Stocks in Focus: FRI 30 OCT 2020

SCC: 9M20 net income disappoint on poor

performance of power generation business

9M20 net income disappoint on poor performance of power generation business. (AS OF OCT 29, 2020)
SCC’s 3Q20 earnings declined 72% to Php723Mil. This brought 9M20 net income to Php3Bil, INDICES

down 64% y/y, below COL forecasts (62.7%), and consensus forecast (32%). Total revenues Close Points % YTD%
during 9M20 before eliminations declined 36.4% y/y to Php23.3Bil, lower than forecasts PSEi 6,249.39 -128.40 -2.01 -20.04
All Shares 3,753.08 -55.21 -1.45 -19.28
(62.8% of COL full year forecast). Revenues from the coal mining segment declined 44%
Financials 1,221.29 -30.39 -2.43 -34.47
to Php14.4Bil, representing 65.2% of our full year forecast. Meanwhile, power generation Holding Firms 6,486.45 -124.20 -1.88 -14.56
revenue declined by 18.4% to Php8.86Bil, representing 59.3% of our full year forecast. Industrial 8,416.73 -155.20 -1.81 -12.64
Earnings missed estimates primarily due to the poor performance of the power generation Mining & Oil 7,373.26 -197.93 -2.61 -8.88
Property 2,991.32 -49.04 -1.61 -28.00
business, only partially offset by the better than expected earnings of the coal business. Services 1,442.84 -30.87 -2.09 -5.76

Top Stories: Dow Jones 26,519.95 -943 -3.43 -7.07

S&P 500 3,271.03 -119.65 -3.53 1.25
Nasdaq 11,004.87 -426.48 -3.73 22.65
RRHI: 3Q20 net income down 30% y/y to Php750Mil, slightly below estimates
EMP: Strong earnings growth sustained in 3Q20 led by whisky segment
INDEX GAINERS
CHP: 3Q20 core net income surges 149.9%, beats estimates
Ticker Company Price %
CHIB: 2Q20 earnings up 21%; above estimates MER Manila Electric Co 294.00 1.03
IMI: IMI books US$9.1Mil profit in 3Q20, in line with estimates SMPH SM Prime Hldgs Inc 32.80 0.92
EMP Emperador Inc 10.00 0.00
MPI Metro Pacific Inv Corp 4.00 -0.25
RRHI Robinsons Retail Hldgs 64.40 -0.92
Other News:
INDEX LOSERS
Economy: Mall vacancy rates approaching AFC levels
Ticker Company Price %
Banking Sector: Lenders expect tighter lending standards in fourth quarter AEV Aboitiz Equity Ventures 42.10 -5.39
GLO: GLO raises investment in Fiber-to-the-Home network ALI Ayala Land Inc 32.20 -4.87
Economy: Foreign portfolio investments yield net outflows of US$494Mil in AP Aboitiz Power Corp 26.30 -4.36
BLOOM Bloomberry Resorts 7.06 -4.34
September
RLC Robinsons Land Corp 15.36 -4.00

COVID-19 Update: TOP 5 MOST ACTIVE STOCKS

Ticker Company Turnover
Total Cases Total Deaths Total Recoveries BDO BDO Unibank Inc 421,359,200
ALI Ayala Land Inc 384,082,300
Philippines 376,935 (+1,761) 7,147 (+33) 329,848 (+740) SMPH SM Prime Hldgs Inc 280,476,900
SM SM Investments Corp 266,656,200
USA 9,207,059 (+92,750) 234,111 (+1,034) 5,971,154 (+55,716) ICT Int'l Container Term 246,366,700

Worldwide 45,301,044 (+573,320) 1,185,629 (+7,228) 32,964,868 (+273,861)

Disclaimer: All content provided in COL Reports are meant to be read in the COL Financial website. Accuracy and completeness of content cannot be guaranteed if reports are viewed outside of the
COL Financial website as these may be subject to tampering or unauthorized alterations.
 DAILY NOTES I PHILIPPINE EQUITY RESEARCH

FRI 30 OCT 2020

Market Summary:

The local equities market continued to slide on Thursday, tracking the overnight decline on
Wall Street, amid the spike in COVID-19 cases globally.

The PSEi fell 128.40 points or 2.01% to close at 6,249.39. The sell-off was broad-based
with decliners beating gainers, 27 to 2. The main drags were AEV (-5.39%), ALI (-4.87%),
AP (-4.36%), BLOOM (-4.34%), and RLC (-4.00%). On the other hand, the only gainers were
MER (+1.03%) and SMPH (+0.92%).

Value turnover fell to Php6.7Bil from Php6.8Bil in the previous session. Meanwhile, foreigners
turned net sellers, disposing Php942.9Mil worth of shares.

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Stocks in Focus:

George Ching SCC: 9M20 net income disappoint on poor

Senior Research Manager performance of power generation business
Semirara Mining Corporation
9M20 net income disappoint on poor performance of power generation business.
BUY
Php25.60 SCC’s 3Q20 earnings declined 72% to Php723Mil. This brought 9M20 net income to
Php3Bil, down 64% y/y, below COL forecasts (62.7%), and consensus forecast (32%).
Total revenues during 9M20 before eliminations declined 36.4% y/y to Php23.3Bil, lower
than forecasts (62.8% of COL full year forecast). Revenues from the coal mining segment
declined 44% to Php14.4Bil, representing 65.2% of our full year forecast. Meanwhile,
power generation revenue declined by 18.4% to Php8.86Bil, representing 59.3% of our
full year forecast. Earnings missed estimates primarily due to the poor performance of
the power generation business, only partially offset by the better than expected earnings
of the coal business.

Exhibit 1: SCC 3Q20 Results Summary

% of COL
in PhpMil 3Q19 3Q20 %Change 9M20
FY forecast
Revenue (gross) 11,387 8,380 (26.4) 23,276 62.8
Coal (gross) 8,229 4,255 (48.3) 14,418 65.2
Power (gross) 3,157 4,125 30.7 8,858 59.3
Operating income 4,222 907 (78.5) 3,556 49.9
Operating Margin (%) 37.1 10.8 (26.3) 15.3 N/A
Net Income 2,585 723 (72.0) 2,989 62.7
Net Margin (%) 22.7 8.6 (14.1) 12.8 N/A

source: SCC, COL estimates

Coal business earnings beat forecast on lower than expected operating cost. Coal
mining revenues in 9M20 declined 44% y/y to Php14.4Bil, equivalent to only 65.2% of our
full year forecast. Sales volume for the period declined 30% to 8.45Mil MT (representing
only 65% of our full year forecast) as primarily due to lower export volume due to the
China import quota restriction. Sales volume to local customers rose 11% to 4.28Mil
MT, while export sales declined 49% to 4.17Mil MT. SCC’s average selling price for coal
declined 20% to 1,712/MT, in line with our full year forecast. Despite the coal business’
lower than expected revenues, earnings managed to beat forecast mainly due to the lower
than expected operating cost. Operating cost declined 39% to Php11.2Bil, representing
only 54% of our full year forecast. As a result, the coal segment’s net income amounted
to Php3Bil(-57% y/y), exceeding forecast, representing 196% of our full year forecast.
Management noted that New Castle coal price began to stabilize during 3Q20 and a
more significant recovery is expected in 2021. Management expects higher sales volume

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for 4Q20 as the company is able to deliver more shipment to China (through forward
contracts) as well as higher consumption from domestic customers. We estimate total
sales volume of 13Mil MT for 2020.

Calaca unit 1 and 2 results disappoint on plunge in selling price, higher than expected
costs. 9M20 revenue from Calaca units 1 and 2 rose 14% to Php5.95Bil, representing 60%
of our full year forecast. Energy sales rose 26% to 2,146Gwh (79% of full year forecast),
while average selling price declined 27% to Php2.77/kwh (24% lower than forecast). Unit
1 and 2 sold 58% of its output to the spot market at an average price of Php2.46/kwh
(-27% lower y/y). Meanwhile, operating cost declined by 9% to Php5.4Bil, equivalent to
95% of our full year forecast. As a result, Calaca unit 1 and 2’s posted a net income of
only Php174Mil during 9M20 (6.5% of our full year net income forecast of Php2.6Bil).
Despite the poor 9M20 performance, unit 1 and 2’s average selling price is set to improve
beginning 2021. Management disclosed that it expects to secure ~ 97MW of long term
contracted capacity with a number of distribution utilities. It is also negotiating 100MW
of capacity contract with Meralco. Assuming that these contracts push through, total
contracted capacity for unit 1 and 2 beginning 2021 will improve to 62% of total capacity
(from 28% currently) and make the company less exposed to WESM prices.

Calaca unit 3 and 4 earnings below forecast on unplanned outages and low selling
price. Revenues generated by the Calaca unit 3 and 4 declined 48% to Php2.9Bil,
representing 58% of our full year forecast. Total volume sold declined 23% to 1,045Gwh
as unplanned outages disrupted the plants operation(unplanned outages hours 534%
higher y/y), and as overall power demand declined due to the impact of Covid-19. 9M20
sales volume represents only 57% of our full year forecast. Average selling price declined
33% to Php2.79/kwh mainly due to the decline in WESM prices. 62% was output was
sold to the WESM due to the limited bilateral contracts held by the units. Cost of power
generation declined 15% to Php3.1Bil, representing 86% of our full year forecast. As a
result, Calaca unit 3 and 4 posted a net loss of Php232Mil during 9M20, lower than our
full year net income forecast of Php600Mil. Management expects the average selling
price of unit 3 and 4 to improve going forward as an additional 150MW of capacity was
contracted beginning last September, bringing total contracted capacity level to 74%.

Maintaining BUY rating. We have a BUY rating on SCC with a FV estimate of Php25.60/
sh. Despite the very poor earnings outlook of the company, we believe that much of the
negative news is already priced-in. The stock is the cheapest among all power companies,
trading at only 6X 21E P/E based on our earnings forecast. Capital appreciation is also
significant at 138% based on our fair value estimate.

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Top Stories:

Justin Richmond Cheng, CFA RRHI: 3Q20 net income down 30% y/y to
Research Analyst
Php750Mil, slightly below estimates
Robinsons Retail Holdings Inc.
BUY 3Q20 net income down 30% y/y, slightly below estimates. RRHI’s 3Q20 net income fell
Php84.00 29.5% y/y to Php750Mil. This brought 9M20 earnings to Php2.4Bil, down 13.8% y/y. Results
were slightly below COL estimates, accounting for only 62.7% of our full-year forecasts,
but in line with consensus at 64.7% of full-year forecasts. The underperformance was
mainly due to weaker-than-expected sales amid lower disposable incomes. This caused
Supermarket sales to be flattish in 3Q20, coming from mid-teens growth in 1H20. The
slowdown in supermarket sales weighed down on RRHI’s overall revenues, offsetting the
slight recovery in some of RRHI’s discretionary formats. Thus, RRHI’s net sales declined
by 11% and 6% in 3Q20 and 9M20, respectively. Blended same-store-sales growth
(SSSG) stood at -11.7% in 3Q20 given the overall weakness of RRHI’s store formats due to
the ongoing pandemic. The reimposition of a two week modified enhanced community
quarantine (MECQ) in early August also dampened foot traffic and sales inside RRHI’s
malls.

Exhibit 1: Results Summary

Source: RRHI, COL Estimates, Bloomberg

RRHI’s 3Q20 sales drop 11% y/y to Php34.6Bil. RRHI’s 3Q20 sales dropped 11.1%
y/y to Php34.6Bil. This brought 9M20 sales down 2.9% y/y to Php110Bil. The decline in
sales was amid the continued double-digit decline across discretionary formats, led by
Department stores (-61%), Specialty stores (-26%), and DIY stores (-18%). Nevertheless,
with the gradual reopening of the economy, these formats have actually shown a 20-
50% improvement in sales quarter-on-quarter versus 2Q. This was despite the return to
MECQ for two weeks in August. Going forward, management shared that some formats
have continued to see improvements in early 4Q (e.g. DIY) as the economy continues to
reopen.

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Despite the improvement in its discretionary formats, RRHI’s supermarket experienced

flattish sales and a significant slowdown in SSSG to 2.2% from 14.2% in 2Q20. The weaker
grocery sales was attributed to lower disposable incomes amid the weaker economic
backdrop and also due to the rising competition from social commerce and aggregators.
Drugstore performance also weakened in the third quarter of 2020 with SSSG turning
negative. This was due to the lower demand for prescription drugs as more people stayed
at home and avoided going to hospitals.

Exhibit 2: Segment sales breakdown

Source: RRHI

Accelerating e-commerce initiatives amid potential threats from social commerce.

RRHI is accelerating its e-commerce initiatives amid the ongoing pandemic. Note that
COVID-19 has accelerated digitalization trends and paved the way for new behaviors such
as online selling through social media platforms and community groups. Aggregators
have also sprouted inside gated communities, providing goods and services to its
residents. In response to these evolving trends, RRHI said it is fast tracking the addition
of more stores and business formats in its own e-commerce website. For supermarkets,
the contribution of online sales is still at 0.9%, but RRHI aims to double this in 2021 as
more stores and products become integrated in its Go Robinsons platform. It also aims
to integrate its DIY, Appliance business, and Drugstores into the said platform within the
next 12 months.

Rose Pharmacy turnaround expected in two years. RRHI expects to turnaround Rose
Pharmacy within two years from its acquisition. Recall that the company is acquiring
Rose Pharmacy for Php4.5Bil. Rose Pharmacy has around Php9Bil in sales and Php21Mil
in EBIT loss as of 2019. Similar to what it did with Rustan’s, RRHI will work on integrating
Rose Pharmacy, leverage on its existing scale and expertise operating South Star Drug
and TGP. Management expects to generate Php400Mil in operating efficiencies and
synergies over the medium to long term (five year horizon) with the acquisition of this
leading VisMin drugstore chain.

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Maintain BUY rating. We currently have a BUY rating on RRHI with an FV estimate of
Php84/sh. We continue to like RRHI given its well-diversified portfolio of retail formats
and positive long-term growth prospects. We think its recovery initiatives, especially the
strengthening of its e-commerce platform, makes RRHI well-positioned to capitalize on
future growth opportunities amid increasing digital trends.

Justin Richmond Cheng, CFA EMP: Strong earnings growth sustained in 3Q20
Research Analyst led by whisky segment
Emperador, Inc.
3Q20 earnings grow 25.9% y/y to Php2.5Bil, ahead of estimates. EMP’s 3Q20 earnings
SELL
Php6.10 grew 25.9% y/y to Php2.5Bil. This brought 9M20 earnings to Php5.9Bil, up 11.4% y/y.
Results outperformed both COL and consensus estimates, accounting for 86.6% and
89.9% of full-year forecasts, respectively. The outperformance continued to be driven by
the robust performance of EMP’s whisky segment. Earnings from EMP’s whisky segment
grew 72% in 3Q20 alone, bringing its net income up 28% y/y for the first nine months of
2020. Notwithstanding the limited on-trade and travel retail sales amid the pandemic,
whisky sales remained robust, growing by double-digits. Meanwhile, the brandy segment
also managed to grow earnings by 7% in 3Q, primarily thanks to operational cost savings
as sales were still partly dampened by prevailing liquor bans in certain areas.

Exhibit 1: Results Summary

Source: EMP

Whisky segment records all-time high in quarterly earnings. EMP’s whisky business
under Whyte and Mackay Group (WMG) recorded Php995Mil in net income during
3Q20, an all-time high in quarterly earnings. The strong performance of WMG was amid
robust sales growth as whisky sales are doing very well in Asian markets, especially in
China, as well as in the UK. WMG’s top whiskey brands Dalmore and Jura led the growth,
while its Tamnavulin brand is gaining strong momentum as the fastest growing single
malt whiskey. WMG’s earnings growth of 72% in 3Q was also boosted by lower operating
expenses, particularly representation expenses and advertising. These expenses are
expected to remain subdued while travel retail sales remain sluggish due to the pandemic.

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Brandy segment earnings up 7% in 3Q20 amid cost controls. EMP’s brandy segment
reported Php1.6Bil in net income for 3Q20, up 7% y/y. This brought 9M19 brandy earnings
to Php3.9Bil, up 4% y/y. Earnings from the brandy business managed to grow despite
the 2% sales decline in 3Q20 thanks to benign input costs and lower costs including
lower marketing expenses among others. Meanwhile, brandy sales continued to decline
in 3Q20 given prevailing liquor bans in certain parts of the country. Nevertheless, sales
did see some improvement quarter-on-quarter, growing by 17% compared to 2Q as the
economy started to reopen and local government units eased liquor restrictions. We
think brandy sales could remain weak going into 4Q20 as some areas in the Philippines
have reimpose liquor bans until the end of 2020 (i.e. Davao).

Exhibit 2: Segment Breakdown

Source: EMP

Estimates under review. We will be reviewing our estimates to take into account the
stronger-than-expected 9M20 results. We currently have a SELL rating on EMP with a FV
estimate of Php6.1/sh.

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Frances Rolfa Nicolas CHP: 3Q20 core net income surges 149.9%,
Research Analyst beats estimates
Cemex Holdings Philippines, Inc.
3Q20 core net income surges 149.9%, beats estimates. CHP’s 3Q20 earnings reached
HOLD
Php1.45 Php623Mil, more than eight fold higher than the Php72Mil income posted in 3Q19.
Excluding non-core items such as forex gain/losses and other expenses, 3Q20 core net
income reached Php493Mil, up 149.9% y/y. The surge in core net income was mainly due
to lower cost of sales, distribution expenses and financial expenses. This brought 9M20
core net income to Php629Mil, down 11.9% y/y. Results outperformed both COL and
consensus estimates, exceeding full year forecasts at 147.3% and 196.9% respectively.
The beat in our estimates was mainly due to lower-than-expected cost of sales and
distribution expenses, accounting for just 70% and 72% of our full year forecasts
respectively.

Exhibit 1: Results Summary

source: COL estimates, CHP, BLoomberg

Volumes up 38% q/q as restrictions are eased. CHP’s volumes rebounded in 3Q20,
growing by 38% q/q, as construction activity gradually improved with the easing of
quarantine restrictions in the country. Meanwhile, ASP remained relatively stable, up
1% q/q, mainly due to product and geographic mix. These brought 9M19 revenues to
Php15.1Bil, down 16.9% y/y. Moving forward, we expect construction activity to remain
muted due to the rainy weather. Moreover, public construction will likely slowdown
as some projects were already discontinued or can no longer be implemented due to
the pandemic. We also expect ASP to remain stable or even to slightly decline due to
intensifying competition given the weak demand. Note that according to management,
cement demand declined by ~15% year to date.

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Margins improve on lower costs and expenses. CHP’s 3Q20 cost of sales dropped by
13.1% y/y to Php3.0Bil mainly due to efforts to contain expenses amidst the pandemic,
and lower energy prices. Likewise, distribution costs dropped 9.7% y/y to Php935Mil due
to lower volumes. These led to a significant improvement in the company’s gross margin
and EBITDA margin, up by 4.5pp to 45.8% and by 7.6pp to 25.9% respectively, during
the quarter. Moreover, CHP’s 3Q20 financial expenses dropped 50.9% to Php173Mil as
a result of lower debt levels. Recall that the company used a portion of the funds from
its stock rights offering to pay related party loans that carry steep interest rates. Moving
forward, we expect cost of sales to increase as CHP implements kiln maintenance works
that were previously deferred because of the pandemic. Note that this will not affect
supply as the company has enough inventory on hand.

Expansion expected to be completed by December 2021. Construction works on the

company’s Solid plant expansion have resumed, with strict health and safety protocols
in place. After evaluating its progress, management noted that the expansion will likely
be completed by December 2021. Recall that this will increase the company’s capacity by
1.5Mil tons, bringing total capacity to 7.2Mil tons.

Revising estimates. We are reducing our ASP growth forecast from -3% to -5% in 2020.
This decreased our revenues forecasts by 2.1% in 2020 and by 1.1% in 2021. Moreover,
we are increasing our gross profit margin forecast by 2pp in 2020 and slightly lowering
it by 0.5pp in 2021. Furthermore, we are reducing our distribution expenses forecast by
4.8% in 2020 and by 3.9% in 2021. Factoring these, our net income estimates increased
by 89.2% to Php809Mil and by 6.7% to Php1.2Bil in 2021.

Exhibit 2: Changes in Forecast summary

source: COL estimates

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Maintain HOLD rating. Accordingly, we are increasing our FV estimate on CHP to

Php1.45/sh. While construction activity is expected to improve as the economy restarts,
social distancing rules and other regulations will likely remain in place as the government
tries to contain the pandemic. Moreover, the rainy weather and discontinuance of some
of the government’s capital outlay projects would likely slowdown construction activity
in the country for the rest of the year. Hence, downside risks remain as construction
operations could face delays, and it would take longer for volumes to return to pre-
COVID-19 levels. As such, we are maintaining our HOLD rating on CHP.

John Martin Luciano, CFA

CHIB: 2Q20 earnings up 21%; above estimates
Senior Research Analyst

2Q20 earnings up 21%; above estimates. China Bank’s net income during the third
China Banking Corporation
BUY quarter expanded by 21% y/y to Php3.0Bil. Growth was driven by robust revenues, with
Php26.00 net interest income expanding 30% y/y on the back of higher net interest margin and
volume and non-interest income increasing 23% y/y. This brought the 9M20 earnings
higher by 23% y/y to Php8.2Bil. This ended above both COL and consensus forecasts,
accounting for 100.2% and 96.0%, respectively. The outperformance vs our forecast can
be attributed to stronger than expected net interest income and non-interest income.
This was partially offset by higher than expected provisions. The 9M20 results translate
to an annualized ROE of 11.1%.

Exhibit 1: Results Summary

source: CHIB, COL estimates

Net interest income expands strongly on higher net interest margin. Net interest
income continues to expand strongly, increasing by 30% y/y to Php9.0Bil. This is driven
by both higher volume and net interest income. The bank’s loan portfolio expanded by
6% y/y to Php595Bil, driving total assets higher by ~5% y/y. Meanwhile, based on our
estimates, net interest margin expanded by ~71 bps y/y and ~28 bps q/q to ~3.79%.
We believe the improvement on a sequential basis was driven by the faster decline of
funding cost vs asset yields. In fact, we estimate that interest expense during the quarter
dropped 49% y/y. Nevertheless, we expect pressure on net interest margin as loans
gradually re-price. Recall that the BSP has already reduced its policy rate by a total of 175
bps this year. This should translate to lower loan yields, particularly on corporate rates.
For 9M20, net interest income amounted to Php25.2Bil, up 35% y/y. This ended above
our forecast, accounting for 80.9% of our full-year target

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Robust trading gains drive non-interest income growth. Non-interest income during
the third quarter rose by 24% y/y to Php2.3Bil. This was largely driven by higher trading
gains and higher income from its trust business. The bank likely sold a portion of its
investment securities and realized some gains. Note that the 10-year bond rates remains
low at 2.98% as of end September 2020. Meanwhile, non-interest income for the first
nine months reached Php7.0Bil, up 35% y/y. This exceeded our expectations, accounting
for 115.5% of our full-year target.

Provisions remain elevated. The bank allocated Php1.5Bil in provisions in the third
quarter, up significantly from Php195Mil last year (low base). Total provisions for the
first nine months amounted to Php6.3Bil. This is equivalent to a credit cost of ~107 bps
(not annualized), of which ~26 bps was booked in the third quarter. The bank plans to
further increase its provisions this year as it looks to book ~125 bps of credit cost. On
the other hand, 2021 credit cost is expected be lower as most of the provisions are front-
loaded this year. Compared to our forecast, provisions for the first nine months already
exceeded our full-year target of Php3.6Bil. In terms asset quality, NPL ratio rose to 2.5%
from 1.6% in the second quarter. The increase in NPL during is expected given that the
loan moratorium of Bayanihan 1 ended in May. The bank believes that NPL ratio will
peak at sub 4% next year as it expects a manageable increase in NPL levels given that
consumer loans composed only a small portion (~20%) of its loan portfolio. In addition,
~2/3 of their consumer loans are secured. Meanwhile, we believe NPL coverage ratio
remains high at 104% despite declining from 146% in the previous quarter.

Maintain Buy. We currently have a BUY rating on CHIB with a FV estimate of Php26/
sh based on 0.65X 2021E P/BV. CHIB’s earnings will be hurt by the COVID-19 pandemic
and the ECQ as these are expected to slow economic activity which will inevitably curtail
loan demand and financial transactions. More importantly, we expect some deterioration
in asset quality amidst the suspension of business operations in various locations.
Nevertheless, we believe that the negatives have already been priced-in. At its current
price, the bank is only trading at 0.5X 2021E P/V.

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Adrian Alexander Yu
IMI: IMI books US$9.1Mil profit in 3Q20, in line
Research Analyst
with estimates
Kerwin Malcolm Chan
Research Analyst IMI books US$9.1Mil net income in 3Q20. IMI booked a net income of US$9.1Mil in
3Q20, a turnaround from the US$21.0Mil net loss reported during 1H20. This brought
Integrated Micro-Electronics
HOLD IMI’s 9M20 net loss to US$11.9Mil, in line with COL’s FY20 estimate of US$4.1Mil net loss
Php6.00 and above consensus’ FY20 estimate of US$13.8Mil net loss.

Meanwhile, 3Q20 revenues increased by 2.8% y/y to US$312.4Mil as IMI’s automotive and
industrial operations normalized, with manufacturing sites reaching 75-80% utilization.
This brought 9M20 revenues to US$788.6Mil, accounting for 68.4% of COL and 75.0% of
consensus’ estimates. IMI’s gross profit margin in 3Q20 likewise expanded by 240bps to
9.7% as IMI improved its utilization of overhead and manufacturing efficiency.

Exhibit 1: Results Summary

source: IMI, COL estimates, Bloomberg

Revenues recover on better automobile and industrial segments. 3Q20 revenues grew
by 2.8% y/y to US$312.4Mil as IMI’s automotive and industrial segments showed a better
than expected recovery during the period. Management mentioned that manufacturing
sites improved with normalized operations resulting in higher revenues. Note that these
two segments contribute to around 73% of IMI’s consolidated revenues. IMI expects the
automotive and industrial segment to sustain its recovery in the fourth quarter of 2020.

On the other hand, IMI’s consumer and telco segments experienced a slowdown in 3Q20
following its resilient growth in 1H20. The company saw its consumer segment normalize
after the sudden surge in demand during the start of the pandemic. Meanwhile, the telco
segment’s revenues fell by 28.5% y/y in 3Q20 due to the continued tensions between
China and the US.

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Exhibit 2: Segment Revenues

source: IMI

OPEX drops as IMI pursues cost-cutting initiatives. Operating expenses in 9M20

fell 5.3% y/y to US$70.5Mil. This is mainly due to the continued streamlining activities
IMI is pursuing to reduce unnecessary costs. Management mentioned that they are
standardizing the operating structure across all their different plant sites to increase
efficiency and drive down costs.

Healthy balance sheet amid pandemic. Management decided to control their

investments this year to maintain a healthy capital structure amid the pandemic. IMI
disclosed that their new capex guidance for the year is US$23Mil, lower than the
US$38.8Mil capex investment spent in FY19. Management also mentioned that the
company is generating higher cash flows as they continue to cut unnecessary costs.
Hence, the company’s cash levels as of end-September ended at US$265.2Mil, much
higher than the US$152Mil level as of end-2019. IMI maintained a healthy balance sheet
with a D/E ratio of 0.44x despite its vulnerability to the pandemic.

Reiterate HOLD rating. We reiterate our HOLD rating on IMI with an FV estimate of
Php6.0/sh. At its current price of Php6.78/sh, the company is already trading above our
fair value estimate. Nonetheless, we continue to like IMI as the company continues to
show a strong recovery post pandemic.

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Other News:
Research Analysts
Economy: Mall vacancy rates approaching AFC levels
John Martin Luciano, CFA
Mall operators are expected to end the year with the highest vacancy rates in retail leasing
Frances Rolfa Nicolas
Justin Richmond Cheng since the Asian Financial Crisis (AFC), with retail rents expected to continue declining until
Adrian Alexander Yu 2021. Vacancies in Metro Manila retail increased to 12.5% in 3Q20, after a 30-50% drop
Kerwin Malcolm Chan in mall foot traffic. Colliers International Philippines expects this vacancy rate to hit 14%
by the end of 2020 as a lot of retailers move to the online space. Their Head of Research
Joey Bondoc said that consumer confidence is low, even hitting a record low in 3Q20, so
they are likely to see a correction in lease rates. With this, Colliers also expects retails rents
to fall 10% by the end of the year, continuing until next year, until a possible recovery in
2022. (Source: Bworldonline)

Banking Sector: Lenders expect tighter lending standards in

fourth quarter

According to a survey conducted by the BSP, most banks remained strict in their loan
standards during the third quarter for enterprises and households, with many expected
to further tighten lending criteria in the fourth quarter as the pandemic drags on. The
central bank’s survey found that while most respondent banks anticipate keeping credit
standards for firms, a large percentage also expect to tighten loan criteria due to a more
uncertain economic outlook along with expected deterioration in borrowers’ profiles and
profitability of banks’ portfolios, including banks’ lower tolerance for risk. Meanwhile,
the outlook for next quarter showed that banks are expecting stricter overall lending
standards for household loans due to economic uncertainty, a likelihood of deterioration
among borrowers’ profile, and lower risk tolerance of banks. Note that loan growth in
August eased to 4.7%, the slowest since the 2.4% pace in June 2007 when the global
financial crisis was just starting. (Source: Businessworld)

GLO: GLO raises investment in Fiber-to-the-Home network

GLO announced that it increased its investment in their Fiber-to-the-Home (FTTH) network
by 189% this year as the company continues to bring high-speed fixed broadband services
to more homes across the country. The company’s investments so far have brought their
broadband fiber capacity lines up by 158% as of September from the whole year of 2019.
GLO expects their fiber capacity lines to further rise with the continuous rollout of their
fiber network. They have allocated Php50.3Bil in capex for network improvements this
year. (Source: Bloomberg)

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Economy: Foreign portfolio investments yield net outflows of

US$494Mil in September

BSP reported that foreign portfolio investments (FPI) transactions in September 2020
registered net outflows of US$494Mil, larger than the recorded net outflows of US$127Mil
in August. Registered foreign portfolio investments for the month dropped by 10.9% to
US$594Mil while outflows grew 37.1% to US$1.1Bil. Investments for the month were
mostly in PSE-listed securities with 92.5% share of the total, while the remaining 7.5%
balance went to investments in Peso government securities. Top investing countries were
Singapore, the United Kingdom (UK), the United States (US), Luxembourg, and Switzerland
with combined share of 82.6% of total investments. In contrast, the US continued to be
the main destination of outflows, receiving 61.0% of total remittances. This brought the
FPI transactions for the first nine months of the year to net outflows of US$4.4Bil, larger
than the US$1.3Bil net outflows in the same period last year. (source: BSP)

Changes in Shareholdings
Date of Acquired or Price per
Stock Volume Person (Designation)
Disclosure Disposed share
159,000 3.82 Ryan Rene C. Jornada
30-Oct NIKL D (Assistant Vice President -
52,000 3.83
Government Relations)
3,000 26.05
1,000 26.10
1,000 26.15
1,000 26.20
1,000 26.30
1,000 26.40 Alexander C. Yu
30-Oct COL D
1,800 26.50 (Vice Chairman)
3,400 26.60
500 26.75
500 27.00
1,100 27.50
500 27.75
Paulwell Han
30-Oct COL 700,000 A 26.00
(Director)
Source: PSE

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I M P O R TA N T R AT ING DEFINITIONS
BUY
Stocks that have a BUY rating have attractive fundamentals and valuations based on our analysis. We expect the share price to outperform the market in the
next six to 12 months.

HOLD
Stocks that have a HOLD rating have either 1) attractive fundamentals but expensive valuations 2) attractive valuations but near-term earnings outlook might
be poor or vulnerable to numerous risks. Given the said factors, the share price of the stock may perform merely in line or underperform in the market in the
next six to twelve months.

SELL
We dislike both the valuations and fundamentals of stocks with a SELL rating. We expect the share price to underperform in the next six to12 months.

I M P O R TA N T DISC L AIM ER
Securities recommended, offered or sold by COL Financial Group, Inc. are subject to investment risks, including the possible loss of the principal amount invested.
Although information has been obtained from and is based upon sources we believe to be reliable, we do not guarantee its accuracy and said information may
be incomplete or condensed. All opinions and estimates constitute the judgment of COL’s Equity Research Department as of the date of the report and are
subject to change without prior notice. This report is for informational purposes only and is not intended as an offer or solicitation for the purchase or sale of
a security. COL Financial and/or its employees not involved in the preparation of this report may have investments in securities of derivatives of the companies
mentioned in this report and may trade them in ways different from those discussed in this report.

CO L R E S EAR C H T EAM

APRIL LYNN TAN, CFA

VP & HEAD OF RESEARCH
[email protected]

CHARLES WILLIAM ANG, CFA GEORGE CHING RICHARD LAÑEDA, CFA

DEPUTY HEAD OF RESEARCH SENIOR RESEARCH MANAGER SENIOR RESEARCH MANAGER
[email protected] [email protected] [email protected]

JOHN MARTIN LUCIANO, CFA FRANCES ROLFA NICOLAS JUSTIN RICHMOND CHENG
SENIOR RESEARCH ANALYST RESEARCH ANALYST RESEARCH ANALYST
[email protected] [email protected] [email protected]

ADRIAN ALEXANDER YU KERWIN MALCOLM CHAN

RESEARCH ANALYST RESEARCH ANALYST
[email protected] [email protected]

C OL F INANC IAL G R O UP, IN C.

2402-D EAST TOWER, PHILIPPINE STOCK EXCHANGE CENTRE,
EXCHANGE ROAD, ORTIGAS CENTER, PASIG CITY
PHILIPPINES 1605
TEL NO. +632 636-5411
FAX NO. +632 635-4632
WEBSITE: www.colfinancial.com

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