Manila Water Company THU 09 NOV 2017

9M17 earnings slightly below

COL estimates on lower revenues
9M17 net income flat y/y. MWCs 3Q17 net income reached Php1.7Bil, down 3.5% y/y, despite
revenues growing by 1.8% y/y during the quarter. This was mainly due to higher cost of services
and operating expenses, specifically direct costs and business development costs, which led to a
HOLD
lower EBITDA margin of 65.7% (down 310 bps). For 9M17, net income reached Php4.9Bil, flat y/y.
Results were slightly below COL estimates at 76.1% of our full year forecast but above consensus TICKER: MWC
forecast at 82.8% of full year forecast. Note that 9M net income over the last three years averaged FAIR VALUE: 31.50
at 78.6% of full year net income. The underperformance relative to COL estimate was mainly
CURRENT PRICE: 30.45
due to the lower-than-expected revenues, which accounted for just 71.2% of our forecast.
Specifically, revenues missed our estimates because of the lower-than-expected availability UPSIDE: 3.45
charges for Estate Water (~40% of our forecast).

Manila Concessions 9M17 earnings up 3% y/y on lower depreciation. The Manila Concessions SHARE PRICE MOVEMENT
9M17 earnings grew 3% to Php4.5Bil despite registering flat revenues during the period. Note
that 9M17 revenues reached Php11.3Bil, up by just 0.4%, as the 2% growth in billed volume was 110

offset by lower average tariff and average consumption. The growth in earnings was mainly due
to the lower depreciation resulting from the adoption of the units of production depreciation
method starting May this year. 100

MWPVs 3Q17 earnings drop 23.9% y/y on aggressive business-building efforts. Manila
Water Philippine Ventures (MWPV), 3Q17 earnings dropped 23.9% y/y to Php137Mil, despite 90
revenues growing by 14.4% during the quarter. MWPVs 3Q17 revenues reached Php764Mil, up
14.4% y/y as mentioned, on the back of strong billed volume of most of the domestic subsidiaries.
However, higher costs, specifically business development costs, which grew 160% to Php39Mil,
80
put pressure on MWPVs earnings. This in turn led to lower EBITDA margin and net margin of 9-Aug-17 9-Sep-17 9-Oct-17 9-Nov-17
40.8% and 17.9% respectively (from 55.5% and 26.9% in 3Q16). MWC said that they expect MWC PSEi
the margin compression to be temporary as the decline is mostly attributable to its intensified
infrastructure build-up.

Reiterate HOLD rating. We reiterate our HOLD rating on MWC given the substantial risk related ABSOLUTE PERFORMANCE
to the Manila Concessions 2018 rate rebasing. Note that the Manila Concessions earnings
account for ~80% of the companys net income. Moreover, valuations are currently unattractive 1M 3M YTD
with the stock currently trading close to our FV estimate of Php31.5/sh. MWC -3.49 -2.87 5.00
PSEi 2.00 6.87 24.76
FORECAST SUMMARY
Year to Dec. 31 2014 2015 2016 2017E 2018E 2019E
Operating Revenues 16,357 16,936 17,712 19,360 20,727 22,132 MARKET DATA
% change y/y 2.7 3.5 4.6 9.3 7.1 6.8
EBIT 9,117 9,070 9,105 9,959 10,372 10,648 Market Cap 62,542.65Mil
% change y/y (0.4) (0.5) 0.4 9.4 4.1 2.7 Outstanding Shares 2,053.95Mil
EBIT Margin (%) 55.7 53.6 51.4 51.4 50.0 48.1 52 Wk Range 27.00 - 33.50
Net Profit 5,813 5,958 6,065 6,427 6,570 6,573
3Mo Ave Daily T/O 43.72Mil
% change y/y 1.1 2.5 1.8 6.0 2.2 0.0
NPM (%) 35.5 35.2 34.2 33.2 31.7 29.7
EPS 2.36 2.41 2.45 2.60 2.66 2.66
% change y/y 0.8 2.2 1.7 6.3 2.2 0.0

RELATIVE VALUE
P/E(X) 13.4 13.2 12.9 12.2 11.9 11.9
P/BV(X) 1.9 1.7 1.5 1.4 1.3 1.2
ROE(%) 17.6 15.9 14.4 13.8 12.9 11.9 FRANCES ROLFA NICOLAS
BVPS(P) 16.9 18.9 21.1 23.2 25.3 27.4 RESEARCH ANALYST
Dividend Yield (%) 2.5 2.6 2.6 2.7 2.9 2.9
rolfa.nicolas@colfinancial.com
so urce: M WC, COL estimates

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.
 EARNINGS ANALYSIS I MWC: 9M17 EARNINGS SLIGHTLY BELOW COL ESTIMATES ON LOWER REVENUES

THU 09 NOV 2017

9M17 net income flat y/y

MWCs 3Q17 net income reached Php1.7Bil, down 3.5% y/y, despite revenues growing by 1.8%
y/y during the quarter. This was mainly due to higher cost of services and operating expenses,
specifically direct costs and business development costs, which led to a lower EBITDA margin
of 65.7% (down 310 bps). For 9M17, net income reached Php4.9Bil, flat y/y. Results were slightly
below COL estimates at 76.1% of our full year forecast but above consensus forecast at 82.8%
of full year forecast. Note that 9M net income over the last three years averaged at 78.6% of full
year net income. The underperformance relative to COL estimate was mainly due to the lower-
than-expected revenues, which accounted for just 71.2% of our forecast. Specifically, revenues
missed our estimates because of the lower-than-expected availability charges for Estate Water
(~40% of our forecast).

Exhibit 1: Results summary

% of estimates
3Q16 3Q17 %change 9M16 9M17 %change
in PhpMil COL consensus
Revenues 4,578 4,661 1.8 13,347 13,785 3.3 71.2 73.5
EBITDA 3,147 3,064 (2.7) 9,232 9,192 (0.4) 70.7 73.4
EBITDA Margin (%) 68.8 65.7 - 69.2 66.7 - - -
Net Income 1,734 1,673 (3.5) 4,873 4,892 0.4 76.1 82.8
Net Margin (%) 37.9 35.9 - 36.5 35.5 - - -
Source: MWC, Bloomberg, COL estimate

Manila Concessions 9M17 earnings up 3% y/y on lower

depreciation

The Manila Concessions 9M17 earnings grew 3% to Php4.5Bil despite registering flat revenues
during the period. Note that 9M17 revenues reached Php11.3Bil, up by just 0.4%, as the 2%
growth in billed volume was offset by lower average tariff and average consumption. Average
tariff during the period dropped 1% to Php29.9/cu.m while average consumption dropped
2% to Php43.19 cu.m per connection. The growth in earnings was mainly due to the lower
depreciation resulting from the adoption of the units of production depreciation method
starting May this year.

MWPVs 3Q17 earnings drop 23.9% y/y on aggressive

business-building efforts

Manila Water Philippine Ventures (MWPV), 3Q17 earnings dropped 23.9% y/y to Php137Mil,
despite revenues growing by 14.4% during the quarter. MWPVs 3Q17 revenues reached
Php764Mil, up 14.4% y/y as mentioned, on the back of strong billed volume of most of the
domestic subsidiaries. However, higher costs, specifically business development costs, which
grew 160% to Php39Mil, put pressure on MWPVs earnings. This in turn led to lower EBITDA
margin and net margin of 40.8% and 17.9% respectively (from 55.5% and 26.9% in 3Q16).

COL Financial Group, Inc. 2

 EARNINGS ANALYSIS I MWC: 9M17 EARNINGS SLIGHTLY BELOW COL ESTIMATES ON LOWER REVENUES

THU 09 NOV 2017

MWC said that they expect the margin compression to be temporary as the decline is mostly
attributable to its intensified infrastructure build-up. This brought MWPVs 9M17 net income
to Php443Mil, up 2.1% y/y.

Exhibit 2: MWPV consolidated results summary

in PhpMil 3Q16 3Q17 %change 9M16 9M17 %change
Revenues 668 764 14.4 1,798 2,266 26.0
COS and Opex 297 450 51.5 849 1,249 47.1
EBITDA 371 312 (15.9) 949 1,017 7.2
EBITDA margin (%) 55.5 40.8 - 52.8 44.9 -
Net income 180 137 (23.9) 434 443 2.1
Net margin (%) 26.9 17.9 - 24.1 19.5 -
Source: MWC

Exhibit 3: Billed volume of domestic subsidiaries

in Mil cubic meters 3Q16 3Q17 %change 9M16 9M17 %change
Boracay Water 1.2 1.4 16.7 3.7 4.1 10.8
Clark Water 3.4 3.7 8.8 10.1 10.9 7.9
Cebu Water 3.2 3.3 3.1 8.3 9.7 16.9
Laguna Water 11.2 11.5 2.7 30.3 34.2 12.9
Estate Water 1.4 1.1 (21.4) 1.9 3.4 78.9
Source: MWC

2018 rate rebasing may be delayed until mid-next year

MWC noted that the MWSS just recently engaged a consultant for the evaluation of
its business plan for the rate rebasing process. As such, management expects that the
consultants recommendation will come out sometime during second quarter next year and
the determination of the rate rebasing mid next year.

Reiterate HOLD rating

We reiterate our HOLD rating on MWC given the substantial risk related to the Manila
Concessions 2018 rate rebasing. Note that the Manila Concessions earnings account for ~80%
of the companys net income. Moreover, valuations are currently unattractive with the stock
currently trading close to our FV estimate of Php31.5/sh.

COL Financial Group, Inc. 3

 EARNINGS ANALYSIS I MWC: 9M17 EARNINGS SLIGHTLY BELOW COL ESTIMATES ON LOWER REVENUES

THU 09 NOV 2017

Manila Water Company INCOME STATEMENT (IN PHPMIL)

(MWC) Revenues
FY14
16,357.0
FY15
16,936.0
FY16
17,712.0
FY17E
19,360.0
FY18E
20,727.0
FY19E
22,132.0
% Growth 3.5% 4.6% 9.3% 7.1% 6.8%
COMPANY BACKGROUND Gross Profit 10,348.0 10,259.0 11,331.0 11,685.0 12,249.0 12,695.0
Manila Water (MWC), under a % Growth -0.9% 10.4% 3.1% 4.8% 3.6%
EBITDA 11,561.0 11,670.0 11,971.0 13,010.0 14,014.0 15,064.0
concession agreement established
% Growth 0.9% 2.6% 8.7% 7.7% 7.5%
with the Metropolitan Waterworks and Operating Profit 8,825.0 8,487.0 8,653.0 9,606.0 10,006.0 10,268.0
Sewerage System, is the sole provider % Growth -3.8% 2.0% 11.0% 4.2% 2.6%
of water and wastewater services to Interest Expense (1,636.0) (1,458.0) (1,429.0) (1,664.0) (2,027.0) (2,244.0)
Other Income/Expense 291.0 583.0 452.0 600.0 753.0 711.0
the East Zone of Metro Manila until
Pretax Income 7,666.0 7,929.0 7,933.0 8,542.0 8,731.0 8,735.0
May 2037. The East Zone covers 23 Tax Expense 1,836.0 1,795.0 1,746.0 2,050.0 2,096.0 2,096.0
cities and munipilities including Makati, Net Income 5,830.0 6,134.0 6,187.0 6,492.0 6,636.0 6,639.0
Mandaluyong, Pasig, Pateros, San Juan, % Growth 5.2% 0.9% 4.9% 2.2% 0.0%
EPS 2.4 2.4 2.5 2.6 2.7 2.7
Taguig, Marikina, parts of Quezon City
% Growth 2.2% 1.7% 6.3% 2.2% 0.0%
and Manila, as well several towns in Rizal.
Aside from the East Zone, the company BALANCE SHEET (IN PHPMIL)
has three wholly-owned subsidiaries FY14 FY15 FY16 FY17E FY18E FY19E
namely, Manila Water Philippine Ventures, Cash & Equivalents 6,453 6,850 4,066 11,054 9,462 10,642
Trade Receivables 1,694 1,865 2,369 2,259 2,695 2,595
Inc. (MWPV), which holds all investments Inventories
in the domestic operating subsidiaries; Other Current Assets 947 1,233 1,822 1,873 1,923 1,980
Manila Water Asia Pacific Pte. Ltd. (MWAP), PPE 2,132 1,255 1,796 3,017 3,441 3,849
which holds the international ventures Other Non-Current Assets 63,634 69,405 75,427 90,406 102,881 115,278
Total Assets 74,860 80,608 85,479 108,608 120,402 134,344
of the Company; and Manila Water Total Accounts Payable 3,847 4,433 3,947 6,521 4,533 7,098
Solutions Corporation, which handles the ST Debts 2,496 6,259 2,287 3,541 4,749 6,709
after-the-meter products and services. Other Current Liabilities 1,516 1,707 1,247 507 507 507
LT Debts 22,975 19,961 25,331 40,933 49,052 54,055
REVENUE BREAKDOWN Other Non-Current Liabilities 8,925 8,529 8,285 8,376 8,471 8,572
Total Liabilities 39,758 40,889 41,098 59,878 67,312 76,940
Total Equity 35,102 39,719 44,382 48,730 53,090 57,404
1,207 Total Liabilities & Equity 74,860 80,608 85,479 108,608 120,402 134,344
1,827 BVPS 16.9 18.9 21.1 23.2 25.3 27.4
1,207
1,827 CASHFLOW STATEMENT (IN PHPMIL)
FY14 FY15 FY16 FY17E FY18E FY19E
Net Income 7,666 7,929 7,933 8,542 8,731 8,735
Depreciation & Amortization 2,444 2,600 2,866 3,050 3,642 4,416
Other Non-Cash Exp (Gains) (2,076) (2,396) (2,444) (2,559) (2,753) (2,707)
14,678 Interest Expense (Income) 1,636 1,458 1,429 1,664 2,027 2,244
14,678
Decrease (Increase) in Working Cap (4,646) (4,602) (8,716) (14,663) (17,754) (13,287)
Operating Cash Flow 5,025 4,989 1,069 (3,966) (6,106) (599)
Capex (353) (726) (944) (1,504) (804) (837)
East Zone Outside East Zone Other Income
East Zone Outside East Zone Other Income Other Investments (7) (70) 329 151 295 222
Investing Cash Flow (359) (796) (614) (1,353) (509) (614)
Proceeds (Payment) Debts (1,887) (2,476) (6,806) 16,856 9,326 6,963
Payment of Cash Dividends (2,013) (2,040) (2,085) (2,144) (2,229) (2,370)
Others (1,093) 720 5,652 (2,404) (2,074) (2,200)
Financing Cash Flow (4,992) (3,796) (3,239) 12,308 5,023 2,394
Change in Cash (327) 397 (2,784) 6,988 (1,592) 1,180

COL Financial Group, Inc. 4

 EARNINGS ANALYSIS I MWC: 9M17 EARNINGS SLIGHTLY BELOW COL ESTIMATES ON LOWER REVENUES

THU 09 NOV 2017

INVESTMENT THESIS: KEY RATIOS

FY14 FY15 FY16 FY17E FY18E FY19E
Manila Concession still growing
GPM (%) 63.3% 60.6% 64.0% 60.4% 59.1% 57.4%
Despite the maturity of the Manila Concession,
EBITDA Margin (%) 70.7% 68.9% 67.6% 67.2% 67.6% 68.1%
it is still growing in terms of billed volume. OPM (%) 54.0% 50.1% 48.9% 49.6% 48.3% 46.4%
This is mainly attributable to the companys NPM (%) 35.5% 35.2% 34.2% 33.5% 32.0% 30.0%
growing water connections from it domestic Times Interest Earned (X) 5.6 6.2 6.4 6.0 5.1 4.7
and semi-commercial accounts. Moreover, the Current Ratio (X) 1.20 0.80 1.10 1.40 1.40 1.10
company has various projects to enhance the Net D/E Ratio (X) 0.50 0.30 0.50 0.70 0.80 0.90
Days Receivable 34.5 38.4 43.6 43.6 43.6 43.6
service in the concession area such as sewage
Days Inventory - - - - - -
treatment and water supply improvement.
Days Payable 245.1 226.3 239.7 248.9 238.0 224.9
As such, we expect the Manila Concession to Asset T/O (%) 0.2 0.2 0.2 0.2 0.2 0.2
grow 3-4% moving forward. ROAE (%) 17.6 15.9 14.4 13.8 12.9 11.9

Significant contribution from non-Manila

Concession subsidiaries to take some time
MWC started to venture into local as well as
international expansion, offering different
services such as reducing non-revenue
water and supplying bulk water. As of 1Q17,
net income contribution of non-East Zone
subsidiaries remains minimal at 19.0%.
Although there are current projects in the
pipeline including the expansion of Laguna
Water and a partnership with ALI for the
provision of water and used water services,
we believe that it would take some time for
contribution to be signficant because of the
sheer size of the East Zone. Management has
a goal of having a 50% contribution by 2020.

COL Financial Group, Inc. 5

 EARNINGS ANALYSIS I MWC: 9M17 EARNINGS SLIGHTLY BELOW COL ESTIMATES ON LOWER REVENUES

THU 09 NOV 2017

Valuation RELATIVE VALUATION

P/E EPS Growth
Methodology 2017E 2018E 2017E 2018E
TTW PCL 16.0 15.2 22.0% 6.0%
Jiangsu Jiangnan Water Co. Ltd 14.7 10.5 30.0% 39.0%
Yunnan Water Investment Co. Ltd 6.5 5.5 49.0% 17.0%
Chongqing Water Group Co. Ltd 20.5 21.0 66.0% -2.0%
Manila Water Company 12.2 11.9 6.0% 2.0%
Industry Ave 14.0 12.8 34.0% 12.0%
Industry Median 14.7 11.9 30.0% 6.0%

VALUATION ASSUMPTIONS

Risk Premium 5.0%

Risk Free Rate 5.0%
Beta 0.85
Cost of Equity 9.0%
Cost of Debt 4.0%
Tax Rate 24.0%
WACC 6.7%
Terminal Growth Rate -

PV (FY17E-FYXXE) 110,604
PV of Terminal Value 0
Enterprise Value 110,604
Less: Net Debt 33,420
Add: Other Investments 0
Equity Value 77,183
O/S 2,454
FV Estimate 31.50

COL Financial Group, Inc. 6

 EARNINGS ANALYSIS I MWC: 9M17 EARNINGS SLIGHTLY BELOW COL ESTIMATES ON LOWER REVENUES

THU 09 NOV 2017

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 COLs 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 LAEDA, CFA

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

FRANCES ROLFA NICOLAS ANDY DELA CRUZ JUSTIN RICHMOND CHENG

RESEARCH ANALYST RESEARCH ANALYST RESEARCH ANALYST
rolfa.nicolas@colfinancial.com andy.delacruz@colfinancial.com justin.cheng@colfinancial.com

KYLE JEMMRIC VELASCO JOHN MARTIN LUCIANO

RESEARCH ANALYST RESEARCH ANALYST
kyle.velasco@colfinancial.com john.luciano@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. 7