Philippines Strategy:High stakes in 3Q16earnings season

Event

Philippine corporates have started reporting 3Q16 financial results. We thinkthat this is an especially crucial period, as this should set the tone for thecountry to potentially sustain, if not improve, earnings growth prospectsheading into 2017E.

Impact

In need of some good news. The Philippines market has once againreverted to a consolidation phase, after grinding higher in early Octoberfollowing our flagging the need for investors to temper expectations related tothe newly elected government. For this reason, 3Q16 earnings season canvery well provide the market a much-needed dose of good news shouldpositive surprises be the norm. While signs point to our optimisticexpectations on key issues such as infrastructure project roll-out and taxreform being intact, any brewing investor impatience in this regard can beovershadowed by good corporate earnings outcomes.

Beating our 12% growth expectation will be key. We are forecasting ourPhilippines coverage universe to have more positive surprises, leading topotential upgrades to our existing expectation of 12% growth for 2016E.

Banks followed by consumer sector look like the likely sources ofpositive surprises. We think banks are best positioned to generate 3Q16earnings that would beat overall expectations, similar to some extent to whathappened in 2Q16. Aside from our base assumption of robust loans growthcoupled with NIM improvement, the sector should also benefit from having avery low base period characterised by very weak treasury performance.

Meanwhile, the consumer sector offers the possibility of robust same-storesales growth that contrasts with the ongoing subdued expectations, with theloss of the election-related spending boost from the equation.

Adjusting our sector preferences and picks accordingly. We thereforeincrease our weightings on the banks, in exchange for mainly reducingweightings on the property sector. Thus the pecking order preference for eachof the sectors would be as follows: banks, consumer, property,conglomerates, telecoms, and utilities.

Outlook

We overweight view of the Philippines. Our top picks are mostly unchanged,with the key exception being the removal of SM Investments (SM) from thetop picks list, in favour of the inclusion of BDO Unibank (BDO) this timearound. All told, we like the following in order of preference: GT Capital(GTCAP), Metrobank (MBT), BDO, Universal Robina (URC), Ayala Land(ALI), Robinsons Retail (RRHI), Ayala Corporation (AC), Metro Pacific (MPI),Robinsons Land (RLC), and Cebu Air (CEB).