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The sound macroeconomic backdrop (GDP growth of 6.7%/6.8% in 2017F/2018F) and an accommodative
liquidity environment (no policy rate hikes expected until 2H18) remain supportive of equities. We remain
bullish on Philippine stocks despite headwinds from rising rates, peso weakness and geopolitical risks. A
young population plus healthy public & private sector balance sheets provide unique advantages. An
investment boom appears underway.
The PCOMP continues to track higher, up 20% YTD. We raised our bottom-up determined 12-month index
target from 7,700 (in Jan 2017) to 8,500 (in June 2017). We are now looking at 8,900 target for PCOMP by
year end 2018 supported by index heavyweights SM, SMPH, AC, and ALI.
Investors need to pay attention to the “twin catalysts” of tax reform and accelerated government
infrastructure spending. The progress on these twin catalysts should amplify our views on stocks and
sectors we like. Sectors we prefer from a risk-reward perspective are conglomerates, property and
industrials. We remain cautious on consumer, utilities, and telecom.
With the index trading at 19x forward P/E, however, there are fewer near-term bargains available. We have
narrowed our top picks to ALI, ICT, MPI, RRHI and SM.
What concerns us? Despite the strong macroeconomic backdrop, corporates’ profits are under pressure
from intensifying competition, regulatory uncertainty, and disruptive technologies. More companies missed
rather than beat our 2Q17 earnings expectations.
1
Healthy macroeconomic backdrop underpins bullish
investment themes for Philippine equities
The Philippines’ robust economic growth outlook translates to positive, growth-oriented investment themes.
We nonetheless highlight risks to our bullish view on Philippine equities.
Factors driving healthy macro backdrop Key investment themes What concerns us?
Attractive demographics Healthy and resilient domestic Corporate earnings under pressure from
consumption story competition and regulatory pressures.
Low levels of debt
Increasing investment spending by Policy catalysts face execution risks
Rising structural growth potential government and corporates
2
Young demographics and low debt levels provide unique
advantages
1) Better working age profile than Vietnam and Indonesia… 2) …turning into a strong advantage with falling unemployment
3) Credit sector as a % of GDP still low 4) Investments and spending likely resilient vs rising rates
10
8 PDST-R2 UST10Y
0
Aug-07 Aug-09 Aug-11 Aug-13 Aug-15 Aug-17
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
Q1 2017
-40.0
Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17
(2) …and so the current account and fiscal balances are (4) Basic balance – Foreign Direct Investment (FDI) inflows
moving in the same direction have more than fully financed current account deficit so far
% y-o-y growth unless otherwise stated 3Q16 4Q16 1Q17 2Q17 3Q17 4Q17 1Q18 2Q18 2016 2017 2018 2019
Real GDP (sa, % q-o-q, annualized) 6.0 7.3 4.3 9.0 6.5 7.7 4.1 9.5
Real GDP 7.1 6.6 6.4 6.6 6.7 6.8 6.8 6.9 6.9 6.7 6.8 7.1
Private consumption 7.2 6.2 5.7 5.8 5.9 6.3 6.0 6.3 7.0 5.9 6.2 6.5
Government consumption 3.1 4.5 0.2 0.3 7.4 4.4 16.6 9.9 8.4 2.8 10.8 10.0
Gross fixed capital formation 25.4 18.5 11.8 8.5 11.6 18.5 21.2 24.7 25.2 12.8 20.6 25.0
Exports (goods & services) 9.0 13.4 20.3 19.8 12.2 6.1 -4.8 -2.2 10.7 14.8 0.8 5.0
Imports (goods & services) 13.3 15.4 17.5 15.8 15.8 9.7 5.5 6.1 18.5 14.7 8.1 15.0
Contribution to GDP growth (% points)
Domestic final sales 11.4 9.6 7.4 6.1 8.1 10.2 12.3 11.7 11.7 8.0 11.4 13.8
Inventories -1.4 -0.8 -0.9 -0.7 1.6 -0.7 1.2 0.1 -0.2 -0.2 -0.1 0.2
Net trade (goods & services) -2.9 -2.2 -0.2 1.2 -2.9 -2.6 -6.6 -4.8 -4.5 -1.1 -4.6 -6.9
Exports -1.8 3.6 16.3 9.4 6.3 1.3 1.5 -1.5 -2.4 8.1 0.2 5.0
Imports 12.6 16.9 15.1 7.6 11.2 5.7 8.3 7.5 18.3 9.7 8.2 11.0
Merchandise trade balance (USDbn) -6.5 -7.2 -6.5 -7.5 -8.0 -8.3 -8.1 -9.4 -26.7 -30.3 -37.7 -45.6
Current account balance (USDbn) 0.8 -1.0 -0.3 0.4 0.9 -0.8 -0.8 -0.2 0.6 0.2 -1.5 -4.1
Current account balance (% of GDP) 1.0 -1.2 -0.4 0.5 1.2 -0.9 -1.0 -0.2 0.2 0.1 -0.4 -1.0
Fiscal balance (% of GDP) -2.4 -2.7 -2.8 -3.1
Consumer prices (2006=100) 2.0 2.5 3.2 3.0 2.9 2.7 3.4 3.7 1.8 3.0 3.9 3.3
Unemployment rate (nsa, %) 5.4 4.7 6.6 5.7 5.4 5.2 5.2 5.2 5.5 5.7 5.2 5.0
Reverse repo rate (%) 3.00 3.00 3.00 3.00 3.00 3.00 3.00 3.00 3.00 3.00 3.50 4.00
Exchange rate (USD/PHP) 48.5 49.6 50.2 50.5 50.3 49.9 49.8 49.6 49.6 49.9 49.3 47.9
Notes: Numbers in bold are actual values; others forecast. Interest rate and currency forecasts are end of period; other measures are period average. All forecasts are modal forecasts (i.e., the single
most likely outcome). Table reflects data available as of 15 August 2017.
7.5
8 Labor Capital 6.7
TFP GDP growth 6.2
7
6
5 4.0
4
2.8
3 2.0
2
1
0
-1 Nomura forecasts
-2
-3
1980-89 1990-99 2000-09 2010-16 2017-22 2017-22
(baseline) (more
reforms)
6
Key catalysts that could improve Philippines’
attractiveness as an investment destination
7
Catalyst #1: A clear case for tax reform
(1) One of the highest personal income tax rates in Asean (2) Sharp rise in diesel and gasoline fuel consumption
(3) The government has underinvested in and needs to fund (4) …as well as human capital spending (as measured by health
physical infrastructure… expenditures)
(1) Already structurally rising FDI inflows (2) Inverse correlation of corporate tax rates in ASEAN and FDIs
USDbn
Country Tax rate FDI inflows (%
9
of GDP)*
8 FDI inflows, 12 month rolling sum
Singapore 17% 17.9%
7
The Department of Finance (DOF)-proposed tax reforms are broken down into “bite-sized”
packages to navigate the legislative process and minimise the risk of delays
Source: Department of Finance, Senate Economic Planning Office, Philippine House of Representatives HB 04774; Nomura Global Economics estimates.
10
Package One intends to lower personal income tax
rates
Poor-quality Philippine infrastructure is a bottleneck to growth. The Duterte administration promises to ramp
up government spending (USD160bn from 2017 to 2022) on infrastructure.
Quality of infrastructure (1 out of 138, 1= highest) Government promises increased infrastructure spending
Sources: World Economic Foundation, 2016-17 Global Competitiveness Report, Department of Finance, Nomura Research
13
What projects should we look out for?
Key projects identified by the Duterte administration’s “Build, Build, Build” program. Some projects are carried
over from Aquino government, but there is a decided switch from PPPs to government-funded projects.
Total Project Estimate
Project Description Cost Completion Source of Funding
General
Clark International Airport (CIA) The project aims to build an 82,600 sqm terminal building, having a design capacity of 8
Php 12.55bn 2019 Appropriations Act
Expansion million passengers per year.
(GAA)
General
Mindanao Railway: Tagum-Davao City-Digos This phase involves the establishment of a 102.28-km commuter railway from Tagum City
Php35.26bn 2020 Appropriations Act
Segment in Davao del Norte to Digos City in Davao del Sur.
(GAA)
This project involves the construction of a commuter line and airport express railway
Official Dev't
between Malolos and Clark Green City through Clark International Airport. It is composed
PNR North 2 (Malolos-Clark Railway Project) Php211.43bn N/A Assistance (ODA)
of two segments: Malolos to Clark International Airport (50.5 kms) and Clark International
Loans
Airport to Clark Green City (19 kms).
Official Dev't
This project is seen to provide irrigation water supply to around 8,700 hectares of farmland
Chico River Pump Irrigation Project Php2.7bn 2020 Assistance (ODA)
and will benefit around 4,350 farmers.
Loans
This involves: 1) construction of an air traffic management automation (ATM) system and
New Communications, Navigation and Official Dev't
construction of the Manila ATM Center Building in Pasay City near the Ninoy Aquino
Surveillance/Air Traffic Management Php10.87bn 2019 Assistance (ODA)
International Airport (NAIA), and 2) the installation of communications equipment and
(CNS/ATM) Systems Development Project Loans
surveillance equipment in 4 radar sites (Tagaytay, Palawan, Zamboanga, and Davao).
The project aims to complete the remaining segments of the Plaridel Bypass Road "to Official Dev't
Arterial Road Bypass Project Phase II alleviate the perennial traffic congestion at the interconnection point of the North Luzon Php4.62bn 2019 Assistance (ODA)
Expressway with the Daang Maharlika Highway," NEDA said. Loans
About 151.5 sq. kms, this project aims to mitigate damage due to flooding in the lower Official Dev't
Cavite Industrial Area Flood Risk Management
reach of the San Juan River Basin and the Maalimango drainage areas in Cavite. It involves Php9.89bn 2024 Assistance (ODA)
Project
the improvement of the San Juan River channel and the drainage for Maalimango Creek. Loans
Official Dev't
New Centennial Water Source – Kaliwa Dam The project will increase Metro Manila's raw water supply and ensure water security, as it
Php10.86bn 2019 Assistance (ODA)
Project involves the construction of an additional supply source of 600 mn liters per day.
Loans
Tax reform and accelerating infrastructure spending go hand in hand. So far, so good on tax reform.
Infrastructure program subject to implementation bottlenecks, however.
#1 Tax Reform #2 Infrastructure Program
The House of Representatives approved HB 5636, the What has changed? The Duterte administration is
1st of 5 tax reform packages, last 30 May while the looking to use the gov’t balance sheet aggressively to
Senate Ways & Means Committee filed its version of fund infrastructure. This means moving away from
Package 1 (SB 1592) last 20 September. Key PPPs and relying more on government borrowings
components: reduction in PIT rates, increase in excise (both local and ODA loans).
tax rates on petrol and automobiles, expanded VAT
base, and new excise tax on sugar-sweetened
Government budget allocation for infrastructure has
beverages. This translates to Php130bn in net
already increased from 3% of GDP in 2016 to 4.5% of
revenues (0.7% of GDP).
GDP in 2017. Disbursements remain slow, however.
Nomura Research
16
The strong domestic growth story helps ensure equity
markets self-correct when valuations get too low
Foreign investors were predominantly net-sellers of PH equities from August 2016 – March 2017 despite
expectations that Philippine’s GDP growth would remain above trend. Sentiment has since reversed, though.
PSE turnover vs net foreign buying/selling (USDmn weekly) GDP 2016-19F CAGR %
250 6.9%
7.0%
200
150 5.4%
5.3% 5.0%
100
50
3.6%
3.5%
0
-50
1.8%
-100
1.8%
-150
-200
0.0%
Philippines Asia Pacific Emerging Global Developed
Markets Markets
Foreign Net Buy/Sell (USDmn) Value Turnover (USDmn)
Despite sluggish corporate profit growth, rising rates, and PHP weakness, Philippine stocks continue to trade
at historical and relative (to peers) premiums
PCOMP 12M forward PERx versus historical levels PCOMP 12M forward PERx versus most regional markets
25.0
22
20.1
20.0 19.6
12.7
10.2
10.0
8.5
12
5.0
0.0
7
Sep-07 Sep-09 Sep-11 Sep-13 Sep-15 Sep-17
Corporate profit growth trajectory this year has been sluggish despite a healthy macro environment. We
expect big cap property, banks, and conglomerates to lead a strong earnings recovery in 2018F, however.
Index weighted YoY earnings per share (EPS ) growth 2013A-18F vs. GDP growth
14.0%
13.2%
11.1%
10.5%
9.4%
7.6%
6.9% 6.7% 6.8%
7.0%
6.1% 6.1%
5.8%
5.2%
4.2%
3.5%
0.0%
2013A 2014A 2015A 2016A 2017F 2018F
Big-cap consumer, utility, and telecom stocks appear to be drags to growth while big-cap property, banks,
industrials, and conglomerates should deliver earnings.
3-year EPS CAGR (%) by Sector
16.0%
10.5%
5.0%
-0.5%
-6.0%
Property Banking Industrials Conglomerates Consumer Power & Utilities Telecom
We have narrowed our top picks to five stocks: Overall equity valuations have become more
pricey, bargains are harder to find.
Earnings for several consumer related companies disappointed relative to Nomura forecasts in 1H17. Conversely, property
developers delivered much of the earnings outperformance, while the deterioration in telecom profits appears to have abated.
• MBT is our top pick, driven by its peer-leading NIMs (3.72% vs. 3.29% industry average) and our projected net-interest income
yield to overall assets (3% vs. 2.7%-2.8% of peers). We believe MBT valuation multiples (i.e. P/E of 13x vs 17x of peers) will
recover as it delivers better earnings starting this year. Good branch coverage outside Metro Manila to benefit from the
government’s push to fast-track infrastructure and countryside development.
• BPI appears near fair value, with its forward P/E surpassing its historical mean of 17.5x, leaving limited implied upside in the
next 12 months after advancing 14% YTD. Despite a flattish earnings outlook for 2017 (due to significant trading gains in 2016),
market seems to look forward to 2018 prospects. We estimate an 2018 EPS growth of 18% with loan growth assumptions of
15% and potential NIM improvements of 10bps.
• SECB also seems near fair value following a 30% YTD share price run-up, which we suspect partly incorporate its increased
MSCI weighting effective Aug 31. SECB aims to be a top-5 Philippine bank and double market share by 2020F with the gradual
deployment of BTMU’s PHP37bn capital infusion for a 20% stake in SECB. Expansion-related expenses and possible increases
in loan provisioning (on the build-up of retail loan books) could weigh on near-term profits however.
BBG Mkt Cap Last Price Target Upside/ P/E (x) EPS Growth Div Yield ROE
Company Ticker (USD mn) Rating 9/22/2017 Price Downside FY17F FY18F FY17F FY18F FY17F FY17F
Bank of the Philippine Islands BPI PM 7,871 Neutral 101.60 103.67 2.0% 17.9 15.1 1.2% 18.3% 1.8% 12.9%
Metropolitan Bank & Trust Company MBT PM 5,566 Buy 89.00 102.23 14.9% 13.7 11.7 11.4% 17.2% 1.3% 9.9%
Security Bank Corporation SECB PM 3,773 Neutral 254.60 259.40 1.9% 17.0 15.9 5.8% 6.9% 1.2% 10.6%
Source: Philippine Statistics Authority, Bangko Sentral ng Pilipinas (BSP), Company Data
25
Banks
Rebased ROEs to creep up as NIMs recover and operating efficiencies improve. However, reduced trading gains, intermittent
opex and provisioning hikes may curb growth.
Focus on lending growth rather than trading income BPI ROE buoyed by significant trading gains in 2016
Onset of rising rates to improve NIMs Reviving branch expansion to tap growth outside MM
Expansion costs and provisioning hikes may curb profits Loan growth est of 13-16% yoy, improving NIMs to aid ROEs
1H17 Trends BDO* MBT BPI SECB
Loan growth (%) 17.0 21.8 16.9 27.7
Net interest income growth (%) 22.0 15.7 13.6 25.5
Fee-related income growth (%) 13.0 0.6 17.8 3.5
Trading-related income growth (%) -21.0 -30.1 -67.9 -35.6
Revenue growth (%) 15.0 7.0 0.4 12.9
Opex growth (%) 14.0 9.0 5.4 15.5
PPOP growth (%) 21.0 4.0 -4.5 10.5
Provisioning (% of PPOP) 14.6 14.7 14.4 3.9
EPS growth (%) 16.0 8.0 -7.8 2.8
ROE (%) 10.2 9.5 13.7 10.6
NIM (%) 3.4 3.7 2.9 3.2
CIR (%) 65.0 58.7 51.6 48.8
Branch Network 1,134 959 826 296
*BDO - comparable basis, excluding impact of BDO Life adjustments
Conclusion of non-core asset sales (during 2013-16) SECB aims to double market share by 2020
should trigger MBT profit recovery using capital infused by BTMU
Loan growth est of 15-18%, peer-leading NIMs to drive ROE Loan growth est of 22-25% yoy, rising NIMs to push ROE
• We forecast a mid-teens ROE for ALI, still trending higher on the back of its extensive pipeline of huge mixed-use projects. ALI
is also trading at an attractive 25x P/E vs. its historical average of 31x. ALI’s expansive land bank also stands to gain from
successful rollout of infrastructure projects.
• MEG has a strategic land bank with a growing portfolio of rental income as it aims to expand and replicate its township
development strategy outside Metro Manila. Stock is trading at 12x P/E vs 21x peer avg, probably weighed by concerns for a
possible BPO slowdown. Even so, our valuations for MEG already assume below-trend growth in office space.
• We have a Buy rating on RLC considering resilient rental income growth at reasonable valuations. RLC is projected to post
stronger earnings growth next year, driven by its continuous focus on leasing portfolio expansion. RLC’s footprint for malls,
offices and hotels are slated to expand by 9%, 22% and 19%, respectively, for 2017, and the material impact will be felt in 2018.
• SMPH is the country’s largest landlord. Stable leasing income accounts for over 80% of total EBITDA, allowing SMPH to post
steady core earnings growth of 13-15% y/y. We believe SMPH deserves premium valuations but further multiple expansion
above current levels (~40x P/E) is unlikely without earnings outperformance or fresh growth catalysts.
• We think VLL (current P/E of 9x) deserves higher valuations, considering our forecast for healthy 14% earnings CAGR 2016A-
2019F with demand for its core business of affordable housing supported by improving incomes and resilient OFW remittances.
BBG Mkt Cap Last Price Target Upside/ P/E (x) EPS Growth Div Yield EV/EBITDA (x) ROE
Company Ticker (USD mn) Rating 9/22/2017 Price Downside FY17F FY18F FY17F FY18F FY17F FY17F FY18F FY17F
Ayala Land ALI PM 13,075 Buy 45.15 49.00 8.5% 26.5 23.6 14.8% 12.2% 1.3% 17.9 16.4 15.4%
Megaworld MEG PM 3,360 Buy 5.30 5.70 7.5% 13.2 11.1 14.1% 18.4% 1.0% 11.7 10.8 9.9%
Robinsons Land RLC PM 2,122 Buy 26.35 29.10 10.4% 18.3 15.5 8.2% 18.0% 1.4% 11.5 10.1 9.1%
SM Prime Holdings SMPH PM 19,762 Neutral 34.85 35.00 0.4% 41.9 36.2 14.6% 15.5% 0.8% 23.4 20.8 11.6%
Vista Land & Lifescapes VLL PM 1,614 Buy 6.40 6.90 7.8% 9.2 8.1 16.0% 12.4% 2.0% 11.0 10.5 11.7%
Property earnings tracks strong GDP growth Philippines still in catch-up phase
GDP versus Property sector EPS growth (%) GDP per capita and urbanization level (PH vs peers)
Land bank and rental assets to sustain growth Rent income build-up augment residential recovery
Increasing rental flows support capex requirements Aggregate ALI, SMPH, MEG, RLC, VLL data (PHP bn)
• Rising affluence should translate into sustained consumption growth, benefitting the sector over the long term. However, sector
valuations are already pricey relative to the broader market, with margins under pressure in the near term due to: 1) intensifying
competition, 2) rising commodity prices, 3) FX volatility, and 4) excise tax overhang.
• RRHI PM is our top sector pick. Unique multi-retail format allows it to capture broad-based private spending growth. Play on
basic consumption and discretionary spending. Net cash position and RLC PM link add value.
• We like PIZZA PM given its dominance (<50% market share) in a fast-growing chained full-service pizza segment (+9% 3Y
sector revenue CAGR). Growth is underpinned by continued new store rollouts augmented by healthy SSSG (3-5%).
• We have a cautious outlook on large-cap consumer stocks URC PM (Reduce) and JFC PM (Neutral). Significant cost
pressures exacerbated by problematic topline growth in key markets continue to impact on URC’s margins. Meanwhile, JFC
PM appears to be fairly valued at current share price levels. The market appears to have already priced in JFC’s ability to
deliver consistent EPS growth which is reflected by its premium valuations.
BBG Mkt Cap Last Price Target Upside/ P/E (x) EPS Growth Div Yield EV/EBITDA (x) ROE
Company Ticker (USD mn) Rating 9/22/2017 Price Downside FY17F FY18F FY17F FY18F FY17F FY17F FY18F FY17F
Century Pacific Food CNPF PM 1,184 Neutral 17.00 18.15 6.8% 21.6 19.6 5.2% 10.1% 1.3% 14.6 13.1 20.6%
Emperador Inc. EMP PM 2,276 Neutral 7.18 7.65 6.5% 16.0 15.1 -6.1% 5.9% 2.7% 13.1 12.1 13.3%
Jollibee Foods Corp JFC PM 5,213 Neutral 245 252 2.9% 37.9 33.4 13.5% 13.5% 1.2% 20.8 18.6 19.7%
Puregold Price Club PGOLD PM 2,855 Neutral 52.50 50.00 -4.8% 23.8 21.5 10.3% 10.6% 0.6% 13.4 11.7 13.3%
Shakey's Pizza Asia Ventures PIZZA PM 406 Buy 13.48 16.00 18.7% 27.4 23.9 12.8% 14.3% 0.6% 17.1 14.9 20.5%
Robinsons Retail Holdings, Inc. RRHI PM 2,479 Buy 91.00 108.00 18.7% 26.9 23.7 13.9% 13.4% 0.8% 14.0 11.8 9.4%
SSI Group, Inc. SSI PM 302 Reduce 4.64 3.30 -28.9% 23.9 21.8 10.8% 9.7% NA 7.8 7.2 6.3%
Universal Robina Corporation URC PM 6,689 Reduce 154 138 -10.6% 29.3 26.8 1.8% 9.0% 1.9% 16.7 15.2 14.5%
Source: Bangko Sentral ng Pilipinas (BSP), Philippine Statistics Authority (PSA) CEIC, Bloomberg
32
Consumer
Valuations look pricey, especially given the headwinds of intensifying competition, rising inflation, peso volatility and potential
near-term regulatory overhang from tax reform. The sector trades at 23x 2018F earnings.
Sector ave. 3Y EPS CAGR: +9.8% Sector ave. 2018F PER: 23x
12% 30.0x
10.8% 26.8x
10.0%
23.7x 23.9x
25.0x
8.7% 21.5x 21.8x
9% 19.6x
20.0x
6.6%
15.1x
6% 15.0x
10.0x
3%
1.5% 5.0x
0% .0x
EMP URC CNPF SSI PGOLD PIZZA RRHI JFC EMP CNPF PGOLD SSI RRHI PIZZA URC JFC
• Sector with high capital investment requirements that result in elevated gearing levels – but also provide barriers for
competitors. Top picks, ICT & PCOR, should enjoy improving EBITDA outlook that translates to bottom-line and balance sheet
improvements, especially as capex has peaked.
• We downgraded our rating on CHP to Neutral due to a more cautious outlook on Philippine cement industry supply-demand
fundamentals.
• DNL 2Q17 results disappointed with +1% y-y net income growth vs expectations of 7% growth. Furthermore, resurgent
contribution of commodities to total revenues (1H17: 41% vs FY16: 39%) warrants discount to consumer company clients.
• CEB should enjoy EBITDARF growth, though bottom line will be dampened by higher depreciation from refleeting program.
Maintain Buy as the stock continues to trade at a discount vs regional peers.
• Bullish outlook on growing online retail penetration benefits last-mile delivery player LBC.
• What concerns us? Earnings for most of these companies may be significantly impacted by external factors (commodity price
and exchange rate fluctuations, global and regional supply-demand dynamics, etc).
BBG Mkt Cap Last Price Target Upside/ P/E (x) EPS Growth Div Yield EV/EBITDA (x) ROE
Company Ticker (USD mn) Rating 9/22/2017 Price Downside FY17F FY18F FY17F FY18F FY17F FY17F FY18F FY17F
Cebu Pacific CEB PM 1,331 Buy 111.70 133.20 19.2% 7.5 12.6 -18.9% -40.1% 1.5% 5.4 6.6 23.9%
Cemex Holdings Philippines CHP PM 584 Neutral 5.72 6.60 15.4% 18.2 15.0 -59.8% 20.9% NA 10.0 9.0 5.6%
D&L Industries DNL PM 1,433 Neutral 10.20 11.00 7.8% 25.5 22.2 8.7% 14.7% 2.2% 18.5 16.5 19.6%
Intl Container Terminal Services ICT PM 4,224 Buy 105.60 118.00 11.7% 26.9 21.4 16.9% 27.0% 1.1% 11.0 9.4 17.4%
LBC Express Holdings Inc LBC PM 517 Buy 16.16 21.16 30.9% 23.1 19.5 14.8% 18.7% 3.6% 12.4 9.9 31.4%
Petron Corporation PCOR PM 1,899 Buy 10.30 12.00 16.5% 11.1 7.8 54.7% 40.8% 1.0% 7.4 6.1 18.3%
1,500 120 8%
1,125 90 6%
Million Barrels
USD Millions
750 60 4%
375 30 2%
- - 0%
FY12 FY13 FY14 FY15 FY16 FY17F FY18F FY19F FY13A FY14A FY15A FY16F FY17F FY18F FY19F
Asia Americas EMEA Philippines Malaysia
PH GDP Growth MY GDP Growth
ICT free cash flow generation looks healthy PCOR should see benefits of deleveraging
EBITDA improving as capex is in decline PCOR EBITDA versus Interest Cover
1,400 600 50 7
6
1,050 450 38
USD Millions
PHP Billions
4
700 300 25
350 150 13
1
- - - (1)
FY12 FY13 FY14 FY15 FY16 FY17F FY18F FY19F FY13A FY14A FY15A FY16F FY17F FY18F FY19F
• Though a duopoly in the Philippines, telecom industry EBITDA margins have trended down, capex levels are elevated, and
balance sheets are generally more levered since data services have increasingly gained importance in the market. Though
EV/EBITDA multiples are close to regional peers, we do not expect dividend payouts to increase anytime soon as data
infrastructure investment is still needed and 5G is around the corner.
• Globe’s (GLO PM, Neutral, PHP2,100 TP) operational performance has been more appealing than PLDT's given better
execution in capturing data revenue growth. However, EBITDA growth has since tapered to single-digits and elevated capex
levels and financing costs hinder capability to increase dividends to shareholders.
• PLDT’s 2017 (TEL PM, Neutral, PHP1,800 TP) outlook suggests its earnings decline (on a recurring basis) could reverse this
year primarily due to cost controls. Decreasing legacy businesses (voice, SMS, ILD) continues to be a drag to overall
performance though, preventing bullishness on the stock even as recovery occurs.
BBG Mkt Cap Last Price Target Upside/ P/E (x) EPS Growth Div Yield EV/EBITDA (x) ROE
Company Ticker (USD mn) Rating 9/22/2017 Price Downside FY17F FY18F FY17F FY18F FY17F FY17F FY18F FY17F
Globe Telecom GLO PM 5,421 Neutral 2,074 2,100 1.3% 19.1 18.3 -9.8% 4.6% 4.3% 7.5 7.0 22.4%
PLDT Inc. TEL PM 7,139 Neutral 1,680 1,800 7.1% 18.2 18.1 -28.6% 0.8% 3.3% 7.5 7.1 19.6%
PHP bn
PHP bn
175 40% 25 90
88 38% 13 45
- 36% - -
FY14 FY15 FY16 FY17F FY18F FY19F FY14 FY15 FY16 FY17F FY18F FY19F
TEL Revenues GLO Revenues Blended EBITDA Margin TEL Capex GLO Capex TEL DPS GLO DPS
• AP is an attractive proxy for the Philippine power sector given the company’s integrated business model, diverse portfolio of
generation assets, and defined project pipeline. The company is targeting a 4,000 MW genco portfolio by 2020 (versus 2,975
MWs at end-2016).
• The entry of strategic investors GIC/Macquarie initiates a tender offer (from 10 August to 18 September) that is likely to lead to
EDC’s eventual delisting from the Philippine Stock Market. We cut our rating to Reduce especially since EDC’s share price is
up almost 20% - and above our fair value target - following the tender offer announcement.
• MER’s healthy dividend yield should be supportive of the stock. However, the uncertain regulatory outlook for the core
electricity distribution business (85% of bottom line) should limit medium-term earnings growth trajectory and cap valuation
upside.
• Water services firm MWC is looking to double net profits over the 2015-2020 period by expanding outside its Metro Manila East
Zone concession (83% of bottom line). We see the stock fully valued at current levels, however, with execution risk on
expansion plans and regulatory risk on the East Zone concession our key concerns.
• SCC’s integrated power generation model (coal mine + power plant) helps mitigate development and offtake risks in a difficult
overall environment for power and utility companies. At current share price levels, however, the stock is trading close to our
estimated fair value for the company.
BBG Mkt Cap Last Price Target Upside/ P/E (x) EPS Growth Div Yield EV/EBITDA (x) ROE
Company Ticker (USD mn) Rating 9/22/2017 Price Downside FY17F FY18F FY17F FY18F FY17F FY17F FY18F FY17F
Aboitiz Power Corporation AP PM 6,013 Buy 41.55 47.00 13.1% 14.1 13.0 4.8% 9.0% 3.3% 10.4 9.4 19.5%
Energy Development Corporation EDC PM 2,605 Reduce 7.07 6.50 -8.1% 13.5 12.5 7.1% 8.4% 3.1% 9.5 8.8 18.2%
Manila Electric Company MER PM 6,202 Neutral 280 310 10.8% 16.3 17.0 -1.5% -3.7% 5.6% 8.8 9.2 23.4%
Manila Water Company, Inc. MWC PM 1,254 Neutral 31.05 32.00 3.1% 11.5 11.2 10.3% 2.8% 2.7% 7.1 7.0 14.8%
Semirara Mining and Power Corporation SCC PM 3,897 Neutral 46.50 46.75 0.5% 12.3 11.3 34.7% 8.1% 2.2% 10.4 9.1 40.3%
We remain cautious on the Philippine power and utility sector, given regulatory and quasi-regulatory risks as
well as a subdued outlook for power rates.
Luzon spot market rates (PHP/mwh) show signs of bottoming out but remain well off recent highs
16,000
14,000
12,000
10,000
8,000
6,000
4,000
2,000
0
Jan-08
Jan-09
Jan-10
Jan-11
Jan-12
Jan-13
Jan-14
Jan-15
Jan-16
Jan-17
-2,000
AP genco mix by capacity (MWs) YTD share price performance of power stocks*
Target 4,000 MWs by 2020 AP has lagged
60%
50% 48%
40% 36%
30%
20%
10% 8%
4%
0%
-2%
-10%
SCC EDC MWC MER AP
• SM’s retail arm, the biggest in the country, should benefit from higher disposable income levels, especially if tax reforms push
through. SM’s dominant retail, property, and banking subsidiaries are valid proxies for the growth drivers of the Philippine
economy.
• AC’s emerging businesses (energy, infrastructure, and industrial technologies) provide fresh growth catalysts that complement
the group’s traditional property, telecom, and banking subsidiaries.
• Though possibly negatively impacted by higher automobile taxes, we believe concerns are currently overdone with regards to
Philippine leader, Toyota Motor Philippines, a unit of GTCAP. We believe negatives are priced in as the stock has lagged YTD.
• We downgraded DMC from Buy to Neutral as the YTD share price run-up limits upside relative to fair value. Accelerated
government infrastructure spending may provide a fresh re-rating catalyst, however.
• Wide discount versus NAV (which assumes status quo on tariffs) suggests MPI valuations already discount regulatory risks.
Maintain Buy as we include MPI among our top picks.
• We also suggest “switch opportunities” as some conglomerate subsidiaries (CEB and RLC over JGS) and (AP over AEV) look
more attractively valued than the parent firms.
BBG Mkt Cap Last Price Target Upside/ P/E (x) EPS Growth Div Yield EV/EBITDA (x) ROE
Company Ticker (USD mn) Rating 9/22/2017 Price Downside FY17F FY18F FY17F FY18F FY17F FY17F FY18F FY17F
Ayala Corporation AC PM 11,765 Buy 963 1,020 5.9% 21.5 18.7 12.5% 15.4% 0.6% 12.7 11.8 12.8%
Aboitiz Equity Ventures AEV PM 8,188 Neutral 73.90 73.80 -0.1% 17.5 15.8 5.2% 10.7% 2.0% 13.1 11.8 16.1%
Alliance Global Group, Inc. AGI PM 3,361 Buy 16.84 17.40 3.3% 12.0 10.6 -4.0% 13.8% 2.1% 8.9 8.7 9.0%
DMC Holdings DMC PM 4,152 Neutral 15.90 16.70 5.0% 13.8 12.6 27.1% 9.3% 3.3% 8.3 7.8 21.4%
GT Capital Holdings, Inc. GTCAP PM 4,549 Buy 1,201 1,340 11.6% 16.1 14.1 -0.8% 13.8% 0.8% 10.0 8.5 13.1%
JG Summit Holdings, Inc. JGS PM 10,847 Neutral 77.00 73.00 -5.2% 23.7 21.3 -14.3% 11.7% 0.2% 12.3 10.9 9.3%
LT Group, Inc. LTG PM 3,682 Reduce 17.30 16.30 -5.8% 20.6 19.1 -3.0% 7.9% 1.2% 3.1 1.2 6.5%
Metro Pacific Investments MPI PM 4,301 Buy 6.94 8.35 20.3% 15.6 14.5 9.2% 8.0% 2.1% 11.5 11.2 8.9%
San Miguel Corporation SMC PM 4,580 Buy 98 120 22.8% 8.9 8.3 13.2% 7.6% 1.4% 5.6 5.7 9.6%
SM Investments Corporation SM PM 20,468 Buy 864.0 920.0 6.5% 30.2 25.7 10.4% 17.5% 1.5% 17.2 15.5 11.2%
Notwithstanding the YTD rally in conglomerate share prices, most still trade at a discount versus net asset
value (NAV).
YTD share price performance (%) Discount to NAV (%)
39.4% 31.0%
28.5%
24.8% 19.3%
18%
15.5% 15.0%
14.3%
13.6%
18%
13.8%
9.9%
9%
0%
-5.0%
-10%
Reference Name BBG Ticker Mkt Cap (USD mn) Index Weighting
SM Investments Corporation SM PM 20,468 11.6%
Ayala Land ALI PM 13,075 8.8%
SM Prime Holdings SMPH PM 19,762 8.2%
BDO Unibank, Inc. BDO PM 11,151 6.4%
Ayala Corporation AC PM 11,765 6.1%
JG Summit Holdings, Inc. JGS PM 10,847 5.7%
Bank of the Philippine Islands BPI PM 7,871 5.0%
Aboitiz Equity Ventures AEV PM 8,188 4.8%
PLDT Inc. TEL PM 7,139 4.6%
Universal Robina Corporation URC PM 6,689 3.8%
Metropolitan Bank & Trust Company MBT PM 5,566 3.5%
Jollibee Foods Corp JFC PM 5,213 2.9%
Security Bank Corporation SECB PM 3,773 2.9%
Intl Container Terminal Services ICT PM 4,224 2.8%
GT Capital Holdings, Inc. GTCAP PM 4,549 2.6%
Metro Pacific Investments MPI PM 4,301 2.3%
Alliance Global Group, Inc. AGI PM 3,361 1.8%
Manila Electric Company MER PM 6,202 1.7%
Energy Development Corporation EDC PM 2,605 1.6%
Globe Telecom GLO PM 5,421 1.5%
DMC Holdings DMC PM 4,152 1.5%
Megaworld MEG PM 3,360 1.5%
Aboitiz Power Corporation AP PM 6,013 1.5%
Semirara Mining and Power Corporation SCC PM 3,897 1.4%
LT Group, Inc. LTG PM 3,682 1.2%
Puregold Price Club PGOLD PM 2,855 1.2%
Robinsons Land RLC PM 2,122 1.1%
San Miguel Corporation SMC PM 4,580 0.9%
Petron Corporation PCOR PM 1,899 0.6%
First Gen Corporations FGEN PM 1,359 0.6%
Analyst Certification
We, Dante Tinga Jr, Angelo Torres, Euben Paracuelles, Abigail Chiw and Thomas Earll Huang, 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.
GT Capital Holdings, Inc. GTCAP PM 1180 PHP 16-Aug-2017 Buy Not Rated 12-Apr-2017 N/A
Intl Container Terminal Services ICT PM 103.3 PHP 16-Aug-2017 Buy Not Rated 14-Feb-2017 N/A
JG Summit Holdings, Inc. JGS PM 72.55 PHP 16-Aug-2017 Neutral Not Rated 12-Apr-2017 N/A
Jollibee Foods Corp JFC PM 239 PHP 16-Aug-2017 Neutral Not Rated 20-Jan-2017 N/A
LBC Express Holdings Inc LBC PM 15.4 PHP 16-Aug-2017 Buy Not Rated 06-Oct-2016 N/A
LT Group, Inc. LTG PM 17.58 PHP 16-Aug-2017 Neutral Not Rated 12-Apr-2017 N/A
Manila Electric Company MER PM 277.4 PHP 16-Aug-2017 Neutral Not Rated 12-Apr-2017 N/A
47
Manila Water Company, Inc. MWC PM 31.6 PHP 16-Aug-2017 Neutral Not Rated 12-Apr-2017 N/A
Megaworld MEG PM 4.98 PHP 16-Aug-2017 Buy Not Rated 14-Feb-2017 N/A
Metro Pacific Investments MPI PM 6.62 PHP 16-Aug-2017 Buy Not Rated 14-Feb-2017 N/A
Metropolitan Bank & Trust Company MBT PM 86.2 PHP 16-Aug-2017 Buy Not Rated 11-Apr-2017 N/A
Petron Corporation PCOR PM 9.6 PHP 16-Aug-2017 Buy Not Rated 12-Apr-2017 N/A
Puregold Price Club PGOLD PM 48.15 PHP 16-Aug-2017 Buy Not Rated 20-Jan-2017 N/A
Robinsons Land RLC PM 24 PHP 16-Aug-2017 Buy Not Rated 14-Feb-2017 N/A
Robinsons Retail Holdings, Inc. RRHI PM 88 PHP 16-Aug-2017 Buy Not Rated 20-Jan-2017 N/A
San Miguel Corporation SMC PM 100 PHP 16-Aug-2017 Buy Neutral 14-Aug-2017 N/A
Security Bank Corporation SECB PM 255 PHP 16-Aug-2017 Neutral Not Rated 11-Apr-2017 N/A
Semirara Mining and Power Corporation SCC PM 176 PHP 16-Aug-2017 Neutral Buy 02-Aug-2017 N/A
Shakey's Pizza Asia Ventures PIZZA PM 12.4 PHP 16-Aug-2017 Buy Not Rated 20-Jan-2017 N/A
SM Investments Corporation SM PM 831 PHP 16-Aug-2017 Buy Not Rated 12-Apr-2017 N/A
SM Prime Holdings SMPH PM 34.7 PHP 16-Aug-2017 Neutral Not Rated 14-Feb-2017 N/A
SSI Group, Inc. SSI PM 4.21 PHP 16-Aug-2017 Reduce Neutral 21-Jun-2017 N/A
Universal Robina Corporation URC PM 147 PHP 16-Aug-2017 Reduce Neutral 10-Aug-2017 N/A
Vista Land & Lifescapes VLL PM 6.02 PHP 16-Aug-2017 Buy Not Rated 14-Feb-2017 N/A
DMC Holdings DMC PM 15.9 PHP 16-Aug-2017 Neutral Buy 04-Aug-2017 N/A
Globe Telecom GLO PM 2050 PHP 16-Aug-2017 Neutral Buy 23-Sep-2016 N/A
PLDT Inc. TEL PM 1740 PHP 16-Aug-2017 Neutral Reduce 08-Mar-2017 N/A
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48
Distribution of ratings (Nomura Group)
The distribution of all ratings published by Nomura Group Global Equity Research is as follows:
50% have been assigned a Buy rating which, for purposes of mandatory disclosures, are classified as a Buy rating; 37% 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.
42% 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
8% have been assigned a Reduce rating which, for purposes of mandatory disclosures, are classified as a Sell rating; 8% 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 30 June 2017.
*The Nomura Group as defined in the Disclaimer section at the end of this report.
** As defined by the EU Market Abuse Regulation
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.
49
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50
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51
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For report with reference of TAIWAN public companies or authored by Taiwan based research analyst:
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NO PART OF THIS MATERIAL MAY BE (I) COPIED, PHOTOCOPIED, OR DUPLICATED IN ANY FORM, BY ANY MEANS; OR (II) REDISTRIBUTED WITHOUT THE PRIOR WRITTEN CONSENT OF A
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The Nomura Group manages conflicts with respect to the production of research through its compliance policies and procedures (including, but not limited to, Conflicts of Interest, Chinese Wall and
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Additional information regarding the methodologies or models used in the production of any investment recommendations contained within this document is available upon request by
contacting the Research Analysts listed on the front page. Disclosures information is available upon request and disclosure information is available at the Nomura Disclosure web page:
http://go.nomuranow.com/research/globalresearchportal/pages/disclosures/disclosures.aspx
Copyright © 2017 Nomura International (Hong Kong) Ltd. All rights reserved.
Disclosures as of 16-Aug-2017.
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Important Disclosures
The lists of issuers that are affiliates or subsidiaries of Nomura Holdings Inc., the parent company of Nomura Securities Co., Ltd., issuers that have officers who concurrently serve as officers of Nomura
Securities Co., Ltd., issuers in which the Nomura Group holds 1% or more of any class of common equity securities and issuers for which Nomura Securities Co., Ltd. has lead managed a public offering of
equity or equity linked securities in the past 12 months are available at http://www.nomuraholdings.com/report/. Please contact the Research Product Management Dept. of Nomura Securities Co., Ltd. for
additional information.
Credit ratings in the text that are marked with an asterisk (*) are issued by a rating agency not registered under Japan’s Financial Instruments and Exchange Act (“Unregistered Ratings”). For details on
Unregistered Ratings, please contact the Research Product Management Dept. of Nomura Securities Co., Ltd.
Investors in the financial products offered by Nomura Securities may incur fees and commissions specific to those products (for example, transactions involving Japanese equities are subject to a sales
commission of up to 1.404% on a tax-inclusive basis of the transaction amount or a commission of ¥2,808 for transactions of ¥200,000 or less, while transactions involving investment trusts are subject to
various fees, such as commissions at the time of purchase and asset management fees (trust fees), specific to each investment trust). In addition, all products carry the risk of losses owing to price fluctuations
or other factors. Fees and risks vary by product. Please thoroughly read the written materials provided, such as documents delivered before making a contract, listed securities documents, or prospectuses.-
Transactions involving Japanese equities (including Japanese REITs, Japanese ETFs, and Japanese ETNs) are subject to a sales commission of up to 1.404% of the transaction amount (or a commission of
¥2,808 for transactions of ¥200,000 or less). When Japanese equities are purchased via OTC transactions (including offerings), only the purchase price shall be paid, with no sales commission charged.
However, Nomura Securities may charge a separate fee for OTC transactions, as agreed with the customer. Japanese equities carry the risk of losses owing to price fluctuations. Japanese REITs carry the
risk of losses owing to fluctuations in price and/or earnings of underlying real estate. Japanese ETFs carry the risk of losses owing to fluctuations in the underlying indexes or other benchmarks.
Transactions involving foreign equities are subject to a domestic sales commission of up to 1.026% of the transaction amount (which equals the local transaction amount plus local fees and taxes in the case
of a purchase or the local transaction amount minus local fees and taxes in the case of a sale) (for transaction amounts of ¥750,000 and below, maximum domestic sales commission is ¥7,668). Local fees
and taxes in foreign financial instruments markets vary by country/territory. When foreign equities are purchased via OTC transactions (including offerings), only the purchase price shall be paid, with no sales
commission charged. However, Nomura Securities may charge a separate fee for OTC transactions, as agreed with the customer. Foreign equities carry the risk of losses owing to factors such as price
fluctuations and foreign exchange rate fluctuations.
Margin transactions are subject to a sales commission of up to 1.404% of the transaction amount (or a commission of ¥2,808 for transactions of ¥200,000 or less), as well as management fees and rights
handling fees. In addition, long margin transactions are subject to interest on the purchase amount, while short margin transactions are subject to fees for the lending of the shares borrowed. A margin equal to
at least 30% of the transaction amount and at least ¥300,000 is required. With margin transactions, an amount up to roughly 3.3x the margin may be traded. Margin transactions therefore carry the risk of
losses in excess of the margin owing to share price fluctuations. For details, please thoroughly read the written materials provided, such as listed securities documents or documents delivered before making a
contract.
Transactions involving convertible bonds are subject to a sales commission of up to 1.08% of the transaction amount (or a commission of ¥4,320 if this would be less than ¥4,320). When convertible bonds are
purchased via OTC transactions (including offerings), only the purchase price shall be paid, with no sales commission charged. However, Nomura Securities may charge a separate fee for OTC transactions,
as agreed with the customer. Convertible bonds carry the risk of losses owing to factors such as interest rate fluctuations and price fluctuations in the underlying stock. In addition, convertible bonds
denominated in foreign currencies also carry the risk of losses owing to factors such as foreign exchange rate fluctuations.
When bonds are purchased via public offerings, secondary distributions, or other OTC transactions with Nomura Securities, only the purchase price shall be paid, with no sales commission charged. Bonds
carry the risk of losses, as prices fluctuate in line with changes in market interest rates. Bond prices may also fall below the invested principal as a result of such factors as changes in the management and
financial circumstances of the issuer, or changes in third-party valuations of the bond in question. In addition, foreign currency-denominated bonds also carry the risk of losses owing to factors such as foreign
exchange rate fluctuations.
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When Japanese government bonds (JGBs) for individual investors are purchased via public offerings, only the purchase price shall be paid, with no sales commission charged. As a rule, JGBs for individual
investors may not be sold in the first 12 months after issuance. When JGBs for individual investors are sold before maturity, an amount calculated via the following formula will be subtracted from the par value
of the bond plus accrued interest: (1) for 10-year variable rate bonds, an amount equal to the two preceding coupon payments (before tax) x 0.79685 will be used, (2) for 5-year and 3-year fixed rate bonds, an
amount equal to the two preceding coupon payments (before tax) x 0.79685 will be used.
When inflation-indexed JGBs are purchased via public offerings, secondary distributions (uridashi deals), or other OTC transactions with Nomura Securities, only the purchase price shall be paid, with no sales
commission charged. Inflation-indexed JGBs carry the risk of losses, as prices fluctuate in line with changes in market interest rates and fluctuations in the nationwide consumer price index.The notional
principal of inflation-indexed JGBs changes in line with the rate of change in nationwide CPI inflation from the time of its issuance. The amount of the coupon payment is calculated by multiplying the coupon
rate by the notional principal at the time of payment. The maturity value is the amount of the notional principal when the issue becomes due. For JI17 and subsequent issues, the maturity value shall not
undercut the face amount.
Purchases of investment trusts (and sales of some investment trusts) are subject to a purchase or sales fee of up to 5.4% of the transaction amount. Also, a direct cost that may be incurred when selling
investment trusts is a fee of up to 2.0% of the unit price at the time of redemption. Indirect costs that may be incurred during the course of holding investment trusts include, for domestic investment trusts, an
asset management fee (trust fee) of up to 5.4% (annualized basis) of the net assets in trust, as well as fees based on investment performance. Other indirect costs may also be incurred. For foreign
investment trusts, indirect fees may be incurred during the course of holding such as investment company compensation.
Investment trusts invest mainly in securities such as Japanese and foreign equities and bonds, whose prices fluctuate. Investment trust unit prices fluctuate owing to price fluctuations in the underlying assets
and to foreign exchange rate fluctuations. As such, investment trusts carry the risk of losses. Fees and risks vary by investment trust. Maximum applicable fees are subject to change; please thoroughly read
the written materials provided, such as prospectuses or documents delivered before making a contract.
In interest rate swap transactions and USD/JPY basis swap transactions (“interest rate swap transactions, etc.”), only the agreed transaction payments shall be made on the settlement dates. Some interest
rate swap transactions, etc. may require pledging of margin collateral. In some of these cases, transaction payments may exceed the amount of collateral. There shall be no advance notification of required
collateral value or collateral ratios as they vary depending on the transaction. Interest rate swap transactions, etc. carry the risk of losses owing to fluctuations in market prices in the interest rate, currency and
other markets, as well as reference indices. Losses incurred as such may exceed the value of margin collateral, in which case margin calls may be triggered. In the event that both parties agree to enter a
replacement (or termination) transaction, the interest rates received (paid) under the new arrangement may differ from those in the original arrangement, even if terms other than the interest rates are identical
to those in the original transaction. Risks vary by transaction. Please thoroughly read the written materials provided, such as documents delivered before making a contract and disclosure statements.
In OTC transactions of credit default swaps (CDS), no sales commission will be charged. When entering into CDS transactions, the protection buyer will be required to pledge or entrust an agreed amount of
margin collateral. In some of these cases, the transaction payments may exceed the amount of margin collateral. There shall be no advance notification of required collateral value or collateral ratios as they
vary depending on the financial position of the protection buyer. CDS transactions carry the risk of losses owing to changes in the credit position of some or all of the referenced entities, and/or fluctuations of
the interest rate market. The amount the protection buyer receives in the event that the CDS is triggered by a credit event may undercut the total amount of premiums that he/she has paid in the course of the
transaction. Similarly, the amount the protection seller pays in the event of a credit event may exceed the total amount of premiums that he/she has received in the transaction. All other conditions being equal,
the amount of premiums that the protection buyer pays and that received by the protection seller shall differ. In principle, CDS transactions will be limited to financial instruments business operators and
qualified institutional investors.
No account fee will be charged for marketable securities or monies deposited. Transfers of equities to another securities company via the Japan Securities Depository Center are subject to a transfer fee of up
to ¥10,800 per issue transferred depending on volume.
Additional information regarding the methodologies or models used in the production of any investment recommendations contained within this document is available upon request by
contacting the Research Analysts listed on the front page. Disclosures information is available upon request and disclosure information is available at the Nomura Disclosure web page:
http://go.nomuranow.com/research/globalresearchportal/pages/disclosures/disclosures.aspx
Copyright © 2017 Nomura Securities Co., Ltd. All rights reserved.
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