The remaining part of 2014 brings both good and bad news…

First, the bad news… The market would most likely remain weak

August historically the

weakest month of the year

PSEi no longer cheap

Foreign investors are once again

exiting the market

- Rising inflation - Political noise

5500

6000

6500

7000

7500

8000

7,800 PSEi

Now, the good news… The long wait is almost over

PSEi to exit consolidation

approaching 2015

End 2015 target is 7,800

Reasons for Bullish 2015 Outlook

Pace of monetary tightening slower than expected

Economic growth gaining momentum

Fundamentals to catch up with valuations

Poor sentiment acts as a contrarian indicator

Pace of Monetary Tightening Slower than Expected May ‘13 – Prospects of Reduced Liquidity Trigger Market Sell-off

Pace of Monetary Tightening Slower than Expected June ‘14 - DM Central Bank More Dovish than Expected

ECB announced several liquidity enhancing measures • Reduction of ECB’s

base rate from 0.25% to 0.15%

• Introduction of a negative deposit rate (-0.1%)

• Opening of a EUR400 Bil liquidity channel tied to bank lending

Fed officials on the average reduce their long-run interest rate forecast • From 4.00% to 3.75% • Due to a less optimistic

LT growth outlook on the US economy

Pace of Monetary Tightening Slower than Expected Philippine Inflation Under Control

Jan-

13Fe

b-13

Mar

-13

Apr

-13

May

-13

Jun-

13Ju

l-13

Aug

-13

Sep

-13

Oct

-13

Nov

-13

Dec

-13

Jan-

14Fe

b-14

Mar

-14

Apr

-14

May

-14

Jun-

14

INFLATION RATE Headline

Core

Source: NSO

63.1 69.7

36.9 30.3

% o

f Pop

ulat

ion

Productive PopulationDependent population

A period of high economic growth brought about by a larger number of people entering the productive ages

Source: UN

PRODUCTIVE VS. DEPENDENT POPULATION

Economic Growth Gaining Momentum Philippines to Enter Demographic Window in ‘15

Fixed capital formation trending higher

Source: NSCB

FIXED CAPITAL FORMATION/GDP

1Q01

3Q01

1Q02

3Q02

1Q03

3Q03

1Q04

3Q04

1Q05

3Q05

1Q06

3Q06

1Q07

3Q07

1Q08

3Q08

1Q09

3Q09

1Q10

3Q10

1Q11

3Q11

1Q12

3Q12

1Q13

3Q13

1Q14

Fixed Capital/GDPAverage of last 4Q

Economic Growth Gaining Momentum Investment Spending Continues to Pick-Up

2

16.3 25.1

89.5

2011 2012 2013 2014

PPP Projects Awarded

PPP Projects Awarded

* Includes those that are in the process of awarding Source: PPP Center

VALUE OF PPP PROJECTS AWARDED SO FAR (PHP BIL)

2.0

16.3 25.1

119.5

Economic Growth Gaining Momentum Growing Pipeline of PPP Projects

*In the process of awarding Source: PPP Center

VALUE OF PPP PROJECTS AWARDED SO FAR

2011 2012

Daang Hari-SLEx Link Road 2.0 2011

PPP for School Infrastructure Project (Phase I) 16.3 2012

NAIA Expressway Project 15.5 2013

PPP for School Infrastructure Project (Phase II) 3.9 2013

Modernization of the Philippine Orthopedic Center 5.7 2013

Automatic Fare Collection System 1.7 2014

Mactan-Cebu Int’l Airport Passenger Terminal Bldg 17.5 2014

Cavite Laguna Expressway* 35.4 2014

LRT Line 1 Cavitex Extension & Operation Mgmt* 64.9 2014

Economic Growth Gaining Momentum Growing Pipeline of PPP Projects

Source: NSCB

9.7% 9.7% 10.8% 11.1%

10.6%

7.6%

21.6%

12.0%

2010 2011 2012 2013

Gov't Spending (RHS %GDP)Gov't Spending (LHS %Growth)

Economic Growth Gaining Momentum Government Spending on the Rise…

Source: DOF, DBM, NEDA

2013E 2014E 2015E 2016E

Infra Spending (Php Bil) 295 399 601 835

% Change 24% 35% 51% 39%

% GDP 2.5% 3.0% 4.0% 5.0%

Economic Growth Gaining Momentum With Focus on Infrastructure Spending

Source: DBM

2011 2012 2013

Value (Php Bil) 75.1 53.2 16.0

% GDP 0.8% 0.5% 0.1%

PROGRAMS & PROJECTS FUNDED THROUGH DAP

Economic Growth Gaining Momentum Removal of DAP to have Minimal Impact

Source: Bloomberg, COL Estimates *Due to one-offs ** Vulnerable to downside risk

SECTOR EPS Growth P/E

2014E 2015E 2014E 2015E PSEi 5.0% 14.5% 19.4 16.9

Banks 1.7% 15.3% 14.0 12.1 Conglomerates -0.3% 15.2% 16.0 16.5 Consumer** 10.6% 16.4% 29.6 25.4 Gaming* 240.3% 87.9% 33.6 17.9 Mining* 43.8% 34.2% 20.0 14.9 Power 20.8% 20.9% 15.5 12.8 Property 12.1% 13.7% 20.9 18.3 Telecoms 2.2% 3.1% 17.1 16.6 Others 14.6% 30.9% 20.4 15.6

Fundamentals to Catch up with Valuations EPS Growth to Jump from 5% ‘14 to 14% in ‘15

Source: Bloomberg, COL Estimates *Due to one-offs ** Vulnerable to downside risk

Fundamentals to Catch up with Valuations Drivers of Strong EPS Growth

14.7 12.3

17.2

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Source: Bloomberg

PSEi FORWARD P/E BAND 16.9x

Fundamentals to Catch up with Valuations PSEi to Trade at more Reasonable Valuations

Why Interest Rates will Stay Low

Stronger government finances Stronger external account position Ratings upgrade

3.9 20

00

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

10-YR BOND RATE

Fundamentals to Catch up with Valuations Lower Interest Rates Justify Higher P/Es

IN PHP BIL 6M13 6M14 % CHANGE

Ave Daily Value T/O 11.5 8.1 -29.3%

Local 5.5 3.9 -28.5%

Foreign 6.0 4.2 -30.0%

Net Foreign Buying 61.5 44.9 -26.9%

Mutual Fund Net Sales (Equity & Balanced Funds) 25,574.3 2,481.1 -90.3%

COMPARISON OF 6M13 & 6M14

Source: Bloomberg, PIFA

Poor Investor Sentiments Acts as a Good Contrarian Indicator Investor Participation Down Significantly

Poor Investor Sentiments Acts as a Good Contrarian Indicator AEC – Both a Threat & an Opportunity

AEC – WHAT TO EXPECT BY 2015 - ASEAN Economic Community

or AEC

- Free flow of goods, services, investment, capital, skilled labor between ASEAN countries

More intense competition Philippines is not competitive in attracting investments Philippine companies are small relative to foreign companies

Poor Investor Sentiments Acts as a Good Contrarian Indicator AEC – Both a Threat & an Opportunity

LISTED COMPANIES ARE NOT WORRIES - Most have already been

preparing for AEC

- Tariffs have already been reduced for most products as a result of AFTA (effective ~ 2008)

Dominant leadership position and strong branding in competitive local market Domestic scale, distribution network Some have experience operating overseas

Poor Investor Sentiments Acts as a Good Contrarian Indicator AEC – Both a Threat & an Opportunity

LISTED COMPANIES ARE NOT WORRIES

Lower cost of raw materials Ease of deploying labor Ease of expansion in ASEAN

BANKS EPS growth to rebound from 1.7% to 15.3% Trading gains bottom Net interest margins to rise Higher demand for loans where big banks have an advantage Potential threat from foreign banks not expected in the ST TOP PICKS: BDO & MBT

Market Weakness in 2H14 Opportunity to Accumulate for ‘15

POWER Rapid sector EPS growth of 20.9% Power shortage to improve sentiment for the sector Could benefit from increase in WESM prices TOP PICKS: AP

Market Weakness in 2H14 Opportunity to Accumulate for ‘15

INFRASTRUCTURE Higher infrastructure spending Launch of more PPPs TOP PICKS: AC & EEI

PROPERTY Residential sector in a secular bull market due to favorable demographics and low interest rates No signs of a bubble Oversupply concerns overblown as take up sales remain strong Strong growth of BPO sector continues to drive demand for office space and growth in recurring income Large players with huge landbank, strong recurring income base and balance sheet have the greatest advantage TOP PICKS: ALI, MEG & SMPH

Market Weakness in 2H14 Opportunity to Accumulate for ‘15

TEL Stable earnings and high dividend yield DNL Best proxy for the consumer sector as it is a beneficiary of the country’s resilient consumer spending Focus on specialized products makes it less vulnerable to competition Wait for pullbacks as prices currently elevated

Market Weakness in 2H14 Opportunity to Accumulate for ‘15

* ‘Buy Below Price’ provides upside of at least 25% for property stocks to factor in negative sentiment

STOCK PRICE ‘15 FV “BUY BELOW” PRICE

BDO 89.90 107.00 93.04

MBT 85.65 111.00 96.52

AP 36.80 45.85 39.87

AC 647.00 757.00 658.26

EEI 11.20 13.70 11.91

ALI 30.70 37.55 30.04*

MEG 4.26 5.82 4.66*

SMPH 15.76 20.86 16.69*

TEL 3,022.00 3,345.00 2,908.70

DNL 11.20 11.50 10.00

SUMMARY OF STOCK PICKS

Market Weakness in 2H14 Opportunity to Accumulate for ‘15

The market would most likely remain weak for the remaining part of 2014 due to concerns of rising inflation, political noise and focus on the PSEi’s 2014 valuation. However, we believe that the stock market will exit the consolidation phase as we approach 2015, and the second half of 2014 would be the best time to start positioning for this eventuality.

Reasons for our bullish 2015 outlook include the slower than expected monetary tightening globally and only a slight increase in interest rates domestically; the growing momentum of domestic economic growth brought about by resilient consumer spending and higher investment and infrastructure spending; recovery of listed companies’ earnings growth; and poor investor sentiment. Our favorite sectors and stock picks for 2015 include the banking sector (BDO & MBT), the power sector (AP), infrastructure plays (AC & EEI), TEL & DNL.