CAYLUMBEATTHEMARKET 8 February 2018

CAYLUMBEATTHEMARKET VOL. IV | ISSUE 1

“One of the
frustrating things
for people who
miss the first rally
in a bull market is
that they wait for
the big correction,
and it never
Investment outlook comes. The

Not so fast!
market just keeps
climbing and
climbing.”
After storming out of the gate to start the year, the PSEi has corrected after a huge route in global equities. Martin Zweig

After a short correction towards the end of the year, the PSEi stormed out of the gate to start 2018 reaching an all-time high of 9,000 as investors turned more
optimistic about the country's outlook with the passage of package 1A of the Tax Reform for Inclusion and Acceleration or TRAIN bill combined with the
expected continued rollout of the government’s Php9 trillion infrastructure program or “Build, Build, Build” program, sustained BPO and OFW remittance
growth, and stable macroeconomic conditions.

However, with the market at overbought levels and due to its sharp rise in a short time, these raised concerns about expensive valuations as the PSEi was
already trading at around 19.5x FY18 PE above historical and regional norms. The question was whether there was any upside left considering most brokerages
had forecasted end-year targets between 9,100-9,300.

Furthermore, concerns about increased spending coupled with rising commodity prices, an expanding current account deficit, and a weaker peso would result
in the economy overheating and inflation accelerating that could force the BSP to hike interest rates.

True enough, the PSEi went down 7 percent since reaching record-highs last week, with the correction aggravated by the plunge of Asian markets after a huge
route in US stocks—the Dow Jones Industrial Average fell more than 1,100 points on Monday February 5, amid concerns of rising inflation pushing interest rates
higher.

PSEi chart, 1-yr daily

Source: bigcharts.com

1
CAYLUMBEATTHEMARKET 8 February 2018
Up until the sell-off, the PSEi had returned more than 26 percent since the start of last year; we believe this correction is just a breather after months of
continuing uptrend. Philippine economic fundamentals remain intact—the economy remains in a strong growth path; corporate profits are expected to
accelerate; and gov't reforms continue to move forward.

Economy remains on a strong growth path

While the PSEi has become more expensive, its rise has been supported by robust economic growth and sound macroeconomic fundamentals. GDP has been
growing above 6 percent for 10 straight quarters, inflation remains controlled, the country remains in a demographic “sweet spot”, OFW remittances and BPO
growth remains steady despite concerns to the contrary, FDI inflows has been increasing, global growth has been accelerating, and the country’s debt levels
remain low versus GDP. Moreover, the passage of TRAIN and other reforms has been moving forward and is expected to boost consumption and enable
increased gov’t spending which should stimulate economic growth. However, to help ease valuation concerns, we need to see significant corporate earnings
growth this year which we believe is going to happen.

Tax reform finally approved and continued infrastructure rollout

After months of uncertainty, the Tax Reform for Acceleration and Inclusion Act or TRAIN was finally signed into effective January 1. Package 1A of the tax reform
bill is expected to bring in close to Php96 billion in revenues. We expect Package 1B of the Comprehensive Tax Reform Package (CTRP) to be passed by 1H18
and raise an additional Php30 billion in taxes per year. The tax reform bill should result in increase household income and revenue for the government which
should boost consumption spending and fund government spending.

Steady OFW remittance and BPO growth

OFW remittances remains strong increasing 5.1 percent to US$ 28.2 billion from Jan to Nov 2017. While BPO revenues, despite concerns of slowing down,
reached US$25 billion as of Nov 2017. Outlook for the BPO industry is optimistic given improved relations with the US, declining political risk, faster processing
of PEZA licences, and retention of tax incentives in the tax reform law.

Sustained GDP growth

The Philippines’ economic growth remains in a strong Philippine GDP growth per quarter (YoY)
growth path as the country again posted GDP growth
7
above 6 percent for the 10th straight quarter, registering
6.9
6.6 percent in 4Q17. 6.9

6.8 6.8
6.8

While this was a bit below estimates (6.7 percent) it was 6.7 6.7 6.7
6.7
still a solid finish to the year. This brought full year GDP
6.6
growth to 6.7 percent, slower than the 6.9 percent in 2016 6.6
%

but looks impressive coming from a post election year. 6.5

Also, this was the third fastest in Asia behind China (6.9 6.4
6.4
percent) and Vietnam (6.8 percent) and within the gov’t's
target GDP range of 6.5 percent and 7.5 percent. 6.3

6.2

The decline in growth in 4Q17 was due to the slowdown

6.1
of the industry and services sector. Services includes the Q1 17 Q2 17 Q3 17 Q4 17 Q1 18E Q2 18E Q3 18E Q4 18E

BPO sector which saw a slowdown last year due to

protectionist threats from Trump and deterioration of US-PH ties.

However, the good news is consumption spending bounced back in the fourth quarter from 5.3 percent in 3Q17 to 6.1 percent; while government spending
grew 14.3 percent versus 8.3 percent in 3Q17.

Source: Bloomberg, COL Financial, Caylum, Company information

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CAYLUMBEATTHEMARKET 8 February 2018

Key risks
While the country’s economic fundamentals remain solid, there are a number of key risks to watch out for: rising inflation, expensive valuations, and execution
risk on gov’t infrastructure spending implementation.

Rising inflation
Inflation remained controlled at 3.3 percent in December bringing full-year inflation to 3.2 percent for 2017—well within the BSP’s target o 2-4 percent. y/y
However, implementation of the tax reform, higher commodity (e.g., oil) prices, widening current account deficit, and a weaker peso could lead to higher than
expected inflation accelerating which would force the BSP to increase interest rates. In fact, January inflation already hit 4 percent, its highest level in three years
as the implementation of train resulted in higher prices. However, the gov’t said that this was expected given that tax reform was just recently implemented and
that they expect inflation rate to stabilise. Uncontrolled inflation and sharp rises in interest rates result in lower consumer spending and slower economic
growth.

Quarterly CPI (%)

5.5

4.5
3.8
4 3.7
3.6
3.5
3.4
3.5 3.1 3.1 3.1

3
%

2.5

1.5

0.5

0
Q1 17 Q2 17 Q3 17 Q4 17 Q1 18E Q2 18E Q3 18E Q4 18E

Valuations
The PSEI rose sharply to start the year and reached a new high. However, at these level valuations were already slightly expensive trading at a FY18 PE of 19.5x
—above its five-year average PE of 19x and above regional peer average of 16.5x. In addition, its earnings yield (reciprocal of the PE ratio) did not look
attractive at 5.1 percent versus the yield of the 10-year government bond yield of 6.0 percent.

After the correction, prices have gone down to more sensible levels at 18.5x FY18 PE. But still, the earnings yield of the PSEi still does not look attractive versus
the 10-yr gov't bond yield of of 6.2 percent.

PSEi 5-year P/E

25

20

15

10

0
2/6/2013 2/6/2014 2/6/2015 2/6/2016 2/6/2017 2/6/2018

Source: Bloomberg, COL Financial, Caylum, Company information

3
CAYLUMBEATTHEMARKET 8 February 2018

Rising rates
The 10-year gov’t Philippine bond yield has been steadily creeping up over the last few months in anticipation of higher interest rates, the implementation of
TRAIN and a Fed rate hike as the 10-year US treasury yield had been breaking out to 1-year highs, reaching as high as 2.85 percent.

10-yr Phil gov’t bond rate

4
%

0
06/02/17 06/04/17 06/06/17 06/08/17 06/10/17 06/12/17 06/02/18

Slow implementation of infrastructure projects and short fall in gov’t revenues from tax reform
Slow down in the roll out of infrastructure projects, delay in passing package 1B of tax reform, and a shortfall in gov’t revenues from the tax reform will hurt
growth and outlook for the economy.

Source: Bloomberg, COL Financial, Caylum, Company information

4
CAYLUMBEATTHEMARKET 8 February 2018

What to do?
As we’ve witnessed during the last few weeks, a lot of stocks in the consumer, gaming, and infrastructure sector have risen significantly since the start of the
year. We believe the recent correction should be healthy for the stock market after a huge run-up in such a short time, allowing the market to digest recent
gains and news of an impending Fed rate hike and rising inflation.

As volatility has returned to the markets, we advice market participants to stay patient and wait for markets to settle down. We remain positive on the markets
and we don’t believe of any systemic risk happening; the economy continues to grow and as corporate earnings accelerate given the fiscal reforms and a
favourable macroeconomic environment, We expect the PSEi to go on duration--around four to six months--which should provide traders and investors
opportunity to enter their favourite stocks at more sensible prices.

In tables 1 and 2, we’ve listed stocks that we’ve chosen for our core portfolio and trading ideas for this year. The stocks in the core portfolio are shares that we
recommend for position trading. These are defensive, quality companies that have sound fundamentals and excellent long-term prospects. While stocks in the
trading list are companies that might be more risky but have short-medium-term upside due to new positive developments in the company or their sector.

Some stocks may already be near their target prices for the year. If you haven’t been able to enter these issues at their recommended 'buy below' prices, we
suggest waiting for them to pullback below the recommended buy levels.

Table 1: Core portfolio

FY18
FY18 Buy FY18 FY18 EV/
Sector Name Ticker Last px Upside profit gr
TP below PE EBITDA
YoY

Power Aboitiz Power AP 39.5 54.8 46.6 32.7% 12.2% 12.5 11.1

Banking BDO Unibank BDO 147.0 185.0 157.3 22.0% 21.9% 19.1 **2.0

Bank of the Philippine Islands BPI 117.4 136.7 116.2 16.4% 17.9% 17.5 **2.3

Infrastructure Metro Pacific Investments MPI 6.2 8.7 7.4 32.4% 5.3% 13.2 14.2

Consumer D&L Industries DNL 11.2 *13.0 11.1 6.7% 11.0% 24.6 18.0

Puregold Inc PGOLD 51.5 65.0 55.3 23.6% 11.6% 21.2 12.7

Shakey’s Pizza Associate Ventures PIZZA 15.0 *16.3 13.9 7.2% 13.6% 25.1 14.8

Property Megaworld Corp MEG 4.8 6.8 5.8 35.9% 12.5% 10.9 10.8

Ayala Land Inc ALI 43.8 58.0 49.3 29.0% 16.8% 23.0 15.0

SM Prime Holdings SMPH 34.7 43.0 36.6 15.1% 15.9% 32.4 22.0

*Caylum estimates. **P/B ratio

Top picks for 2018

As we’ve said in our last report, we are bullish on banking and property for 2018 as these sectors should benefit greatly from the country’s strong economic
growth and the government’s pro-growth policies. However, due to concerns about rising interest rates and slowing office demand, the property sector's
performance have been mixed to start the year. But while these short-medium term concerns weigh down on the sector, we still expect property companies to
do well given strong economic growth and increasing disposable income which should translate to higher sector earnings. While rising rates may dampen
demand for property, historically, the property sector have done well even when rates were rising—as rising rates signify a strong economy which results in
healthy property demand. Therefore, we believe take-up sales should remain robust given sustained economic growth and increase in disposable income.

Banking stocks, meanwhile, have fallen recently due to capital raising concerns. But outlook for their core lending business remains excellent given expanding
NIMs and growing loan portfolios as they benefit form continued economic growth. Also, banks should benefit from the continued strength of the economy
and rising rates resulting in robust loan growth and expanding net interest margins. Therefore, while overall bank valuations have become more expensive
(table 3), the continued growth of their core lending business as well as other segments should help support valuations.

Having said that, consumer and infrastructure may be the best bet this year due to the impact of tax reform and the gov’t's commitment to increase
infrastructure spending coupled with these sectors low valuations. However, risks remain for the consumer sector, especially food and beverage manufacturers
as they continue to grapple with rising input costs, increasing competition, and a weaker peso. For the infrastructure sector, we’re still concerned about the
pace of gov't disbursements and infrastructure project implementations but gov’t infrastructure spending has been accelerating during the last quarter.

Meanwhile, for the gaming sector, we expect the sector to continue its growth momentum driven by growing tourism, improved relations with China, and
increasing disposable income due to the tax reform bill which should boost the mass market segment. The VIP segment should still be driven by proxy betting.

Other sectors like mining and power continue to struggle with regulatory risks and difficult sector conditions. However, we think these concerns are already
priced in as the sector has sold-off significantly over the past year. A number of companies in these sectors present significant value opportunities, however it
may take a while for shares to recover due to the regulatory overhang. We are not keen on utilities as earnings growth is slow and interest rates are rising.

Source: Bloomberg, COL Financial, Caylum, Company information

5
CAYLUMBEATTHEMARKET 8 February 2018
On the other hand, we are neutral on the telecom sector as while conditions have improved as shown by stabilising ARPU’s, solid quarter-on-quarter growth,
and continued acceleration of data revenues, outlook remains hazy. Both GLO and TEL need to make huge capital investments to continue to grow and protect
market share. Moreover, the threat of a third telco player have weighed down on the sector during the past year and has led to both companies shares being
sold down significantly. While we believe it would be difficult for a third player to take on the duopoly of GLO and TEL, the entry of a another player should still
increase competition and lead to lower profitability for the sector in the long run.

However, while investments made by GLO and TEL in Fintech is still years away from contributing to the bottom line, we feel its beginning to gain traction with
PayMaya and Gcash aggressively building up its mobile payment service. Still, with the threat of rising rates, the noise of a third telco player, and low earnings
growth, these factors should continue to weigh down on sector valuations in the short-medium term.

Lastly, for conglomerates, most of them did well last year driven mainly by four companies— Ayala Corp (PM:AC), San Miguel Corp (PM:SMC), LT Group
(PH:LTG), and SM Investment Corp (PM:SM), returning 35 percent , 43 percent, 64 percent, and 55 percent, since last year. While these companies may still
have some upside given positive developments and favourable outlook for their businesses, they have already risen significantly which may limit their short-
term upside. Also, the risk/reward ratio does not look too attractive; there are other better opportunities with significantly higher upside. On the other hand,
while other conglos are still cheap trading at a discount to their NAV such as Alliance Global Holdings (PM:AGI) and GT Capital (PM:GTCAP), we believe
there’s better value in their subsidiaries (MEG, MBT).

Table 2: Trading ideas

FY18
FY18 Buy FY18 FY18 EV/
Sector Name Ticker Last px Upside profit gr
TP below PE EBITDA
YoY

Industrial MacroAsia Corp MAC 24.5 NA NA NA 33.0% 23.4 NA

Infrastructure Megawide Corp MWIDE 21.5 23.2 19.7 7.9% 29.5% 23.3 12.3

Banking Metro Bank and Trust MBT 96.3 125.0 106.3 29.8% 27.3% 13.0 **1.3

China Banking Corp CHIB 35.5 42.0 35.7 18.3% 15.1% 11.5 **1.1

Gaming Bloombery Resorts BLOOM 12.2 15.1 12.8 23.8% 23.6% 16.1 9.7

Melco Resorts and Ent MRP 8.3 13.50 11.5 62.7% 271.6% 22.7 7.0

Consumer Wilcon Corp WLCON 9.8 11.0 9.4 12.2% 11.3% 26.5 17.0

Purefoods San Miguel PF 616.0 790 671.5 28.2% 13.3% 16.1 7.2

**P/B ratio

Banking: Sustained growth in core lending supports high valuations

Our top pick in the banking sector continue to be BDO Unibank (PM:BDO). We expect BDO to continue to sustain the strong growth of its core lending
business given its leading market share, widest branch network, and huge low cost CASA deposit base which should allow it to take advantage of the country’s
continued growth momentum. While valuations are on the expensive end as it's now trading at 2.1 x FY18 PB, way above its five-year median PB of 1.86, we
believe that due to its wide branch network, its brand, huge low CASA deposit base, the repricing of loans, and the expected rise in interest rates, these should
result in expanding NIMs and acceleration of bank sector earnings which should support high valuations. Also, the BSP has been mulling increasing banks’
reserve requirement which should provide additional upside to sector earnings.

Given the bright outlook for the banking sector, we’re adding another bank to our core portfolio, Bank of the Philippine Islands (PM:BPI). BPI has the 2nd
largest branch network and a huge low-cost deposit base (around more than 50% of total deposits) which should enable it to benefit from rising rates resulting
in expanding NIMs. Also, the bank 's repricing a majority of its loans should help boost NIMs further. In addition, the company has been building up its fee
income and other segments which should help it maintain its sector-leading cost-to-income ratio (CIR). Furthermore, the bank is focusing on growing its retail
segment and other high growth areas such as SME this year after years of minimal expansion, which is why its recent capital raising was positive for the
company as this should enable it to address its growth needs.

Table 3: Bank sector valuations and other key ratios

Mkt Cap Last Px Dvd 12M
Ticker Name EPS growth FY18 P/B FY18 P/E FY18 ROE Chg Pct 1M
(PHP) (PHP) Yld
BDO Bdo Unibank Inc 642.3 147.0 21.9% 2.0 19.1 11.1 -8.1 0.8
BPI Bank Of The Philippine Islan 461.3 117.4 17.9% 2.3 17.5 13.9 3.2 1.5
UBP Union Bank Of Philippines 95.9 90.7 18.5% 1.2 9.9 12.7 4.4 2.1
MBT Metropolitan Bank & Trust 306.1 96.3 27.3% 1.3 13.0 10.6 -9.9 1.0
RCB Rizal Commercial Banking 67.2 48.0 13.2% 1.0 14.1 7.3 -14.1 1.1
CHIB China Banking Corp 95.2 35.5 14.5% 1.1 11.5 10.2 6.3 2.1
SECB Security Bank Corp 175.0 232.2 13.7% 1.6 15.7 10.3 -5.6 1.3
PNB Philippine National Bank 71.8 57.5 17.4% 0.6 10.2 6.2 1.0 NA
EW East West Banking Corp 41.8 27.9 15.6% 1.0 8.1 12.8 -13.8 1.2

Source: Bloomberg, COL Financial, Caylum, Company information

6
CAYLUMBEATTHEMARKET 8 February 2018
Also, we’re adding two more banks but this time to the trading list. They are Metropolitan Bank and Trust (PM:MBT) and China Banking Corporation
(PM:CHIB). We like MBT as while it had weak results last year, the banks' core earnings continue to show healthy growth. Core lending continues to grow at a
robust rate due to accelerating loan growth and expanding NIMs. Outlook is positive given a huge low cost deposit base which should result in expanding
margins as interest rates rise and a healthy balance sheet with low LDR (loan-deposit-ratio) and NPLs (non-performing loans). In addition, its increased stake in
Metrobank Card from 60 percent to 100 percent should provide additional boost to earnings. Lastly, the bank is cheap, trading at 1.3x FY18 P/B compared to
the other two big banks (BDO, BPI). We believe at this level the overhang of the SRO is already priced in.

Another bank we're keen on is China Banking Corporation (PM:CHIB). CHIB had reported excellent growth in 9M17 with profits growing 17.1 percent YoY
driven by an increase 16.3 percent in net interest income and a 16.5 percent increase in non-interest income. The company expects continued growth in its
core lending business as its just winding down on its expansion and as its branches start to mature. Moreover, potential increase in interest rates and increasing
ratio of CASA deposits should help boost net interest margins. In addition, the bank has been building up its other segments such as credit card, investment
banking, and stock brokerage business which should result in solid growth in its non-interest income. CHIB’s valuation still looks attractive despite the sharp rise
in its share price to start the year, trading at 1.1x FY18 P/B

Property: Growth should continue despite headwinds

Our main picks for the property sector continue to be Megaworld Corp (PM:MEG) and Ayala Land (PM:ALI). We believe MEG should continue to sustain solid
growth this year due to continued POGO demand, growth of the BPO sector, growing tourism, and improving relations with China, and increase in disposable
income.

MEG's residential segment continue to do well with take-up

MEG EBIT contribution
sales growing 28 percent YoY in 9M17, and leasing continues
its robust growth, increasing 16 percent YoY to Php3 Bil—a
1% -4%
record high for the company—in 3Q17 bringing 9M17 rental
income to Php8.8 Bil, an increase of 19 percent YoY. MEG’s
leasing segment should continue to sustain its hight growth
with continued POGO demand and BPO growth increasing its 22%
share of total earnings which bodes well for MEG given higher
margins (76%) for its rental assets. MEG is the largest office
landlord in the country and has the benefit of holding the most 54%

PEZA accredited spaces which is of value to BPO locators.

27%
For ALI, we expect it to continue generating high earnings
growth given its broad portfolio of products and mixed-use
developments which should capture continued robust demand
in the sector. Also, the company should benefit the most
among the property companies from the gov’t’s infrastructure Residential Office Retail Hotels Others
program as a number of its developments are around key gov’t
infrastructure projects. Moreover, the company continues to
expand its leasing portfolio with the aim of reaching 1.5
million sqm in office space and mall GLA to 3 million sqm by
ALI earnings mix: increasing leasing income
2020.
120%
Valuations for both companies remain attractive with MEG
trading at 11.1x FY18 P/E, below its five-year median PE of 100%
13.4, and ALI at 23.6x FY18 PE, trading at the lower end of its
five-year PE range and below its 5-year median PE of 29.3x. 25%
30% 32% 31% 35%
80%

While there are concerns about slowing BPO demand, we

expect it to bounce back this year due to improving US-Phil 60%
ties, declining political risks, and acceleration of PEZA
accreditations. Combine these developments with attractive 40%
75%
valuations and positive earnings outlook, we believe the 70% 68% 69% 65%
property sector should continue to outperform.
20%

0%
FY13 FY14 FY15 FY16 9M17

Leasing Residential

Source: Bloomberg, COL Financial, Caylum, Company information

7
CAYLUMBEATTHEMARKET 8 February 2018
Another core portfolio staple, SM Prime (PM:SMPH), should SMPH growth in mall GFA
continue to do well this year. The company’s residential
segment remains solid registering 18.5 percent YoY take-up 12
sales in 9M17, while mall revenues continue to sustain their 10.5
high growth, increasing 9.8 percent YoY in 9M17. Outlook for
10 9.3
the company remains bright given its expanding portfolio 8.9 +13%
which should cater to a broader range of income segment 8.3 +4%
and capture increasing demand. Meanwhile, mall revenues 8 7.3
now account for 60 percent of consolidated revenues and 75
7 +14%

In Mil sqm
percent of operating profits. It should benefit from the
6 +14%
expected boost in consumer spending due to tax reform.
Moreover, there’s significant upside (>20%) in the potential +14%
value of its reclamation projects which is estimated could be 4
worth between Php100-Php300 Bil.

2
We’ve decided to remove Cebu Land Masters (PM:CLI) from
our core portfolio as we’re limiting core holdings to quality,
defensive companies that have solid growth prospects. While 0
CLI is a fast grower, it has a limited land banking land low 2013 2014 2015 2016 2017E 2018E
recurring income which makes it more vulnerable to cyclical
downturns. However, we continue to believe that there’s
significant upside to CLI as it remains very cheap, trading at
4.7x FY18 PE, and should continue to sustain its high rate of growth given strong economic growth which should offset concerns of a slowdown in property
demand due to rising interest rates.

Table 4: Property sector financial ratios and valuation

Mkt Cap Profit growth FY18
Ticker Name Last Px FY18 ROE FY18 P/E Chg Pct 1M
(In Php Bil) FY18E EV/EBITDA
ALI PM Equity Ayala Land Inc 645.0 43.8 16.8% 16.5 15.0 23.1 -3.7
RLC PM Equity Robinsons Land Co 104.9 20.2 14.6% 9.2 10.5 14.6 -2.4
SMPH PM Equity Sm Prime Holdings Inc 999.2 34.6 15.9% 12.0 22.0 32.4 -12.1
MEG PM Equity Megaworld Corp 153.8 4.8 12.5% 10.0 10.8 10.9 -10.0
VLL PM Equity Vista Land & Lifescapes Inc 79.4 6.2 13.4% 11.6 10.7 8.2 2.5
FLI PM Equity Filinvest Land Inc 44.6 1.8 12.7% 9.6 11.0 7.1 -3.2
CLI PM Equity Cebu Landmasters Inc 8.0 4.7 36.0% NA NA 4.7 -1.5
HOUSE PM Equity 8990 Holdings Inc 33.8 6.1 3.6% 14.8 NA 10.8 -4.2

Source: Bloomberg, COL Financial, Caylum, Company information

8
CAYLUMBEATTHEMARKET 8 February 2018
Tax reform and increased gov’t spending to boost consumer and infrastructure sector
While we expected the banking and property sector to lead the market this year, the early leaders have been the consumer and infrastructure sector due to the
combination of low valuations and catalysts such as the tax reform bill and increased infrastructure spending which have improved sentiment on these sectors.
Consumer and infrastructure stocks performed poorly last year due to a number of sector-specific issues which weighed down on their valuations. However, with
a better outlook coupled with low valuations, these sectors have a chance to significantly outperform this year

Consumer: Tax reform boost should benefit a number of names but overall sector still facing headwinds
We expect the consumer sector to bounce back this year after some companies were hit hard in 2017 reporting weaker revenue and earnings growth due to
intense competition, rising input costs, and a weakening peso. We expect consumer companies to generate solid revenue and profit growth driven by
continued expansion, improving margins, and growth in consumer spending. With resilient OFW remittances and BPO growth, coupled with the cut in personal
income taxes, we should see a boost in consumer sector earnings.

Some consumer stocks, specifically, food and beverage manufacturers—URC, CNPF, EMP— were expected to be negatively affected by the tax reform bill due
to higher excise taxes on their products. However, we believe most of these issues have already been priced in as these stocks have lagged the market since
last year. That’s why we’ve seen some of these names such as CNPF, EMP, DNL, and URC come out strong to start the year as sentiment improved. However, we
still see these companies continuing to deal with higher input costs, increasing competition, higher operating expenses as they spend to protect market share,
and the the risk of inflation. Therefore, focus should be in companies that are resilient to these headwinds such as D&L Industires (PM:DNL) and Shakey’s Pizza
Asia Ventures (PM:PIZZA) and Puregold (PM:PGOLD).

While DNL had a disappointing second quarter in 2017, earnings recovered in the third quarter. and management is optimistic it will be able to post 10 percent
growth in profits for 2017. Growth of its high margin products remain robust while its partnership with Bunge and Ventura is starting to progress. Export sales
continue to accelerate and is on track to reach the company's goal of 50% of overall revenues in three years. We should see more upside to export sales during
the next two-three years as the company only caters to four countries currently, but its partnership with Ventura covers the entire Asia Pacific which includes
China, Australia and New Zealand.

Moreover, according to management, revenue mix for export sales are better than the company's domestic revenue mix with high margin products accounting
for a higher portion of export sales. According to the company, in over 50 years of its operations, it has been able to double profits every five years or around a
CAGR of 15 percent. Management is confident that it will be able to grow the profits at this rate with future earnings driven by robust export growth, increasing
margins as it continually invests in R&D, and the continued growth in consumer spending.

DNL export sales as % of total sales Moreover, the company is also expanding its capacity by opening new manufacturing
6,000 30%
facilities in a PEZA zone in Batangas which will be completed by 2021. This move will
setup the company to continue to grow for the next 20 years, according to
25%
5,000 25%
management.

19% Given the company's rosy outlook, we’re upgrading our price target from Php12.68
4,000 18% 18% 18% 18% 20%
for FY18 to Php13.5 discounting the expected increase in disposable income and
lower the corporate tax rate which should boost revenues this year. However,
In Php Mil

3,000 15%
currently, DNL has already risen by more than 28 percent to Php12.74 since
4,959

2,000 4,067 10%

bottoming at Php10.0 in December 2017. It’s trading at 28x FY18 PE, we recommend
3,682 3,513 entering when prices dip below our suggested buy levels (Php11.5).
2,775 2,851
1,000 5%
Last January 12, PIZZA (TP Php16.30) finally broke out after 11 months of
consolidation, gaining more than 13 percent in less than two weeks. We continue to
- 0%
FY13 FY14 FY15 FY16 9M16 9M17 like the company’s prospects as we believe it should continue to do well despite
Export sales % of sales increasing competition given its strong brand which we think gives it a narrow moat,
it’s well managed as evidenced by industry-leading margins and high returns on
capital, and as it still has a huge runway for growth. Growth should be driven by its continued store rollout this year (24) and healthy SSSG.

Long-term, the company’s prospects remain attractive given that the

foodservice sector remains under penetrated with most of Shakey's stores in Chained
20.00% pizza full service growth higher than overall foodservice market
Metro Manila and Luzon, while the Vis-Min region offers huge potential for
18.00%
growth. 18%
16.00%

Also, the delivery segment is another potential growth driver for the company
14.00%
as we believe it could easily challenge Pizza Hut, which remains the leader in 14%

this space, for market share given its strong brand and scale. However, watch 12.00%

out for increasing margin pressures due to rising input prices and increasing 10.00% 11%
10%
competition. Also, inflation has been creeping up which could dampen
8.00%
demand but PIZZA should still be able to do well due to its pricing power.
6.00%

4.00%

2.00%

0.00%
Chained pizza full service Fast food Fullservice Chained foodservice

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CAYLUMBEATTHEMARKET 8 February 2018
For consumer retail, we continue to like PGOLD as we believe it continues to have a competitive advantage in the retail store format with its brand, scale (top 3
in net selling space), and business model. It’s well-positioned to benefit from increasing food consumption with bulk of household spending spent on food. The
expected boost in consumption due to tax reform should help offset rising input costs and increasing competition. However, rising inflation could lessen
demand for its goods, while increasing competition and its aggressive store expansion could put pressure on margins and SSSG.

Table 5: Top grocery retailers (9M17)

Grocery retailer Net selling space (thou sqm) Number of stores
PGOLD 502.0 352
SM Retail 1168.0 310
RRHI 385.0 146

For the trading ideas list, we’re adding two consumer names, Wilcon Depot (PM: WLCON) and San Miguel Purefoods Company (PM:PF).

WLCON continues grow at a high rate with revenue and profits growing 11 percent and 132 percent, respectively, and margins expanding due to better sales
mix and discounts in 9M17 driven by store expansion and robust SSSG
(5.9 percent). The long-term outlook for the home improvement industry
Wilcon target number of store by 2021
is excellent due to accelerating construction sector growth, increasing
60
housing formations, increasing household income, and the huge
housing deficit. Also, in the medium-term, the company should sustain
its high growth as it’s planning on opening an additional eight stores this 50 49

year as part of its plan of rolling out 29 new stores by 2021 from 36 in
2016. Currently, it has 40 stores. If WLCON is successful in implementing
40
its expansion plan, this will bring its number of stores to 65 by 2021.
33
Luzon

Our only concern is its high valuation as it’s currently trading at 23x FY18 30
Visayas

P/E compared to the 20x average FY18 P/E of its regional peers and 21x Mindanao

average FY18 P/E of the domestic consumer sector. However, there 20

should still be more upside given WLCON's better earnings outlook due
to its aggressive expansion plans and the expected boost in
10 8 8
consumption spending due to the tax reform bill as well as the corporate
income tax cuts included in the second part of the bill which should help 2 2

boost revenues. 0
FY16 FY21E

Last November, SMC announced that it will be consolidating its consumer

subsidiaries Purefoods, Ginbera San Miguel, San Miguel Beer (delisted 2012) into one company in a Php336 Bil share swap deal creating the largest publicly
listed consumer company in the country. We believe this deal unlocks the value of SMC’s consumer subsidiaries as this: (1) creates synergies between these
businesses which should result in improved efficiency and profitability; and (2), this would make the company more attractive to investors due to increased
liquidity and access to a pure food and beverage consumer play. The share swap deal worth Php336 Bil implies a valuation of Php790 per share for PF.

AFTER SHARE-SWAP DEAL

BEFORE SHARE-SWAP DEAL

San Miguel Corp

San Miguel Corp

San Miguel F&B Inc

95.9%

San Miguel Brewery Ginebra San Miguel San Miguel Purefoods

51.2% 75.8% 85.4%

San Miguel Purefoods

San Miguel Brewery Ginebra San Miguel
other segments
51.2% 75.8%

Source: Bloomberg, COL Financial, Caylum, Company information

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CAYLUMBEATTHEMARKET 8 February 2018
Infrastructure: Aggressive rollout of infrastructure projects to boost construction and cement companies
Outlook for infrastructure and construction companies remain positive as the public infrastructure program gains traction, capital outlays and construction
activities are expected to rise which should benefit companies in these sectors.

These include companies such as MWIDE and EEI, and also conglomerates with
interests in infrastructure such as SMC and AC. Our top pick remains Metro
Pacific Investments Corp (PM:MPI) which is part of our core portfolio and now,
we’re adding Megawide (PM:MWIDE) to our trading list.

However, the jury is still out for the cement sector, as recovery could take a while
if infra spending continues to move slowly and as competition remains intense
due to the presence of imports and other cement players. But we’re actually
seeing some positive signs already. This year, the government will break ground
for 34 of the 75 “flagship” infrastructure projects under the Duterte
administration’s ambitious “Build, Build, Build” program this year.

Also, spending on infrastructure rose sharply in 44.8 percent in November 2017

compared to 17.8 percent in October and 6.2 percent in September. Hopefully,
these continues throughout the year. Cement sector conditions should start to
turn and valuations should rerate for the entire sector once we see strong
indicators of faster pace of gov’t infrastructure rollout. While airport operation s Source: Dept of Budget and Management
account for only 12 percent of revenue, it accounts for 38 percent of EBITDA and
47 percent of net profits.

We also added MWIDE to the trading list. While we’re concerned about valuations, its currently trading at 23.3x FY18 PE (vs 18.4x FY18 regional), the company
has been aggressive bidding out for projects and should benefit greatly from the gov’t’s infrastructure push. Last Dec, its consortium with GMR Infrastructure
was awarded the contract to upgrade the Clark International Airport. It has beefed up its construction backlog increasing it to Php36.4 as of 9M17. Last 2016,
order book was Php38.5 Bil as of year end. Moreover, earnings should get a boost from the start of operations Mactan Airport’s Terminal 2 which will add 12.5
million in peak passenger capacity this year.

MWIDE earnings mix

2%

47% 51%

Construction Airport Merchandising

For MPI, its shares have gone nowhere for more than a year as regulatory concerns have weighed down on its valuations in the short-term but the company's
prospects remain attractive given the significant growth potential of its businesses. Also, 9M17 results actually surprised to the upside and we think this year the
company should continue posting solid results as it continues to benefit from the strong economy and the expected boost from tax reform and increased
government spending. Resolution of regulatory issues such as pending tariff increases should improve sentiment on the company’s shares.

Table 6: MPI 9M17 results

3Q16 3Q17 YoY % 9M16 9M17 YoY %
Core income 2,640 3,530 34% 9,284 11,330 22%

Others:
We continue to have MacroAsia Corp (PM:MAC) in out trading list as we expect the company to continue its robust growth in 2018 driven by the
continued growth of its catering, ground handling, and MRO business (LTP). Also, it’s should be finishing the construction of its institutional catering
facility in Sucat by the first quarter of this year which should provide additional upside to earnings. In addition, LTP (Lufthansa Technik Phlippines) is
mulling on expanding its operations in Subic and Clark airports as its operating near full capacity. While there is no consensus target price for MAC,
current valuations remain attractive given accelerating growth and at 21x FY18 PE vs 25x FY18 PE of its regional peers.

Source: Bloomberg, COL Financial, Caylum, Company information

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CAYLUMBEATTHEMARKET 8 February 2018
Gaming: Continued growth momentum Gross gaming revenues 9M17
The gaming sector returned to growth last year after one to two years of 40.0
struggling. Sector gaming revenues grew 28 percent led by Bloomberry Resorts
Corp (PM:BLOOM) and Melco Resorts and Entertainment (PM:MRP) which 35.0

registered positive profit growth in 9M17, driven mainly by the sharp rise of VIP 34.2

gross gaming revenues (GGR) and the robust growth of the mass market segment 30.0

as the sector benefitted from the ban of proxy betting in Macau, improved 27.4 27.6
25.0
relations with China, and the entry of Okada Manila.

In Php Bil
9M16
20.0
Many expected the entry of Okada to cannibalise profits for other firms in the 9M17
25% 18.0
17.3
sector, however, this development turned out to be positive for the industry as it 15.0 YoY

attracted more players to the Philippine gaming market. 12.8

10.0
60%
This year, we expect sector growth to continue due to increasing Chinese tourists, YoY
5.0 -29%
as well as growing tourism, and the increase in disposable income due to tax 5.8
YoY
reform which should give the mass market segment a boost. Therefore, we’ve 0.0
added BLOOM and MRP to our trading list as we expect earnings to continue to Solaire City of Dreams RWM Okada Manila

accelerate, while their valuations remain attractive.

Power: Oversupply and regulatory concerns priced in

The power sector underperformed last year due to concerns of oversupply and regulatory risks. In addition, with the threat of a rate hike increase this year due
to creeping inflation, shares of power companies power have been sold off even further.

However, we believe that these issue are already mostly priced in and that the recent sell-off has been overdone which has created a significant disparity
between the value of the companies and their share prices. Our top pick for the sector remains to be Aboitiz Power (PM:AP).

We continue to like AP as it remains undervalued despite consistently delivering solid revenue and earnings growth over the past few years. The company also
consistently produces predictable cash flows and returns a dividend yield of 3 percent. Due to its vertically integrated structure, AP is able to maximise value
due to synergies created by having power generation and distribution assets. Also, more than 90 percent of the company’s capacity is under long-term
contracts which provides it with a steady stream of cash flows.

Moreover, 9M17 core earnings came in better than expected as they continued to accelerate increasing 15 percent YoY, while 9M17 EBITDA grew 20 percent
YoY. Earnings outlook is excellent during the next two years as the company is expanding its power generation portfolio from 2,975MW currently to 4,000MW in
2019. This year, three projects will come on line which will add around 508MW in capacity, namely: 68MW Manolo Fortich (hydroelectric), 400MW Pagbilao coal
power expansion project, and 300MW Cebu Coal.

Table 7: Aboitiz Power pipeline on track to meet target of 4,000 MW by 2020

Attributable net Estimated
Grid Project Capacity % Ownership
capacity Completion
Pagbilao (Coal - Pagbilao Energy) 400 50% 200 Jan-18
Luzon Maris (Hydro - SNAP Magat) 8.5 50% 4.3 Nov-17
Dinginin Unit 1 (Coal - GNPD) 668 40% 267 2019
Subic (Coal - RP Energy) 300 25% 75 2020

Visayas Cebu (Coal - Therma Visayas) 300 80% 240 2018

Mindanao Manolo Fortich (Hydro - Hedcor Bukidnon) 68 100% 68 Dec-17

Total 2,045 929

Source: Bloomberg, COL Financial, Caylum, Company information

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CAYLUMBEATTHEMARKET 8 February 2018
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© 2017 Caylum Trading Institute, Inc. All rights reserved. Reproduction by any means is prohibited. While CTI has ensured that the information presented here has been obtained from sources we believe to
be reliable, we make no warranties to the accuracy and completeness of third-party information presented herein. This report only provides general advice and does not constitute any specific investment
recommendation or marketing material. Information provided reflects the views of Caylum Trading Institute (CTI) at a particular time. These views are subject to change at any point and CTI shall not be
obligated to provide notice of any change. Any forward looking statements or forecasts presented in the newsletter are based on assumptions and actual results are expected to vary from any such
statements or forecasts. Any such forecasts or statements should not be relied upon when making investment decisions.

The prices of stocks can fluctuate and are subject to capital loss. Do not trade with money you cannot afford to lose. There's is a risk of loss in investing in securities. Losses of up to 100% of original capital
invested in a security discussed in this newsletter may be possible. Past and current recommendations that are profitable do not guarantee future performance. Caylum Trading Institute will not be liable to
you or anyone else for any loss or injury resulting directly or indirectly from the use of the information contained in this newsletter, caused in whole or in part by its negligence in compiling, interpreting,
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Performance of CTI recommended securities and portfolios are subject to risks and uncertainties. The stocks recommended in the newsletter were based on CTI’s own analysis and proprietary technical and
fundamental screens; they were chosen regardless of the stock’s performance whether the company was losing or making money. The securities presented do not represent all of the securities bought, sold
or recommended. Also, CTI and/or its employees may take a position in a security inconsistent with the recommendations provided by the newsletter or purchase securities that was not mentioned in the
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