07 June 2013 Asia Pacific/Philippines Equity Research Conglomerates
Metro Pacific Investments
(MPI.PS / MPI PM) Rating OUTPERFORM* Price (06 Jun 13, P) 5.86 INITIATION
Target price (P) 7.90¹ Upside/downside (%) 34.8 Mkt cap (P mn) 152,456 (US$ 3,620) Hospitals biz deserves a second look Enterprise value (P mn) 189,919 ■ Initiate with OUTPERFORM. We initiate coverage on Metro Pacific Number of shares (mn) 26,016.46 Investments with an OUTPERFORM rating and a P7.90 target price, Free float (%) 43.9 52-week price range 6.29 - 3.92 implying 35% potential upside. Our target price is SOTP-based and ADTO - 6M (US$ mn) 6.1 translates to an implied 2014E PER of 20.6x and PBR of 2.0x (sector
*Stock ratings are relative to the coverage universe in each average of 18.0x and 2.2x, respectively). The company focuses on water, analyst's or each team's respective sector. ¹Target price is for 12 months. power, toll roads, and hospitals. We forecast that hospitals will contribute 11% to 2014E net profit but we estimate that its NAV contribution is more Research Analysts substantial at 20%. Alvin Arogo ■ Multi-year growth potential for hospitals. Metro Pacific manages and 63 2 858 7716 [email protected] operates various privately held hospitals and we forecast its total beds to witness an 18% CAGR to 3,000 by 2015. This would be the main driver for Gab Roque 63 2 858 7756 the 47% CAGR in its net income contribution, in our view. This is higher than [email protected] the 22% p.a. average of the two fastest growing healthcare stocks in NJA. Over the long term, we believe growth will be driven by the potential for higher per capita healthcare spending and capacity investments, as these have a high positive correlation with improvements in GDP per capita. ■ On solid ground. We believe Metro Pacific’s investments in utilities and toll roads provide a combination of earnings visibility and growth. We forecast that its consolidated net profit and operating cash flow will see 23% and 12% CAGR, respectively, from 2013E to 2015E. ■ Abundant supply of catalysts and has scope for further re-rating. We believe that there is an abundant supply of catalysts in 2H13 (Fig 5). Despite the 32% year-to-date stock price increase, we believe that there is scope for further gains as the stock’s 2014E PER of 15.3x is below its past five-year average of 17.7x. Our SOTP valuation also suggests that ex-hospitals, MPI’s fair value is P6.40 or just 9% above its current stock price. Key investment risks are failure to execute hospitals M&A and unfavourable regulatory decisions.
Share price performance Financial and valuation metrics
Year 12/12A 12/13E 12/14E 12/15E Price (LHS) Rebased Rel (RHS) Revenue (P mn) 27,806.8 32,275.6 37,009.6 42,126.6 8 120 EBITDA (P mn) 15,647.8 17,916.0 20,571.4 23,574.8 6 110 EBIT (P mn) 11,802.1 13,396.4 15,577.5 18,094.7 100 Net profit (P mn) 6,530.2 8,386.6 9,970.7 12,244.7 4 90 EPS (CS adj.) (P) 0.26 0.32 0.38 0.47 2 80 Jun-11 Oct-11 Feb-12 Jun-12 Oct-12 Feb-13 Change from previous EPS (%) n.a. Consensus EPS (P) n.a. 0.30 0.35 0.42 The price relative chart measures performance against the EPS growth (%) 21.4 21.7 18.9 22.8 PHILIPPINE SE COMPOSITE INDEX which closed at 6609.01 P/E (x) 22.1 18.2 15.3 12.5 on 06/06/13 On 06/06/13 the spot exchange rate was P42.12/US$1 Dividend yield (%) 0.46 0.63 0.83 0.98 EV/EBITDA (x) 12.4 10.6 9.1 7.7 Performance Over 1M 3M 12M P/B (x) 1.8 1.6 1.5 1.3 Absolute (%) -4.1 7.7 43.3 ROE (%) 8.5 9.6 10.0 11.2 Relative (%) 3.4 11.0 10.2 Net debt/equity (%) 44.4 33.1 27.3 20.4
Source: Company data, our estimates.
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07 June 2013 Focus charts and tables
Figure 1: We estimate that hospitals’ contribution to Figure 2: …as NJA healthcare valuations suggest Metro Pacific’s Gross NAV is substantial at 20%... premium PER for high earnings growth
Hospitals 45 20% Water 30% 40 IHHH.KL 35
30 Metro Pacific's RAFG.SI 25 Toll roads BGH.BK
22% (x) PER 2014E 20 BH.BK KPJH.KL Power 15 28% 5 10 15 20 25 30 35 40 45 2014E EPS growth (%)
Source: Credit Suisse estimates Source: Credit Suisse estimates
Figure 3: Growth of hospitals biz to be driven by M&A in Figure 4: On solid ground as consolidated operating cash the short term flow and earnings have visibility and growth (P mn) 18% CAGR in # of 3,500 beds for 2013E to 20,000 12% CAGR for 2015E, mainly 3,000 13E to 15E 3,000 through M&A 16,000 2,600 2,500 2,200 12,000 2,000 1,812 1,806 1,599 8,000 1,500 969 987 4,000 1,000
Metro Pacific's MetroPacific's of # beds - 500 12/11A 12/12A 12/13E 12/14E 12/15E
- Operating cash flow Net profit 2008 2009 2010 2011 2012 2013E 2014E 2015E
Source: Company data, Credit Suisse estimates Source: Credit Suisse estimates
Figure 5: Abundant supply of catalysts Figure 6: Scope for re-rating as 2014E PER below 5-year avg (x) Event Business Date 40 Catalysts related to current businesses 35 30 Annoucement of acquisitions Hospitals Early 2H13 25 Rate rebasing implementation Water Early 2H13 20 Generation investments Power 2H13 15 Road network expansion Toll roads 2H13 10 Potential for new businesses 5 Project award notice Mactan airport Jul-13 0 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Project award notice LRT1 Sep-13 Fwd PER Ave-2SD Ave-1SD Average Ave+1SD Ave+2SD
Source: Various, compiled by Credit Suisse Source: Credit Suisse estimates
Metro Pacific Investments (MPI.PS / MPI PM) 2 07 June 2013 Hospital biz deserves a second look We initiate coverage on Metro Pacific with an OUTPERFORM rating and a P7.90 target We estimate that 20% of price, implying 35% potential upside. Our target price is SOTP based and translates to an Metro Pacific’s NAV is from implied 2014E PER of 20.6x and PBR of 2.0x (sector average of 18.0x and 2.2x, the hospitals business respectively). The company focuses on water, power, toll roads, and hospitals. We forecast that hospitals will contribute 11% to 2014E net profit but we estimate that its NAV contribution is more substantial at 20%. In our view, its hospitals business has multi-year growth potential and is an investment angle that deserves a second look. We forecast that utilities and toll roads will account for 89% of Metro Pacific’s 2014E consolidated net income and 80% of NAV. Multi-year growth potential for hospitals Metro Pacific manages and operates various privately held hospitals and we forecast its Short-term growth to come total beds will witness an 18% CAGR to 3,000 by 2015. This would be the main driver for from M&A; long-term growth the 47% CAGR in its net income contribution, in our view. This is higher than the 22% p.a. to be driven by potential for average of the two fastest growing healthcare stocks in NJA. We estimate that 20% of higher per capita healthcare Metro Pacific’s net profit growth in the next three years will come from hospitals. Over the spending and capacity long term, we believe growth will be driven by the potential for higher per capita healthcare investments spending and capacity investments, as these have a high positive correlation with improvements in GDP per capita. On solid ground We believe Metro Pacific’s investments in utilities and toll roads provide a combination of We forecast that its earnings visibility and growth. We forecast that its consolidated net profit and operating consolidated net profit and cash flow will see 23% and 12% CAGR, respectively, from 2013E to 2015E. The operating cash flow will see company’s water utilities business has a forward looking guaranteed return tariff structure 23% and 12% CAGR, to recover opex and capex, with automatic adjustments for inflation and forex. We expect respectively, from 2013E to average annual capex (in real terms) of P10.3 bn for 2013E to 2037E, or 56% higher than 2015E the past five-year average of P6.6 bn. Its power distribution business is the largest electricity distributor in the Philippines, has a net cash position, and is currently re- investing in the power generation business. Its toll roads business is the largest toll road operator in the Philippines, accounting for about 64% of the total 300 km toll roads in operation. The company has identified various projects that could expand its road network by 40% to 268 km from the current 192 km (not factored in our forecasts). Abundant supply of catalysts We believe that Metro Pacific has an abundant supply of catalyst in 2H13. For its current Catalysts in 2H13 should businesses: potential announcement of hospital acquisitions, Maynilad’s rate rebasing come from both current and implementation in early 2H13, updates in Meralco’s power generation investments, and toll potential for new businesses road expansion developments. There is also potential for new businesses (not factored in our forecasts): Metro Pacific plans to bid for the LRT1 (rail) and Mactan International Airport PPP projects. Based on the current timetable of the Philippine government, the project award notices will be announced in July and September 2013, respectively. Scope for further re-rating Despite the 32% year-to-date stock price increase, we believe there is scope for further The stock’s current 2014E gains as the stock’s 2014E PER of 15.3x is below its past five-year average of 17.7x. Our PER of 15.3x is below its SOTP valuation also suggests that ex-hospitals, MPI’s fair value is P6.40 or just 9% above past five-year average of its current stock price. Key investment risks are failure to execute hospitals M&A, 17.7x unfavourable rate rebasing for its water business, delays in its re-entry into the power generation business, and tariff freeze on toll roads.
Metro Pacific Investments (MPI.PS / MPI PM) 3 07 June 2013
Metro Pacific Investments MPI.PS / MPI PM Price (06 Jun 13): P5.86, Rating:: OUTPERFORM, Target Price: P7.90, Analyst: Alvin Arogo Target price scenario Key earnings drivers 12/12A 12/13E 12/14E 12/15E Scenario TP %Up/Dwn Assumptions Water 3,552 3,762 4,494 5,326 Upside 8.90 51.88 14E EPS, 5yr ave+1SD PER (23.3x) Power 1,615 2,876 3,214 3,767 Central Case 7.90 34.81 SOTP-based valuation Toll roads 1,568 1,679 1,856 2,049 Downside 4.70 (19.80) 14E EPS, 5yr ave-1SD PER (12.2x) Hospitals 507 849 1,203 1,616
Head office (713.0) (780.0) (796.0) (512.6)
Income statement (P mn) 12/12A 12/13E 12/14E 12/15E Per share data 12/12A 12/13E 12/14E 12/15E Sales revenue 27,807 32,276 37,010 42,127 Shares (wtd avg.) (mn) 24,652 26,016 26,016 26,016 Cost of goods sold 12,159 14,360 16,438 18,552 EPS (Credit Suisse) (P) 0.26 0.32 0.38 0.47 SG&A — — — — DPS (P) 0.03 0.04 0.05 0.06 Other operating exp./(inc.) — — — — BVPS (P) 3.24 3.67 4.01 4.42 EBITDA 15,648 17,916 20,571 23,575 Operating CFPS (P) 0.54 0.53 0.62 0.71 Depreciation & amortisation 3,846 4,520 4,994 5,480 Key ratios and 12/12A 12/13E 12/14E 12/15E EBIT 11,802 13,396 15,577 18,095 valuation Net interest expense/(inc.) 3,017 2,804 2,775 2,475 Growth(%) Non-operating inc./(exp.) — — — — Sales revenue 26.0 16.1 14.7 13.8 Associates/JV 1,958 3,265 3,653 4,260 EBIT 23.2 13.5 16.3 16.2 Recurring PBT 10,743 13,857 16,455 19,880 Net profit 28.0 28.4 18.9 22.8 Exceptionals/extraordinaries (141.9) — — — EPS 21.4 21.7 18.9 22.8 Taxes 779 1,299 1,548 1,832 Margins (%) Profit after tax 9,822 12,558 14,907 18,048 EBITDA 56.3 55.5 55.6 56.0 Other after tax income — — — — EBIT 42.4 41.5 42.1 43.0 Minority interests 3,434 4,172 4,937 5,804 Pre-tax profit 38.6 42.9 44.5 47.2 Preferred dividends — — — — Net profit 23.5 26.0 26.9 29.1 Reported net profit 6,388 8,387 9,971 12,245 Valuation metrics (x) Analyst adjustments 141.9 — — — P/E 22.1 18.2 15.3 12.5 Net profit (Credit Suisse) 6,530 8,387 9,971 12,245 P/B 1.81 1.60 1.46 1.33 Cash flow (P mn) 12/12A 12/13E 12/14E 12/15E Dividend yield (%) 0.46 0.63 0.83 0.98 EBIT 11,802 13,396 15,577 18,095 P/CF 10.8 11.1 9.4 8.2 Net interest (3,017) (2,804) (2,775) (2,475) EV/sales 6.99 5.88 5.04 4.30 Tax paid (224.2) (352.8) (451.7) (534.1) EV/EBITDA 12.4 10.6 9.1 7.7 Working capital 1,376 (10) 105 (484) EV/EBIT 16.5 14.2 12.0 10.0 Other cash & non-cash items 3,390 3,564 3,708 3,935 ROE analysis (%) Operating cash flow 13,326 13,793 16,164 18,536 ROE 8.5 9.6 10.0 11.2 Capex (8,990) (16,904) (11,937) (12,231) ROIC 8.6 8.5 9.1 10.0 Free cash flow to the firm 4,336 (3,111) 4,227 6,305 Asset turnover (x) 0.16 0.17 0.18 0.19 Disposals of fixed assets — — — — Interest burden (x) 0.91 1.03 1.06 1.10 Acquisitions — — — — Tax burden (x) 0.93 0.91 0.91 0.91 Divestments — — — — Financial leverage (x) 1.84 1.72 1.66 1.56 Associate investments (8,345) (2,885) (3,214) (3,767) Credit ratios Other investment/(outflows) (7,489) (15) — — Net debt/equity (%) 44.4 33.1 27.3 20.4 Investing cash flow (24,825) (19,804) (15,151) (15,998) Net debt/EBITDA (x) 2.67 2.09 1.66 1.22 Equity raised 62 6,163 — — Interest cover (x) 3.91 4.78 5.61 7.31 Dividends paid (668) (958) (1,258) (1,496) Net borrowings 3,393 507 — (5,000) Source: Company data, our estimates Other financing cash flow 2,704 5,119 3,537 4,404 Financing cash flow 5,491 10,830 2,279 (2,092) 12MF P/B multiple Total cash flow (6,007) 4,819 3,292 446 4.0 Adjustments — — — — 3.5 Net change in cash (6,007) 4,819 3,292 446 3.0 Balance sheet (P mn) 12/12A 12/13E 12/14E 12/15E 2.5 Cash & cash equivalents 10,478 15,337 18,629 19,075 2.0 Current receivables 3,608 3,960 4,378 4,828 Inventories — — — — 1.5 Other current assets 1,939 1,950 1,950 1,950 1.0 Current assets 16,025 21,247 24,957 25,853 0.5 Property, plant & equip. 87,919 100,260 107,205 113,958 0.0 Investments 46,487 49,378 52,592 56,359 2008 2009 2010 2011 2012 2013 Intangibles — — — — Other non-current assets 23,074 23,202 23,202 23,202 Source: IBES Total assets 173,504 194,088 207,957 219,373 12MF P/E multiple Accounts payable 13,712 14,054 14,577 14,542 30 Short-term debt 7,235 7,300 7,300 7,300 Current provisions 3,853 4,005 4,064 4,130 25 Other current liabilities 97.4 98.0 98.0 98.0 Current liabilities 24,897 25,457 26,039 26,071 20 Long-term debt 45,094 45,500 45,500 40,500 15 Non-current provisions 3,689 4,521 5,559 6,790 Other non-current liab. 5,464 5,500 5,500 5,500 10 Total liabilities 79,144 80,978 82,597 78,860 5 Shareholders' equity 79,577 95,556 104,269 115,018 Minority interests 14,732 17,504 21,040 25,444 0 Total liabilities & equity 173,504 194,088 207,957 219,373 2008 2009 2010 2011 2012 2013
Metro Pacific Investments (MPI.PS / MPI PM) 4 07 June 2013 Multi-year growth potential for hospitals We initiate coverage on Metro Pacific with an OUTPERFORM rating and a P7.90 target price, implying 35% potential upside. Our target price is SOTP based and translates to an implied 2014E PER of 20.6x and PBR of 2.0x (sector average of 18.0x and 2.2x, respectively). The company focuses on water, power, toll roads, and hospitals. We forecast that hospitals will contribute 11% to 2014E net profit but we estimate that its NAV contribution is more substantial at 20%. In our view, its hospitals business has multi-year growth potential and is an investment angle that deserves a second look. NJA healthcare valuations suggest premium PER for high earnings growth. We forecast that utilities and toll roads will account for 89% of Metro Pacific’s 2014E consolidated net income and 80% of NAV.
Figure 7: Metro Pacific’s NAV breakdown Figure 8: Breakdown of NAV and 2014E net income
100% Hospitals 11% 20% 20% Water 80% 17% 30% 22% 60% 30%
29% 40% Toll roads 22% 20% 42% 30%
Power 0% 28% 2014E net income Gross NAV Water Power Toll roads Hospitals
Source: Credit Suisse estimates Source: Credit Suisse estimates Hospitals business commands valuation premium Metro Pacific manages and operates various privately held hospitals, with a total of 1,806 beds as at end 2012, or about 4% of the total 48,783 private hospital beds in the Philippines (end 2010). With contribution to consolidated net income (before head office expenses) of only 7% in 2012, we believe that the investment value of Metro Pacific’s hospitals business is likely to have been overlooked. In our view, this should not be the case because the hospitals business is likely to have more meaningful net income contribution moving forward (we forecast 13% of consolidated net income for 2015E). In the short-to-medium term, we believe business growth will be driven by acquisition of existing hospitals in the Philippines. Over the long term, we believe growth will be driven by the potential for higher per capita healthcare spending and capacity investments, as these have a high positive correlation with improvements in GDP per capita.
Metro Pacific Investments (MPI.PS / MPI PM) 5 07 June 2013
Figure 9: Metro Pacific’s hospital portfolio as at end 2012 Hospital Location Beds Structure Makati Medical Centre Metro Manila 525 33.5% ownership Our Lady of Lourdes Metro Manila 229 20 year operating and management contract Cardinal Santos Medical Centre Metro Manila 239 20 year operating and management contract Asian Hospital Metro Manila 217 85.7% ownership Riverside Medical Centre Province 307 51.7% ownership Davao Doctors Hospital Province 289 34.9% ownership Total 1,806 Source: Company data NJA healthcare valuations suggest premium PER for high earnings growth Based on Credit Suisse coverage of five NJA healthcare stocks, there is a positive relationship between 2014E PER and EPS growth (see Figure 10). We use this as our primary guide in setting our NAV for the hospitals business at a target 2014E earnings multiple of 35x.
Figure 10: NJA Healthcare’s 2014E PER (x) and EPS growth (%)
45
40 IHHH.KL
35
Metro Pacific's 30 RAFG.SI BGH.BK 2014E PER (x) PER 2014E 25
BH.BK 20 KPJH.KL
15 5 10 15 20 25 30 35 40 45 2014E EPS growth (%)
Source: Credit Suisse estimates Hospitals business’ historical financial and operating performance From 2008 to 2012, the hospital business’ core net income contribution to Metro Pacific expanded at 47% CAGR, mainly driven by a 21% CAGR in the number of patients and a 4% CAGR in revenue per patient. Growth in patients serviced was mainly due to a 51% CAGR in the number of doctors, which was enabled by a 17% CAGR in the number of beds. On a pro-forma basis, revenue witnessed a 26% CAGR while EBITDA margins were stable, ranging from 18.2% to 19.8%.
Metro Pacific Investments (MPI.PS / MPI PM) 6 07 June 2013
Figure 11: Hospitals business historical financial and operating performance 12/08A 12/09A 12/10A 12/11A 12/12A 4-yr CAGR Pro-forma financial highlights Revenues (P mn) 4,566 5,959 6,991 8,485 11,329 26% EBITDA (P mn) 904 1,136 1,274 1,626 2,187 25% EBITDA margin (%) 19.8 19.1 18.2 19.2 19.3 n.a. Pro-forma operating highlights Revenue per patient (P) 6,099 6,724 7,103 6,559 7,026 4% Number of beds 969 987 1,599 1,812 1,806 17% Number of doctors 869 2,433 2,390 4,333 4,546 51% Number of patients 748,698 886,238 984,214 1,293,714 1,612,334 21% Doctors per bed 0.9 2.5 1.5 2.4 2.5 29% Patients per doctor 862 364 412 299 355 -20% Profit & loss contribution to MPI (P mn) Operating Revenues - - 656 1,836 5,140 n.a. EBITDA - - 118 341 1,347 n.a. EBIT - - 64 200 843 n.a. Pre-tax Profit - - 51 147 603 n.a. Associates/JV 110 174 153 163 135 5% Net income (core) 110 174 187 274 562 50% Net income to MPI (core) 110 174 172 248 507 47% Net income to MPI (reported) 159 221 152 237 511 34% Source: Company data, Credit Suisse Hospitals business financial and operating performance forecasts (2013E to 2015E) For 2013E to 2015E, we forecast that the hospital business’ core net income contribution to Metro Pacific will expand by 47% CAGR, which would be mainly driven by our forecasts for a 18% CAGR in the number of patients. Potential growth in the patients serviced would be mainly due to our forecasts for 18% CAGR in the number of doctors, which would be enabled by our forecasts for a 18% CAGR in the number of beds. On a pro-forma basis, we forecast revenue to expand by a 24% CAGR and we assume average EBITDA margin to range from 19.3% to 22.7% (2008 to 2012 ranged from 18.2% to 19.8%).
Figure 12: Hospitals business financial and operating forecasts (2013E to 2015E) 12/12A 12/13E 12/14E 12/15E 3-yr CAGR Pro-forma financial highlights Revenues (P mn) 11,329 14,491 17,981 21,785 24% EBITDA (P mn) 2,187 2,964 3,883 4,948 31% EBITDA margin (%) 19.3 20.5 21.6 22.7 6% Pro-forma operating highlights Revenue per patient (P) 7,026 7,378 7,747 8,134 5% Number of beds 1,806 2,200 2,600 3,000 18% Number of doctors 4,546 5,538 6,545 7,551 18% Number of patients 1,612,334 1,964,083 2,321,190 2,678,296 18% Doctors per bed 2.5 2.5 2.5 2.5 0% Patients per doctor 355 355 355 355 0% Profit & loss contribution to MPI (P mn) Operating Revenues 5,140 6,574 8,158 9,884 24% EBITDA 1,347 1,826 2,392 3,048 31% EBIT 843 1,247 1,736 2,317 40% Pre-tax Profit 603 1,081 1,574 2,155 53% Associates/JV 135 173 215 260 24% Net income (core) 562 940 1,333 1,790 47% Net income to MPI (core) 507 849 1,203 1,616 47% Net income to MPI (reported) 511 849 1,203 1,616 47% Source: Company data, Credit Suisse estimates
Metro Pacific Investments (MPI.PS / MPI PM) 7 07 June 2013
Hospital business contribution to consolidated profit growth substantial at 20% We forecast that Metro Pacific’s consolidated net income will grow by 23% p.a. from 2013E to 2015E. Based on our forecasts, we estimate that on average, 20% of the company’s net profit growth in the next three years will come from hospitals.
Figure 13: Net profit growth and share in net profit growth per business 12/09A 12/10A 12/11A 12/12A 12/13E 12/14E 12/15E Net profit growth (% YoY) Water 580.4 55.4 29.5 14.6 5.9 19.4 18.5 Power n.a. 601.4 13.5 (4.2) 78.1 11.7 17.2 Toll roads 670.6 12.1 1.6 7.7 7.1 10.5 10.4 Hospitals 58.2 (1.1) 44.1 104.9 67.4 41.7 34.3 Head office n.a. n.a. n.a. n.a. n.a. n.a. n.a. Consolidated 489.8 88.3 32.3 28.0 28.4 18.9 22.8 Share in net profit growth (%) Water 77.3 47.2 56.7 31.6 11.3 46.2 36.6 Power 12.5 70.5 16.1 (5.0) 67.9 21.3 24.3 Toll roads 65.5 8.5 1.8 7.9 6.0 11.2 8.5 Hospitals 3.8 (0.1) 6.1 18.2 18.4 22.4 18.2 Head office (59.0) (26.1) 19.3 47.3 (3.6) (1.0) 12.5 Consolidated 100.0 100.0 100.0 100.0 100.0 100.0 100.0 Source: Credit Suisse estimates M&A as growth strategy in the short-to-medium term Likely to be driven mainly by M&A, we believe that the net income contribution from hospitals should see a 47% CAGR from 2013 to 2015 as a base case (13% of consolidated net income by 2015). In our view, M&A is the company’s current preferred growth strategy, as one of its investment criterion is to have a dominant share if the business is not a monopoly. As a base case, we forecast that the company’s hospital beds will increase to 3,000 by 2015 from 1,806 in 2012 (18.4% CAGR).
Figure 14: Hospitals business’ beds for 2008 to 2015E
3,500 3,000 3,000 2,600 2,500 2,200 3yr CAGR: 18.4% 2,000 1,812 1,806 1,599 1,500
969 987 1,000
500
- 2008 2009 2010 2011 2012 2013E 2014E 2015E
Source: Company data, Credit Suisse estimates Shorter capex cycle should encourage consolidation of hospitals Over the medium term, we believe that more private hospitals in the Philippines would consider selling their stake to Metro Pacific. This is because, based on lessons from other countries, small scale operations may prove to be challenging as a key differentiating
Metro Pacific Investments (MPI.PS / MPI PM) 8 07 June 2013 character of the hospitals compared with other capex heavy industries is the recurring nature of capex required for hospitals. According to Credit Suisse analyst Anand Swaminathan (Singapore/Malaysia Hospitals, 12 March), hospitals consistently need capex every three to five years, driven by low average lifespan of current medical equipment and rapid developments in medical technology rendering them obsolete. Moreover, hospitals, irrespective of geography and speciality, typically continue to spend a high proportion of their cash from operating profits on their ongoing capex needs. With increasing competition, the capex cycle is only bound to get shorter in the medium term as hospitals continue to try and keep pace with rapidly evolving technologies—preventing them from improving margins steadily after the gestation period. This probably will put hospitals with bigger scale at an advantage and also encourage consolidation in hospitals over the medium term. For the past two years (2011 and 2012), Metro Pacific’s hospital business’ average capex as a percentage of cash from operations was 67%. In contrast, hospitals in Thailand (i.e., Bumrungrad and Bangkok Dusit) have five-year average range of 55% to 63% while hospitals in Singapore/Malaysia (Raffles, Parkway, KPJ) have a range of 13% to 62%.
Figure 15: Hospitals business’ capex as a percentage of operating cash (2011 and 2012)
120%
100%
78% 74% 80% 70% 67% 56% 60% 52% 36% 40%
20%
0% Makati Medical Our Lady of Cardinal Santos Asian Hospital Riverside Davao Doctors System-wide Center Lourdes Medical Center Medical Center Hospital
2011 2012 Average
Source: Company data, Credit Suisse estimates Numerous potential targets for Metro Pacific Based on the latest data from the 2012 Philippine Statistical Yearbook, there were 1,082 private hospitals and 48,783 private hospital beds in the Philippine as of 2010. We note that from 1976 to 2010, the number of private hospitals expanded by 1.4% CAGR while the number of private hospital beds only grew by 1.3% CAGR. A similar trend can be seen in number of government hospitals and government hospital beds, which saw just 2.1% CAGR and 0.3% CAGR, respectively. As mentioned earlier in this report, we forecast that Metro Pacific’s hospital beds will increase to 3,000 by 2015 from 1,806 in 2012. This only translates to an increase in market share (based on number of beds) to 6% by 2015 from 4% in 2012.
Metro Pacific Investments (MPI.PS / MPI PM) 9 07 June 2013
Figure 16: Number of private and government hospital beds from 1976 to 2010
120,000 Government Private 100,000
80,000
60,000
40,000
20,000
0 1976 1981 1986 1991 1996 2001 2006
Source: 2012 Philippine Statistical Yearbook Higher number of beds should allow for more doctors and more patients From 2008 to 2012, the total number of patients that Metro Pacific was able to accommodate was correlated with the number of its accredited doctors, which in turn was correlated with the number of beds. Historically, doctors per bed ratio has ranged from 0.9x to 2.5x (2.0x average) while the patients per doctor ratio ranged from 299x to 862x (458x average). For our forecasts for 2013E to 2015E, we use the ratio based on 2012 performance of 2.5x and 355x, respectively.
Figure 17: Hospitals business—number of beds, doctors Figure 18: Hospitals business—doctors per bed (x) and and patients serviced—2008 to 2015E patients per doctor (x)
8,000 3,000,000 3.0 1,000
7,000 900 2,500,000 2.5 800 6,000 700 2,000,000 2.0 5,000 600 4,000 1,500,000 1.5 500
3,000 400 1,000,000 1.0 300 2,000 200 500,000 0.5 1,000 100 - - - - 2008 2009 2010 2011 2012 2013E 2014E 2015E 2008 2009 2010 2011 2012 2013E 2014E 2015E
Number of beds Number of doctors Number of patients (RHS) Doctors per bed Patients per doctor (RHS)
Source: Company data , Credit Suisse estimates Source: Company data, Credit Suisse estimates Modest growth in revenue per patient over the short-to-medium term From 2008 to 2012, the hospital business’ revenue per patient expanded by 4% CAGR. In contrast, the Philippines’ health expenditure per capita saw 6% CAGR from 1995 to 2011. For our forecasts for 2013E to 2015E, we assume revenue per patient will see 4% CAGR. Nonetheless, we believe that the growth rate in revenue per patient over the long-term would be higher as we see the potential for higher per capita healthcare expenditure in the Philippines.
Metro Pacific Investments (MPI.PS / MPI PM) 10 07 June 2013
Figure 19: Hospitals business’ revenue per patient from Figure 20: Philippines’ health expenditure per capita from 2008 to 2015E (P) 1995 to 2011 (current US$)
10,000 120 9,000 7,904 3yr CAGR: 4.0% 7,600 100 8,000 7,308 7,103 7,026 6,724 7,000 6,559 CAGR: 6.1% 6,099 80 6,000
5,000 60
4,000 40 3,000
2,000 20 1,000
- - 2008 2009 2010 2011 2012 2013E 2014E 2015E 1995 1997 1999 2001 2003 2005 2007 2009 2011
Source: Company data, Credit Suisse estimates Source: World Bank Open Data Long-term growth from potential for higher per capita healthcare spending and capacity investments Over the long-term, we believe growth will be driven by the potential for higher per capita healthcare spending and capacity investments, as these have a high positive correlation with improvements in GDP per capita (see Figure 21 and Figure 22). We note that according to Credit Suisse economist Michael Wan, growth in Philippines real GDP per capita is expected to average around 4-5% over the next two years, and is expected to rise more significantly to 6-7% over the medium to long term if the reform momentum in the country is sustained.
Figure 21: Health expenditure per capita and GDP per capita relationship 9,000 AU 8,000 7,000 R² = 0.8576
6,000 CA DE 5,000 UK FR 4,000 IT FR 3,000 ES 2,000 PL KR RU 1,000 CN TR IN UA BR MY PH ID TH ZA
Healthspend per capita (current US$) - - 10,000 20,000 30,000 40,000 50,000 GDP per capita, PPP (current US$)
Note: Based on 2010 and 2011 data Source: World Bank Open Data, Credit Suisse estimates
Metro Pacific Investments (MPI.PS / MPI PM) 11 07 June 2013
Figure 22: Hospital beds per 1,000 people and GDP per capita relationship 9 8 DE 7 PL FR 6 R² = 0.4828 5
4 AU CN IT 3 ES UK CA US BR TR VN TH 2 MY
Hospital beds1,000 per people 1 PH ID 0 - 10,000 20,000 30,000 40,000 50,000 GDP per capita, PPP (current US$)
Note: Based on 2010 and 2011 data Source: World Bank Open Data, Credit Suisse estimates We also believe that investments in additional hospital beds in the Philippines is justified as this has been declining on a per capita basis (see Figure 23). In addition, the Philippines has one of the lowest number of hospital beds per 1,000 people in Asia of 1.0 (see Figure 24). In contrast, Malaysia, Thailand and Vietnam have an average of 2.0; while Singapore and China have an average of 3.3.
Figure 23: Philippines hospital beds per 10,000 people from 1976 to 2010 20 18 16 14 12 10 8 6 4 2 0 1976 1981 1986 1991 1996 2001 2006
Source: 2012 Philippine Statistical Yearbook
Metro Pacific Investments (MPI.PS / MPI PM) 12 07 June 2013
Figure 24: ASEAN and China hospital beds per 1,000 people
4.0 3.8
3.5
3.0 2.7
2.5 2.2 2.1 2.0 1.8
1.5 1.0 1.0 0.6 0.5
- Indonesia Philippines Malaysia Thailand Vietnam Singapore China
Source: World Bank Open Data
Metro Pacific Investments (MPI.PS / MPI PM) 13 07 June 2013 On solid ground We believe Metro Pacific’s investments in utilities and toll roads provide a combination of earnings visibility and growth. The company’s water utilities business has a forward looking guaranteed return tariff structure to recover opex and capex, with automatic adjustments for inflation and forex. We expect average annual capex (in real terms) of P10.3 bn for 2013E to 2037E, or 56% higher than the past five-year average of P6.6 bn. Its power distribution business is the largest electricity distributor in the Philippines, has a net cash position, and is currently re-investing in the power generation business. Its toll roads business is the largest toll road operator in the Philippines, accounting for about 64% of the total 300 km toll roads in operation. The company has identified various projects that could expand its road network by 40% to 268 km from the current 192 km (not factored in our forecasts).
Figure 25: Metro Pacific’s organisational structure
Metro Pacific
52.8% 50.0% 99.9% various
Toll Roads Water Power Metro Pacific Hospitals Maynilad Beacon Electric Tollways 48.3%
Meralco
Source: Company Healthy consolidated operating cash flow We forecast that its consolidated net profit and operating cash flow will see 23% and 12% CAGR, respectively, from 2013E to 2015E. In our view, there is high visibility to our forecasts as 89% of net profits over the next three years would come from the operations of utilities and toll roads, which are regulated businesses. For the breakdown of net profit growth per business, please see Figure 13.
Figure 26: Consolidated operating cash flow and earnings have visibility and growth (P mn)
20,000 12% CAGR for 13E to 15E 16,000
12,000
8,000
4,000
- 12/11A 12/12A 12/13E 12/14E 12/15E
Operating cash flow Net profit
Source: Company data, Credit Suisse estimates
Metro Pacific Investments (MPI.PS / MPI PM) 14 07 June 2013
Robust debt capacity Metro Pacific’s net debt-to-equity of 0.44x is below the 0.51x average of the Philippine conglomerates. Coupled with the company’s robust operating cash flow, we believe this gives it a strong debt capacity. As a base case, our forecasts show that operating cash flow can fund the company’s capex and therefore, we do not see additional funding requirements.
Figure 27: The Philippines conglomerates’ 2012A net debt-to-equity (x)
1.4 1.27 1.2
1.0
0.8
0.6 0.51 0.44 0.48 0.45 0.45 0.4 0.32 0.17 0.2 - - Metro Pacific SM Alliance Ayala San Miguel JG Summit DMCI Aboitiz Average Investments Global Inc Corporation Corporation Holdings Equity Ventures
Source: Credit Suisse estimates for Metro Pacific, Bloomberg for other companies Investment in water utilities (Maynilad Water) Metro Pacific owns 52.8% of Maynilad Water (not listed), which holds exclusive concession granted by the Metropolitan Waterworks and Sewerage System, on behalf of the Philippine Government, to provide water and sewerage services in the West Service Area of Metro Manila. Maynilad’s historical financial and operating performance Maynilad’s core net income contribution to Metro Pacific expanded by a 32% CAGR (three-year), mainly driven by the 14% CAGR in revenues. Revenue growth was enabled by the 7% CAGR in water billed volumes and a 7% CAGR in tariff. For 2010 to 2012, we note that the Philippine GDP grew by 6.0% p.a. and inflation rate was 4.2% p.a. EBITDA and EBIT margins improved to 65.9% and 49.4% in 2012, respectively, from 64.9% and 39.8% in 2009.
Metro Pacific Investments (MPI.PS / MPI PM) 15 07 June 2013
Figure 28: Maynilad historical financial and operating performance 12/08A 12/09A 12/10A 12/11A 12/12A 3-yr CAGR Operating highlights Water billed volume (cubic meters '000) 315,000 350,000 374,000 405,000 428,000 7% Total tariff (P/cubic meter) 26.17 30.34 32.22 34.00 37.11 7% Unit cost of services & opex (P/cubic meter) 22.21 10.64 11.15 10.75 12.67 6% EBITDA margin (%) 15.2 64.9 65.4 68.4 65.9 n.a. Profit & loss contribution to MPI (P mn) Operating Revenues 8,245 10,619 12,050 13,769 15,883 14% EBITDA 1,250 6,896 7,879 9,415 10,462 15% EBIT 1,182 4,225 6,048 7,133 7,842 23% Pre-tax Profit 544 2,376 4,029 5,299 5,944 36% Associates/JV - - - - - n.a. Net income (core) 490 2,653 4,215 5,459 6,246 33% Net income to MPI (core) 226 1,540 2,394 3,101 3,552 32% Net income to MPI (reported) 384 2,322 2,465 2,889 3,433 14% Source: Company data, Credit Suisse estimates Maynilad financial and operating performance forecasts (2013E to 2015E) For 2013E to 2015E, we forecast Maynilad’s core net income contribution to Metro Pacific will expand by a 14% CAGR, mainly driven by a 14% CAGR in revenues. This in turn will be enabled by a 5% CAGR in water billed volumes and a 8% CAGR in tariff, in our view. For 2013E to 2015E, Credit Suisse forecasts that the Philippine GDP will grow by 6.2% p.a. and inflation by 3.5% p.a.
Figure 29: Maynilad financial and operating forecasts (2013E to 2015E) 12/12A 12/13E 12/14E 12/15E 3-yr CAGR Operating highlights Water billed volume (cubic meters '000) 428,000 451,048 473,373 495,023 5% Total tariff (P/cubic meter) 37.11 40.32 43.78 47.37 8% Unit cost of services & opex (P/cubic meter) 12.67 13.93 14.98 15.88 8% EBITDA margin (%) 65.9 65.4 65.8 66.5 n.a. Profit & loss contribution to MPI (P mn) Operating Revenues 15,883 18,186 20,723 23,451 14% EBITDA 10,462 11,901 13,632 15,591 14% EBIT 7,842 8,922 10,279 11,848 15% Pre-tax Profit 5,944 7,099 8,479 10,048 19% Associates/JV - - - - n.a. Net income (core) 6,246 7,099 8,479 10,048 17% Net income to MPI (core) 3,552 3,762 4,494 5,326 14% Net income to MPI (reported) 3,433 3,762 4,494 5,326 16% Source: Company data, Credit Suisse estimates Investment in power utilities (Beacon Electric) Metro Pacific owns 50% of Beacon Electric (not listed), which is a holding company incorporated in 2010 with the sole purpose of consolidating ownership in Meralco (MER.PS, P380, NEUTRAL, TP P339). The other 50% is owned by PLDT Communications and Energy Ventures (not listed), which in turn is 99.5% owned by PLDT (TEL.PS, P2,920, OUTPERFORM, TP P3,500). Metro Pacific and PLDT both have First Pacific (0142.HK, HK$10.1, OUTPERFORM, TP HK$14.7) as their parent company. Beacon is the single-largest owner of Meralco at 48.3%.
Metro Pacific Investments (MPI.PS / MPI PM) 16 07 June 2013
Figure 30: Meralco ownership structure
First Pacific
56% 26%
Metro Pacific PLDT
50% 50%
San Miguel First Philippine Public Beacon Electric Corporation Holdings
48.3% 32.8% 3.9% 15.0%
Meralco
Source: Company data Beacon historical financial and operating performance From 2010 to 2012, Beacon’s core net income contribution to Metro Pacific expanded by 4% CAGR. On a steady state basis, growth was driven by the 16% CAGR in Meralco’s net profit, enabled by the 4% CAGR in its electricity sales volumes and 4% CAGR in tariff. For 2010 to 2012, we note that the Philippine GDP grew by 6.0% p.a. and the inflation rate was 4.2% p.a. Meralco’s revenue growth was complemented by the improvement in the EBITDA margin of its distribution business (before provisions) to 64.1% in 2012 from 48.2% in 2010. This was mainly due to the significant reduction in under recoveries (i.e., purchased pass-through cost is more than pass-through revenue). In absolute terms, growth in Beacon’s net profit contribution to Metro Pacific was mainly driven by the increase in Beacon’s ownership of Meralco from 34.8% in 2010 to 48.3% in 2012. This was partially offset by a 48% CAGR in Beacon’s interest expense as its net debt-to-equity ratio increased to 0.39x in 2012 from 0.27x in 2010. We also note that Beacon’s operating expenses coupled with accounting consolidation items (e.g., fair value adjustments) resulted in substantially less than 100% “transmission” of Beacon’s equity in net profit of Meralco (after financing costs) into Metro Pacific’s income statement. The average “transmission” percentage for the past three years was 76%.
Metro Pacific Investments (MPI.PS / MPI PM) 17 07 June 2013
Figure 31: Beacon’s historical financial and operating performance 12/10A 12/11A 12/12A 2-yr CAGR Meralco operating and financial highlights Distribution revenues (P mn) 43,642 48,606 50,892 8% Electricity sales volume (GWh) 30,247 30,592 32,771 4% Distribution tariff (P/KWh) 1.44 1.59 1.55 4% Distribution business EBITDA margin, before provisions (%) 48.2 61.9 64.1 n.a. Percentage of net income from Beacon reported in MPI Meralco net profit - core (P mn) 12,155 14,887 16,265 16% x Beacon's ownership of Meralco (%) 34.8 45.4 48.3 n.a. = Beacon's equity in net profit of Meralco (P mn) 4,230 6,759 7,863 36% less: Beacon's interest expense (P mn) (1,181) (1,932) (2,570) 48% = Beacon's equity in net profit of Meralco, after financing costs (P mn) 3,049 4,826 5,292 32% x Metro Pacific ownership of Beacon (%) 50.0 50.0 50.0 n.a. = Beacon's equity in net profit of Meralco, after financing costs - MPI's share (P mn) [a] 1,525 2,413 2,646 32% Net income to MPI - core, as reported in FS (P mn) [b] 1,486 1,686 1,615 4% Percentage of net income from Beacon reported in MPI's FS (%) [a / b] 97.5 69.9 61.0 n.a. Profit & loss contribution to MPI (P mn) Associates/JV 1,486 1,686 1,615 4% Net income (core) 1,486 1,686 1,615 4% Net income to MPI (core) 1,486 1,686 1,615 4% Net income to MPI (reported) 665 2,086 1,891 69% Source: Company data, Credit Suisse Beacon financial and operating forecasts (2013E to 2015E) For 2013E to 2015E, we forecast Beacon’s core net income contribution to Metro Pacific will expand by 33% CAGR. On a steady state basis, we forecast for a 12% CAGR in Meralco’s net profit, which will be enabled by a 5% CAGR in its electricity sales volumes and a 2% CAGR in tariff. For 2013E to 2015E, Credit Suisse forecasts that the Philippine GDP will grow by 6.2% p.a. and inflation by 3.5% p.a. We estimate that growth in Meralco’s net profit will be complemented by a -3% CAGR in interest expense as we see net debt-to-equity decrease to 0.29x by 2015E from 0.39x in 2012A. In addition, we only forecast for Beacon operating expense and not for fair value adjustments. As a result, we estimate that the “transmission” of Beacon’s equity in net profit of Meralco (after financing costs) into Metro Pacific income’s statement would have a higher average of 87%.
Metro Pacific Investments (MPI.PS / MPI PM) 18 07 June 2013
Figure 32: Beacon financial and operating performance forecasts (2013E to 2015E) 12/12A 12/13E 12/14E 12/15E 3-yr CAGR Meralco operating and financial highlights Distribution revenues (P mn) 50,892 56,000 59,082 62,961 7% Electricity sales volume (GWh) 32,771 34,350 36,240 38,233 5% Distribution tariff (P/KWh) 1.55 1.63 1.63 1.65 2% Distribution business EBITDA margin, before provisions (%) 64.1 64.4 63.0 61.9 n.a. Percentage of net income from Beacon reported in MPI Meralco net profit - core (P mn) 16,265 18,574 20,126 22,669 12% x Beacon's ownership of Meralco (%) 48.3 48.3 48.3 48.3 n.a. Beacon's equity in net profit of Meralco (P mn) 7,863 8,979 9,729 10,958 12% less: Beacon's interest expense (P mn) (2,570) (2,329) (2,329) (2,329) -3% Beacon's equity in net profit of Meralco, after financing costs (P mn) 5,292 6,650 7,400 8,629 18% x Metro Pacific ownership of Beacon (%) 50.0 50.0 50.0 50.0 n.a. Beacon's equity in net profit of Meralco, after financing costs - MPI's share (P mn) [a] 2,646 3,325 3,700 4,315 18% Net income to MPI - core, as reported in FS (P mn) [b] 1,615 2,876 3,214 3,767 33% Percentage of net income from Beacon reported in MPI's FS (%) [a / b] 61.0 86.5 86.9 87.3 n.a. Profit & loss contribution to MPI (P mn) Associates/JV 1,615 2,876 3,214 3,767 33% Net income (core) 1,615 2,876 3,214 3,767 33% Net income to MPI (core) 1,615 2,876 3,214 3,767 33% Net income to MPI (reported) 1,891 2,876 3,214 3,767 26% Source: Company data, Credit Suisse estimates Investment in toll roads (Metro Pacific Tollways) Metro Pacific owns 99.9% of Metro Pacific Tollways (not listed), which is the largest toll road operator in the Philippines. Metro Pacific holds exclusive long-term concessions to operate and manage a total of 192 km (inclusive of the 94 km SCTEX, which is not yet turned over and is therefore not included in our forecasts). Tollways’ historical financial and operating performance From 2009 to 2012 (the business was acquired by the company on August 2008), Tollways’ core net income contribution to Metro Pacific expanded by 7% CAGR, mainly driven by a 7% CAGR in revenues. Revenue growth was enabled by a 5% CAGR in tariff (toll per average km travelled) and a 2% CAGR in volumes (average km travelled). For 2010 to 2012, we note that the Philippine GDP grew by 6.0% p.a. and inflation rate was 4.2% p.a.
Figure 33: Tollways’ historical financial and operating performance 12/08A 12/09A 12/10A 12/11A 12/12A 3-yr CAGR Operating highlights Average km travelled 2,662,845 2,945,750 3,115,475 3,013,224 3,125,066 2% Toll per average km travelled (P) 1,952 1,863 1,880 2,146 2,171 5% Cost of services & opex per average km travelled (P) 979 850 774 866 845 0% EBITDA margin (%) 36.3 54.4 58.8 59.6 61.1 n.a. Profit & loss contribution to MPI (P mn) Operating Revenues 715 5,489 5,858 6,465 6,784 7% EBITDA 260 2,986 3,446 3,855 4,142 12% EBIT 256 2,373 2,805 3,175 3,457 13% Pre-tax Profit 200 1,716 2,061 2,526 2,909 19% Associates/JV 20 132 132 165 208 16% Net income (core) 237 1,810 2,098 2,115 2,254 8% Net income to MPI (core) 166 1,279 1,433 1,455 1,568 7% Net income to MPI (reported) 201 1,065 1,159 1,261 1,483 12% Source: Company data, Credit Suisse
Metro Pacific Investments (MPI.PS / MPI PM) 19 07 June 2013
Tollways financial and operating forecasts (2013E to 2015E) For 2013E to 2015E, we forecast Tollways’ core net income contribution to Metro Pacific expanding by 9% CAGR, mainly driven by a 9% CAGR in revenues. Revenue growth will be enabled by a 4% CAGR in tariff (toll per average km travelled) and a 5% CAGR in volumes (average km travelled). For 2013E to 2015E, Credit Suisse forecasts that the Philippine GDP will grow by 6.2% p.a. and inflation by 3.5% p.a.
Figure 34: Tollways’ financial and operating performance forecasts (2013E to 2015E) 12/12A 12/13E 12/14E 12/15E 12-15E CAGR Operating highlights Average km travelled 3,125,066 3,328,818 3,461,971 3,600,450 5% Toll per average km travelled (P) 2,171 2,258 2,348 2,442 4% Cost of services & opex per average km travelled (P) 845 879 914 951 4% EBITDA margin (%) 61.1 61.1 61.1 61.1 n.a. Profit & loss contribution to MPI (P mn) Operating Revenues 6,784 7,516 8,129 8,792 9% EBITDA 4,142 4,589 4,963 5,368 9% EBIT 3,457 3,668 4,018 4,402 8% Pre-tax Profit 2,909 3,153 3,505 3,889 10% Associates/JV 208 216 225 234 4% Net income (core) 2,254 2,423 2,678 2,956 9% Net income to MPI (core) 1,568 1,679 1,856 2,049 9% Net income to MPI (reported) 1,483 1,679 1,856 2,049 11% Source: Company data, Credit Suisse estimates
Metro Pacific Investments (MPI.PS / MPI PM) 20 07 June 2013 Abundant supply of catalysts We believe that Metro Pacific has an abundant supply of catalyst in 2H13: (1) For its current businesses—potential announcement of hospital acquisitions, Maynilad’s implementation of rate rebasing in early 2H13, updates in Meralco’s power generation investments and toll road expansion developments; (2) There is also potential for new businesses—Metro Pacific plans to bid for the LRT1 (rail) and Mactan International Airport PPP projects. Based on the current timetable of the Philippine government, the project award notices will be announced in July and September 2013, respectively.
Figure 35: Source of potential catalysts for Metro Pacific Event Business Date Remarks Catalysts related to current businesses Announcement of acquisitions Hospitals Early 2H13 Included in our forecasts Rate rebasing implementation Water Early 2H13 Included in our forecasts Generation investments Power 2H13 Partially included in our forecasts Road network expansion Toll roads 2H13 Not included in our forecasts Potential for new businesses Project award notice Mactan airport Jul 2013 Not included in our forecasts Project award notice LRT1 Sep 2013 Not included in our forecasts Source: Company, Credit Suisse Catalysts related to current businesses Potential announcement of hospital acquisitions Metro Pacific announced earlier this year that it will acquire the De Los Santos Medical Centre, which has 150 beds. Recently (4 June), the company announced that it has completed its 51% investment in the aforementioned hospital. The company also said that it is conducting due diligence for one more hospital acquisition this year that also has 150 beds. We forecast for an additional 394 beds for Metro Pacific by end of 2013. Maynilad’s rate rebasing implementation The rate rebasing adjustment that Maynilad is subject to is a regulatory process performed every five years. It enables Metropolitan Waterworks and Sewerage System to review a water utility operator’s performance while simultaneously ensuring that the operator receives a set rate of return. At the time of this writing, the rate rebasing has not yet been implemented but we expect this to happen in early 2H13. We forecast a favourable rate rebasing decision, which translates to an 8.2% p.a. tariff increase from 2013E to 2017E. Updates in Meralco’s power generation investments Currently, Meralco’s business is mainly related to electricity distribution in the Philippines. Over the past three years, however, it has been looking into investments in the power generation business. Meralco has publicly stated that it intends to have a power generation portfolio of up to 2,700 MW over the next five years. Currently, Meralco has investments in the following:
■ 47% interest in a proposed 600 MW coal-fired power-plant that management expects to be commercially operational by 2016. As a base case, we assume a total attributable capacity of 900 MW for Meralco’s forthcoming generation business in the Philippines.
■ 28% interest in GMRE, through a 40% interest in FPM Power (the remaining 60% is owned by First Pacific), which owns 70% of GMRE. GMRE owns an 800 MW natural gas fired power plant in Singapore, which will commence operations by the end of 2013.
Metro Pacific Investments (MPI.PS / MPI PM) 21 07 June 2013
Toll roads expansion We have not factored in new projects for the company’s toll road business except for the Manila Cavite Toll Expressway (CAVITEX), which was acquired in December 2012. At the time of this writing, Metro Pacific continues to reformat and refine its proposals with the government, in a series of negotiations since 2010, on turning over management of the 94 km Subic Clark Tarlac Expressway (SCTEX). Given the uncertainty caused by the prolonged closure of this acquisition, we have not yet included this revenue stream in our forecasts. Another big ticket potential expansion item is the company’s plan to bid for the CALA Expressway project of the Philippine Government. The project is a four-lane, 47 km toll road that will connect the CAVITEX and South Luzon Expressway (SLEX). The winning bidder will finance, design, and construct a total of 29 km toll road section but will operate and maintain the entire 47 km concession area for 35 years. As of April 2013, the government has issued its invitation to prequalify to bid. Project cost is P43 bn. We have not yet included this project in our forecasts. Potential for new businesses LRT1 South Extension Project (rail) Metro Pacific has a 43% stake in a joint venture project company that is a pre-qualified bidder for the Philippine Government’s LRT1 South Extension Project (LRT1). The project involves construction of an 11.7 km double rail-track extension with eight passenger stations (provision for two additional stations). The whole stretch of the integrated LRT 1 (total length of 32.4 km) will be operated and maintained by the winning bidder. The operations and maintenance concession of the integrated line will be for a period of 32 years. Award notice is scheduled to be announced on July 2013. The project cost is P59 bn. We have not yet included this project in our forecasts.
Figure 36: LRT/MRT integrated line
Source: Public-Private Partnership Center
Metro Pacific Investments (MPI.PS / MPI PM) 22 07 June 2013
Mactan International Airport Metro Pacific has a 57% stake in a joint venture project company that is a pre-qualified bidder for the Philippine Government’s Mactan International Airport in Cebu. The project involves the construction of a new passenger terminal building, with a capacity of about 8 mn passengers per year. The winning bidder will be granted with the operation and maintenance concession of both the new and existing passenger terminals. Award notice is scheduled to be announced in September 2013. The project cost P17.5 bn. We have not yet included this project in our forecasts.
Figure 37: Airports in the vicinity of Cebu City
Source: Public-Private Partnership Center
Metro Pacific Investments (MPI.PS / MPI PM) 23 07 June 2013 Scope for further re-rating Despite the 32% year-to-date stock price increase, we believe that there is scope for further gains as the stock’s 2014E PER of 15.3x is below its past five-year average level of 17.7x. Our SOTP valuation also suggests the ex-hospitals, MPI’s fair value is P6.40 or just 9% above its current stock price. Key investment risks are failure to execute hospitals M&A and unfavourable regulatory decisions. P7.90 SOTP-based target price We have a P7.90 SOTP-based 12-months target price for Metro Pacific. Based on our estimates, 20% the company’s NAV comes from its hospitals business while the remaining 80% comes from its investments in utilities and toll roads.
Figure 38: Metro Pacific’s target price Gross Attributable % share 14E NI % share 2014E Subsidiary/associate % stake NAV (Pmn) NAV (P mn) of NAV (Pmn) 14E NI P/E (x) Methodology Maynilad 52.8% 123,691 65,309 30% 4,494 42% 14.5 DCF, 8.0% WACC Beacon (Meralco) 50.0% 123,738 61,869 28% 3,214 30% 19.3 CS TP, 20% discount to NAV Metro Pacific Tollways 99.9% 46,687 46,631 22% 1,856 17% 25.1 DCF, 8.7% WACC Hospitals various 42,117 42,117 20% 1,203 11% 35.0 14E target PER MPI Gross NAV 215,926 100% 10,767 100% 20.1 less: Parent net debt 215 add: Inv Beacon prefs 11,573 Book value MPI NAV, before disc 227,284 less: 10% discount 22,728 Parent opex is 11% net income MPI NAV 204,556 9,971 20.5 Shares (mn) 26,002 MPI target price (P) 7.90 0.38 20.6 Source: Credit Suisse estimates Metro Pacific’s current 2014E PER is below the stock’s past-five-year average Metro Pacific is currently trading at 2014E PER of 15.3x. From 2008 to 2012, the stock traded at an average of PER of 17.7x with a standard deviation of 5.6.
Figure 39: Metro Pacific forward PER from January 2008 to present (x)
40
35
30
25
20
15
10
5
0 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13
Fwd PER Ave-2SD Ave-1SD Average Ave+1SD Ave+2SD
Source: Credit Suisse estimates
Metro Pacific Investments (MPI.PS / MPI PM) 24 07 June 2013
Our target price translates to an implied 2014E PER of 20.6x and PBR of 2.0x Our SOTP-based target price for Metro Pacific translates to an implied 2014E PER of 20.6x and PBR of 2.0x. Using I/B/E/S consensus numbers, we note that the weighted average 2014E PER and PBR for the Philippines conglomerate sector are 18.0x and 2.2x, respectively.
Figure 40: Philippines conglomerates sector 2013E and 2014E valuation summary Company Reuters Mkt Cap P/E (x) P/B (x) ROE (%) Div yield (%) EPS growth (%) Name ticker (US$ mn) 2013E 2014E 2013E 2014E 2013E 2014E 2013E 2014E 2013E 2014E Metro Pacific MPI.PS 3,620 19.3 16.7 1.6 1.5 9.1 9.8 0.5 0.6 14.7 15.1 SM Investments SM.PS 15,412 23.4 20.9 3.2 2.9 12.4 13.6 1.2 1.4 17.7 11.9 Alliance Global Inc AGI.PS 5,827 18.2 15.5 2.7 2.4 13.1 14.4 1.7 1.9 (4.7) 17.4 Ayala Corporation AC.PS 8,771 26.7 22.9 3.3 2.6 10.0 9.9 0.6 0.6 35.5 16.8 San Miguel Corporation SMC.PS 5,395 7.3 16.2 0.7 n.a. 9.7 n.a. 1.1 1.1 45.8 (55.0) JG Summit JGS.PS 7,101 20.5 17.0 1.7 1.6 10.0 10.8 0.2 0.2 8.0 20.7 DMCI Holdings DMC.PS 3,212 10.0 11.7 2.3 2.1 28.6 19.9 2.6 3.3 38.3 (14.4) Aboitiz Equity Ventures AEV.PS 6,942 14.0 13.7 2.8 2.5 21.5 19.4 3.2 3.0 (12.4) 2.0 Simple average 7,035 17.4 16.8 2.3 2.2 14.3 14.0 1.4 1.5 17.9 1.8 Weighted average 19.3 18.0 2.5 2.2 13.4 12.3 1.3 1.4 16.9 5.4 Source: I/B/E/S Hospitals business 12-months forward NAV methodology We estimate the 12-months forward NAV of Metro Pacific’s hospitals business by applying a target PER of 35.0x to its 2014E net income contribution of P1.20 bn. We note that the 47.8% 2013E-2015E average EPS growth of its hospitals business is substantially higher than the 28.5% average the NJA healthcare sector. As discussed earlier this report, there is a positive relationship between 2014E PER and EPS growth (see Figure 10). For this reason, we base our multiple on the two fastest growing stocks in the sector: Bangkok Dusit (BGH.BK, Bt165, OUTPERFORM, TP Bt172) and IHH Healthcare (IHHH.KL, RM3.9, NEUTRAL, TP RM3.30). Based on Credit Suisse forecasts, Bangkok Dusit and IHH Healthcare currently trade at a 2014E PER of 27.7x (24.5% average EPS growth from 2013E to 2015E) and 40.9x (20.3% average EPS growth), respectively.
Figure 41: Hospitals business NAV estimate 12/13E 12/14E 12/15E Average Metro Pacific hospitals business NAV estimate EPS growth (%) 67.4 41.7 34.3 47.8 Target PER (x) 43.0 35.0 29.0 35.7 Net income to MPI - core (P mn) 849 1,203 1,616 1,223 NAV (P mn) 36,513 42,117 46,876 41,835 CS coverage of NJA healthcare PER (x) Bangkok Dusit (BGH.BK) 34.0 27.7 22.8 28.2 Bumrungrad Hospital (BH.BK) 24.9 21.7 18.7 21.8 Raffles Medical (RAFG.SI) 28.8 26.0 24.4 26.4 KPJ Healthcare (KPJH.KL) 22.5 20.9 18.5 20.7 IHH Healthcare (IHHH.KL) 50.5 40.9 33.3 41.6 Average 32.2 27.4 23.5 27.7 CS coverage of NJA healthcare EPS growth (%) Bangkok Dusit (BGH.BK) 28.9 23.0 21.4 24.5 Bumrungrad Hospital (BH.BK) 22.4 14.4 16.2 17.7 Raffles Medical (RAFG.SI) 8.2 10.7 6.5 8.5 KPJ Healthcare (KPJH.KL) 19.6 7.9 12.7 13.4 IHH Healthcare (IHHH.KL) 14.4 23.7 22.9 20.3 Average 18.7 16.0 16.0 16.9 Source: Credit Suisse estimates
Metro Pacific Investments (MPI.PS / MPI PM) 25 07 June 2013
Maynilad 12-months forward NAV methodology We used DCF analysis to estimate the 12-months forward NAV of Maynilad. Forecast period is from 2013E to 2037E and we do not assume a terminal value. Our WACC assumption is 8.0%. Our NAV estimate for Maynilad translates to a 2014E PER of 14.5x. As a reference, we note that Manila Water (MWC.PS, P35.0, OUTPERFORM, TP 36.20) currently trades at a 2014E PER of 11.9x.
Figure 42: Maynilad Water and Manila Water PER for Figure 43: Maynilad Water and Manila Water EPS growth 2013E-2015E (x) for 2013E-2015E (%)
20 25 Manila Water Maynilad Water 18 17.4 Manila Water Maynilad Water 19.4 16 14.5 20 18.5 13.6 14 12.3 11.9 14.7 14.4 14.7 12 15 10.4 10
8 10
6 5.9 4 5
2
0 0 13E P/E 14E P/E 15E P/E 13E EPSg (%) 14E EPSg (%) 15E EPSg (%)
Source: Credit Suisse estimates Source: Credit Suisse estimates Beacon 12-months forward NAV methodology We use Credit Suisse’ target price for Meralco of P339 to derive the equity value attributable to Beacon Electric and then deduct Beacon’s net debt to arrive at its gross NAV. As discussed earlier in this report, however, Beacon’s operating expenses coupled with accounting consolidation items (e.g., fair value adjustments) resulted in a substantially less than 100% “transmission” of Beacon’s equity in net profit of Meralco (after financing costs) into Metro Pacific income statement. The average “transmission” percentage for the past three years was 76%. To account for this in our valuation, we apply a 20% discount to the gross NAV. To derive the Metro Pacific NAV, we also add its investments in the preferred shares of Beacon Electric. These preferred shares of Beacon are non-voting, non-convertible to common shares or any shares of any class, have no pre-emptive rights to subscribe to any share or convertible debt securities or warrants issued or sold by Beacon.
Figure 44: Beacon Electric’s NAV estimate (P mn, unless otherwise stated) 52-wk Low CS Target Price 52-wk High Meralco outstanding shares (mn) 1,127 1,127 1,127 x Meralco share price (P) 230 339 395 Meralco equity value 259,233 382,087 445,204 x Beacon Electric ownership (%) 48.3 48.3 48.3 Equity value, attributable to Beacon Electric 125,313 184,701 215,212 less: Beacon Electric net debt 30,028 30,028 30,028 Beacon Electric Gross NAV 95,285 154,673 185,184 less: 20% discount to NAV 19,057 30,935 37,037 Beacon Electric NAV 76,228 123,738 148,147 Source: Credit Suisse estimates
Metro Pacific Investments (MPI.PS / MPI PM) 26 07 June 2013
Metro Pacific Tollways’ 12-months forward NAV methodology We used DCF analysis to estimate the 12-months forward NAV of Metro Pacific Tollways. Forecast period is from 2013E to 2037E and we do not assume a terminal value. Our WACC assumption is 8.7%. Our NAV estimate for Metro Pacific Tollways translates to a 2014E PER of 25.1x. As reference, we note that Jasa Marga (JSMR.JK, Rp6,800, OUTPERFORM, TP Rp6,750) currently trades at a 2014E PER of 27.1x.
Figure 45: Metro Pacific Tollways’ and Jasa Marga’s PER Figure 46: Metro Pacific Tollways’ and Jasa Marga’s EPS for 2013E to 2015E (x) growth for 2013E to 2015E (%)
35 12 11.0 10.5 10.4 Jasa Marga Metro Pacific Tollways 30.1 10 30 27.8 27.1 7.4 25.1 25.2 8 7.1 25 22.8 6
20 4
2 15 0 13E EPSg (%) 14E EPSg (%) 15E EPSg (%) 10 -2
5 -4 Jasa Marga Metro Pacific Tollways -6 0 (6.1) 13E P/E 14E P/E 15E P/E -8
Source: Credit Suisse estimates Source: Credit Suisse estimates Key risks In our view, the key investment risks for Metro Pacific are failure to execute hospitals M&A, unfavourable rate rebasing for its water business, delays in its re-entry into the power generation business, and tariff freeze on toll roads. Failure to execute hospitals M&A Over the next three years, we believe that growth in the company’s hospitals business will be mainly driven by M&A. Failure to execute this strategy is an investment risk as we believe that building new hospitals is currently a less efficient way to consolidate market share. Unfavourable rate rebasing for its water business As a regulated industry, price increases in the company’s water business may face delays due to political and other external influence. Tariff freeze on power distribution business and delays in its re-entry into the power generation business As a regulated industry, price increases in the company’s power distribution business may face delays due to political and other external influence. Power generation, on the other hand, is not considered a public utility and is not required to secure a national franchise. However, delays may be encountered in securing certificate of compliance from the regulator as well as health, safety and environmental approvals. Tariff freeze on toll roads As a regulated industry, price increases in the company’s toll roads business may face delays due to political and other external influence.
Metro Pacific Investments (MPI.PS / MPI PM) 27 07 June 2013
Companies Mentioned (Price as of 06-Jun-2013) Bangkok Dusit Medical Services (BGH.BK, Bt165.0) Bumrungrad Hospital Pcl (BH.BK, Bt80.75) First Pacific Company Limited (0142.HK, HK$10.1) IHH Healthcare (IHHH.KL, RM3.9) Jasa Marga (Persero) TBK PT (JSMR.JK, Rp6,800) KPJ Healthcare Bhd (KPJH.KL, RM6.41) Manila Electric (Meralco) (MER.PS, P380.0, NEUTRAL, TP P339.0) Manila Water Company (MWC.PS, P35.0) Metro Pacific Investments (MPI.PS, P5.86, OUTPERFORM, TP P7.9) Philippine Long Distance Telephone (TEL.PS, P2920.0) Raffles Medical Group (RAFG.SI, S$3.28)
Disclosure Appendix Important Global Disclosures I, Alvin Arogo, certify that (1) the views expressed in this report accurately reflect my personal views about all of the subject companies and securities and (2) no part of my compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this report.
3-Year Price and Rating History for Manila Electric (Meralco) (MER.PS)
MER.PS Closing Price Target Price Date (P) (P) Rating 08-Oct-10 224.60 194.00 U * 02-Mar-11 230.00 198.00 29-Feb-12 263.60 247.00 N 28-Jun-12 251.00 * 13-Dec-12 260.00 * 20-Dec-12 262.00 262.00 N * 06-Jun-13 380.00 339.00 * Asterisk signifies initiation or assumption of coverage.
UNDERPERFORM NEUTRAL
3-Year Price and Rating History for Metro Pacific Investments (MPI.PS)
MPI.PS Closing Price Target Price Date (P) (P) Rating 25-Oct-12 4.03 NR * Asterisk signifies initiation or assumption of coverage.
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Metro Pacific Investments (MPI.PS / MPI PM) 28 07 June 2013 return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attractive, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. For Latin Ame rican and non-Japan Asia stocks, ratings are based on a stock’s total return relative to the average total return of the relevant country or regional benchmark; Australia, New Zealand a re, and prior to 2nd October 2012 U.S. and Canadian ratings were based on (1) a stock’s absolute total return potential to its current share price and (2) the relative attractiveness of a stock’s total return potential within an analyst’s coverage universe. For Australian and New Zealand stocks, 12-month rolling yield is incorporated in the absolute total return calculation and a 15% and a 7.5% threshold replace the 10-15% level in the Outperform and Underperform stock rating definitions, respectively. The 15% and 7.5% thresholds replace the +10-15% and -10-15% levels in the Neutral stock rating definition, respectively. Prior to 10th December 2012, Japanese ratings were based on a stock’s total return relative to the average total return of the relevant country or regional benchmark. Restricted (R) : In certain circumstances, Credit Suisse policy and/or applicable law and regulations preclude certain types of communications, including an investment recommendation, during the course of Credit Suisse's engagement in an investment banking transaction and in certain other circumstances.
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Price Target: (12 months) for Metro Pacific Investments (MPI.PS) Method: Our P7.90 12-month target price for Metro Pacific Investments is dreived using an SOTP (sum-of-the-parts) methodology. Based on our estimates, 20% of the company's NAV (net asset value) comes from its hospitals business while the remaining 80% comes from its investments in utilities and toll roads. Risk: Risks that could impede achievement of our P7.90 target price for Metro Pacific Investments inlcude: a failure of the company to execute hospitals M&A, unfavourable rate rebasing for its water business, delays in its re-entry into the power generation business, and tariff freeze on toll roads.
Price Target: (12 months) for Manila Electric (Meralco) (MER.PS)
Method: Our P339 target price for Manila Electric (Meralco) is based on an SOTP (sum-of-the-parts) methodology: 85% from the existing distribution business and 15% from the forthcoming generation business. We used DCF (discounted cash flow) analysis to estimate the value of both the distribution and generation businesses. Our WACC (weighted average cost of capital) assumption is 8.7%. Risk: Upside (downside) risks to our P339 target price for Manila Electric (Meralco) include: for the distribution business, higher (lower) electricity sales volume and/or regulated wheeling tariff; for its forthcoming generation business, higher (lower) attributable capacity assumptions.
Metro Pacific Investments (MPI.PS / MPI PM) 29 07 June 2013
Please refer to the firm's disclosure website at www.credit-suisse.com/researchdisclosures for the definitions of abbreviations typically used in the target price method and risk sections.
See the Companies Mentioned section for full company names The subject company (MPI.PS, TEL.PS, MWC.PS, JSMR.JK, 0142.HK, BGH.BK, BH.BK, KPJH.KL, IHHH.KL) currently is, or was during the 12- month period preceding the date of distribution of this report, a client of Credit Suisse. Credit Suisse provided investment banking services to the subject company (MPI.PS, TEL.PS, JSMR.JK, 0142.HK, BGH.BK, BH.BK, KPJH.KL, IHHH.KL) within the past 12 months. Credit Suisse provided non-investment banking services to the subject company (TEL.PS, 0142.HK) within the past 12 months Credit Suisse has managed or co-managed a public offering of securities for the subject company (BGH.BK, IHHH.KL) within the past 12 months. Credit Suisse has received investment banking related compensation from the subject company (MPI.PS, TEL.PS, JSMR.JK, 0142.HK, BGH.BK, BH.BK, KPJH.KL, IHHH.KL) within the past 12 months Credit Suisse expects to receive or intends to seek investment banking related compensation from the subject company (MPI.PS, TEL.PS, MWC.PS, JSMR.JK, 0142.HK, BGH.BK, BH.BK, RAFG.SI, KPJH.KL, IHHH.KL) within the next 3 months. Credit Suisse has received compensation for products and services other than investment banking services from the subject company (TEL.PS, 0142.HK) within the past 12 months Credit Suisse may have interest in (KPJH.KL, IHHH.KL) Important Regional Disclosures Singapore recipients should contact Credit Suisse AG, Singapore Branch for any matters arising from this research report. The analyst(s) involved in the preparation of this report have not visited the material operations of the subject company (MPI.PS, MER.PS, TEL.PS, MWC.PS, JSMR.JK, 0142.HK, BGH.BK, BH.BK, RAFG.SI, KPJH.KL, IHHH.KL) within the past 12 months Restrictions on certain Canadian securities are indicated by the following abbreviations: NVS--Non-Voting shares; RVS--Restricted Voting Shares; SVS--Subordinate Voting Shares. Individuals receiving this report from a Canadian investment dealer that is not affiliated with Credit Suisse should be advised that this report may not contain regulatory disclosures the non-affiliated Canadian investment dealer would be required to make if this were its own report. For Credit Suisse Securities (Canada), Inc.'s policies and procedures regarding the dissemination of equity research, please visit http://www.csfb.com/legal_terms/canada_research_policy.shtml. As of the date of this report, Credit Suisse acts as a market maker or liquidity provider in the equities securities that are the subject of this report. Principal is not guaranteed in the case of equities because equity prices are variable. Commission is the commission rate or the amount agreed with a customer when setting up an account or at any time after that. For Thai listed companies mentioned in this report, the independent 2012 Corporate Governance Report survey results published by the Thai Institute of Directors Association are being disclosed pursuant to the policy of the Office of the Securities and Exchange Commission: Bangkok Dusit Medical Services () , Bumrungrad Hospital Pcl (Very Good) To the extent this is a report authored in whole or in part by a non-U.S. analyst and is made available in the U.S., the following are important disclosures regarding any non-U.S. analyst contributors: The non-U.S. research analysts listed below (if any) are not registered/qualified as research analysts with FINRA. The non-U.S. research analysts listed below may not be associated persons of CSSU and therefore may not be subject to the NASD Rule 2711 and NYSE Rule 472 restrictions on communications with a subject company, public appearances and trading securities held by a research analyst account. Credit Suisse Securities (Philippines) Inc...... Alvin Arogo ; Gab Roque
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Metro Pacific Investments (MPI.PS / MPI PM) 30 07 June 2013
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In addition, CS is not acting for direct or indirect compensation to solicit the municipality on behalf of an unaffiliated broker, dealer, municipal securities dealer, municipal advisor, or investment adviser for the purpose of obtaining or retaining an engagement by the municipality for or in connection with Municipal Financial Products, the issuance of municipal securities, or of an investment adviser to provide investment advisory services to or on behalf of the municipality. If this report is being distributed by a financial institution other than Credit Suisse AG, or its affiliates, that financial institution is solely responsible for distribution. Clients of that institution should contact that institution to effect a transaction in the securities mentioned in this report or require further information. This report does not constitute investment advice by Credit Suisse to the clients of the distributing financial institution, and neither Credit Suisse AG, its affiliates, and their respective officers, directors and employees accept any liability whatsoever for any direct or consequential loss arising from their use of this report or its content. Principal is not guaranteed. Commission is the commission rate or the amount agreed with a customer when setting up an account or at any time after that. Copyright © 2013 CREDIT SUISSE AG and/or its affiliates. All rights reserved. Investment principal on bonds can be eroded depending on sale price or market price. In addition, there are bonds on which investment principal can be eroded due to changes in redemption amounts. Care is required when investing in such instruments. When you purchase non-listed Japanese fixed income securities (Japanese government bonds, Japanese municipal bonds, Japanese government guaranteed bonds, Japanese corporate bonds) from CS as a seller, you will be requested to pay the purchase price only.
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