Deutsche Bank Markets Research

Rating Company Date Hold DMCI Holdings 3 April 2013 Recommendation Asia Change Price at 2 Apr 2013 (PHP) 54.80 Conglomerates Price target - 12mth (PHP) 57.20

Reuters Bloomberg Exchange Ticker 52-week range (PHP) 63.40 - 51.10 DMC.PS DMC PM PHS DMC S.E.COMPOSITE 6,748

Setting the stage; upgrading to Hold Klyne Resullar Deutsche Regis Partners, Inc. Research Analyst Core operations intact; upgrading to Hold (+63) 2 894 6645 The risk-reward for DMCI is now more even, in our view, following the stock's [email protected] underperformance the past year (DMC: +2% vs PCOMP: +34%). We adjust our estimates and raise our SOTP NAV to P63.56/sh due to: 1) revisions in our Gio Dela-Rosa, CFA numbers for Semirara, 2) the partial divestment of Maynilad, 3) a more bullish outlook for construction and 4) new investments. The stock is trading at a 14% Deutsche Regis Partners, Inc. discount to our revised SOTP NAV of P63.56/sh (vs. historical average of 12%). Research Analyst We upgrade to Hold from Sell. (+63) 2 894 6642 [email protected] Maynilad sale completed, special dividend likely DMCI completed the sale of a 16% stake in Maynilad last February, which reduced its stake to 25% and raised c. P13bn (after tax) for the group. We thus Key changes expect DMCI’s headline FY13 net profit to include a P12bn gain but we also Rating Sell to Hold ↑ cut our FY12-FY14E core profit by 10-26% to reflect this and a more subdued Price target 43.00 to 57.20 ↑ 33.0% outlook on thermal coal. A special dividend from DMCI, in our view, is likely Sales (FYE) 51,797 to 50,230 ↓ -3.0% this year given its net cash position ($340m) at the parent level. Op prof 27.2 to 21.8 ↓ -20.0% Medium-term drivers: power, construction and new investments margin (FYE) Over the medium term, we believe Semirara will continue to be the main driver Net profit 11,445.4 to ↓ -10.1% of DMCI’s profitability, with its plans to double generation capacity by (FYE) 10,288.4 2015/2016. DMCI’s construction business could also offer significant upside surprise, as the investment cycle starts in earnest. Beyond those, DMCI is also Price/price relative actively looking for new avenues for growth and has already begun to get its 70 feet wet in mining (nickel). 60

Raising SOTP NAV by 26% to P63.56/sh 50 We raise our SOTP NAV to P63.56/sh after rolling forward our estimates to 40 FY13, reducing our COE to 10.4% (from 11.6%), and re-valuing the 30 construction business to 20x PER (vs. 15x previously). Our price target of 4/11 10/11 4/12 10/12 P57.20/sh (based on 10% discount to SOTP NAV) approximates current trading DMCI Holdings levels. Hold. Upside risks: rise in power and coal prices, order book MANILA S.E.COMPOSITE (Rebased) expansion, value-accretive acquisitions. Downside risks: drop in power and coal prices, execution, and adverse macroeconomic/political risks. Performance (%) 1m 3m 12m Absolute 0.6 0.0 2.7 Forecasts And Ratios MANILA 1.6 15.1 32.0 S.E.COMPOSITE Year End Dec 31 2010A 2011A 2012E 2013E 2014E Reported NPAT (PHPm) 7,867.3 9,595.5 10,288.4 22,371.8 12,200.8 DB EPS FD (PHP) 2.69 3.63 3.97 3.92 4.60 OLD DB EPS FD (PHP) 2.69 3.63 4.41 5.30 5.31 % Change 0.0% 0.0% -9.9% -26.1% -13.2% PER (x) 7.7 10.8 13.8 14.0 11.9 DPS (net) (PHP) 0.50 1.00 1.20 1.50 1.80 Source: Deutsche Bank estimates, company data

1 DB EPS is fully diluted and excludes non-recurring items 2 Multiples and yields calculations use average historical prices for past years and spot prices for current and future years, except P/B which uses the year end close

______Deutsche Bank AG/Hong Kong This research has been prepared in association with Deutsche Regis Partners, Inc. The opinions contained in this report are those of Deutsche Regis Partners, Inc. Deutsche Bank does and seeks to do business with companies covered in its research reports. Thus, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. DISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED IN APPENDIX 1. MICA(P) 072/04/2012.

3 April 2013

Conglomerates DMCI Holdings

Model updated:26 March 2013 Fiscal year end 31-Dec 2009 2010 2011 2012E 2013E 2014E

Running the numbers Financial Summary Asia DB EPS (PHP) 1.49 2.69 3.63 3.97 3.92 4.60 Reported EPS (PHP) 1.76 2.96 3.61 3.87 8.42 4.59 Philippines DPS (PHP) 0.20 0.50 1.00 1.20 1.50 1.80 Conglomerates BVPS (PHP) 7.7 10.1 12.8 15.4 22.4 25.2 Weighted average shares (m) 2,655 2,655 2,655 2,655 2,655 2,655 DMCI Holdings Average market cap (PHPm) 17,324 55,220 104,122 145,521 145,521 145,521 Enterprise value (PHPm) 26,741 60,555 107,591 145,160 137,946 143,567 Reuters: DMC.PS Bloomberg: DMC PM Valuation Metrics Hold P/E (DB) (x) 4.4 7.7 10.8 13.8 14.0 11.9 P/E (Reported) (x) 3.7 7.0 10.9 14.1 6.5 11.9 Price (2 Apr 13) PHP 54.80 P/BV (x) 1.26 3.55 3.24 3.55 2.45 2.18 Target Price PHP 57.20 FCF Yield (%) nm nm 5.0 4.5 17.5 0.1 Dividend Yield (%) 3.1 2.4 2.6 2.2 2.7 3.3 52 Week range PHP 51.10 - 63.40 EV/Sales (x) 0.9 1.4 2.3 2.9 2.6 2.4 Market Cap (m) PHPm 145,521 EV/EBITDA (x) 5.0 5.3 7.5 10.1 8.0 6.5 USDm 3,561 EV/EBIT (x) 6.9 7.5 9.6 13.3 10.5 8.6

Company Profile Income Statement (PHPm) One of the Philippines' oldest construction companies, Sales revenue 29,711 43,484 47,803 50,230 53,380 60,540 DMCI has transformed itself into an engineering and Gross profit 6,732 12,942 16,374 16,869 19,734 24,236 construction-based conglomerate, with businesses EBITDA 5,343 11,424 14,262 14,438 17,27121,962 ranging from construction, property, water utilities Depreciation 1,493 3,299 3,094 3,497 4,1425,325 management, coal mining, and power. Amortisation 0000 00 EBIT 3,850 8,125 11,168 10,941 13,12916,637 Net interest income(expense) 250 -519 -164 652 -681 -921 Associates/affiliates 1,680 1,893 2,185 2,610 1,9582,478 Exceptionals/extraordinaries 40 677 0 0 12,0000 Other pre-tax income/(expense) 224 488 433 31 392 390 Price Performance Profit before tax 6,044 10,664 13,622 14,234 26,798 18,585 Income tax expense 614 1,029 1,345 1,148 1,262 3,209 70 Minorities 747 1,768 2,681 2,798 3,1643,175 60 Other post-tax income/(expense) 0 0 0 0 0 0 Net profit 4,683 7,867 9,595 10,288 22,372 12,201 50 DB adjustments (including dilution) -735 -719 55 263 -11,974 26 40 DB Net profit 3,947 7,148 9,650 10,551 10,398 12,227 30 Apr 11 Jul 11 Oct 11Jan 12Apr 12 Jul 12 Oct 12Jan 13 Cash Flow (PHPm) Cash flow from operations 9,439 12,358 8,775 14,492 27,090 17,377 DMCI Holdings MANILA S.E.COMPOSITE (Rebased) Net Capex -10,583 -14,315 -3,539 -7,941 -1,557 -17,248

Free cash flow -1,145 -1,957 5,235 6,551 25,532 129 Margin Trends Equity raised/(bought back) 0 0 0 0 0 0 40 Dividends paid -531 -1,328 -2,655 -3,187 -3,983 -4,780 36 Net inc/(dec) in borrowings 2,735 10,199 3,249 4,967 19,971 9,835 32 Other investing/financing cash flows -867 -525 -1,417 -1,305 -1,636-1,781 28 Net cash flow 192 6,389 4,411 7,027 39,884 3,404 24 Change in working capital 2,819 1,138 -4,863 520 -630 -846 20 16 Balance Sheet (PHPm) 12 09 10 11 12E 13E 14E Cash and other liquid assets 3,476 10,169 15,197 22,230 62,121 65,532 Tangible fixed assets 21,970 21,541 23,419 27,863 38,278 50,202 EBITDA Margin EBIT Margin Goodwill/intangible assets 0 0 0 0 0 0

Associates/investments 9,364 9,746 10,992 15,554 6,0129,991 Growth & Profitability Other assets 22,828 29,817 34,576 33,448 34,570 37,554 50 50 Total assets 57,638 71,273 84,184 99,096 140,981 163,278 Interest bearing debt 19,331 19,777 23,080 28,047 48,018 57,853 40 40 Other liabilities 14,913 19,072 20,633 20,678 21,041 22,907 30 30 Total liabilities 34,244 38,849 43,714 48,726 69,059 80,760 20 20 Shareholders' equity 20,468 26,951 33,892 40,994 59,382 66,803 10 10 Minorities 2,926 5,472 6,578 9,376 12,54015,715 Total shareholders' equity 23,394 32,423 40,470 50,369 71,922 82,518 0 0 09 10 11 12E 13E 14E Net debt 15,855 9,608 7,883 5,817 -14,103 -7,678

Sales growth (LHS) ROE (RHS) Key Company Metrics

Sales growth (%) 40.4 46.4 9.9 5.1 6.3 13.4 Solvency DB EPS growth (%) 48.5 81.1 35.0 9.3 -1.5 17.6 80 80 EBITDA Margin (%) 18.0 26.3 29.8 28.7 32.4 36.3 EBIT Margin (%) 13.0 18.7 23.4 21.8 24.6 27.5 60 60 Payout ratio (%) 11.3 16.9 27.7 31.0 17.8 39.2 40 ROE (%) 25.3 33.2 31.5 27.5 44.6 19.3 20 40 Capex/sales (%) 38.7 33.1 7.4 15.8 27.3 28.5 0 20 Capex/depreciation (x) 7.7 4.4 1.1 2.3 3.5 3.2 -20 Net debt/equity (%) 67.8 29.6 19.5 11.5 -19.6 -9.3 -40 0 Net interest cover (x) nm 15.7 68.2 nm 19.3 18.1 09 10 11 12E 13E 14E

Source: Company data, Deutsche Bank estimates Net debt/equity (LHS) Net interest cover (RHS)

Klyne Resullar +63 2 894 6645 [email protected]

Page 2 Deutsche Bank AG/Hong Kong

3 April 2013

Conglomerates DMCI Holdings Portfolio update

Semirara: Power plant expansions progressing

We cut our FY12-FY14 forecasts for Semirara by 20-36% to account for soft thermal Power to drive Semirara’s coal prices but upgrade our FY15-FY16 forecasts by 19-59% to reflect our more bullish medium-term profitability outlook on the company’s power plant expansions. As we explained in our latest note (Semirara Bulletin: Well-timed expansion; Upgrading to Buy with a price target of P300/sh, published March 20, 2013), we believe SCC will be able to take advantage of rising power prices in the medium term, given that: 1) electricity demand has been surprising to the upside, 2) grid-wide power supply additions are delayed and 3) progress on Semirara's capacity expansion is more advanced than other gencos.

The company is currently on track to complete its first 2x150 MW facility in 4Q14 and is currently laying the groundwork for Phase 2 of its expansion (another 2x150MW), which is scheduled to be commissioned by 4Q15/1Q16. Management expects to declare commercial operations three months after commissioning. Given that these projects typically encounter delays, we consequently factor in a 6-8 month delay for both phases.

Once these plants are operational, we estimate SCC’s profits could double in 2016. We likewise estimate the power division will account for >70% of profits by 2015 from just c. 40% in 2012. Accounting for 32% of DMCI’s profits, SCC will likewise be one of the biggest drivers of DMCI’s growth in the medium term.

Figure 1: Greenfield power plants to almost double SCC’s profits by 2016

Pmn Coal Power

14,000

12,000

10,000

8,000 8,500

6,000 6,000 2,525 4,366 3,271 4,000

2,000 3,835 2,646 3,391 2,751 3,220 - 2012E 2013E 2014E 2015E 2016E

Source: Deutsche Bank estimates

Acquisition of nickel mining assets

Following the expiration of its nickel mining contracts last year, DMCI began to invest in Acquired 60% of London- several London-listed mining companies that have nickel mining assets/operations in listed nickel miner, ENK PLC the Philippines. It acquired a 60% in ENK PLC in September 2012 and thereafter

Deutsche Bank AG/Hong Kong Page 3

3 April 2013

Conglomerates DMCI Holdings acquired minority stakes in Toledo Mining Corp. (TMC LN) and Berong Nickel. It is currently in the process of increasing its stake in TMC via a tender offer.

Figure 2: Timelines and valuations of nickel mining acquisitions Stake acquired Date Acquired from Valuation (GBPm) Valuation (US$m) Implied EV/resource (US$) ENK 60% Sep-12 Tender offer 31.00 49.00 81.9 TMC 17% Oct-12 Daintree Resources 3.40 5.50 45.3 Berong Nickel 18.7% Dec-12 TMC NA 6.55 255.7 TMC 20.7% Feb-13 Mr. Jason Cropper 5.15 7.97 54.6 TMC 62.3% Feb-13 Tender offer 15.51 23.99 54.6 Total 93.01 Source: Deutsche Bank, Company data

ENK, Toledo Mining, and Berong are estimated to have an aggregate of 145m MT of JORC-certified nickel resources, equivalent to c. 1.65m MT of contained nickel. In contrast, Nickel Asia (NIKL PM, market cap: US$1.19bn), a fully-integrated nickel mining company, has an estimated contained nickel resource of 2.2m MT. DMCI’s plans to enter downstream processing have been pushed back, given the absence of inexpensive technology.

We believe the acquisitions are in line with the company’s pronouncements to expand its nickel mining operations. Assuming full acceptance of the TMC tender offer, we estimate the aggregate purchase price of these assets to be US$93m (P3.8bn), which translates to FY13E PER of c. 8x and EV/resource of c. US$98 per MT (ENK and Toledo Mining do not have debt in their balance sheets).

Figure 3: Estimated resources of each nickel mine DMCI JORC resources Contained nickel Eff. stake (in m MT) % Ni % Co (m MT) ENK Acoje 55% 69.9 1.03% 0.06% 0.720 Zambales 38% 23.5 1.18% 0.05% 0.277 Toledo Mining Berong 40% 8.84 1.55% NA 0.137 Ipilan 20% 43.37 1.20% NA 0.520 Long Point & Monsoon 21% NA NA NA NA Source: Deutsche Bank, Company data

We are now including ENK, Toledo Mining, and Berong Nickel to our valuation and forecasts, which in aggregate account for 2% of DMCI’s NAV. Below are our key assumptions:

ENK - DCF value of P4.5bn Our DCF valuation for ENK PLC is P4.5bn, of which P2.7bn is attributable to DMCI’s We estimate ENK will add 60% stake. This valuation implies a higher valuation than DMCI’s acquisition price and P1/sh to DMC’s NAV effectively adds c. P1/sh to DMC’s NAV (before subtracting for net parent debt). Below are the key parameters:

„ Low-grade nickel resource of 70m MT, with an average nickel grade of c. 1.02%.

„ Shipments of 500k MT in 2013, ramping up to 2m MT by 2015, implying a mine life of 35 years.

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Conglomerates DMCI Holdings

„ Average realized price of US$42/MT in 2013 and US$41/MT in 2014 (benchmarked against LME nickel price of US$17,750 and US$17,000 per MT, respectively). This falls to a long-term price assumption of US$26/MT (LME nickel of US$16,500/MT at a lower nickel grade of c.1.0%).

„ WACC of 9.1%, premised on our regionally-mandated cost of equity of 10.4%, cost of debt (after tax) of 6.0%, and 70% equity-to-capital structure. Berong Nickel - DCF value of P2.5bn We value Berong Nickel at P2.5bn (P460m corresponds to DMCI’s 18.7% stake). Below Berong Nickel to add c. are our assumptions: P0.17/sh to DMC’s NAV

„ High-grade nickel resource of 8.0m MT, with an average nickel grade of 1.8%.

„ Shipments of 815k-855k MT annually, implying a mine life of 10 years.

„ Average realized price of US$56/MT (benchmarked against LME nickel price of US$17,750 per MT at a nickel grade of 1.8%), falling to a long-term price assumption of US$45/MT (LME nickel of US$16,500/MT at a lower nickel grade of 1.6%).

„ WACC of 9.1%, premised on our regionally-mandated cost of equity of 10.4%, cost of debt (after tax) of 6.0%, and 70% equity-to-capital structure. We assume ENK will be consolidated in DMCI’s income statement and Berong Nickel to be equity accounted. We do not factor in any contributions from Toledo Mining, given that its current sole operating asset is Berong Nickel.

Our forecasts assume ENK and Berong to contribute c. P250m and P495m to DMCI’s profits in 2013 and 2014, respectively.

Figure 4: Summary of financial forecasts for ENK and Berong 2013E 2014E 2015E DB Nickel price forecasts (US$/MT) 17,750 17,000 16,000 ENK Realized price (US$/MT) 42.49 40.70 38.30 Shipments (m WMT) 0.50 1.50 2.00 Cost of sales (US$/MT) 21.3 20.5 20.5

Revenues 851 2,417 3,034 EBIT 282 869 1,006 Net profit 197 608 704 DMC's share in net profit 118 365 423

Berong Nickel 2013E 2014E 2015E Realized price (US$/MT) 55.91 53.55 43.40 Shipments (WMT) 814,800 855,540 855,540 Cost of sales (US$/MT) 20.47 19.66 18.68

Revenues 1,825 1,814 1,470 EBIT 472 468 286 Net profit 331 327 200 DMC's share in net profit 132 130 80

Combined share of profits from ENK and Berong 250 495 502 Source: Deutsche Bank estimates

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Conglomerates DMCI Holdings

Maynilad: Delay in rate rebasing

The rate rebasing exercise (i.e. rate review) for the two Metro concessionaires – Maynilad and Manila Water (MWC.PS) – has been pushed back by six months due to the delay in the re-appointments for the Metropolitan Waterworks and Sewerage System (MWSS) board of directors. As a result, the new tariffs and business plan were not implemented as scheduled on January 1, 2013.

MWSS is now targeting to conclude the rate rebasing process by June and expects to Rate rebasing possibly implement the new tariffs by July. Until then, the previous return (or Appropriate delayed until June/July 2013 Discount Rate, ADR) of 9.3% will be maintained and tariff adjustments for Maynilad implemented solely on the inflation component (based on the previous year’s July CPI of +3.2%).

Nevertheless, it is worth pointing out that the concession agreement will need to be Retroactive implementation of upheld, ensuring both concessionaires will be kept whole in NPV terms. Thus, once the new ADR to Jan 1, 2013 rate rebasing exercise is concluded, the new ADR will be implemented retroactively to January 1, 2013.

Recall that our forecasts assume an ADR of 8.4%, lower than management’s proposal (8.95%) and the current ADR of 9.3%.

We lower our FY12 forecast for Maynilad by 6% after considering the lower effective tariff increase of +7% (vs. +9% previously) and higher cash expenses.

We also temper our forecast for 2013, lowering Maynilad’s net profit estimate by 9% to Tempering expectations for reflect the half-year implementation of a P1.00/cum real tariff adjustment and 7% 2013 due to election ban increase in billed volume growth.

Update on share sale to Marubeni Last February, DMCI and its partner Metro Pacific (MPI.PS) completed the sale of a combined 20% stake in Maynilad to Japan-based Marubeni. DMCI sold 16% of its stake in Maynilad for an equivalent 100% equity valuation of US$2.15bn or P88bn, 5% lower than our previous valuation. We estimate DMCI to receive c. P13bn in cash, after taxes. The sale reduced DMCI’s stake in Maynilad to 25% from 41%.

Given that DMCI’s total investment (i.e. for 41% stake) in Maynilad was just c. US$80m DMCI to post a P12bn gain (vs. implied US$880m equivalent valuation of Marubeni), we estimate DMCI to post a from the sale of Maynilad in gain of c. P12bn in 2013. 2013E

Property: Better margins but maintaining soft pre-sales outlook

DMCI Homes reported a net profit of P1.8bn in 9M12, up 47% YoY. Management attributed the strong growth in earnings to 1) price increases and 2) cost management. Gross profit margin as of 9M12 stood at 53%, higher than other property companies.

„ Since 2010, the company has been increasing its prices across all products to >+25% price increase since be at par with its competitors. From a price range of P2.5-2.8m for a typical 2010 boosting margins higher two-bedroom product in 2008, DMCI Homes’ prices today range from P3.2- 3.8m.

„ The company is also streamlining its business processes, which management expects to translate to large cost savings and better margins in the future.

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Conglomerates DMCI Holdings

We raise our FY12 earnings forecasts for DMCI Homes by c. 15% to account for the aforementioned improvements.

The company also successfully raised P10bn in 7-year fixed rate notes at an interest Raised P10bn in 7-year fixed rate of c. 7% last October 2012. The loan will be drawn down this year and will be used rate notes for working capital to fund working capital and land bank acquisition requirements. and land banking

Cautious pre-sales outlook The aforementioned price adjustment did not translate to higher pre-sales, however, as 9M12 pre-sales fell by 1% to P13.7bn.

Note that we previously expected pre-sales to drop significantly this year, given our concerns on the company’s lack of available land for sale. While the land issue remains, management did not seem too concerned about it but was more concerned about rising residential real estate inventory in Metro Manila.

While we increased our FY12 pre-sales forecast to P17.2bn (vs. P13bn previously), we maintained our forecasts of a gradual drop in pre-sales to reflect our cautious outlook on the sector.

Construction: More progress in MRT-7 and other projects

DMCI’s construction backlog stood at P14.3bn as of end-September 2012, down from P17bn in end-2011, due to last year’s delay in the MRT-7 project. The said project, which we expected to add c. P18bn to DMCI’s order book in 2012, has reportedly overcome a hurdle, with project proponent San Miguel finally closing an agreement with the government on the revised terms for the concession (see Philippine Star: DOF, SMC agree on changes in MRT-7 concession, published January 7, 2013).

We continue to include MRT-7 in our near-term estimates and assume this to begin construction in 4Q13. Our forecasts also include San Miguel/Citra’s P25bn Connector Road project, which we estimate to start construction in 1Q14.

We reduce our FY12-FY13 forecasts by 20-25% but increase our FY14 net profit estimate by 65%, as we factor in the delay in the construction of MRT-7 and the addition of the Connector Road project.

Figure 5: Construction forecast revisions New Previous % chg from previous 2012E 2013E 2014E 2012E 2013E 2014E 2012E 2013E 2014E Backlog (EOP) 16,500 25,000 16,667 33,412 20,652 14,604 -51% 21% 14% Revenues 14,500 19,431 20,943 14,270 15,893 13,004 2% 22% 61% Net profit 1,159 1,613 2,401 1,546 2,022 1,452 -25% -20% 65% Net margins 8% 8% 11% 11% 13% 11% -3% -4% 0% Source: Deutsche Bank estimates

Note that our forecasts do not assume project wins from PPP or other power plant projects. Assuming DMCI secures these projects in 2014 (excluding potential construction backlog from Maynilad), we estimate DMCI’s order book to expand further to P105bn, which could translate into an annual profit of c. P3.5bn.

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Conglomerates DMCI Holdings

Figure 6: DMCI construction (existing and potential backlog) Backlog (Pm) Remarks Buildings 5518 Infra 900 Water 500 Power 9,582 Total (as at end-FY12) 16,500 DB estimate only

Newly-awarded projects (FY13) 2,000 Ortigas residential condo 2,000 Completion in 2014

Potential backlog (included in DB forecasts) 43,000 MRT-7 18,000 Completion in 2016 San Miguel/Citra Connector Road project 25,000 Completion in 2016

Potential backlog (not yet included in DB forecasts) 101,650 Trans-Asia (phase 2) 3,850 Highly likely to be added SCC-Calaca (phase 2) 6,500 Highly likely to be added NAIA Expressway 15,500 Bidding on April 3; Highly likely to be added if San Miguel is the proponent MPI's NLEX-SLEX Connector Road project 25,000 Bidding likely in June Mactan airport project 8,800 Bidding in August; Highly likely to be added if San Miguel is the proponent LRT1 South extension 21,000 Bidding on May 27; Highly likely to be added if San Miguel is the proponent Maynilad wastewater projects 21,000 To be spread over 5 years; Highly likely to be added Source: Deutsche Bank, Company data

Page 8 Deutsche Bank AG/Hong Kong

3 April 2013

Conglomerates DMCI Holdings Upgrading to Hold

Pricing in partial sale of Maynilad, soft coal prices, and better prospects for greenfield power plants

We made substantial downgrades (10-26%) to our FY12-FY14 core profit estimates for DMCI to reflect: 1) the reduction in DMCI’s stake in Maynilad and 2) softer thermal coal prices.

We nonetheless raise our forecasts for FY15 and FY16 by 4-30% as we factor in higher power ASP assumptions for SCC’s greenfield power plants and add the Connector Road project in DMCI’s order book.

Figure 7: Forecast revisions New Previous % chg from previous In Pm 2012F 2013F 2014F 2015F 2016F 2012F 2013F 2014F 2015F 2016F 2012F 2013F 2014F 2015F 2016F Semirara 3,562 3,927 3,731 4,901 6,564 4,855 6,179 4,652 4,118 4,129 -27% -36% -20% 19% 59% Maynilad 2,873 1,984 2,504 2,855 2,300 2,914 3,502 4,704 5,369 4,443 -1% -43% -47% -47% -48% Property 2,343 2,496 2,967 4,287 3,558 2,037 2,431 3,271 3,358 2,063 15% 3% -9% 28% 72% Construction 1,159 1,613 2,401 2,149 1,757 1,546 2,022 1,452 1,461 889 -25% -20% 65% 47% 98% Others 615 378 624 630 660 356 (54) 11 (75) (75) 73% -803% 5808% -938% -977% Total 10,552 10,398 12,227 14,823 14,839 11,708 14,079 14,090 14,232 11,449 -10% -26% -13% 4% 30% Source: Deutsche Bank estimates

SOTP NAV rises by 26% to P63.56/sh

We are upgrading our sum-of-the-parts NAV by 26% to P63.56/sh to reflect the abovementioned revisions, a rollover of our DCF forecasts to FY13, and a lower regionally-mandated cost of equity assumption of 11.1% (from 11.6% previously). Apart from incorporating its newly-acquired nickel mining assets, we also re-valued DMCI’s construction business at 20x FY13 PER (vs. 15x previously), in line with the re- rating of regional construction stocks.

We affix a lower holding company discount of 10% (vs. 15% previously) to arrive at our revised price target of P57.20/sh. Note that DMCI's average discount has been 7% for the past three years and 12% for the past five years.

We are consequently upgrading our recommendation to Hold from Sell.

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Conglomerates DMCI Holdings

Figure 8: Sum-of-the-parts NAV Stakes Attributable Per sh % value (Pm) (P/sh) of total Remarks Listed subsidiaries Semirara 56% 60,022 22.61 36% DB TP of P300/sh Toledo Mining 38% 570 0.21 0% Market price

Unlisted subsidiaries Maynilad Water 25% 27,375 10.31 16% DCF @ WACC of 7.8% DMCI Homes 100% 29,952 11.28 18% 12x PER on FY13E Construction 100% 32,260 12.15 19% 20x PER on FY13E ENK PLC 60% 2,667 1.00 2% DCF @ WACC of 9.1% Berong Nickel 460 0.17 0% DCF @ WACC of 9.1% Others 1,384 0.52 1% Total unlisted 94,098 35.44 56%

Less: Parent net debt/(cash) -14,052 (5.29) -8% Includes partial sale of Maynilad

Net asset value 168,741 63.56 DB Price TP (10% discount) 57.20 Source: Deutsche Bank

DMCI’s post-Maynilad divestment parent cash level is now c. P14bn (=P5.30/sh), Special dividend likely accounting for 8% of SOTP NAV. We believe DMCI could declare a special cash dividend, considering its net cash position and underleveraged balance sheet. Note that our dividend projections do not assume a special dividend.

Risks

Upside risks „ Increase in power spot prices. Stronger-than-expected electricity demand growth could lead to large spikes in power spot prices.

„ General increase in coal prices. An improvement in coal prices should also translate to better profitability for Semirara, which still accounts for bulk of DMCI’s value.

„ Order book expansion. Our forecasts do not assume potential projects from PPP. We believe significant additions to DMCI’s order book will translate into higher earnings and valuation.

„ Value-accretive acquisitions/expansions. Without debt and an estimated P14bn in cash (post-Maynilad divestment) at the parent, DMCI is looking to expand into infrastructure (PPP), power, and nickel mining. Downside risks „ Sharp drop in power spot prices. Weaker-than-expected demand growth and faster-than-expected build-outs of power plants could lead to a sharp drop in power prices.

„ Collapse in coal prices, which could result in lower power prices and coal sales.

„ Regulatory risk. DMCI’s businesses, particularly water and power, operate in regulated industries and can be subject to regulatory risks.

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Conglomerates DMCI Holdings

„ Execution risk. Further delays and unanticipated shutdowns pose downside risks to our forecasts for the existing plant. There is also a possibility that the company may not properly execute its plans for its new power plants.

„ Macroeconomic/political factors that stifle economic growth. Investment growth could be stunted if the overall economy were to suffer.

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Conglomerates DMCI Holdings Appendix 1

Important Disclosures

Additional information available upon request

Disclosure checklist Company Ticker Recent price* Disclosure DMCI Holdings DMC.PS 54.80 (PHP) 2 Apr 13 NA *Prices are sourced from local exchanges via Reuters, Bloomberg and other vendors. Data is sourced from Deutsche Bank and subject companies

For disclosures pertaining to recommendations or estimates made on securities other than the primary subject of this research, please see the most recently published company report or visit our global disclosure look-up page on our website at http://gm.db.com/ger/disclosure/Disclosure.eqsr?ricCode=DMC.PS

Analyst Certification The views expressed in this report accurately reflect the personal views of the undersigned lead analyst(s) about the subject issuer and the securities of the issuer. In addition, the undersigned lead analyst(s) has not and will not receive any compensation for providing a specific recommendation or view in this report. Klyne Resullar

Historical recommendations and target price: DMCI Holdings (DMC.PS) (as of 4/2/2013)

70.00 Previous Recommendations

Strong Buy 3 60.00 Buy Market Perform Underperform 50.00 2 Not Rated 1 Suspended Rating 40.00 Current Recommendations

Buy 30.00 Hold Security Price Security Sell 20.00 Not Rated Suspended Rating

*New Recommendation Structure 10.00

as of September 9,2002

0.00 Apr 11 Jul 11 Oct 11 Jan 12 Apr 12 Jul 12 Oct 12 Jan 13 Date

1. 01/09/2011: Downgrade to Hold, Target Price Change PHP45.00 3. 31/05/2012: Downgrade to Sell, Target Price Change PHP43.00 2. 25/01/2012: Hold, Target Price Change PHP42.00

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Conglomerates DMCI Holdings

Equity rating key Equity rating dispersion and banking relationships Buy: Based on a current 12- month view of total 450 55 % share-holder return (TSR = percentage change in 400 share price from current price to projected target price 350 plus pro-jected dividend yield ) , we recommend that 300 39 % 250 investors buy the stock. 200 Sell: Based on a current 12-month view of total share- 150 16 % holder return, we recommend that investors sell the 100 15 % 7 % 50 12 % stock 0 Hold: We take a neutral view on the stock 12-months Buy Hold Sell out and, based on this time horizon, do not recommend either a Buy or Sell. Companies Covered Cos. w/ Banking Relationship Notes: Asia-Pacific Universe 1. Newly issued research recommendations and target prices always supersede previously published research. 2. Ratings definitions prior to 27 January, 2007 were: Buy: Expected total return (including dividends) of 10% or more over a 12-month period Hold: Expected total return (including dividends) between -10% and 10% over a 12- month period Sell: Expected total return (including dividends)

of -10% or worse over a 12-month period

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Conglomerates DMCI Holdings

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Page 14 Deutsche Bank AG/Hong Kong

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Marcel Cassard Ralf Hoffmann & Bernhard Speyer Guy Ashton Richard Smith Global Head Co-Heads Chief Operating Officer Associate Director CB&S Research DB Research Research Equity Research

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