January 6, 2020 Philippine Macro & Strategy 2020 Outlook Analysts Playing the domestic growth story A healthy macro backdrop in 2020, with forecast +6.3% real GDP growth Equity: and further easing of monetary policy amid moderate inflation outlook and stable Peso, underpins our positive equity market outlook. Continued Katherine Tan ramp-up in government and investment spending, and greater private (63) 2 8849 8843 [email protected] sector participation in a growing list of infra projects, provide upside to growth, while structural reforms re optimizing tax rates and investment Romel Libo-on STRATEGY incentives will have broadly positive impact on the PSEi. Base case is for (63) 2 8849 8844 high single digit market earnings growth to sustain in 2020, with higher- [email protected] beta sectors (i.e. banks, property), construction and consumer favoured. Kayzer Llanda Macro: Robust momentum to continue (63) 2 8849 8839 [email protected] MACRO & MACRO GDP growth is expected to strengthen to +6.3% in 2020 (2019E: +6.0%) on additional monetary easing by BSP via another 25bps interest rate cut Fredrick De Guzman (2019: -75bps) and further -300bps RRR cut (2019: -400bps), and fiscal (63) 2 8849 8847 stimulus from a larger 2020 budget (+12% YoY) and spillover of unutilized [email protected] 2019 spending allocation (valid to end-2020). Expansion in the number of Macro: public-private partnership (PPP) infrastructure projects and implementation of Corporate Income Tax and Incentive Rationalisation Suhaimi Ilias Act (CITIRA), which reduces corporate tax from 30% to 20% by 2029, will (603) 2297 8682 broadly reinvigorate private (domestic and foreign) investment. [email protected] Philippines Market: Potential catalysts and risks Dr Zamros Dzulkafli (603) 2082 6818 Our 12M PSEi target of 8,700 based on bottom-up MKE/consensus TPs of [email protected] PSEi constituents, translates to a 16.2x forward PE, in line with historical average (Fig. 8). Besides the aforementioned growth upside, sustaining Ramesh Lankanathan structural reforms would allow the market to trade at above mean (603) 2297 8685 valuation, key measures being i) passage of CITIRA; and ii) liquidity boost [email protected] from a forecast additional 300 bps RRR cut. Re risks, politics could be a wild card, especially given concerns about President Duterte’s health, while a reversal of good relations with China could have implications on the property sector (tourism, POGOs) and investments (China ODA, FDI). Overweight banks, construction, property, consumer Sectors expected to generate the best returns in 2020 are i) banks, on NIM support from aggressive RRR cuts, healthy 11% forecast loan growth and contained asset quality stress; picks are BDO, MBT; ii) construction, as ramp-up in infra spending boosts order book of contractors; EEI is best positioned to defend margins and grow order book; iii) property, where we are cautious on office but positive on residential given easing mortgage rates; preference is for developers with low POGO exposures and potential REIT plays ALI, RLC and SMPH; and iv) consumer, given attractive dynamic of forecast domestic consumption recovery vs. 2019 sector underperformance – top pick is PGOLD; we also like JFC and URC. We are selective on conglos, preferring GTCAP with its exposure to our preferred bank MBT; Toyota sales recovery and car tax incentives. Philippines: stock recommendations BBg Code Mkt. cap Rec. Price TP Upside EPS grw. (%) PER (x) ROE (%) P/B (x) Div. Yield (%) (PHPm) (PHP) (PHP) (%) CY19E CY20E CY19E CY20E CY19E CY20E CY19E CY20E CY19E CY20E Top picks BDO Unibank BDO PM 13,208 BUY 158.0 174.0 10.1 24.7 9.3 17.1 15.7 11.3 11.2 1.9 1.7 0.8 0.8 Ayala Land ALI PM 12,658 BUY 45.5 56.3 23.7 11.4 18.2 20.6 17.4 15.5 16.3 3.2 2.8 1.7 1.9 Jollibee Foods JFC PM 4,600 BUY 216.0 247.0 14.4 17.4 23.5 27.8 42.3 11.1 9.8 4.8 4.1 1.2 0.8 GT Capital GTCAP PM 3,578 BUY 847.0 1095.0 29.3 8.7 14.2 12.8 11.2 10.6 9.2 1.0 1.0 0.4 0.4 Puregold PGOLD PM 2,279 BUY 39.8 52.7 32.6 4.9 16.0 17.1 14.7 11.0 11.7 1.9 1.7 1.0 1.0 EEI Corp EEI PM 195 BUY 9.8 13.1 33.7 48.7 2.0 9.1 8.9 12.7 11.4 1.2 1.0 0.0 0.0 Source: Maybank KE, Bloomberg – as at 27 Dec closing price THIS REPORT HAS BEEN PREPARED BY MAYBANK ATR KIM ENG SECURITIES INC SEE PAGE 21 FOR IMPORTANT DISCLOSURES AND ANALYST CERTIFICATIONS Strategy Research MACRO: Firmer footing on growth Firmer growth in 2020E after slippage in 2019. Real GDP growth was +5.5% in 1H 2019 due to glitch from delay in Budget 2019 approval and ban on government spending during the mid-term election. But subsequent ramp up – thus normalization - in government spending, on top of the series of cuts in policy interest rate and RRR together with receding inflation have spurred +6.2% YoY growth in 3Q 2019 and we see +6.5% YoY expansion in 4Q 2019, which should take the full-year average growth to +6.0%. Growth is expected to strengthen to +6.3% in 2020 on additional monetary policy easing by BSP via another 25bps cut in interest rate and further -300bps RRR cuts; plus fiscal stimulus from higher 2020 budget, spillover of 2019 unutilized government spending into 2020, and corporate tax rate cut. Enhancing “Build, Build, Build”. The government revised and expanded the “Build, Build, Build” list to 100 flagship projects from 75 previously, which includes increasing public-private partnership (PPP) projects to 26 versus 9 previously. The higher numbers of PPP projects are to catalyse the execution of infrastructure investments going forward. Therefore, we expect further push in private investment growth momentum in 2020 and beyond. “Build, Build, Build” focus now is also more on smaller projects like roads, bridges and irrigation systems that will benefit more provinces not included in the original list. Inclusive growth remains a challenge. The economy is mid-way through its Development Plan (PDP) 2017-2022 as part of the “AmBisyon Natin 2040”. PDP aims to increase the size of the economy by 50% between 2016 and 2022 and raise per capita income to at least USD5,000 in 2022 from USD3,550 in 2015 via +7.0%-8.0% real GDP growth p.a. It also target to lower poverty, jobless rate and youth unemployment. The challenge of inclusive growth is reflected by the stubbornly high youth unemployment rate of around 13% currently versus the 8.0% target. Wildcard. There could be upside to our 2020 real GDP growth forecast of +6.3% as the unutilized spending allocation from the delayed Budget 2019 is allowed by law to be utilized until end-2020. Furthermore, actual and outlook of moderate inflation that creates rooms for BSP to ease its monetary policy in 2019-2020 could revive private consumption growth by more than currently expected. In addition, the implementation of Corporate Income Tax and Incentive Rationalisation Act (CITIRA) to cut corporate income tax rate and modernize investment incentives can boost private sector capex. Risks include regulatory related risks which could impact investors’ confidence, and recent surge in crude oil price on geopolitical risk in Middle East concerning the US and Iran that could result in higher than expected inflation. January 6, 2020 2 Strategy Research Race to meet growth target Need for speed in non-monetary policy execution Philippines is on track to meet the official real GDP growth target of +6.0%-7.0% for 2019 after the glitches from the delay in Budget 2019 approval and ban on government spending during the mid-term election that saw real GDP growth slowed to +5.5% in 1H 2019 (2018: +6.2%). Subsequent ramp up to normalize government spending, together with monetary policy stimulus from the series of cuts in policy interest rate totalling 75bps in May-Sep 2019 and in RRR totalling 400bps in May-Dec 2019 amid the deceleration in inflation (11M 2019: +2.5%; 2018: +5.2%), had resulted in faster +6.2% YoY growth in 3Q 2019. This momentum should be sustained in 4Q 2019 at +6.5% YoY, thus taking the economy back on track to hit the low end of the official growth target of +6.0%-7.0% for 2019. After the hiccup in Budget 2019 approval and implementation, a speedier passage of Budget 2020 of PHP4.1tr is vital for timely execution in 2020 given the higher official growth target of +6.5%-7.5% for the year. Economy set to expand +6.3% in 2020 Following the slippage in growth to +6.0% in 2019E (2018: +6.2%), we expect the economy to be on firmer footing in 2020 to post higher growth of +6.3%, though this is below the official target. We expect additional monetary policy easing in 2020 i.e. another 25bps cut in the benchmark policy rate in 1H 2020, and further -300bps RRR cuts via -100bps per quarter reduction in 1Q-3Q 2020. Inflation is expected to remain within BSP’s inflation target range of 2.0%-4.0% at +3.0% (2019E: +2.5%) as the government continues to manage food inflation via existing measures to ensure sufficient supply of food.