Philippines Strategy: 2018 outlook: Stronger earnings growth supported by a better macro

Please refer to page 20 for important disclosures and analyst certification, or on our website www.macquarie.com/research/disclosures. PHILIPPINES Philippine sector valuations PE (x) EPSch (%) P/B (x) ROE (%) Yield (%) Sector 2018E 2018E 2018E 2018E 2018E Banks 15.7 22.2 1.78 12.0 1.4 Consumer 26.0 10.6 3.80 14.8 1.4 Conglomerates 21.0 14.1 2.51 12.5 1.0 Property 24.9 15.8 3.13 13.2 1.4 Telecoms 13.6 10.9 2.79 21.6 4.5 Utilities 15.7 3.9 2.78 17.6 3.3 Philippines 17.8 14.6 2.62 13.7 1.5 Source: Macquarie Research, December 2017; priced as of 7 December 2017 Top Philippine picks in order of preference – valuations PE (x) EPS ch (%) P/B (x) ROE (%) Yield (%) 2018E 2018E 2018E 2018E 2018E ALI PM 20.8 19.2 3.3 16.8 1.1 MEG PM 11.1 16.9 1.1 10.5 1.2 BPI PM 14.7 18.1 2.0 14.3 1.7 MBT PM 11.9 29.8 1.2 11.3 1.1 BDO PM 18.2 21.8 2.0 11.2 1.4 PGOLD PM 20.4 12.4 2.5 13.0 0.6 RRHI PM 22.2 13.9 2.2 10.5 0.8 MPI PM 14.4 0.3 1.1 8.2 1.4 Source: Macquarie Research, December 2017; priced as of 7 December 2017 Top Philippine picks in order of preference – ratings, TP Mkt cap TP Sh price US$m (P) (P) Risk Rating ALI PM 12,225 50.00 42.10 L/M OP MEG PM 3,274 6.40 5.15 M OP BPI PM 7,973 126.00 102.90 Low OP MBT PM 5,914 115.00 94.30 Low OP BDO PM 12,578 171.00 146.00 Low OP PGOLD PM 2,688 62.00 49.30 Low OP RRHI PM 2,485 111.00 91.00 L/M OP MPI PM 3,940 8.50 6.34 Low OP Source: Macquarie Research, December 2017; priced as of 7 December 2017 Analyst(s) Gilbert Lopez +63 2 857 0892 gilbert.lopez@macquarie.com Karisa Magpayo +63 2 857 0899 karisa.magpayo@macquarie.com Kervin Sisayan, CFA +63 2 857 0893 kervin.sisayan@macquarie.com 11 December 2017 Macquarie Capital Securities (Philippines) Inc. Philippines Strategy 2018 outlook: Stronger earnings growth supported by a better macro Conclusion  We have a very positive view on the Philippines for 2018, forecasting a significant acceleration in earnings growth to 15% YoY for the year compared with 10% in 2017. We see the macro backdrop as far more favourable than in recent years, with increased investment spend leading to stronger GDP growth of 6.9% in 2018 as against 2017’s estimated 6.7%. We are overweight the Philippines, our only overweight call in ASEAN.  We have set a year-end 2018 target for the Philippine composite (PCOMP) index of 9,500. With upside potential of 16%, this target is driven by a bottom-up approach and would equate to a 2019E PER of 18.3x. This upside broadly mirrors our forecast Philippine market EPS growth of 15% for 2018. Impact  Improving earnings picture. We forecast corporate earnings growth will accelerate to 15% YoY in 2018, an improvement on our 10% estimate for 2017. This reflects an attractive earnings backdrop based on concrete fundamental progress (as discussed below). We see this growth as broad based, with all but one sector generating at least double-digit EPS growth.  Supportive macro backdrop. This growth will be well supported by a markedly better macro backdrop, as we expect stronger GDP growth of 6.9% compared with 6.7% in 2017E with reliable consumption growth complemented by increased government and private sector investment. We also expect interest rates to increase by a cumulative 50bps as we believe the CPI will reach the upper end of the Bangko Sentral Pilipinas (BSP) target band of 2-4% by 1Q18. Nonetheless we do not see this gradual increase in rates as leading to any derailment of growth.  Banks and property the standouts. We think that the banking and property sectors will be the biggest standouts in 2018. We forecast banks to generate 22% EPS growth while the property sector should see 16% growth.  We see only moderate risks for 2018. We consider execution on the part of the government as the biggest risk factor for 2018. This would be followed closely by external events where the Philippines, as a small economy, is still vulnerable to shocks from events beyond its control. Outlook  We reiterate our overweight on the Philippines equity market. Our top picks in order of preference are Ayala Land (ALI PM), Megaworld (MEG PM), Bank of the Philippine Islands (BPI PM), Metrobank (MBT PM), BDO Unibank (BDO PM), Puregold (PGOLD PM), Robinsons Retail (RRHI PM) and Metro Pacific (MPI PM). Macquarie Research Philippines Strategy 11 December 2017 2 Faster earnings growth in 2018, supported by a better macro outlook EPS growth of 14.6% underpinned by buoyant macro highlighted by currency strength W