Philippines Strategy:3Q17delivers good earnings growth
Limited holdings: high valuations, concerns on macro and politics. Overa span of two weeks in an analyst road show in the US and Europe, we findthat stock ownership in the Philippines was quite limited. The most citedreason for staying in the sidelines was the market’s premium valuation (18xPER for 2018E, higher than historical average and Asia/ASEAN peers) andthe perception of rising macro and political risks. The country shifting to acurrent account deficit was a concern for many, as well as the negativepublicity related to President Duterte’s anti-drug and crime campaign.
Incremental improvements in asset quality and NIM; Buy quality names.
We just concluded with the 3Q17corporate earnings results season. This hasproven to be a source of upbeat sentiment, with aggregate net incomeachieving our optimistic forecasts at 13.9% Y/Y growth. This was by far thestrongest quarter for net income growth in 2017for our coverage universe,contrasting with low-single-digit growth in 1Q17and 2Q17. This positiveearnings delivery strengthens our overweight view of the Philippines.
Optimism may be setting in, led by earnings and potentially bettermacro news flow. Nonetheless, we felt that for the most part for bothcontinents that there was greater optimism after the meetings. Philippines’improving corporate earnings picture, led by the property and consumersectors were taken positively. Likewise appreciated was the expectation of animproving macro related news flow forthcoming by the end of 2017 by way oftax reform and infrastructure roll out. Europe and US investors also becamemore constructive on their view of Philippine politics, especially on thebusiness side of things including foreign policy.
We turned more positive on big Chinese banks after our recent trip to China, aswe saw evidence of incremental improvements in asset quality and margin.
Europe more consumer focussed. While belonging to a minority, investorsin Europe who had Philippines exposure tended to focus on the consumersector. They also had less regard for liquidity as one could expect, with thestock most mentioned as a holding being very recent PCOMP inclusionRobinsons Retail Holdings (RRHI PM, P97.40, Outperform, TP: P115.00,Karisa Magpayo).
The strict implementation of supply-side reforms is driving up the profitabilityof industrial SOEs, which were perceived as the most troubled areas. Propertyrisks have moderated as consolidation momentum has picked up. This shouldrelieve asset quality concerns for these two sectors (c.35% of total credit) andalso be supportive for banks’ asset yields. As a result, we cut the NPLformation rate by 7bps/8bps to 0.6% in 2017/18 for big banks, and lift NIMassumptions by 4bps/9bps. We upgrade ABC-H and BoCom-H to Buy.
Majority met our expectations. A majority (75%) of our coverage universeturned in 3Q17earnings that met our above-consensus expectations. Thishelped drive overall earnings growth in 3Q17to be the best quarter for theyear at 13.9% higher Y/Y. This compares with 2.1% Y/Y growth in 2Q17and3.4% Y/Y growth in 1Q17. With 9M17growth now at 7.1% Y/Y, we think thatour 2017E net profit growth forecast of 10.4% is looking reasonable.
US more conglomerates and banks focussed. Likewise a minority ofinvestors in the US who had Philippines exposure for their part appeared togive more importance to size and liquidity. This can be seen in conglomeratesbeing most held, followed by banks. Country proxy Ayala Corporation (ACPM, P1,092.00, Outperform, TP: P1,075.00) and largest bank BDO Unibank(BDO PM, P143.50, Outperform, TP: P147.00) both figured prominently asholdings.
Supply-side reforms to relieve asset quality risk in the most troubled sectors.