COL 2014 Fundamental Market Outlook Presentation by Mrs. April Lee-Tan, CFA COL Head of Research

2. Philippines to “Toe The Line”
An idiomatic expression meaning to
conform to a rule - Wikipedia

3. Philippines to “Toe The Line”
PSEi Trailing P/E Band
25.0
21.2
20.0
15.0
10.0
5.0
0.0
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Source: Bloomberg
The PSEi went
ahead of itself
during 1H13…

4. Philippines to “Toe The Line”
… Brought About By Ample Liquidity Conditions
Net Foreign Buying in the PSE
10-Yr Bond Rate
Php Bil
% Change
2008
-51
-177.2%
2009
20
140.1%
2010
54
164.8%
2011
58
6.6%
2012
98
69.5%
5M13
72
109.4%
8%
Source: Bloomberg
7%
4%
3%
0%
2011
Source: Bloomberg
2012
2013

5. Prospects to Reduce Liquidity Trigger
Sell-off in May
Timeline of News on Tapering of
US Fed Bond Buying Program
MAY 22
DEC 18
Fed minutes noted that a
number of participants
expressed willingness to
reduce QE as early as June
Fed announced it would
start to taper its bondbuying program from
US$85 Bil to US$75 Bil a
month beginning in
January
Jan 29
Fed announced it would
taper its bond-buying
program further to US$65
Bil a month beginning in
February

6. Sell-off Continues
Normalization
process not yet
over
Factors Negatively
Affecting the
Philippine Market
Bad news
locally
Weakness of
other emerging
market or EM
economies

7. Normalization Process Not Yet Over
Relative Valuation of Global Markets
2014
P/E
EPS
Growth
10-YrAve
P/E
Philippines
16.3
6.4%
14.9
Thailand
11.7
8.0%
13.9
Vietnam
11.5
11.2%
16.2
Malaysia
15.6
9.5%
15.5
Indonesia
13.4
12.5%
18.0
US
14.9
9.6%
16.2
Europe
12.5
29.0%
13.8
India
14.8
8.4%
18.7
China
7.9
19.8%
20.7
Source: Bloomberg
Valuations not yet
cheap relative to
earnings growth,
other markets &
historical average

8. Normalization Process Not Yet Over
Spread of Philippines and US 10-Yr Bond Rates
US vs Phil 10 Year
10
US 10 Year
PH 10 Year
8
Spread
6
4.1
4
2.7
2
1.4
Source: Bloomberg
1/31/2014
10/31/2013
7/31/2013
4/30/2013
1/31/2013
10/31/2012
7/31/2012
4/30/2012
1/31/2012
10/31/2011
7/29/2011
4/29/2011
1/31/2011
10/29/2010
7/30/2010
4/30/2010
1/29/2010
10/30/2009
7/31/2009
4/30/2009
1/30/2009
0
Interest rates still
have room to
increase

9. Normalization Process Not Yet Over
Interest Rates Still have Room to Increase
10 Yr- Bond Rate vs. Inflation Rate of BBB Rated Countries
12.00
Too High
Interest Rate
10.00
8.00
y = 0.6979x + 3.1317
R² = 0.7988
6.00
4.00
Philippines
2.00
Too Low
0.00
-2.00
0.00
Source: Bloomberg
2.00
4.00
6.00
Inflation Rate
8.00
10.00
12.00

10. Normalization Process Not Yet Over
Peso Continues to Weaken
Peso is weaker by 10.1% compared to start of 2013
PHP:USD (2013-present)
46
45.013
44
42
40
1/2/2013
Source: Bloomberg
4/2/2013
7/2/2013
10/2/2013
1/2/2014

11. Weakness of Other EM Economies
Lackluster YTD Performance of “Fragile Five” + Thailand
Stock market
Index
USD Exchange
Rate
End
2013
3-Feb
Basis
Point
Change
-4.1%
10.18
9.96
-22
11.09
-5.4%
7.91
8.70
79
2.36
2.41
-1.9%
13.20
13.43
23
-4.3%
61.80
62.54
-1.2%
8.83
8.71
-12
4,384
2.6%
12,171
12,194
-0.2%
8.45
9.07
62
1,299
1,280
-1.4%
32.70
32.76
-0.2%
3.93
4.00
7
5,890
5,908
0.3%
44.40
45.33
-2.1%
3.50
4.05
55
End
2013
3-Feb
%
Change
End
2013
3-Feb
%
Change
Turkey
67,802
63,284
-6.7%
2.15
2.24
South Africa
46,256
44,437
-3.9%
10.52
Brazil
51,507
46,964
-8.8%
India
21,171
20,261
Indonesia
4,274
Thailand
Philippines
Source: Bloomberg
10-Yr
Bond Rate

12. Bad News Locally
Negative News
o Lackluster 3Q13 earnings season
o Typhoon Yolanda to pull down GDP growth
o “Soft spots” in 4Q13 GDP data
• Constructions spending down 0.5%
• Government spending down 5.2%

13. Current Market Weakness
an Opportunity to Accumulate Stocks
Reasons to be Bullish Over the Longer Term
o
o
o
o
Most factors hurting investor sentiment are noise
Abundance of favorable economic developments merely overlooked
Higher rates already priced in
Stocks are currently the most attractive peso investment instrument
available

14. Most Factors Hurting Investor Sentiment
Are Noise
Philippines Fundamentally Stronger than other EMs
6.0
Current Account Balance (% GDP)
3.1 2.8
4.0
2.0
0.0
-2.0
0.2
Turkey
-4.0
-6.0
-8.0
-10.0
-12.0
South Africa
-3.6
-6.1
-7.2
-9.7
Brazil
-2.1
-2.4
-3.6
-5.5
-6.8
2011
India
Indonesia
-3.8
-4.4
-5.4
2012
-2.8
-3.7
4.2
1.2
Thailand
-0.4
-1.5
Philippines
2013
Source: Bloomberg
Strong current account balance makes Philippines less vulnerable to the
impact of US Fed tapering

15. Most Factors Hurting Investor Sentiment
Are Noise
Impact of Typhoon Yolanda to be Minimal
o Impact on 2014 GDP growth is only 0.3% (NEDA)
o Eastern Visayas accounts for only 4.5% of GDP
o Php361 Bil recovery and reconstruction spending from 2013 to
2017 to act as an offset

16. Most Factors Hurting Investor Sentiment
Are Noise
Construction to Benefit from 35%
Growth of Infrastructure Spending in 2014
Infrastructure Spending
2013E
2014E
2015E
2016E
Infra Spending (Php Bil)
295
399
601
835
% Change
24%
35%
51%
39%
% GDP
2.5%
3.0%
4.0%
5.0%
Source: DOF, DBM, NEDA

17. Most Factors Hurting Investor Sentiment
Are Noise
Government Spending to Increase by 13% in 2014
Expenditure
2013
2014
% change
Social Services
699.4
841.8
20.4%
Economic Services
509.2
593.1
16.5%
General Public
347.3
362.6
4.4%
Services
360.4
377.6
4.8%
Debt Service
89.5
89.5
0.0%
Defense
699.4
841.8
20.4%
2,005.8
2,264.6
12.9%
Total
Source: Bloomberg
o Removal of PDAF only
reduced budget by Php3.2 Bil
(0.14% of original proposed
budget)
o Bulk of the Php25 Bil
proposed budget for PDAF
realigned to calamity funds
and other projects
o Spending on social and
economic services to
increase faster

18. Abundance of Favorable Economic
Developments Merely Overlooked
OFW Remittances and BPO Revenues Remain Strong. . .
OFW Remittance
BPO Revenues (US$Mil)
25.0
30.0%
20.0
25.0%
20.0%
15.0
15.0%
10.0
10.0%
6.1%
5.0
5.0%
0.0
0.0%
2002003004005006007008009010011012013
2 2 2 2 2 2 2 2 2 2 2
Source: BSP
18,000
16,000
16,000
13,000
14,000
11,000
12,000
9,000
10,000
7,200
8,000
6,061
4,875
6,000
3,257
4,000
2,420
1,475
2,000
0
200420052006200720082009201020112012
2013E
Source: BSP
To fuel consumer spending growth and ensure strong current account position

19. Abundance of Favorable Economic
Developments Merely Overlooked
…While Exports Rebound...
Exports (% Growth)
25.0
20.2
20.0
14.0
15.0
10.0
5.0
0.0
-5.0
-2.7
Jan-13 Feb-13
-20.0
Source: NSO
-0.8
Mar-13 Apr-13 May-13 Jun-13
-10.0
-15.0
0.1
4.1
-15.6
-11.1
2.3
Jul-13
18.9
5.1
Aug-13 Sep-13 Oct-13 Nov-13

20. Abundance of Favorable Economic
Developments Merely Overlooked
…Weak Peso is Favorable
o Additional spending power of families dependent on OFW
remittances
o Improves Philippines’ competitiveness as an exporter and
BPO destination

21. Abundance of Favorable Economic
Developments Merely Overlooked
FDI and Manufacturing Sector Showing Signs of Strength
FDI (US$Mil)
% Change
2011
1,816.0
39.9%
Mfg GVA
(PhpBil)
2,047.6
2012
2,797.0
54.0%
2,171.0
6.0%
2013*
3,361.4
35.3%
2,350.4
8.3%
Net FDI 10Mo 2013, Mfg full year (nominal)
Source: BSP, NSCB
% Change
6.1%

22. Abundance of Favorable Economic
Developments Merely Overlooked
Drivers of Investment Spending
o
o
o
o
Strong and resilient domestic consumption
Credit ratings upgrades
Improving competitiveness of the Philippines
Strong and liquid financial system

23. Drivers of Investment Spending
Strong and Resilient Domestic Consumption
Domestic Consumption (% Growth)
8.0
6.0
6.0
5.7
4.4 4.2 4.6
4.0
Drivers:
6.6
5.6
4.6
3.7
3.3
2.3
2.0
0.0
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Domestic consumption
Source: NSCB
Average
o Resilient OFW remittances
o Growing BPO sector
o Young and growing
population

24. Drivers of Investment Spending
Philippines Upgraded to Investment Grade in 2013
Ratings Agency
Rating
Upgrade Date
Fitch
BB+
Jun-11
BBB-
Mar-13
BB
Nov-10
BB+
Outlook from "stable"
to "positive"
BBB-
Jul-12
Dec-12
Ba2
Jun-11
Ba1
Oct-12
Baa3
Oct-13
S&P
Moody's
Apr-13

25. Drivers of Investment Spending
Minimum Wages & Wage Hikes
Current Minimum Wage
Local
Currency
US$/Day
Thailand
BT 300/day
9.6
Indonesia
IDR 2.2 Mil/
Mo
8.8
Philippines
Php466/day
10.7
Source: Various newspaper reports
Rate Hike
+35% y/y effective
2012-2013
+40% y/y in Jakarta
2013
+2.3% y/y in Manila
2013
Philippine labor cost
now more competitive
with that of neighbors
due to significant wage
hikes of neighboring
countries

26. Drivers of Investment Spending
Most Improved for Doing Business
o According to World Band and International Finance Corp.’s “Doing
Business 2014” report
o Ranking improved by 30 points to 108th out of 189
Source of Improvements:
o Less requirements to obtain construction permits
o Improved access to credit information
o Easier to pay SSS contributions

27. Drivers of Investment Spending
Banking Statistics (Universal & Commercial Banks)
NPL
Ratio
Provision/ Loans/
NPL
Deposit
Loans/
Deposit
+ SDA
2010
2.9%
118.3%
62.6%
49.1%
2011
2.2%
126.4%
68.4%
50.9%
2012
1.9%
141.5%
71.6%
53.9%
11M13
2.4%
132.3%
60.8%
49.9%
Capital Adequacy Ratio
Minimum Requirement
Source: BSP
10.0%
Basel III (2014)
Philippine Banks (3M13)
BSP
10.0%
18.9%
Strong and liquid
financial system

28. Higher Rates Already Priced In
PSEi Targets Under Different Interest Rate Scenarios
PSEi Target
10-yr Bond Rate
assumption
End 2014
% Upside from 6,000
Source: COL estimates
Base Case
Bear Case
5.0%
5.5%
6,900
6,600
15.0%
10.0%

29. Stocks are Currently the Most Attractive
Peso Asset Class Available
Comparative Yield of Different Asset Classes
Stocks
Time Deposit
SDA
10-Yr-T-Bond
6.0%
0.85%
2.0%
4.1%
*The PSEi’s earnings yield based on 6,000
Due to low interest rates, stocks remain the most attractive peso asset
class even though valuations seem expensive compared to historical
averages

30. Stocks are Currently the Most Attractive
Peso Asset Class Available
Comparison of Different Investment Products
Investment
Instrument
Positives
Negatives
Bank Deposits Very liquid
Low yield; High risk of losing purchasing power
Liquid
Money Market
Fund
Yields higher than bank deposits
Interest income is not paid out to investors
Bonds
Stocks
Higher yields, especially for longer
dated bonds
Yields still below inflation; High risk of losing
purchasing power
Bond prices drop in response to higher interest
rates
Prices of longer dated bonds are more sensitive
to interest rate movements
Returns are higher compared to other
Highly volatile, especially in the ST
asset classes over the LT
Not sensitive to rising rates over the
LT
Dividend yield of some stocks are
higher than bond rates

31. Stocks are Currently the Most Attractive Peso
Asset Class Available
PSEi EPS Growth and P/E Multiple Estimates
EPS Growth
P/E (X)
2014
6%
16.4
2015
14%
14.4
PSEi at 6,000
Source: COL estimates
Fundamentals to eventually catch up with price

32. Summary of Factors Affecting the Market
Negatives
o Philippine stocks are
not yet cheap relative
to other markets
globally
o Interest rates have
room to increase
o Peso could still weaken
Positives
o Nothing fundamentally
wrong with the
Philippines
o Higher interest rates
already priced in
o Stocks remain the most
attractive peso asset
class

33. Summary of Factors Affecting the Market
Negatives
Positives
o Nothing fundamentally
o Philippine stocks are
wrong with the
not yet cheap relative
Philippines
to other markets
o Higher interest rates
globally
already priced in
o Interest rates have
o Stocks remain the most
room to increase
attractive peso asset
o Peso could still weaken
class
Conclusion:
Although stocks will
most like stay here in
the ST, they will
continue to go up in the
LT.

34. “Buy Now” or “Buy Later”?
Buy Now
Positives:
o No possibility of missing out
Negatives:
o Opportunity cost of capital
o Possible ST losses
o Emotional impact of ST losses or
“prospecting”
Prospect theory explains why people
would rather place money in SDAs
(2%) than buy PLDT stocks (7% div
yield)

35. “Buy Now” or “Buy Later”?
Buy Later
Positives:
o No opportunity cost of capital
Negatives:
o Nobody knows the bottom
o Prices may be significantly higher
later
o “Anchoring” bias might cause
investors to miss out
Technical
BUY signal
(+40% from
low)
Anchoring bias explains why most
investors did not buy the PSEi in
4Q09 despite the technical BUY
signal

36. ‘Peso Cost Averaging”
Is a Good Compromise
Peso Cost Averaging Strategy
o Buy only a fixed value of stocks in a period of time
o Buy only when thresholds are hit (ex., “buy below price”)
Positives:
o Limits the amount of exposure
o Improves average buying price assuming stock prices continue to drop
o Creates discipline, removes “emotions” out of investing (prospecting,
anchoring)

37. ‘Peso Cost Averaging”
Is a Good Compromise
Peso Cost Averaging Strategy
Risks are no longer significant
o Higher rates already priced in
o Stocks remain the most attractive peso asset class

38. Stock Picks – Adding BDO, MBT, ALI & SMPH
Removing PGOLD and RLC
“COLing the Shots” Model Portfolio
Current
Price
FV
Buy Date
Buy Below
Price
EEI
10.00
12.70
30-Mar-12
11.04
MEG
3.74
4.54
11-Jan-13
3.95
TEL
2,648.00
3,260.00
11-Jan-13
2,834.78
DNL
6.95
9.10
14-Feb-13
7.91
AC
525.50
689.00
5-Aug-13
599.00
BDO
79.50
94.00
23-Jan-14
81.74
MBT
76.80
100.00
23-Jan-14
87.00
ALI
26.15
36.08
23-Jan-14
31.37
SMPH
14.82
19.41
23-Jan-14
16.88

39. New Stock Picks
BDO (Php79.50, FV: Php94.00)
MBT (Php76.80, FV: Php100.00)
o
o
o
o
o
Prices have corrected to attractive levels
BDO now at 1.6X 14E P/BV while MBT now at 1.4X 14E P/BV
Rising interest rates will only hurt banks’ trading income
Demand for loans remains robust
BDO and MBT are less dependent on trading income to generate profits
given their large size

40. New Stock Picks
ALI (Php26.15, FV: Php36.08)
o Property prices and demand for properties are not expected to weaken
despite higher interest rates
o Steep decline in prices of property companies an opportunity to buy,
with ALI now trading at 38% discount to NAV, wider than its historical
average discount of 26%
o ALI is expected to deliver among the faster earnings growth despite its
larger size
o Other strengths include its huge landbank and numerous rental
properties

41. New Stock Picks
SMPH (Php14.82, FV: Php19.41)
o A hybrid consumer and property play
o Despite its larger size post merger with other SM property companies,
around 60% of revenues and 70% of EBIT in the next few years will still
come from rental income
o Larger size provides numerous advantages over the LT such as the
ability to roll-out large-scale master planned mixed use developments
and more financing options
o Valuations are also attractive, with SMPH trading at 20.1X 14E P/E vs.
consumer sector average of 27.4X and 31% discount to NAV.

42. New Stock Picks
Removing PGOLD and RLC
PGOLD
o Stock could underperform the market as valuations are no longer
attractive
o Stock trading at 23X 14E P/E, earnings growth to slow to 13% in 2014
from 36% in 2013
RLC
o We still like the company but we feel that ALI is a better play
o RLC’s earnings growth is expected to be slower compared to ALI
since its portfolio is more defensive, largely comprised of mall and
office rental properties

43. It Pays To Think Long Term
S&P 500 (1993 – 1995)
550
500
First rate hike on Feb 4, 1994. Total
of 6 rate hikes (+2.5% on Fed fund
rate) over the next 10 months.
450
400
Source: Bloomberg
1 year consolidation of the S&P

44. It Pays To Think Long Term
S&P 500 (1993 – 2001)
1600
800
First rate hike
400
Jan-93
Jan-94
Source: Bloomberg
Jan-95
Following the 1994 consolidation, S&P rallied
from 1995 to 2000, reaching a peak of 1,527 in
March 2000 (up 217% from its 1994 high of 482).
Jan-96
Jan-97
Jan-98
Jan-99
Jan-00
Jan-01

45. It Pays To Think Long Term
S&P 500 (2003 - 2005)
1300
April 20, 2004, Fed hints that
it will raise Fed fund rates
soon.
First rate hike on June 30, 2004. Total of
17 rate hikes (+4.25% on the Fed fund
rate) over the next two years.
1200
1100
1000
5 1/2 months consolidation of the S&P
900
Jul-03 Sep-03 Nov-03 Jan-04 Mar-04 May-04 Jul-04 Sep-04 Nov-04 Jan-05 Mar-05 May-05
Source: Bloomberg

46. It Pays To Think Long Term
S&P 500 (2003 - 2008)
1600
1400
Hint of first rate hike
1200
Following the 2004 consolidation, S&P
rallied from 2005 to 2007, reaching a peak
of 1,565 in Oct 2007 (up 35% from its 2004
high of 1,158)
1000
800
Jul-03
Source: Bloomberg
Jul-04
Jul-05
Jul-06
Jul-07

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