Foreign risk exposure Chinas economy has been expanding and is projected to grow on a sustainable basis and with

this, disposable income per capita will also rise. In fact, the Chinese National Bureau of Statistics reported that annual per capita disposable income of urban residents increased by 11.3% in 2010 compared to 2009, while rural residents disposable income grew by almost 15%. SM are spending Php9.0 billion in 2011. Of this amount, Php4.5 billion (US$100.0 million) will be from the proceeds of the equity placement done by SM Prime last October 2010, and the balancewill be from long-term debt Foreign Currency Risk The Groups exposure to foreign currency risk arises as the Parent Company and SM Prime have significant investments and debt issuance which are denominated in U.S. dollars. To manage its foreign exchange risk, stabilize cash flows and improve investment and cash flow planning, the Group enters into foreign currency swap contracts, foreign currency call options, non-deliverable forwards and foreign currency range options aimed at reducing and/or managing the adverse impact of changes in foreign exchange rates on financial performance and cash flows. As of December 31, 2010 and 2009, approximately 46.4% and 48.9%, respectively, of the Groups total consolidated bank loans and debt were denominated in US dollars. Thus, a strengthening of the Philippine peso against the US dollar will decrease both the principal amount of the foreign currency denominated debt and interest expense on the Groups debt in Philippine peso terms. The Group has recognized in its consolidated statements of income, foreign exchange gain of 407.2 million, 224.0 million and 3.0 million on its net foreign-currency denominated assets and liabilities for the years end. Performance in China The three operating malls in China are extremely doing well. Revenues is up to 36% in 2010 compared to 2009, while occupancy levels have increased to over 90% in all malls. We also expanded our Xiamen mall and opened the Xiamen Lifestyle Center attracting a lot of international brand tenants like Zara, Muji, Starbucks, Toys R Us and Brooks Brothers. We expect these malls to generate double digit growth over the next 2-3 years. The driving consumption growth in China The rising disposable income in China due to the rapid pace of urbanization will be the main factor in driving consumption growth in the areas where we have shopping malls and where we plan to expand. Competition in China

The SM malls in China are located in the second and third tier cities and competition is not as intense yet as those in first tier cities like Shanghai or Beijing. Although we expect that competition will intensify in the long term, we should have the first mover advantage and the SM brand should be well-established by the time other developers consider these locations. Our management expertise and experience in retail operations should enable us to be the leaders in shopping center developments. Ability to develop new products in a timely, cost effective manner Sm company depends on the new product like M Place because it gives SM other income. M Place gives a good impact on company SM company because it become successful project. A strong pickup occur when M Place is introduce. The strategy of SM is to generate longterm sales. It is like a appliance which is deliberately designed to near cut with five year of its purchase, pushing consumer to replace it within five years. M Place information This product is primarily intended to cater to the needs of those who are just starting out in their career and those who wish to be different, as this will allow for the pursuit of artistic inclinations as regards their own individuality. The SM has been relatively happy with the market acceptance of the product. SM are very optimistic that as the market fully appreciates its value proposition, a strong pick up will occur given its distinct advantage of being located in the city. Financial Risk The Groups principal financial instruments, other than derivatives, comprise of bank loans, long-term debt, AFS investments, investments held for trading, time deposits and short-term investments and cash and cash equivalents. The main purpose of these financial instruments is to raise financing for the Groups operations. The Group has other financial assets and liabilities such as receivables and accounts payable and other current liabilities, which arise directly from its operations. The Group also enters into derivative transactions, principally, cross currency swaps, interest rate swaps, foreign currency call options, non-deliverable forwards and foreign currency range options. The purpose is to manage the interest rate and currency risks arising from the Groups operations and its sources of finance. The main risks arising from the Groups financial instruments are interest rate risk, foreign currency risk, liquidity risk, credit risk and equity price risk. Interest Rate Risk Fixed rate financial instruments are subject to fair value interest rate risk while floating rate financial instruments are subject to cash flow interest rate risk. Repricing of

floating rate financial instruments is mostly done at intervals of three months or six months. The Groups policy is to manage its interest cost using a mix of fixed and variable rate debts. The Groups guideline is to keep between 50% to 60% of its borrowings at fixed rates of interest. To manage this mix in a cost-efficient manner, the Group enters into interest rate swaps, in which the Group agrees to exchange, at specified intervals, the difference between fixed and variable rate interest amounts calculated by reference to an agreed-upon notional principal amount. These swaps are designated to economically hedge the underlying debt obligations. As of December 31, 2010 and 2009, after taking into account the effect of interest rate swaps, approximately 67% and 60%, respectively, of the Groups borrowings are kept at a fixed rate of interest, considering market conditions.

Liquidity Risk Liquidity risk arises from the possibility that the Group may encounter difficulties in raising funds to meet commitments from financial instruments or that a market for derivatives may not exist in some circumstance. The Group seeks to manage its liquidity profile to be able to finance capital expenditures and service maturing debts. To cover its financing requirements, the Group intends to use internally generated funds and proceeds from debt and equity issues and sales of certain assets. As part of its liquidity risk management program, the Group regularly evaluates its projected and actual cash flow information and continuously assesses conditions in the financial markets for opportunities to pursue fund-raising initiatives. These initiatives may include bank loans, export credit agencyguaranteed facilities and debt capital and equity market issues. The Groups financial assets, which have maturities of less than 12 months and used to meet its short-term liquidity needs, include cash and cash equivalents, current portion of time deposits and short-term investments, investments held for trading and current portion of AFS investments-bonds and corporate notes amounting to 66,961.0 million, 876.8 million, 444.7 million and 1,000.0 million, respectively, as of December 31, 2010. Credit Risk The Group trades only with recognized, creditworthy related and third parties. It is the Groups policy that all customers who wish to trade on credit terms are subject to credit verification procedures. In addition, receivable balances are monitored on a regular basis which aims to reduce the Groups exposure to bad debts at a minimum level. Given the Groups diverse base of customers, it is not exposed to large concentrations of credit risk. With respect to credit risk arising from the other financial assets of the Group, which comprise of cash and cash equivalents, time deposits and short-term investments, investments held for trading, AFS investments and certain derivative instruments, the Groups exposure to credit risk arises from default of the counterparty, with a maximum

exposure equal to the carrying amount of these instruments, without considering the effects of collateral. Since the Group trades only with recognized related and third parties, there is no requirement for collateral. Equity Price Risk The Groups exposure to equity price pertains to its investments in quoted equity shares which are either classified as investments held for trading and AFS investments in the consolidated balance sheets. Equity price risk arises from the changes in the levels of equity indices and the value of individual stocks traded in the stock exchange. The Group has no equity risk exposure on stocks that are not traded. Capital Structure Capital Structure This company's capital structure relies on a level of debt that is comparable with the Real Estate Management and Development industry's norm, despite its rise during the last fiscal year to 44.48%. Additionally, there are enough liquid assets to satisfy current obligations.

Currency in Millions of Philippines Pesos Assets Cash And Equivalents Trading Asset Securities TOTAL CASH AND SHORT TERM INVESTMENTS Accounts Receivable Other Receivables TOTAL RECEIVABLES Other Current Assets TOTAL CURRENT ASSETS Gross Property Plant And Equipment Accumulated Depreciation

Sep 30 As 2011 of: PHP

Dec 31 2011 PHP

Mar 30 2012 PHP

Jun 30 2012 PHP

9,542.2 800.6

8,290.2 813.0

--9,103.2 --------

12,496.8 747.1 13,243.9 3,773.5 995.6 4,769.0 2,718.7 20,731.6 144,257. 2 29,123.2

10,342.7 9,103.2 3,204.6 751.3 3,955.9 1,940.3 4,022.0 930.9 4,953.0 2,140.4

16,239.0 16,196.5 128,564. 8 26,319.8 135,135. 4 27,299.2

NET PROPERTY PLANT AND EQUIPMENT Deferred Tax Assets, Long Term Other Long-Term Assets TOTAL ASSETS

102,245. 107,836.2 -0 276.6 3,594.9 123,542. 0 254.1 3,153.9 128,556. 4 ----

115,134.0 216.1 3,798.8 140,880. 5

LIABILITIES & EQUITY Accounts Payable Accrued Expenses Current Income Taxes Payable Other Current Liabilities, Total TOTAL CURRENT LIABILITIES Long-Term Debt Minority Interest Deferred Tax Liability Non-Current Other Non-Current Liabilities TOTAL LIABILITIES Common Stock Additional Paid In Capital Retained Earnings Treasury Stock Comprehensive Income And Other TOTAL COMMON EQUITY TOTAL EQUITY TOTAL LIABILITIES AND EQUITY 4,184.2 4,059.4 394.3 679.9 9,996.8 39,975.2 745.3 1,273.3 10,503.4 4,914.7 3,514.0 623.0 1,721.6 11,572.4 40,093.5 573.1 1,258.5 11,285.2 ---------------4,358.2 4,784.0 489.0 1,510.9 12,034.1 51,299.9 770.4 1,261.5 11,134.9 75,730.4 17,392.5 8,219.1 38,285.0 -101.5 584.5

61,748.7 64,209.6 13,917.8 8,219.1 38,222.1 -101.5 790.6 13,917.8 8,219.1 40,865.6 -101.5 872.7

61,048.0 63,773.7 61,793.3 64,346.8 123,542. 0 128,556. 4

63,773. 64,379.6 7 64,346. 65,150.1 8 -140,880. 5