WED 26 JUNE 2019

Improving outlook domestically,

but overseas risks remain

The outlook of the Philippine economy has improved during the past month as interest A monthly publication
rates continue to go down. The pressure for rates to go up is also much less, thanks to by COL which provides
falling oil prices and the increasing likelihood that the U.S. Fed will cut rates. insights on investments
opportunities based
Not surprisingly though, many investors remain cautious, largely due to the deteriorating on global and local
outlook of the U.S. economy after U.S. president Trump imposed higher tariffs on many developments that could
Chinese imports. He also threatened to expand tariffs on another US$300 Mil worth of affect the market.
Chinese imports. The negative impact of the said development is reflected in several
indicators such as the steep drop in the U.S. Purchasing Managers Index (PMI), lower COLing the Shots aim to
copper prices and the falling 10-year bond yield. provide timely and relevant
information and analysis as
Surprisingly though, the S&P 500 still went up in June and is now at an all-time high. Other well as a model portfolio for
emerging markets, including equity markets in China, also performed well. The latest rally successful investing.
was triggered by increasing hopes of a rate cut by the U.S. Fed. Although the Fed did not
cut rates during its meeting last week, eight out of the 17 participants on the Fed’s policy-
making board now believe that one or two rate cuts are needed this year to keep the U.S.
economy strong, up from only six as of March this year.

Admittedly, a looser monetary policy is a potent driver of strong equity markets. However,
nobody knows if a looser monetary policy is enough to drive the U.S. market higher. There
is reason to be cautious especially since historically, a weaker U.S. market has negatively
affected the performance of global markets including the Philippines.

In summary, the Philippine stock market is in a good position to go up given the improving
outlook of the domestic economy and falling interest rates. However, uncertainty regarding
the sustainability of the U.S. market’s strong performance would most likely cause markets
to stay volatile so it pays to exercise some caution.

For retail investors, the best way to control risk is by managing exposure to the stock
market. Make sure that the amount you have invested is not too much, allowing you to
stomach any volatility that could take place if the market fails to go up in a sustainable
manner. Also, make sure to invest only in fundamentally sound stocks that are trading at
April Lynn Tan, CFA
attractive valuations. These qualities should make those stocks more resilient to volatility. VP & Head of Research
Earlier this month, we added FLI to our COLing the Shots stock pick list. We added FLI april.tan@colfinancial.com

Disclaimer: All content provided in COL Reports are meant to be read in the COL Financial website. Accuracy and completeness of content cannot be guaranteed if reports are viewed outside of
the COL Financial website as these may be subject to tampering or unauthorized alterations.
 COLING THE SHOTS I IMPROVING OUTLOOK DOMESTICALLY, BUT OVERSEAS RISKS REMAIN

WED 26 JUNE 2019

because we think it is an excellent rerating candidate given that profits from its leasing
business already accounted for 46% of profits in 2018, up from only 28% in 2014 when the
company was still predominantly a low-cost property developer. Moreover, profits from
leasing should continue to grow in significance given FLI’s plans to expand its leasing
portfolio by a CAGR of 18% from 2018 to 2023. The growing share of leasing gives FLI a
more stable source of recurring cash flow and less volatile earnings. Moreover, all of FLI’s
future office buildings inside Metro Manila have pending PEZA applications, making the
company less vulnerable to the moratorium on new ecozones. Finally, FLI is positioned
to benefit from Clark’s transformation into one of the country’s premier destinations for
foreign and local investors in the country given its huge landbank in the area. Despite
FLI’s improving outlook, it continues to trade at only 6.3X 2019E P/E, which is a huge
discount to the 17.6X average 2019E P/E of property stocks, and at a steep 60% discount
to NAV.

COL Financial Group, Inc. 2

 COLING THE SHOTS I IMPROVING OUTLOOK DOMESTICALLY, BUT OVERSEAS RISKS REMAIN

WED 26 JUNE 2019

Can the Fed triumph over the increasingly cautious

outlook of the U.S. economy?

The PSEi has rallied by a total of 335 points or 4.3% to close at 8,060.58 since we last
wrote our COLing the Shots report. The outlook of the domestic economy has likewise
improved during the same period. Note that domestic rates continue to go down, led
by short term rates. Aside from the ongoing reduction in banks’ reserve requirement
ratio (RRR), inflation also continues to stay below 4%. This has allowed the yield curve to
become steeper compared to where it was the past two months.

Exhibit 1: PH 91-day T-Bill vs 10-year Bond Yield Spread

(as of end April, end May, and today, in %)

91-day T-bill 10-year bond Spread

30/04/2019 6.126 5.946 -0.18
31/05/2019 5.579 5.551 -0.028
25/06/2019 4.957 4.987 0.03
Source: Bloomberg

The pressure for rates to go up is also much less, thanks to falling oil prices and the
increasing likelihood that the U.S. Fed will cut rates. Note that after hitting a peak of
US$66.20/barrel last April, the price of oil has gone down to US$57.30/barrel as of this
writing. Meanwhile, economists globally are now anticipating the U.S. Fed to cut rates
twice by the end of this year. This is a sharp contrast to the consensus view earlier this
year that the Fed would increase rates twice in 2019.

Not surprisingly though, many investors remain cautious towards the stock market given
the deteriorating outlook of the U.S. economy.

Note that the economic outlook of the U.S. has deteriorated further after U.S. president
Trump imposed higher tariffs on many Chinese imports. He also threatened to expand
tariffs on another US$300 Mil worth of Chinese imports. The negative impact of this
development has hurt business sentiment and this is reflected in several indicators.

For example, the U.S. Markit Manufacturing Purchasing Managers Index (PMI), which
measures the level of activity of purchasing managers in the manufacturing sector, has
deteriorated sharply to only 50.1 as of June 21. Although it still indicates expansion
as it remains above the critical 50 level which separates growth from contraction, the
said number is sharply lower from 55.7 during the start of the year and 52.6 during the
start of May, when investors were still anticipating a deal between the U.S. and China to
materialize.

COL Financial Group, Inc. 3

 COLING THE SHOTS I IMPROVING OUTLOOK DOMESTICALLY, BUT OVERSEAS RISKS REMAIN

WED 26 JUNE 2019

Exhibit 2: U.S. Market Manufacturing Purchasing Managers Index

Source: Bloomberg

After rallying early this year, the price of copper has also gone down from US$6,415/MT
as of end April to US$5,960/MT as of this writing. Given copper’s numerous applications in
cyclical industries, the lower price of copper is viewed as an indicator of global economic
weakness.

Exhibit 3: LME Copper Price (US$/MT)

Source: Bloomberg

Finally, the yield on the U.S. 10-year bond has fallen by 48 basis points from its end April
level to 2.02% as of this writing, which is the lowest level for the 10-year bond yield since
November of 2016. This could be an indicator of investors’ increasingly cautious outlook
on the U.S. economy, prompting them to switch to bonds which are considered safe
haven investments.

COL Financial Group, Inc. 4

 COLING THE SHOTS I IMPROVING OUTLOOK DOMESTICALLY, BUT OVERSEAS RISKS REMAIN

WED 26 JUNE 2019

Exhibit 4: U.S. 10-Year Bond Yield

Source: Bloomberg

Surprisingly though, despite the deteriorating outlook of the U.S. economy, the U.S.
market still went up in June after falling initially in May. In fact, the S&P 500 is now back
to an all-time high.

Exhibit 5: S&P 500

Source: Bloomberg

COL Financial Group, Inc. 5

 COLING THE SHOTS I IMPROVING OUTLOOK DOMESTICALLY, BUT OVERSEAS RISKS REMAIN

WED 26 JUNE 2019

The latest rally was triggered by increasing hopes of a rate cut by the U.S. Fed. Recall that
earlier this month, Fed Chairman Jerome Powell said that the Federal Reserve is ready to
respond if the Trump administration’s ongoing trade war hurts the U.S. economy.

Although the Fed did not cut rates during its meeting last week, eight out of the 17
participants on the Fed’s policy-making board now believe that one or two rate cuts are
needed this year to keep the U.S. economy strong, up from only six as of March this year.
Aside from the U.S., other emerging markets are also performing well. For example, the
benchmark equity indices of Thailand and Indonesia are up by 5.9% and 1.3% from their
end May levels after suffering from a steep sell-off earlier in May. Even the Shanghai Stock
Exchange Composite Index in China is up significantly by 3.8% from its end May level,
notwithstanding the fact that the Chinese economy is most vulnerable to the ongoing
U.S. China trade war.

Admittedly, a looser monetary policy is a major driver of strong equity markets. As

market players always say, “Don’t fight the Fed!” However, the major dilemma is this:
Can a looser monetary policy be enough to drive the U.S. market higher even with the
growing risk that the U.S. economy will not do well? There is reason to be cautious
especially since historically, a weaker U.S. market has negatively affected the performance
of global markets including the Philippines.

In summary, the Philippine stock market is in a good position to go up given the improving
outlook of the domestic economy and falling interest rates. However, uncertainty
regarding the sustainability of the U.S. market’s strong performance would most likely
cause markets to stay volatile so it pays to exercise some caution.

For retail investors, the best way to control risk is by managing exposure to the stock
market. To be prudent, make sure that the amount you have invested is not too much,
allowing you to stomach any volatility that could take place if the market fails to go up
in a sustainable manner. This should be an amount of money that you can afford to keep
invested over a long period of time. Also, make sure to invest only in fundamentally
sound stocks that are trading at attractive valuations. These qualities should make those
stocks more resilient to volatility.

COL Financial Group, Inc. 6

 COLING THE SHOTS I IMPROVING OUTLOOK DOMESTICALLY, BUT OVERSEAS RISKS REMAIN

WED 26 JUNE 2019

COLing the Shots stock picks – Adding FLI

After underperforming in May, our COLing the Shots stock picks outperformed in June,
led by property stocks and small cap consumer stocks.

Exhibit 6: Performance of COLing the Shots Stock Picks

Stock Price (5/27) Price (6/24) Return
MEG 5.46 6.10 11.7%
ALI 48.10 51.80 7.7%
MBT 71.80 73.50 2.4%
SECB 173.80 169.10 -2.7%
DNL 10.00 10.44 4.4%
MAXS 12.52 13.82 10.4%
SSI 3.16 3.60 13.9%
AC 902.00 897.00 -0.6%
Average 5.9%
PSEi 7,725.01 8,060.58 4.3%

The outperformance of property stocks is not surprising given the continuous decline
of interest rates domestically and globally. After all, property companies are major
beneficiaries of lower rates.

However, property stocks could be under pressure in the short term given news that
President Duterte has imposed a moratorium on new ecozones in Metro Manila. Under
Administrative Order No. 16, only 22 approved and endorsed Metro Manila-based
ecozone proposals to Malacañang as of June will be considered for accreditation. This
development is expected to hurt demand for office space from the BPO sector (which
demand office spaces that are ecozones) potentially hurting the profitability of property
companies.

Nevertheless, the impact of the moratorium on listed property companies is not expected
to be significant. The source of demand for office space in Metro Manila is now more
diverse, with offshore gaming operators and traditional businesses accounting for 37%
and 31% of total demand as of the first half of 2019 according to Leechiu Property
Consultants.

Moreover, property companies under our coverage list are now focused on expanding
outside Metro Manila. Most of their Metro Manila developments are also already PEZA-
accredited. (Please read our “PEZA moratorium to have limited impact on developers”
report for more details)

COL Financial Group, Inc. 7

 COLING THE SHOTS I IMPROVING OUTLOOK DOMESTICALLY, BUT OVERSEAS RISKS REMAIN

WED 26 JUNE 2019

Meanwhile, SSI continued to go up after reporting strong first quarter numbers in May.
On the other hand, MAXS rebounded after falling significantly the past month. Recall
that MAXS was sold off after reporting lackluster revenue growth for the first quarter.
Nevertheless, we think that the weak revenue performance in the first quarter is only
temporary as consumer confidence remained poor due to the high inflation environment
in the fourth quarter.

Our banking picks continued to underperform the market the past month, with MBT
increasing by only 2.4% and SECB falling by 2.7%. Nevertheless, as we had mentioned
last month, we are not worried because we think that the worst is over. Although banks
suffered from tight liquidity and high funding cost during the first half of the year, the
reduction in banks’ reserve requirement ratio (or the amount of deposits they need to
keep with the BSP) by a total of 200 bps from 18% to 16% by end July should boost
liquidity, allowing their’ funding cost to go down. Aside from higher funding costs, we
don’t see any other problems. Loan growth and trading gains remain robust, while non-
performing loans continue to be manageable.

Moreover, valuations of banks are very cheap, with MBT trading at 0.9X 2019E P/BV
and SECB trading at 1.1X 2019E P/BV. The said levels are below the two banks’ 5-year
historical average P/BV of 1.3X and 1.5X respectively.

For those who missed it, we added FLI to our COLing the Shots stock pick list earlier
this month. We added FLI because we think it is an excellent rerating candidate given
that profits from its leasing business already accounted for 46% of profits in 2018, up
from only 28% in 2014 when the company was still predominantly a low-cost property
developer. Moreover, profits from leasing should continue to grow in significance given
FLI’s plans to expand its leasing portfolio by a CAGR of 18% from 2018 to 2023. The
growing share of leasing gives FLI a more stable source of recurring cash flow and less
volatile earnings. Moreover, all of FLI’s future office buildings inside Metro Manila have
pending PEZA applications, making the company less vulnerable to the moratorium on
new ecozones. Finally, FLI is positioned to benefit from Clark’s transformation into one of
the country’s premier destinations for foreign and local investors in the country given its
huge landbank in the area.

Despite FLI’s improving outlook, it continues to trade at only 6.3X 2019E P/E, which is
a huge discount to the 17.6X average 2019E P/E of property stocks and at a steep 60%
discount to NAV. The huge discount is unwarranted in our opinion given FLI’s improving
fundamentals.

COL Financial Group, Inc. 8

 COLING THE SHOTS I IMPROVING OUTLOOK DOMESTICALLY, BUT OVERSEAS RISKS REMAIN

WED 26 JUNE 2019

We also increased our FV estimate on MEG from Php5.84 to Php7.19. We increased our
FV estimate after factoring in its new leasing projects and higher market prices of its
landbank which are in prime locations such as Bonifacio Global City, Paranaque City (in
Bay City), Pasig City, Cebu, Iloilo, and Davao.

Exhibit 7: COLing the Shots Stock Picks

Sector Stock Price FV Buy Below Buy Date Buy Price
MEG 6.10 7.19 6.30 9/9/2015 4.180
Properties ALI 51.80 49.33 42.90 24/05/2017 38.95
FLI 1.73 2.41 2.10 6/6/2019 1.730
MBT 73.50 92.50 80.40 21/07/2016 92.50
Banks
SECB 169.10 205.00 178.30 19/11/2018 146.50
DNL 10.44 10.60 9.20 23/11/2017 10.68
Consumer MAXS 13.82 19.00 16.50 17/01/2019 11.88
SSI 3.60 4.00 3.50 17/01/2019 2.37
Conglomerates AC 897 1,077.00 936.50 1/12/2017 1,007.00

COL Financial Group, Inc. 9

 COLING THE SHOTS I IMPROVING OUTLOOK DOMESTICALLY, BUT OVERSEAS RISKS REMAIN

WED 26 JUNE 2019

IMPORTANT RATING DEFINITIONS

BUY
Stocks that have a BUY rating have attractive fundamentals and valuations based on our analysis. We expect the share price to outperform the market in the
next six to 12 months.

HOLD
Stocks that have a HOLD rating have either 1) attractive fundamentals but expensive valuations 2) attractive valuations but near-term earnings outlook might
be poor or vulnerable to numerous risks. Given the said factors, the share price of the stock may perform merely in line or underperform in the market in the
next six to twelve months.

SELL
We dislike both the valuations and fundamentals of stocks with a SELL rating. We expect the share price to underperform in the next six to12 months.

IMPORTANT DISCLAIMER
Securities recommended, offered or sold by COL Financial Group, Inc. are subject to investment risks, including the possible loss of the principal amount invested.
Although information has been obtained from and is based upon sources we believe to be reliable, we do not guarantee its accuracy and said information may
be incomplete or condensed. All opinions and estimates constitute the judgment of COL’s Equity Research Department as of the date of the report and are
subject to change without prior notice. This report is for informational purposes only and is not intended as an offer or solicitation for the purchase or sale of
a security. COL Financial and/or its employees not involved in the preparation of this report may have investments in securities of derivatives of the companies
mentioned in this report and may trade them in ways different from those discussed in this report.

COL RESEARCH TEAM

APRIL LYNN TAN, CFA

VP & HEAD OF RESEARCH
april.tan@colfinancial.com

CHARLES WILLIAM ANG, CFA GEORGE CHING RICHARD LAÑEDA, CFA

DEPUTY HEAD OF RESEARCH SENIOR RESEARCH MANAGER SENIOR RESEARCH MANAGER
charles.ang@colfinancial.com george.ching@colfinancial.com richard.laneda@colfinancial.com

ANDY DELA CRUZ JOHN MARTIN LUCIANO FRANCES ROLFA NICOLAS

SENIOR RESEARCH ANALYST SENIOR RESEARCH ANALYST RESEARCH ANALYST
andy.delacruz@colfinancial.com john.luciano@colfinancial.com rolfa.nicolas@colfinancial.com

JUSTIN RICHMOND CHENG ADRIAN ALEXANDER YU

RESEARCH ANALYST RESEARCH ANALYST
justin.cheng@colfinancial.com adrian.yu@colfinancial.com

COL FINANCIAL GROUP, INC.

2402-D EAST TOWER, PHILIPPINE STOCK EXCHANGE CENTRE,
EXCHANGE ROAD, ORTIGAS CENTER, PASIG CITY
PHILIPPINES 1605
TEL NO. +632 636-5411
FAX NO. +632 635-4632
WEBSITE: www.colfinancial.com

COL Financial Group, Inc. 10