WED 11 JAN 2023

Top Story:

Property Sector 2023 Outlook: Preferring defensive plays as interest rates

stay high

Other News:

MPI: Maynilad to spend Php19Bil on new sewer lines

MPI: NLEX to begin third Candaba viaduct project and to complete
connector’s first section
Economy: BSP sees 25-50 bps hike in Feb. meeting
November trade deficit widens to US$3.68Bil

Market Summary:

The local bourse closed lower on Tuesday on profit-taking ahead of the release of US
inflation data for December.

The PSEi shed 33.55 points or 0.49% to close at 6,756.69. The top decliners were ACEN
(-3.95%), ALI (-2.28%), AEV (-1.67%), MONDE (-1.44%), MEG (-1.43%), and URC (-1.43%).
On the other hand, the top gainers were MPI (+7.78%), ICT (+2.53%), TEL (+1.49%), SM
(+0.39%), and JGS (+0.18%).

Value turnover rose from Php6.4Bil to Php20.6Bil, boosted by block sales of BPI shares
amounting to Php14.9Bil. Meanwhile, net foreign selling reached Php163.0Mil, reversing
the Php283.8Mil net buying on Monday.

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

WED 11 JAN 2023

Top Story:

Richard Laneda, CFA Property Sector 2023 Outlook: Preferring

Senior Research Manager
defensive plays as interest rates stay high
Ayala Land, Inc.
Inflation to keep interest rates high
BUY
PHP40.00
Interest rates in the Philippines will remain high this year as the fight on inflation continues.
Filinvest Land Inc. The fight on inflation has been led by the US Federal Reserve as it hiked its benchmark
HOLD
rates by 425 bps in 20222 to 4.50%. In response to rising inflation and the aggressive
PHP0.90
move the by Fed, BSP has also increased its benchmark rates by 350 bps to 5.5%.
Megaworld Corporation
BUY Exhibit 1. US and Philippine benchmark interest rates
PHP4.28

Robinsons Land Corporation

BUY
PH26.00

SM Prime Holdings, Inc.

BUY
PHP40.50

Vista Land & Lifescapes

BUY
PHP2.97

Source: Bloomberg

This year, we expect some more rate hikes and for interest rates to remain high. In its
December meeting, Fed officials viewed inflation rate as “unacceptably high” due to the
tight labor market and expressed the need to keep restrictive policy in place with no rate
cuts in 2023. The most recent Fed minutes showed that officials expect rates to increase
to 5.1% or higher this year, up from 4.5% in the prior round of forecasts in September.

The hawkishness of the Fed and high inflation readings in the Philippines will force the
BSP to continue raising rates this year. This means our domestic monetary policy will
remain tight this year, which is a headwind for the real estate sector.

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The possible positive surprise to interest rates is a sharp downturn in some countries’
economic activity, which could prompt their central banks to pivot later this year.

Economic growth to slow

With most major economies facing high inflation and interest rates and fiscal tightening,
global economic growth is expected to slow down, with numerous countries going into a
recession. Based on consensus forecast, Philippine GDP growth is expected to slow down
from 7% in 2022 to 5.5% in 2023.

Residential segment most at risk

The increase in the central bank’s benchmark rate has inevitably led to higher mortgage
rates. In 2022, mortgage rates increased by around 200 bps for 5-year and 10-year
loans. We estimate that for every 100 bps increase in the home loan rate, the monthly
amortization increases by around 2.45% for 5-year loans and around 4.5% for 10-year
loans. This reduces the affordability of housing for buyers availing of bank loans, which
comprises most of the market.

For 2022, higher interest rates did not lead to a steep drop in take-up sales as higher
demand brought about by the reopening of the economy had a bigger impact on take-
up sales. In the first nine months of last year, take-up sales value grew 20.8% Y/Y. We note
that last year’s sales also benefited from strong overseas demand as the depreciation of
the peso made real estate more affordable to families receiving dollar remittances.

However, we do not expect the peso to depreciate sharply against the dollar this year.
Coupled with the deteriorating global economic outlook, overseas sales could see a
slowdown this year. Local sales are also expected face challenges brought about by
higher prices of basic goods, higher mortgage rates, and slower economic growth.

Apart from risk on the sales side, revenues growth of property developers’ residential
development businesses will continue to slow due to the lengthening payment terms.
In the last two years, developers stretched their payment terms to entice more buyers
are inventory levels were rising. While most developers have started to shorten their
payment periods, they are still far from pre-pandemic levels. This means that residential

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units sold since the pandemic started will take a lot longer to book, which in turn will
lead to slower top line growth. Also, the stretched payment terms mean developers need
to put more of their own capital to work during the construction period. This puts some
strain on the balance sheet of smaller developers like FLI.

High office inventory to keep rates subdued

Net take-ups to grow

In 2022, net take-up of the office leasing segment turned positive after two years of
contraction due to the pandemic and the departure of POGOs. Take-ups were driven by
the IT-BPM segment and robust demand from the traditional office segment.

This year we should see growth in office take-up to continue despite calls for more
workplace flexibility among IT-BPM players. Based on the trend of increasing IT-BPM
headcount per year, Leechiu Property Consultants (LPC) projected that office space
demand from the said sector could reach more than 400,000 sqm per year. This already
conservatively assumes that 40% of the headcount is on a work-from-home setup. For
reference, according to LPC, total IT-BPM office gross take-up reached 466,000sqm in
2022. Its highest level reached 658,000sqm in 2018. Meanwhile, the traditional office
segment should remain robust in 2023 and register higher net take-up.

In addition to higher gross take-ups, office contractions peaked in late 2020 and has
been on a downtrend since. We do not expect to see a sudden increase in office space
contractions this year.

Vacancy rate to inch up

Despite the positive outlook on demand and take-ups, the office segment in general will
continue to see higher vacancy rates this year primarily due to scheduled completion of
more projects. Colliers is forecasting a 20.5% vacancy rate in Metro Manila for 2023 (up
from 19.5% in 2022 and 15.7% in 2020). Makati and Pasay have the highest vacancy rates
as 22%, followed by Ortigas as 17%. The vacancy rate should peak this year given the
lower new supply expected to be completed in 2024 and 2025.

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Lease rate under pressure

The high level of vacancy rate in Metro Manila will put pressure on lease rates across
all segments. In previous years, we expected PEZA-accredited spaces to remain resilient
given the lack of new supply in Metro Manila. However, with the Fiscal Incentives Review
Board or FIRB resolution of allowing firms registered with PEZA to shift their registration
to the Board of Investments or BOI (while enjoying most of the same incentives),
PEZA-registered space could lose its premium as BOI registered firms have no location
restrictions.

Revenues to grow due to new inventory

While overall picture looks bleak, we expect office leasing revenues of listed developers
to grow this year due to contribution of new spaces added last year and those to be
added this year. Also, rents of existing tenants usually have built-in escalations annually.
We expect renewal rate of expiring leases to remain high as they usually have been
before the pandemic. We forecast office revenues to grow an average of 6.4%, slower
than the 9.4% growth for 9M22.

Mall recovery to extend into 2023

The lifting of almost all mobility restrictions late last year will continue to have a positive
impact on the mall and retail segment of the property sector. We expect higher revenues
from existing tenants and higher mall occupancy rates as retailers gain more confidence
and look to take advantage of the robust consumer spending.

Last year, the gradual lifting of mobility restrictions led to improving operations of mall.
As of 3Q22, operational GLA improved to more than 80% of pre-COVID levels, foot traffic
was around 80-90% of pre-COVID level, and tenant sales were almost at par with pre-
COVID levels. We believe 4Q22 numbers will show that foot traffic and tenant sale have
exceeded 4Q19 levels.

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 DAILY NOTES I PHILIPPINE EQUITY RESEARCH

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We expect the improving trend of consumer spending to continue in 2023. This would
not only lead to higher variable rent revenues for the malls, but the strong foot traffic
and appetite to spend will lead to higher occupancy rates and higher operational GLA for
malls, leading to further improvement in revenues.

In 2023, we expect mall revenues to grow by an average of 25% Y/Y, slower than the
9M22 growth of 86.7% as there will be no more low base effect this year.

Prefer defensive plays; RLC over SMPH

Given the rising interest rate environment and gloomy global economic outlook, we
prefer companies with higher level of recurring income, over companies that have a
higher level of real estate sales, given the downside risk on the property development
segment.

Based on the latest nine-month revenue breakdown of top developers, RLC has the least
exposure on the property development business and biggest exposure on mall and
offices combined, followed by SMPH.

Exhibit 2. Revenue breakdown (9M22)

*Excludes revenues from China

Source: ALI, SMPH, MEG, RLC

Although we like both RLC and SMPH as defensive plays, we prefer RLC over SMPH
given the former’s deep discount to NAV and significant upside to our fair value
estimate. Our fair value estimate on RLC of Php26.00 implies a 75% upside from the
current price of Php14.86. Moreover, the recent weakness in RLC is largely related to the
upcoming rebalancing of the PSE Composite Index in February wherein RLC is expected
to be removed. We advise investors to take advantage of this and any further weakness
following the announcement of the rebalancing.

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Exhibit 3. Upside to FV estimate

Source: COL

Other News:

Research Analysts MPI: Maynilad to spend Php19Bil on new sewer lines

Frances Rolfa Nicolas
Maynilad, a unit of MPI, is targeting to spend Php19Bil in the next 5 years for the
Denise Joaquin
installation of 121km of new sewer lines as part of the expansion of its sewerage services.
Carlos Matthew De Leon
The new pipelines will be laid in portions of Manila, Muntinlupa, Valenzuela, Bacoor,
Charmaine Co
Las Piñas, Caloocan, and Quezon City. The company noted that the new lines will catch
used water generated by 2.1Mil customers, which will then be treated under Maynilad’s
sewerage treatment plants for proper discharge. Maynilad currently operates up to
625km of sewer lines, and about 22 wastewater treatment facilities that can treat 664Mil
liters of wastewater per day. (source: Businessworld)

MPI: NLEX to begin third Candaba viaduct project and to

complete connector’s first section

MPTC unit NLEX Corp. said it is planning to start the implementation of its Candaba
Third Viaduct project in 1Q23. The project, which will expand the 5km bridge, is expected
increase the maximum speed at the viaduct from 60kph to 80kph. Other projects in NLEX
Corp’s pipeline include the construction of new expressway lanes from San Fernando in
Pampanga to Subic-Clark-Tarlac Expressway (SCTEX) Spur in Mabalacat, as well as an 8km
connector project from Caloocan Interchange on C3 Road to Sta. Mesa in Manila. NLEX
Corp. added that the first section between Caloocan and España is 94% complete and
is set to open within 1Q23 while the second section connecting España and Sta. Mesa is
29% complete. (Source: BusinessWorld)

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Economy: BSP sees 25-50 bps hike in Feb. meeting

BSP governor Felipe Medalla said the central bank is likely to raise the benchmark
rate by 25 or 50 bps at its meeting on February 16 to anchor inflationary expectations.
Meanwhile, he added that the pressure to match the US Federal Reserve’s moves has
waned, citing the recent strength of the peso. The BSP expects inflation to be within
the target 2-4% range by the middle of this year, and fall below 3% by late 2023 or
early 2024. Despite expectations of cooling inflation, Medalla reiterated that monetary
tightening will continue until inflationary pressures are addressed. (Source: BusinessWorld)

November trade deficit widens to US$3.68Bil

The Philippines’ trade deficit widened to US$3.68Bil in November, as export growth

slowed and imports declined for the first time in nearly two years. Data from the Philippine
Statistics Authority (PSA) showed that the value of merchandise imports slipped by 1.9%
y/y to US$10.78Bil in November, a reversal of the revised 7.7% growth in October and
the 36.8% rise in November 2021. Exports, on the other hand, jumped by 13.2% y/y to
US$7.10Bil in November, slower than the revised 20.3% growth in October but faster
than 6.6% in November 2021. This brought the trade-in-goods deficit — the difference
between exports and imports — to US$3.68Bil in November, narrower than the US$4.71Bil
shortfall in the same month in 2021. Year-to-date, exports grew by 7% y/y to US$73.17Bil,
faster than the revised 4% growth target set by the Development Budget Coordination
Committee (DBCC). Meanwhile, imports climbed by 20.3% y/y to US$126.86Bil, matching
the government’s 20% growth target for 2022. All in all, this brought the the trade deficit
to US$53.69Bil in the January-to-November period, widening from the US$37.11Bil gap
in 2021. (Source: BusinessWorld)

Changes in Shareholdings
Date of Acquired or Price per
Stock Volume Person (Designation)
Disclosure Disposed share
Alexander C. Yu
10-Jan COL 2,000 A 3.21
(Vice Chairman)
211,000 0.94
Edward K. Lee
10-Jan CTS 216,000 A 0.95
(Chairman)
37,000 0.97
Source: PSE

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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

FIRST VICE PRESIDENT & CHIEF EQUITY STRATEGIST
april.tan@colfinancial.com

CHARLES WILLIAM ANG, CFA GEORGE CHING RICHARD LAÑEDA, CFA

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

FRANCES ROLFA NICOLAS DENISE JOAQUIN CARLOS MATTHEW DE LEON

RESEARCH ANALYST RESEARCH ANALYST RESEARCH ANALYST
rolfa.nicolas@colfinancial.com denise.joaquin@colfinancial.com matthew.deleon@colfinancial.com

CHARMAINE CO
RESEARCH ANALYST
charmaine.co@colfinancial.com

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

24/F EAST TOWER, TEKTITE TOWERS,
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. 9