SM GROUP OF COMPANIES

GENERAL OVERVIEW

ABOUT US
Company Headquarters SM Investments Corporation One E-Com Center, 10th Floor, Harbor Drive Mall of Asia Complex, CBP-1A Pasay City 1300, Philippines Directline: [632] 857-0100 Email: ir@sminvestments.com Website: www.sminvestments.com

SM GROUP OF COMPANIES

Viewpoint: Chief Executive Officer (CEO) Time Context: Present (October 2009) Latest Press release (09.15.09) SM Investments Issues Landmark Bond Deal Worth US$500mn Wednesday, September 15, 2009 SM Investments Corporation (SM) successfully issued its five-year dollar bonds worth US$500 million at a fixed rate of 6% p.a. This is the largest US dollar bond since 1997, with the lowest coupon rate to be issued by a Philippine corporate.

SM GROUP OF COMPANIES

This landmark issue marks the first successful Philippine corporate that has capitalized on the reopening of the regions debt capital markets. Strong offshore and onshore bids resulted in an oversubscribed issue, supporting the message that the market is open for Asian borrowers with strong credit and a compelling story.

SM GROUP OF COMPANIES

SM President Harley Sy said, We thank the investors for their continued support of our bond issue and their confidence in SMs ability to meet its medium-term goals. There is reason for us to be more optimistic on near-term prospects now that the global economy appears to be stabilizing and recovering from the recent financial shake up.

SM GROUP OF COMPANIES

SM reported that its net income as of end June 2009 grew 14% to Php7.4 billion from revenues which grew 12.4% to Php74 billion resulting in an improvement in net margin from 9.8% the previous year to 10% this year. EBITDA margin also improved from 19.2% last year to 21.5% this year.

SM GROUP OF COMPANIES

SM will use the proceeds for general corporate purposes to include refinancing some of its maturing obligations.

Barclays Capital and Citi were the joint lead managers and bookrunners for the issue.

SM GROUP OF COMPANIES

SM is now one of the largest holding companies in the Philippines with a market capitalization of US$3.8 billion as of end June 2009. SM is the dominant player in Philippine retail, mall operations, and banking. It is also an emerging player in residential, commercial property, resorts and hotel development.

RETAIL MERCHANDISING

SM is the Philippine's most dominant player in retail with 102 stores nationwide. Of these, 34 are SM Department Stores; 25 are SM Supermarkets, 16 are SaveMore branches; and 13 are SM Hypermarkets. SM also owns 60% of Pilipinas Makro which has 14 Makro stores. In 2008, SM retail opened a total of 11 stores, of which 2 are department stores, 2 are supermarkets, 2 are hypermarkets, and 5 are SaveMore stores.

PROPERTY

SM's property group is a fast emerging business with interests in residential, commercial, leisure and hotel development. Listed company SM Development Corp. is rapidly growing with seven ongoing residential condominium projects. Costa del Hamilo is embarking on a long-term integrated eco-tourism project in Nasugbu, Batangas. SM is also developing the 60-hectare Mall of Asia Complex. Its hotel projects all fall under SM Hotels Corp.

MALL OPERATIONS

SM is the dominant player in mall operations with 34 malls nationwide. The malls are owned and operated by publicly listed SM Prime Holdings, Inc. In 2008, SM Prime inaugurated three new malls in Marikina, Rosales, and Baliwag, and expanded two, namely SM Megamall and SM City North Edsa. In May 2009, it opened its first mall in the Bicol region, SM City Naga. All 34 supermalls have a total gross floor area (GFA) of 4.4 million square meters.

BANKING AND FINANCE

SM's bank network is the largest in the Philippines with its 40% interest in BDO Unibank and 20% interest in China Banking Corp. Last year, BDO became the country's largest bank in terms of assets with 665 branches nationwide. Chinabank is the 10th largest with 214 branches nationwide.

Corporate Social Responsibility (CSR)

Creating ways for people to help people, armed with deep commitment, sincerity and a passion for service, SM Foundation, Inc. (SMFI) strives to live up to its mission to help thousands of disadvantaged who are deprived of opportunities for a brighter future.

Mission, Vision and Values

Vision We envision SM to be a Filipino brand that is world class. We see SM as a market leader that constantly innovates to provide best-value products and services to its millions of customers.

Mission

To achieve world-class standards, SM shall adhere to long-held corporate values of hard work, focus, and integrity. To meet the ever-changing needs of customers, SM shall take the lead in constantly innovating its products and services. To become an employer of choice, SM shall develop its employees into professionals who are highly motivated to excel in their respective fields of service.

Mission

To generate sustainable growth and optimal returns, SM shall exercise prudence in resource management based on its vision and principles of good corporate governance. To assist and nurture the communities in which it operates, SM shall progressively build on its role as a responsible corporate citizen through its various civic and environmental programs.

Core Values
Vision. Leadership. Innovation. Focus. Hard Work. Integrity. Prudence.

SMs Net Income Grows 14% to Php7.4 Billion Thursday, August 13, 2009 Philippine conglomerate SM Investments Corporation (SM) realized a 14% growth in net income of Php7.4 billion for the first half of 2009 from Php6.5 billion during the same period in 2008. The companys consolidated revenues, on the other hand, increased 13% to Php74.5 billion as compared to Php65.8 billion in 2008. EBITDA for the period reached Php16.3 billion, for an EBITDA margin of 21.9%.

SM Investments Corporation (SM)

SM President Mr. Harley Sy said, SMs results for the first six months of the year stayed ontrack as all our major subsidiaries performed well amid a generally slower business environment due to the global financial crisis. Our long-term view of the economy keeps us focused on our strategic expansion program in all our lines of business, complemented by efforts to better understand our markets, and ensuring cost efficiencies.

SM Investments Corporation (SM)

SMs main growth drivers continued to be the retail and property groups, while the mall business was a major source of steady growth in earnings. The banks have also shown significant recovery as they continued to benefit from the integration of past acquisitions and increased market penetration.

SM Investments Corporation (SM)

Among SMs core businesses, retail merchandising contributed the most to the companys net income profile, accounting for 39% of the total. This was followed by shopping malls and banking with 27% and 22%, respectively. The contribution of SMs real estate business increased significantly to 12.0%.

Statement of the Problem

Progressive Problems How to improve or at least maintain its market dominance in retail, mall operation, banking and finance How to capture market dominance in the property market

Creative Problem

How to innovate and create new products and services to completely round, up Maslows hierarchy of needs How to enshrine SM as top-of-mind brand for all human needs How to compel all Filipinos to surrender their purchasing power to just one company - SM

STATEMENT OF OBJECTIVES

To improve or at least maintain market dominance in retail merchandising, mall operations and banking and finance To expand market reach domestically and globally by saturating the Filipino market and making a dent in the Chinese mall market To develop new markets or carve out niches by offering novel, creative and innovative products and services To drum up corporate social responsibility by undertaking programs, activities and projects geared toward socio-economic upliftment of underprivileged Filipinos

AREAS OF CONSIDERATION
SWOT ANALYSIS OVERALL STRENGTHS
1. 2.

3.
4. 5. 6. 7.

8. 9.

An excellent model of good governance Market share dominance in retail merchandising, mall operations, universal banking & finance operations Strategic location of business establishments Excellent brands and fantastic customer loyalty Widest array of products and services offered Better product quality relative to rivals Abundant and reliable resources- human, financial and physical Agility in responding to change Very strong investors confidence

SM Investments Net Income Profile, January to June 2009

Retail merchandising 39% Mall operations 27% Banking & finance 22% Property 12%

STRENGTH ON STRENGTH PROFILE

On CORPORATE GOVERNANCE
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2.

Well conceived and crafted Manual on Corporate Governance Revised and adopted in 2007, the Manual institutionalizes the principles of good corporate governance in the entire organization. It lays down the compliance system and identifies the responsibilities of the Board of Directors and management

CORPORATE GOVERNANCE
1.

It also states the Company's policies on disclosure and transparency, and mandates the conduct of communication and training programs on corporate governance. The Manual further provides for the rights of all shareholders and the protection of the interests of minority stockholders. It likewise sets the penalties for non-compliance with the Manual.

AWARDS AND RECOGNITION

Voted as one of the Philippines Best in Corporate Governance for 2008, based on a survey by The Asset Magazine. SM was voted for the same award in 2007. The award gives credence to the progressive approach that the holding company is taking in the area of corporate governance. The other awardees were Manila Water, Ayala Corp, Globe Telecoms, and Bank of the Philippine Islands.

STRENGTH ON STRENGTH PROFILE

1.

On FINANCIAL MANAGEMENT
Very strong fundamentals strong financial condition; profitability; solvency, leverage, rate of return; Excellent credit rating the SM retail bond is rated triple A by the Philippine Ratings Services Corp. (PhilRatings), the highest credit rating on PhilRatings long-term credit rating scale; It is also assigned to issuing companies with an extremely strong ability to meet its financial obligations

2.

FINANCIAL MANAGEMENT

SM was also awarded the 2008 Best Philippine Capital Markets Deal Award by the International Financing Review (IFR) Asia for its US$ 350 million bonds that were issued in July 2008. The SM bonds, which mature in five years with a three-year put option, were priced at a fixed rate of 6.75 percent, one of the lowest yields in the market. It was also the first major international corporate bond offering from the Philippines in over two years, and the countrys largest private bond issue. In addition, the issue was successfully launched in spite of a turbulent market environment. UBS served as the sole book runner of the issue.

Strength on Strength Profile

On MARKETING MANAGEMENT

Market share dominance in retail merchandising, mall operations, universal banking & finance operations Excellent location of malls, stores, banks, property development projects, etc. Very high occupancy rate of malls 96% Very strict selection process for tenants; very strong anchor tenants in malls; very balanced mix of tenants Institutional brands SM Supermall, SM Department store, BDO Pioneering , trendsetter supermalls, ice skating, IMAX, sky garden & amphitheater
Rapidly growing patronage of hotel & leisure products

STRENGTH ON STRENGTH PROFILE

On HUMAN RESOURCE MANAGEMENT

Very capable and hardworking founder, family owners and managers Very industrious workforce Excellent work ethic modelled after a hardworking founder and family of handson owners

WEAKNESSES
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VULNERABILITY to depressed socioeconomic problems (retail merchandising, property, durable products) UNCERTAIN and shifting socioeconomic and political scenario DEPENDENCE on availability and price of energy (air conditioning)

OPPORTUNITIES
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2. 3.

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Bright prospects of the Asia-Pacific region due to improving global economic conditions Rapid economic progress in China Improving economic conditions of Filipino Overseas Workers Excellent tourism prospects both local and foreign due to internationally recognized tourist visit and dive sites ( Palawans Subterranean river & Tubattaha reef, Siargao, Cebu, Anilao, etc.) Improving economic status of locals in Metro Manila and key city hubs

THREATS

Aggressive head-on competitors- Ayala & Robinsons Most recent devastation brought by typhoon Ondoy & Pepeng to Metro Manila and the whole of Luzon Growing militancy of Filipinos as a result of poverty and incorrigible corruption in society Glaring disparity in wealth of Taipans which include Henry Sy, Sr. and the ordinary Pinoy Political instability

COMPETITION of CONGLOMERATES
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JG Summit- Robinson Malls, Department stores and Hypermarts, Properties, AyalaS - Ayala Malls (Greenbelt, Glorietta, Alabang Town Center, Trinoma, Cebu); High-rises, Oakwood Hotel, BPI

No. 1 ALTERNATIVE COURSE OF ACTION Aggressively pursue market and product expansion

ADVANTAGES
It will enhance market dominance and provide a broader network and customer base It can stun head-on competitors and block the entry of new and potential competitors

DISADVANTAGES It is too risky at this time and costly to undertake It involves huge capital investment and unusual professional and technical skills

No. 2 ALTERNATIVE COURSE OF ACTIONLimit business exposure to areas that are less vulnerable to shifting market conditions

ADVANTAGE By limiting its focus to safe segments, the company can shield itself from market shocks and conserve its resourceS DISADVANTAGE It will put a brake on the momentum of growth and set back the conglomerate. It may give competition an avenue to expand while SM is on the wait & seemode

No. 3 ALTERNATIVE COURSE OF ACTION

Expand the CSR initiatives and highlight its importance in the strategic planning process
ADVANTAGES

DISADVANTAGES

It will provide the company a clearer understanding and a more humane way of doing business in the 21st century It will delight customers to know they are able to help the Philippines improve economically by buying from SM a very responsible corporate giant It will imbue employees with a strong team spirit and lead them to be more involved and responsible in the successful implementation of the corporate goals and objectives It will encourage a more open communication among managers as a result of more fulfilling membership in the business panel It will provide a mechanism for the company to gain wider exposure to the populace which is its customer and beneficiary at the same time The strategic planning will gain a gentle and humanizing dimension by melding hard financial figures with noble humanistic and environmental concerns It will endear SM to all sectors of society thereby gaining the populaces full trust and confidence that can lead them to surrender their purchasing power to this lovable total service conglomerate

This will require diversion of financial resources, exertion of effort and require much time and attention This will involve additional work and is time consuming This might lead to distraction and too many focal points which may hurt the strategic planning process and hurt the chances of achieving corporate goals and objectives It is very difficult to mix money and God/goodness. Tension can distract and destruct. It may not be an eitheror, but both may suffer if not handled in a balanced way

STRATEGY FORMULATION
We choose to select option nos. 1 & 3 as the course of action to take for the following reasons: 1. Option 1 will push forward SMs thrust for sustained and escalating market dominance in all lines of business, namely: retail merchandising, mall operations, banking and finance and property. 2. Option 3 will humanize SM and endear it to its customers as the best business, the best brand, the best service provider and the best friend 3. Combining the 2 options will lead to assured market dominance, market and product expansion through innovation and product and service upgrades

ACTION PLAN
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4. 5.

Conduct intensive and comprehensive study on how to pursue expansion plans in the Philippines and in China to expand markets in terms of products /services and geographic locations Direct the Research and Development Department of the company to analyze, assess existing products, and determine the innovations that may be developed and introduced Continuously monitor and track developments and trends in all lines of business and engage the product development teams to create and innovate Challenge the creativity of think-tanks to come up with new ideas Keep a keen eye on operations and financial results to ensure cost-effectiveness, avail of economies of scale and achieve efficiency

POTENTIAL PROBLEMS
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What if the strategy employed fails, meaning when SM slips in market dominance? When the core industries of the company becomes exposed to greater risks of economic crisis, how can the company recover and shield its resources? For example, what will SM do if the cost of electricity and the cost of keeping the malls cool becomes too costly and beyond reach of customers? When the CSR move fails to attract the customer patronage that it enjoys now?

CONTINGENCY PLANS
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2.

When the formulated strategy fails, the company has to carefuly identify and evaluate the factors that contributed to the failure; check the ones that were overlooked, re-think, adjust and revise the strategy When costs incurred exceeded the benefits derived, the company has to forego the plan and instead: a. if markets are favorable, invest to new emerging industries that promise great prospects b. if market is unfavorable, shelve the plan and exercise prudence in the spending or placing of resources

FALL BACK OPTIONS

Determine the line(s) of business where SM is strongest and focus/concentrate on it (them). Reduce the scale of operations to manageable proportions and slowly rebuild from there Do not quit but build from strength to strength until the situation clarifies. Consolidate , not dissipate

Insights

The story of SM lies in one word aircon. On the day Henry Sy bought the first aircon to cool his store in Quiapo, the fate of SM has been sealed. It was a store with a cool difference. People loved the cool environment. They preferred to stay in SM rather than stay at home. That started the malling habit. He ate, drank, chat with friends, even rested and slept there- nakaaircon na walang bayad pa. How nice and how wise, di ba? On the day Henry Sy decides to poke his gun at us to surrender all our earnings to him, that will be the day the Filipinos will realize that they have been working for Henry Sy all their lives: from the day he was born till the day he dies. The slogan goes: SM, weve got it all for you To which one will say: SM,SM, take all my life na, do! Dean Estelita D. Bello

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