Philippines Strategy:How a weaker peso impacts our top picks

Ayala Land (ALI PM) – Higher demand for resi and office. A weaker pesocan potentially have a positive effect on ALI, as OFWs and foreigners willhave higher purchasing power over residential. In addition, the company’soffice segment will also benefit, as setting up or expanding BPO operations inthe Philippines will be cheaper. On the other hand, ALI’s dollar-denominateddebt is just less than 1% of total loans.

Universal Robina (URC PM) – Mitigants in place. Of URC’s raw materials,60% is USD-denominated. Based on our sensitivities, we estimate a ~4.5%drop in profit for every P1.00 depreciation vs the USD, assuming URC doesnot pass this on. URC, however, raised prices 2–3% in December 2016 and2.5–3.0% in Feb/Mar 2017, which should help temper the adverse impact of aweaker PHP. We believe URC has pricing power, especially in categories inwhich it dominates – it is number one in snacks, candies, chocolates, cupnoodles and RTD tea. A weaker PHP also strengthens the purchasing powerof OFW money (a key driver of domestic consumption), which could enableconsumers to absorb such price hikes. URC also continues to push its highermarginproducts (as it taps the affordable premium segment) and isrationalizing its SKUs, which should free up some costs.

GT Capital (GTCAP PM) – Auto business’ forex risk overstated. We estimatethat for every P1.00 depreciation vs the US dollar, EPS for GTCAP is reduced by2.1%, assuming prices are unchanged. We find this to be a fairly manageableimpact, considering how GTCAP has seen its share price weaken in the last yearduring bouts of peso weakness. GTCAP’s auto unit should have a built-inadvantage to adjust prices given its industry-leading market share of c43% that ismore than double its closest competitor. Upcoming quarterly earnings for GTCAPshould also exhibit the company’s high diversification, which we believe is furtherproof of being unduly punished when the peso weakens.

Puregold (PGOLD PM) – Unique positioning gives it pricing power. Around60% of goods sold in the company’s S&R segment (~20% and ~36% ofPGOLD’s net sales and net profit, respectively) is imported, mostly from the US,exposing it to FX risk. We estimate a P1.00 depreciation vs the USD could leadto a 2.8% decline in earnings, assuming incremental cost is not passed on tothe consumer. However, we believe S&R has the flexibility to raise prices given1) its strong brand equity, 2) it targets the less-price sensitive upper incomesegment and 3) a number of items sold by S&R are typically not carried byother retailers. Our recent S&R store visit shows that S&R hiked prices forcertain SKUs in the past year without really dampening volume/traffic.