Market Outlook 2012Market Outlook 2012

February 3, 2012

The Philippine Economy

• The Philippine's macroeconomic conditions remain sound.

• We have maintained macroeconomic stability while building the foundations for faster growth.

• Government fiscal and monetary policy management are • Government fiscal and monetary policy management are supporting confidence

• The key challenge now is to navigate through the period of global uncertainty

• Concerns of an escalating debt crisis in Europe, the continuing weak global labor market and the risk of a slowdown in China

Unemployment Rate

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Bank Earnings

BANKS 2010 2011 2012BDO 3.38 4.03 4.83BPI 3.18 3.56 3.99MBT 3.96 5.55 6.38MBT 3.96 5.55 6.38PNB 5.31 3.47 3.89RCB 3.72 4.02 4.42SECB 14.33 9.95 10.95Ave. NI % 7.60% 14.14%

Power Sector Earnings

POWER 2010 2011 2012AP 3.13 2.72 2.94EDC 0.22 0.04 0.40EDC 0.22 0.04 0.40FGEN 0.95 0.41 0.93FPH 45.48 2.22 5.00MER 8.61 12.35 14.20Ave. NI % -42.64% 34.33%

Property Sector Earnings

PROPERTY 2010 2011 2012ALI 0.42 0.56 0.72SMPH 0.56 0.61 0.69MEG 0.20 0.27 0.29FLI 0.12 0.09 0.10VLL 0.32 0.37 0.40RLC 0.85 0.98 1.05Ave. NI % 17.01% 13.79%

Telcos and Broadcasting

SERVICE 2010 2011 2012ABS 4.62 3.21 3.27GMA7 0.84 0.57 0.60GMA7 0.84 0.57 0.60GLO 73.29 73.29 76.95TEL 187.46 191.19 195.85ICT 2.35 2.81 3.10Ave. NI % -0.51% 3.60%

Mining Sector

MINING 2010 2011 2012AT 0.23 1.32 1.71SCC 12.88 16.10 17.64SCC 12.88 16.10 17.64PX 0.83 1.05 1.24Ave. NI % 48.05% 16.47%

Leading Indicator

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GDP Growth Projection

• Economic growth is expected to be driven by higher government expenditures, direct investments, services and consumption.

• For 2012, we are forecasting a GDP growth of 4.47%

• Government spending is expected to improve after dropping last year • Government spending is expected to improve after dropping last year while private demand would remain resilient.

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Business Confidence Index

How We Stack Up

How We Stack Up

Fiscal Policy• Current fiscal policy is expansionary via increased government spending.

• Sluggish government expenditures and public construction have been blamed for lackluster economic growth this year

• Planned infrastructure spending of P182.2 billion this year is 25.6% more than 2011 allocations.2011 allocations.

• It will be equivalent to 1.6% of gross domestic product (GDP), compared to last year’s 1.4% ratio.

• The government’s budget deficit is seen to be at P292 billion compared to 2011's P190 billion

Government Debt to GDP Ratio• Declining debt-to-GDP ratio, country’s economy growing faster than debt and deficit

• Philippines's sovereign ratings believed to be underrated by one to two notches.

• The Philippines received a series of credit rating and credit outlook upgrades from the three international rating agencies within the first year of the administration of President Aquino.

• Investment grade seen to be attained by 2013.

Monetary Policy•Monetary policy is also in an expansionary mode

• Higher money supply growth (+7% M3) as against inflation growth of only (+ 4.4%)

• The steady growth in domestic liquidity indicates that liquidity in the financial system remains in line with the economy’s growth trajectory.

•Much of the money going into investments because of low interest rates•Much of the money going into investments because of low interest rates

• Outstanding loans of commercial banks grew at a faster rate of 22 percent over 2010.

• BAP projecting lending growth to average of between 15 and 20 percent.

Philippine Inflation Rate

BSP Overnight Rates

Interest Rate Cycle• The interest rate cycle is clearly in an expansionary bias.

• Liquidity situation - e.g. rising money supply +7%

• Tame inflation - 4.7%

• Improving fiscal situation

•Modest economic growth

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Philippine Peso• Philippine Peso is expected to consolidate with a bias to depreciate

• Downward pressure by more rate cut expectations

• Absence of clear signs from Europe to improve its ability to refinance debts.

• The prolonged crisis and its impact on the global economy ; Philippine exports and remittances

• The dollar can appreciation in 2012 as the US economy continues on a moderate growth • The dollar can appreciation in 2012 as the US economy continues on a moderate growth path

• The risk of sharp fall limited due to fresh asset allocation to the emerging markets.

Philippine PesoRange trading between 42.20 to 44.5

Currently at the support level of the range

Global Markets

• Developed economies will still be plagued by worries about their sovereign debt levels

• Emerging markets remain bullish as economies are characterized by high growth rates, low debt-to-GDP ratios, and high foreign reserves.

•We expect that China to undertake more stimulus measures in 2012 to help bolster its •domestic economy.

•Market downturns don’t usually happen in a U.S. election year

• U.S. Federal Reserve Board low rate policy

Attractive Yields and Values

Dow Jones Industrial Average

In a bullish uptrend long ter,m

Short Term at major resistance 12,800

Likely to form inverted head and shoulder – 14,830

Support at 11,860

European Markets

Asian Markets

Gold

Debt write-downs, massive contraction in the money supply. --> Stronger dollar

Continuing low rates in the US to prevail til2014 --> Weaker dollar

21-month cycle to the upside --> July 2013 (possibly 2,500)

Copper

Base metals Supply and demand have been essentially balanced for the past four years.

China's relaxing of monetary policies

The copper and nickel markets' fundamentals returning to normalcy in 2012.

Lower warehouse inventories and slight pick up in demand

the use of nickel pig-iron as a substitute for pure nickel now limited

Nickel

Market Valuations

Historical PSE Valuation

PSEi

Summary• Estimate value for the PSEi is 4,880

• Increasing liquidity (4.4Tn) and low interest rate environment

• Potential value enhancer - ratings upgrade

• Relatively expensive historically and against peer markets

• Slow down in the global economies

• Recommended sectors - Construction, Utilities, Leisure

Utilities and InfrastructureUtilities and Infrastructure

February 3, 2012

Philippine installed capacity is 16,359MWPhilippine installed capacity is 16,359MW

An initial addition of 500MW of capacity is needed by the country to meet the demand for power in the succeeding years; 300MW for Luzon and 200MW for Mindanao.

Hurdles in the renewable energy sector and delays in the Open Access scheme.

Luzon Supply Demand Outlook

Source: DOE Presentation

Mindanao Supply Demand Outlook

UTILITIESUTILITIES

Aboitiz Power Corp. (AP)

• AP has both renewable energy and traditional plants. Risk is lower due to mix of power plants.

Total Plant Capacity (MW) Total Attributable Cap. (MW)Portfolio Total Plant Capacity (MW) Total Attributable Cap. (MW)Hydro 721 436Geo 467 467Coal 1,178 843Oil 535 358TOTAL 2,901 2,104

Renewable

Non Renewable

Portfolio

Aboitiz Power Corp. (AP)

• Full rehabilitation, completion and ownership of old and new plants increased attributable generating capacity to 2,344MW.generating capacity to 2,344MW.• Participation in Open Access. • Using our forecast EPS of P2.94, AP is trading at a PE of 10.32x. • Our target price is P36.70 per share.

Energy Development Corp. (EDC)

�Will benefit from expected increase in power demand in the next years.

� Improving margins� Improving margins�With our core EPS forecast for 2012 of P0.31, EDC is trading at a PE of 16.26x.

�We derived a target price of P6.73 per share.

Installed Capacity (MW)Leyte 609.2Mindanao 1 52Mindanao 2 54

Portfolio

Energy Development Corp. (EDC)

Mindanao 2 54North. Negros 79.4Tongonan 1 112.5Palinpinon 1&2 192.5Bacman 130

Hydro Pantabangan Masiway 112TOTAL 1,342

Geothermal

Govt. is seeking to improve institutional and regulatory Govt. is seeking to improve institutional and regulatory environment of the infrastructure sector to attract investments.

Government’s PPP initiative invites potential investors and bidders.

Govt. has put up incentives such as Income Tax Holiday, Tax Credits, additional deductions from Taxable Income for PPP investors.

Public Private Partnership (PPP)

• Role of private sector• To augment govt. budgetary support for capital investmentinvestment• Incentives will be provided

Source: ppp.gov.ph; neda.gov.ph

Public Private Partnership (PPP)

• Reasonable rate of return to be determined by an Approving Body • Repayment scheme depending on the • Repayment scheme depending on the Contractual Agreement• There are four Live Projects, or are in advanced stages of preparation and tender. • Bulk of projects to be rolled out second half this year.

Source: ppp.gov.ph

Interested firms:COMPANIES PROJECTS

MPI Mactan Cebu Airport

MRT 3

NLEx-SLEx Connector Road

Modernization of Orthopedic Center

AC NAIA Expressway IIAC NAIA Expressway II

NLEx-SLEx Connector Road

DMC LRT Elevated Station

Tollroads

ALI Laguindingan Airport (O&M)

JGS Airport RelatedSource: ppp.gov.ph

CONSTRUCTION AND INFRASTRUCTURECONSTRUCTION AND INFRASTRUCTURE

Metro Pacific Investments (MPI)

• Infrastructure uptrend beneficiary – interested in MRT3, NLEx SLEx road connector etc. • Current balance sheet is optimal for expansion • Current balance sheet is optimal for expansion as seen in its Gross D/E ratio of 0.10 • Stable projected earnings performance led by lower NRW for Maynilad and increasing traffic for MPTC.

• Our forecast 2012 EPS for MPI is P0.34. This translates to a PE of

Metro Pacific Investments (MPI)

a PE of 10.26x• Target price for MPI is P4.26 using sum of parts

Holcim Philippines, Inc. (HLCM)

• PPP boost towards a turnaround.• Increase in cement demand• We are valuing the company’s shares at P11.55• We are valuing the company’s shares at P11.55• Accumulate once it dips back to 10 or lower. Gain of 16% from said level.

Stocks that may also be considered due to infrastructure/power Stocks that may also be considered due to infrastructure/power interests and tourism-related business.

San Miguel Corp. (SMC)

• The company is actively participating in infrastructure opportunities, lately in toll roads and expressways. and expressways. • It is interested to bid for the LRT1-MRT3 operations and maintenance this year once a contract with the Japanese firm expires.• SMC and Citra group to develop the Southern Luzon backbone.

San Miguel Corp. (SMC)

• Timetable or signs of SMC Global IPO to push through • Their total contracted capacity is 2,345MW • Their total contracted capacity is 2,345MW

PORTFOLIO LOCATION CAPACITY

Sual Coal Pangasinan 2x500MW

Ilijan Natural Gas Batangas 2x500MW

San Roque Hydro Pangasinan 345MW

San Miguel Corp. (SMC)

• Our forecast 2012 EPS is P8.82, translating to a PE of 13.21x• Target price for SMC is P140.• Target price for SMC is P140.

Alliance Global Inc. (AGI)

• With ownership and investments in tourism and entertainment related businesses. • Travellers International – Resorts World Manila • Travellers International – Resorts World Manila near NAIA3 and another casino/entertainment complex in PAGCOR City.• Our 2012 EPS is P1.15 with a target price of P12.04

TablesSTOCK EPS PE PB TARGET

AP 2.94 10.32 3.48 36.70

EDC 0.31 16.26 2.90 6.73

MPI 0.34 10.26 1.19 4.26

HLCM O.44 25.00* 2.89 11.55

SMC 8.82 13.21 1.24 140.00

AGI 1.55 6.92 1.51 12.04

*Holcim’s PE to decline to 10x as revenues increase significantly in the next 5 years.

Aboitiz Power

Energy Development Corporation

Metro Pacific Investments Corp.

Holcim Phils. Inc.

Alliance Global Inc.