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PHILIPPINE 16 SepSTOCK
2016 09:22 PM HKT
EXCHANGE Disseminated 16 Sep 2016 09:48 PM HKT
Asia Pacific Equity Research
16 September 2016

Philippine Property
Implications of the property-related tax reforms

PPROP has underperformed PSEi by 4% in the last month. There is growing Conglomerates, Infrastructure,
investor concern about the potential adverse impact of a couple of property-related Property, Strategy
tax measures under Duterte’s tax reform program. We believe SMPH stands out Jeanette Yutan
AC
as the most vulnerable name if these tax measures are successfully pursued. (63-2) 878-1188
 Property-related tax reforms. Duterte’s economic team has submitted a jeanette.g.yutan@jpmorgan.com
comprehensive tax reform program (CTRP) that aims to make the tax system Bloomberg JPMA YUTAN <GO>
simpler, more equitable and more efficient. This includes two property-related J.P. Morgan Securities Philippines, Inc.
measures – the Valuation Reform Act (VRA) and lifting of VAT exemptions. Jelline E Gaza
 Property valuation reform. VRA aims to adopt a harmonized real estate (63-2) 878 1131
jelline.gaza@jpmorgan.com
valuation system that is reflective of market value. This impacts the basis of real
J.P. Morgan Securities Philippines, Inc.
property tax (RPT).
Cusson Leung, CFA
 Real property valuation in PH is a big structural problem. RPT, which is
(852) 2800-8526
collected by local government units (LGUs), has a collection efficiency of cusson.leung@jpmorgan.com
<60%, contributing <11% of total government revenues. It is estimated that J.P. Morgan Securities (Asia Pacific) Limited
government property valuations are ~3-81x lower than actual private appraisals.
A confluence of reasons is behind this: (1) different valuation systems and not Figure 1: PPROP relative performance
reflective of market value; (2) a lack of competent, qualified appraisers and vs. PSEi (1 month)
assessors from the government; (3) an outdated database; and (4) the politicized
Services -2.6%
technical function of valuation.
 We see VRA passage as a tail risk. Different versions of VRA have been under Property -3.7%
review in Congress since 2009. The challenge, in our view, is that some
lawmakers may be hesitant to push out of fear of an electorate backlash. We also Conglomerates 0.8%
think the VRA requires other complementary structural reforms before it can be
effectively implemented, e.g., land security is an issue due to poor real estate Industrials 3.8%
registration and the cadastral data system, with 19 different government
agencies in charge in land administration and management. Financials 5.9%
 Of VRA and RPT. RPT covers not only land, but also buildings and structures.
Commercial buildings are more valuable than raw land and face higher RPT -10.0% 0.0% 10.0%
assessments, i.e., a maximum tax assessment of 50% vs. 20% for residential. Source: Bloomberg. Note: Past results are not an
 Impact of VRA. If pursued, this could mean higher RPT for big property indicator of future performance.
owners, particularly commercial leasing asset owners. We estimate that SMPH
will be the most vulnerable, as it has the biggest commercial asset base, paying
Php2bn in RPT in 2015. ALI is the second-most exposed. Simplistically, a
doubling of RPT would mean an 8%/5% drag to SMPH/ALI 2016E net income.
 Impact of VRA on property demand. Higher RPT would mean lower rental
yields for residential condo investors. The quantum of yield compression
depends on the extent of an RPT increase and location, in our view. RPT is
typically a small portion of ownership cost, which includes association dues, etc.
 Lifting of VAT exemption. If this covers low-cost, affordable housing, we
think it will have a negative impact on housing affordability. Please see our
report, Implications of a possible removal of VAT exemption on real estate sales,
for more details. FLI is the most exposed, in our view. We think this is also a tail
risk, as the low-cost, affordable housing segment is where the country has the
biggest backlog.

See page 3 for analyst certification and important disclosures, including non-US analyst disclosures.
J.P. Morgan does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the
firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in
making their investment decision.
www.jpmorganmarkets.com

0% 3.4 30.3% -50..3 10.9 9.1% RLC N 34.1 11.0% -70. Bloomberg. -11.0% Source: Bloomberg.P.1 7.1% SM Prime -3.9 1.9 4. Note: Past results are not an indicator of future performance.com Figure 2: PH property valuation comparison JPM PT JPM NAV CMP Mkt cap P/E (x) EV/EBITDA (x) P/BV (x) YTD Company Rating FY17E (Php) FY17E (Php) (Php) (US$ M) FY16E FY17E FY16E FY17E FY16E FY17E stock perf.8 3.0 12.0% Mean.7 14.d.7 3..0% 4. -23.6 0.3 17.6 23.0 48.5% -60. -36.0% -80. Source: J.0 4.yutan@jpmorgan.0% +1 s.This document is being provided for the exclusive use of RACHELLE BLANCH at PHILIPPINE STOCK EXCHANGEJeanette Yutan Asia Pacific Equity Research (63-2) 878-1188 16 September 2016 jeanette.1 3.0% -2.2 1.86 943 8.4 22. -48.5% FLI N 2.0% -4.0 1.10 16.8% Financials 5.0% 0. PSEi (1M) Filinvest Land 1.9 17.1 24.d.358 32.0% 2. -1 s.7% -20.6% Property -3.0 30.P.0% +2 s.0% 0.4 3.393 26.5 12.d.05 11.0% Source: Bloomberg.d. ALI OW 45. 2 .20 2. +2 s.9 12.0% 6.d. Figure 5: PH property companies’ relative performance vs.0 9.3 7.0 1.0% -1 s.7 3.0% -1.0% -4.0% -2.7 2.0 37.1% Ayala Land-5.2 7. Morgan.8 10.0% -3..9% -6.1% -40.8% Robinsons Land -0.0% Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Philippines Mean +1 s..9% -30.0 14.0% 2. Morgan estimates. Figure 3: PH property sector NAV discount band chart 0.9% MEG N 5.8 0.d.0% -10.0 67. Figure 4: PPROP relative performance vs. Note: Past results are not an indicator of future performance.6% -6. -2 s.9 27.0% -2 s.g. -60.0% -5.1% Megaworld -5. PSEi (1M) Services -2.9% Source: J.7% Conglomerates 0.0% 8.066 12.d.5 21.584 18. Bloomberg.8% Industrials 3.55 3.d.8% SMPH N 28. Note: Past results are not an indicator of future performance.0% 1.8 29.

 Client: J.This document is being provided for the exclusive use of RACHELLE BLANCH at PHILIPPINE STOCK EXCHANGE Jeanette Yutan Asia Pacific Equity Research (63-2) 878-1188 16 September 2016 jeanette. Ayala Land. Inc. the research analyst denoted by an “AC” on the cover or within the document individually certifies. Inc.disclosure.  Investment Banking (next 3 months): J.  Investment Banking (past 12 months): J.g.yutan@jpmorgan.com with your request..disclosure.. with respect to each security or issuer that the research analyst covers in this research) that: (1) all of the views expressed in this report accurately reflect his or her personal views about any and all of the subject securities or issuers. Morgan currently has. Filinvest Land.: Jeanette Yutan.. or had within the past 12 months. including price charts and credit opinion history tables. Inc. securities-related: SM Prime Holdings. and (2) no part of any of the research analyst's compensation was. compensation for investment banking services in the next three months from Filinvest Land.  Analyst Position: The following analysts (and/or their associates or household members) own a long position in the securities of Filinvest Land. are available for compendium reports and all J.P. Morgan owns a position of 1 million USD or more in the debt securities of SM Prime Holdings. Morgan currently has. the following entity(ies) as investment banking clients: Filinvest Land. Ayala Land. Securities-Related: J.com/research/disclosures. as per KOFIA requirements. Ayala Land. Company-Specific Disclosures: Important disclosures. Filinvest Land.. Morgan Securities plc and/or an affiliate is a market maker and/or liquidity provider in securities issued by SM Prime Holdings.. without undue influence or intervention.P. calling 1-800-477-0406. Inc.  Other Significant Financial Interests: J. Morgan received in the past 12 months compensation for investment banking services from Filinvest Land. Morgan has received compensation in the past 12 months for products or services other than investment banking from SM Prime Holdings.P.  Client/Non-Investment Banking..P. Inc. Ayala Land. or had within the past 12 months. or will be directly or indirectly related to the specific recommendations or views expressed by the research analyst(s) in this report. they also certify. Important Disclosures  Market Maker/ Liquidity Provider: J.inquiries@jpmorgan. Morgan currently has.P. and Quantitative Research teams may screen companies not covered by J.P. where multiple research analysts are primarily responsible for this report..  Non-Investment Banking Compensation: J.inquiries@jpmorgan. please call 1-800-477- 0406 or e-mail research. or e-mailing research. J. Inc. Inc. Filinvest Land. Morgan’s Strategy. that their analysis was made in good faith and that the views reflect their own opinion.  Client/Investment Banking: J.P. Filinvest Land. Filinvest Land. 3 . Ayala Land. or intends to seek. For all Korea-based research analysts listed on the front cover. Morgan–covered companies by visiting https://jpmm. Inc. Morgan. Technical.P.com Analyst Certification: The research analyst(s) denoted by an “AC” on the cover of this report certifies (or. or had within the past 12 months. For important disclosures for these companies. Morgan expects to receive.P. the following entity(ies) as clients. is.P.P. and the services provided were non-investment-banking. the following entity(ies) as clients: SM Prime Holdings. Inc.com..

90 22-Apr-08 N 1.82 1 09-May-11 OW 1.816 OW Php1.24 OW Php23 10-Nov-09 N 7.64 0.9N Php1.00 16-Nov-09 OW 0.02 1.yutan@jpmorgan.90 15-Aug-12 OW 1.27 1.90 14-Jun-07 UW 1.60 18-May-09 N 0.20 3 07-Apr-08 N 1.24 28-Apr-10 N 8. Morgan. 2009.00 Oct Apr Oct Apr Oct Apr Oct 09-May-14 NR 1.00 Source: Bloomberg and J. price data adjusted for stock splits and dividends.75 11 07-Oct-14 OW 17.50 29-Oct-12 OW 14. 15-Apr-16 N 1.6 OW Php1 15-Jun-07 N 1.Oct 07.12 22 22-May-12 OW 12.33 1.3 OW Php1.75 1.52 1.PS.88 14.30 23-Sep-10 OW 1.6 N Php0.This document is being provided for the exclusive use of RACHELLE BLANCH at PHILIPPINE STOCK EXCHANGE Jeanette Yutan Asia Pacific Equity Research (63-2) 878-1188 16 September 2016 jeanette.20 UW Php2.80 33 N Php7.20 8.7 N Php1.94 2. 2014 .9 OW Php1. SMPH PM) Price Chart 55 Date Rating Share Price Price Target (Php) (Php) 07-Aug-09 N 7.62 -- 06 08 09 11 12 14 15 07-Oct-14 N 1.96 23. Inc.079 OW Php12 OW Php13.8 N Php11.7 OW Php1.68 7.P.85 OW Php2 NR N Php1.39 1.72 18-Jan-12 OW 1.88 2.94 2.90 Break in coverage May 09.76 8.34 13. price data adjusted for stock splits and dividends.20 44 N Php8. Initiated coverage Aug 07. Morgan.2 18-Apr-07 UW 1. 2014.00 04-Nov-11 OW 10.12 OW Php14. Filinvest Land.00 0 15-Apr-16 N 22.5 OW Php15.90 1.54 22.PS.70 Price(Php) 2 17-Jun-09 OW 0.com SM Prime Holdings (SMPH.58 12.00 21-Aug-15 OW 20.60 UW Php1.00 11.00 May Nov May Nov May 09 10 12 13 15 05-Sep-16 N 28.85 0 04-Jan-13 OW 1.04 1.2 N Php8.00 4 .93 1.75 28.13 1.42 0.54 2.9 N Php2 17-Nov-08 N 0.30 15.85 22.P.00 28-Sep-15 OW 19. (FLI.08 Price(Php) 04-May-11 OW 9.75 1.72 OW Php1.70 Source: Bloomberg and J.g. FLI PM) Price Chart Date Rating Share Price Price Target (Php) (Php) 4 N Php2.75 OW Php22 OW Php25N Php22 N Php28 23-Sep-10 N 10. 28-Sep-15 N 1.9 N Php0.2 N Php1.00 25.

the price target.00 Oct Apr Oct Apr Oct Apr Oct 27-Feb-13 OW 31.60 8.P.00 OW Php8.PS).00 Initiated coverage Apr 03.25 OWOW Php14 Php17. ALI PM) Price Chart 15-Feb-08 OW 12. In our Asia (ex-Australia) and U. Cosco Capital (COSCO. If it does not appear in the Important Disclosures section of this report. J.5 OW Php23. Jeanette: Ayala Corporation (AC.00 Ayala Land (ALI.32 25.70 35.50 8.25 30.90 21-Jan-10 OW 11.00 20.50 30 20-Jul-10 OW 14.40 03-Aug-07 OW 15. price data adjusted for stock splits and dividends. An NR designation is not a recommendation or a rating. SM Prime Holdings (SMPH. not to those analysts’ coverage universe.50 10-Feb-09 OW 6. Megaworld Corp (MEG.10 8. Morgan ratings or designations: OW = Overweight.06 11-May-11 OW 16. regulatory or policy reasons. UW = Underweight.00 23-Sep-10 OW 17. Designations and Analyst(s) Coverage Universe: J.50 18. we expect this stock will underperform the average total return of the stocks in the analyst’s (or the analyst’s team’s) coverage universe.This document is being provided for the exclusive use of RACHELLE BLANCH at PHILIPPINE STOCK EXCHANGE Jeanette Yutan Asia Pacific Equity Research (63-2) 878-1188 16 September 2016 jeanette.9 OW Php15.75 OW OW Php30 Php35. Cemex Holdings Philippines. Inc.yutan@jpmorgan.] Neutral [Over the next six to twelve months. Morgan. Robinsons Land Corp (RLC.50 45 OW OW Php20.00 15-Apr-16 OW 35.60 11.996 OW Php36 11-May-09 OW 7. Inc.50 18.5 OW OW Php11. The previous rating and.25 OW Php8. Morgan's continuing coverage of the stocks.4 OW Php20 Php18.50 15 08-Nov-11 OW 15.P.5 OW Php30 OW Php44OW Php38 OWOW Php45 13-Nov-09 Php40 OW 12. we expect this stock will perform in line with the average total return of the stocks in the analyst’s (or the analyst’s team’s) coverage universe. Inc.g.PS). 2007.PS).00 05-Sep-16 OW 39.P.and mid-cap equity research. Morgan’s research website. Morgan uses the following rating system: Overweight [Over the next six to twelve months.95 44.50 06 08 09 11 12 14 15 28-Aug-13 OW 25. the certifying analyst’s coverage universe can be found on J. if applicable. the price target. we expect this stock will outperform the average total return of the stocks in the analyst’s (or the analyst’s team’s) coverage universe. NR = Not Rated Explanation of Equity Research Ratings. for this stock because of either a lack of a sufficient fundamental basis or for legal. (CHP.5 OW Php23.PS). Morgan has removed the rating and.45 17-Jun-09 OW 8.95 OW Php25. no longer should be relied upon.00 15.00 13.PS). 07-Oct-14 OW 33. each stock’s expected total return is compared to the expected total return of a benchmark country market index. the current analysts may or may not have covered it over the entire period. 01-Nov-13 OW 29.PS).50 36. Filinvest Land.00 The chart(s) show J.25 75 22-Apr-08 OW 10.25 14.K.PS) 5 .P.75 0 08-Nov-12 OW 22.PS).25 60 OW Php16 OW Php8.60 30.P.95 10-May-12 OW 21. if applicable. (CEB. small.com. Ayala Land (ALI.PS.00 28-Sep-15 OW 33.PS).com Date Rating Share Price Price Target (Php) (Php) 03-Apr-07 OW 13.jpmorganmarkets.96 20.62 23. (FLI. Coverage Universe: Yutan. N= Neutral.] Underweight [Over the next six to twelve months.50 45.PS).42 23.00 Source: Bloomberg and J.5 Php13. SM Investments Corp (SM.50 40.] Not Rated (NR): J.50 16.00 Price(Php) 07-May-10 OW 13.063 10-Nov-08 OW 6.30 25.45OW Php25.P. www. Cebu Air.15 38.

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