT PM 0.80 No X Slowdown in global trade biggest risk to ICT
JGS PM 0.74 No X X Does not hedge FX debt. Consumer and LCC businesses service price sensitive markets.
JFC PM 0.44 No Strong brand/pricing power can mitigate inflation risk
LBC PM NM No Net cash balance sheet
LTG PM 0.06 No X Net cash balance sheet but tobacco and spirits subs service price sensitive markets
MER PM 0.50 No Net cash balance sheet; core distribution business has regulated margins
MWC PM 1.10 No Water supply and distribution business faces regulatory - not macro - risks
MWIDE PM 2.40 No Future expansion might be limited by balance sheet
MEG PM 0.61 No Property sector healthy; Top developers manage prices and costs on a per project basis
MPI PM 0.67 No Risks are regulatory and not macro in nature
MBT PM NA No Rising rates might actually drive NIM improvement
PCOR PM 2.50 No X Company in deleveraging mode with no FX risk. Oil price and GRM volatility biggest risks
TEL PM 1.55 Yes X Most of capex in USD
PGOLD PM 0.12 No X Sells to price sensitive market
RLC PM 0.44 No Property sector healthy; Top developers manage prices and costs on a per project basis
RRHI PM 0.07 No Net cash balance sheet; middle class market less price sensitive
SMC PM 2.10 Yes Gearing may increase given capex requirements
SECB PM NM No Rising rates might actually drive NIM improvement
SCC PM 0.86 No X Exposed to commodity risks as coal producer
PIZZA PM 0.83 No Middle class market less price sensitive
SM PM 1.13 No Most debt at operating level; USD costs related to imported inventory
SMPH PM 0.73 No Property sector healthy; Top developers manage prices and costs on a per project basis
SSI PM 0.64 No X Imported inventory, competition, pressures margins
URC PM 0.41 No X X Inputs imported; inflation may squeeze margins especially if competition is intense
VLL PM 1.11 No Property sector healthy; Top developers manage prices and costs on a per project basis
WLCON PM 0.10 No Net cash balance sheet; middle class retail market less price sensitive

Source: Nomura research

14
Nomura | Philippine perspectives 16 April 2018

Rising rates means higher hurdle for valuations


Given the QE unwinding and a normalising rate environment, current equity valuations
need to be viewed in the context of implied real risk premiums. Implied Equity Risk
Premium (ERP) refers to forward earnings yields less real bond yields. In our view, the
valuation approach is particularly applicable to low-growth sectors (telecoms, utilities) as
the recent spike in bond yields has pushed equity risk premiums for dividend plays and
bond proxies below historical average. We recently downgraded our rating on Aboitiz
Power (AP PM, Neutral) for this reason notwithstanding the company’s sound
fundamentals.

Regulatory risks should not be overlooked


We believe Philippine corporates are exposed to risks associated with the proposed
changes in the Philippine tax system, populist and politicised tariff setting in the utility
and infrastructure sector, and the government’s intention to fulfil President Duterte’s
campaign promise to end contractualisation of labour.
Tax reform
The potential impact on equities of Package 1 should already be largely discounted by
the markets. It is difficult to speculate on the effects of Packages 2-4, however, given
that the DOF-proposed tax measures are likely to go through numerous, significant
amendments before they are enacted into law, as was the case with Package 1.
Nonetheless, we undertook an initial top-down analysis of Package 2 (Fig. 36) as well as
identified which sectors could be adversely affected by proposed changes in the tax
system.

Fig. 36: Package 2 may not be as well received by the equity markets as Package 1
Key aspects of DOF proposed Tax Reform Package 2
Components Current Proposed Analysis

Conditional: Starting Jan 1, 2020, reduce DOF wants revenue losses from corporate income
CIT by 1% pt for every 0.15% of GDP worth tax cut to be roughly offset by revenue gains from
1) Lowering of Statutory
of reduction in investment tax incentives. rationalization of incentives. Medium-term net effect
Corporate Income Tax 30%
Goal is to reduce CIT rate from 30% to 25% from the lowering of corporate income tax rates on
(CIT) rate
by 2022 while expanding the tax base by aggregate corporate earnings for stocks under
0.75% of GDP. coverage may be minimal.

Companies with high direct cost and low opex cost


2) Lowering of Optional
40% 20% of gross income structures opt for OSD in computing vatiable income
Standard Deduction
and may be affected by Package 2

14 investment promotion agencies Fiscal Incentives Review Board (FIRB) Simplification of incentives framework should have
(IPAs) grant incentives that are chaired by DOF to oversee all IPAs with just positive long-term implications for the country's
3) Centralized conflicting, uncoordinated, and/or one single menu of applicable incentives. investment climate and the government's fiscal
governance of incentives redundant; incentives granted to non- Only new investments meeting FIRB position. However, removal of incentives mid-stream
exporters or domestic firms without standards shall be granted income tax may adversely impact company earnings and
strategic importance incentives. investor confidence in Philippines.

Existing ITH alllowed to continue until expiry


4Y initially can be extended up to 8
4) Revisit income tax or for 5 years whichever comes first; Earnings and valuations of projects in mid-stream
years and available to expansion
holidays (ITH) Prospective ITH capped at 5 years and not might be adversely affected.
projects
available to expansion

5% tax on gross income (paid in lieu of


5) General rationalization Tax incentives need to be performance
CIT, VAT, and local taxes applicable in
of investment tax based, time-bound, targeted, and May have execution issues
perpetuity); customs duties exemptions
incentives transparent.
applicable in perpetuity

Source: DOF, Nomura research

• The proposed rationalisation of tax incentives under Package 2 could affect the relative
competitiveness of the domestic Business Process Outsourcing (BPO), energy, and
gaming industries. Property and utility/energy companies are top of mind but we expect
the rationalisation of tax incentives to impact all corporates in varied degrees as the
withdrawal or limitation of tax holidays and other investment incentives may have larger
implications for the economy and the Philippine investment climate.

15
Nomura | Philippine perspectives 16 April 2018

• The DOF is looking to further restructure the sin tax law (under Package 2 Plus) that
may ultimately result in higher selling prices for alcohol and thus impact volume growth
for food and beverage companies.
• The property sector may be affected by the government’s plans to centralise and
rationalise valuation of real estate for property tax purposes (Package 3).
End to contractualisation of labor
The Department of Labour and Employment’s (DOLE) order 174 (Series of 2017). DO
174 represents the Implementing Rules and Regulations (IRR) governing contracting
and subcontracting arrangements. A total ban on contractualisation would lead to higher
operating costs as companies that utilise third-party manpower agencies may have to
absorb and regularise their current pool of contract workers. In our view, retailers and
restaurant stocks would be most affected by this development.
Opaque regulatory environment for utilities and infrastructure
The government decision last 13 February to set aside the July 2017 arbitration win of
water concessionaire and MPI (MPI PM, Buy) subsidiary Maynilad was both confusing
and surprising. In our view, the utility sector may be entering a more politicised and
opaque regulatory environment for utilities and infrastructure, especially with inflation
rising and new infrastructure projects less reliant on private funding.

Prefer straightforward proxies for Philippine growth


We maintain our “find safety in growth” stock-picking strategy for the Philippines with our
top picks focused in the banks and property sectors. Note that:
• We believe bank and property stocks represent straightforward proxies for the healthy
Philippine macroeconomic backdrop. The two sectors also fared fairly well in our
balance sheet and earnings stress test.
• It is worth pointing out that banks and properties have actually underperformed the
PCOMP YTD, notwithstanding 2018F and 2019F EPS growth that compares favourably
versus index average (Fig. 37 and Fig. 38). We forecast market cap weighted
FY18F/19F EPS growth of 11.1%/21.2% and 15.7%/15.7% for the Philippine banks and
property sectors, respectively. This compares to FY18F/19F EPS growth of
12.2%/14.2% for the index. It is worth pointing that FY18F profit growth for the banks
excludes BDO (BDO PM, Not rated) and incorporates EPS dilution from planned cash
raising by MBT and BPI. Ayala Land (ALI PM) and Metrobank (MBT PM) represent our
top picks in the property and banking sectors, respectively.
• We remain cautious on utilities and telecoms (Fig. 39). We believe that both sectors are
bond proxies which face valuation headwinds with interest rates headed higher.
Regulatory (politicised tariff-setting environment, opaque regulations) and quasi
regulatory (non-regulated power generation firms selling to regulated utilities need to
have the power sales contracts approved, populist pressure supportive of a third
telecom player may impact regulations in the sector, etc) are also key risks to look out
for.
• We keep our non-consensus bearish view on consumer stocks given rising input costs
coupled with premium multiples at risk of de-rating. We believe the YTD
outperformance of the consumer segment is due to the outsized rallies in restaurant
stocks JFC and PIZZA as well as specialty retailer WLCON. Of late, we have
downgraded our ratings on all three stocks from Buy to Neutral given valuation
concerns.
• Larger conglomerates such as SM, AEV, and JGS appear near full value based on
sum-of-the-parts valuation (SOTP) methodology. We prefer under-owned names such
as SMC or LTG or laggard stocks such as AGI or GTCAP.

16
Nomura | Philippine perspectives 16 April 2018

Fig. 37: Both banks and property stocks have Fig. 38: Property and banks earnings growth expected to
underperformed YTD outpace that of the index
Sector performance (market cap weighted) vs PCOMP 2017F/18F/19F market cap weighted EPS y-y growth forecasts
25.0%

Banks 20.0%

15.0%

10.0%
Property

5.0%

0.0%
PCOMP 2017F 2018F 2019F
-5.0%

-10.0% -8.0% -6.0% -4.0% -2.0% 0.0% Property Banks (ex-BDO) PCOMP

Source: Bloomberg, Nomura research Source: Bloomberg, Nomura research

Fig. 39: We like banks and properties


Nomura Philippines sector outlook
Sector Relative View Comments Analysts

Sector positioned for re-rating. Strong GDP activity to support loan growth while rising rates provide near to
Banks Bullish Abigail Chiw
medium-term NIM boost. Asset quality remains healthy. Within the sector, we favor big banks MBT and BPI.

Scale and diversified businesses benefit from broadening growth and mitigate competitive risks. Larger
Thomas Earll Huang,
Conglomerates Neutral conglomerates such as SM, AEV, and JGS appear near full value from a SOTP perspective, however.
Genevieve Hazel Yap
Valuations for YTD laggards GTCAP and MPI and underowned LTG and SMC look more appealing.

Companies face difficulty translating strong macro backdrop into profit growth due to intensifying
Consumer Bearish competition and rising input costs. Valuations also pricey. Tax reform (lower PIT) positive in the long-run but Angelo Torres
a "double edged sword" in the near-term. RRHI only Buy rated stock in the sector.

High capex companies with dominant franchises are seeing cash flows and balance sheets at positive
Thomas Earll Huang,
Industrials Neutral inflection point. ICT (due to strong share price performance last year) and CLC (regulatory issues)
Ahmad Maghfur Usman
dowgraded to Neutral, however, leaving PCOR the top pick in the sector.

Tax reform and accelerated infrastructure spending should provide long-term tailwinds to the sector.
Property Bullish Concerns on residential oversupply have eased. BPO slowdown priced in. Real estate remains a direct Abigail Chiw
proxy for the PH economy with ALI our top pick. SMPH, MEG, and RLC also look attractive.

Industry undergoing structural shift. Capex elevated. Margins under pressure. Competitive pressures
Gopa Kumar, Thomas
Telecoms Bearish appear to be stabilizing but newsflow on 3rd player provides downside risk. We remain cautious on TEL
Earll Huang
and GLO.

PER expansion unlikely with rates rising. Beware regulatory/quasi-regulatory risks. Power rates soft due to
Utility/Power Neutral supply overhang. Focus on cost competitive gencos with clear development pipelines. SCC our lone buy Dante Tinga Jr
rated stock given attractive valuations following selldown.

Source: Nomura research

17
Nomura | Philippine perspectives 16 April 2018

Fig. 40: Outperformance of consumer led by outsized rally in restaurant stocks and
select retailers; underperformance of financials and property provide buying
opportunities in our view
YTD share price performance by sector (market cap weighted)
4.0% 3.0%

2.0%

0.0%

-2.0%

-4.0%
-4.6% -4.5%
-6.0%

-8.0% -6.9%

-8.9% -8.6% -8.5%


-10.0%

Source: Bloomberg, Nomura research

Fig. 41: We recently downgraded ratings on WLCON, JFC, and PIZZA due to valuation concerns
YTD share price performance of stocks under Nomura Philippine coverage

30.0%

20.0%

10.0%

0.0%

-10.0%

-20.0%

-30.0%
SMPH PM
SSI PM

ICT PM
DMC PM

JGS PM

BPI PM
LBC PM

MEG PM

PCOM

MER PM

PCOR PM

SMC PM
CHP PM

AGI PM

DNL PM

LTG PM
MPI PM

SCC PM
GLO PM

MBT PM
GTCAP PM

AP PM
SECB PM
CLC PM

CEB PM

AC PM
PCOMP Index
AEV PM
RLC PM

MWC PM
FLI PM

CNPF PM

MWIDE PM

WLCON PM
BDO PM

ALI PM

URC PM

TEL PM

SM PM

EMP PM

PGOLD PM

PIZZA PM
JFC PM
VLL PM

Source: Bloomberg

18
Nomura | Philippine perspectives 16 April 2018

Fig. 42: Top picks concentrated within banks and property sectors
Top picks (PHP)
BBG Mkt Cap Price (Php) Target Upside/ P/E (x) EPS Growth Div Yield EV/EBITDA P/B (x) ROE %
Company Ticker (USD mn) Rating 4/11/2018 (Php) Downside FY18F FY19F FY18F FY19F FY18F FY18F (x) FY18F FY18F
Ayala Land ALI PM 11,484 Buy 40.50 53.70 33% 19.2 16.3 22% 18% 1.6% 13.8 3.0 16.8%
Bank of the Philippine Islands BPI PM 9,000 Buy 103.80 133.00 28% 17.2 14.0 6% 23% 1.6% NA 1.9 12.2%
Megaworld MEG PM 2,856 Buy 4.60 5.70 24% 10.1 8.8 14% 16% 1.3% 10.4 1.0 10.2%
Metropolitan Bank and Trust MBT PM 6,280 Buy 81.95 119.30 46% 12.3 10.2 16% 21% 1.4% NA 1.1 10.1%
SM Prime Holdings SMPH PM 18,492 Buy 33.30 43.00 29% 34.3 29.8 16% 15% 1.0% 20.2 3.4 11.9%

Source: Bloomberg, Nomura estimates

Fig. 43: Nomura 42-stock Philippine coverage


Data as of end of trading 11 April 2018
BBG Mkt Cap Last Price (Php) P/E (x) EPS Growth Div Yield EV/EBITDA (x) P/B (x) ROE
Company Ticker (USD mn) Rating 4/11/2018 FY18F FY19F FY18F FY19F FY18F FY18F FY18F FY18F
Aboitiz Equity Ventures AEV PM 7,377 Neutral 68.00 14.5 13.4 10.7% 8.7% 2.4% 11.2 2.2 16.0%
Aboitiz Power Corporation AP PM 5,300 Neutral 37.40 10.9 10.2 8.1% 7.1% 3.8% 8.3 2.1 20.4%
Alliance Global Group, Inc. AGI PM 2,739 Buy 14.00 8.8 8.0 13.8% 10.0% 2.8% 8.0 0.8 9.2%
Ayala Corporation AC PM 11,568 Buy 967.00 18.6 16.5 11.9% 12.3% 0.6% 12.4 2.1 13.3%
Ayala Land ALI PM 11,484 Buy 40.50 19.2 16.3 21.9% 17.6% 1.6% 13.8 3.0 16.8%
Bank of the Philippine Islands BPI PM 9,000 Buy 103.80 17.2 14.0 5.9% 23.4% 1.6% NA 1.9 12.2%
Cebu Pacific CEB PM 1,065 Buy 91.30 6.3 5.6 5.5% 12.4% 3.2% 4.6 1.2 20.3%
Cemex Holdings Philippines CHP PM 357 Buy 3.57 22.6 33.7 24.4% -32.9% NA 10.3 0.6 2.8%
Century Pacific Food CNPF PM 1,153 Neutral 16.90 22.6 21.3 4.0% 6.1% 1.3% 15.3 3.7 17.4%
Chelsea Logistics Holdings Corp. CLC PM 266 Neutral 7.59 16.4 14.0 22.6% 16.9% NA 9.0 1.0 6.0%
D&L Industries DNL PM 1,472 Neutral 10.70 23.1 20.2 13.8% 14.1% 2.3% 17.2 4.5 20.6%
DMC Holdings DMC PM 3,160 Neutral 12.36 10.1 9.6 8.9% 5.3% 4.4% 6.8 1.9 20.0%
Emperador Inc. EMP PM 2,279 Neutral 7.34 18.1 17.6 3.6% 2.9% 2.1% 14.0 2.1 12.0%
Filinvest Land Inc. FLI PM 822 Buy 1.76 6.9 6.3 9.4% 9.9% 3.9% 13.0 0.6 9.5%
Globe Telecom GLO PM 4,044 Neutral 1,580.00 15.1 13.8 3.1% 9.4% 5.2% 6.1 3.0 20.5%
GT Capital Holdings, Inc. GTCAP P 4,109 Buy 1,108.00 13.7 11.8 14.2% 16.9% 0.5% 9.6 1.3 11.0%
Intl Container Terminal Services ICT PM 3,879 Neutral 99.00 23.4 17.4 15.3% 30.3% 1.2% 9.7 3.7 17.3%
JG Summit Holdings, Inc. JGS PM 8,835 Neutral 64.05 17.7 17.5 11.7% 1.3% 0.3% 9.6 1.6 9.5%
Jollibee Foods Corp JFC PM 6,060 Neutral 289.60 42.1 37.6 5.5% 11.8% 0.9% 22.4 7.1 17.7%
LBC Express Holdings Inc LBC PM 412 Buy 15.00 19.1 17.8 18.7% 7.0% 1.6% 8.9 3.9 22.1%
LT Group, Inc. LTG PM 4,043 Buy 19.40 17.8 13.9 8.9% 27.9% 1.1% 3.1 1.4 7.9%
Manila Electric Company MER PM 7,119 Neutral 328.00 18.9 18.6 -1.6% 1.1% 4.8% 10.8 4.6 24.6%
Manila Water Company, Inc. MWC PM 1,074 Neutral 27.15 9.8 9.3 2.8% 4.4% 3.5% 6.5 1.1 13.8%
Megawide Construction Corp. MWIDE P 892 Neutral 21.65 49.6 45.0 -31.3% 10.1% NA 18.7 2.9 9.0%
Megaworld MEG PM 2,856 Buy 4.60 10.1 8.8 14.4% 15.5% 1.3% 10.4 1.0 10.2%
Metro Pacific Investments MPI PM 3,143 Buy 5.18 10.8 10.2 8.0% 5.8% 2.9% 9.4 0.9 8.9%
Metropolitan Bank & Trust CompanMBT PM 6,280 Buy 81.95 12.3 10.2 15.9% 20.6% 1.4% NA 1.1 10.1%
Petron Corporation PCOR PM 1,659 Buy 9.19 6.4 5.4 53.8% 18.3% 1.1% 6.1 1.2 23.2%
PLDT Inc. TEL PM 6,033 Neutral 1,450.00 14.7 14.7 -4.9% 0.1% 5.2% 6.8 2.8 15.4%
Puregold Price Club PGOLD P 2,766 Neutral 51.95 22.2 20.3 8.9% 8.9% 0.6% 12.4 2.7 12.7%
Robinsons Land RLC PM 1,900 Buy 19.00 13.8 12.4 -4.2% 10.9% 1.9% 7.9 1.1 8.8%
Robinsons Retail Holdings, Inc. RRHI PM 2,347 Buy 88.00 23.6 21.4 10.1% 10.2% 0.8% 11.9 2.2 9.5%
San Miguel Corporation SMC PM 6,541 Buy 142.80 12.0 11.0 12.6% 9.5% 2.5% 6.4 1.2 10.1%
Security Bank Corporation SECB PM 3,288 Neutral 226.60 14.5 12.1 14.3% 20.4% 1.3% NA 1.5 10.7%
Semirara Mining and Power CorporSCC PM 2,463 Buy 30.05 8.3 8.4 8.4% -0.7% 3.3% 6.3 2.3 30.9%
Shakey's Pizza Asia Ventures PIZZA PM 436 Neutral 14.80 26.8 22.9 12.2% 16.7% 0.7% 16.9 4.8 19.5%
SM Investments Corporation SM PM 22,849 Neutral 985.00 31.1 26.3 19.1% 18.0% 1.5% 16.5 3.5 11.6%
SM Prime Holdings SMPH PM 18,492 Buy 33.30 34.3 29.8 15.5% 15.2% 1.0% 20.2 3.4 11.9%
SSI Group, Inc. SSI PM 167 Neutral 2.62 12.3 11.2 9.7% 9.4% NA 4.6 0.8 6.4%
Universal Robina Corporation URC PM 6,172 Reduce 145.40 33.2 31.5 -1.4% 5.6% 1.5% 16.8 3.8 11.7%
Vista Land & Lifescapes VLL PM 1,694 Buy 6.86 8.8 7.5 16.6% 16.5% 2.1% 10.0 1.0 11.9%
Wilcon Depot, Inc. WLCON P 853 Neutral 10.80 31.2 28.1 11.5% 11.1% 0.8% 17.4 3.5 12.4%

Source: Bloomberg, Nomura estimates

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Nomura | Philippine perspectives 16 April 2018

Appendix A-1
Analyst Certification
We, Dante Tinga Jr, Chetan Seth and Euben Paracuelles, hereby certify (1) that the views expressed in this Research report
accurately reflect our personal views about any or all of the subject securities or issuers referred to in this Research report, (2)
no part of our compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in
this Research report and (3) no part of our compensation is tied to any specific investment banking transactions performed by
Nomura Securities International, Inc., Nomura International plc or any other Nomura Group company.

Issuer Specific Regulatory Disclosures


The terms "Nomura" and "Nomura Group" used herein refers to Nomura Holdings, Inc. and its affiliates and subsidiaries, including Nomura
Securities International, Inc. ('NSI') and Instinet, LLC('ILLC'), U. S. registered broker dealers and members of SIPC.

Materially mentioned issuers

Issuer Ticker Price Price date Stock rating Previous rating Date of change Sector rating
Aboitiz Equity Ventures AEV PM PHP 68.95 12-Apr-2018 Neutral Not Rated 14-Feb-2017 N/A
Alliance Global Group,
Inc. AGI PM PHP 14.20 12-Apr-2018 Buy Not Rated 12-Apr-2017 N/A
Ayala Land ALI PM PHP 40.80 12-Apr-2018 Buy Not Rated 14-Feb-2017 N/A
Aboitiz Power Corporation AP PM PHP 37.50 12-Apr-2018 Neutral Buy 19-Mar-2018 N/A
Bank of the Philippine
Islands BPI PM PHP 109.00 12-Apr-2018 Buy Neutral 03-Apr-2018 N/A
PHP
GT Capital Holdings, Inc. GTCAP PM 1,123.00 12-Apr-2018 Buy Not Rated 12-Apr-2017 N/A
Intl Container Terminal
Services ICT PM PHP 99.10 12-Apr-2018 Neutral Buy 22-Jan-2018 N/A
Jollibee Foods Corp JFC PM PHP 300.00 12-Apr-2018 Neutral Buy 21-Mar-2018 N/A
JG Summit Holdings, Inc. JGS PM PHP 64.00 12-Apr-2018 Neutral Not Rated 12-Apr-2017 N/A
LT Group, Inc. LTG PM PHP 19.40 12-Apr-2018 Buy Reduce 17-Jan-2018 N/A
Metropolitan Bank & Trust
Company MBT PM PHP 81.80 12-Apr-2018 Buy Not Rated 11-Apr-2017 N/A
Megaworld MEG PM PHP 4.70 12-Apr-2018 Buy Neutral 11-Apr-2018 N/A
Shakey's Pizza Asia
Ventures PIZZA PM PHP 14.86 12-Apr-2018 Neutral Buy 16-Feb-2018 N/A
SM Investments
Corporation SM PM PHP 988.00 12-Apr-2018 Neutral Buy 10-Oct-2017 N/A
San Miguel Corporation SMC PM PHP 142.40 12-Apr-2018 Buy Neutral 14-Aug-2017 N/A
SM Prime Holdings SMPH PM PHP 34.45 12-Apr-2018 Buy Neutral 08-Nov-2017 N/A
Wilcon Depot, Inc. WLCON PM PHP 10.98 12-Apr-2018 Neutral Buy 22-Mar-2018 N/A

Important Disclosures
Online availability of research and conflict-of-interest disclosures
Nomura Group research is available on www.nomuranow.com/research, Bloomberg, Capital IQ, Factset, Reuters and ThomsonOne.
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The analysts responsible for preparing this report have received compensation based upon various factors including the firm's total revenues, a
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Distribution of ratings (Nomura Group)


The distribution of all ratings published by Nomura Group Global Equity Research is as follows:
51% have been assigned a Buy rating which, for purposes of mandatory disclosures, are classified as a Buy rating; 42% of companies with this
rating are investment banking clients of the Nomura Group*. 0% of companies (which are admitted to trading on a regulated market in the EEA)
with this rating were supplied material services** by the Nomura Group.

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Nomura | Philippine perspectives 16 April 2018

43% have been assigned a Neutral rating which, for purposes of mandatory disclosures, is classified as a Hold rating; 51% of companies with
this rating are investment banking clients of the Nomura Group*. 0% of companies (which are admitted to trading on a regulated market in the
EEA) with this rating were supplied material services by the Nomura Group
6% have been assigned a Reduce rating which, for purposes of mandatory disclosures, are classified as a Sell rating; 6% of companies with this
rating are investment banking clients of the Nomura Group*. 0% of companies (which are admitted to trading on a regulated market in the EEA)
with this rating were supplied material services by the Nomura Group.
As at 31 March 2018.
*The Nomura Group as defined in the Disclaimer section at the end of this report.
** As defined by the EU Market Abuse Regulation

Distribution of ratings (Instinet, LLC)


The distribution of all ratings published by Instinet, LLC Equity Research is as follows:
61% have been assigned a Buy rating which, for purposes of mandatory disclosures, are classified as a Buy rating; Instinet LLC has provided
investment banking services to 0% of companies with this rating within the previous 12 months.
35% have been assigned a Neutral rating which, for purposes of mandatory disclosures, is classified as a Hold rating; Instinet LLC has provided
investment banking services to 0% of companies with this rating within the previous 12 months.
4% have been assigned a Reduce rating which, for purposes of mandatory disclosures, are classified as a Sell rating; Instinet LLC has provided
investment banking services to 0% of companies with this rating within the previous 12 months.

Definition of Nomura Group's equity research rating system and sectors


The rating system is a relative system, indicating expected performance against a specific benchmark identified for each individual stock,
subject to limited management discretion. An analyst’s target price is an assessment of the current intrinsic fair value of the stock based on an
appropriate valuation methodology determined by the analyst. Valuation methodologies include, but are not limited to, discounted cash flow
analysis, expected return on equity and multiple analysis. Analysts may also indicate expected absolute upside/downside relative to the stated
target price, defined as (target price - current price)/current price.

STOCKS
A rating of 'Buy', indicates that the analyst expects the stock to outperform the Benchmark over the next 12 months. A rating of 'Neutral',
indicates that the analyst expects the stock to perform in line with the Benchmark over the next 12 months. A rating of 'Reduce', indicates that
the analyst expects the stock to underperform the Benchmark over the next 12 months. A rating of 'Suspended', indicates that the rating, target
price and estimates have been suspended temporarily to comply with applicable regulations and/or firm policies. Securities and/or companies
that are labelled as 'Not rated' or shown as 'No rating' are not in regular research coverage. Investors should not expect continuing or
additional information from Nomura relating to such securities and/or companies. Benchmarks are as follows: United States/Europe/Asia ex-
Japan: please see valuation methodologies for explanations of relevant benchmarks for stocks, which can be accessed
at: http://go.nomuranow.com/research/globalresearchportal/pages/disclosures/disclosures.aspx; Global Emerging Markets (ex-Asia): MSCI
Emerging Markets ex-Asia, unless otherwise stated in the valuation methodology; Japan: Russell/Nomura Large Cap.

SECTORS
A 'Bullish' stance, indicates that the analyst expects the sector to outperform the Benchmark during the next 12 months. A 'Neutral' stance,
indicates that the analyst expects the sector to perform in line with the Benchmark during the next 12 months. A 'Bearish' stance, indicates that
the analyst expects the sector to underperform the Benchmark during the next 12 months. Sectors that are labelled as 'Not rated' or shown as
'N/A' are not assigned ratings. Benchmarks are as follows: United States: S&P 500; Europe: Dow Jones STOXX 600; Global Emerging
Markets (ex-Asia): MSCI Emerging Markets ex-Asia. Japan/Asia ex-Japan: Sector ratings are not assigned.

Target Price
A Target Price, if discussed, indicates the analyst’s forecast for the share price with a 12-month time horizon, reflecting in part the analyst's
estimates for the company's earnings. The achievement of any target price may be impeded by general market and macroeconomic trends, and
by other risks related to the company or the market, and may not occur if the company's earnings differ from estimates.

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NSL under an agreement between BDO Unibank, NSL and BDO-NS. BDO-NS is a Philippines securities dealer, which is a joint venture
between BDO Unibank and the Nomura Group.

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Nomura | Philippine perspectives 16 April 2018

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Nomura | Philippine perspectives 16 April 2018

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