Philippines secures another credit-rating upgrade

The credit image of the Philippines got another boost after NICE Investors Service cited its governance reforms and intensified campaign for infrastructure development.

NICE upgraded the country’s credit rating by a notch from the minimum investment grade of BBB- to BBB. The move has tightly secured the Philippines’ place within the investment-grade territory.

In a statement released Friday, NICE, which is based in South Korea, said the upgrade was anchored on “improved government transparency as well as enhanced environment backed by expanded infrastructure and social overhead capitals in the form of public-private partnerships.”

The upgrade came amid sustained rise in infrastructure investments, with the state budget for infrastructure rising to 5 percent of GDP this year from 1.8 percent in 2010.

Also, infrastructure contracts amounting to $4.8 billion have been awarded to private-sector investors since 2010 under the Public Private Partnership (PPP) program, making the Philippines one of the most active infrastructure markets in the ASEAN.

The Philippines’ new credit rating with NICE is assigned a “stable” outlook, indicating it may stay the same at least over the short term despite challenges posed by external developments.

Compared with peers, NICE said, the Philippines is seen to be more resilient to shocks, including the impact of a slowing Chinese economy and market volatility arising from higher interest rates in the United
States.

“Considering its [Philippines] trade structure and strong FX [foreign exchange] liquidity, the impact of global economic uncertainties such as slowdown of the Chinese economy and US interest rate hike will be manageable,” NICE said.

The credit watchdog expects the Philippines to sustain a robust economic growth of 6.3 percent over the short and medium term.

Meantime, economic officials welcomed the latest credit-rating upgrade, which marks the 24th positive rating action for the Philippines under the Aquino administration (9 outlook changes to “positive” and 15 actual hikes in credit ratings from various agencies).

“The string of favorable actions from credit rating agencies, the latest of which is from NICE Investors Service, resonates the process of economic strengthening that the Philippines has undergone over the years. Contributory to this process were forward-looking monetary policy, proactive bank supervision, and prudent external accounts management, which have played crucial roles in promoting a stable
inflation environment and a strong financial system,” BSP Governor Amando M. Tetangco, Jr. said.

Finance Secretary Cesar V. Purisima remarked, “Virtuous cycles result from dogged discipline, even when political headwinds seem too strong. Expanded fiscal space has opened up a Pandora’s box of opportunities in infrastructure, allowing us to play a fast game of catch-up with our neighbors.”

“With increased transparency, we have empowered citizens who participate in the process of governance, and who—having known the gains reforms can bring—will refuse to roll back progress,” he added.

Purisima also noted that with this latest credit rating action from NICE, Fitch Ratings remains the only agency that assigns the minimum investment grade to the Philippines. The others assign higher ratings.

Investor Relations Office (IRO) Executive Director Editha L. Martin said upgrades in credit ratings have provided concrete benefits for the economy, including improved business confidence and reduced borrowing cost for the government. The latter has contributed to lower commercial lending rates for consumers and businesses as well, thus fueling consumption and investments.

“Having reaped the gains of investment grade sovereign credit ratings, there should be no room for the economy to slide back. The Filipino people, as it is incumbent upon them, are expected to demand from our leaders the kind of governance that will ensure that the economic transformation of the Philippines over the last half decade transcends changes in political settings,” Martin said.

- Interaksyon

Manila Water files Notice of Arbitration to national govt

The Department of Finance's failure to honor the Notice of Claim filed by Manila Water on April 23, 2015 has spurred the private water concessionaire to file a Notice of Arbitration with the Permanent Court of Arbitration in Singapore.

Through this Notice of Claim to the Republic of the Philippines via the Department of Finance, Manila Water called upon the government’s Letter of Undertaking to reimburse its losses in operating revenues arising, it said, from a significant diminution in the rate of return committed in its concession contract. 

These losses are expected to be reimbursed as they are actualized for each remaining year of Manila Water’s Concession, and which are at this point estimated to amount to P79 billion for the entire period of 2015 up to 2037.

In the Letter of Undertaking, the Republic, through the DOF, undertook to indemnify Manila Water, against any loss caused by any action on the part of the MWSS resulting in the reduction of the standard rates “below the level that would otherwise be applicable in accordance with the Concession Agreement.” This effectively denied Manila Water a rate of return “allowed from time to time to operators of long term infrastructure concession agreements in other countries having a credit standing similar to the Philippines” pursuant to Section 9.4 of the Concession Agreement.  

Even if Manila Water continues to pursue its claim, it has started to implement the new rates set by MWSS in June 2015 which incorporates a reduction of P1.66 per cubic meter in the basic charge.

- Interaksyon

Rental revenue lifts SM Prime's profit by 70%

SM Prime Holdings, Inc. (SM Prime), the Philippines’ leading integrated property company, booked a whopping 70-percent surge in profit in the first nine months of 2015 on the back of the growth in rental revenues.

Its consolidated net income reached P22.9 billion in January to September from P13.47 billion during the same period last year.

This was inclusive of the P7.4-billion one-time trading gains on marketable securities booked in the first quarter of the year.

On a recurring basis, net income surged by 15 percent to P15.5 billion in the first nine months.

Consolidated revenues rose nine percent to P52.2 billion after third-quarter earnings reached P16.2 billion.

“SM Prime’s expansion across all its various business portfolios since 2013 has driven its strong financial performance this year. We expect SM Prime’s growth to be sustained as we continue to increase our mall footprint by 13 percent this year. We are excited to launch SM Seaside Cebu later this year, a landmark project in the Visayas region. We see Metro Cebu as one of our important growth corridors following our growth track in Metro Manila,” SM Prime President Hans T. Sy said.

Rental revenues from retail and commercial spaces, which contributed 56 percent to the consolidated revenues, increased by 11 percent to P29.4 billion from P26.4 billion.

The growth in rental revenues was mainly driven by rising contribution from the new malls and the expansion of shopping spaces in existing malls in 2013 and 2014.

SM Prime’s real estate sales, which account for 32 percent of the consolidated revenues, grew by 4 percent to P16.6 billion, mainly due to higher sales take-up and construction accomplishment of SMDC projects.

It maintained a total of 52 malls in the Philippines and six malls in China in the first nine months with total retail space of 7.6 million square meters.

SM Prime is set to open its regional landmark, SM Seaside City Cebu, later this month. It is also expanding two existing malls --SM City Lipa in Batangas and SM City Iloilo.

By the end of 2015, SM Prime will have 55 malls in the Philippines and six malls in China with an estimated combined GFA of 8.3 million sqm.

It currently has 27 residential projects in the market, 25 of which are in Metro Manila and two in Tagaytay.

Meanwhile, the Commercial Properties Group has five office buildings with an estimated gross floor area of 318,000 square meters. Five E-com Center will be formally launched this month.

- Interaksyon

Credit Suisse upbeat on Asia Pacific wealth outlook, sees profitability doubled by 2018

Credit Suisse announced Thursday it was investing more capital and resources into the Asia Pacific region, where it noted growing wealth and deepening financial markets. It also announced the appointment of the first Southeast Asian to the bank’s Executive Board: Helman Sitohang, currently Chief Executive Officer, Asia Pacific.

The announcement came following a global strategic review of Credit Suisse Group.

Credit Suisse, meanwhile, reported record results for Asia Pacific, with January-September 2015 revenues rising to 3 billion Swiss francs (up 17%) and pre-tax income is CH 1.1 billion, up 48%.

The results were driven by continued strong performances across the bank in Asia Pacific and its highly successful ‘One Bank’ model, under which it provides integrated Private Banking & Wealth Management and Investment Banking products to its clients.

Mr. Sitohang said: “Credit Suisse Asia Pacific generated record pre-tax income for the first nine months of the year. Asia Pacific now accounts for 15% of total Credit Suisse revenues and 28% of pre-tax income. This is a strong performance, particularly given the current market conditions and demonstrates the resilience of our business model and our ability to generate profitability through the cycle.”

Credit Suisse Asia Pacific has now set a target to double pre-tax income and client assets under management in the region by the end of 2018. Currently Credit Suisse has CHF133 billion of client assets under management and in the first nine months gathered CHF14.7 billion of net new assets, representing 55% of the bank’s total Private Banking net new assets.

Mr. Sitohang said: “We are making a significant investment of capital and resources into Asia Pacific. Our focus is on being a partner to our High Net Worth Individual, Entrepreneur and Institutional clients and supporting them in their growth ambitions. We plan to expand further in our core markets, capitalizing on our strengths in Southeast Asia and building out our China franchise, while maintaining a consistent culture of compliance and controls.

“Our ambition is to be the Trusted Entrepreneurs Bank in Asia Pacific, and a key destination for talent.”

First-generation entrepreneurs

According to the Credit Suisse Research Institute Family Business Model 2015 report, 57% of new wealth in Asia Pacific is driven by first generation entrepreneurs and family ownership of listed companies is expected to grow in many markets in the region as more wealth is created.

“As wealth in Asia Pacific grows and financial markets deepen, we see significant opportunities to help our clients capture this growth. Our track record of performance, our culture of partnership and our strong client franchise gives Credit Suisse in Asia Pacific a strong platform. With the additional investment in the region, we expect to further build on this platform to the benefit of our key Entrepreneur and Investor clients,” Mr. Sitohang said.

- Interaksyon

Puregold Price Club, Inc: Aggressive expansion continues

On track to meet estimates.

PGOLD’s margins in 1H15 seemed weak initially with Puregold brand stores registering a gross margin of only 15.0%. Accounting for the delayed booking of Php150Mil of gross profit last year, this implies a y/y decline of 50 basis points. However, management clarified that the decline was due to a change in accounting treatment which moved items down from gross profit to other income. Adjusting for this, gross margin of Puregold stores was flattish at 15.5% in 1H15, in line with our expectations.

Raising FV to Php55/sh on rollover, maintain BUY rating

We are raising our FV estimate on PGOLD to Php55/sh from Php50/sh as we rollover to end-2016 estimates. We are also maintaining our BUY rating on PGOLD as valuations on the stock remain cheap. At its current price of Php32/sh, the stock is being valued at 16.5X 2016E P/E, a discount relative to the 17.7X P/E of the market and the 20.5X P/E of other consumer stocks.

- COL Financial

Megaworld Corporation: Improved visibility on leasing expansion

We reiterate our BUY rating on MEG. We like MEG for the continuous expansion of its rental income portfolio. Based on the company’s expansion plans, total leasing portfolio will increase at a CAGR of 16.7% from 791,000sqm as of end 2014 to 1.7 Mil sqm by end 2019. Moreover, at its current price of Php4.30, MEG is trading at a steep 47.7% discount to NAV. Furthermore, MEG is trading at only 13.56X FY15 P/E, less than half of ALI’s current FY15E P/E of 30.5X. This is despite the fact that MEG is growing its more defensive rental income portfolio which should strengthen the company’s ability to withstand economic downturns going forward. As of FY14, operating profit from MEG’s leasing business accounted for 43% of consolidated operating profit, already larger compared to 32% for ALI. See full report here.

- Col Financial

COLing the Shots: Learning from past corrections and bear markets

COL Financial released their latest COLing the Shots report entitled "Lessons from past corrections and bear markets". 

Below are the key highlights of our latest view on the market:

• After studying the characteristics of two previous bear markets and three major corrections in the Philippines, we have two major insights, namely "This is just a major corrrection, not a bear market" and "There is a good chance that we have already seen the low."

• We believe that there is a strong likelihood that we have already seen the worst. With careful consideration of current market conditions, we think that now would be a good time to start accumulating stocks. Remember to choose quality names, to space your orders over a span of six months or to practice cost-averaging, and to determine an entry price that will allow you to capitalize on downward swings in the market. This is an opportunity to buy quality stocks that normally trade at expensive valuations. 

• After reviewing our stock picks, we have decided to remove FLI and add MEG and BDO to our COLing the Shots stock picks list.  

To access the full report, please click here.

- COL financial