Philippines Strategy:Weathering higher interest rates

Banks benefit the most. An increase in interest rates should benefit thebanking sector the most on the back of improved net interest margins. Weestimate that the three largest banks would an average EPS enhancement of5% should a 25bp increase in benchmark rates. Large CASA deposits (>60%)should come in handy, as well as loans where majority are repriceable.

Property companies likely to continue launches. We expect that propertycompanies will continue to launch more residential projects in 2018 to ride theresurgence in demand from last year. Ayala Land and Megaworld, the twolargest residential developers by take-up value, are keen to increase launchesthis year in light of declining inventory levels. In addition, we continue to seestrong demand from Chinese buyers due to expansion of offshore gaming.

Consumer/Retail – fairly insulated due to underleveraged positions. Weexpect minimal earnings impact to PH consumer/retail companies of risinginterest rates given their relatively low debt levels, with gross D/E at 0.1-0.6xas of Sep 2017 (net D/E ranging from net cash position to 0.5x). Whilecompanies continue to expand, capex can largely be internally funded (unlessa sizeable acquisition arises that could necessitate bank borrowing for some).

Conglomerates have relatively elevated debt levels. Aside from havingaggressive capex, conglomerates’ relatively elevated debt levels (gearingexceeding 100% for some) are drawbacks during higher interest rates.

Telcos might see higher financing costs. Both PLDT and Globe are likelyto keep capex elevated, close to 30% of total service revenues in the nearterm. Since dividend payout remains high for both PLDT (60%) and Globe(89%), capex will likely be funded by more debt. Consequently, financing costwill also increase as rates go up.

Utilities – not immune to higher interest costs. PH utility companies couldface some pressure from higher finance costs given their relatively highgearing (D/E of 1.2-1.6x, net D/E of 0.9-1.4 as of Sep 2017), except forMeralco (D/E of 0.6x and net cash position as of Sep 2017). What could helpis that much of their debt carry fixed interest rates, helping to mitigate theimpact. More at risk would be those that could be taking on new debt to fundexpansion projects. MPI, for instance, has a healthy pipeline of projects (newand prospective) although other funding options could be explored.