Its More Fun Investing in the Philippines

Comparative Performance (YTD)

130
PSEi, 18.5%

120 110 100 90 80 Jun Jan Feb Mar Apr

Source: Bloomberg S&P500, 8.4% SH Comp, -1.4%

Philippine stock market managed to perform well despite all the bad news that came out of the US, Europe and China.

Euro Stoxx 50, -5.6%

May

Jul

Philippine Economy: So Far So Good

2007 Philippines US Euro zone China 6.6 1.9 0.6 11.4

2008 4.2 -0.3 -0.6 9.2

2009 1.1 -3.5 -0.6 8.5

2010 7.7 3.0 0.5 10.4

2011 5-yr Ave 1Q12 3.9 1.7 0.2 9.3 4.7 0.6 0.0 9.8 6.4 2.0 0.0 8.1

Philippine Economy: So Far So Good

1Q GDP Growth Drivers Consumer Spending Government Spending Exports +6.6% +24.0% +7.9%

Outlook Remains Favorable

Consumer spending growth to remain resilient

Government ready and willing to spend

PPP projects gaining momentum

Mining industry ensuring sustainable growth

Consumer Spending Growth to Remain Resilient

OFW Remittances (US$Bil)
25.0 20.0 15.0 10.0 5.0 0.0 14.2% 12.8% 10.1% 25.0% 19.4% 13.7% 13.2% 30.0% 25.0% 20.0% 15.0% 12,000 10,000 8,000 6,000 4,000

BPO Revenues (US$ Mil) 11,000

9,000 7,200 6,061 4,875

10.0% 8.2% 7.2% 5.6% 5.0%

5.3%

3,257 2,420 2,000 1,475 0

2004 2005 2006 2007 2008 2009 2010 2011

20022003200420052006200720082009201020112012

0.0%

Source: BSP

Source: BPAP

OFW remittances and BPO revenues continue to increase. . .

Consumer Spending Growth to Remain Resilient

Daily Minimum Wages (in US$) Cambodia Vietnam Indonesia China Thailand Philippines Taiwan Hong Kong South Korea Japan New Zealand Australia
Source: DOLE

2.03 2.20 2.93 3.99 6.92 9.36 19.69 28.87 30.71 64.86 66.53 123.71

. . . thanks to the significant wage differential

Consumer Spending Growth to Remain Resilient

Favorable Demographics
Population Growth Median Age 1.9% 22.9 80 70 60 50 40 30 20 10 0 10.0 5.0

Age-Sex Population Pyramid (in Millions)

Age
0 15 16 65 Above 65

% of Population
34.6% 61.1% 4.3%

Female Male

0.0

5.0

10.0

Source: CIA World Fact Book

Young and growing population to ensure continuous growth in consumer spending

Consumer Spending Growth to Remain Resilient

CRB Commodity Index
600

Falling commodity prices to give spending power a boost

550

500

450

400 Jul-11
Source: Bloomberg

Nov-11

Mar-12

Jul-12

Government Ready and Willing to Spend

Debt to GDP
85 80 75
72.5 65.7 77.7 78.2 71.4

Government Finances improving

70 65 60 55 50 45 40
64.6

63.9 57 57.3

55.8

55.4 50.9

50.5 48.6

200020012002200320042005200620072008200920102011 2012F 013F 2

Source: DBM

Government Ready and Willing to Spend

Budgeted & Actual Spending for 2012
2012 Target Value (PhpBil) Revenue Expenditures Budget Deficit
Source: DBM

YTD ending May Value (PhpBil) 654.6 668.4 (22.8) % Growth 11.6% 13.1% NA

% Growth % of GDP 14.8% 18.1% 41.1% 14.2% 17.0% (2.6%)

1,560.0 1,839.0 (279.1)

Department of Budget and Management already released Php1.36 Tril or 74.9% of the 2012 National Budget as of June 30, 2012

Government Ready and Willing to Spend

2013 Budget Highlights
Value (PhpBil) Total Spending Infrastructure Economic & Social Services Debt Services
Source: DBM

% Growth 10.5% 20.8% 14.9% 0.2%

2,006.0 409.8 1,209.3 333.9

Government expenditure set to increase by another 10.5% in 2013, with infrastructure spending up by 20.8%

Government Ready and Willing to Spend

Budget Preparation & Legislation Flow Chart
Budget Preparation
1. 2. 3. 4. 5. 6. 7. Budget Call Stakeholder Engagement Technical Budget Hearings Executive Review Consolidation, Validation and Confirmation Presentation to President and Cabinet The Presidents Budget

Strong likelihood of another early enactment of the budget in 2013.

Budget Legislation
1. 2. 3. 4. 5. 6. House Deliberations We are Here Senate Deliberations Bicameral Deliberations Ratification and Enrollment Veto Message Enactment

PPP Projects Gaining Momentum

PPP Process Flow Chart

Step 1: Step 2:

Business Case/Feasibility Study Preparation Project Review & Evaluation NEDA-ICC Approval

Step 3: Step 4: Step 5:

For Publication of Invitation to Pre-Qualify & Bid Bidder Due Diligence Award of Project

* Step 3 to 5 will take 6 months based on government estimates

PPP Projects Gaining Momentum

PPP Projects with High Probability of Award in 2H12

Project School Infrastructure Project LRT Line 1 South Extension and Operation & Maintenance NAIA Expressway Project (Phase II) NLEX-SLEX Connector Road
Source: PPP Center, COL Estimates

Value (PhpBil) 10.04 9.20 15.77 20.18 55.19

PPP Projects Gaining Momentum

Other PPP Projects
Project
CALA Expressway (Cavite & Laguna Side) Modernization of Philippine Orthopedic Center Vaccine Self-Sufficiency Project (Phase II) LRT Line 2 East Extension and Operation & Maintenance Operation & Maintenance of the Laguindingan Airport New Bohol (Panglao) Airport Development Mactan-Cebu Int'l Airport Passenger Terminal Bldg. Automatic Fare Collection System Integrated Transport System New Centennial Water Supply Source Project O&M of Angat Hydro-Electric Power Plant Balara Water Hub Grains Central Project Establishment of Cold Chain Systems Covering Strategic Areas in the Phil. Logistics Support on the Agri-Fishery Products O&M of the Puerto Princesa Airport Cebu Bus Rapid Transit Demonstration Project Improvement/Rehabilitation of the Quirino Highway Source: PPP Center, COL Estimates

Value (PhpBil)
19.69 5.52 0.45 11.90 1.80 8.00 10.15 1.80 NA 25.00 1.60 20.00 1.25 5.30 0.03 NA NA NA

112.49

PPP Projects Gaining Momentum

Potential Value of PPP Project Awards

Value (PhpBil) 2011 2012E 2013E

Source: PPP Center, COL Estimates

% of GDP 0.0% 0.5% 1.0%

2.00 55.19 112.49

Mining Industry Ensuring Sustainable Growth

Huge potential of the mining industry
9 Mil ha. out of 30 Mil ha. have high mineral potential

Mineral reserves estimated at US$1.0Tril

Aquino Government targeting US$12Bil worth of investments in the next 5 years (vs. US$4.4Bil worth of investments from 2004-2011)

Mining Industry Ensuring Sustainable Growth

Executive Order 79: Positives Outweigh Negatives
Negatives: Delays and Higher Costs No mining permits will be awarded until law on revenue sharing scheme is passed Government share in revenues to increase from 2% to 5%-7% Abandoned ores and wastes will now be bid out Positives: Sustainability is Ensured Better legislation and reduction of red tape to attract more investments Government tax revenues to increase Environmental protection emphasized Incentives for investments in higher value added processes

Abundance of Favorable Developments

S&P upgraded Philippines credit rating just one notch lower than investment grade

Bank lending grows 14.7% in May

Power consumption up 8.5% in 2Q12

Exports up 19.7% in May

We are Still in the Early Stages

No signs of excessive borrowings yet
House Debt to GDP Malaysia 75.9 South Korea 67.8 Taiwan 64.2 Hong Kong 60.3 Singapore 49.9 Thailand 26.2 China 18.7 Indonesia 13.6 India 9.1 Sri Lanka 8.3 Philippines 5.6
Source: CEIC, COL estimates

Loans to GDP
70% 60% 50% 40% 30% 20% 10% 0% 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 May-12
Source: NSCB, BSP, COL estimates

58%

31%

We are Still in the Early Stages

Investments: Still a long way to go
30%

Investments to GDP (%)

Regional Investments-toGDP Ratio Country Inv-to-GDP Philippines 22% India 31% Indonesia 32% Malaysia 20% Thailand 26% Vietnam 39%
Source: Bloomberg, BSP, NSCB, COL estimates

25% 20% 15% 10% 5% 0%

17%

Source: NSCB, COL estimates

But it wont be a Smooth Ride Up

Serious problems overseas

Valuations are not attractive

Share placements to sap liquidity

Serious Problems Overseas

US Debt ceiling Fiscal cliff Europe China Significant differences in the economic Weak exports condition of member economies Housing No flexibility in monetary policy bubble Poor access to capital markets Harsh austerity measures have to be implemented to avail of bailout funds No meaningful structural reforms have yet to be implemented Overinvestment

Valuations are not Attractive

25 20 15 10 5 0 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Source: PSE, COL Estimates

Forward PE Band

16.3 14.2 12.1

PSEi currently trading at the high end of its historical trading range

Valuations are not Attractive

Trailing PE
Philippines Thailand Vietnam Malaysia Indonesia S&P Brazil Russia India China
Source: Bloomberg, COL estimates

Forward PE
16.2 12.7 10.0 15.0 14.3 13.2 10.1 5.3 15.0 9.7

17.8 15.3 11.0 15.5 17.9 13.8 11.4 5.0 16.4 11.7

PSEi is also expensive relative to foreign markets

Share Placements to Sap Liquidity

Recent Share Placements Date June June July July July Company BDO URC ALI AC PGOLD Value (PhpBil) 43.5 7.4 13.6 6.5 6.5

Total
Source: PSE

77.5

Strategy
Stay invested Fundamentals will eventually catch up with valuations Pullbacks are opportunities to buy more Philippine economy is resilient to developments overseas Share placements are only short-term drags, as proceeds enable companies to fund expansion

Fundamentals to Catch Up with Valuations

Scenario Analysis: When will PSEi reach 10,000?
Assumptions PSEi EPS Growth Forward P/E Years to PSEi 10,000 Implied CAGR Scenario 1 10% 14X 8 8.7% Scenario 2 12% 16X 5.5 12.9% Scenario 3 15% 18X 3.5 20.9%

Proceeds of Share Placements to Fund Expansion

Share Placements
Company BDO URC ALI AC PGOLD Type of Share Offering Treasury shares Use of Proceeds

Rights offering Address CAR problems, to grow loan portfolio For potential acquisition and general corporate purposes To fund its expansion program including land Primary shares banking & the planned acquisition of a stake in Ortigas family's OCLP Holdings Inc. Help fund investments of up to US$1 Bil over the Treasury shares next 5 years in transport, infrastructure & power generation sectors

Secondary shares NA

Model Portfolio: Maintaining Growth Bias; Adding BDO and SMPH

FV Growth Stocks MBT BDO MPI AC AGI ALI EEI PGOLD SMPH Dividend Plays BPI RLC MWC 108.00 80.50 4.70 467.70 14.90 22.00 8.68 29.00 16.00 80.00 19.90 29.00 Buy Date 5-Jan-12 25-Jul-12 5-Jan-12 5-Jan-12 5-Jan-12 5-Jan-12 30-Mar-12 11-Jun-12 25-Jul-12 5-Jan-12 5-Jan-12 5-Jan-12 Buy Price 70.70 61.25 3.66 333.00 10.66 15.30 6.07 24.60 13.26 56.60 11.58 21.50 Current Price 95.30 61.25 4.12 415.00 11.52 19.94 6.86 25.90 13.26 72.00 18.80 25.25 Current Return 34.8% 12.6% 24.6% 8.1% 30.3% 13.0% 5.3% 27.2% 62.3% 17.4% Buy Below Price 94.00 70.00 4.08 407.00 12.80 19.12 7.55 25.22 13.90 69.50 17.30 25.20

Summary: Its More Fun Investing in the Philippines

The Philippine stock market has done well so far this year. It should continue to do well in the future due to its resilient consumers, the governments ability and willingness to spend, and the growing momentum of PPP projects among other things.

There are also no signs of a bubble yet given the absence of excessive borrowings and investments.

Summary: Its More Fun Investing in the Philippines

It wont be a smooth ride up however due to serious problems prevailing overseas, expensive valuations, and numerous share placements that are sapping liquidity.

Nevertheless, investors should stay invested.

Fundamentals should eventually catch up with expensive valuations, allowing share prices to continue going up.

Summary: Its More Fun Investing in the Philippines

Meanwhile, pullbacks brought about by developments overseas and share placements are opportunities to buy more stocks. We are confident that the Philippines will remain resilient to developments overseas, while share placements allow companies to raise funds to finance their expansion plans. Given our favorable view on growth, our model portfolio is comprised mostly of growth stocks (MBT, MPI, AC, AGI, ALI, EEI and PGOLD). We also have some high dividend yielding stocks in our portfolio. These stocks will continue to be in favor given the low interest rate environment (BPI, RLC and MWC).

Summary: Its More Fun Investing in the Philippines

We also added BDO and SMPH in our model portfolio. BDOs stronger capital base should enable it to resume the rapid growth of its lending portfolio and allow profitability to reach new highs starting 2015. Valuations are also attractive. SMPH should be a major beneficiary of the favorable growth outlook for consumer spending in the country given its dominant leadership position in the mall leasing business.