Philippines Property

Philippines Real Estate 25 June 2018

Initiation: sustained momentum in the residential segment boosting rental expansion

 We see sustained confidence among property buyers amid increased visibility on infrastructure development and robust economic growth  We think concerns over office-space demand relating to a BPO Micaela Abaquita slowdown and automation are overdone. (63) 2 7373021 [email protected]  We initiate with a Positive call; top picks are Ayala Land and Vista

Land, given their strong brand equity and track records

Investment thesis: We initiate on the Philippines Property sector with a Key stock calls Positive rating amid an improved residential outlook, aggressive rental New Prev. expansion, and a healthy leasing environment, which we see driving an Ayala Land (ALI PM) aggregate core earnings CAGR across our coverage of 13.2% for 2017- Rating Buy Outperform 20E. Our top sector picks are Ayala Land and Vista Land as we think their Target 50.00 49.00 strong brand equity and proven track records will help to sustain their Upside p 33.2% attractive long-term prospects. Vista Land & Lifescapes (VLL PM) Rating Buy Buy We believe that optimism in the residential property market will persist Target 8.30 8.00 through 2018, as we see the drivers that allowed pre-sales to exceed Upside p 27.9% expectations in 2017 remaining intact, including: 1) a resurgence in Megaworld (MEG PM) confidence among locals amid the government’s commitment to accelerate Rating Buy Buy infra development and improve the business climate, 2) the development of Target 5.50 5.30 Upside p 23.6% new economic centres beyond Makati and Bonifacio Global City (BGC), Filinvest Land (FLI PM) leading to new employment opportunities and fresh residential demand, Rating Buy Buy and 3) a strong expat market, including demand from Chinese nationals. Target 2.20 2.15 Upside p 41.9% Meanwhile, developers continue to pursue their aggressive leasing SM Prime (SMPH PM) expansion plans. We see office-space demand being supported by healthy Rating Hold Underperform Business Processing and Outsourcing (BPO) industry growth, especially Target 34.00 34.00 from the expansion of existing locators, sustained momentum of Philippine Upside p 2.3%

offshore gaming companies (POGOs) for at least the next 12 months, and Source: Daiwa forecasts increased entrepreneurial activity as the Philippine economy expands. We believe that concerns over the impact of Artificial Intelligence on office- space demand are overdone. We expect that higher-value jobs created by the adoption of new technologies will require office space larger than that of low-value roles and also exceed the job losses resulting from automation.

We raise our 2018-19E EPS forecast for ALI by 7-8% on the back of better- than-expected pre-sales over the past 5 quarters. We also lift our 2019-20E EPS forecasts for FLI by 0.4-1.2% as we update its office pipeline.

Catalysts: Accelerated infrastructure development, regulations supportive of BPOs and POGOs, and industry liberalisation creating office demand.

Valuation: We roll-over our valuations to average 2018-19E NAV per share and re-affirm our Buy (1) ratings on Vista Land, Megaworld and Filinvest Land. We also upgrade our ratings on Ayala Land to Buy (1) from Outperform (2) and SM Prime to Hold (3) from Underperform (4) following the recent market sell-off. Most of our covered stocks are trading at discounts considerably wider than their historical averages despite better- than-expected pre-sales and growing recurring income contribution.

Risks: A sharp increase in interest rates, delays in project construction, restrictive regulations on BPOs and POGOs, and slowdown in remittances.

See important disclosures, including any required research certifications, beginning on page 54

Philippines Property: 25 June 2018

How do we justify our view? Growth outlook Valuation Earnings revisions

Growth outlook Philippines Property: 2017-20E core net income CAGR (%)

We forecast for core aggregate net earnings of the (% ) Philippines property companies under our coverage to 25 21.0 expand at a 2017-20E CAGR of 13.2%, driven by 12.0% 18.0 20 17.4 16.9 residential revenue and 14.1% rental revenue CAGRs over 15.0 13.9 14.0 13.7 the same period. We see healthy property demand 15 13.613.1 10.7 sustained by continued confidence among local buyers 9.6 10 amid rising incomes and increasing visibility of infrastructure development. Meanwhile, we see rental 5 revenue growth, aided by developers’ continued expansion 0 of mall and office space, especially as they build new Ayala Land Filinvest Land Megaworld SM Prime Vista Land Aggregate mixed-use communities in new growth areas within and 2018 2017-20E outside of Metro Manila. Source: Companies, Daiwa Note: Core net income attributable to equity holders of the parent

Valuation Philippines Property: discount to NAV Property companies under our coverage trade at varying 80 discounts to NAV with companies that have a higher share 70 60 of recurrent income, and therefore more earnings visibility, 60 50 50 trading at the narrower end of the spectrum (ie, SM Prime), 50 while companies with large landbanks, especially in more 40 rural areas, trading at a wider discount to NAV (ie, Vista 30 20 Land and Filinvest Land). With the exception of SM Prime, 15 20 which we find expensive at the current share price, we 10 think property companies are currently undervalued and 39 72 59 17 61 0 should trade closer to their 5-year historical averages on Ayala Land Filinvest Land Megaworld SM Prime Vista Land the back of an improved residential outlook and growing Discount to NAV Target discount to NAV contribution of recurrent income. Source: Daiwa

Earnings revisions Philippines Property: 12-month EPS revisions

The street has upgraded its EPS estimates for property 15 11.8 companies under our coverage by 1.2% to 4.6% for 2018, 10 with the exception of Filinvest Land, which saw a 6.2% 4.5 4.5 4.3 4.6 5 2.4 2.7 average downgrade as a result of a change in payment 1.2 0.8 scheme that lengthens downpayment terms and therefore 0 the time before revenue recognition. The upgrades were -1.3 -0.5 -1.1 (5) largely due to an improvement in the residential outlook -6.2 (10) -7.1 following better-than-expected pre-sales since 4Q16. Ayala -9.1 Land, Megaworld and Vista Land have the highest upward (15) revisions at about 4.5% for 2018. Ayala Land Filinvest Land Megaworld SM Prime Vista Land

2018 2019 2020 Source: Bloomberg

Philippines Property: 25 June 2018

Sector stocks: key indicators

EPS (local curr.) Share Rating Target price (local curr.) FY1 FY2 Company Name Stock code Price New Prev. New Prev. % chg New Prev. % chg New Prev. % chg Ayala Land ALI PM 37.55 Buy Outperform 50.00 49.00 2.0% 2.071 1.937 6.9% 2.416 2.262 6.8% Filinvest Land FLI PM 1.55 Buy Buy 2.20 2.15 2.3% 0.260 0.259 0.1% 0.313 0.312 0.4% Megaworld MEG PM 4.45 Buy Buy 5.50 5.30 3.8% 0.466 0.466 0.0% 0.532 0.532 0.0% SM Prime SMPH PM 33.25 Hold Underperform 34.00 34.00 0.0% 1.088 1.088 0.0% 1.173 1.173 0.0% Vista Land & Lifescapes VLL PM 6.49 Buy Buy 8.30 8.00 3.8% 0.779 0.779 0.0% 0.894 0.894 0.0% Source: Bloomberg, Daiwa forecasts, share prices as of 22 June 2018.

Philippine Property: aggregate pre-sales Philippine Property: aggregate launches 400 18.8 20 300 57.0 70 16.6 350 18 250 60 16 50 300 200 14 40 250 12 150 30 200 10 100 8.0 9.5 20 6.3 150 5.7 8 50 10 6 213 204 153 241 264 0 100 3.4 0 4 -4.3 (10) 50 (50) -24.8 247 261 270 315 334 2 (20) 0 0 (100) (30) 2014 2015 2016 2017 18E 2014 2015 2016 2017 18E

Aggregate (PHP bn) YoY growth (%) Aggregate (PHP bn) YoY growth (%) Source: Companies, Daiwa Source: Companies, Daiwa Note: Limited to property companies under coverage Note: Limited to property companies under coverage

Philippine Property: office gross leasable area (‘000 sqm) Philippine Property: mall gross leasable area (‘000 sqm) 4,500 10,000 4,000 155 9,000 788 368 723 3,500 155 8,000 287 658 155 7,000 3,000 287 445 147 1,508 6,000 359 4,681 2,500 287 1,351 228 4,487 115 1,218 5,000 169 200 4,292 2,000 207 0 80 4,035 207 1,010 4,000 3,871 70 684 3,647 524 1,500 124 851 684 3,185 3,287 420 361 9770 737 561 3,000 3,026 361 970 621 348 383 1,000 509 348 2,000 318 300 432 275 236 151273 239 200 208 1,098 1,321 166 134170 136170 141 2,550 2,883 500 166 921 990 1,000 134 1,806 2,088 447 500 553 591 709 1,168 1,251 1,298 1,396 1,602 0 0 2012 2013 2014 2015 2016 2017 2018E 2019E 2020E 2012 2013 2014 2015 2016 2017 2018E 2019E 2020E Ayala Land Filinvest Land Megaworld SM Prime Vista Land Ayala Land Filinvest Land Megaworld SM Prime Vista Land

Source: Companies, Daiwa Source: Companies, Daiwa Note: Limited to property companies under coverage Note: Limited to property companies under coverage

Philippines Property: 25 June 2018

Table of contents

Executive summary ...... 5 Residential: resurgence in confidence ...... 7 Metro Manila: resilient residential market ...... 7 Provincial expansion: opportunities abound ...... 14 Offices: concerns overdone ...... 19 Business Process Outsourcing ...... 19 Offshore gaming companies ...... 23 Traditional office space ...... 23 Positive on the office sector ...... 23 Good earnings growth outlook ...... 25 Valuation and risks ...... 30 Top picks ...... 30 Risks to our Positive sector view ...... 31

Company Section Ayala Land ...... 32 Vista Land & Lifescapes ...... 36 Megaworld ...... 40 Filinvest Land ...... 44 SM Prime ...... 48

Philippines Property: 25 June 2018

Executive summary

We see aggregate net We initiate coverage on the Philippines Property sector with a Positive rating. Our Positive income of developers view of the sector is reflected in our aggregate core earnings forecast CAGR of 13.2% over under our coverage 2017-20E, driven by a 12.1% CAGR in residential revenue and 14.1% CAGR in rental growing by a 13% 2017- revenue over the same 3-year period. 20E CAGR Residential: The residential pre-sales of developers under our coverage exceeded our expectations in 2017 with pre-sales rising by a combined YoY growth of 17%, driven by: 1) an overall resurgence in confidence among locals amid the government’s commitment to accelerate infrastructure development and improve the business climate, 2) a robust expatriate market, especially from Chinese nationals employed by offshore gaming companies, and 3) the development of new business centres beyond Makati and BGC, leading to new employment opportunities and fresh residential demand in these new locations.

We see overall We believe overall confidence will persist throughout 2018. President Rodrigo Duterte’s confidence persisting in strong political will has enabled the relatively speedy passage of the first package of a tax 2018 as 2017 drivers reform bill and approvals of key infrastructure projects. While we recognise that the remain intact implementation of these projects comes with execution risks, we think significant progress, especially if the pace is unprecedented, should sustain optimism among buyers, particularly in emerging CBDs that benefit from infrastructure projects. Stable mortgage rates (due to abundant liquidity in the system), despite the observed uptick in corporate bond rates, should also help support property demand, especially in the middle-income and affordable segments.

Lower inventory levels With accelerating take-up growth amid lower inventory levels, we have more confidence will likely encourage that developers will hike launches this year, supporting pre-sales and residential revenues developers to hike over 2018-19. launches, in our view

We do not see rental Office: We remain comfortable with the office sector in the next 12 months as we expect reversion despite an the BPO sector to continue to post healthy growth, especially from the expansion of uptick in vacancies existing locations; offshore gaming to continue its momentum; and entrepreneurial activity to strengthen along with economic expansion in the Philippines. Despite our forecasted uptick in vacancy (to 6% in 2018/19 from 5.3% in 2017), we are not overly concerned as we do not believe this projected increase will result in a decline in rents. Historically, we have observed such rental reversion either when vacancy spikes by 4% on a year-on-year basis, such as in 1998 and 2009, or when vacancy is sustained over 9% as in 1999 to 2003, within which vacancy reached a high of 17% in 2001. We note that these periods are accompanied by sluggish economic growth – something we do not expect for the Philippines in the medium term given a sound macroeconomic backdrop. Hence, we find the increase in vacancy more a timing issue, as the completions take some time to be absorbed, rather than signs of a fundamental imbalance.

Automation should Additionally, we think concern on the impact of Artificial Intelligence on office-space create more middle and demand is overdone. We think the adoption of new technologies will be gradual, rather high-value jobs that than abrupt. Moreover, the IT-BPO Association of the Philippines expects additional jobs require more office (mid and high-value functions) created by the adoption of new technologies to exceed job space losses (low-skilled functions) resulting from automation. Additionally, higher-value functions require larger office space than low-skilled functions (due to the nature of the work, ie, game developers or animators would require several monitors compared to contact service workers who simply require a phone), potentially offsetting the impact of low-value job cuts on office-space demand, in our view.

Philippines Property: 25 June 2018

Valuation and top picks: In this report, we roll-over our NAV-based valuations for all property companies under our coverage to the 2018-19E average.  We raise our TP for Ayala Land to PHP50 (from PHP49) as the impact of the roll-over is tempered by our expectation of delays in the completion of some of its leasing properties. We upgrade our rating to Buy (1) from Outperform (2). On our estimates, Ayala Land has the highest earnings CAGR over 2017-20E thanks to its prime, diversified landbank, strong brand equity and track record in estate development, aggressive leasing expansion and a management committed to achieving its PHP40bn 2020 goal in attributable net income.  We lift our TP for Vista Land to PHP8.3 from PHP8.0 and re-affirm our Buy (1) call as the company continues to book healthy end-user-oriented residential sales and to build its track record in mall operations.  We raise our TP for Megaworld to PHP5.5 from PHP5.3. With accelerating residential sales and healthy rental revenue expansion, we reiterate our Buy (1) call on Megaworld.  We raise Filinvest Land’s TP to PHP2.20 (from PHP2.15). We increase our applied discount to 60% (from 55%) as we expect the risk of prolonged revenue recognition from the now longer downpayment terms to weigh on its share price. We re-affirm our Buy (1) call on the back of strong potential land value accretion and a growing recurring income base.  Our TP for SM Prime remains unchanged at PHP34 after we roll-over valuation and factor in a higher cap rate amid rising interest rates. However, the recent market-wide sell-off has increased potential upside and we upgrade our rating to Hold (3) from Underperform (4). We highlight that the Manila Bay reclamation project dilutes the recurring income story of SM Prime, on which its historical narrow discount to NAV has been predicated.

We like ALI and VLL the While we have Buy (1) recommendations on most property names under our coverage most given strong brand given an improved residential outlook and strong leasing expansion, our top picks include and track records in Ayala Land and Vista Land, as we are most comfortable with the long-term prospects of execution these companies as we believe their strong brand equity and track records in building estates (for Ayala Land) and residential communities (for Vista Land) will help them perform better than peers amid varying market conditions. Both companies have strong residential and rental growth relative to comparative peers. Moreover, based on our estimates, Ayala Land has the highest earnings CAGR while Vista Land has the highest NAV CAGR over 2017-20E.

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Residential: resurgence in confidence Metro Manila: resilient residential market The Metro Manila The low interest rate environment in the Philippines over the past 8 years has fuelled property market has robust growth in the residential real estate market beginning in 2009. Since then, concerns moved in an upward of oversupply and a peaking property market have frequently beset the investing market. trajectory over the past 8 Despite this, the sector has proven resilient, moving in an upward trajectory, albeit non- years, albeit non-linearly linearly.

Average Philippine mortgage rates Mortgage rates have 16% remained stable 14% despite the recent 12% uptick in corporate 10% 9.0% bond rates 8% 8.0% 6% 5.5% 4% 2% 0% 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

5-Year 10-Year 15-Year Source: Various banks, Ayala Land

A brief history 2009-12: Metro Manila condominium boom Due to scarcity of land in Metro Manila, especially in established business districts, condominiums have become the pre-dominant format, particularly in recent years.

Metro Manila condominium unit take-up posted a 23% CAGR over 2009-12, following consecutive interest rate cuts since 2009. This was accompanied by a 22% CAGR in launches over the same period as developers turned aggressive in order to take advantage of the favourable macro environment.

Metro Manila pre-sales Metro Manila launches 75 75 60.7 65 65 59.0 52.6 52.4 53.5 55 48.2 55 42.6 40.9 45 38.1 39.6 39.6 45 36.9 32.6 33.4 34.4 34.0 35 35 30.2 22.4 25 25 15 15 5 5 (5) (5) 2009 2010 2011 2012 2013 2014 2015 2016 2017 2009 2010 2011 2012 2013 2014 2015 2016 2017 Pre-sales ('000 units) Launches ('000 units) Source: Colliers Source: Colliers

2013-15: Unit take-up declines Pre-sales growth inevitably slowed, and with launches exceeding take-up from 2009-13, residential inventory in Metro Manila rose, prompting concerns of an oversupply. In an effort to manage inventory and bring stock down to a healthier level, many developers tempered their launches and take-up declined.

Philippines Property: 25 June 2018

Metro Manila condominium market: launches and pre-sales Launches exceeded 100 take-up from 2009- 90 80 2013 70 59.0 60.7 60 52.4 53.5 52.6 48.2 50 42.6 38.1 39.6 39.6 40.9 36.9 34.4 34.0 40 33.4 32.6 30.2 30 22.4 20 10 0 2009 2010 2011 2012 2013 2014 2015 2016 2017

Launches ('000 units) Pre-sales ('000 units) Source: Colliers

Metro Manila pre-sales Metro Manila launches 75 75 65 65 59.0 60.7 52.6 52.4 53.5 55 48.2 55 42.6 40.9 45 38.1 39.6 39.6 45 36.9 32.6 33.4 34.4 34.0 35 35 30.2 22.4 25 25 15 15 5 5 (5) (5) 2009 2010 2011 2012 2013 2014 2015 2016 2017 2009 2010 2011 2012 2013 2014 2015 2016 2017 Launches ('000 units) Pre-sales ('000 units) Source: Colliers Source: Colliers

Some developers fared Big listed developers coped with the challenging Metro Manila condominium supply better than others during situation differently, with some faring better than others, depending on the location of their the challenging projects and the strength of their brand. Among listed developers, Ayala Land, Megaworld, residential market DMCI Homes (DMC PM, not rated) and SM Prime’s SM Development Corp (SMDC PM, not rated), have among the biggest exposures in the Metro Manila condominium space.

SMDC managed to post  SMDC’s projects in the Manila Bay area benefited significantly from the establishment of strong growth – thanks BPO hubs and the opening of casinos within the Entertainment City complex. These to its exposure in the developments enhanced the investment proposition of many condominium projects in Manila Bay area, where the area and it supported its 30% CAGR over the 3-year period. Note that this is gross casinos began opening of cancellations as residential revenues remained flat from 2012-15.

ALI fared better than  Ayala Land and Megaworld have the highest exposures in Makati and Fort Bonifacio, MEG, in our view, as it where most of the residential condominium developments have been. As a result of the gained market share rising inventory levels in these major CBDs, both companies started cutting launches in 2014 and 2015, respectively.

In our view, Ayala Land weathered through the supply situation better, managing to post an 11% growth in 2014 and a 3% annual growth in 2015 and 2016, despite reduced launches – thanks to strong brand equity in the upscale and high-end market. Ayala Land Premiere supported pre-sales growth as the company sold ultra-high-end condominiums at record-high prices. In 2016, the company launched the first phase of Park Central, which saw an average selling price of PHP296,000/sqm during the year. The ultra-luxury project saw strong take-up with 48% sold within the first month of its launch – a testament to Ayala Land’s strong standing in the high-end market.

Meanwhile, Megaworld’s pre-sales remained virtually flat from 2014-16 at PHP85-87bn, as the pre-sales of Megaworld’s stand-alone brand were virtually unchanged during the period. Pre-sales even declined by 16% YoY in 9M16 before rebounding significantly in

Philippines Property: 25 June 2018

4Q16 – a development that came as a surprise to the developer – and closed the year with pre-sales flat.

2017: Pre-sales growth amid renewed confidence Pre-sales rose by 27% In 2016 we saw a marked rebound in pre-sales, which for the first time in at least 7 years over 2015-17 exceeded launches. The recovery persisted in 2017 with full-year take-up rising by 29% YoY to 52,600 units (from 42,000 units in 2016). This is higher than the 34,000 units launched in the same period.

Metro Manila condominium market: launches and pre-sales Unit take-up exceeded 70 59.0 60.7 60 launches markedly in 52.4 53.5 52.6 2016 and 2017 48.2 50 42.6 39.6 39.6 40.9 38.1 36.9 40 33.4 34.4 32.6 34.0 30.2 30 22.4 20

0 2009 2010 2011 2012 2013 2014 2015 2016 2017 Launches ('000 units) Pre-sales ('000 units)

Source: Colliers

Metro Manila pre-sales Metro Manila launches 95 95 85 85 75 75 60.7 65 65 59.0 52.6 52.4 53.5 55 48.2 55 42.6 40.9 45 38.1 39.6 39.6 45 36.9 32.6 33.4 34.4 34.0 35 35 30.2 22.4 25 25 15 15 5 5 (5) (5) 2009 2010 2011 2012 2013 2014 2015 2016 2017 2009 2010 2011 2012 2013 2014 2015 2016 2017 Pre-sales ('000 units) Launches ('000 units)

Source: Colliers Source: Colliers

The rebound in pre-sales The pre-sales growth figures of Ayala Land, Megaworld and SM Prime (firms with is reflected in the take- significant residential exposures to the Metro Manila residential market) reflect the robust up of developers with take-up in 2017. These companies registered 13%, 21% and 21% YoY pre-sales growth in significant Metro Manila 2017 as they benefited from the aforementioned drivers. condominium exposure Based on our discussions with developers, property consultants and real estate sales agents, the expansion can be attributed to an overall resurgence in confidence on the back of the following:

Rising confidence amid  Optimism on the country’s economic prospects amid the government’s commitment to increased visibility of accelerate infrastructure development and improve the business climate. This has infrastructure renewed confidence among wealthy Filipinos that property, especially in prime CBDs development which has Makati and BGC, is an attractive store of value with strong potential capital appreciation. encouraged property These buyers are not necessarily speculative buyers looking for a quick profit, but have purchases excess cash and are looking to diversify their investments. This is especially common in the high-end segments where buyers are less sensitive to price and even yields.

Philippines Property: 25 June 2018

A lot of wealthy local According to real estate agents we’ve spoken to, the high-end property (for sale) market buyers seem to care remains locals-driven and many of these property buyers pay via equity (rather than more about long-term debt), hence they have holding power and care more about long-term appreciation of capital appreciation value and exposure to prime CBDs over current yields and making a quick profit. The rather than rental yields scarcity of land in these areas also prevents some of their clients from selling property in or a quick profit the secondary market on concerns that they may not be able to find another available property within the CBDs to purchase. This unique psyche, along with strong purchasing power of this market, has kept the upscale and luxury segments healthy, in our view.

New office-anchored  Emerging business centres within Metro Manila, such as newer townships in Taguig townships bring new (Arca South), Quezon City (Vertis North), and Manila Bay (Aseana City) have also employment boosted the Metro Manila Market. These townships bring employment opportunities opportunities and beyond Makati and BGC, thereby creating fresh residential demand in these areas. residential demand Planned infrastructure projects enhance the attractiveness of these sites as well.

Given lower land costs in these emerging business districts, residential condominiums are more affordable vs. Makati and BGC. The larger unit sizes have also become popular among young couples and those starting families.

The establishment of BPOs and retail space as anchors of these townships also enhances the value proposition of residential properties as investment vehicles, in our view.

A strong expatriate  The expatriate market continues to fuel property demand. While real estate agents have market, especially from noted higher overall interest from various nationalities, the surge in demand from Chinese nationals, has Chinese nationals has been remarkable and unprecedented. This comes amid the boosted property country’s improved relations with China and the establishment of several online gaming demand companies after the government legalised and regulated the industry.

POGOs seek housing for Some offshore gaming companies have been buying condominium units to house its their Chinese employees employees, many of whom are Chinese nationals. Apart from demand from the offshore gaming companies, Chinese nationals residing in China have also been buying properties for investment. According to sales channel head for Ayala Land’s Alveo brand, because of demand from Chinese nationals, projects that previously had slower sales take-up were fully sold in 2017.

More expats are now Apart from property for sale, the expatriate market continues to be a ready source of leasing 1-bedroom units leasing demand, especially in the high-end segments. In the past, expats more as well commonly rented large units as they tended to bring their families to the country. Recently brokers have observed demand even for 1-bedroom units.

Sustained optimism in 2018 We think the Metro Manila residential real estate market continues to be healthy.

The Metro Manila RREPI  According to the Metro Manila residential real estate price index (RREPI) tracked by the has risen by a healthy Bangko Sentral ng Pilipinas (BSP), housing prices in Metro Manila rose at a 4.6% YoY 4.6% CAGR over 2015-17 CAGR over 2015-17. In 4Q17, the RREPI rose by 8.8% YoY, driven by a 15% YoY increase in condominium prices. We believe the surge in prices in the Manila Bay area contributed to this. Prior to 4Q17, the Metro Manila RREPI posted YoY growth that ranged between 0.2% and 4.6% in the past 8 quarters.

Residential price increases are generally inflation-aligned, except for upscale and high- end properties, especially in major CBDs, which are able to command high-single-digit YoY annual growth.

Philippines Property: 25 June 2018

Metro Manila: residential real estate price index Metro Manila: residential real estate price index YoY growth 30 170 150 20 130 10

110 0 90 (10) 70 50 (20) 30 (30) 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 4Q17 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 4Q17

All Types of Housing Unit Single Detached/Attached House All Types of Housing Unit Single Detached/Attached House Townhouse Condominium Unit Townhouse Condominium Unit

Source: Bangko Sentral ng Pilipinas Source: Bangko Sentral ng Pilipinas Note: Residential real estate price index Note: YoY growth

Inventory levels have  Inventory declined to more manageable levels especially after take-up exceeded eased launches in 2016-17.

In its latest report, Colliers reported that a record 12,750 units (+12% YoY) are expected to be completed in Metro Manila in 2018 with the bulk located in Fort Bonifacio (50%) and the Manila Bay area (31%). We think, however, construction delays will continue to move the scheduled openings of some condominium projects likely by 1-2 years, easing the actual additions to inventory.

Metro Manila condominium supply (units) Colliers expects 12,750 160,000 8,200 units to come on 140,000 3,100 15,860 120,000 stream in 2018 12,750 100,000 16,100 80,000 135,910 139,010 60,000 120,050 107,300 40,000 91,200 20,000 0 2017 18E 19E 20E 21E Existing Metro Manila supply Additional supply

Source: Colliers

Metro Manila: 18E condominium supply breakdown, by location Metro Manila: 18E additional condominium supply, by location

18E split Rockwell Center Araneta 2.7% 18E split Center Rockwell Center Araneta Center Alabang 2.4% Alabang 3.8% 3.7% Ortigas Center 5.1% Eastwood 3.8% City Ortigas Center Eastwood City 3.8% 0.0% 15.0% 7.1%

Manila Bay Area Manila Bay Area 30.6% 17.1% Makati Fort Bonifacio CBD 28.5% Fort Bonifacio 21.0% Makati CBD 52.5% 2.9%

Source: Colliers Source: Colliers

High levels of supply have caused rental yields to decline in major CBDs, especially in recent quarters. Nonetheless, because these will remain important economic hubs, along with the country’s robust economic growth, the capital appreciation potential of property units continues to make them attractive investment vehicles, in our view.

Philippines Property: 25 June 2018

Metro Manila average rental yields Rental yields have 10 been declining 9 8 7 6 5 4 3 2 1 0 2Q11 4Q11 2Q12 4Q12 2Q13 4Q13 2Q14 4Q14 2Q15 4Q15 2Q16 4Q16 2Q17 4Q17 Makati CBD Rockwell Bonifacio Global City

Source: Colliers Note: Colliers re-stated their capital value numbers in 4Q16, resulting in a sharp drop historically

In our view, progress on  We believe overall confidence will persist throughout 2018. President Rodrigo Duterte’s infrastructure projects strong political will has enabled the relatively speedy passage of a first package of the will sustain optimism tax reform bill and approvals of key infrastructure projects. While we recognise that the among property buyers implementation of these projects comes with execution risks, we think significant progress, especially if the pace is unprecedented, should sustain optimism among buyers, especially in emerging CBDs that benefit from infrastructure projects.

Mortgage rates have  Despite the hike in interest rates and the increase in corporate bond rates observed remained low and have over the past 6 months, mortgage rates have remained stable, likely due to abundant been stable despite the liquidity in the system. This should continue to support lending, especially in the uptick in corporate bond affordable and middle income segments. rates The positive trend persisted in 1Q18 with aggregate pre-sales of property companies under our coverage rising by 26% YoY.

1Q18 pre-sales (PHPbn) and YoY growth 1Q18 aggregate pre- 45 42.7 70 sales of covered 40 60 35 31.5 63 property firms grew to 50 PHP126bn, +26% YoY 30 25 40 18.67 18.1 20 30 14.820 15 16 12 20 10 6 5 10 0 0 Ayala Land Filinvest Land Megaworld SM Prime Vista Land 1Q18 YoY growth (%)

Source: Companies

Metro Manila will continue to be a key market despite many developers’ widespread efforts to diversify geographically. This is because the capital continues to command higher prices and contributes a significant share of pre-sales and revenue value-wise.

Scale advantage We see ALI and MEG With accelerating take-up growth amid lower inventory levels, we have more confidence hiking launches that Ayala Land and Megaworld will hike their launches this year, supporting pre-sales and residential revenues for at least the next two years.

We are positive on the Our on-the-ground discussions give us confidence in the high-end and upscale segments high-end segment given as we believe drivers remain intact. Buyers in this segment are also generally less price- strong purchasing sensitive and have higher credit quality and purchasing power. Moreover, yields in the power and credit quality high-end space have declined less than more affordable counterparts in recent quarters, given the high purchasing power of its tenant base.

Philippines Property: 25 June 2018

We think that if there is a segment to be cautious on, it would be the affordable and middle Dormitories pose a income market given most of the supply is in this segment. Additionally, more developers, threat to the middle such as Ayala Land and Robinsons Land (RLC PM, not rated), and private-equity firms are income and affordable launching dormitories. This poses a threat to the affordable/middle income segment leasing market condominium projects, especially studios and 1-bedroom units as they compete for the same tenant base (ie, young professionals, fresh graduates and BPO employees). In our view, dormitories will continue to be well-received as they offer an affordable housing alternative for BPO employees and young professionals amid worsening Metro Manila traffic. Improving tourist arrivals should help mitigate this risk as these units are made available for short-term rent such as through AirBnB.

Ayala Land’s The Flats (Artist’s rendition) Ayala Land’s The Flats (Artist’s rendition)

Source: Company Source: Company

Despite record supply potentially coming on stream this year, we believe the larger developers have the advantage as their projects are in prime locations and have stronger brand equity compared to smaller developers. This should further support sustained pre- sales growth of Ayala Land and Megaworld, amid sustained optimism in the property market.

Philippines Property: 25 June 2018

Provincial expansion: opportunities abound Beyond Metro Manila, While the National Capital Region (NCR) continues to account for the biggest share of other cities are GDP contribution, other regions have been growing faster than the national GDP growth. In experiencing fast growth 2017, the regions that posted growth higher than the average include the Cordillera Administrative Region, the Davao Region, Western Visayas, Central Luzon and Calabarzon.

Annual average household income CAGR (%) Other regions have 9 7.4 8.4 8 6.7 7 5.9 been growing at a 5.3 5.5 5.2 6 4.9 4.9 4.6 4.9 faster pace than NCR 5 3.9 3.8 4 3.1 3.2 3.2 3 2.3 2 1

Bicol

Ilocos

ARMM

CARAGA

Calabarzon

MIMAROPA

CentralLuzon

CentralVisayas

Cagayan Valley

Region

EasternVisayas

WesternVisayas

CentralMindanao

WesternMindanao

NorthernMindanao SouthernMindanao

National National RegionCapital 2012-15 cagr CordilleraAdministrative Source: Philippine Statistics Authority

Developers have been Major developers are capitalising on rising incomes in the provinces, especially with land in expanding to other Metro Manila becoming increasingly scarce and expensive. The steady rise in remittances, regions where incomes emergence of BPO hubs in provinces and growth in tourism have been among the key are rising drivers of economic progress in the provinces. We see the same drivers continuing to support rural economic growth, especially amid the current government’s commitment to accelerate countryside development.

The government has Moreover, the government’s initiatives to strengthen ties with other Asian countries have taken steps towards resulted in funding for various infrastructure projects. Earlier in April 2018, a loan improving infrastructure agreement with China for the construction of the Chico River Pump Irrigation was sealed. in the countryside The Department of Finance also announced the signing of a USD79m grant for at least four projects undertaken by the Philippine government with China, including a feasibility study for the Davao City Expressway project.

Philippines Property: 25 June 2018

The Metro Manila spillover effect: Calabarzon and Central Luzon

Map of Calabarzon and Central Luzon relative to Metro Manila Central Luzon and Calabarzon are regions directly north and south of Metro Manila, respectively

Source: Google maps, Daiwa

Calabarzon is benefitting Calabarzon is a region south of Metro Manila. It has benefitted from a growth spillover from economic spill-over effect given its proximity to the capital, bolstering its residents’ incomes. The region, which effects given its comprises Cavite, Laguna, Batangas, Rizal and Quezon has the second-highest GDP proximity to the capital contribution at 17%. Cavite and Laguna have become popular sites for manufacturing and high-tech industries. These cities house several economic development zones as well.

Calabarzon statistics Indicator Cities and provinces: Cavite, Laguna, Batangas, Rizal, Quezon Land size: 16,560 sq. km Population: 14.41 m (2015) GDP 1,456,088 (2017) GDP contribution to PH 17% Major sources of livelihood Agriculture, aquaculture, industrial estates

Source: Philippine Statistics Authority

Given relatively high salaries compared to other provinces, many developers have expanded to the Calabarzon region. Ayala Land’s Nuvali, which started development in 2009, is among the most successful townships in the area. Vista Land has also launched the 700-lot Vista City while Megaworld has introduced Maple Grove, a 140-hectare industrial estate in Cavite. Ayala Land has further broadened its presence with the development of its 700-hectare Vermosa in Cavite.

Commercial and Sales for both commercial and residential lots located in areas even further south from residential sales Makati have also been brisk. According to Ayala Land, a phase of its Vermosa performance in the area development was sold-out within 7 hours of launch. Megaworld echoed a similar trend. has been strong, According to the company, the initial 360 prime commercial lots in Maple Grove were 80% especially in 2017 sold (250 lots) just 45 days after launch.

Meanwhile, directly north of Metro Manila is Central Luzon, a region comprising of Bulacan, Tarlac, Pampanga, to name some of the local provinces.

Philippines Property: 25 June 2018

Central Luzon statistics Key indicator Cities and provinces: Zambales, Bataan, Bulacan, Pampanga, Tarlac, Nueva Ecija, Aurora Land size: 2,201,463 ha Population: 11,22 m (2015) GDP 844,709 (2017) GDP contribution to PH 10% Major sources of livelihood Agriculture, hunting, forestry, and fisheries (~17% of economy in 2013)

Source: CEIC, Daiwa

Central Luzon can With the government launching more infrastructure projects in the region, the same spill- potentially benefit from over effect may accelerate developments in Central Luzon. The following are among the spill-over effects as well major infrastructure projects and developments planned for the area:

A number of major  PNR North Railway: The PNR North Railway is a commuter railway connecting Manila infrastructure projects and Clark. According to the Department of Transport (DOTr), the first phase of the PNR will benefit Central North Railway (PNR North 1), which spans a 38-km line running from Tutuban in Manila Luzon to Malolos, Bulacan, is expected to commence construction in 2018.

The second phase (PNR North 2), which was approved by the National Economic Development Authority (NEDA) Board on 28 June 2017, involves a 69.5km commuter line and airport express railway connecting Malolos, Bulacan to Clark Airport and New Clark City.

 Clark Airport Expansion: The NEDA Board has also approved the Clark International Airport Expansion Project. The expansion involves construction of a new terminal able to accommodate 8m passengers annually. This is expected to be completed by 2019. Presently, the existing terminal has a capacity of 4m passengers.

The government has begun inviting interested parties to bid for the projects, which involves the engineering and procurement, and construction of airport facilities and a new passenger terminal. Meanwhile, the government is planning to auction the operations and management of the airport within the year.

 New Manila International Airport: The PHP653.63bn unsolicited proposal was initiated by San Miguel Corporation. The project involves the construction, operation and maintenance of a new airport spanning a 2,500-hectare property in Bulacan. The project covers 50 years and is seen to have an initial annual capacity of 100 million passengers – three times that of the Ninoy Aquino International Airport (NAIA).

The project has been approved by the National Economic Development Authority (NEDA) Board in April 2018 and will now be subject to a Swiss Challenge, wherein other private firms will be invited to make a competing bid, which the original proponent can choose to match to win the project.

 New Clark City (formerly Clark Green City) is a 9,450ha development, envisioned by the government to be the country’s first smart, green and sustainable metropolis, making it arguably the government’s most ambitious township project to date. Located 120km north of Metro Manila and 90km from Subic Bay Freeport, it aims to decongest Metro Manila, where traffic has worsened over the years. The project is spearheaded by the state-owned Bases Conversion and Development Authority (BCDA), the same body behind the highly successful Bonifacio Global City (BGC).

Philippines Property: 25 June 2018

New Clark City (Artist’s rendition) PNR Railway (Artist’s rendition)

Source: Business Conversions and Development Authority (BCDA) Source: Build.gov.ph

ALI and MEG have With the pipeline of infrastructure projects to improve the accessibility of Central Luzon, launched townships in developers are establishing CBDs in Bulacan and Pampanga. Ayala Land is developing the region the 98-ha Altaraza in Bulacan and the 1,125-ha Alviera in Pampanga, while Megaworld has launched the Capital Town in Pampanga. Filinvest Land is also developing the first phase of New Clark City.

Select townships being developed outside Metro Manila Township project Developer Location Region Launch Size (ha) Nuvali Ayala Land Laguna Luzon ex-NCR 1990 2,240 Altaraza Town Center Ayala Land Bulacan Luzon ex-NCR 2014 98 Alviera Ayala Land Pampanga Luzon ex-NCR 2014 1,025 Vermosa Ayala Land Cavite Luzon ex-NCR 2015 700 Southwoods City Megaworld Cavite and Laguna Luzon ex-NCR 2015 561 Suntrust Ecotown Megaworld Cavite Luzon ex-NCR 2015 350 Capital Town Megaworld Pampanga Luzon ex-NCR 2016 36 Maple Grove Megaworld Cavite Luzon ex-NCR 2016 140 Evo City Ayala Land Cavite Luzon ex-NCR 2017 200

Source: Companies

Philippines Property: 25 June 2018

Urbanisation outside Manila: the township formula Property companies are Developers are broadening their geographic footprints by developing townships, especially supporting urbanisation in more urbanised provinces. In the past decade, major developers have launched mixed- in next-wave cities with use communities in next-wave cities, particularly Cebu, Iloilo, Bacolod, Cagayan de Oro their BPO-anchored and Davao, to name a few. Many of their townships have been anchored on BPOs. townships Select townships being developed outside Metro Manila Township project Developer Location Region Launch Size (ha) Atria Park District Ayala Land Iloilo Visayas 2010 21 Capitol Central Ayala Land Bacolod City Visayas 2010 9 City di Mare Filinvest Land Cebu City Visayas 2011 50 Upper East Megaworld Bacolod City Visayas 2011 34 Cebu Park District Ayala Land Cebu City Visayas 2013 50 Gatewalk Central Ayala Land Mandaue Visayas 2014 18 Mactan Newtown Megaworld Cebu Visayas 2014 29 Iloilo Business Park Megaworld Iloilo Visayas 2015 72 Boracay Newcoast Megaworld Boracay Visayas 2015 150 SM Seaside City SM Prime Cebu Visayas 2015 30 Mactan Seagrove Ayala Land Cebu City Visayas 2016 14 North Hill Gateway Megaworld Bacolod City Visayas 2016 53 North Point Ayala Land Talisay City, Cebu Visayas 2017 215 Sicogon Island Ayala Land Iloilo Visayas 2018 1,160 Lio Ayala Land El Nido Visayas 2018 325

Abreeza Ayala Land Davao City Mindanao 2013 10 Azuela Cove Ayala Land Davao City Mindanao 2015 25 Davao Park District Ayala Land Davao City Mindanao 2015 11 Centrio Ayala Land Cagayan De Oro Mindanao 2016 3

Source: Companies

Reaching out to farther provinces Infrastructure development has allowed developers such as Vista Land and Filinvest Land to expand further into even more rural areas where house and lot remains the preferred residential format.

Vista Land and Filinvest Vista Land, which has the broadest geographic footprint among listed companies, has a Land are launching presence in 133 cities and municipalities and 46 provinces as of end-2017, higher than 99 residential community and 37, respectively in 2016. For these companies, strong pre-sales in recent quarters was projects in rural areas driven by Overseas Filipino Worker (OFW) deployment and remittances and increased visibility of infrastructure development. The OFW market is significant to Vista Land’s end- user oriented products given their aspiration to own a home for their family and higher- than-average incomes.

Vista Land: nationwide presence Filinvest Land: nationwide presence

Source: Company Source: Googlemaps, Daiwa

Philippines Property: 25 June 2018

Offices: concerns overdone

BPOs have driven Metro Metro Manila office space has been driven by two decades of a BPO industry boom. Manila office-space However, in 2017, regulatory uncertainties following rhetoric on US protectionist policies, demand for the past two potential alterations in BPO fiscal incentives as well as delays in Philippine Economic Zone decades Authority (PEZA) accreditation of properties have prompted many BPO companies to assume a wait-and-see stance. This resulted into significantly lower BPO-driven office leasing transactions in 2017. Despite this, Colliers reported that Metro Manila office vacancy eased to 5.3% at end-2017 from 5.7% in 3Q17 as office-space demand from Philippine offshore gaming companies (POGOs) and traditional companies surged, picking up the slack from lower BPO demand during the year. POGOs and traditional companies accounted for 75% of the 870,000 sq m of office GLA transacted in 2017 (from 41% in 2016).

Metro Manila: office transactions breakdown (%) Office transactions 120 have become more 100 9 diversified 23 80 35 32 60 31 40 40 38 28 20 16 21 18 9 0 2016 2017 1Q18 BPO (Voice) BPO (KPO) Non-BPO POGO

Source: Colliers

In this section, we discuss the drivers of office-space demand, namely BPOs, POGOs and traditional companies, as well as the issues surrounding them.

Business Process Outsourcing Regulatory uncertainty caused a slowdown in BPO office demand The BPO industry has grown significantly over the past two decades. Today, the Philippines is a leading IT-BPM (business process management) service provider, especially in voice-related services, thanks to competitive pricing and a young service- oriented population proficient in the English language.

Philippines: BPO positioning Proficiency in the English language, affinity to western culture and service orientation are among the Filipino characteristics that have supported BPO growth

Source: IT & Business Process Association (IBPAP), Daiwa

Philippines Property: 25 June 2018

Over 2010-16, BPO revenue expanded by a 17% CAGR (to USD22.9bn in 2016), while employment rose by a 14% CAGR (to 1.15m full-time employees or FTEs in 2016). The rapid expansion of the industry has come with large office-space requirements, with many developers earlier reporting the need to accelerate the construction of buildings to accommodate demand. Frost and Sullivan estimated the office space rentable by BPOs at 6.5m sq m as of 2016.

Philippines: BPO revenue and full-time employee (FTE) 2,000 35.5 38.9 39 BPO revenue and FTE 32.6 have expanded by 17% 1,800 29.8 34 1,600 27.1 24.5 29 and 14%, respectively 1,400 22.9 20.5 24 over 2010-16 1,200 18.0 1,000 15.8 19 13.2 800 11.0 14 8.3 8.9 600 6.3 4.4 9 400 4 200 272 355 445 527 640 777 858 958 1,044 1,146 1,250 1,359 1,467 1,577 1,689 1,800 0 (1) 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017E 2018E 2019E 2020E 2021E 2022E FTE ('000) Revenues (USD mn)

Source: IT-Business Process Association of the Philippines (IBPAP)

However, in 2017, Colliers reported a 53% decline in BPO-related office leasing transactions as new companies waited on the sidelines for more regulatory clarity following President Donald Trump’s protectionist pronouncements and talks on the removal of fiscal incentives that may affect the industry. These have been further aggravated by delays in the Philippine Economic Zone Authority (PEZA) accreditation of properties where BPOs can locate to avail fiscal incentives.

In 2017, regulatory This year, we see BPO demand for office space recovering as regulatory uncertainty eases. uncertainty resulted in First, according to the IT-Business Process Association of the Philippines (IBPAP), President lower BPO-related Trump has clarified that protectionist measures eyed by the US will likely apply to the transactions; we see manufacturing sector rather than the services sector. Second, the Department of Finance BPO transactions clarified that the “Tax Reform for Acceleration and Inclusion Act (TRAIN) does not affect the recovering in 2018 current zero-rating of sales to goods and services to PEZA locators” (ie, those who have opened shops in PEZA-accredited areas). In other words, PEZA locators will continue to enjoy a VAT zero rating. Finally, 4Q17 saw acceleration in PEZA proclamations by the government. The improved pace of accreditations should encourage BPO expansion, in our view. The share of BPO transactions has We have already seen this recovery in 1Q18 data with BPOs accounting for 46% of office increased in 1Q18 leasing transactions in Metro Manila from 25% in 2017.

The IBPAP expects The IBPAP forecasts BPO revenue to rise by a 9.22% CAGR and the industry’s number of revenue and FTEs FTEs to expand at a CAGR of 7.8% from 2016-22. The slower growth projection considers to rise by 9% and 8% the base effect of a maturing sector and the potential impact of technology on the industry. respectively, over 2016-22E The impact of technology Beyond the short-term impact on BPO demand from regulatory uncertainty prompted by recent rhetoric, we examine the impact of technological advances on the industry landscape longer-term.

The predominance of Automation is seen displacing low-value-adding and clerical functions such as data entry, contact centres in the basic customer services (information provision, identity verification and profiling), simple Philippines has transaction-based financial services and other tasks that require minimal creative thinking prompted concerns that and autonomy. This has especially been a concern given the predominance of contact job cuts from centre workers in the Philippines. Based on a 2016 survey conducted by Frost and Sullivan automation would hurt among IT-BPM operators in the country (as cited in the IT-BPM roadmap of the office-space demand Philippines), 45.8% of the IT-BPM workforce is employed in low-skilled functions, 39.4% in mid-skilled jobs and 14.7% are involved in high-skilled roles.

Philippines Property: 25 June 2018

Automation is seen to IBPAP estimates a 40% to 60% probability that one in three low-skilled tasks will be displace low-value automated by 2020. The probability is seen rising to 70% to 80% by 2022, as functions receptiveness and openness improves upon growing evidence of successful adoption of new technology over time.

Probability of job replacement due to automation Probability of automation by 2020 Probability of automation by 2022 Low-skilled 40-60% for 1 out of 3 70-80% for 1 out of 3 Medium-skilled 40-60% for 1 out of 6

High-skilled 15-25% for 1 out of 20

Source: Frost and Sullivan estimates, IT-Business Process Association of the Philippines (IBPAP)

Tasks likely to be More sophisticated forms of automation are also seen affecting some middle- and high- automated include level tasks, albeit to a lesser degree within the same time frame. IBPAP estimates a 40% medical transcription, to 60% probability that one out of six middle-level functions will be automated by 2020 and basic contact services, a 15% to 20% likelihood for high-value roles. Tasks that are likely to be automated include and transactional back- medical transcription, basic contact services and transactional mid- and back-office office support processes.

However, automation will At the same time, IBPAP sees the growth of technology-enabling services paving the way also create higher-value for more opportunities for higher-value tasks. For example, the application of new functions, which require technology in healthcare may increase demand for clinical data analysis and remote care. larger office space IBPAP sees mid-skilled tasks and high-skilled functions rising at a 12.2% and 19.1% 2016- 22 CAGR respectively – much faster than the 3-6% CAGR seen for low-skilled tasks over the same period.

Overall, IBPAP expects the additional jobs created by the adoption of new technologies to exceed the job losses resulting from automation. Specifically, the group estimates that 388,000 mid-skilled workers and 309,000 high-skilled jobs will be added from end 2016 through 2019 – significantly more than the 43,000 job cuts expected for low-skilled workers over the same period. This results in a forecast of a net FTE addition of 654k jobs to 1.8m FTEs by 2022.

Moreover, high-value functions require larger office space than lower-value functions. For example, animators and gaming developers may require at least two monitors and therefore a larger desk space compared to contact workers that only require a smaller desk for a single monitor and/or a phone.

Philippines Property: 25 June 2018

BPO employment projections Overall, IBPAP sees job creation exceeding the job losses from automation

Source: IT-Business Process Association of the Philippines (IBPAP), Frost and Sullivan

Philippines: BPO revenue Philippines: BPO FTE (‘000) 50 2,000 1,800 9 210 40 0.20 1,600 5 1,400 207 188 30 5.7 1,200 9 118 0.0 7.6 1,000 123 2.4 800 149 20 3.0 4.7 600 1,186 10 20.4 400 751 12.8 200 0 0 2016E 2022E 2016E 2022E Contact center and BPO Global In-house centers Contact center and BPO Global In-house centers Health information management Information technology outsourcing Health information management Information technology outsourcing Animation and game development Animation and game development Source: IT-Business Process Association of the Philippines (IBPAP), Frost and Sullivan Source: IT-Business Process Association of the Philippines (IBPAP), Frost and Sullivan

Need for timely re- The key therefore is the timely upskilling of existing manpower and variety of mid-career skilling and upskilling of entrants while the industry gradually adopts new technologies, so that there will be an workers adequate talent pool to fill more mid- and high-skilled roles.

Because rank-and-file and basic entry-level jobs dominated IT-BPM employment demand in previous years, BPO companies have been less concerned about undergraduate degrees as long as candidates display proficiency in speaking English, basic computer use and interest in joining the industry. They then offer extensive training post-hire. The adoption of new technology, however, is seen increasing the demand for more specialised degrees relevant to areas such as data analysis and proficiency in new animation software, to name some key areas.

Large BPO companies Ultimately, the sector and the government’s ability to close the IT-BPM employment gap have long started re- through collaboration with the academe will be critical in ensuring the industry’s growth. skilling and upskilling For its part, BPO companies, which have seen the potential impact of technological their talent pool advances, have started upskilling its employees as early as five years ago.

Philippines Property: 25 June 2018

Offshore gaming companies Property companies Demand for office space from POGOs surged to 312,000sq m GLA in 2017 (from 80,000sq have reported a surge in m GLA in 2016), according to data from Colliers. Demand has been accelerating as half of office-space demand these transactions occurred in 4Q17. Several property brokers and developers have from POGOs observed the remarkable growth in demand from these companies. Most of these companies are locating in the Manila Bay area, close to Entertainment City where rental prices remain competitive. Some have also chosen to be located in less prime areas such as Alabang and Circuit Makati. The surge in demand comes amid a supportive regulatory environment as well as President Duterte’s improved relationship with China.

Based on our discussions with office property brokers, because landlords recognise that POGOs are relatively higher risk, they tend to require more stringent lease terms, such as an additional two years to the standard lease duration, 10% higher rent and higher deposit requirements. With an abundant amount of cash, the POGOs do not seem to have any problem with these terms.

We think POGOs will We think strong demand from POGOs will continue this year, as we see regulation continue their growth remaining supportive of the industry. It is difficult to say whether the offshore gaming momentum this year, industry will be as sustainable as BPOs have been longer term. Regulation remains in its amid a supportive infancy and is expected to evolve. However, we believe that POGOs can grow steadily at regulatory environment least within President Duterte’s administration, given his government’s more accommodative approach towards the industry.

Developers are Listed developers under our coverage have taken advantage of the opportunity presented capitalising on POGO by the surge in POGO office-space demand by offering work space and even dedicated growth but anchor their buildings in suitable areas. However, their expansion plans remain hinged on the BPO expansion plans on BPO industry’s expansion, rather than on POGOs given the uncertainty of POGO sustainability. growth Traditional office space Traditional companies Office-space demand has also received a boost from traditional companies, which have in areas of finance, flourished amid the Philippines’ economic expansion. Office-space demand has come from logistics and conventional firms in the fields of finance, logistics and e-commerce as well as government e-commerce have also agencies. Existing companies have also been seen relocating to newer, more modern boosted office-space buildings. demand We see government plans to liberalise more industries, such as retail and trade, as well as efforts to improve the business and investment climate encouraging office-space demand. Recall that in 2014, the government allowed the full entry of foreign banks into the country. Recently, the government has expressed plans to ease foreign ownership restrictions upon review of its foreign investment negative list (an Executive Order that lists the industries in which foreigners cannot have ownership, or are only allowed limited ownership). While the government has not definitively identified sectors which will see more relaxed foreign ownership rules, Socio Economic Planning Secretary Ernesto Pernia has mentioned that it is eyeing retail, trade and public utilities. Apart from this, the Ease of Doing Business Act and the Right Sizing the National Government Act are proposed legislations aimed at reducing red tape and bureaucracy.

Timely passage and successful execution of these measures is likely to attract more foreign investment and result in increased office-space demand.

Positive on the office sector Overall, we forecast office vacancy to range between 4.8-6.3% from 2018-20, driven by steady growth in BPO, POGO and traditional office-space demand over the period.

Philippines Property: 25 June 2018

Metro Manila: office demand and supply We project Metro 14,000 6.3% 6.1% 7% Manila office vacancy 12,000 5.3% 6% 4.6% 4.8% to range between 4.8% 10,000 5% and 6.3% from 2018-20 8,000 4%

6,000 3%

4,000 2%

2,000 1% 9,191 9,705 10,189 10,682 10,981 11,713 11,816 12,586 12,525 13,155 0 0% 2017 2018E 2019E 2020E 2021E

Total office space demand ('000 sqm) Total office space supply ('000 sqm) Vacancy Source: Colliers, Daiwa estimates

Our projections are based on the following key assumptions, determined based on discussions with developers, property consultants and the IBPAP:

 An 8% 2017-20E CAGR based on IBPAP’s full-time employee growth estimates.  Metro Manila distribution of FTEs declining from 75% in 2017 to 73% by 2021.  Average space requirement per employee rising from 4.6 sq m in 2017 to 4.9 sq m by 2021, in line with increasing middle- and high-value functions.  5-7% growth in non-BPO office space demand – in line with expected GDP growth – to capture growth of other industries.

We do not expect rental We are Positive on the office sector as we expect the BPO sector to continue to post reversion despite an healthy growth, offshore gaming to continue its momentum, and entrepreneurial activity to uptick in vacancy as we strengthen along with the Philippines’ economic expansion. Despite our forecasted uptick see this to be a timing in vacancy rate, we are not overly concerned, as we do not believe this projected uptick issue rather than a long- will result in a decline in rents. Historically, we have observed such rental reversion either term fundamental when vacancy spikes by 4% on a year-on-year basis such as in 1998 and 2009 or when imbalance vacancy is sustained over 9% as in 1999 to 2003, within which vacancy reached a high of 17% in 2001. We note that these periods are accompanied by sluggish economic growth – something we do not expect for the Philippines in the medium term given sound a macroeconomic backdrop. Hence, we find the increase in vacancy more a timing issue, as the completions take some time to be absorbed, rather than a fundamental imbalance.

Philippines: BPO FTE distribution (‘000) 2,000 1,800 1,600 499 454 1,400 416 381 1,200 345 309 1,000 273 256 800 1,236 1,301 600 1,086 1,161 941 1,014 400 788 873 200 0 2015 2016 2017 2018E 2019E 2020E 2021E 2022E

National Capital Region Other Regions Source: IT-Business Process Association of the Philippines (IBPAP), Frost and Sullivan

Philippines Property: 25 June 2018

Good earnings growth outlook

We forecast the property We forecast the companies under our coverage to achieve aggregate core attributable net companies under our income growth of 15.0% YoY for 2018 and a CAGR of 13.2% over 2017-20E. In our view, coverage to deliver a this growth will be driven by strong rental revenue growth, as these developers continue to 13.2% core net income expand their malls and offices within their existing and developing townships across the CAGR over 2017-20E country. At the same time, steady pre-sales growth should secure healthy residential revenue recognition over the next 3 years, in our view.

Philippines Property: real estate revenue CAGR Philippines Property: attributable net income CAGR (% ) (% ) 18 15.4 25 16 15.1 21.0 13.8 13.7 12.7 18.0 14 12.4 20 17.4 16.9 10.4 11.0 11.0 15.0 12 9.8 9.9 13.9 14.0 13.613.1 13.7 10 9.0 15 10.7 8 9.6 10 6 4 5 2 0 0 Ayala Land Filinvest Land Megaworld SM Prime Vista Land Aggregate Ayala Land Filinvest Land Megaworld SM Prime Vista Land Aggregate 2013-17 2017-20E 2018 2017-20E

Source: Companies, Daiwa forecasts Source: Companies, Daiwa forecasts

Across our coverage, we look for Ayala Land to post the highest 2017-20E earnings CAGR, at 17%, followed by Filinvest Land, at 14%.

Philippines Property: 2018 ranking by metric Metric Company Remarks Earnings growth of 21% YoY driven by residential (+21% YoY) and rental Earnings growth leader Ayala Land segments (+16% YoY). Residential revenue growth of 21% YoY from its 7.6% 2015-17 pre-sales CAGR Residential revenue growth leader Ayala Land for revenue recognition and PHP137bn in unbooked revenue as of 1Q18. Rental revenue growth of 34% YoY, followed by Megaworld with 21% growth Rental growth leader Filinvest Land YoY. Highest share of recurring revenue at 65%, though this has declined as Highest share of rental revenue by period end SM Prime residential revenue outpaced recurring revenue in 2017. Rental revenue share to grow by 4pp, as rental revenue outpaces residential Highest growth in share of recurring revenue Filinvest Land revenue due to both its aggressive leasing expansion and the now longer revenue recognition of its residential segment. Highest NAV growth Vista Land Estimated YoY NAV growth of 11%.

Source: Daiwa

Philippines Property: 2018 ranking by metric Ayala Land Filinvest Land Megaworld SM Prime Vista Land Core earnings growth 1 4 5 2 3 Operating revenue growth 1 3 5 4 2 Residential revenue growth 1 4 5 2 3 Rental revenue growth 4 1 3 5 2 Rental revenue share 4 3 2 1 5 Rental revenue share growth 4 1 2 5 2 NAV growth 2 5 3 4 1

Source: Daiwa

Philippines Property: 25 June 2018

Philippines Property: 2017-20E ranking by metric Metric Company Remarks Earnings CAGR of 17% over 2017-20E, driven by residential (14% CAGR for Earnings growth leader Ayala Land 2017-20E) and rental segments (19% CAGR for 2017-20E). Residential revenue CAGR of 14% over 2017-20E as we expect pre-sales to grow Residential revenue growth leader Ayala Land by a 7.3% CAGR over 2017-20E and as construction of condominiums progresses. Rental revenue CAGR of 30% over 2017-20E as the company opens an Rental growth leader Filinvest Land unprecedented amount of retail and office space. Highest share of rental revenue by period Highest share of recurring revenue, at 64% by 20E, though we expect this to be SM Prime end lower than the 67% for 2017, given a faster growth rate in the residential segment. Highest growth in share of recurring Rental revenue share forecast to grow by 12pp over the period on the back of an Filinvest Land revenue unprecedented level of mall and office GFA openings. Highest NAV growth Vista Land We estimate a NAV CAGR of 11% over 2017-20E. Source: Daiwa

Philippines Property: 2017-20E ranking by metric Ayala Land Filinvest Land Megaworld SM Prime Vista Land Earnings growth 1 2 4 5 3 Operating revenue growth 1 2 4 5 3 Residential revenue growth 1 4 5 3 2 Rental revenue growth 3 1 4 5 2 Recurring revenue share 4 2 3 1 5 Recurring revenue share growth 4 1 2 5 3 NAV growth 3 3 2 5 1 Source: Daiwa estimates

Residential revenue We forecast the aggregate residential revenue of the companies under our coverage to expand by 16.0% YoY for 2018 and by a 12.0% CAGR over 2017-20E. We expect this growth to be supported by the 10% pre-sales expansion achieved over 2015-17.

Philippines Property: residential revenue CAGR Philippines Property: residential revenue share of total

25 100 87 90 84 20.5 79 77 76 80 73 76 20 18.1 72 71 70 64 64 63 62 58 15.9 60 56 14.4 15 50 11.8 12.012.1 12.0 40 35 33 36 30 20 10 7.6 7.4 7.1 6.6 10 0 5 Ayala Land Filinvest Land Megaworld SM Prime Vista Land Aggregate 2013 2017 20E

0 Ayala Land Filinvest Land Megaworld SM Prime Vista Land Aggregate 2018 2017-20E

Source: Daiwa forecasts Source: Companies, Daiwa forecasts

We like ALI and VLL the In the residential space, we like Ayala Land and Vista Land the most, given strong brand most in the residential equity in their respective markets, diversified geographic landbank readily available for space residential development, and strong track records in residential communities, especially in the provinces.

While SM Prime’s residential revenue has been recovering – thanks to better buyer quality, especially of projects near sites of popular Philippine offshore gaming companies – it is currently highly concentrated in affordable condominiums in the Manila Bay area. Although the company is venturing into provincial house and lot projects, we believe there remains execution risk, since SM Prime has no track record in these formats and Vista Land’s Camella Homes is a strong player in this space.

FLI looks well placed for As we see it, Filinvest Land is poised for accelerated rural development, given its presence rural development, but in areas outside Metro Manila and track record in provincial residential development. long revenue recognition However, the introduction of a new payment scheme that lengthens the downpayment could be near-term drag terms and thus sales booking threatens to weigh on its residential revenue until mid-2019, on growth despite healthy pre-sales growth.

Philippines Property: 25 June 2018

Philippines Property: residential segment Description (+) (-) Highly diversified in terms of residential formats Price leader; strong brand equity especially in the Construction delays from shortage of skilled labour threaten timely Ayala Land (HRB, MRB, H&L) and income class exposure upscale and luxury segments completion of projects Middle-income player with significant exposure in New payment scheme lengthening downpayment terms seen to drag Filinvest Land Significant exposure to the provinces urban MRBs and provincial H&L revenue recognition, in our view Significant presence in major CBDs such as BGC Best known for HRBs in Bonifacio Global City; where demand is sustainable; has nationwide Many of its mixed-use communities are in early phases of development Megaworld has exposure in affordable and middle-income landbank that should benefit the company longer and not as readily monetisable as those of some of its peers segments via its subsidiaries term Middle-income player with significant exposure in Highly concentrated in middle-income condominiums, a space where Strong presence in the Manila Bay area where prices SM Prime Metro Manila MRBs and HRBs; venturing into competition is intense and threatened by the growing popularity of the have been rising due to strong property demand provincial H&L dormitory format in our view; no track record in H&L Present in all formats but best known for its Strong brand equity (Camella) especially in provincial middle-income house and lot Camella Homes; Vista Land middle-income housing; experienced countryside Sensitive to OFW demand slowdown Half of residential revenue as of 2017 derived residential development from the provinces

Source: Daiwa

Rental revenue Companies that have traditionally focused on residential projects have been embarking on an aggressive leasing expansion programme, as they develop mixed-use communities in new growth areas all over the Philippines. Developers like Filinvest Land and Ayala Land have even established a 50-50 target split in residential recurring earnings by 2020.

Ex SMPH, we look for Overall, we remain positive on the rental space. We expect aggregate rental revenue to aggregate rental revenue increase by a 14% CAGR over 2017-20E as we expect the developers under coverage to to see a 2017-20E CAGR expand their office and malls portfolio by CAGRs of 14% and 18%, respectively, over the of 21% same period. Our aggregate property forecast is weighed down by our forecast for SM Prime to see a 2017-20E rental revenue CAGR of 7.6% — slower than its historical growth rate and our aggregate projection, given the large mall portfolio it has established over the years. Excluding SM Prime, we forecast combined rental revenue to rise by a 21% CAGR over 2017-20E.

Philippines Property: recurring revenue CAGR Philippines Property: recurring revenue share of total

40 80 34 65 67 35 70 64 30 60 30 28 50 25 21 20 36 36 36 37 19 19 40 33 20 16 28 29 14 14 30 24 25 24 20 20 15 16 16 9 20 10 8 10 6 5 0 0 Ayala Land Filinvest Land Megaworld SM Prime Vista Land Aggregate Ayala Land Filinvest Land Megaworld SM Prime Vista Land Aggregate 2013 2017 20E

2018 2017-20E

Source: Daiwa forecasts Source: Companies, Daiwa forecasts Note: Includes malls, offices, hotels and property management

Philippines Property: malls — gross leasable area (GLA ‘000 sq Philippines Property: offices — gross leasable area (GLA ‘000 m) sq m) 10,000 4,500 9,000 788 4,000 155 723 368 8,000 3,500 155 658 287 7,000 155 445 3,000 287 6,000 359 4,681 147 1,508 228 4,487 2,500 287 1,351 5,000 169 200 4,292 115 1,218 0 2,000 207 4,035 80 4,000 3,871 207 1,010 3,647 524 70 684 3,185 3,287 420 361 1,500 124 851 684 3,000 3,026 361 9770 737 561 383 970 621 348 2,000 318 300 1,000 509 348 236 151273 239 432 275 166 134170 136170 141 2,550 2,883 200 208 1,098 1,321 1,000 134 1,806 2,088 500 166 921 990 1,168 1,251 1,298 1,396 1,602 447 500 553 591 709 0 0 2012 2013 2014 2015 2016 2017 2018E 2019E 2020E 2012 2013 2014 2015 2016 2017 2018E 2019E 2020E Ayala Land Filinvest Land Megaworld SM Prime Vista Land Ayala Land Filinvest Land Megaworld SM Prime Vista Land

Source: Company, Daiwa estimates Source: Company, Daiwa estimates

Philippines Property: 25 June 2018

We expect FLI to lead Across our Philippines Property coverage, we forecast Filinvest Land to post the highest the way in rental revenue 2017-20E CAGR in rental revenue, at 31%, as it expands its leasing portfolio at an growth on the back of its unprecedented pace. For 2018-20E, FLI plans to open 336k sq m of office GLA, more than unprecedented office double the amount it completed over 2014-17. Given this strong expected rental and retail GLA expansion, coupled with delayed revenue recognition of its residential projects, we foresee expansion FLI growing the share of its rental business the most among our coverage. By 2020, we expect FLI’s leasing revenue to account for 37% of its total revenue, up from 24% as of 2017. Since the leasing business has a higher margin than the residential business, the share of the recurring segments is potentially closer to its 50% target at the bottom line.

We expect ALI and Meanwhile, we expect Ayala Land and Megaworld to expand their rental revenue by MEG’s rental revenue to c.19.5% apiece over 2017-20E. However, as we see Ayala Land’s residential projects see a 19.5% CAGR for growing at a faster pace than Megaworld’s, we expect the former to grow the share of its 2017-20E rental revenue (+2pp to 28%) by less than Megaworld (+7pp to 34%).

Philippines Property: rental segment Description (+) (-) Prime landbank and solid track record in building estates make its Construction delays from shortage of skilled labour threaten Ayala Land Has exposure to malls, offices and hotels developments attractive to various tenants; has become the go-to timely completion of projects of upscale and high-end retails shops Lack of retail affiliates and established partnerships may make it Has created a BPO hub in Alabang and Cebu which continues to Filinvest Land Growing its office portfolio more than retail difficult to secure retail tenants, especially when competition see strong locator demand intensifies in a location. Has exposure to both offices and malls, Longstanding relationship with BPO companies ensures healthy Construction delays from shortage of skilled labour threaten Megaworld but focuses on office space; long known as occupancy levels as these locators expand with MEG timely completion of projects the largest BPO landlord Affiliate SM Retail provides SM Prime with equally established Revenue growth expected to slow given large base established Primarily a mall operator but opportunistic SM Prime anchor tenants; malls tend to transform new rural areas into town over the years; provincial expansion may also result in lower on offices and hotels centres mall revenue per GLA, in our view Focuses more on malls; opportunistic on Malls are well-constructed, in our view; affiliate retail shops secure Yet to improve marketing of its Starmalls, long known as a low- Vista Land office space good tenant mix end mall

Source: Daiwa

Margins Over the past 3 years, the earnings of our covered companies have received a boost from higher overall margins which have resulted from the increased contribution of the leasing segment, where margins are higher than for the residential business.

We project margins to be Due to the surge in new malls and office space planned for completion over the next 3 stable over 2017-20E years, much of which had already been delayed, we believe that higher pre-operating expenses (than if there were no new malls or offices) could offset the incremental margin expansion resulting from the increased contribution of the higher-margin leasing segment. As such, we expect margins to be more or less stable over 2017-20E.

Philippines Property: 25 June 2018

Net debt Capex spending saw an The developers’ general optimism on infrastructure development and aggressive rental 11% CAGR over 2013-17 expansion has prompted record-high capital expenditure (aggregate spending recorded an 11.0% CAGR over 2013-17). Moreover, companies have announced record-high capex budgets for this year.

We look for net debt to As a result of this aggressive expansion, companies have geared up, with their aggregate ease slightly to 0.58x by net gearing having risen from 0.43x in 2013 to 0.69x in 2017. We expect aggregate net 2020E gearing to decline to 0.58x by 2020, as many investment projects ramp up occupancy and contribute more to cash generation.

Philippines Property: debt (PHPbn) Philippines Property: net gearing (x) 700 1.20 1.00 600 1.00 0.89 104 109 114 0.86 94 0.80 0.82 500 0.80 80 0.69 185 0.62 0.61 0.58 65 195 179 0.57 400 194 0.60 0.49 0.42 0.47 0.51 0.41 0.43 45 164 0.36 300 156 98 100 0.40 27 75 85 129 61 106 53 70 81 87 200 34 53 58 0.20 81 29 40 48 20 36 100 26 160 174 174 174 162 0.00 102 125 131 75 -0.03 0 -0.20 2012 2013 2014 2015 2016 2017 2018E 2019E 2020E Ayala Land Filinvest Land Megaworld SM Prime Vista Land Aggregate Ayala Land Filinvest Land Megaworld SM Prime Vista Land 2013 2017 2020E

Source: Companies, Daiwa estimates Source: Companies, Daiwa estimates

Philippines Property: 25 June 2018

Valuation and risks Top picks We have a Positive We initiate coverage of the Philippines Property sector with a Positive rating. Property outlook on the sector companies under our coverage trade at varying discounts to NAV. Companies with a relatively high proportion of recurrent income and therefore more earnings visibility tend to trade at relatively narrow discounts (ie, SM Prime), while those with large landbanks, especially in more rural areas, trend to trade at relatively wide discounts (ie, Vista Land and Filinvest Land).

Philippines Property: discount to NAV Sector stocks are 80 trading at a wide range 70 60 of discounts to NAV 60 50 50 50 40

30 20 15 20 10 39 72 59 17 61 0 Ayala Land Filinvest Land Megaworld SM Prime Vista Land Discount to NAV Target discount to NAV

Source: Daiwa estimates

Philippines Property: valuations PER (x) PBR (x) FNAV TP Share price (PHP) 18F 19F 18F 19F (PHP) Discount (PHP) Rating Ayala Land 37.6 18.1 15.5 2.9 2.6 62.0 20% 50.0 Buy Vista Land 6.5 8.3 7.3 0.4 0.4 16.6 50% 8.3 Buy Megaworld 4.5 9.5 8.4 0.9 0.9 11.0 50% 5.5 Buy Filinvest Land 1.6 6.0 4.9 0.5 0.5 5.6 60% 2.2 Buy SM Prime 33.3 30.6 28.3 2.9 2.7 40.1 15% 34.0 Underperform

Source: Daiwa estimates Note: share prices as at 22 June 2018

Our top picks are ALI We have Buy (1) ratings on 4 of the 5 Philippines Property names under our coverage, and VLL given the improved residential outlook and strong leasing expansion. The recent market- wide sell-off has made valuations compelling in our view, especially amid a positive property outlook.

Our top picks are Ayala Land and Vista Land. We are most comfortable with these companies’ long-term prospects, as we believe their strong brand equity and track records in building estates (for Ayala Land) and residential communities (for Vista Land) will help them perform better than peers amid varying market conditions. Indeed, both companies have strong residential and rental growth on our forecasts, relative to their peers. Moreover, on our forecasts, Ayala Land offers the highest earnings CAGR over 2017-20E, while Vista Land has the highest NAV CAGR over 2017-20E.

We think the reclamation While we like the recurring income story of SM Prime, we consider the stock’s prevailing project dilutes the valuation to be rich. Strong demand in the Manila Bay area has pushed property prices to recurring income story new highs, which has benefitted SM Prime’s residential sales and inflated the valuation of of SMPH, which we rate the Manila Bay reclamation project, which is pending government approval. Inclusion of the at Hold (3) reclamation project in SM Prime’s NAV-based valuation increases non-recurring segments as a proportion of NAV, which we believe argues for a higher-than-historical discount to NAV, especially because the reclamation project is non-earnings accretive in the near to mid-term and is potentially a drag on ROE.

Philippines Property: 25 June 2018

Risks to our Positive sector view  A considerable hike in interest rates is the biggest risk. Such hikes could be mitigated by a highly liquid banking system, however, which would continue to encourage lending, mortgages included. This may involve lengthening tenors such that the monthly amortisation remains affordable despite the higher interest rates.

 Persistent delays in construction due to a shortage of skilled labour – an industry-wide issue – would likewise push back the new revenue contribution from the delayed projects and result in actual earnings underperforming initial expectations.

 A sustained lack of regulatory clarity on relevant foreign and local policy affecting the BPO sector, as well as the introduction of restrictive policies affecting both BPO and offshore gaming are key risks, especially in the longer term.

 A significant slowdown in OFW remittances, due to possible global labour issues, could affect pre-sales, especially those of Vista Land and Filinvest Land.

Philippines Real Estate 25 June 2018

(ALI PM) Ayala Land Ayal a Land

Target price: PHP50.00 (from PHP49.00) Share price (22 Jun): PHP37.55 | Up/downside: +33.2%

Upgrading: net income of PHP40bn by 2020 in sight

 We raise our 2018-19E EPS by 7% Micaela Abaquita (63) 2 7373021  Our upgrades are led by stronger-than-expected pre-sales in 2017 [email protected]  Upgrading to Buy (1) from Outperform (2); raising TP to PHP50

What's new: We raise our 2018-19E EPS by 7% as we lift our 2018-19E revenue by 11-12% on the back of Ayala Land’s (ALI) higher-than-expected Forecast revisions (%) Year to 31 Dec 18E 19E 20E pre-sales and residential revenue in 2017. Meanwhile, the company continues Revenue change 11.0 12.0 14.0 in its pursuit of expanding its rental portfolio, with 1.3m sq m of combined mall Net profit change 8.4 8.3 7.8 and office space under construction as at end-2017. We forecast ALI to post a Core EPS (FD) change 6.9 6.8 6.3 net income CAGR of 17% over 2017-20, the highest among property names Source: Daiwa forecasts under our coverage. With this, we see the company reaching its net income target of PHP40bn by 2020. Share price performance (PHP) (%) 48 110

What's the impact: ALI reported higher-than-expected pre-sales and 45 106 residential revenue growth in 2017 (+13% YoY in 2017 vs. our forecast of 42 102 -6%) and 1Q18 (+16% YoY, the fastest since 2013). We observed robust take- 39 98 up across brands that were driven locally, with sales to Filipino residents rising 36 94 Jun-17 Sep-17 Dec-17 Mar-18 Jun-18 by 23% YoY to PHP22.4bn (71% of total pre-sales). Ayala Land (LHS) Relative to PCOMP Index (RHS) Strong take-up has reduced inventory levels to 10 months’ worth as of 1Q18. As this level is lower than its inventory target of 12-15 months, we believe ALI 12-month range 37.05-47.50 will accelerate launches in the next three quarters to reach its launch target of Market cap (USDbn) 10.35 3m avg daily turnover (USDm) 7.77 PHP100bn. Thanks to these positive developments, we raise our 2018 Shares outstanding (m) 14,725 projections for launches to PHP97bn (from PHP92bn) and pre-sales to Major shareholder Ayala Corporation (68.8%) PHP128bn (from PHP106bn). We see ALI’s residential revenue rising at a CAGR of 14% over 2017-20E. Financial summary (PHP) Year to 31 Dec 18E 19E 20E Revenue (m) 165,110 187,676 213,054 The strong performance of ALI’s residential segment will make it challenging to Operating profit (m) 55,269 62,171 69,401 achieve a 50:50 residential-recurring income split, especially with some leasing Net profit (m) 30,623 35,736 40,966 projects delayed. We cut our 2018E rental revenue by 4% as some investment Core EPS (fully-diluted) 2.071 2.416 2.770 properties initially scheduled to be completed in 2018 have been delayed to EPS change (%) 21.0 16.7 14.6 Daiwa vs Cons. EPS (%) 6.7 7.3 5.6 2019-20. Hence, while we expect the share of recurring revenue to continue to PER (x) 18.1 15.5 13.6 rise, we see a possibility of it reaching half of net income only beyond 2020. Dividend yield (%) 1.6 1.8 2.1 Nonetheless, we forecast ALI recording a strong recurring income revenue DPS 0.590 0.689 0.790 CAGR of 19% over 2017-20. PBR (x) 2.9 2.6 2.3 EV/EBITDA (x) 11.1 9.8 8.6 ROE (%) 17.4 17.8 18.0 What we recommend: We raise our NAV-based TP to PHP50 (from PHP49) Source: FactSet, Daiwa forecasts after factoring in delays in the completion of some rental projects initially scheduled to open in 2018 and rolling over our valuation to the average of 2018-19E NAV (from 2018E). ALI has the highest 2017-20E earnings growth among property names under our coverage and we see the recent sell-off as an opportunity to accumulate the stock. As such, we upgrade our rating to Buy (1) from Outperform (2). Risk: sharp rise in mortgage rates.

How we differ: Our 2018-20E EPS are 6-7% above the consensus, likely as we are more confident that it will achieve its PHP40bn net income target by 2020, thanks to a committed management team, prime landbank and strong brand equity and track record.

See important disclosures, including any required research certifications, beginning on page 54

Ayala Land (ALI PM): 25 June 2018

How do we justify our view? Growth outlook Valuation Earnings revisions

Growth outlook Ayala Land: attributable net income We forecast ALI’s earnings to rise at a CAGR of 17% 45 over 2017-20, driven by the recurring segments (retail 40 and office leasing, and hotels and resorts operations); 35 30 we project these segments’ EBIT to increase at a 22% 30 26 25 21 21 CAGR over the same period, amid an aggressive 19 19 17 pipeline of investment properties, of which many are 20 15 already under construction. We forecast the residential 15 segment’s revenue to rise at a 14% CAGR over 2017- 10 5 20, supported by strong prior years’ (before 2017) pre- 11.7 14.8 17.6 20.9 25.3 30.6 35.7 41.0 0 sales and continued expansion outside of Metro Manila, 2013 2014 2015 2016 2017 2018E 2019E 2020E where housing demand remains robust. Net income (PHP bn) YoY growth (%)

Source: Company, Daiwa forecasts

Valuation Ayala Land: Historical PER We arrive at our TP of PHP50 using the discounted NAV 40 approach. We value the company’s efficient attributable 35 30 raw landbank using our end-2018E market prices. We 25 use cap rates of 8-10% to value ALI’s malls, offices and 20 hotels. We applied a 20% discount to NAV, in line with its 15 10 past-5-year average, on the back of its prime landbank, 5 robust earnings growth prospects and strong corporate 0 governance.

2/22/2016 2/22/2012 5/22/2012 8/22/2012 2/22/2013 5/22/2013 8/22/2013 2/22/2014 5/22/2014 8/22/2014 2/22/2015 5/22/2015 8/22/2015 5/22/2016 8/22/2016

11/22/2013 11/22/2014 11/22/2015 11/22/2016 We note that our TP implies an average 2018-19E PER 11/22/2012 -2SD -1SD AVERAGE of ~22x, within 1SD of its past-5-year average of 23.5x. +2SD +1SD PER We believe this is warranted given that ALI has the Source: Bloomberg, Daiwa fastest earnings growth forecast among property names under our coverage.

Earnings revisions Ayala Land: 12-month consensus EPS revisions 3.0 14.0 For the past three years (2015-17), ALI’s full-year 2.63 earnings outperformed the consensus by 2-3%. In the 2.35 12.0 2.5 2.17 2.23 past 12 months, the Bloomberg consensus 2018-20E 11.8 1.85 1.93 10.0 EPS have been revised upwards by 2-12%. Currently, 2.0 8.0 our 2018-20E EPS are 6-7% above the consensus. With 1.5 strong 1Q18 pre-sales and earnings results, we expect 4.5 6.0 1.0 the consensus EPS to be upgraded. 2.4 4.0 0.5 2.0 We believe ALI will be able to achieve its 2020 target of 0.0 0.0 PHP40bn in net income attributable to equityholders of 18E 19E 20E the parent, as we think the company has the assets and Previous New Change resources to achieve this target. Source: Bloomberg, Daiwa

Ayala Land (ALI PM): 25 June 2018

Financial summary Key assumptions Year to 31 Dec 2013 2014 2015 2016 2017 2018E 2019E 2020E Pre-sales growth (YoY%) 18 11 3 3 13 5 10 7 Launches (Pbn) 111 84 80 61 89 97 107 118 Mall GLA expansion ('000 sqm) 71 77 114 170 204 282 462 333 Office GLA expansion ('000 sqm) 80 53 50 103 212 69 108 223 Hotel rooms expansion (number) 683 534 161 162 83 646 1,173 1,325

Profit and loss (PHPm) Year to 31 Dec 2013 2014 2015 2016 2017 2018E 2019E 2020E Property sales 41,398 54,986 67,765 77,728 96,387 116,517 129,957 144,691 Malls, Offices & Hotels 17,401 21,012 24,335 27,934 30,760 35,590 43,366 52,551 Other Revenue 20,042 17,017 13,366 17,049 11,361 13,004 14,353 15,812 Total Revenue 78,841 93,015 105,466 122,711 138,508 165,110 187,676 213,054 Other income 0 0 0 0 0 0 0 0 COGS (32,845) (40,712) (45,555) (50,896) (65,300) (78,407) (87,787) (98,365) SG&A (21,025) (19,897) (21,302) (26,826) (24,716) (24,101) (29,406) (35,994) Other op.expenses (3,898) (4,990) (5,070) (5,875) (5,180) (7,334) (8,312) (9,294) Operating profit 21,072 27,416 33,539 39,114 43,312 55,269 62,171 69,401 Net-interest inc./(exp.) (3,081) (4,536) (5,331) (7,166) (7,438) (7,870) (7,522) (6,986) Assoc/forex/extraord./others 968 977 (457) 716 2,116 299 541 851 Pre-tax profit 18,960 23,857 27,751 32,663 37,991 47,698 55,190 63,266 Tax (4,655) (6,142) (6,854) (8,232) (9,825) (12,336) (14,273) (16,362) Min. int./pref. div./others (2,625) (2,974) (3,329) (3,586) (2,861) (4,740) (5,181) (5,939) Net profit (reported) 11,680 14,741 17,568 20,846 25,305 30,623 35,736 40,966 Net profit (adjusted) 11,680 14,741 17,568 20,846 25,305 30,623 35,736 40,966 EPS (reported)(PHP) 0.840 1.047 1.205 1.429 1.719 2.080 2.427 2.783 EPS (adjusted)(PHP) 0.840 1.047 1.205 1.429 1.719 2.080 2.427 2.783 EPS (adjusted fully-diluted)(PHP) 0.840 1.047 1.205 1.429 1.711 2.071 2.416 2.770 DPS (PHP) 0.291 0.417 0.433 0.480 0.488 0.590 0.689 0.790 EBIT 21,072 27,416 33,539 39,114 43,312 55,269 62,171 69,401 EBITDA 24,970 32,406 38,609 44,989 48,492 62,603 70,483 78,695

Cash flow (PHPm) Year to 31 Dec 2013 2014 2015 2016 2017 2018E 2019E 2020E Profit before tax 18,960 23,857 27,751 32,663 37,991 47,698 55,190 63,266 Depreciation and amortisation 3,898 4,990 5,070 5,875 5,180 7,334 8,312 9,294 Tax paid (4,655) (6,142) (6,854) (8,232) (9,825) (12,336) (14,273) (16,362) Change in working capital (4,164) 2,907 (2,221) (9,783) (2,713) 7,341 650 2,679 Other operational CF items (4,702) (10,892) (7,129) 10,599 (2,405) 903 (1,601) (4,543) Cash flow from operations 9,336 14,720 16,616 31,123 28,228 50,940 48,278 54,334 Capex (29,124) (30,663) (34,779) (41,246) (23,913) (25,276) (24,394) (24,354) Net (acquisitions)/disposals (2,192) (4,698) (7,982) (10,205) (5,229) (3,190) (4,127) (4,437) Other investing CF items (11,035) 8,029 5,356 (1,445) (415) 3,657 743 3,063 Cash flow from investing (42,351) (27,332) (37,405) (52,895) (29,557) (24,808) (27,778) (25,728) Change in debt 27,124 22,764 6,330 28,805 14,584 0 0 (12,341) Net share issues/(repurchases) 10,336 396 16,221 490 387 0 0 0 Dividends paid (4,129) (5,933) (6,157) (7,061) (7,127) (8,625) (10,065) (11,538) Other financing CF items (4,472) (3,904) (5,196) 1,355 (6,422) (8,336) (4,116) (3,082) Cash flow from financing 28,859 13,323 11,199 23,589 1,422 (16,960) (14,181) (26,961) Forex effect/others 0 0 0 0 0 0 0 0 Change in cash (4,156) 711 (9,590) 1,817 94 9,172 6,319 1,646 Free cash flow (19,788) (15,944) (18,163) (10,122) 4,315 25,665 23,884 29,980 Source: FactSet, Daiwa forecasts

Ayala Land (ALI PM): 25 June 2018

Financial summary continued … Balance sheet (PHPm) As at 31 Dec 2013 2014 2015 2016 2017 2018E 2019E 2020E Cash & short-term investment 41,386 35,243 19,984 23,077 26,278 33,184 40,636 41,715 Inventory 43,572 48,179 59,247 66,728 62,192 77,922 86,911 96,767 Accounts receivable 42,849 58,574 64,961 97,468 98,311 101,528 111,880 123,549 Other current assets 19,319 23,638 22,012 23,740 31,779 30,109 35,343 39,531 Total current assets 147,127 165,634 166,204 211,012 218,561 242,743 274,770 301,561 Fixed assets 157,109 198,542 239,270 271,025 301,940 324,131 347,693 370,830 Goodwill & intangibles 0 0 0 0 0 0 0 0 Other non-current assets 21,238 24,768 36,868 54,395 53,491 53,268 53,981 55,005 Total assets 325,474 388,944 442,342 536,433 573,992 620,141 676,444 727,396 Short-term debt 15,949 21,369 19,294 29,431 24,217 17,644 29,985 21,644 Accounts payable 79,478 106,992 121,757 141,713 137,684 161,190 184,176 210,809 Other current liabilities 6,196 6,239 5,082 17,059 22,722 23,833 26,073 27,830 Total current liabilities 101,623 134,601 146,133 188,203 184,623 202,667 240,233 260,284 Long-term debt 85,953 103,296 111,702 130,370 150,169 156,741 144,400 140,400 Other non-current liabilities 25,800 29,052 34,681 45,177 46,937 46,937 48,937 50,506 Total liabilities 213,376 266,949 292,516 363,750 381,729 406,346 433,571 451,190 Share capital 15,480 15,497 16,002 16,019 16,032 16,032 16,032 16,032 Reserves/R.E./others 82,990 91,443 117,728 131,686 150,723 172,721 198,392 227,820 Shareholders' equity 98,470 106,940 133,731 147,705 166,755 188,753 214,424 243,852 Minority interests 13,628 15,056 16,095 24,978 25,509 25,043 28,449 32,353 Total equity & liabilities 325,474 388,944 442,342 536,433 573,992 620,141 676,444 727,396 EV 617,746 646,437 662,507 689,639 699,737 692,589 687,830 677,291 Net debt/(cash) 60,516 89,422 111,012 136,725 148,107 141,202 133,750 120,330 BVPS (PHP) 6.855 7.444 9.011 9.950 11.236 12.730 14.473 16.472

Key ratios (%) Year to 31 Dec 2013 2014 2015 2016 2017 2018E 2019E 2020E Sales (YoY) 35.8 18.0 13.4 16.4 12.9 19.2 13.7 13.5 EBITDA (YoY) 33.4 29.8 19.1 16.5 7.8 29.1 12.6 11.7 Operating profit (YoY) 29.4 30.1 22.3 16.6 10.7 27.6 12.5 11.6 Net profit (YoY) 29.9 26.2 19.2 18.7 21.4 21.0 16.7 14.6 Core EPS (fully-diluted) (YoY) 24.5 24.7 15.1 18.6 19.8 21.0 16.7 14.6 Gross-profit margin 58.3 56.2 56.8 58.5 52.9 52.5 53.2 53.8 EBITDA margin 31.7 34.8 36.6 36.7 35.0 37.9 37.6 36.9 Operating-profit margin 26.7 29.5 31.8 31.9 31.3 33.5 33.1 32.6 Net profit margin 14.8 15.8 16.7 17.0 18.3 18.5 19.0 19.2 ROAE 13.2 14.5 14.8 15.0 16.2 17.4 17.8 18.0 ROAA 4.0 4.1 4.2 4.3 4.6 5.1 5.5 5.8 ROCE 11.0 11.9 12.7 12.8 12.4 14.6 15.4 16.2 ROIC 10.3 10.6 10.7 10.3 9.9 11.8 12.6 13.3 Net debt to equity 61.5 83.6 83.0 92.6 88.8 74.8 62.4 49.3 Effective tax rate 24.6 25.7 24.7 25.2 25.9 25.9 25.9 25.9 Accounts receivable (days) 129.6 150.4 175.5 183.7 214.0 216.4 194.3 182.8 Current ratio (x) 1.4 1.2 1.1 1.1 1.2 1.2 1.1 1.2 Net interest cover (x) 9.1 8.9 7.4 7.3 6.0 7.4 7.9 9.2 Net dividend payout 34.7 39.9 35.9 33.6 28.4 28.4 28.4 28.4 Free cash flow yield n.a. n.a. n.a. n.a. 0.8 4.6 4.3 5.4 Source: FactSet, Daiwa forecasts

Company profile

Ayala Land is the largest, most diversified and fully integrated real estate company in the Philippines with interests in construction, residential development, retail and office leasing, hotels and resort operations, and property management. These are integrated in large-scale, master- planned communities, widely referred to as estates by the company. Ayala Land has a well- established track record in estate development, having transformed the Makati CBD and Bonifacio Global City from empty lots to bustling city centres. Presently, the company is developing 20 estates nationwide.

Philippines Real Estate 25 June 2018

(VLL PM) Vista Land & Lifescapes Vista Land & Lifescapes

Target price: PHP8.30 (from PHP8.00) Share price (22 Jun): PHP6.49 | Up/downside: +27.9%

Scaling up its malls business

 VLL is looking to add 38 malls from 2017 to 2020  Aggressive mall expansion supplements healthy residential growth  Lifting our TP to PHP8.3; Reiterating Buy (1) call

What's new: Looking to scale up its malls business, Vista Land (VLL) Forecast revisions (%) targets to have 60 malls by 2020, up from 22 as at end-2017. We forecast Year to 31 Dec 18E 19E 20E its recurring revenue to see a 21% CAGR over 2017-20E, contributing Revenue change - - - Net profit change - - - 3.4pp of our forecast 13.7% revenue CAGR over the same period. This Core EPS (FD) change - - - supplements our forecast for a 12% residential revenue CAGR over 2017- Source: Daiwa forecasts 20E, which in turn contributes 9.6pp of our revenue growth forecast. We raise our target price to PHP8.3 (from PHP8.0) and reiterate our Buy (1) Share price performance rating. (PHP) (%) 7.0 130 What's the impact: Since its acquisition of Starmalls in 2015, VLL has 6.6 119 expanded its mall gross floor area (GFA) from 500k sq m in 2015 to 834k 6.2 108 5.8 96 sq m as at end-2017 (18% CAGR). In turn, its rental revenue more than 5.4 85 doubled from PHP2.2bn to PHP5.6bn (37% CAGR) in the same period. Jun-17 Sep-17 Dec-17 Mar-18 Jun-18 Vista Land (LHS) Relative to PCOMP Index (RHS) VLL has set a 1.16m sq m mall GFA target for 2018 (up 325k sq m, or 39%

YoY), but has not provided information on its annual pipeline beyond 2018. 12-month range 5.55-6.99 The company has indicated that these new malls will likely be within its Market cap (USDbn) 1.56 mixed-use townships or “communicities”. We assume 100k sq m of annual 3m avg daily turnover (USDm) 0.71 retail GFA additions, though we acknowledge the company may well open Shares outstanding (m) 12,839 Major shareholder Fine Properties Inc. (51.9%) more than this. As highlighted in our initiation report, A Quality home and mall builder (26 October 2017), following our on-the-ground checks, we Financial summary (PHP) are generally impressed with the transformation of older Starmalls into Year to 31 Dec 18E 19E 20E Vista malls, as well as the execution of the company’s mall operations. Revenue (m) 39,925 45,893 51,192 Operating profit (m) 15,771 18,519 20,594 The rental segment supplements healthy residential revenue growth, which Net profit (m) 9,998 11,483 12,749 Core EPS (fully-diluted) 0.779 0.894 0.993 we see being supported by the record-high launches in 2017 and EPS change (%) 13.6 14.9 11.0 aggressive expansion in provinces where end-user demand is robust. Daiwa vs Cons. EPS (%) (1.0) 0.9 (0.4) PER (x) 8.3 7.3 6.5 Dividend yield (%) 2.2 2.5 2.8 What we recommend: We lift our TP to PHP8.3 after rolling over our NAV- DPS 0.141 0.160 0.183 based valuation to the average of 2018-19E NAV (from 2018E) and re- PBR (x) 0.4 0.4 0.3 affirm our Buy (1) call. VLL is among our top picks in the sector, given its EV/EBITDA (x) 9.5 8.6 8.1 strong brand equity in the end-user oriented middle-income market as well ROE (%) 11.6 12.1 12.1 as its solid track record in provincial home building, which we believe Source: FactSet, Daiwa forecasts positions it to benefit from the government’s commitment to accelerate countryside development. Risks: considerable hike in interest rates and significant demand slowdown from overseas Filipino workers (OFW).

How we differ: Our above-consensus target price reflects our confidence in the company’s ability to grow its malls business strongly, which we see contributing significantly to income and improving earnings visibility. VLL’s rental segment continues to provide strong evidence of successful expansion and, in our view, supports our view that the stock should trade at its past-5-year discount-to-NAV of 50%, vs. its prevailing discount of 61%.

See important disclosures, including any required research certifications, beginning on page 54

Vista Land & Lifescapes (VLL PM): 25 June 2018

How do we justify our view?

Growth outlook Valuation Earnings revisions

Growth outlook Vista Land: attributable net income

We forecast VLL’s net income attributable to equityholders 14 19 20 18 of the parent to rise by a 2017-20E CAGR of 13%, as we 12 14 15 project its revenue to rise by a 13.7% CAGR over the same 14 16 10 12 14 period. We look for its residential revenue to see a 12% 11 11 8 12 CAGR over 2017-20E as pre-sales grow steadily on the 10 back of healthy end-user demand and continued provincial 6 8 expansion. Meanwhile, we forecast its rental revenue to 4 6 4 rise by a faster 21% 3-year CAGR as the company 2 expands its leasing space from 1.16m sq m of GFA as of 6.2 7.0 7.9 8.8 10.0 11.5 12.7 2 0 0 2017 to 1.4m sq m of GFA by 2018. By 2019, we expect 2012 2013 2014 2015 2016 2017 rental revenues to account for 20% of Net income (PHP bn) YoY growth

revenue, up from 16% in 2017. Source: Company, Daiwa forecast

Valuation Vista Land: historical PER Our PHP8.3 NAV-based target price is based on: 1) the 16 market prices of its raw, efficient landbank, 2) the NPV of 14 12 our estimated market value of its residential inventory, and 10 3) an 11% cap rate on EBITDA. We apply a 50% discount 8 to NAV, consistent with the stock’s past-5-year average 6 discount. We believe the shares should trade at a narrower 4 discount to NAV than their prevailing 61% discount, as 2

VLL’s malls segment provides strong evidence of 0

Jun-14 Jun-15 Jun-16 Jun-17 Jun-18

successful expansion and enhances its track record in mall Jun-13

Mar-17 Mar-14 Mar-15 Mar-16 Mar-18

Sep-13 Dec-13 Sep-14 Dec-14 Sep-15 Dec-15 Sep-16 Dec-16 Sep-17 Dec-17 operations. At our TP, VLL would be trading at a 1-year -2SD -1SD AVERAGE forward PER of 10x, consistent with its past-5-year +2SD +1SD PE average PER. Source: Bloomberg

Earnings revisions Vista Land: earnings revisions The Bloomberg consensus has revised up its 2018E EPS 7.5 1.0 forecast for VLL by 4.6% over the past 12 months, on the 7.0 0.9 back of its upgraded launches in 2017, which doubled from 6.5 0.8 PHP30bn to PHP60bn. 6.0 0.7

5.5 0.6

5.0 0.5

Jul-17 Jul-17

Oct-17 Apr-18 Apr-18

Jun-17 Jan-18 Jan-18 Jun-18

Feb-18 Mar-18

Sep-17 Nov-17 Aug-17 Sep-17 Nov-17 Dec-17 May-18 Price (LHS) BEst Standard EPS, Adj+ 2018 (RHS) BEst Standard EPS, Adj+ 2019 (RHS) Source: Bloomberg

Vista Land & Lifescapes (VLL PM): 25 June 2018

Financial summary Key assumptions Year to 31 Dec 2013 2014 2015 2016 2017 2018E 2019E 2020E Pre-sales, PHP bn n.a. 51.7 56.7 57.8 64.5 73.0 81.0 90.7 Residential launches, PHP bn n.a. 26.6 40.4 26.2 60.2 51.2 48.6 48.6 Additional retail GLA, '000 sqm n.a. 31.1 27.8 130.7 86.5 213.0 65.0 65.0 Additional office GLA, '000 sqm n.a. 0.0 9.9 34.9 31.8 8.2 0.0 0.0

Profit and loss (PHPm) Year to 31 Dec 2013 2014 2015 2016 2017 2018E 2019E 2020E Residential n.a. 23,081 25,212 25,668 28,138 31,504 35,384 39,600 Rental n.a. 1,527 2,246 4,375 5,625 7,187 9,090 10,008 Other Revenue n.a. 900 1,231 953 1,077 1,234 1,419 1,583 Total Revenue n.a. 25,508 28,690 30,996 34,840 39,925 45,893 51,192 Other income n.a. 0 0 0 0 0 0 0 COGS n.a. (11,032) (12,254) (12,321) (13,304) (14,894) (16,729) (18,724) SG&A n.a. (4,371) (4,724) (4,541) (4,315) (5,053) (5,833) (6,503) Other op.expenses n.a. (2,084) (2,168) (3,053) (3,766) (4,207) (4,811) (5,370) Operating profit n.a. 8,021 9,543 11,080 13,455 15,771 18,519 20,594 Net-interest inc./(exp.) n.a. (964) (1,348) (1,372) (2,182) (2,950) (3,512) (3,933) Assoc/forex/extraord./others n.a. (29) (7) (26) 0 0 0 0 Pre-tax profit n.a. 7,028 8,188 9,683 11,274 12,820 15,007 16,661 Tax n.a. (741) (1,001) (1,582) (2,211) (2,578) (3,243) (3,601) Min. int./pref. div./others n.a. (130) (155) (193) (259) (245) (281) (312) Net profit (reported) n.a. 6,156 7,032 7,907 8,804 9,998 11,483 12,749 Net profit (adjusted) n.a. 6,156 7,032 7,907 8,804 9,998 11,483 12,749 EPS (reported)(PHP) n.a. 0.721 0.622 0.676 0.686 0.779 0.894 0.993 EPS (adjusted)(PHP) n.a. 0.721 0.622 0.676 0.686 0.779 0.894 0.993 EPS (adjusted fully-diluted)(PHP) n.a. 0.721 0.622 0.676 0.686 0.779 0.894 0.993 DPS (PHP) n.a. 0.119 0.091 0.112 0.126 0.141 0.160 0.183 EBIT n.a. 8,021 9,543 11,080 13,455 15,771 18,519 20,594 EBITDA n.a. 8,702 10,309 12,078 14,722 17,114 20,038 22,292

Cash flow (PHPm) Year to 31 Dec 2013 2014 2015 2016 2017 2018E 2019E 2020E Profit before tax n.a. 7,028 8,188 9,683 11,274 12,820 15,007 16,661 Depreciation and amortisation n.a. 699 786 1,021 1,285 1,361 1,537 1,716 Tax paid n.a. (741) (1,001) (1,582) (2,211) (2,578) (3,243) (3,601) Change in working capital n.a. (4,238) (6,012) (4,235) (11,256) (2,433) (7,355) (6,982) Other operational CF items n.a. 3,017 (2,246) 1,366 4,192 (2,184) 1,447 2,011 Cash flow from operations n.a. 5,765 (285) 6,252 3,283 6,987 7,394 9,806 Capex n.a. (10,993) (15,329) (9,408) (12,047) (11,723) (11,746) (11,771) Net (acquisitions)/disposals n.a. (10,363) (1,363) (6,199) 411 0 0 0 Other investing CF items n.a. 0 0 0 0 0 0 0 Cash flow from investing n.a. (21,356) (16,692) (15,607) (11,636) (11,723) (11,746) (11,771) Change in debt n.a. 18,373 19,354 14,836 14,562 10,000 5,000 5,000 Net share issues/(repurchases) n.a. (30) (2,182) (160) (63) 0 0 0 Dividends paid n.a. (926) (1,235) (1,432) (1,616) (1,804) (2,049) (2,353) Other financing CF items n.a. (935) 650 (1,151) (1,789) (2,774) (3,309) (3,709) Cash flow from financing n.a. 16,482 16,588 12,092 11,093 5,422 (358) (1,062) Forex effect/others n.a. (29) (7) (26) 0 0 0 0 Change in cash n.a. 862 (395) 2,712 2,739 685 (4,710) (3,028) Free cash flow n.a. (5,228) (15,614) (3,156) (8,765) (4,736) (4,352) (1,965) Source: FactSet, Daiwa forecasts

Vista Land & Lifescapes (VLL PM): 25 June 2018

Financial summary continued … Balance sheet (PHPm) As at 31 Dec 2013 2014 2015 2016 2017 2018E 2019E 2020E Cash & short-term investment n.a. 10,820 8,140 12,358 26,465 27,150 22,440 19,412 Inventory n.a. 17,926 22,856 22,955 26,334 29,482 33,115 37,063 Accounts receivable n.a. 24,720 28,394 32,246 42,653 43,790 49,608 54,760 Other current assets n.a. 2,829 3,815 3,807 4,018 4,333 4,723 5,133 Total current assets n.a. 56,295 63,205 71,366 99,469 104,755 109,886 116,367 Fixed assets n.a. 42,050 55,342 63,374 73,353 83,733 93,960 104,033 Goodwill & intangibles n.a. 0 147 147 147 147 147 147 Other non-current assets n.a. 26,642 34,201 39,881 26,965 31,837 33,602 35,193 Total assets n.a. 124,988 152,895 174,768 199,935 220,472 237,596 255,742 Short-term debt n.a. 8,083 3,940 7,570 4,326 12,862 0 2,400 Accounts payable n.a. 7,558 11,208 11,400 13,275 14,994 16,993 18,994 Other current liabilities n.a. 3,475 3,309 2,831 3,700 4,149 4,637 5,162 Total current liabilities n.a. 19,117 18,457 21,801 21,301 32,005 21,630 26,556 Long-term debt n.a. 37,226 60,724 71,929 89,736 91,199 109,061 111,661 Other non-current liabilities n.a. 4,388 3,749 4,542 4,890 4,890 4,890 4,890 Total liabilities n.a. 60,730 82,930 98,273 115,927 128,095 135,581 143,108 Share capital n.a. 8,572 12,688 13,147 13,147 13,147 13,147 13,147 Reserves/R.E./others n.a. 52,940 54,399 61,803 69,093 77,286 86,721 97,116 Shareholders' equity n.a. 61,512 67,087 74,950 82,240 90,433 99,868 110,263 Minority interests n.a. 2,746 2,878 1,545 1,768 1,944 2,147 2,370 Total equity & liabilities n.a. 124,988 152,895 174,768 199,935 220,472 237,596 255,742 EV n.a. 120,563 142,729 152,015 152,692 162,183 172,097 180,348 Net debt/(cash) n.a. 34,489 56,523 67,142 67,597 76,911 86,622 94,649 BVPS (PHP) n.a. 7.200 10.799 12.650 13.881 15.264 16.857 18.612

Key ratios (%) Year to 31 Dec 2013 2014 2015 2016 2017 2018E 2019E 2020E Sales (YoY) n.a. n.a. 12.5 8.0 12.4 14.6 14.9 11.5 EBITDA (YoY) n.a. n.a. 18.5 17.2 21.9 16.3 17.1 11.2 Operating profit (YoY) n.a. n.a. 19.0 16.1 21.4 17.2 17.4 11.2 Net profit (YoY) n.a. n.a. 14.2 12.4 11.3 13.6 14.9 11.0 Core EPS (fully-diluted) (YoY) n.a. n.a. (13.7) 8.7 1.4 13.6 14.9 11.0 Gross-profit margin n.a. 56.8 57.3 60.2 61.8 62.7 63.5 63.4 EBITDA margin n.a. 34.1 35.9 39.0 42.3 42.9 43.7 43.5 Operating-profit margin n.a. 31.4 33.3 35.7 38.6 39.5 40.4 40.2 Net profit margin n.a. 24.1 24.5 25.5 25.3 25.0 25.0 24.9 ROAE n.a. 20.0 10.9 11.1 11.2 11.6 12.1 12.1 ROAA n.a. 9.9 5.1 4.8 4.7 4.8 5.0 5.2 ROCE n.a. 14.6 7.8 7.6 8.1 8.4 9.1 9.4 ROIC n.a. 7.3 7.4 6.9 7.3 7.9 8.1 8.2 Net debt to equity n.a. 56.1 84.3 89.6 82.2 85.0 86.7 85.8 Effective tax rate n.a. 10.5 12.2 16.3 19.6 20.1 21.6 21.6 Accounts receivable (days) n.a. 176.9 337.9 357.0 392.3 395.1 371.4 372.1 Current ratio (x) n.a. 2.9 3.4 3.3 4.7 3.3 5.1 4.4 Net interest cover (x) n.a. 8.3 7.1 8.1 6.2 5.3 5.3 5.2 Net dividend payout n.a. 16.4 14.7 16.6 18.4 18.0 17.8 18.5 Free cash flow yield n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. Source: FactSet, Daiwa forecasts

Company profile

Vista Land is a Philippine property developer well-known for its affordable and mid-market house and lot developments under the Camella brand. It has one of the highest provincial exposure, with over 50% of its residential real estate revenues outside of Metro Manila. Its recent acquisition of Starmalls, provides a mall-driven recurring base, which it aims to grow aggressively in the coming years.

Philippines Real Estate 25 June 2018

Megaworld (MEG PM)

Megaworld

Target price: PHP5.50 (from PHP5.30) Share price (22 Jun): PHP4.45 | Up/downside: +23.6%

Residential sales accelerate, robust rental income

 Strong sales and lower inventory levels prompt a hike in launches Micaela Abaquita (63) 2 7373021  Healthy pre-leasing levels support office expansion [email protected]  Raising TP to PHP5.5; reiterating our Buy (1) rating

What's new: We expect MEG’s improved residential outlook to further Forecast revisions (%) boost its recurring income-driven earnings growth in 2018. Renewed Year to 31 Dec 18E 19E 20E confidence among local property buyers and the proliferation of Philippine Revenue change - - - Net profit change - - - offshore gaming operators (POGOs) that seek housing for its Chinese Core EPS (FD) change - - - employees have allowed Megaworld’s pre-sales to grow by 21% YoY and Source: Daiwa forecasts 63% YoY in 2017 and 1Q18, respectively. We raise our TP to PHP5.5 after rolling over our valuation and reiterate our Buy (1) rating. Share price performance

(PHP) (%) What's the impact: Megaworld upgraded its guidance on 2018 launches 6.0 120 to PHP80bn (from PHP60bn), which is more than double its launches in 5.6 113 2017 and the first meaningful rise in launches since 2013. The hike in 5.1 105 4.7 98 launches comes after the company posted record pre-sales of PHP105bn 4.2 90 in 2017 (+21% YoY), PHP43bn in 1Q18 (+63% YoY) and PHP73bn in Jun-17 Sep-17 Dec-17 Mar-18 Jun-18 5M18, amid strong demand for commercial lots south of Metro Manila and Megaworld (LHS) Relative to PCOMP Index (RHS) condominium units in McKinley (Taguig) and Cebu, where many POGOs require housing for their employees. Robust pre-sales growth amid 12-month range 4.25-5.84 tempered launches in previous years eased inventory levels to 11 months Market cap (USDbn) 2.70 as at end-1Q18 from a high of 2.2 years in 2015. With accelerating pre- 3m avg daily turnover (USDm) 1.46 sales growth and increasing launches, we forecast Megaworld’s residential Shares outstanding (m) 32,371 Major shareholder Alliance Global (43.7%) revenue to rise at a 7% CAGR over 2017-20 (vs. 3% CAGR over 2015-17).

Financial summary (PHP) Meanwhile, the leasing business continues to be healthy, with occupancy Year to 31 Dec 18E 19E 20E rates of its offices and malls at 96% and 94%, respectively, in 1Q18. Office Revenue (m) 54,179 60,573 65,811 pre-leasing remains robust with office space for turnover in 2018/19/20 Operating profit (m) 20,470 23,804 26,706 already 25%/40%/40% pre-leased, primarily led by existing BPO tenants Net profit (m) 15,073 17,211 19,444 Core EPS (fully-diluted) 0.466 0.532 0.601 expanding operations in the country. Megaworld plans to increase its office EPS change (%) 18.0 14.2 13.0 and mall GLA at 14% and 18% CAGR over 2017-20E, respectively. Daiwa vs Cons. EPS (%) 4.6 5.8 2.1 PER (x) 9.6 8.4 7.4 Dividend yield (%) 1.4 1.6 1.8 What we recommend: We raise our NAV-based TP to PHP5.5 (from DPS 0.063 0.072 0.081 PHP5.3) after rolling over our valuation to the average of 2018-19E NAV PBR (x) 0.9 0.9 0.8 (from 2018E). We note that at this TP, Megaworld trades at an implied EV/EBITDA (x) 10.4 9.4 8.3 2018-19 average PER of 11.2x, broadly in line with its past-5-year average ROE (%) 10.4 10.8 11.1 of 10.3x. Led by accelerating residential sales and healthy rental revenue Source: FactSet, Daiwa forecasts expansion over 2017-20E, we reiterate our Buy (1) rating. Key risks: a sharp rise in mortgage rates, and significant slowdown in Business Processing and Outsourcing (BPO) firms and POGOs.

How we differ: Our 2018-20E EPS are 2-6% above the consensus, likely as we have factored in Megaworld’s improved residential outlook for 2018 ahead of the street. Moreover, we believe concerns about the near-term impact of a BPO slowdown and artificial intelligence on Megaworld’s office space demand are overdone, given its prime landbank and long-standing relationships with large BPO firms.

See important disclosures, including any required research certifications, beginning on page 54

Megaworld (MEG PM): 25 June 2018

How do we justify our view?

Growth outlook Valuation Earnings revisions

Growth outlook Megaworld: core net income attributable to equityholders We forecast Megaworld’s net profit to rise at a 15% 25,000 35 28.7 CAGR over 2017-20. Excluding the impact of the 30 20,000 PHP1.56bn impairment loss on financial assets in 2017, 25 we estimate its net income to rise at an 11% CAGR over 15,000 15.4 20 2017-20. We expect its leasing business to remain the 15.1 14.2 13.0 fastest growing segment (+19% 2017-20E CAGR) as 10,000 11.4 15 MEG plans to add 498k sq m of office GLA and 206k sq 6.0 10 m of retail space in the next 3 years. 5,000 0.6 5 7,412 8,553 8,604 11,070 12,329 14,193 15,047 17,185 19,418 0 0 Meanwhile, we project its residential revenue to rise at a 2012 2013 2014 2015 2016 2017 2018E 2019E CAGR of 7% over 2017-20 vs. 3% CAGR over 2015-17, Core net income (PHP bn) YoY growth (%) as we expect strong property demand for its projects in Source: Company, Daiwa forecasts Calabarzon and townships with POGOs to persist this year.

Valuation Megaworld: historical PER (x) We arrive at our TP of PHP5.50 for Megaworld using the 20 18 discounted NAV approach. We applied a 50% discount 16 to our average 2018-19E NAV of PHP11.0 as we have 14 12 included the landbank of Megaworld’s subsidiaries, a 10 large portion of which is located in rural areas. This 8 6 information was only recently made available. 4 2 We note that at our TP, Megaworld would trade at a 0

11.2x 2018-19E average PER, broadly in line with its

Jun-13 Jun-14 Jun-15 Jun-16 Jun-17

Mar-18 Mar-14 Mar-15 Mar-16 Mar-17

Sep-14 Sep-13 Dec-13 Dec-14 Sep-15 Dec-15 Sep-16 Dec-16 Sep-17 Dec-17 past-5-year average PER of 10.3x. PER -2SD -1SD AVERAGE +1SD +2SD

Source: Bloomberg

Earnings revisions Megaworld: consensus EPS Over the past 12 months, the Bloomberg consensus 6.0 0.52 5.8 2018-19E EPS have been upgraded by 4.5% and 4.2%, 5.6 0.50 5.4 0.48 respectively, likely led by improved residential revenue 5.2 5.0 0.46 outlook for 2018 after the company recorded better- 4.8 than-expected pre-sales in 2017. 4.6 0.44 4.4 0.42 4.2

Our 2018-20E EPS are 2-6% above the consensus, 4.0 0.40 Jul-17

likely as we are more positive on the company’s Jul-17

Oct-17 Apr-18 Apr-18

Jun-17 Jan-18 Jan-18 Jun-18

Mar-18 Feb-18

Aug-17 Sep-17 Sep-17 Nov-17 Nov-17 Dec-17 May-18 residential outlook. Moreover, we believe concerns Price (LHS) about the near-term impact of a BPO slowdown and BEst Standard EPS, Adj+ 2018 (RHS) artificial intelligence on Megaworld’s office space BEst Standard EPS, Adj+ 2019 (RHS) demand are overdone, given its prime landbank and Source: Bloomberg long-standing relationships with large BPO firms.

Megaworld (MEG PM): 25 June 2018

Financial summary Key assumptions Year to 31 Dec 2013 2014 2015 2016 2017 2018E 2019E 2020E Residential pre-sales (Pbn) 68.2 85.0 85.3 87.1 105.0 110.8 115.3 123.2 Residential project launches (Pbn) 20.8 71.9 35.4 18.7 39.1 59.8 65.8 72.4 Additional office GLA ('000 sqm) 77 112 116 114 159 209 133 157 Additional retail GLA ('000 sqm) 4 0 66 37 45 65 37 104 Additional hotel rooms 0 150 208 408 684 974 500 500

Profit and loss (PHPm) Year to 31 Dec 2013 2014 2015 2016 2017 2018E 2019E 2020E Residential property sales 25,844 29,507 32,727 33,131 34,623 37,079 40,061 41,995 Rental revenues 6,038 7,071 8,730 10,012 11,830 14,140 16,991 19,630 Other Revenue 1,569 2,214 1,800 2,162 2,418 2,960 3,521 4,185 Total Revenue 33,451 38,792 43,257 45,304 48,871 54,179 60,573 65,811 Other income 0 0 0 0 0 0 0 0 COGS (16,884) (18,902) (19,950) (19,713) (19,659) (21,879) (23,433) (24,415) SG&A (4,941) (6,560) (7,111) (7,548) (8,488) (9,476) (10,689) (11,899) Other op.expenses (1,008) (1,370) (1,440) (1,672) (2,020) (2,354) (2,647) (2,791) Operating profit 10,618 11,960 14,755 16,372 18,704 20,470 23,804 26,706 Net-interest inc./(exp.) 249 (331) (121) (247) (247) (440) (914) (832) Assoc/forex/extraord./others 739 13,075 (746) (897) (1,355) 146 146 146 Pre-tax profit 11,606 24,704 13,888 15,228 17,101 20,176 23,035 26,020 Tax (2,571) (3,120) (3,285) (3,489) (3,793) (4,477) (5,112) (5,775) Min. int./pref. div./others (64) (364) (389) (406) (536) (627) (712) (801) Net profit (reported) 8,971 21,220 10,215 11,332 12,772 15,073 17,211 19,444 Net profit (adjusted) 8,971 21,220 10,215 11,332 12,772 15,073 17,211 19,444 EPS (reported)(PHP) 0.308 0.670 0.321 0.356 0.401 0.474 0.541 0.611 EPS (adjusted)(PHP) 0.308 0.670 0.321 0.356 0.401 0.474 0.541 0.611 EPS (adjusted fully-diluted)(PHP) 0.305 0.667 0.319 0.354 0.395 0.466 0.532 0.601 DPS (PHP) 0.035 0.039 0.061 0.050 0.053 0.063 0.072 0.081 EBIT 10,618 11,960 14,755 16,372 18,704 20,470 23,804 26,706 EBITDA 11,575 13,260 16,104 17,859 20,534 22,635 26,262 29,307

Cash flow (PHPm) Year to 31 Dec 2013 2014 2015 2016 2017 2018E 2019E 2020E Profit before tax 11,606 24,704 13,888 15,228 17,101 20,176 23,035 26,020 Depreciation and amortisation 957 1,300 1,349 1,487 1,831 2,165 2,458 2,602 Tax paid (2,571) (3,120) (3,285) (3,489) (3,793) (4,477) (5,112) (5,775) Change in working capital (11,553) (23,353) (10,709) (13,165) (11,295) (8,110) (11,648) (8,603) Other operational CF items 1,026 (12,454) (231) 5,862 (3,728) (3,447) (3,403) (2,306) Cash flow from operations (535) (12,923) 1,013 5,922 117 6,308 5,330 11,938 Capex (10,101) (21,445) (17,945) (20,192) (17,744) (18,816) (15,816) (3,816) Net (acquisitions)/disposals (5,755) 4,506 983 2,621 (898) (119) (119) (119) Other investing CF items 1,230 13,180 402 291 260 146 146 146 Cash flow from investing (14,626) (3,759) (16,559) (17,279) (18,381) (18,789) (15,789) (3,789) Change in debt 8,572 4,911 19,065 8,581 13,718 10,024 12,982 2,482 Net share issues/(repurchases) 11,447 262 8 0 0 0 0 0 Dividends paid (1,030) (1,247) (1,936) (1,609) (1,722) (2,032) (2,321) (2,622) Other financing CF items 1,589 6,251 (2,822) (794) 6,360 1,648 1,474 1,870 Cash flow from financing 20,578 10,177 14,315 6,178 18,356 9,639 12,135 1,730 Forex effect/others 0 0 0 0 0 0 0 0 Change in cash 5,416 (6,504) (1,231) (5,179) 91 (2,842) 1,677 9,879 Free cash flow (10,637) (34,368) (16,931) (14,269) (17,627) (12,508) (10,485) 8,122 Source: FactSet, Daiwa forecasts

Megaworld (MEG PM): 25 June 2018

Financial summary continued … Balance sheet (PHPm) As at 31 Dec 2013 2014 2015 2016 2017 2018E 2019E 2020E Cash & short-term investment 32,010 25,368 22,763 16,462 16,430 13,589 15,266 25,145 Inventory 35,110 56,908 61,467 62,659 64,778 70,515 76,814 80,863 Accounts receivable 19,557 23,719 27,363 35,508 44,200 44,726 48,909 52,308 Other current assets 11,781 16,095 19,583 26,061 30,078 33,084 36,084 39,084 Total current assets 98,458 122,091 131,175 140,690 155,487 161,914 177,073 197,400 Fixed assets 30,698 50,843 67,438 86,143 102,056 118,707 132,065 133,279 Goodwill & intangibles 0 0 0 0 0 0 0 0 Other non-current assets 44,726 48,107 53,071 51,910 52,990 56,277 59,905 62,279 Total assets 173,882 221,040 251,685 278,743 310,533 336,899 369,043 392,957 Short-term debt 1,565 7,626 4,245 6,006 18,600 15,618 16,118 13,893 Accounts payable 7,198 10,620 12,069 13,567 16,166 17,156 18,253 18,959 Other current liabilities 17,133 20,632 20,164 21,317 22,253 22,421 23,158 24,297 Total current liabilities 25,897 38,878 36,479 40,890 57,018 55,196 57,529 57,148 Long-term debt 27,062 25,912 48,358 55,178 56,302 69,307 81,790 86,497 Other non-current liabilities 18,971 27,451 32,435 39,057 35,909 35,935 35,955 35,991 Total liabilities 71,929 92,241 117,271 135,124 149,229 160,438 175,274 179,636 Share capital 48,819 49,081 49,089 49,089 49,089 49,089 49,089 49,089 Reserves/R.E./others 43,109 61,722 67,600 76,391 89,689 102,729 117,620 134,442 Shareholders' equity 91,927 110,803 116,688 125,480 138,778 151,818 166,709 183,531 Minority interests 10,026 17,996 17,725 18,138 22,526 24,643 27,060 29,791 Total equity & liabilities 173,882 221,040 251,685 278,743 310,533 336,899 369,043 392,957 EV 137,918 164,132 184,843 201,721 219,653 234,517 248,120 243,334 Net debt/(cash) (3,383) 8,169 29,839 44,721 58,472 71,337 82,642 75,245 BVPS (PHP) 2.862 3.422 3.603 3.890 4.285 4.688 5.148 5.668

Key ratios (%) Year to 31 Dec 2013 2014 2015 2016 2017 2018E 2019E 2020E Sales (YoY) 19.6 16.0 11.5 4.7 7.9 10.9 11.8 8.6 EBITDA (YoY) 31.3 14.6 21.4 10.9 15.0 10.2 16.0 11.6 Operating profit (YoY) 31.7 12.6 23.4 11.0 14.2 9.4 16.3 12.2 Net profit (YoY) 22.9 136.5 (51.9) 10.9 12.7 18.0 14.2 13.0 Core EPS (fully-diluted) (YoY) 10.7 118.8 (52.1) 10.9 11.4 18.0 14.2 13.0 Gross-profit margin 49.5 51.3 53.9 56.5 59.8 59.6 61.3 62.9 EBITDA margin 34.6 34.2 37.2 39.4 42.0 41.8 43.4 44.5 Operating-profit margin 31.7 30.8 34.1 36.1 38.3 37.8 39.3 40.6 Net profit margin 26.8 54.7 23.6 25.0 26.1 27.8 28.4 29.5 ROAE 11.0 20.9 9.0 9.4 9.7 10.4 10.8 11.1 ROAA 5.7 10.7 4.3 4.3 4.3 4.7 4.9 5.1 ROCE 9.2 8.2 8.4 8.4 8.5 8.2 8.6 8.8 ROIC 9.6 8.9 7.5 7.2 7.1 6.8 7.1 7.4 Net debt to equity n.a. 7.4 25.6 35.6 42.1 47.0 49.6 41.0 Effective tax rate 22.2 12.6 23.7 22.9 22.2 22.2 22.2 22.2 Accounts receivable (days) 190.4 203.6 215.5 253.3 297.7 299.5 282.1 280.7 Current ratio (x) 3.8 3.1 3.6 3.4 2.7 2.9 3.1 3.5 Net interest cover (x) n.a. 36.1 122.3 66.3 75.6 46.5 26.0 32.1 Net dividend payout 11.4 5.8 18.9 14.1 13.3 13.3 13.3 13.3 Free cash flow yield n.a. n.a. n.a. n.a. n.a. n.a. n.a. 5.6 Source: FactSet, Daiwa forecasts

Company profile

Megaworld is a major residential property developer and BPO operator, credited for pioneering the first BPO-anchored mixed use complex, Eastwood City, in the 1990s. It aims to replicate this success with the development of large-scale communities following the live-work-play concept. While it continues to build residential projects, it has been aggressive in its push to build rental income, especially in the office space. Together with its subsidiaries, Global Estates Resorts, Inc., Sun Trust Properties, Inc. and East Empire Land Holdings, the company is developing 22 townships covering 3,705 hectares of land nationwide.

Philippines Real Estate 25 June 2018

(FLI PM) Filinvest Land Filinvest Land

Target price: PHP2.20 (from PHP2.15) Share price (22 Jun): PHP1.55 | Up/downside: +41.9%

Unlocking land value

 Key beneficiary of infrastructure progress in Clark Micaela Abaquita (63) 2 7373021  Plans to begin development of New Clark City phase 1 in 2019 [email protected]  Reaffirming our Buy (1) rating with new 12-month TP of PHP2.20

What's new: We believe Filinvest Land (FLI) stands to benefit from developments in the Clark area where it has 489 hectares of property. The Forecast revisions (%) government has been fast-tracking the development of Clark as a new Year to 31 Dec 18E 19E 20E Revenue change - 2.1 2.4 economic hub to reduce congestion in Metro Manila. Among the projects that Net profit change 0.1 0.4 1.2 we see benefiting the area are the Clark International Airport expansion, Core EPS (FD) change 0.1 0.4 1.2 Manila-Clark railway project and the New Clark City. We factor in FLI’s updated Source: Daiwa forecasts office pipeline, especially in Clark, and raise our EPS forecasts by 0.1-1.2% over 2018-20E. We widen our applied discount to NAV to 60% (from 50%) as Share price performance we think the risk of a prolonged residential drag from its now longer revenue (PHP) (%) recognition (see our report: 1Q18 earnings: longer revenue recognition still a 2.2 125 2.0 116 drag) will weigh on the share price. These adjustments result in a TP of 1.9 108

PHP2.20 (from PHP2.15) after rolling over our valuation to the average of 1.7 99 2018-19E NAV (from 2018E). We reiterate our Buy (1) rating on the back of the 1.5 90 strong potential for land value accretion and its growing recurring income base. Jun-17 Sep-17 Dec-17 Mar-18 Jun-18 Filinvest (LHS) Relative to PCOMP Index (RHS) What's the impact: Select key developments in the Clark area include:  The bidding process for the operations and maintenance (O&M) of the 12-month range 1.55-2.16 Clark International Airport commenced in May. The O&M contract is Market cap (USDbn) 0.70 targeted to be awarded in August 2018. 3m avg daily turnover (USDm) 0.23 Shares outstanding (m) 24,250  The Clark International Airport expansion began construction in December Major shareholder Filinvest Development Corp. (59.4%) 2017. It is due to open within 1H 2020.  Pre-construction work of phase 1 of the PNR-Clark Railway began in Financial summary (PHP) January 2018. The project is targeted to be completed by 2020. Year to 31 Dec 18E 19E 20E  The government has announced plans to move several state agencies to Revenue (m) 20,688 24,387 26,740 New Clark City. In line with this development, construction of the National Operating profit (m) 7,542 9,584 10,655 Net profit (m) 6,294 7,597 8,403 Government Administrative Center (NGAC) started in January 2018. Core EPS (fully-diluted) 0.260 0.313 0.347 Phase 1A is expected to be completed by October 2019. EPS change (%) 10.7 20.7 10.6 Daiwa vs Cons. EPS (%) (1.0) 6.7 8.3 PER (x) 6.0 4.9 4.5 Filinvest Land has completed the masterplan for the projects and is currently Dividend yield (%) 4.4 5.3 5.8 waiting for the government to finish the construction of access roads before it DPS 0.068 0.082 0.091 begins development. It expects the necessary road networks to be ready by PBR (x) 0.5 0.5 0.5 2019. In our view, this property would be a meaningful source of revenue for EV/EBITDA (x) 11.8 10.1 9.7 ROE (%) 9.6 10.8 11.0 Filinvest Land in the medium to long term. Nearby, Filinvest Land is also re- Source: FactSet, Daiwa forecasts developing the 201-hectare former Clark Mimosa Leisure Estate in the Clark Freeport Zone. We see the projects here contributing to Filinvest Land’s earnings in the nearer term, given readily available infrastructure. These include four office towers, two of which resulted into our revised forecasts.

What we recommend: With the 42% upside potential to our NAV-based TP of PHP2.20, we re-affirm our Buy (1) call on Filinvest Land. Risks: sharp interest rate hike, slowdown in Overseas Filipino Worker (OFW) remittances.

How we differ: Our 2019-20E EPS are 7-8% higher than consensus likely due to our more positive outlook for the office segment.

See important disclosures, including any required research certifications, beginning on page 54

Filinvest Land (FLI PM): 25 June 2018

How do we justify our view?

Growth outlook Valuation Earnings revisions

Growth outlook Filinvest Land: net income and YoY growth We forecast Filinvest Land to realise a 2017-20E net 9 25 21 income CAGR of 14%, driven by a 30% CAGR in 8 7 20 recurring revenue, as we look for residential sales to rise 16 6 14 by a more modest 8% CAGR over the same period. 15 5 11 11 11 4 8 Filinvest Land is building its leasing assets at an 10 3 unprecedented pace. From 2018-20, the company 5 2 expects to complete 122k sq m of retail and 336k sq m 5 1 of office GLA – 18% and 139% more than the retail and 3.92 4.53 5.01 5.25 5.69 6.3 7.6 8.4 0 0 office space it completed from 2014-17, respectively. 2013 2014 2015 2016 2017 2018E 2019E 2020E Meanwhile, we expect residential revenue growth to Core net income (PHP bn) YoY growth (%)

recover and accelerate after slowing down over 2014-17 Source: Company, Daiwa forecasts (+1% CAGR). Recall that in 2017, it introduced a new payment scheme that lengthened its downpayment terms, and consequently its revenue recognition period. We expect growth to normalise in 2019 as it books sales made during the transition period.

Valuation Filinvest Land: PER (x) We arrive at our 12-month TP of PHP2.20 using a 13 discounted NAV approach: 1) we value its raw, efficient 12 11 landbank using estimates of market values, 2) we use a 10 blended cap rate of 9% on the EBITDA of its rental 9 segment, and 3) we apply a 60% discount to our 2018- 8 7 19E average NAV/share estimate of PHP5.5. This 6 discount is in line with the stock’s past-5-year average. 5 We think FLI’s discount to NAV should narrow to its 4

historical discount on the back of improving earnings

Jun-13 Jun-14 Jun-15 Jun-16 Jun-17

Mar-16 Mar-14 Mar-15 Mar-17 Mar-18

Sep-15 Sep-13 Dec-13 Sep-14 Dec-14 Dec-15 Sep-16 Dec-16 Sep-17 Dec-17 visibility and rising land values in areas in which Filinvest -2SD -1SD AVERAGE Land has significant landholdings. +2SD +1SD PER

Source: Bloomberg We note that at our TP, the stock would trade at an 8.5x 2018E PER, in line with its past-5-year average multiple.

Earnings revisions Filinvest Land: consensus EPS revisions We think the consensus EPS forecasts have been 2.2 0.33 2.1 revised down over the past 12 months due largely to the 0.31 2.0 company’s now longer residential revenue recognition 1.9 0.29 period following the longer downpayment terms 1.8 0.27 introduced in 2017. 1.7 0.25 1.6

We see this as a drag on residential revenue in 2018 1.5 0.23 Jul-17

(given the 12-18 month extension of the downpayment Jul-17

Apr-18 Oct-17 Apr-18

Jun-17 Jan-18 Jun-18

Feb-18 Feb-18 Mar-18

Aug-17 Dec-17 Sep-17 Sep-17 Nov-17 Nov-17 terms) before sales made in 2017-18 are booked in May-18 Price (LHS) 2019 and lead to an acceleration in revenue growth. BEst Standard EPS, Adj+ 2018 (RHS) BEst Standard EPS, Adj+ 2019 (RHS)

Source: Bloomberg

Filinvest Land (FLI PM): 25 June 2018

Financial summary Key assumptions Year to 31 Dec 2013 2014 2015 2016 2017 2018E 2019E 2020E Residential project launches (PHP bn) 7.5 12.5 12.5 11.9 14.3 16.0 15.2 14.5 Residential pre-sales (PHP bn) 14.4 15.4 16.4 17.7 18.7 19.7 21.1 22.6 Additional retail GLA ('000 sqm) 0.0 1.8 4.8 10.5 88.1 61.0 61.2 0.0 Additional office GLA ('000 sqm) 34.5 7.4 67.5 73.2 0.0 212.6 123.6 0.0 share of real estate EBITDA (%) 73.6 74.6 73.9 68.1 61.6 56.2 49.1 47.9 share of rental EBITDA (%) 26.4 25.4 26.1 31.9 38.4 43.8 50.9 52.1

Profit and loss (PHPm) Year to 31 Dec 2013 2014 2015 2016 2017 2018E 2019E 2020E Real estate sales 10,478 13,204 14,051 14,256 13,748 14,760 15,891 17,149 Rental services 2,034 2,264 2,953 3,384 4,415 5,928 8,495 9,591 Other Revenue 0 0 0 0 0 0 (0) 0 Total Revenue 12,513 15,468 17,003 17,640 18,163 20,688 24,387 26,740 Other income 0 0 0 0 0 0 0 0 COGS (6,337) (7,925) (8,438) (8,673) (8,530) (9,360) (10,492) (11,366) SG&A (1,974) (2,223) (2,123) (2,395) (2,662) (2,922) (3,292) (3,548) Other op.expenses (287) (426) (484) (506) (720) (864) (1,018) (1,171) Operating profit 3,914 4,893 5,958 6,067 6,251 7,542 9,584 10,655 Net-interest inc./(exp.) 75 104 (75) (201) (127) (305) (421) (443) Assoc/forex/extraord./others 755 680 491 989 1,171 937 959 984 Pre-tax profit 4,744 5,678 6,374 6,854 7,295 8,173 10,122 11,196 Tax (768) (1,074) (1,275) (1,504) (1,461) (1,715) (2,326) (2,573) Min. int./pref. div./others (58) (70) (87) (104) (149) (165) (199) (220) Net profit (reported) 3,918 4,534 5,012 5,247 5,685 6,294 7,597 8,403 Net profit (adjusted) 3,918 4,534 5,012 5,247 5,685 6,294 7,597 8,403 EPS (reported)(PHP) 0.162 0.187 0.207 0.216 0.234 0.260 0.313 0.347 EPS (adjusted)(PHP) 0.162 0.187 0.207 0.216 0.234 0.260 0.313 0.347 EPS (adjusted fully-diluted)(PHP) 0.162 0.187 0.207 0.216 0.234 0.260 0.313 0.347 DPS (PHP) 0.048 0.050 0.056 0.061 0.061 0.068 0.082 0.091 EBIT 3,914 4,893 5,958 6,067 6,251 7,542 9,584 10,655 EBITDA 4,201 5,319 6,443 6,573 6,971 8,406 10,602 11,826

Cash flow (PHPm) Year to 31 Dec 2013 2014 2015 2016 2017 2018E 2019E 2020E Profit before tax 4,744 5,678 6,374 6,854 7,295 8,173 10,122 11,196 Depreciation and amortisation 287 426 484 506 720 864 1,018 1,171 Tax paid (523) (395) (592) (563) (879) (652) (884) (978) Change in working capital (2,337) (2,940) (2,834) (3,535) 3,065 (9,588) (7,382) (6,354) Other operational CF items (246) (223) (88) 50 (119) 69 185 206 Cash flow from operations 1,925 2,546 3,344 3,313 10,083 (1,134) 3,058 5,241 Capex (5,874) (6,122) (5,481) (7,252) (8,714) (11,676) (9,369) (9,835) Net (acquisitions)/disposals 7 (6) 5 (38) 0 0 0 0 Other investing CF items 80 96 11 155 61 383 259 259 Cash flow from investing (5,787) (6,032) (5,465) (7,135) (8,653) (11,293) (9,110) (9,577) Change in debt 10,530 4,255 7,416 5,542 4,855 12,000 11,100 6,300 Net share issues/(repurchases) 0 0 0 0 0 0 0 0 Dividends paid (1,164) (1,212) (1,365) (1,479) (1,487) (1,646) (1,986) (2,197) Other financing CF items (1,279) (1,701) (1,642) (1,965) (2,095) (451) (597) (638) Cash flow from financing 8,087 1,341 4,408 2,098 1,274 9,903 8,517 3,465 Forex effect/others 0 0 0 0 0 0 0 0 Change in cash 4,225 (2,145) 2,288 (1,723) 2,703 (2,524) 2,464 (870) Free cash flow (3,948) (3,576) (2,136) (3,939) 1,368 (12,810) (6,311) (4,594) Source: FactSet, Daiwa forecasts

Filinvest Land (FLI PM): 25 June 2018

Financial summary continued … Balance sheet (PHPm) As at 31 Dec 2013 2014 2015 2016 2017 2018E 2019E 2020E Cash & short-term investment 6,391 4,246 6,596 4,873 7,576 5,053 7,517 6,647 Inventory 24,427 24,239 25,239 25,906 33,456 35,918 38,671 41,731 Accounts receivable 4,465 4,576 4,086 4,632 4,535 4,173 4,849 5,279 Other current assets 356 465 455 597 1,128 1,193 1,393 1,520 Total current assets 35,638 33,526 36,377 36,008 46,695 46,337 52,430 55,177 Fixed assets 39,538 45,023 51,704 58,205 66,607 77,419 85,769 94,434 Goodwill & intangibles 4,567 4,567 4,567 4,567 4,567 4,567 4,567 4,567 Other non-current assets 18,353 23,291 28,546 30,645 27,253 30,092 33,977 36,430 Total assets 98,097 106,408 121,195 129,425 145,122 158,415 176,744 190,608 Short-term debt 2,284 6,209 6,855 5,724 6,661 8,900 8,700 6,000 Accounts payable 7,373 7,321 8,869 7,120 11,602 8,842 9,943 10,815 Other current liabilities 1,264 1,531 1,781 2,225 2,706 2,856 3,046 3,266 Total current liabilities 10,922 15,060 17,505 15,070 20,969 20,598 21,689 20,081 Long-term debt 33,785 34,097 40,842 47,528 51,423 61,184 72,484 81,484 Other non-current liabilities 4,404 5,168 7,152 7,414 9,228 8,464 8,769 9,010 Total liabilities 49,111 54,326 65,498 70,013 81,621 90,247 102,943 110,576 Share capital 24,551 24,551 24,551 24,551 24,551 24,551 24,551 24,551 Reserves/R.E./others 24,082 27,396 30,875 34,607 38,695 43,343 48,954 55,160 Shareholders' equity 48,633 51,947 55,426 59,158 63,246 67,894 73,504 79,710 Minority interests 353 135 271 255 255 274 297 322 Total equity & liabilities 98,097 106,408 121,195 129,425 145,122 158,415 176,744 190,608 EV 63,601 69,808 74,818 82,175 84,154 98,842 107,522 114,739 Net debt/(cash) 29,678 36,061 41,100 48,380 50,508 65,032 73,667 80,837 BVPS (PHP) 2.021 2.159 2.303 2.459 2.629 2.822 3.056 3.314

Key ratios (%) Year to 31 Dec 2013 2014 2015 2016 2017 2018E 2019E 2020E Sales (YoY) 17.1 23.6 9.9 3.7 3.0 13.9 17.9 9.6 EBITDA (YoY) 14.8 26.6 21.1 2.0 6.1 20.6 26.1 11.5 Operating profit (YoY) 18.1 25.0 21.8 1.8 3.0 20.6 27.1 11.2 Net profit (YoY) 14.2 15.7 10.5 4.7 8.3 10.7 20.7 10.6 Core EPS (fully-diluted) (YoY) 14.2 15.7 10.5 4.7 8.3 10.7 20.7 10.6 Gross-profit margin 49.4 48.8 50.4 50.8 53.0 54.8 57.0 57.5 EBITDA margin 33.6 34.4 37.9 37.3 38.4 40.6 43.5 44.2 Operating-profit margin 31.3 31.6 35.0 34.4 34.4 36.5 39.3 39.8 Net profit margin 31.3 29.3 29.5 29.7 31.3 30.4 31.2 31.4 ROAE 8.3 9.0 9.3 9.2 9.3 9.6 10.8 11.0 ROAA 4.3 4.4 4.4 4.2 4.1 4.1 4.5 4.6 ROCE 5.0 5.5 6.1 5.6 5.3 5.8 6.5 6.6 ROIC 4.4 4.8 5.2 4.6 4.5 4.8 5.3 5.3 Net debt to equity 61.0 69.4 74.2 81.8 79.9 95.8 100.2 101.4 Effective tax rate 16.2 18.9 20.0 21.9 20.0 21.0 23.0 23.0 Accounts receivable (days) 113.7 106.7 93.0 90.2 92.1 76.8 67.5 69.1 Current ratio (x) 3.3 2.2 2.1 2.4 2.2 2.2 2.4 2.7 Net interest cover (x) n.a. n.a. 79.0 30.2 49.1 24.7 22.8 24.1 Net dividend payout 29.7 26.7 27.2 28.2 26.1 26.1 26.1 26.1 Free cash flow yield n.a. n.a. n.a. n.a. 3.6 n.a. n.a. n.a. Source: FactSet, Daiwa forecasts

Company profile

From being purely a house and lot residential developer, Filinvest Land has become a multi-product property company with a presence in mid-rise and high-rise condominiums, as well as office and retail leasing. The company is expanding provincially through townships and residential communities (notably in Clark, Cebu and Davao) and aggressively building leasing assets in a bid to reach a 50:50 residential/recurring mix by 2020.

Philippines Real Estate 25 June 2018

(SMPH PM) SM Prime SM Pri me

Target price: PHP34.00 (from PHP34.00) Share price (22 Jun): PHP33.25 | Up/downside: +2.3%

Recurring income story diluted

 Manila Bay property demand boosts pre-sales, reclamation value Micaela Abaquita (63) 2 7373021  Residential revenue to grow faster than mall revenue over 2017-20E [email protected]  Upgrading to Hold (3) rating and reiterating TP of PHP34

What's new: In the past 2 years, the rapid growth in land value in the Manila Bay area, home to several major casinos and many Philippine offshore gaming Forecast revisions (%) Year to 31 Dec 18E 19E 20E operators (POGOs), reflects strong appetite for property in the area. SM Prime Revenue change - - - has benefitted from this story through robust pre-sales and accelerating Net profit change - - - revenue growth, as well as enhanced value of its 600ha reclamation project, Core EPS (FD) change - - - which is currently pending government approval. However, we believe these Source: Daiwa forecasts factors also dilute its recurring income story, on which its narrow discount to Share price performance NAV is predicated. We maintain our TP of PHP34, but upgrade to Hold (3) following the recent market sell-off. (PHP) (%) 40 115

38 109 What's the impact: Strong sales of its condominiums in Manila Bay, coupled 36 103 with lower cancellations, led SM Prime to record a 15% residential revenue 34 96 32 90 CAGR over 2015-17, faster than the flat growth it registered during 2012-15. Jun-17 Sep-17 Dec-17 Mar-18 Jun-18 We see robust demand for property in the area continuing and expect SM SM Prime (LHS) Prime’s residential revenue to rise at a 12% CAGR over 2017-20, contributing Relative to PCOMP Index (RHS) 3.9pp to our 9% revenue CAGR forecast over the period. While we welcome the company’s diversification into house and lot formats in the provinces, we 12-month range 32.35-39.70 Market cap (USDbn) 17.97 expect Metro Manila, especially Manila Bay, to remain significant for SM 3m avg daily turnover (USDm) 7.06 Prime’s revenue growth, given higher market prices in the area vs. the Shares outstanding (m) 28,879 provinces. Major shareholder SM Investments Corporation (49.7%)

Meanwhile, we forecast SM Prime’s mall revenue to rise at an 8% CAGR over Financial summary (PHP) 2017-20, slower than the 11% CAGR posted during 2014-17, partly due to the Year to 31 Dec 18E 19E 20E Revenue (m) 101,773 110,046 117,774 large base established over the years. The company has not provided Operating profit (m) 45,140 48,522 51,909 guidance on mall openings beyond 2018; hence, our estimates are based on Net profit (m) 31,428 33,889 36,292 additional gross floor area (GFA) of 350,000 sq m, consistent with its average Core EPS (fully-diluted) 1.088 1.173 1.257 EPS change (%) 14.0 7.8 7.1 annual additions in the past 5 years. We expect most of its new malls to be Daiwa vs Cons. EPS (%) (0.0) (3.7) (9.8) located in the provincial areas, which remain underserved. As the mall PER (x) 30.6 28.3 26.5 segment contributed 58% to SM Prime’s revenue in 2017, we estimate it to Dividend yield (%) 0.9 1.0 1.1 account for 4.5pp of our 9% 2017-20E revenue CAGR. DPS 0.304 0.328 0.351 PBR (x) 2.9 2.7 2.5 EV/EBITDA (x) 20.0 18.7 17.5 What we recommend: We think the current share price fully factors in the ROE (%) 11.6 11.5 11.4 Manila Bay reclamation project and we see no further near-term upside once it Source: FactSet, Daiwa forecasts is approved. In our view, the inclusion of the reclamation project (c.27% of NAV) dilutes SM Prime’s recurring income story. Also, we think the project is not earnings-accretive in the near term and a potential drag on ROE. We roll over our valuation to the average of 2018-19E NAV (from 2018E) and factor in a higher cap rate amid rising interest rates. These adjustments result in our NAV-based TP remaining unchanged at PHP34, but we upgrade to Hold (3) from Underperform (4) following the recent market sell-off. Key risks: higher- than-expected mall rollout, and approval of the Cebu reclamation project.

How we differ: Our 2019-20E EPS are 4-10% below the consensus, likely as we are more conservative on SM Prime’s mall GFA rollout.

See important disclosures, including any required research certifications, beginning on page 54

Philippines Property: 25 June 2018

How do we justify our view? Growth outlook Valuation Earnings revisions

Growth outlook SM Prime: core attributable net income and YoY growth

We forecast SM Prime’s net profit to rise at a 10% 40 92 100 CAGR over 2017-20, led by: 1) steady expansion of its 35 80 30 mall segment (9% revenue CAGR), and 2) the continued 60 expansion of its residential segment (12% revenue 25 40 CAGR) from flat growth over 2012-15. 20 15 19 16 8 7 20 15 -7 0 SM Prime aims to expand its mall segment through the 10 construction of new malls, expansion of existing malls 5 -33 (20) and acquisition of smaller malls. In the absence of 15.4 17.7 34.0 22.8 27.2 31.4 33.9 36.3 0 (40) guidance beyond 2018, we assume an annual GFA 2013 2014 2015 2016 2017 2018E 2019E 2020E addition of 350,000 sq m, consistent with the average Core net income (PHP bn) YoY growth (%) additions in the past 5 years. Meanwhile, we expect Source: Company, Daiwa forecasts residential revenue growth to continue over 2017-20, led by continued robust demand for its Manila Bay projects.

Valuation SM Prime: Historical PER To arrive at our 12-month TP of PHP34, we applied a 40 15% discount to our average 2018-19E NAV, slightly 35 30 higher than the stock’s average past-3-year discount, as 25 the inclusion of the reclamation project increases the 20 share of non-recurring segments to NAV and dilutes its 15 recurring income story, on which its narrow discount to 10 5 NAV is predicated. Furthermore, we believe a premium 0

to NAV is undeserved, considering its history of capex

Jun-17 Jun-13 Jun-14 Jun-15 Jun-16 Jun-18

Mar-14 Mar-15 Mar-16 Mar-17 Mar-18

Sep-17 Dec-17 Dec-13 Sep-14 Dec-14 Sep-15 Dec-15 Sep-16 Dec-16 indiscipline, sub-par disclosures, and concentration and Sep-13 execution risks related to its residential business. -2SD -1SD AVERAGE +2SD +1SD PER (LHS)

At our TP, SM Prime trades at an implied forward 2018E Source: Bloomberg

PER of 30x, 1SD above the stock’s past-5-year average PER of 26.5x.

Earnings revisions SM Prime: consensus EPS Over the past 12 months, the Bloomberg consensus 40 1.25 39 2018-19E EPS for SM Prime have been upgraded by 38 1.20 1.2-2.7%, likely due to better-than-expected pre-sales 37 1.15 36 and residential revenue in 2017. 35 1.10 34 33 1.05 Our 2019-20E EPS are 4-10% below the consensus, 32 1.00 31 likely as we are more conservative on SM Prime’s mall 30 0.95

GFA rollout.

Jul-17 Jul-17

Oct-17 Apr-18 Apr-18

Jun-17 Jan-18 Jan-18 Jun-18

Mar-18

Feb-18

Sep-17 Sep-17 Aug-17 Nov-17 Nov-17 Dec-17 May-18 Price (LHS) BEst Standard EPS, Adj+ 2018 (RHS) BEst Standard EPS, Adj+ 2019 (RHS) Source: Bloomberg

Philippines Property: 25 June 2018

Financial summary Key assumptions Year to 31 Dec 2013 2014 2015 2016 2017 2018E 2019E 2020E Residential project launches (Pbn) 31.8 17.6 35.6 35.0 38.5 39.2 38.5 39.7 Residential gross pre-sales (Pbn) 17.2 24.4 31.8 35.3 46.2 49.7 50.6 52.2 Additional malls GLA ('000 sqm) 159.0 190.8 359.1 224.7 434.1 257.1 194.3 194.3 Additional office GLA ('000 sqm) 0.0 27.5 82.7 0.0 79.8 0.0 0.0 81.1 Additional hotel rooms 0.0 0.0 154.0 347.0 0.0 0.0 0.0 0.0

Profit and loss (PHPm) Year to 31 Dec 2013 2014 2015 2016 2017 2018E 2019E 2020E Mall 34,333 38,643 44,518 48,528 53,102 57,998 62,075 66,348 Residential 20,907 22,723 22,563 25,419 30,039 35,466 39,132 41,953 Other Revenue 4,555 4,875 4,430 5,869 7,780 8,308 8,839 9,473 Total Revenue 59,794 66,240 71,511 79,816 90,922 101,773 110,046 117,774 Other income 0 0 0 0 0 0 0 0 COGS (11,921) (12,257) (12,039) (13,117) (15,152) (17,725) (19,557) (20,967) SG&A (11,437) (12,440) (13,449) (15,702) (17,247) (19,305) (20,875) (22,341) Other op.expenses (12,301) (13,856) (14,584) (15,732) (17,894) (19,602) (21,093) (22,558) Operating profit 24,136 27,687 31,439 35,265 40,629 45,140 48,522 51,909 Net-interest inc./(exp.) (2,994) (3,702) (2,765) (3,636) (4,631) (4,538) (4,712) (4,966) Assoc/forex/extraord./others (431) (310) 6,237 (640) (50) 371 371 371 Pre-tax profit 20,710 23,674 34,911 30,989 35,948 40,973 44,181 47,314 Tax (3,984) (4,778) (6,018) (6,621) (7,823) (8,917) (9,615) (10,297) Min. int./pref. div./others (451) (506) (591) (562) (551) (628) (677) (725) Net profit (reported) 16,275 18,390 28,302 23,806 27,574 31,428 33,889 36,292 Net profit (adjusted) 16,275 18,390 28,302 23,806 27,574 31,428 33,889 36,292 EPS (reported)(PHP) 0.586 0.660 0.982 0.824 0.955 1.088 1.173 1.257 EPS (adjusted)(PHP) 0.586 0.660 0.982 0.824 0.955 1.088 1.173 1.257 EPS (adjusted fully-diluted)(PHP) 0.586 0.660 0.982 0.824 0.955 1.088 1.173 1.257 DPS (PHP) 0.169 0.189 0.210 0.230 0.267 0.304 0.328 0.351 EBIT 24,136 27,687 31,439 35,265 40,629 45,140 48,522 51,909 EBITDA 30,116 34,266 38,406 43,079 49,588 54,888 59,032 63,182

Cash flow (PHPm) Year to 31 Dec 2013 2014 2015 2016 2017 2018E 2019E 2020E Profit before tax 20,710 23,674 34,911 30,989 35,948 40,973 44,181 47,314 Depreciation and amortisation 5,981 6,580 6,967 7,814 8,959 9,748 10,510 11,273 Tax paid (4,116) (4,895) (5,486) (6,187) (7,608) (8,917) (9,615) (10,297) Change in working capital (1,990) (21,922) 1,062 1,475 (5,365) (6,190) (4,522) (3,335) Other operational CF items 3,234 3,572 (4,973) 3,790 4,999 3,755 3,320 3,829 Cash flow from operations 23,819 7,009 32,481 37,881 36,933 39,369 43,874 48,784 Capex (24,994) (35,669) (42,714) (30,714) (26,791) (36,309) (34,422) (32,969) Net (acquisitions)/disposals (6,557) (268) (7,942) (331) (2,518) 0 0 0 Other investing CF items 143 5,826 (5,222) (2,721) (1,835) (1,865) (2,006) (2,159) Cash flow from investing (31,408) (30,111) (55,878) (33,766) (31,143) (38,173) (36,428) (35,128) Change in debt 22,471 22,875 23,605 5,583 27,452 1,654 (10,322) (5,672) Net share issues/(repurchases) 0 17,646 0 0 158 0 0 0 Dividends paid (5,021) (5,587) (6,442) (7,137) (8,278) (8,786) (9,474) (10,146) Other financing CF items (4,049) (3,719) (2,500) (3,283) (4,333) (4,566) (4,713) (4,941) Cash flow from financing 13,401 31,215 14,663 (4,837) 15,000 (11,698) (24,509) (20,759) Forex effect/others 0 0 0 0 0 0 0 0 Change in cash 5,812 8,113 (8,734) (722) 20,789 (10,503) (17,063) (7,103) Free cash flow (1,176) (28,659) (10,233) 7,167 10,142 3,060 9,452 15,815 Source: FactSet, Daiwa forecasts

Philippines Property: 25 June 2018

Financial summary continued … Balance sheet (PHPm) As at 31 Dec 2013 2014 2015 2016 2017 2018E 2019E 2020E Cash & short-term investment 29,181 36,889 27,355 26,784 45,744 35,241 18,178 11,075 Inventory 6,103 7,579 8,165 7,788 8,733 10,216 11,272 12,085 Accounts receivable 27,184 30,687 32,492 32,833 34,277 38,143 41,091 43,844 Other current assets 23,217 30,841 31,117 36,545 36,822 43,595 47,733 51,116 Total current assets 85,685 105,996 99,130 103,951 125,576 127,195 118,274 118,120 Fixed assets 194,785 227,325 255,126 272,591 310,726 337,286 361,198 382,895 Goodwill & intangibles 0 0 0 0 0 0 0 0 Other non-current assets 55,113 55,518 80,710 89,018 102,116 105,718 109,155 112,649 Total assets 335,584 388,840 434,966 465,560 538,418 570,200 588,627 613,663 Short-term debt 10,637 13,677 29,716 7,994 26,088 22,894 24,610 22,744 Accounts payable 55,547 49,630 39,957 40,325 51,084 57,016 60,636 64,249 Other current liabilities 947 744 956 1,103 1,035 1,035 1,035 1,035 Total current liabilities 67,131 64,051 70,629 49,421 78,208 80,946 86,282 88,029 Long-term debt 95,676 115,606 125,952 156,384 167,509 172,357 160,319 156,513 Other non-current liabilities 6,556 6,945 22,542 24,392 29,826 31,038 31,383 31,937 Total liabilities 169,362 186,602 219,123 230,197 275,544 284,341 277,984 276,479 Share capital 33,166 33,166 33,166 33,166 33,166 33,166 33,166 33,166 Reserves/R.E./others 130,100 165,921 179,323 198,315 225,791 248,433 272,848 298,994 Shareholders' equity 163,267 199,088 212,489 231,481 258,957 281,599 306,014 332,161 Minority interests 2,955 3,151 3,354 3,883 3,917 4,259 4,628 5,024 Total equity & liabilities 335,584 388,840 434,966 465,560 538,418 570,200 588,627 613,663 EV 1,034,562 1,049,724 1,069,818 1,078,874 1,087,436 1,098,070 1,103,174 1,102,842 Net debt/(cash) 77,132 92,394 128,313 137,593 147,854 160,010 166,752 168,183 BVPS (PHP) 7.266 8.096 8.641 9.413 10.530 11.451 12.444 13.507

Key ratios (%) Year to 31 Dec 2013 2014 2015 2016 2017 2018E 2019E 2020E Sales (YoY) 4.5 10.8 8.0 11.6 13.9 11.9 8.1 7.0 EBITDA (YoY) 10.7 13.8 12.1 12.2 15.1 10.7 7.5 7.0 Operating profit (YoY) 9.4 14.7 13.6 12.2 15.2 11.1 7.5 7.0 Net profit (YoY) 0.4 13.0 53.9 (15.9) 15.8 14.0 7.8 7.1 Core EPS (fully-diluted) (YoY) 0.4 12.6 48.8 (16.0) 15.8 14.0 7.8 7.1 Gross-profit margin 80.1 81.5 83.2 83.6 83.3 82.6 82.2 82.2 EBITDA margin 50.4 51.7 53.7 54.0 54.5 53.9 53.6 53.6 Operating-profit margin 40.4 41.8 44.0 44.2 44.7 44.4 44.1 44.1 Net profit margin 27.2 27.8 39.6 29.8 30.3 30.9 30.8 30.8 ROAE 10.5 10.2 13.8 10.7 11.2 11.6 11.5 11.4 ROAA 5.2 5.1 6.9 5.3 5.5 5.7 5.8 6.0 ROCE 9.6 9.2 8.9 9.1 9.5 9.6 9.9 10.3 ROIC 8.7 8.2 8.1 7.7 8.1 8.2 8.2 8.3 Net debt to equity 47.2 46.4 60.4 59.4 57.1 56.8 54.5 50.6 Effective tax rate 19.2 20.2 17.2 21.4 21.8 21.8 21.8 21.8 Accounts receivable (days) 135.3 159.4 161.2 149.4 134.7 129.9 131.4 131.6 Current ratio (x) 1.3 1.7 1.4 2.1 1.6 1.6 1.4 1.3 Net interest cover (x) 8.1 7.5 11.4 9.7 8.8 9.9 10.3 10.5 Net dividend payout 28.8 28.7 21.4 27.9 28.0 28.0 28.0 28.0 Free cash flow yield n.a. n.a. n.a. 0.7 1.1 0.3 1.0 1.6 Source: FactSet, Daiwa forecasts

Company profile

SM Prime is the largest mall operator in the Philippines, having built 67 malls with an 8.0m sq m gross floor area (GFA). Its malls and offices complement its retail business by boosting foot traffic in its malls. The company's residential arm is presently concentrated in the Metro Manila condominium market.

Philippines Property: 25 June 2018

Daiwa’s Asia Pacific Research Directory

HONG KONG SOUTH KOREA Takashi FUJIKURA (852) 2848 4051 [email protected] Sung Yop CHUNG (82) 2 787 9157 [email protected] Regional Research Head Pan-Asia Co-head/Regional Head of Automobiles and Components; Automobiles; Jiro IOKIBE (852) 2773 8702 [email protected] Shipbuilding; Steel Co-head of Asia Pacific Research Mike OH (82) 2 787 9179 [email protected] John HETHERINGTON (852) 2773 8787 [email protected] Banking; Capital Goods (Construction and Machinery) Co-head of Asia Pacific Research Josh RHEE (82) 2 787 9124 [email protected] Craig CORK (852) 2848 4463 [email protected] Chemicals Regional Head of Asia Pacific Product Management Iris PARK (82) 2 787 9165 [email protected] Paul M. KITNEY (852) 2848 4947 [email protected] Consumer/Retail Chief Strategist for Asia Pacific; Strategy (Regional) SK KIM (82) 2 787 9173 [email protected] Kevin LAI (852) 2848 4926 [email protected] IT/Electronics – Semiconductor/Display and Tech Hardware Chief Economist for Asia ex-Japan; Macro Economics (Regional) Thomas Y KWON (82) 2 787 9181 [email protected] Olivia XIA (852) 2773 8736 [email protected] Pan-Asia Head of Internet & Telecommunications; Software – Internet/On-line Games Macro Economics (Hong Kong/China) Kelvin LAU (852) 2848 4467 [email protected] TAIWAN Head of Automobiles; Transportation and Industrial (Hong Kong/China) Rick HSU (886) 2 8758 6261 [email protected] Jay LU (852) 2848 4970 [email protected] Head of Regional Technology; Head of Taiwan Research; Semiconductor/IC Design (Regional) Automobiles and Components (Hong Kong/China) Nora HOU (886) 2 8758 6249 [email protected] Leon QI (852) 2532 4381 [email protected] Banking; Diversified financials; Insurance Regional Head of Financials; Banking; Diversified financials; Insurance (Hong Kong/China) Steven TSENG (886) 2 8758 6252 [email protected] Anson CHAN (852) 2532 4350 [email protected] IT/Technology Hardware (PC Hardware) Kylie HUANG (886) 2 8758 6248 [email protected] Consumer (Hong Kong/China) Adrian CHAN (852) 2848 4427 [email protected] IT/Technology Hardware (Handsets and Components) Consumer (Hong Kong/China) Helen CHIEN (886) 2 8758 6254 [email protected] John CHOI (852) 2773 8730 [email protected] Small/Mid Cap Head of Hong Kong and China Internet; Regional Head of Small/Mid Cap Fiona LIANG (852) 2532 4341 [email protected] INDIA Punit SRIVASTAVA (91) 22 6622 1013 [email protected] Industrial (Hong Kong/China) Dennis IP (852) 2848 4068 [email protected] Head of India Research; Strategy; Banking/Finance Saurabh MEHTA (91) 22 6622 1009 [email protected] Regional Head of Power, Utilities, Renewable and Environment (PURE); PURE (Hong Kong/China) Capital Goods; Utilities Daniel YANG (852) 2848 4443 [email protected] Power, Utilities, Renewable and Environment (PURE) – Solar and Nuclear (China) SINGAPORE Don LAU (852) 2848 4469 [email protected] Ramakrishna MARUVADA (65) 6228 6742 [email protected] Power, Utilities, Renewable and Environment (PURE) – Utilities (Hong Kong) Head of Singapore Research; Telecommunications (China/ASEAN/India) Jonas KAN (852) 2848 4439 [email protected] David LUM (65) 6228 6740 [email protected] Head of Hong Kong and China Property Banking; Property and REITs Cynthia CHAN (852) 2773 8243 [email protected] Royston TAN (65) 6228 6745 [email protected] Property (China) Oil and Gas; Capital Goods Carlton LAI (852) 2532 4349 [email protected] Jame OSMAN (65) 6228 6744 [email protected] Small/Mid Cap (Hong Kong/China) Transportation – Road and Rail; Pharmaceuticals and Healthcare; Consumer (Singapore) Michelle WANG (852) 2773 8842 [email protected] Transportation (Hong Kong/China) JAPAN Fan LI (852) 2773 8741 [email protected] Yukino YAMADA (81) 3 5555 7295 [email protected] Strategy (Regional) Custom Products Group

PHILIPPINES Renzo CANDANO (63) 2 737 3022 [email protected] Consumer Micaela ABAQUITA (63) 2 737 3021 [email protected] Property Gregg ILAG (63) 2 737 3023 [email protected] Utilities; Energy

Philippines Property: 25 June 2018

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Philippines Property: 25 June 2018

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*Subsidiaries of Daiwa Securities Group Inc. for the purposes of this section shall mean any one or more of: Daiwa Capital Markets Hong Kong Limited (大和資本市場香港有限公司), Daiwa Capital Markets Singapore Limited, Daiwa Capital Markets Australia Limited, Daiwa Capital Markets India Private Limited, Daiwa-Cathay Capital Markets Co., Ltd., Daiwa Securities Capital Markets Korea Co., Ltd.

Hong Kong This research is distributed in Hong Kong by Daiwa Capital Markets Hong Kong Limited (大和資本市場香港有限公司) (“DHK”) which is regulated by the Hong Kong Securities and Futures Commission. Recipients of this research in Hong Kong may contact DHK in respect of any matter arising from or in connection with this research.

Relevant Relationship (DHK) DHK may from time to time have an individual employed by or associated with it serves as an officer of any of the companies under its research coverage.

Singapore This research is distributed in Singapore by Daiwa Capital Markets Singapore Limited and it may only be distributed in Singapore to accredited investors, expert investors and institutional investors as defined in the Financial Advisers Regulations and the Securities and Futures Act (Chapter 289), as amended from time to time. By virtue of distribution to these category of investors, Daiwa Capital Markets Singapore Limited and its representatives are not required to comply with Section 36 of the Financial Advisers Act (Chapter 110) (Section 36 relates to disclosure of Daiwa Capital Markets Singapore Limited’s interest and/or its representative’s interest in securities). Recipients of this research in Singapore may contact Daiwa Capital Markets Singapore Limited in respect of any matter arising from or in connection with the research.

Australia This research is distributed in Australia by Daiwa Capital Markets Australia Limited and it may only be distributed in Australia to wholesale investors within the meaning of the Corporations Act. Recipients of this research in Australia may contact Daiwa Capital Markets Stockbroking Limited in respect of any matter arising from or in connection with the research.

India This research is distributed in India to Institutional Clients only by Daiwa Capital Markets India Private Limited (Daiwa India) which is an intermediary registered with Securities & Exchange Board of India as a Stock Broker, Merchant Bank and Research Analyst. Daiwa India, its Research Analyst and their family members and its associates do not have any financial interest save as disclosed or other undisclosed material conflict of interest in the securities or derivatives of any companies under coverage. Daiwa India and its associates, may have received compensation for any products other than Investment Banking (as disclosed)or brokerage services from the subject company in this report or from any third party during the past 12 months. Daiwa India and its associates may have debt holdings in the subject company. For information on ownership of equity, please visit BlueMatrix disclosure Link at https://daiwa3.bluematrix.com/sellside/Disclosures.action. There is no material disciplinary action against Daiwa India by any regulatory authority impacting equity research analysis activities as of the date of this report. Associates of Daiwa India, registered with Indian regulators, include Daiwa Capital Markets Singapore Limited and Daiwa Portfolio Advisory (India) Private Limited.

Taiwan This research is solely for reference and not intended to provide tailored investment recommendations. This research is distributed in Taiwan by Daiwa-Cathay Capital Markets Co., Ltd. and it may only be distributed in Taiwan to specific customers who have signed recommendation contracts with Daiwa-Cathay Capital Markets Co., Ltd. and non-customers including (i) professional institutional investors, (ii) TWSE or TPEx listed companies, upstream and downstream vendors, and specialists that offer or seek advice, and (iii) potential customers with an actual need for business development in accordance with the Operational Regulations Governing Securities Firms Recommending Trades in Securities to Customers. Recipients of this research including non-customer recipients of this research shall not provide it to others or engage in any activities in connection with this research which may involve conflicts of interests. Neither Daiwa-Cathay Capital Markets Co., Ltd. nor its personnel who writes or reviews the research report has any conflict of interest in this research. Since Daiwa-Cathay Capital Markets Co., Ltd. does not operate brokerage trading business in foreign markets, this research is prepared on a “without recommendation” to any foreign securities basis and Daiwa-Cathay Capital Markets Co., Ltd. does not accept orders from customers to trade in such foreign securities that are without recommendation. Recipients of this research in Taiwan may contact Daiwa-Cathay Capital Markets Co., Ltd. in respect of any matter arising from or in connection with the research.

Philippines This research is distributed in the Philippines by DBP-Daiwa Capital Markets Philippines, Inc. which is regulated by the Philippines Securities and Exchange Commission and the Philippines Stock Exchange, Inc. Recipients of this research in the Philippines may contact DBP-Daiwa Capital Markets Philippines, Inc. in respect of any matter arising from or in connection with the research. DBP-Daiwa Capital Markets Philippines, Inc. recommends that investors independently assess, with a professional advisor, the specific financial risks as well as the legal, regulatory, tax, accounting, and other consequences of a proposed transaction. DBP-Daiwa Capital Markets Philippines, Inc. may have positions or may be materially interested in the securities in any of the markets mentioned in the publication or may have performed other services for the issuers of such securities. For relevant securities and trading rules please visit SEC and PSE links at http://www.sec.gov.ph and http://www.pse.com.ph/ respectively.

Thailand This research is distributed to only institutional investors in Thailand primarily by Thanachart Securities Public Company Limited (“TNS”). This report is prepared by analysts who are employed by Daiwa Securities Group Inc. and/or its non-U.S. affiliates. This report is provided to you for informational purposes only and it is not, and is not to be construed as, an offer or an invitation to make an offer to sell or buy any securities. Neither TNS, Daiwa Securities Group Inc. nor any of their respective parent, holding, subsidiaries or affiliates, nor any of their respective directors, officers, servants and employees accept any liability whatsoever for any direct or consequential loss arising from any use of this research or its contents. The information and opinions contained herein have been compiled or arrived at from sources believed to be reliable. However, TNS, Daiwa Securities Group Inc. nor any of their respective parent, holding, subsidiaries or affiliates, nor any of their respective directors, officers, servants and employees make no representation or warranty, express or implied, as to their accuracy or completeness. Expressions of opinion herein are subject to change without notice. The use of any information, forecasts and opinions contained in this report shall be at the sole discretion and risk of the user. TNS, Daiwa Securities Group Inc., their respective parent, holding, subsidiaries or affiliates, their respective directors, officers, servants and employees may have positions and financial interest in securities mentioned in this research. Thanachart Securities Public Company Limited, Daiwa Securities Group Inc., their respective parent, holding, subsidiaries or affiliates may from time to time perform investment banking or other services for, or solicit investment banking or other business from, any entity mentioned in this research. Therefore, investors should be aware of conflict of interest that may affect the objectivity of this research.

Philippines Property: 25 June 2018

United Kingdom This research report is produced by Daiwa Securities Co. Ltd. and/or its affiliates and is distributed in the European Union, Iceland, Liechtenstein, Norway and Switzerland. Daiwa Capital Markets Europe Limited is authorised and regulated by The Financial Conduct Authority (“FCA”) and is a member of the London Stock Exchange and Eurex. This publication is intended for investors who are not Retail Clients in the United Kingdom within the meaning of the Rules of the FCA and should not therefore be distributed to such Retail Clients in the United Kingdom. Should you enter into investment business with Daiwa Capital Markets Europe’s affiliates outside the United Kingdom, we are obliged to advise that the protection afforded by the United Kingdom regulatory system may not apply; in particular, the benefits of the Financial Services Compensation Scheme may not be available.

Daiwa Capital Markets Europe Limited has in place organisational arrangements for the prevention and avoidance of conflicts of interest. Our conflict management policy is available at http://www.uk.daiwacm.com/about-us/corporate-governance-regulatory.

Germany This document is distributed in Germany by Daiwa Capital Markets Europe Limited, Niederlassung Frankfurt which is regulated by BaFin (Bundesanstalt fuer Finanzdienstleistungsaufsicht) for the conduct of business in Germany.

Bahrain This research material is distributed in Bahrain by Daiwa Capital Markets Europe Limited, Bahrain Branch, regulated by The Central Bank of Bahrain and holds Investment Business Firm – Category 2 license and having its official place of business at the Bahrain World Trade Centre, South Tower, 7th floor, P.O. Box 30069, Manama, Kingdom of Bahrain. Tel No. +973 17534452 Fax No. +973 535113

United States This research is distributed into the United States directly by Daiwa Capital Markets Hong Kong Limited and indirectly by Daiwa Capital Markets America Inc. (DCMA), a U.S. Securities and Exchange Commission registered broker-dealer and FINRA member firm, exclusively to “major U.S. institutional investors”, as defined under Rule 15a-6 promulgated under the U.S. Securities Exchange Act of 1934, as amended, and as interpreted by the staff of the U.S. Securities and Exchange Commission (SEC). This report is not an offer to sell or the solicitation of any offer to buy securities. U.S. customers wishing to effect transactions in any designated investment discussed in this report should do so through a qualified salesperson of DCMA. Non-U.S. customers wishing to effect transactions in any designated investment discussed in this report should contact a Daiwa entity in their local jurisdiction. The securities or other investment products discussed in this report may not be eligible for sale in some jurisdictions. Analysts employed outside the U.S., as specifically indicated elsewhere in this report, are not registered as research analysts with FINRA. These analysts may not be associated persons of DCMA, and therefore may not be subject to FINRA Rule 2241 restrictions on communications with a subject company, public appearances and trading securities held by a research analyst account. ADDITIONAL IMPORTANT DISCLOSURES CAN BE FOUND AT: https://daiwa3.bluematrix.com/sellside/Disclosures.action

Ownership of Securities For “Ownership of Securities” information please visit BlueMatrix disclosure link at https://daiwa3.bluematrix.com/sellside/Disclosures.action. Investment Banking Relationships For “Investment Banking Relationships” please visit BlueMatrix disclosure link at https://daiwa3.bluematrix.com/sellside/Disclosures.action. DCMA Market Making For “DCMA Market Making” please visit BlueMatrix disclosure link at https://daiwa3.bluematrix.com/sellside/Disclosures.action.

Research Analyst Conflicts For updates on “Research Analyst Conflicts” please visit BlueMatrix disclosure link at https://daiwa3.bluematrix.com/sellside/Disclosures.action. The principal research analysts who prepared this report have no financial interest in securities of the issuers covered in the report, are not (nor are any members of their household) an officer, director or advisory board member of the issuer(s) covered in the report, and are not aware of any material relevant conflict of interest involving the analyst or DCMA, and did not receive any compensation from the issuer during the past 12 months except as noted: no exceptions.

Research Analyst Certification For updates on “Research Analyst Certification” and “Rating System” please visit BlueMatrix disclosure link at https://daiwa3.bluematrix.com/sellside/Disclosures.action. The views about any and all of the subject securities and issuers expressed in this Research Report accurately reflect the personal views of the research analyst(s) primarily responsible for this report (or the views of the firm producing the report if no individual analyst is named on the report); and no part of the compensation of such analyst (or no part of the compensation of the firm if no individual analyst is named on the report) was, is, or will be directly or indirectly related to the specific recommendations or views contained in this Research Report.

The following explains the rating system in the report as compared to relevant local indices, unless otherwise stated, based on the beliefs of the author of the report. "1": the security could outperform the local index by more than 15% over the next 12 months. "2": the security is expected to outperform the local index by 5-15% over the next 12 months. "3": the security is expected to perform within 5% of the local index (better or worse) over the next 12 months. "4": the security is expected to underperform the local index by 5-15% over the next 12 months. "5": the security could underperform the local index by more than 15% over the next 12 months.

Disclosure of investment ratings Rating Percentage of total Buy* 68.4% Hold** 21.2% Sell*** 10.4% Source: Daiwa Notes: data is for single-branded Daiwa research in Asia (ex Japan) and correct as of 31 March 2018. * comprised of Daiwa’s Buy and Outperform ratings. ** comprised of Daiwa’s Hold ratings. *** comprised of Daiwa’s Underperform and Sell ratings.

Additional information may be available upon request.

Japan - additional notification items pursuant to Article 37 of the Financial Instruments and Exchange Law (This Notification is only applicable where report is distributed by Daiwa Securities Co. Ltd.)

If you decide to enter into a business arrangement with us based on the information described in materials presented along with this document, we ask you to pay close attention to the following items.  In addition to the purchase price of a financial instrument, we will collect a trading commission* for each transaction as agreed beforehand with you. Since commissions may be included in the purchase price or may not be charged for certain transactions, we recommend that you confirm the commission for each transaction.  In some cases, we may also charge a maximum of ¥ 2 million (including tax) per year as a standing proxy fee for our deposit of your securities, if you are a non-resident of Japan.  For derivative and margin transactions etc., we may require collateral or margin requirements in accordance with an agreement made beforehand with you. Ordinarily in such cases, the amount of the transaction will be in excess of the required collateral or margin requirements.  There is a risk that you will incur losses on your transactions due to changes in the market price of financial instruments based on fluctuations in interest rates, exchange rates, stock prices, real estate prices, commodity prices, and others. In addition, depending on the content of the transaction, the loss could exceed the amount of the collateral or margin requirements.  There may be a difference between bid price etc. and ask price etc. of OTC derivatives handled by us.  Before engaging in any trading, please thoroughly confirm accounting and tax treatments regarding your trading in financial instruments with such experts as certified public accountants. *The amount of the trading commission cannot be stated here in advance because it will be determined between our company and you based on current market conditions and the content of each transaction etc.

When making an actual transaction, please be sure to carefully read the materials presented to you prior to the execution of agreement, and to take responsibility for your own decisions regarding the signing of the agreement with us. Corporate Name: Daiwa Securities Co. Ltd. Financial instruments firm: chief of Kanto Local Finance Bureau (Kin-sho) No.108 Memberships: Japan Securities Dealers Association, The Financial Futures Association of Japan Japan Securities Investment Advisers Association Type II Financial Instruments Firms Association