FRI 04 SEP 2020

Opportunities despite weakness

Not surprisingly, the latest GDP numbers and corporate earnings results were disappointing. A monthly publication by
Second quarter GDP was down 16.5% while 82.3% of the listed companies that we monitor COL which provides insights
reported significantly lower profits or losses in the first half of the year.
on investment opportunities
Nevertheless, there were some good news. Based on the government’s revised budget based on global and local
for 2020 and 2021, it is planning to spend more despite expectations of lower revenue developments that could
collection because of weaker economic conditions. Higher spending by the government
should help the economy recover faster. Note that in the second quarter, GDP contraction affect the market.
would have been steeper, if not for the 22.1% increase in government spending.
COLing the Shots aims to
Although property companies suffered from significantly lower revenues during the second
quarter as malls were forced to close and as construction activity was suspended, demand provide timely and relevant
for offices remained resilient, allowing property companies to book higher office leasing information and analysis as
revenues despite the pandemic. Property companies also continued to sell residential
properties during the second quarter although at a slower pace as buyers who could still well as a model portfolio for
afford to buy properties took advantage of more attractive payment terms to fulfill their successful investing.
dream of owning a home.

When the government loosened restrictions in most parts of the country starting mid-May
allowing most businesses to reopen, some companies’ businesses returned either close to
or back to pre-ECQ level. For example, power generation companies said that demand for
electricity is now back to 90% to 95% of pre-ECQ levels. Toll road operators also said traffic
in July returned to 90% of pre-ECQ levels.

Due to changes in consumer behavior brought about by the pandemic, demand for
some products and services remain resilient and is even stronger despite poor economic
conditions. For example, many Filipinos are now remodeling their homes to make it a
more comfortable place to work and study, benefiting home improvement stores such
as WLCON and HOME. More Filipinos are also subscribing to home broadband to stay
productive and entertained, benefiting telcos such as TEL and GLO which are both seeing
substantial increases in their home broadband subscriptions. Demand for home appliances
is also picking up, with appliance manufacturer CIC saying that refrigerator sales in July
have already exceeded sales during the same period last year.

While the country’s economic outlook remains poor in general, the fact that there are some
bright spots means that there are opportunities to make money by buying undervalued
companies that are already recovering despite the crisis. This is especially true in an
environment where interest rates are expected to stay low, and where some stocks have
both resilient earnings and high dividend yields.

We are moving AP from COLing the Shot’s list of stocks to buy for the long term to our list
of resilient stocks that can be bought today. AP has already seen the worst. As discussed
earlier, demand for electricity is now back to 90% to 95% of pre-ECQ levels. Moreover, AP is
no longer expected to suffer from outages which hurt profits in the first half as all its power April Lynn Tan, CFA
plants are now back online. Although unit 1 of its Manolo-Fortich hydroelectric plant was Chief Equity Strategist
recently damaged by a mudslide incident, potential impact is only minimal at 3% of 2021 april.tan@colfinancial.com
profits. Valuations are also attractive. 

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 CO L I N G T H E S H OTS I O PPO RT U N I T I E S D E SPITE W EA K NESS

FRI 04 SEP 2020

Not surprisingly, the second quarter GDP numbers and corporate earnings results were
disappointing. For example, second quarter GDP contracted by 16.5%, much sharper than
the 9% drop that economists were expecting. Meanwhile, 82.3% of listed companies that
we monitor reported significantly lower profits or losses which were much worse than
expected. In fact, first half profits were down by a median rate of 46.1%. Consequently,
analysts once again cut their earnings forecasts such that earnings for 2020 are now
projected to be 30% lower compared to what they were in 2019. Although profits should
recover next year, analysts are now forecasting profits for 2021 to still be 10% lower
compared to what they were in 2019.

Exhibit 1: PH Quarterly GDP Growth

1Q19 2Q10 3Q10 4Q19 1Q20 2Q20

Household Final Consumption 6.2% 5.6% 6.0% 5.7% 0.2% -15.5%
Gov't Final Consumption 6.4% 6.8% 8.8% 17.0% 7.0% 22.1%
Gross Capital Formation 9.8% -0.8% -0.1% 2.5% -17.4% -53.5%
Exports 4.2% 3.1% 1.8% 0.3% -4.4% -37.0%
GDP 5.7% 5.4% 6.3% 6.7% -0.7% -16.5%
Net Primary Income -1.6% 0.3% -4.6% -2.8% -5.9% -22.0%
GNI 5.0% 4.9% 5.2% 5.8% -1.2% -17.0%
Source: PSA

Exhibit 2: Median 1H Earnings Growth per Sector

Sector Growth (Y/Y)

Consumer - Mfg 2.4%
Telcos -1.4%
Banks -6.3%
Properties -37.5%
Power -49.9%
Retailers -50.6%
Conglomerates -61.8%
Cement -70.9%
Restaurants -264.9%
Total -46.1%

Source: Listed companies, COL estimates

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FRI 04 SEP 2020

Nevertheless, there were some good news. Based on the government’s revised
budget for 2020 and 2021, it is planning to spend more than previously planned to
stimulate the economy. This is despite expectations that revenue collection will go
down because of weaker economic conditions. For this year, the government plans to
increase disbursements from Php4.2 Tril to Php4.3 Tril. For next year, it plans to increase
disbursements from Php4.2 Tril to Php4.5 Tril. Higher spending by the government should
help the economy recover faster. Note that in the second quarter, GDP contraction would
have been steeper, if not for the 22.1% increase in government spending.

Exhibit 3: DBCC Projections

2020 2021 2022
New New New
Old Old Old
5/20* 7/20** 5/20*
7.1% to 7/20** 5/20* 7/20**
GDP Growth (%) -2% to -3.4% -4.5% to -6.60% 8.1% 6.5% to 7.5% 7% to 8% 6.5% to 7.5%
Revenues (PhpTril) 3.2 2.6 2.5 3.8 2.9 2.7 4.3 3.3 3.0
Change (%) -18.0% -3.8% -23.9% -7.10% -24.1% -7.3%
Revenues (% GDP) 17.7% 13.6% 13.4% 15.7% 14.1% 13.2% 16.0% 14.6% 13.3%
Disbursements (PhpTril) 4.2 4.2 4.3 4.6 4.2 4.5 5.1 4.5 4.7
Change (%) 0.3% 3.7% -9.9% 6.9% -13.1% 5.1%
Disbursement (% GDP) 21.4% 21.7% 23.0% 20.2% 19.6% 21.6% 19.9% 19.9% 20.5%
Deficit (% GDP) 5.3% 8.1% 9.6% 3.0% 6.0% 8.5% 3.0% 5.0% 7.2%
Debt/GDP (%) 50.0% 53.9% 52.3% 58.3% 53.6% 60.0%

Source: DBCC, COL Estimates

* As of May 13, 2020

**As of July 28, 2020

Although property companies suffered from significantly lower revenues during the
second quarter as malls were forced to close and as construction activity was suspended,
demand for offices remained resilient, thanks to the business process outsourcing (BPO)
industry which continued to expand. As a result, offices did not suffer from higher
vacancies or lower rental rates, allowing property companies to book higher office leasing
revenues despite the pandemic.

Property companies also continued to sell residential properties during the second
quarter although at a slower pace as buyers who could still afford to buy properties took
advantage of more attractive payment terms to fulfill their dream of owning a home.

When the government loosened restrictions in most parts of the country starting mid-
May allowing most businesses to reopen, some companies’ businesses returned either
close to or back to pre-ECQ level. Although these companies’ second quarter profits were
badly hit since they were not allowed to operate in April and early May, they are quite
optimistic about their outlook for the second half of the year.

COL Financial Group, Inc. 3

 CO L I N G T H E S H OTS I O PPO RT U N I T I E S D E SPITE W EA K NESS

FRI 04 SEP 2020

For example, power generation companies said that demand for electricity is now back
to 90% to 95% of pre-ECQ levels as most businesses have resumed operations. Toll road
operators also said the same, that traffic in July has returned to 90% of pre-ECQ levels.
Although demand weakened when Metro Manila and its neighboring provinces were
once again placed under MECQ in early August, the decline was much less than the drop
both power generation companies and toll road operators saw in April.

Due to changes in consumer behavior brought about by the pandemic, demand for some
products and services have remained resilient and even picked up despite poor economic
conditions. For example, many Filipinos are now remodeling their homes to make it more
comfortable for working and studying at home. This is benefiting home improvement
stores such as WLCON and HOME which both said that sales have shown a “V” shaped
recovery and are now back to pre-ECQ levels.

More Filipinos are also subscribing to home broadband to stay productive and entertained
while at home. This in turn is benefiting telcos such as TEL and GLO which are both seeing
substantial increases in their home broadband subscriptions.

Demand for home appliances is also picking up since more Filipinos now cook their own
meals instead of eating out. In fact, appliance manufacturer CIC said that refrigerator
sales in July have already exceeded sales during the same period last year.

While the country’s economic outlook remains poor in general, it is encouraging to know
that there are some bright spots. For stock market investors, it means that we should not
be too bearish as there are opportunities to make money by buying undervalued stocks
that are already recovering despite the crisis. This is especially true in an environment
where interest rates are expected to stay low, and where some stocks have both resilient
earnings and high dividend yields.

The continuous increase in COVID-19 infections is the main risk though as it is preventing
the government from fully reopening the economy. It is also the main reason why
consumers are acting cautiously which is not good for businesses and the economy.

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FRI 04 SEP 2020

Exhibit 4: PH Daily New COVID-19 Cases

Source: Bloomberg

COLing the Shots stock pick list: Resilient stocks outperform

the market

We are happy to note that our stock picks (that are part of the resilient basket) performed
well the past month. TEL, PGOLD, CNPF all reported strong first half earnings results,
justifying their outperformance relative to the PSEi index.

Exhibit 5: Relative Performance of Stock Picks vs PSEi (since July 24)

Source: Bloomberg

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 CO L I N G T H E S H OTS I O PPO RT U N I T I E S D E SPITE W EA K NESS

FRI 04 SEP 2020

Despite being a power company, we initially did not include AP to the list of resilient
stocks. This was because of the steep decline in power demand in the second quarter,
when most of the country was placed under ECQ. Moreover, AP suffered from company
specific issues such as unplanned outages. It was also hurt by the steep drop in power
prices. These factors led to the 58.8% drop in AP’s first half profits.

However, AP has already seen the worst. As discussed earlier, demand for electricity is
now back to 90% to 95% of pre-ECQ levels as most businesses have resumed operations.
Moreover, AP is no longer expected to suffer from outages as all its power plants are now
back online.

Although unit 1 of its Manolo-Fortich hydroelectric plant was recently damaged by a

mudslide incident, potential foregone earnings is only equivalent to 3% of AP’s 2021
profits. Consequently, AP’s profits should still be higher compared to what it was during
the first half of 2020.

Because of stronger future earnings outlook and attractive valuations, we are now
including AP in our list of resilient stocks.

Meanwhile, we continue recommending a slow accumulation of ALI, MEG, BDO, MBT,

and DNL as their businesses remain vulnerable to the ongoing pandemic. Although the
said companies’ profits are expected to stay weak in the near term, this is only temporary.
As such, now is a great time to take advantage of the said stocks’ cheap valuations as
patient, long term investors will be rewarded once these companies’ profits recover and
return to normalized levels.

Exhibit 6: COLing the Shots Stock Picks (Resilient Stocks)

Sector Stock Price FV Buy Below
PGOLD 51.05 54.50 47.30
Consumer
CNPF 16.62 20.40 17.70
Telco TEL 1,450.00 1,640.00 1,426.00
Power AP 25.95 33.57 26.80

Exhibit 7: COLing the Shots Long Term Stock Picks

Sector Stock Price FV Buy Below

ALI 27.00 38.30 30.64
Property
MEG 2.89 3.70 3.00
BDO 85.75 129.00 107.00
Banks
MBT 33.10 67.00 55.80
Consumer DNL 5.04 6.20 4.70

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FRI 04 SEP 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, 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

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

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