Stocks in Focus: THU 29 OCT 2020

PGOLD: 3Q profits drop 4.2% y/y as sales

slows down
3Q profits drop 4.2% y/y as sales slows down. PGOLD’s 3Q20 net income declined by
(AS OF OCT 28, 2020)
4.2% y/y to Php1.6Bil. The decline in earnings was amidst weak sales with consolidated INDICES
same-store-sales growth (SSSG) down 4.5% in 3Q20 from +4.4% in the second quarter.
Close Points % YTD%
Hence, 3Q20 sales only grew by 1.1% y/y to Php39.2Bil, significantly slower compared to
PSEi 6,377.79 -37.29 -0.58 -18.39
the 12.8% growth in 2Q20. Broken down, sales from Puregold stores declined by 1.8% as All Shares 3,808.29 -9.82 -0.26 -18.10
disposable income of consumers weakened, while Puregold’s non-retail clients (sari-sari Financials 1,251.68 -0.67 -0.05 -32.84
6,610.65 -26.07 -0.39 -12.93
stores, food service industry) also suffered from the pandemic. Meanwhile, S&R’s sales Holding Firms
Industrial 8,571.93 42.16 0.49 -11.03
growth slowed down during the quarter to +11% from +26% in 2Q, which management Mining & Oil 7,571.19 -75.71 -0.99 -6.44
attributed to the cancellation of its Member’s Treat sale and also due to the pantry loading Property 3,040.36 -63.33 -2.04 -26.82
in 2Q. Services 1,473.71 2.19 0.15 -3.75

Dow Jones 27,463.19 -222 -0.80 -3.77

For the nine months, PGOLD’s net income reached Php5.1Bil, up 10.9% y/y. This accounted S&P 500 3,390.68 -10.29 -0.30 4.95
for 73.8% of COL’s full-year forecast and 67.9% of consensus. While PGOLD’s 9M results Nasdaq 11,431.35 72.41 0.64 27.40

appear to be ahead of COL estimates (~9M usually accounts for 67% of full-year estimates),
note that PGOLD’s fourth quarter outlook is expected to be challenging. Recall that INDEX GAINERS
management expects a very weak performance for the remainder of 2020, especially in Ticker Company Price %
December. Hence, it guided flat sales at best for 2020, implying a ~20% decline in 4Q sales. FGEN First Gen Corporation 29.30 10.98
This, however, was revised upwards in its latest results briefing to +4-5% sales growth GLO Globe Telecom Inc 2100.00 2.44
MBT Metrobank 43.00 2.38
after the company saw some signs of recovery. Management’s revised guidance, which still
URC Universal Robina Corp 140.00 1.01
implies a weaker 4Q performance, is in line with our full-year sales growth forecast of 4.3% SMC San Miguel Corp 102.00 0.89
in 2020.
INDEX LOSERS
Ticker Company Price %
Top Stories: AP Aboitiz Power Corp 27.50 -3.68
SMPH SM Prime Hldgs Inc 32.50 -2.99
AEV Aboitiz Equity Ventures 44.50 -2.84
CHP: 3Q20 core net income surges 149.9%, beats estimates BPI Bank of the Phil Islands 73.50 -1.93
Power Sector: Department of Energy issues moratorium on new coal power plants DMC DMCI Hldgs Inc 4.47 -1.76

TOP 5 MOST ACTIVE STOCKS

Other News: Ticker Company Turnover
SMPH SM Prime Hldgs Inc 263,023,300
BDO BDO Unibank Inc 262,700,800
ABS: ABS taps new platforms for movies
AC Ayala Corporation 255,108,800
Economy: Gov’t to borrow Php140Bil in November ALI Ayala Land Inc 232,795,300
FGEN First Gen Corporation 213,126,600

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.
 DAILY NOTES I PHILIPPINE EQUITY RESEARCH

THU 29 OCT 2020

COVID-19 Update:

Total Cases Total Deaths Total Recoveries

Philippines 375,180 (+2,053) 7,114 (+61) 329,111 (+540)

USA 9,114,309 (+80,210) 233,077 (+1,063) 5,915,438 (+42,521)

Worldwide 44,727,724 (+505,936) 1,178,401 (+7,253) 32,691,007 (+261,671)

Market Summary:

The local equities market finished lower on Wednesday as investors continued to take
profit.

The PSEi lost 37.29 points or 0.58% to close at 6,377.79. The main drags were AP (-3.68%),
SMPH (-2.99%), AEV (-2.84%), BPI (-1.93%), and DMC (-1.76%). On the other hand, the
top movers were FGEN (+10.98%), GLO (+2.44%), MBT (+2.38%), URC (+1.01%), and
SMC (+0.89%). FGEN rallied following the news that the Department of Energy issued a
moratorium on new coal power plants.

Value turnover fell to Php6.8Bil from Php8.0Bil in the previous session. Meanwhile, foreigners
turned net sellers, disposing Php442.9Mil worth of shares.
 

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Stocks in Focus:

Justin Richmond Cheng, CFA PGOLD: 3Q profits drop 4.2% y/y as sales slows down
Research Analyst
3Q profits drop 4.2% y/y as sales slows down. PGOLD’s 3Q20 net income declined by
Puregold Price Club Inc.
4.2% y/y to Php1.6Bil. The decline in earnings was amidst weak sales with consolidated
BUY
Php48.50 same-store-sales growth (SSSG) down 4.5% in 3Q20 from +4.4% in the second quarter.
Hence, 3Q20 sales only grew by 1.1% y/y to Php39.2Bil, significantly slower compared to
the 12.8% growth in 2Q20. Broken down, sales from Puregold stores declined by 1.8% as
disposable income of consumers weakened, while Puregold’s non-retail clients (sari-sari
stores, food service industry) also suffered from the pandemic. Meanwhile, S&R’s sales
growth slowed down during the quarter to +11% from +26% in 2Q, which management
attributed to the cancellation of its Member’s Treat sale and also due to the pantry
loading in 2Q.

For the nine months, PGOLD’s net income reached Php5.1Bil, up 10.9% y/y. This
accounted for 73.8% of COL’s full-year forecast and 67.9% of consensus. While PGOLD’s
9M results appear to be ahead of COL estimates (~9M usually accounts for 67% of full-
year estimates), note that PGOLD’s fourth quarter outlook is expected to be challenging.
Recall that management expects a very weak performance for the remainder of 2020,
especially in December. Hence, it guided flat sales at best for 2020, implying a ~20%
decline in 4Q sales. This, however, was revised upwards in its latest results briefing to +4-
5% sales growth after the company saw some signs of recovery. Management’s revised
guidance, which still implies a weaker 4Q performance, is in line with our full-year sales
growth forecast of 4.3% in 2020.

Exhibit 1: Results Summary

Source: PGOLD, COL Estimates, Bloomberg

3Q20 sales slows down amid weaker consumer spending. PGOLD’s sales in 3Q20
inched up 1.1% y/y as both Puregold and S&R reported lower SSSG, specifically -4.5%
and -2.9%, respectively. Management said foot traffic was noticeably weaker in both
business formats. PGOLD also attributed the weakness in 3Q sales to the pantry loading
in 2Q, the challenging economic backdrop, and the cancellation of key PGOLD events
(e.g. TNAP convention for sari-sari store partners). Government relief programs were also

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THU 29 OCT 2020

not present in 3Q unlike the previous quarter. Sari-sari store partners (normally ~30% of
Puregold sales) were unable to operate amid the pandemic and quarantine measures.
Finally, PGOLD’s other events that catered to the hotel, restaurant, and catering industry
and bi-annual sale in S&R were also cancelled, dampening sales further in 3Q20.

Gross margin remains weak in 3Q, but is expected to improve in 4Q. PGOLD’s 3Q20
gross margin continued to contract in 3Q20, down 20 bps y/y to 16.5%. This was still
mostly due to the lower supplier support affecting Puregold’s stores. Thus, the Puregold
format’s 3Q20 gross margin dropped by 60 bps y/y, while 9M20 gross margin is also
down 90 bps y/y. Recall that the pandemic has caused manufacturing companies and
retailers to focus on supply availability, while many marketing and promotional events
were cancelled or delayed. Nevertheless, PGOLD expects margins to improve this 4Q
relative to 9M20 as it sees marketing events ramping up going into the last quarter of
2020.

Despite the contraction in gross margin and sluggish sales in 3Q20, PGOLD continued
to benefit from some operating efficiencies. In fact, opex-to-sales still improved by 40
bps in 3Q20 to 11.2%. Cost savings continued to come from lower salary and utility
costs given that government restrictions led to lower overall operating hours. In addition,
management expects to see cost savings continue into 2021 as it focuses on streamlining
its operations and capitalizing on opportunities to digitalize and automate highly manual
processes.

Raising its sales guidance after seeing some signs of recovery. PGOLD is seeing some
signs of recovery going into 4Q20. In fact, management shared that SSSG in October has
returned to positive territory for both Puregold and S&R. Hence, the company raised its
full-year 2020 sales guidance to +4-5% from previously flat. Nevertheless, at PGOLD’s
revised sales guidance, sales in 4Q20 is still implied to drop by 7-10% y/y. Note that
management remains cautious of its December performance given the strong comparable
in 4Q19. Furthermore, consumer spending this holiday season will likely be dampened
by lower disposable incomes given that several companies have already paid out their
employees’ 13th month pay back in 2Q. Lastly, Christmas basket sales to government and
corporate institutions are also expected to be weak due to the pandemic.

Maintain BUY rating. We are maintaining our BUY rating on PGOLD with a FV estimate
of Php48.5/sh. While earnings will likely remain weak in 4Q20 due to the impact of the
pandemic, we only expect this to be temporary. The steady reopening of the economy
will also be beneficial for PGOLD, and this should help the company perform better in
2021. We believe the slower earnings performance of Puregold is already priced in. At
its current price of Php42.2/sh. PGOLD is still trading at 18X 2020E P/E. This is a discount
relative to the 21X median P/E of its consumer peers.

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Top Stories:

Frances Rolfa Nicolas CHP: 3Q20 core net income surges 149.9%,
Research Analyst
beats estimates
Cemex Holdings Phils.
UNDER REVIEW 3Q20 core net income surges 149.9%, beats estimates. CHP’s 3Q20 earnings reached
N/A Php623Mil, more than eight fold higher than the Php72Mil income posted in 3Q19.
Excluding non-core items such as forex gain/losses and other expenses, 3Q20 core net
income reached PHp493Mil, up 149.9% y/y. The surge in core net income was mainly due
to lower cost of sales, distribution expenses and financial expenses. This brought 9M20
core net income to Php629Mil, down 11.9% y/y. Results outperformed both COL and
consensus estimates, exceeding full year forecasts at 147.3% and 196.9% respectively.
The beat in our estimates was mainly due to lower-than-expected cost of sales and
distribution expenses, accounting for just 70% and 72% of our full year forecasts.

Exhibit 1: Results Summary

source: COL estimates, CHP, Bloomberg

Estimates under review. In light of the better-than-expected 3Q20 results, we will be

reviewing our estimates on CHP.

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George Ching Power Sector: Department of Energy issues

Senior Research Manager
moratorium on new coal power plants
Department of Energy issues moratorium on new coal power plants. The Department
of Energy (DOE) announced yesterday that it has declared a moratorium on new coal
power plant projects. The decision to halt the approval of applications for greenfield
coal-fired power plants was to address the need of the country for a shift to a more
flexible power supply mix as well as to accommodate the entry of new, cleaner, and
indigenous power sources. The DOE added that the moratorium will remain in effect until
such time that the country will be needing additional baseload power. Meanwhile, the
DOE said that they are still reviewing pending coal plant applications.

The DOE’s moratorium pertains only to new coal plant applications and will have no impact
on power companies with existing coal plants that are already operating. Furthermore, for
listed power companies that are currently expanding its coal power generation capacity
(MER’s 1,200MW Antimonan Coal Project and AP’s 1,200 Dinginin Project), all these
projects have already obtained the necessary permits from the government and thus
the moratorium will have no impact on these projects. For SCC, while the moratorium
will have no immediate impact on its coal business, we believe that this could somewhat
diminish the long term growth outlook of domestic coal demand. Note that domestic
coal sales account for ~ 50% of SCC’s total coal sales volume.

Other News:

Research Analysts ABS: ABS taps new platforms for movies

John Martin Luciano, CFA
ABS announced that its film unit would begin releasing its newly produced movies
Frances Rolfa Nicolas
on various platforms such as digital, cable and satellite TV. This will be made possible
Justin Richmond Cheng
through the company’s partnership with streaming platform iWantTFC, digital site KTX.
Adrian Alexander Yu
ph, cable company Sky Cable, and satellite provider Cignal. Note that ABS has been
Kerwin Malcolm Chan
expanding its digital presence after it was denied a new franchise in July. Management
said that despite the current circumstances, they still want to find ways to connect and
still be of service to their audience. Nevertheless, the company remains hopeful and is in
full support for the reopening of cinemas. (source: Philstar)

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Economy: Gov’t to borrow Php140Bil in November

The Bureau of the Treasury (BTr) announced yesterday that the government is looking to
sell Php80Bil worth of Treasury bills and Php60Bil worth of Treasury bonds in November,
for a total domestic borrowing of Php140Bil. Note that this does not include the
premyo-bond issuance scheduled to launch on November 11, which is targeted to raise
at least Php3Bil. From January to September, the government has raised Php2.56Tril
from domestic and external sources, accounting for 85% of the Php3Tril that they plan
to borrow this year. The government is ramping up its borrowings to plug the deficit
in its budget, which is expected to reach Php1.82Tril or 9.6% of GDP due to weaker
revenue generation and higher spending requirements amid the pandemic. Based on
their forecasts, the Philippines’ debt-to-GDP level is expected to reach 53.9% for 2020
and 58.1% for 2021. (Source: PhilStar)

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 DAILY NOTES I PHILIPPINE EQUITY RESEARCH

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I M P O R TA N T R AT ING 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.

I M P O R TA N T DISC L AIM ER
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.

CO L R E S EAR C H T EAM

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, CFA 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

CO L F IN ANC IAL G R O UP, IN C.

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WEBSITE: www.colfinancial.com

COL Financial Group, Inc. 9