2GO Group, Inc.

WED 12 JULY 2017

Restated earnings largely driven

by non-cash expenses
Following the entry of Udenna Corporation and SM Group into 2GO Group, Inc., the new management
had tapped SGV & Co. to perform a special audit on the shipping and logistics company’s financial
statements for FY15, FY16, and 1Q17. The auditor had found that certain accounts in the financial
N/A
statements initially audited by R.G. Manabat & CO. required restatement. As a result, management
and the new Board of Directors agreed to restate prior period financials to present its state of business TICKER: 2GO
in a fair manner. The restatement resulted in 2015 net income dropping 91% to Php97Mil and 2016 FAIR VALUE: N/A
figures also dropping 75% to Php330Mil. Upon closer inspection, the huge drop in earnings was a
result of higher depreciation and amortization expense, higher provisioning for doubtful accounts, CURRENT PRICE: 24.25
impairment of a vessel, and impairment of goodwill. UPSIDE: N/A
Non-cash expenses contribute largely to lower earnings. FY15, FY16, and 1Q17 net income
showed a decline of almost 91%, 75%, and a reversal to losses in each of the said periods,
respectively. These were largely driven by non-cash expenses. For example, upon restatement, SHARE PRICE MOVEMENT
depreciation and amortization were 38% higher to Php1.4Bil in 2016 as well as 36% higher to
260
Php440Mil in 1Q17. The huge increase came from a change in useful life estimate for evaluating
the lives of vessels and spare parts and related equipment. We estimate that the average useful 240
life of 2GO’s total PPE had dropped to 10.3 years in 2016 from 14.8 years, 9.3 years in 1Q17 from 220
13.0 years. In addition, the restated financials show provisions for doubtful accounts amounting 200
to Php264Mil, Php538Mil, and Php249Mil in 2015, 2016 and 1Q17, respectively. Another huge 180
difference in the audit includes impairment of one of 2GO’s vessels amounting to Php260Mil and 160
the impairment of a goodwill amounting to Php250Mil. 140

On one hand, the huge drop in earnings was driven by non-cash expenses. Furthermore, 120

2GO’s revenues experienced little to no change from the restatement. Meanwhile, on the 100
flipside, the higher depreciation and provisioning both seem to be mostly recurring expenses. 80
Total depreciation as a % of average gross PPE in 2016 stood at 9.7% while the same figure in 13-Apr-17 13-May-17 13-Jun-17 13-Jul-17
1Q17’s annualized depreciation amounted to 10.8%. Similarly, provisions for doubtful accounts 2GO PSEi
continued to be observed from 2015 to the most recent 1Q17 figures. The continued and higher
depreciation and provisioning appear to indicate that any one-off expenses in the past were
minimal and negligible. Only the impairment of goodwill and the vessel in 2015 are clear one-
time expenses. ABSOLUTE PERFORMANCE

1M 3M YTD
FORECAST SUMMARY
2GO 4.30 94.94 217.41
Year to December 31 (Php Mil) 2014 2015* 2016*
PSEi 0.48 4.27 16.30
Net Sales 14,427 16,383 19,054
% change y/y 13.6 16.3
Gross Profit 2,114 3,067 3,426
% change y/y 45.1 11.7 MARKET DATA
Gross Margin (%) 14.7 18.7 18.0
Operating Income 1,156 1,370 1,085 Market Cap 59,318.81Mil
% change y/y 18.6 (20.8) Outstanding Shares 2,446.14Mil
Operating Margin (%) 8.0 8.4 5.7 52 Wk Range 7.11 - 30.90
Net Income 828 97 330 3Mo Ave Daily T/O 25.61Mil
% change y/y (88.3) 240.4
Net Profit Margin (%) 5.7 0.6 1.7
EPS 0.34 0.04 0.14
% change y/y (88.3) 240.4

RELATIVE VALUE
P/E (X) 66.8 569.7 167.4
P/BV (X) 4.0 3.8 3.6 JUSTIN RICHMOND CHENG
ROE (%) 73.0 8.1 19.9 RESEARCH ANALYST
Dividend Yield (%) 0.0 0.0 0.0 justin.cheng@colfinancial.com
So urce: 2GO, COL estimates
*Figures based o n restatement

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.
 FIELD NOTES I 2GO: RESTATED EARNINGS LARGELY DRIVEN BY NON-CASH EXPENSES

THU 13 JULY 2017

Following the entry of Udenna Corporation and SM Group into 2GO Group, Inc., the new
management had tapped SGV & Co. to perform a special audit on the shipping and logistics
company’s financial statements for FY15, FY16, and 1Q17. The auditor had found that certain
accounts in the financial statements initially audited by R.G. Manabat & CO. required restatement.
As a result, management and the new Board of Directors agreed to restate prior period financials to
present its state of business in a fair manner. The restatement resulted in 2015 net income dropping
91% to Php97Mil and 2016 figures also dropping 75% to Php330Mil. Upon closer inspection,
the huge drop in earnings was a result of higher depreciation and amortization expense, higher
provisioning for doubtful accounts, impairment of a vessel, and impairment of goodwill.

Non-cash expenses contribute largely to lower earnings

FY15, FY16, and 1Q17 net income showed a decline of almost 91%, 75%, and a reversal to losses
in each of the said periods, respectively. These were largely driven by non-cash expenses. For
example, upon restatement, depreciation and amortization were 38% higher to Php1.4Bil in
2016 as well as 36% higher to Php440Mil in 1Q17. The huge increase came from a change in
useful life estimate for evaluating the lives of vessels and spare parts and related equipment.
We estimate that the average useful life of 2GO’s total PPE had dropped to 10.3 years in 2016
from 14.8 years, 9.3 years in 1Q17 from 13.0 years. In addition, the restated financials show
provisions for doubtful accounts amounting to Php264Mil, Php538Mil, and Php249Mil in 2015,
2016 and 1Q17, respectively. The audit explained that the recoverability of 2GO’s trade and
other receivables were a key audit matter in determining the allowance for doubtful accounts
and the provisions. Another huge difference in the audit includes impairment of one of 2GO’s
vessels amounting to Php260Mil and the impairment of a goodwill amounting to Php250Mil.

On one hand, the huge drop in earnings was driven by non-cash expenses. Furthermore, 2GO’s
revenues experienced little to no change from the restatement. Meanwhile, on the flipside,
the higher depreciation and provisioning both seem to be mostly recurring expenses. Total
depreciation as a % of average gross PPE in 2016 stood at 9.7% while the same figure in 1Q17’s
annualized depreciation amounted to 10.8%. Similarly, provisions for doubtful accounts
continued to be observed from 2015 to the most recent 1Q17 figures. The continued and
higher depreciation and provisioning appear to indicate that any one-off expenses in the past
were minimal and negligible. Only the impairment of goodwill and the vessel in 2015 are clear
one-time expenses.

Exhibit 1: Summary of Restatements in Income Statement

2015 2016 1Q17

Original Restated % Change Original Restated % Change Original Restated % Change
Revenues 16,418 16,383 (0.20) 19,276 19,054 (1.20) 4,901 4,901 -
CO GS 13,250 13,317 0.50 15,126 15,628 3.30 3,981 4,196 5.40
G&A Expenses 1,362 1,697 24.50 1,617 2,341 44.80 404 711 76.20
EBITDA 2,797 2,356 (15.80) 3,575 2,521 (29.50) 841 380 (54.80)
Net Income 1,069 97 (90.90) 1,325 330 (75.10) 267 -266 (199.60)

COL Financial Group, Inc. 2

 FIELD NOTES I 2GO: RESTATED EARNINGS LARGELY DRIVEN BY NON-CASH EXPENSES

THU 13 JULY 2017

2015 2016 1Q17

In PhpMil Original Restated % Change Original Restated % Change Original Restated % Change
Depreciation and
991 986 (0.5) 1,043 1,436 37.7 325 440 35.5
Amortization
Provision for Doubtful
- 264 - - 538 - - 249 -
Accounts
Loss on sale of asset/
- (260) - (251) - - - - -
Impairment of asset
Impairment of
- (250) - - - - - - -
Goodwill

Higher capex and working capital requirements

Assuming SGV’s assumptions are accurate, the lower estimated useful life would indicate
that 2GO’s capital expenditure requirements are expected to increase in the future in order
to maintain the efficiency of its operations. In addition, the higher provisioning for doubtful
accounts indicate that 2GO’s ability to collect cash from its customers is poor compared to
what was originally expected. This translates to a higher working capital requirement for
the company so that it is able to satisfy its maturing obligations and incoming operational
expenses. We note that upon restatement of 1Q17 balance sheet figures, 2GO’s current portion
of long term debt has ballooned to Php3.9Bil from Php92Mil. Bulk of this is owed to SM Group’s
Banco de Oro Unibank, Inc (BDO).

Trading suspension lifted, share price likely under pressure

The PSE has disclosed that it is lifting the trading suspension on 2GO shares today, July 12, at
10:00AM. A reservation period of 10 minutes prior to the resumption of trading at 10:00AM will
be implemented and orders, besides cross transactions, can be posted, modified, and cancelled
during the said period. In light of the restatements in 2GO’s financials, which although are non-
cash expenses still signal potential issues regarding 2GO’s operational ability, it is likely that
the share price may come under pressure especially with 2GO already having rallied 305%
year-to-date.

COL Financial Group, Inc. 3

 FIELD NOTES I 2GO: RESTATED EARNINGS LARGELY DRIVEN BY NON-CASH EXPENSES

THU 13 JULY 2017

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

FRANCES ROLFA NICOLAS ANDY DELA CRUZ JUSTIN RICHMOND CHENG

RESEARCH ANALYST RESEARCH ANALYST RESEARCH ANALYST
rolfa.nicolas@colfinancial.com andy.delacruz@colfinancial.com justin.cheng@colfinancial.com

KYLE JEMMRIC VELASCO JOHN MARTIN LUCIANO

RESEARCH ANALYST RESEARCH ANALYST
kyle.velasco@colfinancial.com john.luciano@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. 4