Cosco Capital, Inc.

THU 20 AUG 2020

Profits pulled down by COVID-19

pandemic
2Q core profits down 17% y/y due to the pandemic. COSCO’s 2Q20 consolidated net
income dropped 5.5% y/y to Php1.9Bil. However, core earnings to common shareholders
declined by a larger extent, down 17.4% y/y given the weaker contribution of wholly-
BUY
owned subsidiaries, which are the real estate and liquor distribution business. In particular,
the commercial real estate business recorded a 69% decline in profits, largely due to rental TICKER: COSCO
concessions given during the enhanced community quarantine (ECQ). Similarly, liquor
distribution profits declined by 15.7% y/y as the government imposed a nationwide liquor FAIR VALUE: 11.00
ban during the ECQ. Only PGOLD did well with profits up 24% during the quarter given the CURRENT PRICE: 5.00
sustained demand for basic goods despite the lockdown. First half core income to common
shareholders declined by 4.9% to Php2.5Bil, in line with COL estimates at 43.9% of full-year UPSIDE: 120.00
forecasts.
Profits from real estate business plummets due to limited operations. 2Q profits from SHARE PRICE MOVEMENT
the commercial real estate business plummeted by 69% y/y to Php100Mil. Real estate
profits were hurt due to the limited operation of malls given the community quarantine.
Recall that malls and its tenants were not allowed to operate for around two months, unless 120
the stores were engaged in essential services (e.g. groceries, drugstores, etc.). Hence, similar
to the larger mall operators, COSCO gave rental concessions to its tenants. In particular,
the company waived rental payments for those tenants that were not allowed to operate 110

during the ECQ. Note that around 47% of its tenants were affected and closed due to
government restrictions. 100

Liquor distribution business dragged by liquor ban. Liquor distribution earnings

dropped by 15.7% y/y in 2Q20 to Php190Mil. The lower profits were amid a 44% drop 90
in liquor sales as municipalities imposed a liquor ban during the enhanced community
quarantine. Hence, liquor sales volume actually dropped by 34%, led by a 34% drop in
the brandy segment. In subsequent months, certain areas also re-imposed a liquor ban as 80

these cities reverted back to tighter quarantine rules. Given that Metro Manila also reverted
20-May-20 20-Jun-20 20-Jul-20 20-Aug-20

back to MECQ (tighter restrictions) for two weeks, 3Q liquor sales were likely hurt further COSCO PSEi

since liquor bans were also reinstated in the first half of August.
Maintain BUY rating. We currently have a BUY rating on COSCO with a FV estimate of ABSOLUTE PERFORMANCE
Php11.0/sh. COSCO remains severely undervalued with the market not valuing its other
businesses (apart from PGOLD) like the liquor distribution and real estate business. In fact, 1M 3M YTD
if we only value COSCO (adjusting for parent net debt) for its 49% stake in PGOLD based COSCO -3.85 -0.40 -26.90
on the latter’s market value, this still translates to a target price of Php9.9/sh.
PSEi -2.36 7.59 -23.16
FORECAST SUMMARY

Year to December 31 (PhpMil) 2017 2018 2019 2020E 2021E 2022E

Revenue 145,750 168,388 166,067 193,447 207,957 228,984 MARKET DATA
% change y/y 12.8 15.5 (1.4) 16.5 7.5 10.1
Market Cap 35,991.27Mil
EBITDA 11,476 12,088 15,623 15,754 17,356 16,905
Outstanding Shares 7,198.25Mil
% change y/y 7.0 5.3 29.2 0.8 10.2 (2.6)
EBITDA Margin (%) 7.9 7.2 9.4 8.1 8.3 7.4 52 Wk Range 4.25 - 7.07
Net Income 4,925 5,548 11,597 5,668 6,666 7,634 3Mo Ave Daily T/O 13.77Mil
% change y/y 4.0 12.6 109.1 (51.1) 17.6 14.5
Net Profit Margin (%) 3.4 3.3 7.0 2.9 3.2 3.3
EPS 0.67 0.76 1.60 0.78 0.92 1.05
% change y/y 4.2 13.6 110.6 (51.1) 17.6 14.5

RELATIVE VALUE
P/E (X) 7.4 6.5 3.1 6.3 5.4 4.7
Justin Richmond Cheng
P/BV (X) 0.7 0.6 0.5 0.5 0.4 0.4
Research Analyst
ROE (%) 9.3 9.6 17.6 7.7 8.5 9.1
Dividend Yield (%) 0.03 0.03 0.03 0.03 0.03 0.03
justin.cheng@colfinancial.com
So urce: COSCO, 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 COSCO: PROFITS PULLED DOWN BY COVID-19 PANDEMIC

THU 20 AUG 2020

2Q core profits down 17% y/y due to the pandemic

COSCO’s 2Q20 consolidated net income dropped 5.5% y/y to Php1.9Bil. However, core
earnings to common shareholders declined by a larger extent, down 17.4% y/y given
the weaker contribution of wholly-owned subsidiaries, which are the real estate and
liquor distribution business. In particular, the commercial real estate business recorded
a 69% decline in profits, largely due to rental concessions given during the enhanced
community quarantine (ECQ). Similarly, liquor distribution profits declined by 15.7% y/y
as the government imposed a nationwide liquor ban during the ECQ. Only PGOLD did
well with profits up 24% during the quarter given the sustained demand for basic goods
despite the lockdown. First half core income to common shareholders declined by 4.9%
to Php2.5Bil, in line with COL estimates at 43.9% of full-year forecasts.

Exhibit 1: Results Summary

in PhpMil 2Q19 2Q20 % Change 1H19 1H20 % Change %COL

Puregold 1,318 1,637 24.2% 2,828 3,397 20.1% 42.2%
Real estate 324 100 -69.1% 637 395 -38.0% 51.1%
Liquor distribution 226 190 -15.7% 457 423 -7.4% 47.9%
Office Warehouse 25 -4 -116.6% 54 15 -72.2% 30.0%
Others 131 -10 - 6,237 2 - -
Consolidated net income 2,024 1,913 -5.5% 10,213 4,232 -58.6% -
Core Income to equity 1,300 1,074 -17.4% 2,616 2,488 -4.9% 43.9%

Source: COSCO, COL Estimates

PGOLD 2Q20 profits increase 24% y/y, in line with estimates

PGOLD 2Q net income increased by 24% y/y to Php1.6Bil, bringing 1H20 income up
20% y/y. This is in line with COL estimates but slightly ahead of consensus at 42.2% and
43.5% of full-year forecasts, respectively (1H usually around 41% of FY). Earnings growth
during the second quarter was amid the strong topline increase of 12.8%. Same-store-
sales-growth (SSSG) remained elevated at 7.6% in 2Q20, but this is slower than the 12.2%
growth in 1Q as sales from Puregold started to normalize. Profit growth expanded at a
faster pace compared to revenues in 2Q, thanks to operating cost savings amid reduced
operating hours and less marketing events.

COL Financial Group, Inc. 2

 EARNINGS ANALYSIS I COSCO: PROFITS PULLED DOWN BY COVID-19 PANDEMIC

THU 20 AUG 2020

Profits from real estate business plummets due to limited

operations

2Q profits from the commercial real estate business plummeted by 69% y/y to Php100Mil.
Real estate profits were hurt due to the limited operation of malls given the community
quarantine. Recall that malls and its tenants were not allowed to operate for around two
months, unless the stores were engaged in essential services (e.g. groceries, drugstores,
etc.). Hence, similar to the larger mall operators, COSCO gave rental concessions to its
tenants. In particular, the company waived rental payments for those tenants that were
not allowed to operate during the ECQ. Note that around 47% of its tenants were affected
and closed due to government restrictions.

Liquor distribution business dragged by liquor ban

Liquor distribution earnings dropped by 15.7% y/y in 2Q20 to Php190Mil. The lower
profits were amid a 44% drop in liquor sales as municipalities imposed a liquor ban during
the enhanced community quarantine. Hence, liquor sales volume actually dropped by
34%, led by a 34% drop in the brandy segment. In subsequent months, certain areas also
re-imposed a liquor ban as these cities reverted back to tighter quarantine rules. Given
that Metro Manila also reverted back to MECQ (tighter restrictions) for two weeks, 3Q
liquor sales were likely hurt further since liquor bans were also reinstated in the first half
of August.

Maintain BUY rating

We currently have a BUY rating on COSCO with a FV estimate of Php11.0/sh. COSCO

remains severely undervalued with the market not valuing its other businesses (apart
from PGOLD) like the liquor distribution and real estate business. In fact, if we only value
COSCO (adjusting for parent net debt) for its 49% stake in PGOLD based on the latter’s
market value, this still translates to a target price of Php9.9/sh.

COL Financial Group, Inc. 3

 EARNINGS ANALYSIS I COSCO: PROFITS PULLED DOWN BY COVID-19 PANDEMIC

THU 20 AUG 2020

Cosco Capital, Inc. INCOME STATEMENT (IN PHPMIL)

(COSCO) Revenues
2017
145,750
2018
168,388
2019
166,067
2020E
193,447
2021E
207,957
2022E
228,984
% Growth 12.8% 15.5% -1.4% 16.5% 7.5% 10.1%
COMPANY BACKGROUND EBITDA 13,526 14,463 18,057 18,329 20,110 19,867
% Growth 8.1% 6.9% 24.8% 1.5% 9.7% -1.2%
COSCO is the holding company of
Interest Expense (406) (469) (2,077) (343) (311) (320)
businessman Lucio Co for his retail
Other Income/Expense (115) 501 11,058 653 684 675
businesses in the consumer industry. Pretax Income 11,124 12,204 10,713 15,180 16,751 16,308
COSCO currently has a 49% stake in retail Tax Expense 3,291 3,399 3,521 5,583 5,919 3,936
company Puregold Price Club, Inc. It also Net Income 4,925 5,548 11,597 5,668 6,666 7,634
has wholly-owned subsidiaries engaged in % Growth 4.0% 12.6% 109.1% -51.1% 17.6% 14.5%
liquor distribution, commercial real estate, EPS 0.67 0.75 1.57 0.77 0.90 1.03
% Growth 4.0% 12.6% 109.0% -51.1% 17.6% 14.5%
and specialty retailing: distribution of office
supplies and related technology (under
BALANCE SHEET (IN PHPMIL)
Office Warehouse).
2017 2018 2019 2020E 2021E 2022E
Cash & Equivalents 15,353 16,785 24,402 34,328 38,406 43,833
REVENUE BREAKDOWN Trade Receivables 7,902 6,631 16,638 10,445 11,229 12,364
Inventories 21,195 23,932 24,722 28,017 30,119 33,164
Other Current Assets 2,929 10,398 2,237 3,936 4,214 4,616
6.7% PPE 26,623 26,344 27,928 29,505 31,914 34,123
-4.2% Other Non-Current Assets 37,613 36,279 58,523 59,139 59,433 59,859
15.8% Total Assets 111,614 120,368 154,450 165,371 175,314 187,959
Accounts Payable 13,793 13,015 15,128 18,233 19,601 21,583
ST Debts 8,006 4,916 915 2,912 1,914 2,413
59.5% Other Current Liabilities 2,388 4,566 3,673 3,673 3,673 3,673
LT Debts 4,782 6,572 5,095 5,483 5,717 5,431
Other Non-Current Liabilities 4,201 4,458 27,579 27,732 27,773 27,832
22.2%
Total Liabilities 33,170 33,528 52,389 58,033 58,677 60,932
Total Equity 78,444 86,840 102,061 107,338 116,637 127,027
Total Liabilities & Equity 111,614 120,368 154,450 165,371 175,314 187,959

Puregold Commercial Real Estate Liquor Distribution

Puregold Specialty Retailing Mining and Oil

Commercial Real Estate

Liquor Distribution
55%
Specialty Retailing
Mining and Oil

COL Financial Group, Inc. 4

 EARNINGS ANALYSIS I COSCO: PROFITS PULLED DOWN BY COVID-19 PANDEMIC

THU 20 AUG 2020

INVESTMENT THESIS: RATIOS

A cheaper way to own PGOLD 2017 2018 2019 2020E 2021E 2022E
EBITDA Margin (%) 9.3% 8.6% 10.9% 9.5% 9.7% 8.7%
COSCO is a cheaper way to own Puregold
NPM (%) 3.4% 3.3% 7.0% 2.9% 3.2% 3.3%
given that PGOLD accounts for 60% of Times Interest Earned (X) 33.3 30.8 8.7 53.5 64.6 62.1
COSCO’s earnings and NAV. Furthermore, Current Ratio (X) 2.0 2.6 3.4 3.1 3.3 3.4
investors are currently only paying for the Net D/E Ratio (X) (0.0) (0.1) (0.2) (0.2) (0.3) (0.3)
Days Receivable 17.0 17.1 14.6 31.4 18.3 17.9
holding company’s 49% stake in PGOLD.
Days Inventory 54.6 50.3 59.0 51.5 54.4 52.6
All other businesses – real estate, liquor Days Payable 32.5 32.7 32.1 31.5 35.4 34.2
distribution, and specialty retail – are free. Asset T/O (%) 135.6% 145.2% 120.9% 121.0% 122.1% 126.1%
ROAE (%) 6.6% 6.7% 12.3% 5.4% 6.0% 6.3%

PGOLD primed for growth

PGOLD is strategically positioned to take
better advantage of the positive outlook
in the retail industry given its differentiated
focus that captures the middle-to-low
income customers, the niche market of
resellers (mom and pop stores), and the
upper-to-middle income consumers
(through S&R). Furthermore, the retail
subsidiary is not slowing down in expanding
to underpenetrated areas as it expands 25
Puregold stores, 2 S&R Warehouse stores,
and 10 S&R quick service restaurants,
annually.

COL Financial Group, Inc. 5

 EARNINGS ANALYSIS I COSCO: PROFITS PULLED DOWN BY COVID-19 PANDEMIC

THU 20 AUG 2020

Valuation NAV COMPUTATION

Methodology Value (PhpMil) Value (Php/Sh) % of GAV% of NAV Valuation Methodology

Puregold 76,643 10.6 79.8% 72.0% DCF
Liquor Distribution 7,069 1.0 7.4% 6.6% 8X forward P/E
Real Estate 10,908 1.5 11.4% 10.3% EBITDA cap rate
Specialty Retail 76 0.0 0.1% 0.1% 4X forward P/E
Mining Assets 1,379 0.2 1.4% 1.3% Book Value
96,075 13.2 100.0% 90.3%
Net Cash 10,316 1.4 10.7% 9.7%
Equity Value 106,391 14.7 110.7% 100.0%
Less: Holding Company Discount 26,598 3.7
FV Estimate 79,793 11.0

RELATIVE VALUATION
P/E EPS Growth
2020E 2021E 2020E 2021E
AC 28.4 20.4 -51.8% 39.3%
AEV 22.9 15.2 -44.0% 51.4%
AGI 6.1 4.3 -44.9% 39.2%
DMC 7.1 4.4 -34.4% 59.9%
FPH 4.3 4.2 -38.9% 3.5%
GTCAP 8.3 5.4 -43.3% 51.7%
JGS 17.5 12.0 -21.5% 45.6%
MPI 8.9 7.4 -50.6% 20.9%
SM 35.4 25.0 -31.4% 41.7%
Industry Ave ex-COSCO 15.4 10.9 -40.1% 39.3%
Industry Median ex-COSCO 8.9 7.4 -43.3% 41.7%

COSCO 6.3 5.4 -51.1% 17.6%

COL Financial Group, Inc. 6

 EARNINGS ANALYSIS I COSCO: PROFITS PULLED DOWN BY COVID-19 PANDEMIC

THU 20 AUG 2020

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 COL’s 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 LAÑEDA, CFA

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

JOHN MARTIN LUCIANO FRANCES ROLFA NICOLAS JUSTIN RICHMOND CHENG

SENIOR RESEARCH ANALYST RESEARCH ANALYST RESEARCH ANALYST
john.luciano@colfinancial.com rolfa.nicolas@colfinancial.com justin.cheng@colfinancial.com

ADRIAN ALEXANDER YU KERWIN MALCOLM CHAN

RESEARCH ANALYST RESEARCH ANALYST
adrian.yu@colfinancial.com kerwin.chan@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