CFA Institute Research Challenge

Transcription

CFA Institute Research Challenge
hosted by
CFA Society of the Philippines
Ateneo de Manila University Student Research
Ateneo de Manila University Student Research
SM Prime Holdings
Expansion built on expertise yields superior growth
Philippine Stock Exchange, Ticker: SMPH
Financials Sector, Real Estate Industry
Recommendation: BUY
Price Objective: Php24.70 | Current Price (27 Nov 15): Php21.50 | Upside: 14.9%
Premium deserved; issuing a Buy with 14.9% upside
Trading Data
We issue a Buy recommendation for SM Prime Holdings with a price objective (PO) of Php24.70 indicated by
our Discounted Cash Flow (DCF) Analysis-based Sum-of-the-Parts (SOTP) valuation. Our valuation is driven by
its malls segment, which accounts for 84% of SMPH’s gross asset value. Our PO implies a 28.2x 2016E P/E;
above peers (19.8x), the PCOMP Index (21.2x), and its historical mean (27.1x). We believe SMPH merits a
premium due to (1) its market leadership in the malls sector, (2) its aggressive expansion in underpenetrated
markets, and (3) earnings reliability that underpins an EPS CAGR of 14.9% from 2015-2018E.
Price (27 Nov 15)
Price objective
52-week range
Market cap (Php/USD)
Leading mall developer in a consumption-driven economy
SM Prime is the largest mall developer and operator in the Philippines, accounting for over 51% of total leasable
space of the country. It has 55 malls in its Philippine portfolio, covering almost every region in the country. It
operates six out of the ten largest malls in the Philippines. Its established brand equity pulls in the biggest
retailers as its anchor tenants. SMPH’s malls unit contributed 58% of total revenues in 2014. We consider
SMPH’s retail exposure, where 75% of mall revenues are driven by a percentage of tenants’ sales, as a proxy
for rising consumer spending.
Mall expansion in underpenetrated markets under way
21.50
24.70
Php15.74 – 22.70
Php619.92 bn
USD13.16 bn
28.88 bn
USD7.11 mn
26.74%
SMPH.PM
SMPH PS
SMIC (49.60%)
Sy Family (23.66%)
Shares out.
Avg. Daily Val
Free Float
Bloomberg
Reuters
Major Shareholders
Historical Performance rel. PCOMP Index
300
Moving forward, we expect revenues to grow at a CAGR of 14.8% from 2015-2018E. This will be driven by an
aggressive mall expansion program in underpenetrated markets, which are key provincial centers
characterized by increasing consumption and low retail penetration rates. It is important to note that 78% of
consumption happens outside Metro Manila, and retail space per capita in these areas averages only 0.03
sqm, much lower compared to Metro Manila’s 0.21 sqm. SMPH will consolidate its market leadership by
bringing its size, scale, and its base of popular tenants to these underserved markets, adding 4-6 malls
nationwide per annum. This is significant because, while same-store-sales-growth has remained robust at 7%
over the last few years, contributions from new developments have been the primary driver behind SMPH’s
strong topline growth.
Limited exposure in slowing segments; building on reliable growth
As the Philippines is transitioning into a demographic sweet spot and unemployment levels are dropping, the
market for low-cost affordable residential units is expected to grow. This benefits SMPH’s residential unit, as it
caters exclusively to this market, which is underserved by our estimates. This also limits its exposure to the
higher-end segments, characterized by a slowdown in developments and elevated inventory levels. Moreover,
the surge in the BPO sector has encouraged major developers to aggressively ramp up office space, which has
caused a short-term oversupply, in our view. Focusing its expansion plans on its retail unit, SMPH’s nature as
a retail-focused property developer allows it to benefit from growth in consumption, while its nature as a real
estate developer in general enables its property values to improve with asset appreciation. Because of its
reliable growth, we argue that SMPH is the most strategic and resilient property firm in the Philippines.
200
100
0
01/12/2010
01/12/2011
01/12/2012
01/12/2013
SMPH
01/12/2014
PCOMP
P/E (ttm) rel. PCOMP Index
40
30
20
10
0
30/11/2010
30/11/2011
30/11/2012
SMPH P/E (ttm)
30/11/2013
30/11/2014
PCOMP P/E (ttm)
Earnings reliability, strong balance sheet, and execution address key risks
Key risks for our valuation are (1) sensitivity to a macro slowdown, (2) cyclicality of the residential segment, (3)
increasing competition, and (4) delayed execution of mall developments. In mitigating these risks, we believe
SMPH’s retail-based property portfolio provides greater earnings reliability in a cyclical sector, with 63% of 2014
revenues coming from recurring income (the highest in the industry). SMPH’s size, scale, and leadership
defends itself from competition risk, and its proven track record answers execution risk. Furthermore, factoring
in new developments’ immediate contributions to earnings, we project a 2015-2018 core EPS growth of
14.9%, and a Cash Flow from Operations (CFO) growth of 13.9%. These internally generated funds, and an
underleveraged position with a total debt/total capital ratio of 41.4% in 2015E will help fund its expansion.
Financial Highlights
Revenues (Php mns)
Core Net Income (Php mns)
EPS
EPS Change (YoY)
DPS
P/E
EV/EBITDA
2013
2014
2015E
2016E
2017E
2018E
59,794
16,726
0.59
0.3%
0.18
25.1
16.2
66,240
18,896
0.66
12.6%
0.19
25.8
17.2
73,648
21,975
0.74
12.2%
0.20
30.0
19.1
87,120
26,031
0.88
18.5%
0.31
24.5
15.8
99,468
29,837
1.01
14.6%
0.27
21.4
13.8
111,346
33,300
1.12
11.6%
0.31
19.2
12.1
*Core net income/EPS exclude extraordinary gains
1
Business Description
In 1985, SM Prime opened its first mall along North EDSA in Quezon City, a single SM mall with a gross floor
area (GFA) of 125,000 sqm. Subsequently. its mall development business grew rapidly, along with the other
real estate businesses of the SM Group, justifying the 2013 corporate restructuring that consolidated all of the
SM Group’s real estate properties under SMPH. Post-merger, SMPH has transformed into an integrated
property developer with direct exposure to mall operations, residential developments, office developments,
hotels and convention centers.
•
•
•
•
Retail (58% of 2014 Revenues): SM Prime is the market leader in mall developments and
operations in the country in terms of mall count and leasable space. It has 55 malls around the
country with over 7.3 mn sqm gross floor area (GFA), or an estimated 3.6 mn sqm gross leasable
area (GLA), comprising over 51% of mall retail space in the country. SMPH also has 6 more malls in
China, bringing its total GFA to 8.1 mn sqm. While 40% of its mall space is in Metro Manila, SMPH
now has malls in 12 out of 17 regions in the Philippines, and owns 6 of the 10 largest malls. Its
malls also draw in a combined foot traffic of 3.7 mn people every day, and hosts over 18,300
tenants.
Residential (34% of 2014 Revenues): SM Prime currently has 12 completed residential
condominium projects and 14 on-going developments. It has launched over 80,751 condominium
units since its inception, and has exposure to two large-scale leisure destinations, including the 40
ha Pico de Loro project located in one of the Philippines’ premiere coastlines.
Offices (4% of 2014 Revenues): SM Prime owns over 330,000 sqm GFA of office space which is
primarily leased by the business process outsourcing (BPO) sector. It has currently been focused on
building around its “E-com” series of office developments inside its Mall of Asia Complex in Pasay
City.
Hotels (3% of 2014 Revenues): SM Prime completes its business model by adding hotels and
conventions centers to its already diverse portfolio. Its hotels have a total of 325,000 sqm GFA (or
1,019 rooms), while its convention centers have a total of 36,000 sqm GLA, adding foot traffic to
SMPH’s other properties nearby.
SM Investments, the largest conglomerate in the country (USD14.9 bn market cap), is the parent company of
the SM Group. It has significant interests in retail, banking, and property (SMPH). Parent SMIC directly owns
49.60% of SMPH. The SM Group’s founder and SMPH’s Chairman Emeritus Henry Sy Sr. sits on the board of
SMPH along with his sons, Hans Sy (President), Henry Sy Jr. (Chairman), and Herbert Sy. Each of them have at
least 20 years of experience in related fields. Adhering to strong corporate governance practices, SMPH has
three independent directors, and has received multiple local and international awards for its corporate
governance practices as well as its corporate social responsibility efforts (Appendix 3.1-3.3).
Fig 1: SMPH ownership structure
Parent
Retail
Property
Banking
Source: Company Data
Fig 2: Revenues per business segment (2014)
4%
3%
34%
59%
Malls
Residential
Commercial
Hotels
Fig 3: Retail space (malls) market share
(sqm GLA, 2015E)
12%
16%
52%
20%
SM Prime
Ayala Land
Robinsons Land
Others
Source: KMC Mag, Company Data, Team Estimates
Industry Overview and Competitive Positioning
Malls: A clear leader in Philippine retail
Filipinos are natural spenders; consumption expected to remain robust
With GDP growing at an average rate of 6.3% for the past 5 years, and by 6.0% as of 3Q15, the Philippines is
one of the fastest growing economies in the world. This is primarily fueled by household consumption, which
has accounted for an average of 73% of GDP in the last 25 years. Increasing consumption is further supported
by the growth of the BPO sector (6.5% of GDP) and reliability of remittances (10% of GDP), which are growing
themes contributing to the increasing per-capita income of Filipinos. Strong consumption benefits retailing, with
store-based sales (USD68.0 bn) growing 6.0% in 2014, close to the 6.3% GDP growth print, due to the fact that
store-based retailing accounted for 33% of household consumption in 2014. Historically, SM’s malls have
captured a significant portion of Philippine consumption, as evidenced by its foot traffic. Moreover, 75% of its
rental income is calculated as a given percentage of its tenants’ sales. Therefore, SMPH’s malls unit is perfectly
poised to take advantage of the Philippines’ robust consumption and retail growth.
Fig 4: GDP (USD mns), GDP growth rate (%), and Household Final
Consumption Expenditure (USD mns)
400,000
8.0%
300,000
6.0%
200,000
4.0%
100,000
2.0%
-
Company
SM Prime
Ayala Land
Robinsons Land
Total
Overall capex
(FY 2015)
Retail Allocation (%)
GLA Additions
(2015)
GLA Pipeline (20162017)
56.0%
14.7%
66.4%*
36.0%
389,431
103,400
32,576
525,407
389,545
565,000
303,000
1,257,545
Php64-65 bn
Php80-90 bn
Php15-17 bn
*Note: Capex allocation for investment properties (includes offices)
Source: Company Data, Team Estimates
These major developers will allot 36% of capex for retail space, adding over 507,487 sqm GLA in 2015, and
1.3 mn sqm GLA in 2016-2017. Factors such as aggressive expansion, and the lucrative and growing Filipino
2013
2014 2015 E 2016 E
GDP
Household Final Consumption Expenditures
Growth Rate (%)
Developers most aggressive in adding retail space; capex at all-time highs
Due to the expected slowdown in the cyclical residential segment (discussed later), aggressive domestic
geographic expansion in retail has since become the theme for the property sector to achieve earnings
reliability. The country’s top three property developers: SM Prime, Ayala Land (ALI PM), and Robinsons Land
(RLC PM) together own a substantial 87.5% share of the country’s mall retail space. In 2015 alone, they had
an aggregate capex budget of Php120 bn, 50% more than their aggregate 2012 capex budget levels.
0.0%
2012
Source: World Bank
Fig 5: Household final consumption expenditure (as % of GDP)
80%
70%
60%
50%
40%
30%
20%
10%
0%
Source: World Bank
2
consumer market have resulted in fierce competition. This competition is tempered by strong growth in
household consumption, which leaves much room for retail space additions (see Appendix 4.1.5 for Porter’s
Analysis of Retail Market).
SM Prime’s size, scale, and leadership to command incoming retail supply
SMPH owns the largest amount of retail space across the country (51% of total mall GLA), and hosts a wide
array of market leaders as its tenants, which makes it the preferred landlord. Its established brand equity as
largest developer in the country in terms of mall count gives it a key competitive advantage in terms of presence
in the most number of locations (i.e., convenience and accessibility). Besides housing the most number of
malls, its average mall space (in GLA) more than doubles that of its nearest competitors. This ensures that SM
malls can offer consumers not just a wider selection of retail brands, but also a variety of entertainment and
leisure activities (e.g. cinema, skating rinks, etc.). All these factors enable SMPH to carry 43.7% of the country’s
new retail supply in 2015-2017 amidst aggressive expansion by major developers.
Company
Mall Count
GLA
Avg. GLA/mall
% of Total GLA
55
45
39
3.58 mn
1.31 mn
1.09 mn
65,091
26,734
27,948
51.7
21.2
16.2
SM Prime
Ayala Land
Robinsons Land
SMPH’s anchor tenants – particularly from its affiliate SM Retail, which accounts for 6.2% of total store-based
retail space in the country, doubling that of next competitor Puregold – are market leaders in their respective
segments. It has also long-standing relationships with top local and international food brands such as Jollibee,
McDonald’s, The Max’s Group, and Starbucks. Attracted by the strong economic growth, and some of the
lowest rent rates in the world (Appendix 4.1.4), foreign brands continue to expand in the Philippines. In fact,
190 new foreign brands have entered the market in 2008-2014 (45 in 2014 alone), and these brands partner
with local retailers, particularly when entering the market for the first time (Appendix 4.1.3). The escalating
competition for retail space benefits landlords like SMPH, which is able to select the most competitive and
popular tenants for its malls. For instance, major fashion brands such as Fast Retailing. also known as UNIQLO,
Forever21, and Crate&Barrel have picked SM Retail as an official partner, locating most of their Philippine
stores in SM malls. As a result, SMPH has arguably the strongest brand equity among retail developers, due to
its long history and focus on retail and the portfolio of brands it carries.
SM Prime’s expansion in underpenetrated markets present new wave of growth
Although nearly 50% of retail space in the country is still concentrated in Metro Manila, under penetration of
provincial markets in terms of retail space still persists, despite the rapidly increasing per-capita income
experienced in these provincial growth centers. (Appendix 4.1.1 and 4.1.2)
NCR – Nat’l Capital Region
1 – Ilocos
2 – Cagayan Valley
3 – Central Luzon
4-A – CALABARZON
4-B – MIMAROPA
7 – Central Visayas
10 – Northern Mindanao
180,000
160,000
140,000
120,000
100,000
80,000
60,000
40,000
20,000
-
RLC
ALI
SMPH
2012
2013
2014
2015
Fig 7: Porter’s Five Forces Analysis (Retail)
Rivalry
among
competing
firms
5
4
3
2
1
0
Bargaining
power of
consumers
And leverages on strategic partnerships as a key differentiating advantage
Region
Fig 6: Aggregate capex of major developers (Php mns, 2015)
Potential
entry of new
competitors
Potential
development
of substitute
products
Bargaining
power of
suppliers
Source: Team Estimates
Fig 8: List of key anchor tenants and affiliates
SM Dept. Store
Jollibee
SM Supermarkets
National
Bookstore
SM Hypermarkets
Uniqlo
Bench
Forever 21
Industry Add’ns
2015-2016E (GLA)
SMPH Add’ns 20152016E (GLA)
SMPH Additions as
% of Total
Per Cap, HH
Consumption (Php)
Growth Rate (%)
Per Cap, Retail
Space (sqm)
334,883
53,746
24,603
174,998
141,995
32,182
321,846
85,506
101,149
53,746
24,603
174,998
79,595
28,982
230,396
85,506
30.2%
100.0%
100.0%
100.0%
56.1%
90.1%
71.6%
100.0%
160,879
82,099
74,102
101,946
102,629
69,765
89,178
73,040
5.9%
5.7%
6.4%
9.0%
5.1%
6.5%
8.8%
7.2%
0.21
0.02
0.02
0.05
0.06
0.01
0.05
0.02
*Note: Per capita household consumption values are in nominal terms, while growth rates are in real terms
Source: Philippine Statistics Authority, Company Data, Team Estimates
In response to this, an estimated 1.2 mn sqm GLA will be added by the three major retail developers in 20152016, and 72% of these additions will be outside Metro Manila. It is also important to note that SMPH leads
the pack in developing malls in these key provincial centers, accounting for around 78% of new provincial mall
GLA, while ALI and RLC together account for only 22%. SMPH’s developments will be focused in Regions 3, 4A and 7, which primarily exhibit the underpenetrated characteristics of increasing per capita household
consumption and low space per capita vs NCR. Notably, SMPH has recently established its fourth largest mall
complex, dubbed its largest destination mall in the south with a 470,000 sqm GFA (230,390 est. GLA) in Cebu
(Region 7). It has shown an 8.8% growth rate in consumption (vs 3.3% of NCR), one of the fastest in the region
while retail space per capita in Region 7 is at 0.05, in comparison to NCR’s 0.21. We would like to emphasize
that SMPH will bring its size, scale, and its anchor tenants’ leadership to cater to this unattended demand.
Soon after, this supersized mall will anchor several of its other developments (residential, offices, and others)
to bring in additional foot traffic, and maximize the promising opportunity in the region.
Fig 9: Philippine population pyramid (2014)
Residential: Targeting an undersupplied market; limiting sector slowdown impact
Affordability and demographics to underpin long-term demand
The Philippine population, with a median age of 23.4 years, is expected to hit a demographic dividend,
characterized by a period of high economic growth where 15-64 year olds will comprise majority of the
population. In comparison to mature markets, the Philippines’ young demographics, coupled with low
unemployment rates (5.6% in 10M15) will contribute to a growing working class population, expected to reach
Source: CIA World Factbook
3
64% of total population by 2020. This is characterized by majority of the population having less dependents to
support, which increases disposable income. Furthermore, a record low of 5.5% bank average interest rates
(from 10.1% in 2005) has encouraged demand for borrowing as evidenced by heightened real estate banking
loans during periods of low interest rates.
Fig 10: Real estate bank loans (Php bns) – LHS
and bank average interest rates (%) – RHS
3,500
12.0%
3,000
10.0%
2,500
But developers cautious in the wider market; short-term slowdown expected
8.0%
2,000
While macroeconomic factors such as the growing population base, and increasing disposable income
indicate growth in the long-term; in the short-term, The Subdivision and Housing Developers Association (SHDA)
estimates a surplus in the mid- and high-end housing market, currently at 474,414 units.
Housing
Price (per unit)
Supply (units)
Demand (units)
Surplus/(Deficit)
Mid End
High End
Total
Php3.0-6.0 mn
> Php6.0 mn
322,995
242,246
565,241
72,592
18,325
90,827
250,403
224,011
474,414
6.0%
1,500
4.0%
1,000
500
2.0%
-
0.0%
REL Bank Loans
Bank Average Interest Rates
Source: Banko Sentral ng Pilipinas
Source: SHDA
This surplus, we believe, is evident, as three of the country’s major developers’ (who have exposure in these
segments) inventory levels have escalated over 25% to Php105 bn in 2014 from Php80 bn in 2012.
Furthermore, there has been a continuous downtrend of licenses-to-sell, a certification obtained by property
developers from the Housing and Land Use Regulatory Board (HLURB) to develop residential projects, which
acts as a leading indicator for future developments (dropping 18% to 216 mn from 261 mn in 2012). This
trend is expected to persist, showing a -11.7% and -15.35% QoQ growth for 2Q and 3Q15 respectively. The
delay in developments reflects the cautious stance of developers.
Fix 11: High-end residential developers’ inventory (Php mns)
90,000
80,000
70,000
60,000
40,000
In contrast, shortage in mass-market segment presents an opportunity
30,000
However, it is interesting to note that SHDA also asserts that there is a backlog (shortage) in developments in
the socialized, economic and low cost segments of 3.1 mn units. We believe this is due to high interest rates
during 2001-2011 (6.6%-10.9%), which discouraged households to avail of loans.
20,000
Housing
Socialized
Economic
Low Cost
Total
Price (per unit)
Supply (units)
Demand (units)
Surplus/(Deficit)
< Php400,000
Php0.4-1.5 mn
Php1.5-3.0 mn
479,765
541,913
242,246
1,263,924
1,143,048
2,503,990
704,406
4,351,444
(663,283)
(1,962,077)
(462,160)
(3,087,520)
Source: SHDA
For these segments, SHDA forecasts until 2030 assume an annual demand of 345,941 units and an annual
supply of 200,000 units, in line with historical trends. At this pace, the total housing need (shortage) is
expected to double, reaching 6.2 mn units by 2030 E (Appendix 4.2.1 and 4.2.2).
SM Prime’s one product, one segment strategy maximizes market opportunity
Top residential developers such as Ayala Land (ALI PM), Megaworld (MEG PM), and Robinsons Land (RLC PM)
continue to develop properties in the high-end segments, exposing them to the expected market slowdown. In
contrast, SMPH’s offerings in the residential segment cater only to the low-cost, affordable condominium
segment, with majority of their products ranging from Php2.8–3.2mn per unit. This has given them the
advantage of focusing on the needs of an underserved market. Additionally, the value adding proposition of
their residential developments makes it a preferred choice by homeowners, as these developments are
established near (1) their own malls, (2) transportation hubs located near Central Business Districts (CBDs),
and (3) house their own retail establishments within the vicinity of the building. It is also important to note that
adding residential developments beside malls also draws in additional foot traffic for their malls.
Offices: Creating synergy with malls
Surge in the BPO sector prompts aggressive expansion of developers
The BPO (business process outsourcing) sector is one of the fastest growing segments of the economy, with
revenues (Php18.4 bn) and full-time employees (FTEs) growing annually by 21% and 18% respectively,
accounting for nearly 6.5% of GDP. This trend is expected to grow hence; office developers have planned an
aggressive outlay of office space in Metro Manila in 2015-2018E, which may prompt an oversupply, in our view
(see Appendix 4.3.4 for Porter’s Analysis). Colliers International has forecasted a 2.6 mn sqm of new office
supply in Metro Manila for the same period. This supply forecast exceeds our forecasted demand of 2.1 mn
sqm (Appendix 4.3.1) from 2015-2018E. This analysis is validated by KMC Mag, which estimates vacancy
rates to increase from 2016-2018 in major central business districts like Bonifacio Global City (15-16% from
4% in 2014) and Ortigas (4% from 2.5% in 2014). Fortunately, SMPH’s pipeline of commercial developments
are all located in the MOA Complex (Appendix 5), which is strategically located in the Bay Area, where supply is
still expected to be absorbed, and office rent is still expected to increase – KMC Mag estimates the highest YoY
rental rate growth in the Bay Area among all districts at 17.0% in 3Q15.
SM Prime’s distances self from market volatility, creates synergy with malls
SMPH’s limited exposure in the offices segment shields it from the negative impact on profits from the expected
oversupply in the commercial segment. This limited exposure is a result of SMPH’s strategy of not developing
standalone offices, but instead building offices around its malls as a complimentary business (e.g. SMPH’s Ecom office tower series in the Mall of Asia Complex), drawing in additional foot traffic for its malls while receiving
Robinsons Land
50,000
Megaworld
Ayala Land
10,000
2012
2013
2014
Fig 12: HLURB licences-to-sell (units)
Compliance
300,000
250,000
Socialized
200,000
Economic
150,000
Condo
100,000
50,000
Medium Cost
2012 2013 2014
9M14 9M15 Open Market
Source: HLURB
Fig 13: Porter’s Five Forces Analysis (Residential)
Bargaining
power of
consumers
Rivalry
among
competing
firms
5
4
3
2
1
0
Potential
entry of new
competitors
Potential
development
of substitute
products
Bargaining
power of
suppliers
Fig 14: Incremental office space (sqm)
900,000
800,000
700,000
600,000
500,000
400,000
300,000
200,000
100,000
0
2015 E
2016 E
2017 E
2018 E
Incremental Office Demand Incremental Offce Supply
Source: Coillers Philippines, Team Estimates
4
rental income from its commercial leases. This strategy links the higher disposable income earned by office
workers (particularly the strong spending patterns of BPO workers) to consumption in SM malls.
Fig 15: Porter’s Five Forces Analysis (Commercial)
Rivalry among
competing
firms
5
4
3
2
1
0
Lifestyle Cities: an integrative strategy for all proprietary segments
Bargaining
power of
suppliers
45
40
35
30
25
20
15
10
SMPH will focus its aggressive mall expansion program on underpenetrated markets, which are provincial
growth centers that exhibit high consumption and low retail penetration rates. SMPH began by tapping Cebu
City in Region 7, which showed a 9.4% growth rate in per capita household consumption expenditure (vs NCR’s
3.3%) but a significantly lower retail space/capita of 0.05 (vs NCR’s 0.21). In response to this, SMPH finished
its fourth largest destination mall (470,000 sqm GFA) in 3Q15. SMPH will consolidate its market leadership by
bringing its size, scale, and its base of popular tenants to these underserved markets, adding 4-6 malls
nationwide per annum. This is significant because, although SSSG has remained robust at 7% for the past few
years, the primary driver of topline growth has been the revenues generated by new facilities. Moving forward,
we expect 4-6 mall developments each year, particularly in underpenetrated regions. As a result, we expect
revenues to grow by 14.8% p.a. in 2015-2018E.
Strategic positioning in other business units supports reliable growth
By developing residential units catering to the underserved low-cost, affordable condominium segment, SMPH
is poised to capitalize on the growth of the labor force while largely avoiding the slowdown in developments and
elevated inventory levels experienced in the mid- and high-end segments. The new developments of SMPH’s
commercial segment are limited to its E-com office building series, which limits its exposure to the short-term
oversupply caused by the aggressive response by most developers to the surge in the BPO sector. It is also
important to note that SMPH’s strategy is to add office space/residential developments only to support its retail
segment, insulating it from the slowdowns in both segments while synergistically enhancing the value of all of
its properties. As a result, SMPH’s nature as a retail-focused property developer allows it to benefit from growth
in consumption, while its nature as a real estate developer in general enables its property values to improve
with asset appreciation.
Earnings reliability, strong balance sheet and execution address key risks
We project a 2015-2018EPS growth of 14.9%, and CFO growth of 13.9% per annum during the same period
that will help its heavy capex program (CFO/Capex at 42.9% and 58.4% in 2015E and 2016E). Stable earnings
and cash flows are due to SMPH’s retail-based property portfolio, where 63.5% in 2015E of total revenues
come from recurring income segments. Moreover, SMPH asserts its leadership due to (1) its size, (2) its solid
track record, (3) strong cash position exhibited by cash ratios of 44.9% in 2015E, and 66.9% in 2016E, and
(4) an unleveraged balance sheet exhibited by a total debt/total capital ratio of only 41.4%. These help mitigate
key risks for our valuation on SMPH: (1) sensitivity to a macro slowdown (2) cyclicality of the residential segment,
(3) increasing competition in the sector, and (4) a delayed execution in new mall developments.
0
NCR
CAR
1
2
3
4-A
4-B
5
6
7
8
9
10
11
12
13
ARMM
5
Dominant name in mall development; proxy for a consumption-driven economy
Mall expansion in underpenetrated markets propels a new wave of growth
Potential
development
of substitute
products
Fig 16: Mall count of major developers per region
We issue a Buy recommendation for SM Prime Holdings with a price objective (PO) of Php24.70 indicated by
our Discounted Cash Flow (DCF) Analysis-based Sum-of-the-Parts (SOTP) valuation. Our valuation is driven by
its malls segment, which accounts for 84% of SMPH’s gross asset value. Our PO implies a 28.2x 2016E P/E;
above peers (19.8x), the PCOMP Index (21.2x), and its historical mean (27.10x). We believe SMPH merits a
premium due to (1) its market leadership in the malls sector, (2) its aggressive expansion in underpenetrated
markets, and (3) earnings reliability that underpins an EPS CAGR of 14.9% from 2015-2018E.
SM Prime is the largest mall developer and operator in the Philippines in terms of leasable area (GLA) and mall
count. It has 55 malls in the Philippines and 6 in China. SMPH’s malls account for 51% of total leasable space
in the country and include six out of the ten largest malls. Although its malls are primarily located in key cities in
Metro Manila, SMPH is present in 12 out of 17 regions. Moreover, SMPH has a wide network of anchor tenants,
which are leaders in their respective segments. One of its most notable tenants is its affiliate, SM Retail, is the
clear market leader in store-based retailing. SMPH’s strength in retail allows it to take advantage of the
Philippine economy’s healthy GDP growth of 6.3% per annum, 73% of which has come from consumption. As
revenue contributions from malls take up 58% of SMPH’s total revenues, and 75% of mall revenues were
calculated as a percentage of tenants’ sales, we consider SMPH a proxy for rising consumer spending.
Potential entry
of new
competitors
SMPH ALI
RLC
Fig 17: Per capita, household final consumption expenditures,
and growth rates (Php)
180,000
160,000
140,000
120,000
100,000
80,000
60,000
40,000
20,000
-
10.0%
8.0%
6.0%
4.0%
2.0%
0.0%
-2.0%
NCR
CAR
1
2
3
4-A
4-B
5
6
7
8
9
10
11
12
13
ARMM
Investment Summary
Bargaining
power of
consumers
Per Capita, Household Final Consumption
Source: Philippine Statistics Authority
-4.0%
Growth Rate
Fig 18: Per capita, retail space (sqm)
0.25
0.20
0.15
0.10
0.05
-
NCR
CAR
1
2
3
4-A
4-B
5
6
7
8
9
10
11
12
13
ARMM
Under SMPH’s Lifestyle City strategy, destination malls (malls >250,000 GFA) will serve as the centerpiece of
an integrated township design, which will anchor commercial, residential, and hotel properties. Inspired by the
success of its 60 ha Mall of Asia Complex in Pasay (Appendix 2.10) which contributed 8% of total revenues in
2014, SMPH is developing its second master-planned estate in Cebu (Region 7). Moving forward and
leveraging on its strategic long-term land bank planning, SMPH also seeks to develop more lifestyle cities in
other regions, particularly in Clark, Davao, and Iloilo, post-2018. A key idea behind SMPH’s push for building
lifestyle cities is the synergistic effect that these townships have: malls receive additional foot traffic from the
developments built around them, which in turn increase in value due to the attractiveness of being located in
an integrated development. This also allows SMPH to limit its exposure to sectors that it is currently being
cautious about while positioning it to be able to expand in these sectors in the future, should the market outlook
become more positive.
Fig 19: Percentage of recurring income to total revenues major developers (%)
100
80
60
40
20
0
SM Prime
Ayala Land
Robinsons Megaworld
Land
Malls and Offices
Other Segments
5
Confirmative valuations through our DCF-Based SOTP methodology
Fig 20: EPS (Php)
While the stock trades at 30.0x adjusted P/E (above peers and the PCOMP Index), we believe the stock merits
its premium valuation as indicated by our SOTP methodology. We value our Php24.70 price objective of SMPH
primarily through a DCF approach for its businesses with recurring cash flows, and a NAV for its residential
segment. Our DCF is valued against a 7.35% WACC and a terminal growth rate of 4.0% for the malls business,
and a 3.6% for the commercial and hotels segment. Interestingly, SMPH’s strategy is confirmed by our value
of its malls segment accounting for 84% of SMPH’s gross asset value. Furthermore, we value the residential
segment using a conservative NAV approach that is further segmented into: (1) an appraised value of its land
bank, (2) a 5-year NPV of cash flows for its pipeline projects, and (3) the net realizable value of its inventory.
Valuation
1.2
1
0.8
0.6
0.4
0.2
0
2013
2014 2015 E 2016 E 2017 E 2018 E
DCF-Based SOTP Valuation
We arrived at our Php24.70 price objective (PO) of SMPH’s Readjusted Net Asset Value (RNAV) using a Sumof-the-Parts (SOTP) methodology, valuing each segment independently given the diverse base of cash flows.
Our SOTP RNAV is based primarily on 2 main methodologies. (1) We valued businesses with recurring cash
flows (malls, offices and hotels) using a Discounted Cash Flow (DCF) approach against a 7.35% weighted
average cost of capital (WACC) and a terminal growth rate of 4.0% for the malls segment and 3.6% for the
commercial and hotels segment %. (2) The residential segment, seen as a high-risk segment in the property
sector, merited a conservative NAV approach driven by a capital-based land bank, a 5-year Net Present Value
(NPV) of cash flows for its pipeline projects, and the net realizable value of its inventory.
Valuation (Php mn)
Malls
Land bank
Residential (Inventory)
Residential (Pipeline Projects)
Commercial
Hotels
AFS Securities
Gross Value
Net Cash (Debt)
NAV
Discount to NAV
Price Objective
FV
FV/Share
% of GAV
Methodology
669,327
114,544
54,472
30,629
18,792
10,358
20,721
918,845
(125,810)
793,035
23.18
3.97
1.89
1.06
0.65
0.36
0.72
84%
14%
7%
4%
2%
1%
3%
Discounted Cash Flows, 7.35% WACC
Market Value
Net Realizable Value
NPV 2016-2020, 7.35% WACC
9M15 Interim Financial Statement
-16%
9M15 Interim Financial Statement
27.46
10%
24.70
Discounted Cash Flow Method – Malls, Offices, and Hotels
•
•
Discounted Cash Flow Method – SMPH’s malls, offices, and hotels segments derive their value
primarily from recurring cash flows, and hence, each segment was independently valued based on
a Discounted Free Cash Flow to Firm Method.
Revenues – Revenues were primarily computed using a Revenue/GFA basis for both the malls and
offices segments, and Revenue/Room for the hotels segment. To calculate the base year
Revenue/GFA, we divided SMPH’s reported revenue per segment by its corresponding segment
GFA; these figures were multiplied by the segment’s total GFA for the year. The following key factors
were also taken into consideration:
o
Rental growth:
§
Different rental growth rates were applied to each segment’s Revenue/GFA base year
estimate to calculate the appropriate Revenue/GFA segment for the succeeding years.
§
For SMPH’s retail segment, its same-store sales growth of 7%, which has stayed
constant since 2012, was used. As variable-term agreements generate 75% of mall
revenues, this growth rate is expected to hold steady due to the positive
macroeconomic outlook, particularly healthy consumption growth and an increase in
the employed population.
§
For the office segment, the historical rent escalation rate of 5% was used.
§
For the hotels segment, the tourism growth rate of 2% was used, from KMC Mag’s
latest estimates.
o
New additions:
§
Each year’s Revenue/GFA estimate was multiplied by the total expected GFA per
segment. While same-store-sales-growth remains strong at 7%, the opening of new
facilities was the most significant driver of revenue growth, particularly for the malls
segment, in which most planned expansions are concentrated. This justifies our 14.8%
total revenue CAGR from 2015-2018E.
§
The revenues generated by new facilities were adjusted to reflect the actual start of
their operations (e.g. a mall opening in 3Q generates only half a year’s worth of
revenue).
o
Occupancy rates:
§
Each segment’s expected revenue (yearly Revenue/GFA estimate multiplied by total
segment GFA) was multiplied by a segment-specific occupancy rate to calculate the
final yearly segment revenues.
Fig 21: Free cash flows to firm (Php mns)
2020 E
2019 E
2018 E
2017 E
2016 E
(10,000)
-
Malls
10,000
20,000
30,000
Commercial Hotels
Fig 22: Total revenues (Php mns)
120,000
90,000
60,000
30,000
2013 2014 2015 E 2016 E 2017 E 2018 E
Hotels and Convention Centers
Commerical
Residential
Malls
6
An overall occupancy rate of 97% was assumed for mature malls, in line with SMPH’s
historical average. For new malls, a conservative rate of 80% was used for the first year,
in line with its historical lease-awarded occupancy rates; these malls are expected to
catch up to existing malls’ 97% rate in their second year, as brands are drawn from
SMPH’s tenant pipeline.
§
SMPH’s current occupancy rate of 99% for all current commercial properties was
assumed for the office segment. Three E-com, the only new commercial addition in
2018E, is conservatively assumed to be 80% occupied in its first year, and will be 99%
occupied in the following year, an assumption supported by the fact that the area in
which it is located is expected to absorb new demand.
§
SMPH’s historical 70% occupancy rate was used for its hotels, due to their strategic
locations and proximity to malls and transportation hubs. SMPH currently has no plans
of launching any new hotel properties.
Capital Expenditures – Although management has guided a capital expenditure budget of Php300
bn for 2015-2018E, we estimate approximately Php260 bn will actually be spent, given that SMPH
was ahead of its expansion targets after disclosing its 2016 guidance numbers. We expect Php60
bn will be spent annually in 2015 and 2016, and Php70 bn per annum after. Of this capex budget,
55-65% has been allotted for investment properties (Php30.0-32.5 bn per annum in 2015-2018E);
this is in line with SMPH’s strategy of aggressively adding retail space.
Weighted Average Cost of Capital – We used a WACC of 7.35% for all three segments, and a 20.2%
tax rate for SMPH, which was its rate in 2014 (lower than the standard Philippine tax rate as SMPH
enjoys an income tax holiday for catering to low-income segments in its residential developments).
We also utilized an equity risk premium of 6.1% derived from A. Damodaran’s methodology, a beta
of 1.15, and a risk-free rate of 4.07% from the PSDT-R2 10-year government treasury yields
(Appendix 6).
Terminal Growth Rate – We assume a 4.0% terminal growth rate for SMPH’s malls segment, 1.5%
lower than the 5.5% World Bank long-term GDP forecast, and 1% lower than our regression model
estimate (Appendix 5.3.1). For the commercial and hotels segment, we assume 3.6% terminal
growth rate which is derived from a long-term inflation forecast indicated by our regression analysis
(Appendix 5.3.2).
§
•
•
•
Net Asset Value – The residential segment is currently seen as the high risk segment in the property
sector and therefore merits a conservative appraisal. We derived the value of SMPH’s NAV for the
residential segment using three main approaches, namely:
o
Appraised Value of Land Bank – We appraised SMPH’s land bank through using comparable
prices of recently closed transactions, using estimates of property appraisers such as Jones
Lang Lasalle and KMC Mag when possible.
o
Net Realizable Value of Inventory – We appraised SMPH’s inventory primarily by using an
estimated gross margin of 46% as a markup to its inventory value (reported at cost).
o
Net Present Value of Cash Flows – We discounted expected cash flows from its pipeline
projects from 2016-2020, reflecting only launched and announced projects (of 39,600
units). In our cash flow model, we expect the same turnover period of 3 years from start of
project construction and also assume that units are going to be completely sold. We also
remove the terminal value in discounting cash flows to highlight the risk in this segment. We
also assume the same discount rate equal to SMPH’s WACC of 7.35%.
Peer Valuation
Ayala Land
Robinsons Land
Megaworld
Central Pattana
CapitaLand
Sun Hung Kai
Median
SM Prime
40,000
20,000
2013 2014 2015 E 2016 E 2017 E 2018 E
Malls
Residential
Commercial
Hotels
Fig 24: Select land banking portfolio (ha)
Note: Batangas (514 ha – scaled)
140
120
100
80
60
40
20
0
10,000
8,000
6,000
4,000
2,000
2016 E 2017 E 2018 E 2019 E 2020 E
Fig 26: SMPH and PCOMP P/E (ttm)
40
35
30
We also compare SMPH to key local and regional competitors of similar size in terms of market capitalization;
with limited exposure to non-property businesses; exposure to the retail and residential sectors; and significant
land banking portfolios. The primary methodology we used was a comparison of P/E (ttm) multiples. At our
price objective of Php24.70, SMPH will be trading at 28.2x 2016E P/E. This may seem expensive compared
to the local and regional peer average (19.8x) and the index (21.2x), but we believe that (1) our projected EPS
growth of 14.9% in 2015-2018, while regional peers are experiencing decelerating growth, (2), SMPH’s retailbased property portfolio with more than 87% of our Gross Asset Value coming from recurring cash flow
businesses, and (3) a resilient macroeconomic backdrop – SMPH merits to trade at a premium.
Company
60,000
Fig 25: NPV of cash flows 2016-2020 (Php mns)
Readjusted Net Asset Value – Residential
•
Fig 23: Capital expenditures (Php mns)
80,000
Country
Ticker
Market Cap
(USD bn)
Philippines
Philippines
Philippines
Thailand
Singapore
Hong Kong
ALI PM
RLC PM
MEG PM
CPN TB
CAPL SP
16 HK
10,541
2,615
3,033
5,659
9,127
35,950
Philippines
SMPH PM
13,157
25
20
15
10
5
0
30/11/2010
30/11/2011
30/11/2012
30/11/2013
SMPH P/E (ttm)
Source: Bloomberg
30/11/2014
PCOMP P/E (ttm)
P/E (ttm)
EV/EBITDA
(current/ttm)
P/B (ttm)
29.51
23.76
13.45
26.08
15.83
8.68
19.80
30.04
18.77
14.38
13.19
17.92
18.71
14.10
16.15
20.08
3.89
2.23
1.26
4.61
0.73
0.61
1.75
2.99
Adj. EPS (ttm)
Growth (%)
15.68%
10.79%
0.34%
7.83%
-2.90%
-11.01%
12.35%
7
(1) Interestingly, SMPH’s P/E, has been trading at a 3 year premium over industry (global and local) peers. As
this is the case, we use the median industry P/E of 19.8, and add our implied premium to get SMPH’s implied
P/E. We use our implied P/E against our 2016E EPS, where we arrive at a PO.
•
Applying a 41.1% premium, SMPH’s three-year historical premium average, we derived an implied
P/E of 27.93x, translating to a PO of Php24.5, an upside of 14.0%
•
At 51.8% premium, where SMPH trades at 27 November’s closing price, we derive an implied P/E
of 30.0x, translating to a PO of 26.35, and a 22.6% upside.
(2) We also compare SMPH to key local competitor Ayala Land, as they compare best in terms of size (market
cap), earnings growth, and has traded at relatively the same levels of P/E since. We apply ALI’s P/E of 29.5,
translating to a PO of Php25.9 (20.4% upside).
Financial Analysis
Key Ratios
Profitability Indicators
Gross Margin
EBITDA Margin
Net Income Margin
Return on Invested Capital
Return on Total Equity
Solvency Indicators
Total Debt/Capital
Net Debt/Capital
CFO/Capex
Liquidity Indicators
Cash Ratio
Quick Ratio
Shareholder's Indicators
EPS
DPS
Fig 27: SMPH and Industry P/E (ttm)
40
35
30
25
20
15
10
27/11/2012
27/11/2013
27/11/2014
SMPH (P/E, ttm)
Source: Bloomberg
27/11/2015
Industry (P/E, ttm)
2013
2014
2015E
2016E
2017E
2018E
40.36%
50.05%
27.97%
7.66%
10.56%
41.80%
51.10%
28.53%
6.56%
10.26%
42.92%
53.26%
29.84%
7.01%
10.45%
44.54%
54.49%
29.88%
7.37%
11.47%
44.90%
54.67%
30.00%
7.56%
12.11%
45.92%
55.74%
29.91%
7.61%
12.36%
39.44%
32.34%
54.81%
39.37%
31.86%
11.87%
41.39%
36.39%
42.91%
43.10%
37.67%
58.43%
46.68%
38.96%
50.71%
47.35%
39.37%
54.35%
49.74%
97.53%
71.29%
131.69%
44.93%
96.94%
66.92%
136.40%
79.71%
131.78%
103.82%
165.70%
0.59
0.18
0.66
0.19
0.74
0.20
0.88
0.31
1.01
0.27
1.12
0.31
New expansions value accretive; to beef up top and bottom-line YoY growth
We expect total revenues to grow from Php66.2 bn in 2014 to Php111.34 in 2018E, and net earnings from
Php18.9 bn to Php33.3 bn in the same period. This translates to CAGRs of 14.8% and 14.9% for revenues
and core net income respectively. Strong top and bottom-line growth is owed to the opening and expansions
of 4-6 malls annually and the operation of its ThreeE-com office in 2018E. These new developments are
expected to contribute to SMPH’s top and bottom-line immediately. To show how value accretive mall additions
are: in 2016E alone, we expect contributions of new developments (in 2015 and 2016) to contribute 7.5% of
total revenues. It is also important to note that from 2012-2014, roughly 300,000 to 600,000 sqm of retail
space were added each year, and the malls segment consequently experienced 12-13% topline growth in the
next year. With 991,000 sqm GFA added in 2015E, and approximately 1.1 mn sqm GFA in 2016E, mall
revenues are set to grow by approximately 10.9% in 2015E and 20.8% in 2016E.
Fig 28: Mall additions (GFA) and leading mall revenue
growth rate (%)
1,500,000
25%
20%
1,000,000
15%
10%
500,000
5%
-
0%
2012 2013 2014 2015E 2016E 2017E
Mall GFA Additions - LHS
Leading (Following Year) Mall Revenue Growth - RHS
Predictable earnings due to strong recurring cash flows
Due to SMPH’s aggressive expansion plans, we expect cash flow from operations to grow 13.9% annually in
2015-2018E. This is primarily due to strong recurring revenues from its malls and offices. In 2015E, malls and
offices contributed 63.5% of total revenues of Php73.6 bn. SMPH’s recurring revenue print is in stark contrast
to peers which are more reliant to a more cyclical residential segment – ALI with only 22% core recurring
revenues, RLC with 47%, and MEG with 17%. SMPH’s recurring income-based business model provides it with
earnings reliability, making it one of the most resilient property developers, in our view.
Capex has not peaked; expect relatively lower profitability margins
Capital expenditures were Php34.6 bn and Php43.5 bn in 2013 and 2014 respectively. At these levels, ROIC
declined to 6.6% in 2014 from 7.7% in 2013. Even so, SMPH plans to engage in even more aggressive capex
spending. We estimate capex at Php65 bn annually in 2015-2016 and Php55-80 bn annually in 2017-2018.
However, ROIC is expected to increase marginally in 2015E and 2016E (7.0% and 7.3% respectively) due to
immediate contributions from new developments, which are larger (in terms of GLA) than previous years’
additions. It is important to note that SMPH’s ROIC is slightly lower than of its closest peer, ALI, which averages
of 7.8%. SMPH’s 2015E ROA is also expected to improve somewhat, from 5.2% in 2014 to 5.4%; this figure
puts it at level with ALI’s ROA average of 5.0%.
Healthy cash and financial position to fund aggressive capex program
Because of SMPH’s aggressive capex program, free cash flows (FCFs) are expected to range from neg. Php25
bn to neg. Php35 bn in 2015-2016E. However, CFO is still expected to contributed significantly to funding
capex, and CFO/capex will grow from 42.9% in 2015E to 58.4% in 2016E due to strengthening bottom line
growth. We expect SMPH’s total debt-total capital ratio to stay at current levels, reaching 46.8-47.4% by 20172018E and staying below its ideal gearing of 50:50. SMPH’s relatively lax total debt-total capital ratio also gives
it headroom for future debt funding. This gives it an advantage over its closest peer ALI, which had a debt-heavy
total debt-total capital ratio of 50.5% in 2014.
Fig 29: Recurring (malls and offices) and nonrecurring
revenues as % of total revenues
100%
80%
60%
40%
20%
0%
2014 2015 E 2016 E 2017 E
Recurring Revenues
ALI
RLC
MEG
Nonrecurring Revenues
Fig 30: Return on Equity (%), Return on Assets (%)
13%
12%
11%
10%
9%
8%
7%
6%
5%
4%
2013
2014
2015 E 2016 E 2017 E 2018 E
ROE
ROA
8
Margin expansion through economies-of-scale in the residential segment
Fig 31: CFO/capex (%)
SMPH’s gross margin in the residential segment improved in 9M15, rising to 46% from its 2013 print of 43%.
This is due to effective cost-control measures implemented in the residential segment. Management
centralized its supply chain sourcing and availed of lower raw material costs, creating economies-of-scale.
Moving forward, this will benefit margins across the board, particularly gross margin (from 41.8% in 2014 to
42.9% in 2015E), EBITDA margin (from 51.1% in 2014 to 53.2% in 2015E), and net income margin (from
28.5% in 2014 to 29.8% in 2015E).
Higher inventory levels alarming only in the short-term
Inventory has significantly increased to Php10.3 bn in 3Q15, (Php7.58 bn in 2014) from levels in 2012
(Php2.97 bn) and 2013 (Php6.10 bn). Days inventory increased from 78 in 2012 to 226 in 2014. However,
we believe this is attributable to the cyclical nature of the residential segment. It is also important to note that
SMPH’s days inventory in 2014 was lower than that of its peers: ALI with 283 and MEG with 1,298. This means
SMPH can comfortably launch 12,000-15,000 units per annum, taking advantage of its industry-leading presales growth: 36.5% in 2014 and 31.5% in 1H15, while ALI had 7.8% and MEG had 3.0% 1H15 growth.
Pre-sales indicative of a stronger residential segment
SMPH’s residential sales have bounced back from its 2013 slump (Php 20.9 bn), surpassing 2012 levels (Php
22.5 bn) to reach Php 22.7 bn in 2014. Furthermore, pre-sales, a leading indicator of sales, continue to show
growth. YoY numbers for 2Q, 1Q15 have grown 34% and 29%, respectively. We expect stronger pre-sales in
2015E, reflecting stronger revenues in 2016E, when construction will begin and down payments are
recognized as revenues.
Investment Risks
We are positive on SMPH and see upside to the stock at current levels. However, we believe investors should
be cognizant of the key risks faced by the company. These are:
Market risk: Sensitivity to a domestic macroeconomic slowdown (MR1):
The biggest risk SMPH may face is a slowdown in macroeconomic activity, affecting a lower bottom line and
cash position. To varying degrees, all of SMPH’s segments are exposed to this risk. However, we believe that
sensitivity to this risk is especially related to its retail business where mall revenues (driven by variable-term
lease agreements) are directly affected by income coming from tenants, exhibited in its same-store-salesgrowth print. However, we argue that this is unlikely because for the past 30 years, consumption has remained
resilient and less volatile compared to GDP, especially in economic downturns.
Market risk: Sensitivity to the sector’s cyclicality (MR2):
SMPH’s earnings may follow the general cyclical trend of the global property market, which may be more glaring
in its residential segment. Supply and demand characteristics of properties may be affected by unforeseen
events, such as that of in 2008 (sub-prime mortgage crisis), where there were devaluations in real estate
properties. Moreover, the recent developments of raising US benchmark interest rates may affect interest rates
in the Philippines – and may affect the demand-side dynamics of the sector as higher interest rates are
unattractive to buyers. However, (1) catering an undersupplied market, (2) interest rates today (5.5%) are still
far from interest rates from 12.4% in 2001, and projected hikes are staggered only in 25 bps, and (3) SMPH’s
heavy exposure to the retail segment (recurring income), should mitigate this risk.
70%
60%
50%
40%
30%
20%
10%
0%
2013 2014 2015 E 2016 E 2017 E 2018 E
Fig 32: Total debt to total-capital ratio (%)
49%
47%
45%
43%
41%
39%
37%
35%
2013 2014 2015 E 2016 E 2017 E 2018 E
Fig 33: SMPH residential pre-sales (Php bns)
40,000
35,000
30,000
4Q
25,000
20,000
3Q
15,000
2Q
10,000
1Q
5,000
2012 2013 2014
9M14 9M15
Fig 34: Company risk matrix
Market risk: Sensitivity to a Chinese economic slowdown (MR3):
SMPH has mall operations in China (5.4% of 2014 revenues), and a slowdown in general consumption trends
in the country may also affect a lower bottom line cash position. Despite China being the second largest
economy in the world, it may be important to note that concerns of slowing growth in the country may pose a
risk to SMPH. However, we argue that (1) China’s malls are located thriving regional hubs in Tier 2 and 3 regions
with an undersupply of high-quality malls (JLL) and, (2) only 10% of total mall revenues (or 5% of total revenues)
are dependent on China, help mitigate this risk.
Market Risk: Increasing competition in the property sector (MR4)
Key competitors are keen in expanding their overall portfolio in the 5-year period. Top 4 property developers,
SMPH, ALI, RLC and MEG have an estimated Php230 bn capex budget in 2015 alone, 50% higher than their
budgets in 2012. An aggressive ramp-up in the retail and the office sector may affect foot traffic and may lower
rental prices. However, attractiveness of SMPH’s retail establishments through size, scale, and leadership of
its anchor tenants mitigate this risk.
Operational Risk: Slowdown in developments (OR1)
A slowdown of its rollout, especially with its malls segment will drag down our expected revenues and impact
our valuations. SMPH also relies much of its internally generated cash flow to fund for its additional capital
requirements (as we expect new developments to contribute immediately, albeit slower). But SMPH’s solid
management team and proven and consistency in the past should mitigate execution risk.
Fig 35: GDP and household final consumption growth rates (%)
10%
8%
6%
4%
2%
0%
-2%
-4%
-6%
-8%
-10%
Source: World Bank
GDP Growth
HH Growth
Operational Risk: Sensitivity to borrowing int. rates and currency volatility (OR2)
SMPH has a portfolio consisting of both foreign and local denominated loans; and fixed and floating interest
rates. Volatility in the exchange rate and interest rates (particularly the LIBOR) will drag down a lower bottom
9
line for SMPH. To date, foreign currency and floating rate exposure is roughly at USD1.2 bn, of which we
estimate USD350 mn is already hedged, mitigating this risk. The remainder is already in the process of being
hedged, which should further mitigate this risk.
Business Risk: Reliance on anchor tenants (BR1)
The SM Group’s subsidiaries especially in the retail sector have engaged in transactions with the SMPH’s malls.
Particularly, both of these segments serve as SMPH’s anchor tenants and occupy around 50% of total leasable
area. Hence, negative publicity, or a slowdown in trade activities of its affiliates will affect SMPH’s topline
number. However, we believe the event is unlikely, evidenced by consistent growth rates and market
leadership of affiliates.
Environmental Risk: Regulations in the sector (ER1)
Property development requires a variety of zonal, environmental related, and construction permits. Noncompliance may incur additional costs to the developer resulting to lower profitability margins; and may acquire
sanctions if not complied with. Furthermore, developers are required to obtain “licenses to sell” before
dispatching and selling their units. The delay of which, may cause a slower ramp-up of developments. However,
its experienced management team ensures that project launches are well executed.
Sensitivity Analysis to Key Risks
We also assess the upside/downside scenario of SMPH against of key drivers to our valuations and our 2016E
EPS. We regard inputs such as (1) occupancy rates, (2) SSSG, and (3) additions to mall space (faster rollup/slowdown until 2018E) in developments to be the most important variables – as malls take up over 84%
of our GAV. Furthermore, we also assess SMPH’s margin in the residential segment, and the sensitivity of
borrowing rates to interest expense. Note that we have a PO of 24.70 and a 2016E EPS of 0.877.
Inputs
Base Case
Assumption
Positive
Sensitivity
Negative
Sensitivity
97%
7%
100%
100%
46%
4.5%
+2%
+2%
+20%
-2%
-2%
-20%
-100%
-3%
+1%
Occupancy rate
SSSG
Additions to mall space (2016-2018E)
No additions in mall space
Gross margin (residential)
Borrowing interest rates
+3%
-1%
PO (+) Sensitivity
PO (-) Sensitivity
25.05
26.60
25.15
24.38
22.99
24.14
20.38
24.37
24.70
25.07
24.66
2016E EPS
(+) Sensitivity
2016E EPS
(-) Sensitivity
0.877
0.907
0.881
0.877
0.848
0.873
0.858
0.855
0.867
0.899
0.836
In our sensitivity analysis, we like to reiterate that mall additions are the key driver for our valuation. Particularly,
without any additions in 2016-2018E, SMPH’s intrinsic value is only estimated to be Php20.38. Furthermore,
although the reverse holds true, occupancy rates and especially SSSG impacts our valuation most with a
negative sensitivity. However, we also would like to reiterate that SMPH has always been consistent in its
execution, drawing to its long history, commendable track record, solid tenant base, and experienced
management team.
Furthermore, we assess our key growth drivers against thresholds in changing our recommendations to a Hold
or a Sell. Although these scenarios are very unlikely, we outline them below:
Inputs
Base Case Assumption
Change to Hold
Change to Sell
97%
7.00%
100%
46%
90%
5.76%
- 34%
36%
78%
3.01%
- 81%
16%
Occupancy rate
SSSG
GFA additions (2016-2018E)
Gross margin (residential)
Key Catalysts
Potential key catalysts for the stock include:
Presidential elections may translate to an earnings surprise
We view the imminent election year as a key catalyst, because average GDP during election years has
historically been 2% higher than during non-election years (7% versus 5%). This is primarily driven by electionrelated spending, which is expected to support domestic demand. We view the increase in consumption to be
beneficial to the retail sector.
Land reclamation projects provide long-term upside
SMPH has engaged in land reclamation projects, specifically, a 600 ha project in Pasay-Paranaque and a
1,500 ha project in Cordova, Cebu. These projects are still awaiting approval from the Philippine Reclamation
Authority and the Office of the President, but it is highly likely that both projects will reach completion as they
have already been approved by their respective local governments for reclamation and land development.
These projects provide a significant long-term upside on SMPH as the company will develop these lands for
mixed-use developments in the future. We note that the 60 ha land value of its previous reclamation project,
the Mall of Asia development, has been appraised at Php58.3 bn vs its book value of Php2.3 bn.
10
Appendices
1.
Financial Statements
1.1.
Consolidated Income Statement
Revenue
Rent
Sales:
Rent Estate
Cinema
Others
Total Revenues
Cost and Expenses
Gross Profit
Other Income (Charges)
Gain on Sale of AFS Instruments
Interest Expense
Interest and Dividend Income
Restructuring Costs and Others, Net
EBT
Provision for (Benefit from) Income Tax
Current
Deferred
Net Income
Core Net Income
Core EPS
1.2.
2014
2015E
2016E
2017E
2018E
32,195
36,497
40,556
50,034
59,606
69,039
20,775
3,740
3,084
59,794
35,659
24,136
22,152
4,269
3,323
66,240
38,554
27,687
24,768
4,630
3,694
73,648
42,037
31,610
26,997
5,720
4,370
87,120
48,319
38,801
28,272
6,600
4,989
99,468
54,811
44,657
29,120
7,601
5,585
111,346
60,211
51,135
(3,687)
1,094
(833)
20,710
(4,099)
732
(645)
23,674
7,411
(4,811)
731
34,941
(6,838)
647
32,611
(7,925)
647
37,379
(10,065)
647
41,717
4,392
(408)
16,726
16,726
4,698
80
18,896
18,896
5,556
6,581
7,543
8,419
29,385
21,975
26,031
26,031
29,837
29,837
33,300
33,300
0.59
0.66
0.74
0.88
1.01
1.12
Segment Information (Revenues)
Malls
Residential
Commercial
Hotels and Convention Centers
Total Revenues
2013
2013
2014
2015E
2016E
2017E
2018E
34,333
20,907
2,856
1,600
59,794
38,643
22,723
2,867
2,008
66,240
42,836
24,768
3,996
2,048
73,648
51,728
26,997
5,463
2,933
87,120
62,339
28,272
5,504
3,353
99,468
71,728
29,120
6,728
3,769
111,346
11
1.3.
Consolidated Balance Sheet
Assets
Current Assets
Cash and Cash Equivalents
Short-Term Investments
Investments Held for Trading
Receivables
Condominium and Residential Units for Sale
Land for Development - Current Portion
Available-for-Sale Instruments
Prepaid Expenses and Other Current Assets
Total Current Assets
Noncurrent Assets
Available-for-Sale Instruments, Net of Current Portion
Property and Equipment, Net
Investment Properties, Net
Land for Development, Net of Current Portion
Derivative Assets
Deferred Tax Assets
Investment and Advances to Associates and JVs
Other Noncurrent Assets
Total Noncurrent Assets
Total Assets
Liabilities and Equity
Current Liabilities
Loans Payable
Accounts Payable and Other Current Liab.
Current Portion of LT Debt
Income Tax Payable
Total Current Liabilities
Noncurrent Liabilities
Long-Term Debt, Net of Current Portion
Tenants' and Customers' Deposits
Liability for Purchased Land - Net of Current Port.
Deferred Tax Liabilities, Net
Derivative Liabilities
Other Noncurrent Liabilities
Total Noncurrent Liabilities
Total Liabilities
Equity Attributable to Equity Holders of Parent
Capital Stock
Additional Paid-in-Capital, Net
Cumulative Transaction Adjustment
Net Unrealized Gain on AFS Investments
Net Fair Value of Changes on Cash Flow Hedges
Remeasurement Loss on Defined Benefit Obligation
Retained Earnings
Appropriated
Unappropriated
Treasury Stock
Total Equity Attributable to Equity Holders of Parent
Noncontrolling Interests
Total Equity
Total Liabilities and Equity
2013
2014
2015E
2016E
2017E
2018E
27,142
888
1,151
27,184
6,103
13,281
9,936
85,685
35,245
968
30,687
7,579
19,572
677
11,270
105,996
27,890
968
33,400
14,228
18,798
677
12,396
108,355
34,650
968
36,982
11,890
23,972
677
13,636
122,774
59,638
968
39,591
12,117
28,400
677
15,000
156,390
68,944
968
41,672
10,464
36,327
677
16,500
175,551
23,369
1,579
171,666
21,540
1,779
691
5,756
23,518
249,898
335,584
28,995
2,258
202,181
22,886
1,633
650
6,051
18,190
282,844
388,840
21,528
2,005
232,690
25,835
1,633
650
21,662
18,199
324,201
432,556
21,528
1,732
261,734
30,379
1,633
650
21,662
18,199
357,517
480,291
21,528
1,479
295,248
37,476
1,633
650
21,662
18,199
397,875
554,266
21,528
1,179
323,052
46,976
1,633
650
21,662
18,199
434,878
610,429
3,250
45,298
7,387
947
56,882
2,670
36,379
11,007
744
50,799
39,636
23,843
744
64,223
44,051
8,432
744
53,227
47,355
27,936
744
76,034
50,035
16,564
744
67,342
95,676
10,249
1,118
2,023
160
3,255
112,480
169,362
115,606
13,252
1,171
1,934
59
3,781
135,803
186,602
128,106
15,052
1,054
1,934
53
3,783
149,982
214,205
167,674
17,070
948
1,934
48
3,783
191,457
244,684
195,738
18,207
1,934
5,044
220,923
296,957
235,174
19,343
1,934
5,044
261,496
328,838
33,166
22,303
1,381
19,958
429
1
33,166
39,302
840
25,905
249
(142)
33,166
39,302
1,543
18,495
0
(1)
33,166
39,302
2,282
18,495
0
(1)
33,166
39,302
2,755
18,495
0
(1)
33,166
39,302
3,583
18,495
0
(1)
42,200
47,808
(3,980)
163,267
2,955
166,222
335,584
42,200
60,921
(3,356)
199,088
3,151
202,238
388,840
42,200
83,850
(3,356)
215,200
3,151
218,351
432,556
42,200
100,367
(3,356)
232,456
3,151
235,607
480,291
42,200
121,595
(3,356)
254,158
3,151
257,308
554,266
42,200
145,050
(3,356)
278,441
3,151
281,591
610,429
12
1.4.
Consolidated Statement of Cash Flows
Income before Income Tax
Adjustments for:
Depreciation and Amortization
Interest Expense
Interest Income
Restructuring Costs
Loss (Gain) in:
Unrealized Foreign Exchange
Fair Value Changes in Investments Held for Trading
Fair Value Changes in Derivatives
Sale of AFS Investments
Sale/Retirement of Investment Properties, and PPE
Operating Income before WC Changes
Decrease (Increase) in:
Receivables
Condominium and Residential Units for Sale
Land and Development
Prepaid Expenses and other Current Assets
Increase (Decrease) in:
Accounts Payable and Other Current Liabilities
Tenants' Deposits
Cash Generated from Operations
Income Tax Paid
Interest Paid
Cash Provided by Operating Activities
Cash Flows from Investing Activities
Deductions (Additions) to:
Investment Properties
Available-for-sale Investments
Property and Equipment
Investments Held for Trading
Proceeds from Pretermination of Short-Term Investments
Proceeds from Pretermination of Early Redemption of AFS
Proceeds from Sale of:
Held-for-trading Investments
Investment Properties
Available-for-sale Investments
Interest Received
Dividends Received
Investment in a JV and Acquisition of a Subsidiary
Decrease (increase) in other Noncurrent Assets
Net Cash used in Investing Activities
Cash Flows from Financing Activities
Availment of Loans
Payments of:
Long-term Debt
Dividends
Interest
Bank Loans
Proceeds from Reissuance of Treasury Shares
Proceeds from Issuance of Common and Treasury
Proceeds from Unwinding of Derivatives
Payments and Restructuring Costs
Increase in Non-controlling Interests
Deposit for Future Subscription
Net Cash Provided by Financing Activities
Effect of Exchange Rate in Cash and Cash Eq.
Net Increase in Cash and Cash Equivalents
Cash and Cash Equivalents at Beginning of the Year
Cash and Cash Equivalents at End of Year
2013
2014
2015E
2016E
2017E
2018E
20,710
23,674
34,941
32,611
37,379
41,717
5,981
3,687
(1,094)
1,277
6,580
4,099
(732)
-
7,611
4,811
(731)
-
8,674
6,838
(647)
-
9,726
7,925
(647)
-
10,933
10,065
(647)
-
(30)
(94)
(63)
(285)
(69)
30,020
174
101
(21)
(3)
33,872
(249)
(7,411)
38,972
47,476
54,383
62,068
(8,470)
4,197
(11,109)
2,722
(3,560)
2,667
(13,907)
(911)
(2,713)
3,344
(12,169)
(1,127)
(3,583)
3,645
(11,026)
(1,240)
(2,609)
3,817
(15,570)
(1,364)
(2,080)
3,931
(19,706)
(1,500)
9,478
1,192
28,029
(4,116)
(95)
23,818
(9,230)
3,019
11,950
(4,895)
(47)
7,009
3,257
1,801
31,365
(5,556)
(63)
25,747
4,415
2,018
41,705
(6,581)
(68)
35,056
3,303
1,137
43,097
(7,543)
(59)
35,494
2,680
1,137
46,529
(8,419)
(63)
38,047
(24,553)
(2)
(441)
1,000
(35,511)
(357)
(158)
(65)
888
-
(37,627)
(239)
-
(37,210)
(236)
-
(42,716)
(271)
-
(38,194)
(243)
-
300
100
398
692
355
(7,353)
(1,212)
(30,715)
150
4
418
334
4,604
(29,693)
7,467
397
334
(15,611)
(9)
(45,288)
397
250
(36,799)
397
250
(42,340)
397
250
(37,789)
76,494
48,121
36,000
48,000
56,000
56,000
(20,813)
(5,021)
(4,112)
(33,210)
(22)
(607)
(1)
12,709
30
5,841
21,299
27,141
(16,176)
(5,587)
(4,137)
(9,070)
17,646
30,797
(10)
8,104
27,142
35,245
(10,664)
(5,669)
(4,811)
(2,670)
12,186
(7,356)
35,245
27,890
(23,843)
(8,816)
(6,838)
8,503
6,760
27,890
34,650
(8,432)
(7,809)
(7,925)
31,834
24,989
34,650
59,638
(27,936)
(8,951)
(10,065)
9,048
9,306
59,638
68,944
13
2.
Company Overview
2.1.
List of Malls - Philippines
SM North EDSA
SM City Sta. Mesa
SM Megamall
SM City Cebu
SM Southmall
SM City Fairview
SM City Bacoor
SM City Iloilo
SM City Manila
SM City Pampanga
SM City Davao
SM City Sucat
SM City Bicutan
SM City Cagayan de Oro
SM City Baguio
SM City Marilao
SM City Lucena
SM City Dasmarinas
SM City Batangas
SM City San Lazaro
SM City Valenzuela
SM Center Molino
SM Mall of Asia
SM City Clark
SM City Lipa
SM City Sta. Rosa
SM Center Pasig
SM City Bacolod
SM City Taytay
SM Center Muntinlupa
SM City Marikina
SM City Baliwag
SM City Rosales
SM City Naga
SM City Rosario
SM Center Las Pinas
SM City Tarlac
SM City Calamba
SM City Novaliches
SM City San Pablo
SM City Masinag
SM Lanang Premier
SM City General Santos
SM City Consolacion
SM City Olongapo
SM City San Fernando
SM Aura Primer
SM City BF Paranaque
SM Cauayan
SM Angono
SM Megacenter Cabanatuan
SM Sangandaan
SM Center San Mateo
SM Cabanatuan
SM Seaside City Cebu
Total (Philippines) – Count: 55
Completion
Location
Region
GFA (sqm)
1985
1990
1991
1993
1995
1997
1997
1999
2000
2000
2001
2001
2002
2002
2003
2003
2003
2004
2004
2005
2005
2005
2006
2006
2006
2006
2006
2007
2007
2007
2008
2008
2008
2009
2009
2009
2010
2010
2010
2010
2011
2012
2012
2012
2012
2012
2013
2013
2014
2014
2015
2015
2015
2015
2015
North Edsa, Quezon City
Sta Mesa, Manila
Mandaluyong
Cebu
Las Pinas
Quezon City
Bacoor, Cavite
Iloilo
Manila City
Pampanga
Davao
Sucat, Parañaque City
Bicutan, Parañaque City
Cagayan de Oro, Misamis Oriental
Baguio City
Marilao, Bulacan
Lucena, Quezon
Dasmarinas, Cavite
Batangas
Sta. Cruz, Manila
Valenzuela City
Molino, Cavite
Pasay City
Clark, Pampanga
Lipa, Batangas
Sta. Rosa, Laguna
Pasig City
Bacolod City, Negros Occidental
Taytay, Rizal
Muntinlupa City
Marikina City
Bulacan
Pangasinan
Naga City, Camarines Sur
Rosario, Cavite
Las Piñas
Tarlac City, Tarlac
Calamba Laguna
Novaliches, Quezon City
San Pablo Laguna
Antipolo Rizal
Davao City
General Santos City
Cebu
Olongapo, Zambales
San Fernando, Pampanga
BGC, Taguig City
San Dionisio, Paranaque City
Cauayan, Isabela
Angono, Rizal
Nueva Ecija
Caloocan, Quezon City
Rizal
Nueva Ecija
Cebu
NCR
NCR
NCR
7
NCR
NCR
4-A
6
NCR
3
11
NCR
NCR
10
CAR
3
4-A
4-A
4-A
NCR
NCR
4-A
NCR
3
4-A
4-A
NCR
6
4-A
NCR
NCR
3
1
5
4-A
NCR
3
4-A
NCR
4-A
4-A
11
12
7
3
3
NCR
NCR
2
4-A
3
3
4-A
3
3
457,403
132,965
474,225
273,804
184,552
188,681
120,202
104,942
167,812
131,158
126,425
92,770
114,214
87,837
107,950
93,910
78,655
201,615
80,350
181,593
70,681
52,061
406,961
144,484
141,283
86,463
28,829
199,228
98,928
57,060
178,178
91,241
63,330
75,651
60,657
39,727
101,369
73,632
60,440
59,609
96,313
145,174
131,818
103,558
44,979
43,130
251,094
125,582
94,386
41,181
48,688
35,319
80,043
154,020
460,791
7,346,951
14
2.2.
List of Malls – China
SM Xiamen
SM Jinjiang
SM Chengdu
SM Suzhou
SM Chongqing
SM Zibo
2.3.
Location
Region
GFA (sqm)
2001
2005
2006
2011
2012
2015
Xiamen
JinJiang
Chengdu
Suzhou
Chongqing
Zibo
4-A
2
4-B
1
3
NCR
238,125
167,830
166,665
72,552
149,429
154,913
949,514
Completion
Location
Region
GFA (sqm)
2016E
2016E
2016E
2016E
2016E
2016E
Trece Marites, Cavite
Cagayan
Palawan
Pangasinan
Bulacan
Commonwealth, Quezon City
4-A
2
4-B
1
3
NCR
80,715
50,181
59,113
22,256
114,186
104,218
430,669
Completion
Location
% Sold
Units
2011
2011
2012
2013
2013-2014
2010-2015
2014
2014
2015
2013-2015
2015
2013
2013
Paranaque City
Sta. Mesa, Manila
Katipunan, Quezon City
MOA Complex, Pasay City
Aurora Boulevard, Quezon City
Espana, Welcome Rotonda, Manila
N. Garcia, cor. Jupiter, Makati City
Katipunan Ave., Quezon City
North Edsa, Quezon City
EDSA, Mandaluyong
South Triangle, Quezon City
Sta. Mesa, Manila
Sucat, Paranaque City
Aguinaldo Highway, Tagaytay City
95%
93%
99%
99%
83%
95-98%
84%
86%
98%
93%
50-86%
64%
83%
83%
2,820
2,322
1,276
2,899
1,096
4,039
5,367
1,591
6,013
4,227
1,793
1,324
1,974
3,524
2017-2019
2016
2015-2016
2016
2015
2015
2015
2016
2015-2018
2016-2017
2018
2020
2020
2020
North EDSA, Quezon City
Sucat, Paranaque City
Aguinaldo Highway, Tagaytay City
Tagaytay
Pasig
Taft Avenue
Roxas Boulevard
Taguig City
Quezon City
San Antonio, Makati
EDSA, Mandaluyong City
66%
60%
83%
22%
74%
92%
96%
91%
91%
84%
3,921
602
3,524*
363
892
3,378
3,093
2,133
2,541
3,166
5,691
3,642
2,486
5,488
80,751
List of Malls – Philippine Expansion Targets
SM City Trece Martires Cavite
SM Tuguegarao Center
SM Puerto Princesa
SM Urdaneta 2
SM City San Jose del Monte
SM Commonwealth - OLGM
2.4.
Completion
List of Residential Projects
Completed
Chateau Elysee
Mezza Residences
Berkeley Residences
Sea Residences
Princeton Residences
Sun Residences
Jazz Residences
Blue Residences
Grass Residences – Phase 2
Light Residences
M. Place
Mezza II Residences
Field Residences* (Bldgs 1,2,3,7)
Wind Residences* (Tower 1, 2)
Ongoing Developments
Grass Residences – Phase 2
Field Residences* (Bldg 4)
Wind Residences* (Tower 4, 5)
Cool Suites @ Wind Residences
Shine Residences
Green Residences
Shell Residences
Breeze Residences
Grace Residences
Trees Residences
Shore Residences
Air Residences
Fame Residences
Shore 2 Residences
Total (Units) – Count: 25 Projects
14%
15
2.5.
List of Offices
SM Cyber Makati One
SM Cyber Makati One
SM Cyber West
TwoE-Com Center
FiveE-Com Center
Total – Count: 5
ThreeE-Com Center
2.6.
GFA (sqm)
2008
2008
2014
2012
2015
Sen. Gil Puyat Ave, Makati City
Sen. Gil Puyat Ave, Makati City
EDSA cor, West Ave., Quezon City
2018E
22,055
16,725
41,799
107,962
141,706
330,247
111,727
Completion
Location
Rooms (keys)
2003*
2010
2011
2013
2015
Tagaytay
Cebu
Pico Sands Hamilo Coast
Davao
Clark
2016E
Mall of Asia Complex
261
396
154
202
154
1,167
347
Location
GLA (sqm)
Mall of Asia Complex
SM Lanang
SM Aura Premier
Bacolod
Megamall
Cebu
17,326
5,196
3,137
4,269
4,212
1,498
35,640
List of Convention Centers
SMX Mall of Asia
SMX Lanang Premier
SMX Aura Premier
SMX Bacolod
Megatrade Hall
Cebu Trade Hall
Total – Count: 6
Location
List of Hotels
Taal Vista (Reopening)
Radisson Blu
Pico Sands Hamilo Coast
Park Inn by Radisson Davao
Park Inn by Radisson Clark
Total – Count: 5
Conrad Hotel
2.7.
Completion
16
2.8.
Key 2013 Merger Details
In 2013, SM Prime, which was originally created as the SM group’s mall development arm, underwent a
merger in which all of the SM group’s property units were consolidated under SMPH. The following key steps
were undertaken to complete the consolidation process:
Transaction Steps:
•
SM Land offered existing shares of SM Prime in exchange for the outstanding shares of SM
Development Corp. (SMDC) and Highlands Prime, Inc. (HPI), both of which were subsequently
delisted.
•
SM Land and SM Prime then merged via a share swap with SM Prime as the surviving entity.
•
SM Prime then acquired specific real estate assets held by SM Investments Corporation (SMIC),
which in turn received new shares of SM Prime.
The rationale behind this merger was to create an integrated property business for the SM Group, enhancing
the value of its real estate businesses as a whole. As a result, SM Prime expanded its exposure from purely
mall operations to residential developments, commercial developments, and hotels and convention centers.
The transaction increased SM Prime’s outstanding shares by 66% to 28.4bn (from 17.1bn) in 2013. SMPH
became not only largest property developer in the Philippines, but also one of the largest in South East Asia,
with a market capitalization of USD13.4 bn and an asset base of USD7 bn. SMPH became the 3rd largest
listed company in terms of market value back in 2013. This made the stock more attractive to investors who
are looking for size, liquidity in the market, and earnings reliability.
This merger also allowed SMPH to centralize and simplify the group structure, increasing organizational
efficiency across its different units. Moreover, as SMPH’s different business units targeted the same customer
base, the increased coordination and cooperation among these units allowed the Company to create
synergistic effects. Moving forward, SMPH’s increased size and capabilities also enable the Company to
execute its long-term growth strategy, which is centered on building Lifestyle Cities.
17
2.9.
SM Prime 5-Year Targets
18
2.10. Lifestyle City – SM Mall of Asia Complex
19
2.11. Lifestyle City – SM Seaside Cebu Complex
20
2.12. Recent Township Developments
Source: KMC Mag
21
3.
Corporate Governance and Social Responsibility
3.1.
Corporate Governance
SMPH believes in abiding by the practices and principles of good corporate governance in order to protect its
shareholders and uphold the image of the SM brand. It aims to foster a culture of fairness, accountability and
transparency, which serves as a foundation for its Corporate Governance Framework; this is made apparent
in its operations and various dealings with stakeholders. Measures to protect shareholder rights include
publishing a revised Manual on Corporate Governance on July 30, 2014; Code of Ethics; Conflict of Interest
Policy; Policy of Accountability, Integrity, and Vigilance; and more. We have used the following facets to analyze
the quality of SMPH’s corporate governance:
3.1.1. Qualifications of Directors and Key Executive Officers
Position
Chairman Emeritus
Chairman
Vice Chairman and Independent Director
Name
Brief Background
Henry Sy, Sr.
Mr. Sy, 91, Filipino, is SMPH’s Chairman Emeritus, having served as the Company’s
Chairman from 1994 to April 2014. He founded the SM Group in 1958, is the
current Chairman of SM Investments Corporation (SMIC) and Highlands Prime Inc.
(HPI), and is the Chairman Emeritus of BDO Unibank and Honorary Chairman of
China Banking Corporation. Mr. Sy received a degree in Commerce Studies from Far
Eastern University, and an Honorary Doctorate in Business Management from De La
Salle University. In the course of his work with the SM Group, Mr. Sy has gained
experience in real estate development, financial services, retail merchandising, and
tourism businesses.
Mr. Sy, 62, Filipino, is SMPH’s Chairman of the SMPH, as well as Vice Chairman of
SMIC, Chairman and CEO of SM Development Corporation (SMDC), Vice Chairman
and President of HPI, Chairman of Pico de Loro Beach and Country Club, and
President of the National Grid Corporation of the Philippines. Mr. Sy is the son of the
SM Group’s founder, Mr. Henry Sy, Sr., and received a degree in Business
Management from De La Salle University.
Mr. Cuisa, 72, Filipino, is SMPH’s Vice Chairman, as well as the current Philippine
Ambassador Extraordinary and Plenipotentiary to the United States and ViceChairman of the Philippine American Life and General Insurance Company
(Philamlife), of which he previously served as President and CEO. He served as an
Administrator of the Social Security System (SSS) from 1986 to 1990, and as a
Governor of the Bangko Sentral ng Pilipinas (BSP) from 1990 to 1993. Mr. Cuisia
received a degree in Commerce from De La Salle University and an MBA from the
Wharton School of the University of Pennsylvania.
Mr. Kilayko, 61, Filipino, is an Independent Director of SMPH, as well as a founding
head of ING Barings’ stockbrokerage and investment banking business in the
Philippines. He has previously served as the Chairman of ABN Amro’s Philippine
banking operations, a Governor of the Philippine Stock Exchange (PSE) in 1996 and
2000, and a director of the PSE in 2003. Mr. Kilayko received an MBA from the
Wharton School of the University of Pennsylvania.
Mr. Sibayan, 57, Filipino, is an Independent Director of SMPH, as well as the
President and CEO of Mabuhay Capital Corporation (MC2). He has previously served
as Vice Chairman, Investment Banking – Philippines and Country Manager for Credit
Suisse First Boston, a member of the Natwest Markets’ Fixed Income and
Derivatives Sales/Trading operation, and Head of International Fixed Incomes Sales
for Deutsche Bank. Mr. Sibayan received an MBA from the University of California in
Los Angeles.
Henry T. Sy, Jr.
Jose L. Cuisia, Jr.
Independent Director
Gregorio U.
Kilayko
Independent Director
Joselito H.
Sibayan
Continued in the next page
22
Position
Director and President
Name
Brief Background
Hans T. Sy
Mr. Sy, 60, Filipino, is a Director of the Board of SMPH, and has been SMPH’s
President since 2004. He is also the Vice Chairman of SMDC, Director of HPI, Advisor
to the Board of SMIC, and Chairman of China Banking Corporation and National
University. Mr. Sy is a son of the SM Group’s founder, Mr. Henry Sy, Sr., and received
a degree in Mechanical Engineering from De La Salle University.
Mr. Mendiola, 56, Filipino, is a Director of SMPH and the current President of SM
Retail Inc. Outside the SM Group, he is also the Vice Chairman for Advocacy of the
Philippine Retailers Association. Mr. Mendiola received a degree in Economics from
the Ateneo de Manila University and an MBA from the Asian Institute of
Management.
Mr. Sy, 59, Filipino, is a Director of SMPH, as well as an Advisor to the Board of SMIC;
Director of China Banking Corporation; and Vice Chairman of Supervalue Inc., Super
Shopping Market Inc., and Sandford Marketing Corporation. He also holds board
positions in other SM Group companies. Mr. Sy is a son of the SM Group’s founder,
Mr. Henry Sy, Sr., and received a degree in Management from De La Salle University.
Mr. Lim, 54, Filipino, is the Executive Vice President and a member of the Executive
Committee of SMPH. He is also the President of SMDC, a Director of Pico de Loro
Beach and Country Club, and holds both board and executive positions in other
SMPH subsidiary companies. Outside of the SM Group, Mr. Lim is a member of the
Management Board of the Asia Pacific Real Estate Association. He is a Certified
Public Accountant (CPA), and received a degree in Accounting from the University of
the East.
Mr. Ong, 45, Filipino, is the Chief Finance Officer and Compliance Officer of SMPH,
and holds board position in other SMPH subsidiary companies. He is a CPA, and
received a degree in Accounting from the Ateneo de Zamboanga University and an
MBA from the Asian Institute of Management.
Director
Jorge T. Mendiola
Director
Herbert T. Sy
Executive Vice President and Corporate
Information Officer
Jeffrey C. Lim
Chief Finance Officer and Compliance Officer
John Nai Peng C.
Ong
3.1.2. Board Committees
SMPH’s Board of Directors has formed the following committees to aid in the performance of its duties and
address the needs of the company:
•
Audit and Risk Management Committee
•
Compensation Committee
•
Nomination Committee
•
Executive Committee
23
3.1.3. Responsibilities of the Board of Directors
Criteria
Independence
Accountability
Responsiveness
Competence
Elections
Board Attendance
Directorship
Elections
Related Party Transactions
Board Members
Independent Members
Role Delegation
Committees
Description
Yes/No
Comments
Boards must be willing and able to effectively
scrutinize strategy and management
performance and set reasonable
compensation
Governance practices should reflect a board
that is answerable to its owners
Directors must be responsive to the wishes of
its shareholders as expressed through
elections or votes on shareholder proposals
and respond accordingly
Directors should add value through skills or
expertise in a particular field
Yes
Under the Manual on Corporate Governance states
the board’s responsibility to review performance and
operations (e.g – review VM, oversee strategies
implementation with mgmt, etc.)
Roles and Accountabilities are clearly defined among
Executive, Non-Executive and Independent Director
See Protection of Shareholder Rights
Annually Elected Directors
Yes
Adequate attendance at board and
committee meetings
Reasonable number of board directorships
Yes
Majority voting in director elections
Yes
Absence of material related party transactions
Yes
Board of at least 5 but no more than 15
members
Board must have greater of: 2 independent
directors or 20% Independent members of
the board
Role of CEO and Chair should be separate
Yes
Established Audit, Risk, Compensation,
Executive, Nomination and Election
Committees
Yes
Yes
Yes
Yes
Yes
Diversity in gender, field expertise and career
background in the process of selection instilled by
the Board of Directors. SMPH’s Chairman (nonexecutive director) has significant experience in real
estate acquisitions and development activities of the
SM Group
Annual elections are held during annual
shareholders’ meetings.
100% attendance by all 8 board members for all
2014 board meetings
Stated in their Manual on Corporate Governance,
non-executive and independent directors may hold a
maximum of 5 board seats in publicly listed
companies simultaneously. CEO and other executive
directions can hold 2 maximum seats. Currently,
SMPH’s board meets the standards
The vote required for the election of directors is
majority of the outstanding capital stock. Based on
the Final List of Candidates, directors are elected by
shareholders individually.
SMPH presents all details with material transactions
with related parties and presents it also to the
independent directors for guidance and to the Audit
and Risk Management Committee
Yes. SMPH has 8 board members
Yes
SMPH’s board contains 3 independent board
members
Yes
Chairman acts as the preceding officer of the BOD.
CEO is the President of the company who oversees
operations
Their roles have been clearly defined to ensure more
balanced decision-making.
24
3.1.4. Audit Function
Criteria
Description
Yes/No
Comments
Independent Audit
Auditor should provide an impartial and
professional opinion. Independence is
compromised when the auditor receives
significant payments for non-audit work
Yes
Independent Audit
Board’s Audit Committee should be
independent
Company’s financials should have integrity.
(Items that raise concerns include changes in
auditors, irregularities over many years,
material weaknesses in the company’s
controls, certain restatements, and excessive
fees paid for non-audit work
Company should allow shareholders to ratify
the selection of the auditor
Yes
SMPH has an Audit Committee who reviews the
performance of an external auditor. They preapprove all auditing and non-audit services. The
Audit Committee is also spearheaded by an
independent director.
SMPH’s Code of Ethics ensures an independent
audit of financial statements by external auditors.
The external auditor elevates the accounting and
auditing processes to international standards. Also
develops a transparent financial management
system that will ensure the integrity of internal control
activities throughout the Corporation through a
handbook.
Audit and Risk Committee recommends to BOD the
appointment, re-appointment or removal of external
auditor. BOD and stockholders approve the
recommendation.
Integrity of Financials
Selection of Auditor
Yes
Yes
3.1.5. Compensation Committee Function
Criteria
Description
Yes/No
Comments
Performance Metrics
Performance metrics should encourage
executives to make decisions that benefit
shareholders
Yes
Performance Metrics
Performance metrics should be
communicated to shareholders
Yes
A substantial amount of an executive’s pay
should be “at risk”
Yes
A portion of executive compensation should
be in the form of equity
Shareholders should have an advisory vote on
executive compensation
No
In line with the Code of Ethics, employee
compensation and rewards are determined based
on the individual performance and this is measured
against defined targets. Fixed remuneration is based
on performance measures.
This is presented during the Annual Stockholders’
Meeting where the stockholders ratify all acts of the
Board and Management, including those pertaining
to the Board remuneration.
The fixed remuneration amount is performance
based for the 4 most highly compensated
management officers.
The company does not grant stock rights, options or
warrants over the company’s shares.
The company complies with Sec. 30 of the
Corporation Code of the Philippines, which states
that compensation other than per diems may be
granted to directors by the vote of shareholders
representing at least a majority of the outstanding
capital stock.
Performance Metrics
Performance Metrics
Performance Metrics
Yes
25
3.1.6. Protection of Shareholder Rights
Criteria
Description
Yes/No
Comments
One share, one vote
Yes
Shareholder’s Rights
Right to Dividend
Yes
Absence of supermajority vote requirements
Yes
Right of shareholders to call special meetings
Yes
Information
Yes
Appraisal Rights
Yes
All stockholders are entitled to vote following the oneshare, one-vote system.
Stockholders are entitled to receive dividends
subject to the discretion of the Board. Dividends are
declared when the company’s retained earnings are
in excess of 100% of its paid-in-capital stock.
In line with the Code of Ethics, the company asserts
the voting rights of all shareholders, including in the
minority.
In the Code of Ethics, shareholders (also the minority)
are allowed to propose a meeting and the items in
the agenda of the meeting, provided the items are
for legitimate business purposes and in accordance
with law, jurisprudence and best practice
All shareholders have the right to inspect corporate
books and records in accordance with the Corporate
Code of the Philippines. They also have the right to
ask for periodic reports about officers as well as
matters for which management is accountable.
Stockholders may exercise their appraisal right or the
right to dissent and demand payment of the fair
value of their shares pursuant of Section 81 of the
Corporate Code of the Philippines.
Election
26
3.2.
Corporate Social Responsibility
SMPH also believes in giving back to the community through various civic assistance, environmental education,
and sustainability efforts. Its corporate social responsibility (CSR) programs are handled by SM Cares, a division
of the SM Foundation; these programs are classified under SMPH’s two main focal points: the Environment,
and People and Communities. Initiatives under these two focal points are listed below:
The Environment
•
Awareness programs with the Green Retail Agenda
•
Top Leaders Forum, in partnership with the United Nations Office for Disaster Risk Reduction
(UNISDR)
•
Greenhouse Gas Emissions Management
•
Energy Efficiency
•
Solid Waste Management
•
Water Treatment and Recycling
•
Air Quality Management
•
Solar Power Investments
People and Communities
•
Children and Youth Development
•
Overseas Filipino Workers (OFWs) and their families
•
Persons with Disability (PWDs)
•
Elderly Care
•
Women and Breastfeeding Moms
3.3.
Awards and Recognitions
As testament to the results of SMPH’s corporate governance practices and CSR initiatives, SMPH has received
various local and international awards, which are listed below (2011 onwards):
2011 – Event
7th Corporate Governance Asia Recognition Awards
Corporate Governance Asia’s 1st Asian Excellence Awards 2011
The Asset Corporate Awards
2012 – Event
Corporate Governance Asia 2nd Asian Excellence Recognition Awards
Institute of Corporate Directors
8th Corporate Governance Asia Recognition Awards
Best Practices 2012
Finance Asia
2013 – Event
Corporate Governance Asia 3rd Asian Excellence 2013 Recognition Award
UN Sasakawa Award for Disaster Risk Reduction
WWF 2013
2014 – Event
The Asset Asia Corporate Excellence
Awards
Annual Corporate Governance Award- Best of Asia
Best Environmental Responsibility
Platinum Awardee
Excellence Award in Management
Excellence Award in Financial Performance
Excellence Award in Corporate Governance
Excellence Award in Social Responsibility
Excellence Award in Environmental Responsibility
Excellence Awards in Investor Relations
Awards
Gold Award for Corporate Governance
Annual Corporate Governance Awards- Best of Asia
Merit Award for Corporate Governance
Best CFO in Philippines
Awards
Asia’s Icon on Corporate Governance
Asia’s Outstanding Company on Corporate Governance
Asia’s Best CEO
Best Investor Relations Company
Finalist
Environmental Leadership Award
Awards
Platinum Award – Asia’s Best CEO
Platinum Award – Best Investor Relations Company
Platinum Award – Best Environmental Responsibility
27
2015 – Event
Awards
Corporate Governance Asia 5th Asian Excellence Recognition Awards 2015
Best CEO
Best CSR
Best CFO
Best IR Company
Platinum Award
People of the Year Award
The Asset Asia Corporate Excellence
People’s Asia
Although SM Retail is an affiliate company rather than a subsidiary of SMPH, it is important to recognize SM
Retail’s awards (for 2015 alone), as further proof of its strength as a retailer and therefore SMPH’s
competitive advantage in having SM Retail as an exclusive anchor tenant.
2015 – Event
17th Outstanding Filipino Retailers and Shopping Centers of the Year
Reader’s Digest 17th Annual Trusted Brands Survey
Awards
Hall of Fame: Department Store Category
Foreign Fashion Apparel Award
Shopping Center of the Year
Philippine Retailer Association President’s Award
SM Founder honored as Father of Philippine Retail
Platinum Trusted Brand Award in the Shopping Center Category: SM Supermalls
28
4.
Industry Analysis
4.1. Retail
4.1.1. Select regional economic data
Region
NCR NCR
CAR
Cordillera Administrative
1
Ilocos
2
Cagayan Valley
3
Central Luzon
4-A
CALABARZON
4-B
MIMAROPA
5
Bicol
6
Western Visayas
7
Central Visayas
8
Eastern Visayas
9
Zamboanga Peninsula
10
Northern Mindanao
11
Davao
Source: Philippine Statistics Authority
GDP
(Php mns)
HH Final
Consumption
Expenditures
(Php mns)
Population
(units)
4,679,830
390,511
230,706
234,315
1,147,550
2,014,890
212,218
264,495
502,800
831,833
258,739
257,060
485,705
519,069
2,059,155
148,137
411,423
254,156
1,124,014
1,457,361
205,513
406,660
587,825
654,208
309,140
233,080
340,321
355,389
12,799,400
1,739,700
5,011,300
3,429,800
11,025,600
14,200,300
2,945,800
5,775,300
7,531,800
7,336,000
4,337,300
3,668,400
4,659,400
4,829,500
Per Cap, GDP
(Php)
Per Cap, HHF
Consumption
Expenditures
(Php)
Growth Rate
(%)
365,629
224,470
46,037
68,317
104,081
141,891
72,041
45,798
66,757
113,391
59,654
70,074
104,242
107,479
160,879
85,151
82,099
74,102
101,946
102,629
69,765
70,414
78,046
89,178
71,275
63,537
73,040
73,587
5.9%
3.2%
5.7%
6.4%
9.0%
5.1%
6.5%
4.2%
4.9%
8.8%
-2.3%
6.5%
7.2%
9.4%
4.1.2. Select regional retailing data
We define retail penetration as a unit of measurement of retail space compared to the number of persons in a
given location. Furthermore, a major assumption we used for retail space is that we only included the leasable
area of the top three retail developers in the country – SMPH, ALI, and RLC, as they occupy 87.5% of GLA.
Population
(units)
Per Cap, Retail
Space (sqm)
2015 Additions
(GLA)
2016 Additions
(GLA)
NCR NCR
2,672,966
12,799,400
CAR
Cordillera Administrative
46,533
1,739,700
1
Ilocos
81,273
5,011,300
2
Cagayan Valley
73,405
3,429,800
3
Central Luzon
525,763
11,025,600
4-A
CALABARZON
899,587
14,200,300
4-B
MIMAROPA
25,854
2,945,800
5
Bicol
31,956
5,775,300
6
Western Visayas
324,957
7,531,800
7
Central Visayas
349,841
7,336,000
8
Eastern Visayas
23,244
4,337,300
9
Zamboanga Peninsula
3,668,400
10
Northern Mindanao
93,933
4,659,400
11
Davao
210,196
4,829,500
Source: Company Data, Team Estimates, Philippine Statistics Authority
0.21
0.03
0.02
0.02
0.05
0.06
0.01
0.01
0.04
0.05
0.01
0.02
0.04
52,734
119,014
89,422
18,000
15,842
230,396
-
282,149
53,746
24,603
55,984
52,574
32,182
1,000
91,450
85,506
-
Region
Mall space (GLA)
4.1.3. Select New Foreign Brands (with Affiliates) in the Philippines
Cushman and Wakefields highlight that there are approximately 190 brands that have entered the Philippine
landscape in 2008-2014 alone, and tend to partner with local industry retailers.
Distributor
Bench (Suyen) Corporation
Brand Gateway
Premier Group of Companies
Lucerne
Luxasia
Robinsons Retail
SM Group
Store Specialties Inc.
Source: Cushman and Wakefields
New Brands
Casadei, St. Marc Café
Luminox, Orca, Paul & Shark, Piquadro, Rudy Project
DC, Flight 001, Fox, Quiksilver, Roxy
Patek Philippe, IWC, Panerai, Hublot, Rolex, Omega,Tudor
Philosophy, Makeup Forever, Shisheido
Miss Selfridge, River Island
Crate & Barrel, Forever21, Sfera, Suiteblanco, UNIQLO
Aeropostale, Brooks Brothers, F&F, Muji, Old Navy
29
2008
Agatha, Royce,Tumi, Hermes, Jimmy Choo and Massimo Dutti
2009
BonChon,Forever21,HappyLemon,Muji,PapaJohn’s,andPaylessShoeSource
2010
JambaHuice
2011
Clinique, Cotton On, Repetto, TWG Tea Salon and Boutique, Tory Burch, UNIQLO, J.Co Donuts
2013
Baskin Robbins, Casadei, Carven, Crate & Barrel, H&M, H&M Home, Hamleys, Pottery Barn
4.1.4. Retail Locations and Average Rental Prices
The Philippines ranks 62 in terms of global rental prices for retail space. Even so, this is comparatively lower
than key regional peers Hong Kong (2), Singapore (16), Thailand (43), and Indonesia (52).
Rank
Country
1
USA
2
Hong Kong (China)
3
France
4
UK
5
Australia
6
Italy
7
Japan
8
South Korea
9
Switzerland
10
Russia
11
Austria
12
Germany
13
China
14
Spain
15
Colombia
16
Singapore
21
Malaysia
26
Taiwan
28
UAE
34
Vietnam
43
Thailand
52
Indonesia
60
Bulgaria
61
Macedonia
62
Philippines
63
Estonia
64
Jordan
City
Location
Rent (USD/sq ft/year)
New York
Hong Kong
Paris
London
Sydney
Milan
Tokyo
Seoul
Zurich
Moscow
Vienna
Munich
Beijing
Barcelona
Bogota
Singapore
Kuala Lumpur
Taipei
Dubai
Hanoi
Bangkok
Jakarta
Sofia
Skopje
Manila
Tallinn
Amman
Upper 5th Avenue
3,500
2,735
1,556
1,216
1,016
998
953
932
875
557
521
514
481
380
368
362
311
277
259
212
120
93
62
56
47
42
37
Causeway Bay
Avenue des Champs Elysees
New Bond Street
Pitt Street Mall
Via Montenapoleone
Ginza
Myeongdong
Bahnhofstrasse
Stoleshnikov
Kohlmarkt
Kaufingerstrable
Wangfujing
Portal de I’Angel
Shopping Centre
Orchard Road
Pavilon KL
ZhongXiao E. Road
Prime Shopping Centre
Shopping Centre
Central Retail District
Vitosha Blvd
Makati CBD
City Centre (BCD)
30
4.1.5. Porter’s Five Forces Analysis
1. Rivalry Among Competing Firms
High number of competing firms
Similar size of firms competing
Similar capability of firms competing
Rivals sell similar products/services
Rivals have excess inventory
Rivals have excess capacity
Falling demand for the industry’s products
Falling product/service prices in the industry
Consumers can easily switch brands
Barriers to leaving the market are high
Barriers to entering the market are low
Fixed costs are high among competing firms
Mergers are common in the industry
Score
2. Potential Entry of New Competitors
Low capital requirements
Available new locations are desirable
Low saturation of the market
Low customer loyalty
Low brand preferences
Loose government regulatory policies
Lack of need to gain economies of scale quickly
Lack of need to gain technology and specialized know-how
Low level of experience needed by potential new competitors
Ease of access to raw materials
Low possibility of counterattack by entrenched firms
Score
3. Potential Development of Substitute Products
Availability of substitute products
Low switching costs for consumers
Rising prices of current product
Lower prices of substitute products
Low customer satisfaction with current product
Growth of substitute products
Lack of variety among current market offerings
Saturation of current product market
Score
4. Bargaining Power of Suppliers
Large number of suppliers
Low volume of purchases by firms
High costs of switching raw materials
Scarcity of substitute raw materials
Low incidence or probability of long-term strategic partnerships
Low incidence or probability of backward integration strategies
Score
5. Bargaining Power of Consumers
High volume or value of customer purchases
Few customers
Standard or undifferentiated products/services being offered
Consumer ability to choose whether and when to purchase the product
Consumer tendency to switch
Falling consumer demand
Consumer knowledge of sellers’ products, prices, and costs
Score
Porter's 5 Forces - Retail
Weight
Power
0.1
0.1
0.1
0.1
0.1
0.1
0.1
0.05
0.05
0.05
0.05
0.05
0.05
1
Weight
3
2
2
5
1
4
1
1
5
5
2
5
2
Power
0.15
0.15
0.15
0.1
0.1
0.1
0.05
0.05
0.05
0.05
0.05
1
Weight
Power
Weight
0.2
0.2
0.2
0.1
0.1
0.1
0.05
0.05
1
Bargaining
power of
consumers
Bargaining
power of
suppliers
Rivalry among
competing
firms
5
4
3
2
1
0
Potential
entry of new
competitors
Potential
development
of substitute
products
0.15
0.6
0.45
0.5
0.2
0.2
0.05
0.2
0.1
0.2
0.05
2.7
Score
2
5
1
1
2
2
2
3
Power
0.2
0.2
0.2
0.15
0.15
0.1
1
0.3
0.2
0.2
0.5
0.1
0.4
0.1
0.05
0.25
0.25
0.1
0.25
0.1
2.8
Score
1
4
3
5
2
2
1
4
2
4
1
0.25
0.25
0.1
0.1
0.1
0.1
0.05
0.05
1
Weight
Score
0.5
1.25
0.1
0.1
0.2
0.2
0.1
0.15
2.6
Score
4
1
4
1
1
1
Power
0.8
0.2
0.8
0.15
0.15
0.1
2.2
Score
1
1
4
5
3
4
1
5
0.2
0.2
0.8
0.5
0.3
0.4
0.05
0.25
2.7
31
Porter's Five Forces
Score
Rating
Insight
Rivalry among competing
firms
2.8
Moderate
Potential entry of new
competitors
2.7
Moderate
Potential development of
substitute products
2.6
Moderate
Bargaining power of
suppliers
2.2
Moderate
Bargaining power of
consumers
2.7
Moderate
Score
2.6
Moderate
Rivalry among competing developers of retail space is deemed moderate due to the
three main players' aggressive expansion plans for the near future and their offering of
essentially the same product (retail and food space, cinemas, etc.), only slightly
differentiated for different income segments. However, the fierceness of this rivalry is
somewhat tempered by the strong continued growth in household consumption, which
leaves room for much more retail space to be built. However, due to SMPH's significant
advantages in terms of size, mall count, and land bank location, it is in the best position
to capitalize on this demand for more retail space.
The possibility of new players entering the retail development market is moderate. On
one hand, the recent focus on developing provincial markets has made major players'
ownership of key Metro Manila locations a less significant advantage than it was in the
past. Moreover, many provincial areas are still underpenetrated in terms of retail
presence, which leaves room for other players to enter provincial markets. On the other
hand, besides extremely high capital requirements, a key success factor in retail
development is presence in as many locations as possible, which gives established
major players a sizable advantage, and these players tend to push very popular and
large-scale promotions to edge out competition. SMPH in particular remains largely
unthreatened by new competitors, due to its strong brand equity and the tendency of
provincial customers to switch to SMPH facilities when they are introduced to the market.
The only viable substitute to the offerings of the three major retail players is boutique or
specialty malls or stores. Since current retail space offerings are essentially the same,
customers do constantly search for new retail experiences, and can try these substitutes
at no costs to themselves. However, the growth of these specialty/boutique
establishments is still very slow, particularly as they tend to be geared to high-end goods
and services; fortunately, such products typically appeal to market segments that are
very different from those targeted by SMPH.
Suppliers of retail real estate developers include both construction companies as well as
direct suppliers of raw construction materials. The bargaining power of these suppliers is
moderate, because although there are a large number of suppliers in the market and
switching raw materials can have high costs due to the large volumes of materials used,
most companies have strategic partnerships or their own construction subsidiaries, and
have high bargaining power with raw material suppliers as well, due to the size of their
contracts. For instance, SMPH as 13 different subsidiaries under its Malls division, such
as First Asia Real Estate Development Corp. and Consolidated Prime Dev. Corp., giving it
substantial control over its construction activities.
Retail developers' final consumers have moderate bargaining power, primarily due to the
largely undifferentiated offerings for each income segment, negligible switching costs,
and the tendency to pick retail space based on convenience rather than strong loyalty to
a specific developer being balanced out by the very low volume and value of each
customer's purchases and the high number of customers served. SMPH's competitive
advantage in this respect is the significantly higher amount of foot traffic their malls
attract, which further lessens the impact of consumer switching, and their ownership of
the most number of malls, which makes their malls the most accessible and therefore
most likely to be switched to.
All in all, the level of competition in the retail space development market is moderate.
Aggressive expansion and consumers' tendency to switch has generated fierce
competition among major players, but this rivalry is tempered by strong growth in
demand for retail space and the significant advantage these three leaders hold over
other players in terms of size, scale, and large asset bases. SMPH in particular is the
clear market leader in terms of mall size and presence in various locations, and has
arguably the strongest brand equity of the three due to its focus on retail and strategic
partnerships with popular international brands.
32
4.2. Residential Segment
4.2.1. Housing Segmentation and Characteristics
The Subdivision and Housing Developers Association’s (SHDA)’s classifies housing projects into 5 segments:
Housing
Socialized
Economic
Low Cost
Mid End
High End
Price (per unit)
Annual Amortization
Required Income
< Php400,000
Php0.4-1.2 mn
Php1.2-3.0 mn
Php3.0-6.0 mn
> Php6.0 mn
Php23,468
Php38,041
Php121,493
Php324,595
Php649,190
Php78,226
Php126,805
Php404,907
Php1,081,984
Php2,163,968
4.2.2. Supply Demand Analysis
To get our supply and demand analysis for the residential segment, we use the Subdivision and Housing
Developers Association’s (SHDA)’s analysis in a report they published last 2011. We believe that their
estimates of the property market (as of 2011) and their forecasts until 2030 are reasonable. The data is
summarized in the table below.
SHDA Supply Demand Analysis – Historical Housing Supply Demand Profile
Housing
Socialized
Economic
Low Cost
Mid End
High End
Price (per unit)
Supply (units)
Demand (units)
Surplus/(Deficit)
< Php400,000
Php0.4-1.2 mn
Php1.2-3.0 mn
Php3.0-6.0 mn
> Php6.0 mn
479,765
541,913
242,246
322,995
242,246
1,143,048
2,503,990
704,406
72,592
18,325
(663,283)
(1,962,077)
(462,160)
250,403
224,011
For estimates until 2030, we also use SHDA’s assumptions of 200,000 units per year. We believe that this
number is also reasonable from the historical trend of the market, reflective in the licenses-to-sell permits of
developers.
SHDA Supply Demand Analysis – Forecast until 2030
Housing
Can’t Afford
Socialized
Economic
Low Cost
Mid End
High End
Total
Source: SHDA
Price (per unit)
Units Needed
Annual Need/
Year (Avg)
< Php 400,000
< Php400,000
Php0.4-1.2 mn
Php1.2-3.0 mn
Php3.0-6.0 mn
> Php6.0 mn
1,449,854
1,582,497
2,588,897
605,692
No Need
No Need
6,226,940
80,547
87,917
143,828
33,650
No Need
No Need
345,941
% of Total Needed
23%
25%
42%
10%
100%
33
4.2.3. Porter’s Five Forces Analysis
Score
Score
Score
Score
Few customers
Consumer ability to choose whether and when to purchase the product
Score
Porter's 5 Forces - Residential
Weight
Power
0.1
0.1
0.1
0.1
0.1
0.1
0.1
0.05
0.05
0.05
0.05
0.05
0.05
1
Weight
3
4
3
4
5
4
4
1
2
5
1
5
2
Power
0.15
0.15
0.15
0.1
0.1
0.1
0.05
0.05
0.05
0.05
0.05
1
Weight
Power
Weight
0.2
0.2
0.2
0.1
0.1
0.1
0.05
0.05
1
Bargaining
power of
consumers
Bargaining
power of
suppliers
Rivalry among
competing
firms
5
4
3
2
1
0
Potential
entry of new
competitors
Potential
development
of substitute
products
0.15
0.15
0.15
0.5
0.3
0.1
0.1
0.2
0.1
0.2
0.1
2.05
Score
1
1
3
1
1
1
4
4
Power
0.2
0.2
0.2
0.15
0.15
0.1
1
0.3
0.4
0.3
0.4
0.5
0.4
0.4
0.05
0.1
0.25
0.05
0.25
0.1
3.5
Score
1
1
1
5
3
1
2
4
2
4
2
0.25
0.25
0.1
0.1
0.1
0.1
0.05
0.05
1
Weight
Score
0.25
0.25
0.3
0.1
0.1
0.1
0.2
0.2
1.5
Score
5
1
4
2
1
1
Power
1
0.2
0.8
0.3
0.15
0.1
2.55
Score
2
1
4
1
2
2
4
5
0.4
0.2
0.8
0.1
0.2
0.2
0.2
0.25
2.35
34
Score
Rating
Insight
3.5
Moderately
High
2.05
Moderately Low
1.5
Moderately Low
Bargaining power of
suppliers
2.55
Moderate
Bargaining power of
consumers
2.35
Moderate
Score
2.39
Moderate
Rivalry among residential developers is classified moderately high due to the similar size
(in terms of revenues) of the three main players, essential similarity of product offerings
for each income segment (since each developer typically has a different brand for each
segment), and most importantly, the expected oversupply of mid- and high-end
residential units. Fortunately, SMPH's residential properties all cater to the low-cost
affordable segment, largely insulating it from the fierce competition to sell off mid- and
high-end units, and allowing SMPH to respond to the current shortage in the low-end
market. It is important to note that catering to this market, for which demand is expected
to grow due to PAG-IBIG's announcement that it will lower interest rates for loans below
P3.2 mn, also offers SMPH additional benefits such as VAT exemptions.
The potential for new competitors entering the residential development market is
moderately low, because although residential unit buyers do not consider the developer
or brand a top priority in their decision-making, there are significant barriers to entry for
new players, particularly the decreasing rate of licenses to sell issued by the HLURB, and
the importance of building in key locations (which translates to convenience for
customers), most of which are already part of established players' land banks. SMPH's
integration of its land bank into its long-term Lifestyle City strategy is therefore a key
competitive advantage.
Despite the saturation of the current product market (specifically the mid- and high-end
segments), there are currently no available or potential substitutes for buying or leasing
residential space, which is why the threat of substitute products is moderately low.
Moreover, SMPH's residential units are in fact becoming more affordable due to the
aforementioned interest rate cuts by both the BSP and by PAG-IBIG in recent years,
decreasing the threat of substitute products even further.
Suppliers for residential developers include both construction firms and raw materials
suppliers. These suppliers have moderate bargaining power, as the large number of
suppliers and the high costs of switching raw materials (due to high order volumes) are
counterbalanced by the high order volumes (and therefore high order values) of
developers and the high incidence of developer-owned construction companies. SMPH,
for instance, has the SMDC.
On one hand, the residential units being offered by the various developers for each
income segment are essentially the same. However, while residential unit sales are
substantial to the individual consumer, they have a negligible impact on the total sales of
each major developer (particularly SMPH, which sells relatively lower-priced units), and
once a customer is committed to buying or leasing a unit, it is difficult for him or her to
switch to a different unit by another developer. To convince consumers to choose SMPH
units first, SMPH builds developments near its retail facilities as well as transportation
hubs.
Competition among existing residential developers is moderately high, particularly due to
the expected oversupply mid- and high-end segments. However, this is balanced by the
moderately low level threat of new competitors entering the market, as established
developers own most prime locations (especially within Metro Manila) and government
regulations are tightening. There is also a moderately low threat of substitutes for
residential units being developed in the near future. As a result, the competition in the
residential development market is classified as moderate. SMPH's key advantages here
are its extremely value-adding strategy of locating its residential units near its other
developments, and its positioning in the underserved low-end segment, which allows it to
take advantage of the opportunity to serve an underserved market while limiting its
exposure to slowing segments.
firms
competitors
substitute products
35
4.3. Office Segment
4.3.1. Supply Demand Analysis
To get the projected supply and demand take up by the BPO sector (as majority of office space demand will
come from this sector), we use the following assumptions:
For the forecasted office supply, we use Coillers’ Philippines estimates from 2015-2018E. We assume that the
new office supply in Metro Manila will be primarily taken by the BPO sector. We multiply Coillers’ estimates per
year by 80% to estimate the supply take up by the BPO sector (KMG Mag estimates that 80% of new office
space is taken by BPOs).
Incremental Supply
Makati CBD
Ortigas
Fort Bonifacio
Eastwood
Alabang
Mandaluyong
North EDSA - Triangle
Pasay City
Other Locations in MM
Makati CBD
Office Space (sqm)
Source: Coillers Philippines
2015E
2016E
2017E
2018E
2,287
81,509
186,910
24,947
71,219
136,360
2,287
503,232
60,287
315,370
91,106
119,049
78,922
69,032
733,766
14,393
339,656
35,004
142,153
36,900
25,385
189,035
782,526
60,200
39,290
183,227
23,268
51,569
220,473
60,200
578,027
For the demand side, we assume full-time employee (FTE) incremental additions of 147,626 each year, in line
with additions in FY 2015. We then multiply our estimates by the minimum space requirement by 4.6 sqm per
employee, as mandated by the government, to show the projected incremental demand in office space.
Furthermore, as 77% of office space is located in Metro Manila, we incorporate another multiplier to get our
final estimate.
Incremental Demand
FTEs (Total)
Additions in FTEs
Office Space (*4.6sqm)
In Metro Manila (*77%)
Office Space (sqm)
Source: IT-BPAP, Team Estimates
2015E
2016E
2017E
2018E
1,200,000
147,626
679,081
522,892
522,892
1,347,626
147,626
679,081
522,892
522,892
1,495,252
147,626
679,081
522,892
522,892
1,642,879
147,626
679,081
522,892
522,892
The show the incremental shortage-surplus dynamics: we summarize our data below.
Incremental
2015E
Office Supply (sqm)
503,232
Office Demand (sqm)
522,892
Net (Under)/oversupply
(19,660)
Comments
Shortage
Source: Coillers Philippines, IT-BPAP, Team Estimates
2016E
2017E
2018E
733,766
522,892
210,874
Surplus
782,526
522,892
259,634
Surplus
578,027
522,892
55,135
Surplus
36
4.3.2. Filipino Competitive Advantages
We also summarize the competitive advantage of Filipinos as to they they are the preferred employees in the
outsourcing/offshoring business (from the IT-BPAP)
Incremental
Scalable Educated Talent Pool
3rd-largest English-speaking country
12th most populous country
500,000+ college graduates per year
93% literacy rate
Western-based legal and accounting curriculum
All-in costs among the lowest in the world
Manageable inflation
Labor costs among lowest in the world
Abundant low-cost and high-quality real estate
Available low cost 24/7 transportation
No. 1 in Voice: customer care, sales, collections
Primarily English-based services
Analytics and KPO capabilities
Cost Competitiveness
Excellent Infrastructure
Proven Track Record
Source: IT-BPAP
4.3.3. Regional Wages per FTE
Illustrated in the table below are the wages per full-time employee (FTE) in key business districts around the
world:
In USD
Wage per FTE
Source: IT-BPAP
US-Tier 2
Mexico City
Krakow
Kuala Lumpur
Cairo
Metro Manila
Delhi
72,000
32,000
28,000
28,000
22,000
16,000
14,000
37
4.3.4. Porter’s Five Forces Analaysis
Score
Score
Score
Score
Few customers
Consumer to choose whether/when to purchase the product
Score
Porter's 5 Forces - Commercial
Weight
Power
0.1
0.1
0.1
0.1
0.1
0.1
0.1
0.05
0.05
0.05
0.05
0.05
0.05
1
Weight
3
5
3
5
5
5
1
1
1
5
2
5
2
Power
0.15
0.15
0.15
0.1
0.1
0.1
0.05
0.05
0.05
0.05
0.05
1
Weight
Power
Weight
0.2
0.2
0.2
0.1
0.1
0.1
0.05
0.05
1
Bargaining
power of
consumers
Bargaining
power of
suppliers
Rivalry among
competing
firms
5
4
3
2
1
0
Potential
entry of new
competitors
Potential
development
of substitute
products
0.15
0.15
0.3
0.4
0.4
0.3
0.1
0.15
0.1
0.2
0.15
2.4
Score
1
1
3
1
1
1
4
4
Power
0.2
0.2
0.2
0.15
0.15
0.1
1
0.3
0.5
0.3
0.5
0.5
0.5
0.1
0.05
0.05
0.25
0.1
0.25
0.1
3.5
Score
1
1
2
4
4
3
2
3
2
4
3
0.25
0.25
0.1
0.1
0.1
0.1
0.05
0.05
1
Weight
Score
0.25
0.25
0.3
0.1
0.1
0.1
0.2
0.2
1.5
Score
5
1
4
2
1
1
Power
1
0.2
0.8
0.3
0.15
0.1
2.6
Score
5
3
5
1
2
1
1
5
1
0.6
1
0.1
0.2
0.1
0.05
0.25
3.3
38
Score
Rating
Insight
firms
3.5
Moderately
High
competitors
2.4
Moderate
substitute products
1.5
Moderately Low
Bargaining power of
suppliers
2.55
Moderate
Bargaining power of
consumers
3.3
Moderately
High
2.65
Moderate
Competition is quite fierce among the three major commercial developers, largely due to
the similarity of the units being offered. Unlike the retail and residential sectors, which
have differentiated product lines targeted at different income segments, most of the new
commercial developments target the same market: the BPO industry. Major players are
also very similar in size (in terms of revenue), and are all exposed to the oversupply of
commercial units.
Although, again, customers (in this case, companies seeking to buy or lease office space)
are not particularly loyal to a specific developer, the potential entry of new competitors is
tempered by the fact that the demand for new commercial space is concentrated in
Metro Manila, where most available land is already in the portfolio of established players.
Moreover, economies of scale are advantageous to established players because it
allows them to accommodate the space requirements of large firms and therefore
secure the most lucrative contracts. SMPH's advantage lies in its network of strategic
partnerships, building only when it has 60% commitments, and in its integration of its
land bank in its long-term expansion plans.
The threat of the development of substitute products for commercial space is
moderately low, largely because there are currently no substitutes in the market, and no
current market players are actively seeking out the development of such substitutes.
Moreover, customers do not necessarily seek new kinds of office space, particularly as
there are high costs to selling of buildings or ending leases early, as well as high
transitioning costs once they have secured new office space. SMPH in particular keeps
its tenants satisfied through its competitive prices and the close proximity to retail and
transportation centers that its commercial developments offer.
Despite the large number of construction firms and raw materials suppliers in the
market, the bargaining power of suppliers remains moderate, due to the high values of
commercial development contracts with major players, which has given rise to the
popularity of long-term partnerships and/or construction subsidiaries. SMPH, for
example, has the Associated Development Corporation.
The bargaining power of consumers is moderately high in the commercial development
market, primarily due to the fact that contracts with these customers are extremely high
in value, as firms tend to buy or lease a large number of units at a time. Commercial
space offerings, as mentioned earlier, are also largely undifferentiated, and offered to the
same customer segment. SMPH addresses this threat with its approach of building
strong and healthy long-term relationships with tenants, and leveraging on its strategic
location.
Although there is no significant threat of substitutes for commercial real estate being
developed any time soon, the level of competition in this market is not low. The level of
rivalry among the major commercial developer is fierce, largely due to the current
oversupply in the market, and customers have a relatively high level of bargaining power,
as new developments in the market cater to the same group of customers, the BPO
firms. SMPH, however, leverages on its strategic locations, with new developments
concentrated in one of the few areas expected to absorb new demand and located near
retail and transportation facilities, and its strong relationships with tenants, drawing them
in with the SM brand as much as with its competitive pricing.
Score
39
4.4.
China
Macro fundamentals support growth
The retail scene In China has remained strong, thanks to the country’s strong fundamentals. First, there is an
urban population close to 300 million—bigger than the urban population of the entire United States— in
emerging business locations beyond Tier 1 cities (cities that are deemed most developed in terms of
population, services, infrastructure, and cosmopolitan nature). Of this growing urban population, 130 million
households earn over US$5,000 annually, which is almost double the 2011 income level, and is seen as a
major factor propelling domestic consumption. Second, the national GDP of China is still expected to continue
growing at a healthy rate of 5-6% per year. Third, the country is focusing more on service sector growth,
particularly white-collar jobs and high-value manufacturing, which will increase demand for high-quality real
estate across multiple sectors. Given these circumstances, it is particularly advantageous that SMPH’s 6 malls
are all located in Tier 2 and 3 cities, where it can benefit not just from the rise in large urban population with
higher-paying service sector jobs.
Intense competition driven by rapid consumer shifts
Competition among mall developers is intense, as differentiation is seen as the key factor in securing more foot
traffic. Furthermore, there is a rapid growth in consumer trends in the retail sector, which forces retailers to
undergo rapid structural shifts. Consumers prefer more price-competitive, food- and entertainment-oriented,
and conveniently located shopping malls with better parking facilities. Consumers are also becoming more
discerning and price-sensitive, which is highlighted by their demand for higher quality service and richer in-store
experiences. As a result, competition among retailers has grown fiercer, as firms strive to cater to the increasing
demands of the Chinese consumer.
Digital revolution paves a new line of growth for the retail sector
China is going through a digital revolution, as it is now home to the world’s largest online population. This will
largely affect retail demand across the country. Accounting for close to 10% of total sales in China in 2014, ecommerce is emerging as the next engine of consumption growth, with more and more consumers switching
from buying from traditional brick and mortar retailers to buying online, particularly in the case of apparel. As a
result, omni-channel retailing (in which retailers provide consumers with goods and services across multiple
online and offline sales channels) is on the rise. This has led to some property companies partnering up with
online retailers to develop a joined-up sales solutions system.
Aggressive expansion in mall development saturates market
Double digit retail sales growth (2005-2012) has seen an aggressive expansion in mall development with retail
space growing at a CAGR of 21% from 2010-2014 across emerging locations outside of Tier 1 cities. In
comparison, Alpha/Tier 1 mall stock grew at only 12% per year, highlighting the shift of retail away from Tier 1
cities towards these new locations. This has seen Tier 1.5 cities experiencing the largest growth in terms of
retail space since 2011, and these assets are expected to show a 13% CAGR in 2014-2017. This lower CAGR
demonstrates that developers have recently become more cautious about an oversupply.
High quality malls and high-standard management a differentiating factor for growth
While there is a possible oversupply in terms of retail space, the growth opportunity in the Chinese retail market
lies in the undersupply of high-quality malls. According to JLL, only 10-15% of existing stock meets international
standards. This further reinforces the idea that differentiation of the retail experience offered is a key success
factor in Chinese retail. Property developers typically seek to differentiate themselves on the basis of their
central locations, tenant mixes, and convenient layouts. In this area, SMPH’s retail expertise becomes a
significant advantage, allowing it to marry function and sophistication in its developments and attract the
increasingly discerning Chinese consumer. This expertise that SMPH places so much value in, if not offered in
the future as high-standard and professional property management services to Chinese retail company
customers, will at the very least function as a competitive advantage from SMPH itself, ensuring long-term value
preservation of its China assets.
40
5.
Valuations
5.1. Discounted Cash Flow Assumptions
5.1.1. Malls
Core Net Income
Interest (After-Tax)
NOPAT
Depreciation and Noncash Charges
Depreciation
Other Noncash Charges
Changes in WC
Receivables
Tenants' Deposits
Operating Cash Flows
Capital Expenditures
Changes in Noncurrent Assets
Free Cash Flow to Firm
Valuation Date
PV Factor
Discounted Free Cash Flows
Discounted Free Cash Flows over Period
Terminal Value
Discounted Terminal Value
2015E
2016E
2017E
2018E
2019E
2020E
15,511
2,597
18,108
18,374
3,691
22,065
21,060
4,278
25,338
23,504
5,434
28,938
27,327
6,115
33,442
31,487
5,946
37,434
6,202
(5,285)
7,069
(408)
7,926
(408)
8,910
(408)
9,789
(408)
9,509
(408)
(1,709)
(710)
2,203
1,801
20,611
(31,080)
(9,838)
(20,307)
(2,257)
(781)
2,986
2,018
30,693
(30,780)
(87)
(1,643)
(859)
2,234
1,137
33,725
(30,030)
3,695
(1,310)
(945)
1,813
1,137
38,134
(32,480)
5,654
(1,712)
2,328
727
44,167
(5,574)
38,593
(1,507)
2,015
727
47,769
(5,414)
42,355
66,467
1
0.932
(81)
2
0.868
3,206
3
0.808
4,570
4
0.753
29,061
5
0.701
29,710
2015E
2016E
2017E
2018E
2019E
2020E
924
62
986
1,094
88
1,183
1,254
103
1,357
1,400
130
1,530
1,628
147
1,774
1,876
143
2,018
922,589
602,860
5.1.2. Commercial
Core Net Income
NOPAT
Depreciation
Changes in WC
Receivables
696
(618)
794
(48)
890
(48)
1,000
(48)
1,099
(48)
1,067
(48)
(200)
(83)
53
835
(3,360)
(1,150)
(3,674)
(264)
(91)
72
1,646
(4,140)
(2,494)
(192)
(100)
54
1,960
(10,290)
(8,330)
(153)
(110)
43
2,263
(4,550)
(2,287)
(200)
56
2,681
(781)
1,901
(176)
48
2,910
(758)
2,152
Valuation Date
PV Factor
(8,460)
1
0.932
(2,324)
2
0.868
(7,228)
3
0.808
(1,849)
4
0.753
1,431
5
0.701
1,509
Terminal Value
41,706
27,253
41
5.1.3. Hotels
2015E
2016E
2017E
2018E
2019E
2020E
295
47
342
349
67
416
400
77
477
447
98
545
519
110
630
598
107
706
Core Net Income
NOPAT
Depreciation
Changes in WC
Receivables
360
(203)
411
(16)
461
(16)
518
(16)
569
(16)
552
(16)
(66)
(27)
40
446
(3,420)
(377)
(3,351)
(87)
(30)
54
748
(2,520)
(1,772)
(63)
(33)
40
867
(2,660)
(1,793)
(50)
(36)
33
993
(1,400)
(407)
(66)
42
1,159
(240)
919
(58)
36
1,221
(233)
988
Valuation Date
PV Factor
(2,151)
1
0.932
(1,650)
2
0.868
(1,556)
3
0.808
(329)
4
0.753
692
5
0.701
693
Terminal Value
19,144
12,510
42
5.2.
Weighted Average Cost of Capital
We use the formula 𝑊𝐴𝐶𝐶 = 𝑤& 𝑘& 1 − 𝑡 + 𝑤- 𝑘- in computing our discount rate. Furthermore, our
assumptions for SMPH’s WACC are summarized in the table below:
Calculations
WACC
Methodology
7.35%
Cost of Debt, Post Tax
Cost of Debt
Tax Rate
3.59%
4.50%
20.18%
Yield-to-Maturity Approach
Historical Tax Rate (Company)
Cost of Equity
Risk-Free Rate
Equity Risk Premium
Beta
11.11%
4.07%
6.12%
1.15
Capital Asset Pricing Model
PDST-R2
Mature Market Risk Premium + Country Risk Premium
Bloomberg
Share of Debt
Share of Equity
50.00%
50.00%
Target Capital Structure
5.2.1. Cost of Debt
We estimate SMPH’s cost of debt using the yield-to-maturity approach. Particularly, we used SMPH’s Series A
5.1% bond, issued September 2014 (maturity: September 2020). We derive our YTM estimate of 4.49% from
Bloomberg’s calculations. Furthermore, we imply a 20.18% tax rate, derived from our computed 2014
company average tax rate. Note that this is lower than the Philippine corporate tax rate of 30% as it has an
income tax holiday for catering to low-income segments in its residential developments.
5.2.2. Cost of Equity – Capital Asset Pricing Model
We estimate SMPH’s cost of equity using the Capital Asset Pricing Model with the formula 𝑘- = 𝑟/ + 𝛽(𝑟2 ).
Our risk free rate is based on the 10-year Philippine treasury bond, particularly using the benchmark rate, or
the PDST-R2 rate, as computed by the PDEx (Philippine Dealing and Exchange Corp.) Our Beta assumption of
1.15 is computed by Bloomberg using five year monthly returns as basis.
The equity risk premium of 6.12% was computed using Professor Aswath Damodaran’s (The Stern School of
Business – New York University) methodology. The methodology lies on using a mature market risk premium
and adding a country-specific risk premium based on the country’s risk. Particularly we use a default spread
based on the Philippine sovereign ratings to determine the country-specific risk premium.
In estimating the mature market risk premium, we use an implied equity risk premium of the S&P 500 of
5.20%. We base this number using 10 years’ worth of data. Other assumptions used were (1) a t-bill average
rate of 2.17%, and (2) the S&P500 index level of 2059. Applying the Philippine Moody’s rating of Baa2, we
derive a default spread (against the U.S. risk free rate) of 1.90%. This value (also from Mr. Damodaran) is based
on the average spread of Baa2 sovereign ratings against the U.S. risk free rate.
We then add a multiplier effect by scaling the default spread (of 1.90%) to reflect the risk levels of the equity
market, against bond prices. Particularly, also from Mr. Damodaran’s computations, we divide the derived the
Philippine equity market standard deviation (14.69%) against the standard deviation in bond prices (30.36%).
This reflects a lower relative standard deviation (multiplier of 0.484) as bond prices are more volatile than equity
returns. Multiplying this number to the rating-based default spread, we derive a country risk premium of 0.92%.
We add this to the mature market risk premium to arrive at our equity risk premium of 6.12%
Calculations
Mature Market Risk Premium
Standard Deviation in Equities
Standard Deviation in Bond Prices
Relative Standard Deviation
Moody’s Rating
Rating-Based Default Spread
Country Risk Premium
Country Equity Risk Premium
Methodology
5.20%
a
14.69%
30.36%
0.484
b
c
d
Baa2
1.90%
0.92%
6.12%
e
f
=b/c
=e*d
=a+f
43
5.3. Terminal Growth Rate
5.3.1. Malls Segment
For the malls segment, we assume a long-term household final consumption expenditure growth rate (4.0%)
as our terminal growth rate. This is 1.5 percentage points below the 5.5% GDP forecast of the World Bank and
1 percentage point below our regression analysis. We keep a more conservative stance in determining the
long-term consumption growth rate. Furthermore, our 4% terminal growth rate for the malls segment is in line
with consensus’ estimates.
Regression Statistics
Multiple R
R Square
Adjusted R Square
Standard Error
Observations
0.028930483
0.000836973
-0.018377701
1.488046617
54
ANOVA
Regression
Residual
Total
Year
2017
2018
2019
2020
2021
2022
2023
2024
2025
2026
2027
2028
2029
2030
Average
Methodology
df
1
52
53
SS
0.09645204
115.142702
115.239154
MS
0.096452
2.214283
F
0.043559
Sig F
0.83549156
Forecasted
4.03%
3.89%
3.98%
3.59%
3.54%
3.51%
3.41%
3.43%
3.47%
3.42%
3.60%
3.63%
3.59%
3.56%
3.62%
44
5.3.2. Commercial and Hotels
For the commercial and hotels segment, we assume a long-term inflation growth rate (3.6%) as our terminal
growth rate. This is derived from a regression analysis summarized below:
Regression Statistics
Multiple R
R Square
Adjusted R Square
Standard Error
Observations
0.556360817
0.309537358
0.268921909
0.017721256
19
ANOVA
Regression
Residual
Total
Intercept
Year
Year
2015
2016
2017
2018
2019
2020
2021
2022
2023
2024
2025
2026
2027
2028
2029
2030
Average
Methodology
df
1
17
18
SS
0.002393
0.005339
0.007732
MS
0.002393
0.000314
F
7.621173
Sig F
0.013366
df
Coefficients
4.15890526
-0.0020491
SE
1.489725
0.000742
t Stat
2.791727
-2.76065
P-value
0.012521
0.013366
Low 95%
1.015861
-0.00362
Up 95%
7.30195
-0.00048
Forecasted
5.12%
4.86%
4.81%
4.81%
4.80%
4.88%
5.10%
5.24%
5.21%
5.08%
5.03%
5.00%
4.98%
5.00%
5.01%
5.03%
5.00%
45
5.4.
Net Present Value Assumptions
We discount expected cash flows from its pipeline projects from 2015-2022, reflecting only launched and
announced projects (of 39,600 units). In our cash flow model, we expect the same turnover period of 3 years
from start of project construction and also assume that units are going to be completely sold. We also assume
different booking assumptions to take into account the difference in completion periods.
•
For three-year completion targets, we assume revenues will be booked 10%, 20%, and 70%
respectively in its first, second, and third year.
•
For four-year completion targets, we assume booking assumptions of 5%, 5%, 20%, and 70%.
•
For five-year completion targets, we assume 5%, 5%, 5%, 20%, and 75%.
We also remove the terminal value in discounting cash flows to highlight the risk in this segment. We also
assume the same discount rate equal to SMPH’s WACC of 7.35%.
Project
Grass Residences - Phase 2, Tower 4
Grass Residences - Phase 2, Tower 5
Field Residences (Bldg 4)
Wind Residences (Tower 4)
Wind Residences (Tower 5)
Cool Suites @ Wind Residences
Shine Residences
Green Residences
Shell Residences
Breeze Residences
Grace Residences (Tower 1)
Trees Residences (Phase 1 Buildings)
Trees Residences (Phase 2 Buildings)
Shore Residences
Air Residences
Fame Residences (Tower 1)
Fame Residences (Tower 2)
Shore 2 Residences
Assumed Sales (at 100% Occupancy)
Costs and Non-cash Charges
Cash Flows from 2015-2020E
Valuation Date
PV Factor
Discounted Cash Flows
Start Est.
End Est.
2015E
2016E
2017E
2018E
2019E
2014
2014
2015
2013
2013
2015
2013
2011
2012
2013
2013
2013
2014
2015
2014
2015
2014
2015
2015
2015
2015
2017
2019
2016
2015
2016
2016
2015
2015
2015
2016
2015
2016
2016
2018
2016
2017
2018
2020
2019
2020
2020
589
295
1,178
295
1,806
4,124
295
1,178
3,830
1,692
423
2020E
1,480
1,089
2,141
6,495
1,280
508
508
508
1,256
854
182
191
823
16,548
(9,279)
7,270
-
4,479
1,779
2,033
254
5,023
644
854
546
182
191
823
22,656
(12,703)
9,953
508
1,779
2,575
3,415
546
726
191
823
12,659
(7,098)
5,561
11,951
546
2,541
766
3,293
17,195
(9,641)
7,554
2,488
10,702
12,614
(7,073)
5,542
7,102
182
191
823
20,292
(11,378)
8,914
1
0.932
9,271
2
0.868
4,826
3
0.808
6,106
4
0.753
4,173
5
0.701
6,253
2,185
46
5.5.
Land Bank Assumptions
We readjust the land bank of SMPH to prevailing market prices. The table below summarizes our assumptions
Location
Residential Undeveloped Land Inventory
Batangas
Pampanga
Davao
Rizal
Cavite
SUM
Quezon City
Makati
Paranaque
Pasay
Las Pinas
Mandaluyong
Valenzuela
Manila
Taguig
SUM
Residential (Secondary) Undeveloped Land Inventory
Batangas
Laguna
Tagaytay
SUM
Area
Est. Php/sqm
Est. Market Value (Php bn)
810,000
290,000
60,000
60,000
20,000
1,200,000
5,000
5,233
10,911
4,933
18,122
5,000
4,065
2,491
527
468
136
7,686
180,000
110,000
90,000
80,000
50,000
30,000
20,000
20,000
2,000
600,000
39,350
463,500
17,639
69,211
12,689
43,653
4,856
56,145
400,000
7,122
52,376
1,517
5,468
596
1,397
97
1,067
800
70,440
433
94
33
560
5,000
12,653
11,380
21,645
7,990
2,785
32,420
47
5.6. Revenue Assumptions
5.6.1. Philippine Malls
For mature malls, we use our revenue/GFA estimate from our base year (2014). We grow this by our samestore-sales-growth estimate of 7% to determine the following years’ estimate. We then multiply this by our
assumed occupancy rate of 97% and the total GFA of the corresponding year to determine our total Philippine
mall revenues.
2013
2014
2015E
2016E
2017E
2018E
Philippine Malls
Total Rental, Philippine Malls
% of Total Mall Revenues
Occupancy Rate (Mature Malls)
Occupancy Rate (New Malls)
34,333
91%
97%
80%
38,643
91%
97%
80%
42,836
91%
97%
80%
51,728
90%
94%
80%
62,339
90%
97%
80%
71,728
90%
97%
80%
Mall Count
Total GFA
GFA: Excl. Additions/Expansions
GFA: Additions/Expansions
Rental Revenue/GFA
6.20
5.60
0.60
4,806
50.00
6.50
6.20
0.30
5,016
55.00
7.34
6.50
0.84
5,367
61.00
7.91
7.34
0.57
5,743
8.54
7.91
0.63
6,145
9.16
8.54
0.63
6,575
For new malls, we value each mall independently for already disclosed projects. We use our corresponding
year’s revenue/GFA estimate and multiply this by our assumed occupancy rate of 80% on its first year, and its
corresponding GFA. During the second year of its operations, we assume the mall to perform as a mature mall.
The revenues generated by new facilities were adjusted to reflect the actual start of their operations (e.g. a mall
opening in 3Q generates only half a year’s worth of revenue).
Additions: (in mns sqm)
SM Megacenter Cabanatuan
SM City San Mateo
SM Center Sangandaan*
SM City Cabanatuan*
SM Seaside Cebu
SM City Trece Martires Cavite
SM Tuguegatarao Center
SM Puerto Princesa
SM Urdaneta 2
SM City San Jose del Monte
SM Commonwealth - OLGM
Expansions: (in mns sqm)
SM City Iloilo
SM City Lipa
SM Calamba
SM Bicutan
Additions/Expansions (Unidentified)
Expected GFA Additions
2013
2014
2015E
2016E
2017E
2018E
GFA
0.05
0.08
0.04
0.15
0.46
0.08
0.05
0.06
0.02
0.11
0.10
Compl.
2Q15
2Q15
3Q15
3Q15
4Q15
2016
2016
2016
2016
2016
2016
-
-
112
171
40
174
-
195
121
143
54
276
252
-
-
0.04
0.03
0.06
0.08
2Q15
2Q15
2016
2016
-
-
85
64
-
150
188
-
-
0.87
0.87
2017
2018
-
-
-
-
1,617
-
1,730
48
5.6.2. China Malls
For mature malls, we use our revenue/GFA estimate from our base year (2014). We grow this by our samestore-sales-growth estimate of 7% to determine the following years’ estimate. We then multiply this by our
assumed occupancy rate of 90% and the total GFA of the corresponding year to determine our total China mall
revenues.
China Malls
Total Rental, China Malls
% of Revenues
Occupancy Rate (Mature Malls)
Occupancy Rate (New Malls)
Mall Count
Total GFA
Rental Revenue/GFA
2013
2014
2015E
2016E
2017E
2018E
3,090
9%
90%
70%
3,478
9%
90%
70%
3,721
9%
90%
80%
5,000
10%
75%
75%
6,963
10%
75%
75%
7,947
10%
80%
80%
0.79
0.79
4,324
6.00
0.79
0.79
4,867
7.00
0.94
0.79
0.15
5,208
8.00
1.48
0.94
0.54
5,572
1.48
1.48
5,962
1.48
1.48
6,379
2015E
2016E
2017E
2018E
4,630
7%
703
5,720
7%
752
6,600
7%
804
7,601
7%
861
5.6.3. Cinema
For mature malls, we use our cinema revenue/GFA estimate from our base year (2014). We grow this by our
same-store-cinema-ticket-sale-growth estimate of 7% (lower than 10% in 1Q-3Q15) to determine the following
years’ estimate. For new malls, we also assume the same methodology as the Philippine malls segment.
Outlined below are the highlights:
2013
2014
Total Cinema Revenues
SSSG
Cinema/GFA
3,740
-3%
603
4,269
9%
657
5.6.4. Total Malls
Total Revenue, Philippine Malls
Total Revenue, China Malls
Total Revenues, Malls
2013
2014
2015E
2016E
2017E
2018E
31,243
3,090
34,333
35,165
3,478
38,643
39,115
3,721
42,836
46,728
5,000
51,728
55,376
6,963
62,339
63,781
7,947
71,728
49
5.6.5. Commercial
For mature buildings, we use our revenue/GFA estimate from our base year (2014). We grow this by rental
escalation rates of 5% to determine the following years’ estimate. We then multiply this by our assumed
occupancy rate of 99% and the total GFA of the corresponding year to determine our total commercial
revenues.
Total Revenues, Commercial
GFA (in mns sqm)
Occupancy Rate (Existing Offices)
Occupancy Rate (2015-2017 Developments)
Revenues/GFA
2013
2014
2015E
2016E
2017E
2018E
2,856
0.15
0.15
99%
95%
19,037
2,867
0.19
0.15
0.04
99%
95%
15,089
3,996
0.33
0.19
0.14
99%
95%
15,844
5,463
0.33
0.33
99%
95%
16,636
5,504
0.33
0.33
95%
95%
17,468
6,728
0.50
0.33
0.17
99%
95%
18,341
2015E
2016E
2017E
2018E
1,069
-
-
-
742
For new buildings, we value each office building independently for already disclosed projects. We use our
corresponding year’s revenue/GFA estimate and multiply this by our assumed occupancy rate of 95% on its
first year, and its corresponding GFA. During the second year of its operations, we assume the mall to perform
as a mature building. The revenues generated by new facilities were adjusted to reflect the actual start of their
operations (e.g. an office building opening in 3Q generates only half a year’s worth of revenue).
2013
2014
FiveE-Com
ThreeE-Com
GFA
0.14
0.17
Compl
2Q15
2018
-
-
5.6.6. Hotels
For mature hotels, we use our revenue/GFA estimate from our base year (2014). We grow this by rental
escalation rates of 2% to determine the following years’ estimate. We then multiply this by our assumed
occupancy rate of 70% and the total GFA of the corresponding year to determine our total hotel revenues.
Total Revenues, Hotels
Rooms
Rooms: Excl. Additions/Expansions
Rooms: Additions/Expansions
Occupancy Rate
Revenues/Room
2013
2014
2015E
2016E
2017E
2018E
1,600
1,013
1,013
65%
2.43
2,008
1,013
1,013
65%
3.05
2,048
1,167
1,013
154
65%
3.11
3,360
1,841
1,167
674
65%
3.17
4,054
2,014
1,841
173
65%
3.24
4,506
2,187
2,014
173
65%
3.30
2015E
2016E
2017E
2018E
For new hotels, we value each hotel independently for already disclosed projects. We use our corresponding
years revenue/room estimate and multiply this by our assumed occupancy rate of 95% on its first year, and
the corresponding number of hotel rooms. During the second year of its operations, we assume the hotel to
perform as a mature development. The revenues generated by new facilities were adjusted to reflect the actual
start of their operations (e.g. an office building opening in 3Q generates only half a year’s worth of revenue).
2013
2014
Conrad Manila
Park Inn, Clark
Rooms
347
154
Compl.
1Q16
4Q15
-
-
-
809
-
-
-
Additions/Expansions (Und.)
Rooms
163
163
Compl.
2017
2018
-
-
-
-
259
-
264
50
6. Investment Rating Guide
Rating
Total return expectation (within 12-month period)
BUY
HOLD
SELL
Returns greater or equal to 10%
Returns greater or equal to 0%
Negative returns
51
Disclosures:
Ownershipandmaterialconflictsofinterest:
Theauthor(s),oramemberoftheirhousehold,ofthisreportdoesnotholdafinancialinterestinthesecuritiesofthiscompany.
Theauthor(s),oramemberoftheirhousehold,ofthisreportdoesnotknowoftheexistenceofanyconflictsofinterestthatmightbias
thecontentorpublicationofthisreport.
Receiptofcompensation:
Compensationoftheauthor(s)ofthisreportisnotbasedoninvestmentbankingrevenue.
Positionasaofficerordirector:
Theauthor(s),oramemberoftheirhousehold,doesnotserveasanofficer,directororadvisoryboardmemberofthesubjectcompany.
Marketmaking:
Theauthor(s)doesnotactasamarketmakerinthesubjectcompany’ssecurities.
Disclaimer:
Theinformationsetforthhereinhasbeenobtainedorderivedfromsourcesgenerallyavailabletothepublicandbelievedbythe
author(s)tobereliable,buttheauthor(s)doesnotmakeanyrepresentationorwarranty,expressorimplied,astoitsaccuracyor
completeness.Theinformationisnotintendedtobeusedasthebasisofanyinvestmentdecisionsbyanypersonorentity.This
informationdoesnotconstituteinvestmentadvice,norisitanofferorasolicitationofanoffertobuyorsellanysecurity.Thisreport
shouldnotbeconsideredtobearecommendationbyanyindividualaffiliatedwithCFASocietyofthePhilippines,CFAInstituteorthe
CFAInstituteResearchChallengewithregardtothiscompany’sstock.
CFAInstituteResearchChallenge

CFA Institute Research Challenge

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