WED 27 FEB 2019

Don’t be concerned about the stock

market’s weakness

After rising by a total of 7.3% for the month of January, the PSEi is now showing signs of weakness. A monthly publication by COL
However, we are maintaining our positive view for 2019 since fundamental factors that triggered which provides insights on
the recovery of the Philippine stock market and emerging markets remain in play. investments opportunities
based on global and local
In January, headline and core inflation in the Philippines continued to fall, with both numbers
developments that could affect
dropping to 4.4% from 5.1% and 4.7% in December respectively. Lower inflation should help
keep interest rates stable and boost consumer confidence which in turn should lead to higher the market.
consumer spending.
COLing the Shots aim to
Despite delays, the Senate and House of Representatives ratified the 2019 national budget provide timely and relevant
earlier this month. This should allow government spending to resume its rapid growth pace later information and analysis as
this year as it no longer operates under a reenacted budget, helping boost economic growth.
well as a model portfolio for
Factors that triggered the reversal of foreign fund flows back to emerging markets including successful investing.
the Philippines also remain in play. In January, members of the Federal Open Market Committee
meeting voted not to increase benchmark rates in the U.S. Moreover, the minutes from the
January meeting also implied that the Fed would stop shrinking its balance sheet in the second
half of the year given downside risk to economic growth. The latest economic numbers out of
the U.S. also continue to support the view that the U.S. Fed will stay on hold. As a result, U.S. bond
rates remain low while the dollar remains steady after appreciation strongly in 2018.

Despite rallying by 6.6% for the year to date period, the PSEi is still trading at a reasonable
valuation of 16.9X P/E, well below its peak multiple of more than 20X P/E. Numerous stocks are
also still trading at depressed valuations.

During our market briefing last January 26, we recommended investors to switch to CHP instead
of EAGLE as our preferred cement play. Although EAGLE is a better managed company compared
to CHP, this is already reflected in EAGLE’s share price as it is trading at 10 2019E EV/EBITDA and
has a market capitalization of Php80 Bil. On the other hand, CHP is trading at only 6.6X 2019E EV/
EBITDA and has a market capitalization of around Php13 Bil which is just 16% of EAGLE’s market
capitalization. CHP is also in a better position to benefit from the DTI’s imposition of a provisional
safeguard duty on imported cement as the company was able to increase prices prior to the
imposition of the said duty. Moreover, EAGLE is currently facing some issues as far as its plant APRIL LYNN TAN, CFA
expansion is concerned. This already led to earnings disappointment in 2018 and could continue VP & HEAD OF RESEARCH
to lead to earnings disappointments going forward. april.tan@colfinancial.com

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.
 CO LIN G T H E S H OTS I D O N’ T B E CO N C E R N E D A B O U T T H E STO C K MA RKE T; ’S WEA KNES S

WED 27 FEB 2019

No Dejavu

After rising by a total of 7.3% for the month of January, the PSEi is now showing signs of
weakness. Not surprisingly, some are concerned as the PSEi also performed strongly in January
last year, but ended 2018 lower by 12.8%.

However, we don’t except to see a repeat of 2018 this year since fundamental factors that
triggered the recovery of the Philippine stock market and emerging markets remain in play.
Domestically, inflation continues to go down. In January, headline and core inflation continued
to fall, with both numbers dropping to 4.4% from 5.1% and 4.7% in December respectively.
Lower inflation should help keep interest rates stable and boost consumer confidence which
in turn should lead to higher consumer spending.

Exhibit 1: Headline and Core Inflation

Source: PSA

The passage of the rice tariffication law earlier this February should also help prevent the repeat
of the rice shortage which pushed inflation higher last year. Note that the rice tariffication
law will lift the quantitative restriction on rice imports and instead slap a 35% import tariff
on imported rice. Aside from preventing a rice shortage, the measure will make rice more
affordable for Filipinos as domestically produced rice is more expensive compared to imported
rice, even after factoring in the cost of tariffs.

Despite delays, the Senate and House of Representatives ratified the 2019 national budget
earlier this month. This should allow government spending to resume its rapid growth pace
later this year as it no longer operates under a reenacted budget, helping boost economic
growth.

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WED 27 FEB 2019

Outside of the Philippines, factors that triggered the reversal of foreign fund flows back to
emerging markets including the Philippines also remain in play.

Recall that the U.S. dollar strengthened last year as the U.S. Fed was one of only a handful
of central banks that raised rates in 2018 given the strong performance of the U.S. economy
despite signs of a slowdown in the global economy. The strong dollar coupled with higher
rates were responsible for funds flowing out of emerging markets into the U.S. last year.

However, in the January Federal Open Market Committee meeting, the members of the
committee voted not to increase benchmark rates in the U.S. Moreover, aside from implying
that it would already stop raising interest rates, the minutes from the said meeting also implied
that the Fed would stop shrinking its balance sheet in the second half of the year given
downside risk to economic growth.

The latest economic numbers continue to support the view that the U.S. Fed will stay on hold.
For example, core capital goods orders for December fell 0.7% after falling by 1% in November
reflecting a slowdown in business spending. Meanwhile, the U.S. manufacturing purchasing
managers’ index fell to a 17-month low of 53.7 in February, from 54.9 in January as survey
respondents cited weaker demand due to uncertainty brought about by the ongoing trade
war.

Not surprisingly, the U.S. 10-year bond rate remains low while the U.S. dollar remains steady
after appreciating strongly in 2018.

Exhibit 2: U.S. 10-Year Bond Rate

Source: Bloomberg

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WED 27 FEB 2019

Exhibit 3: U.S. Dollar

Source: Bloomberg

Finally, even after rising by 6.6% for the year to date period, the PSEi is still trading at a reasonable
valuation of 16.9X P/E, well below its peak multiple of more than 20X P/E. Numerous stocks are
also still trading at depressed valuations.

Consequently, although we are not discounting the possibility that the Philippine stock market
could go down in the short term as some investors capitalize on the market’s recent strength to
lock in profits, any drop will most likely be temporary. As such, investors should take advantage
of any weakness to accumulate stocks.

COLing the Shots stock picks: Reiterate recommendation to

switch from EAGLE to CHP

Our COLing the Shots stock picks did well the past month and a half, with an equally weighted
portfolio of our stock picks rising by 1.7%, outperforming the market which rose by 0.4%
during the same period.

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WED 27 FEB 2019

Exhibit 4: COLing the Shots Stock Picks Performance

Stock Price (1/17) Price (2/22) Return

MEG 5.27 5.3 0.60%
ALI 45 44.5 -1.10%
MBT 82.5 81.4 -1.30%
SECB 178.5 173 -3.10%
DNL 11.76 11.5 -2.20%
MAXS 11.88 12.2 2.70%
SSI 2.37 2.26 -4.60%
BLOOM 10.66 12.18 14.30%
AC 923 942 2.10%
EAGLE 15.3 16.1 5.20%
CEB 80.5 85.75 6.50%
Average 1.70%
PSEi 7,927.20 7,962.13 0.40%

There were some underperformers such as banks (MBT -1.3%, SECB -3.1%) and consumer
companies (DNL -2.2%, SSI -4.6%). Nevertheless, we are maintaining our positive view on both
sectors and recommend buying them on weakness.

The earnings results of banks that have reported 2018 profits so far have been very good,
with net interest margins rising in the fourth quarter, helping boost profit growth. Recall that
improving margins is one the reasons why we are bullish on banks this year.

Meanwhile, with inflation on a downtrend, consumer confidence is set to improve. This in turn
should help increase consumer spending and boost consumer companies’ revenue growth
this year. The stable peso should also help keep costs down for consumer companies, helping
margins increase.

During our market briefing last January 26, we recommended investors to switch to CHP instead
of EAGLE as our preferred cement play. There are two main reasons why we recommended the
switch – valuations, and execution risk for EAGLE.

Admittedly, EAGLE is a better managed company compared to CHP because it is more efficient,
allowing it to have higher margins and return on equity. However, this is already reflected in
EAGLE’s share price as it is trading at 10 2019E EV/EBITDA and has a market capitalization of
Php80 Bil. On the other hand, CHP is trading at only 6.6X 2019E EV/EBITDA and has a market
capitalization of around Php13 Bil which is just 16% of EAGLE’s market capitalization.

Moreover, given all the bad luck that happened to CHP in 2018, earnings have no where to
go but up. From a core net loss of Php556 Mil in 2018, we forecast CHP to generate a core net
income of Php1.2 Bil in 2019. Recall that aside from higher oil prices which pushed up costs,
CHP’s 2018 profits were hurt by the landslide incident which affected its supplier Apo Land &
Quarry Corp. Because of the landslide incident, CHP’s raw material costs went up as it had to
source raw materials from other suppliers. It also had to temporarily suspend the operations
of one its two kilns in its Apo plant. However, Apo Land & Quarry Corp. has already resumed
operations which should allow CHP’s operations to return to normal.

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 CO LIN G T H E S H OTS I D O N’ T B E CO N C E R N E D A B O U T T H E STO C K MA RKE T; ’S WEA KNES S

WED 27 FEB 2019

CHP is also in a better position to benefit from the Department of Trade and Industry’s (DTI)
imposition of a provisional safeguard duty of Php8.40/bag on imported cement (equivalent
to 4% of the average retail price) as the company was able to increase prices prior to the
imposition of the said duty. On the other hand, EAGLE did not increase prices. Note that in an
effort to protect the public, the DTI prohibited cement companies from adjusting prices after
it imposed the safeguard duty on imports. Moreover, EAGLE is currently facing some issues as
far as its plant expansion is concerned which already led to earnings disappointment in 2018
and could continue to lead to earnings disappointments going forward.

Exhibit 5: COLing the Shots Stock Picks

Sector Stock Price FV Buy Below Buy Date Buy Price
MEG 5.30 5.84 5.10 9/9/2015 4.18
Properties
ALI 44.50 49.33 42.90 24/05/2017 38.95
MBT 81.40 93.50 81.30 21/07/2016 92.50
Banks
SECB 173.00 205.00 178.30 19/11/2018 146.50
DNL 11.50 10.90 9.50 23/11/2017 10.68
Consumer MAXS 12.20 19.90 17.30 17/01/2019 11.88
SSI 2.26 3.20 2.80 17/01/2019 2.37
Gaming BLOOM 12.18 13.74 11.90 24/05/2017 9.54
Conglomerates AC 942.00 1075.00 934.80 1/12/2017 1007.00
Cement CHP 2.39 3.10 2.70 17/08/2018 2.39
Airline CEB 85.75 99.00 86.10 17/01/2019 80.50

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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

ANDY DELA CRUZ JOHN MARTIN LUCIANO FRANCES ROLFA NICOLAS

SENIOR RESEARCH ANALYST SENIOR RESEARCH ANALYST RESEARCH ANALYST
andy.delacruz@colfinancial.com john.luciano@colfinancial.com rolfa.nicolas@colfinancial.com

JUSTIN RICHMOND CHENG ADRIAN ALEXANDER YU

RESEARCH ANALYST RESEARCH ANALYST
justin.cheng@colfinancial.com adrian.yu@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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