J.P. 摩根-亚太地区-房地产行业-菲律宾房地产投资策略-2019.8.13-33页.pdf

Asia Pacific Equity Research13 August 2019Equity Ratings and Price TargetsMkt CapPriceRatingPrice TargetCompanyTicker($mn)CCYPriceCurPrevCurEnd DatePrev End DateSM Prime HoldingsSMPH PM19,750PHP35.50OWUW40.00Jun-2035.00n/cAyala LandALI PM13,283PHP48.65Nn/c47.00Jun-2049.00n/cRobinsons Land CorpRLC PM2,435PHP25.00OWn/c28.00Jun-2029.00Dec-19Megaworld CorpMEG PM2,912PHP5.70UWOW4.80Jun-206.60n/cFilinvest Land,Inc.FLI PM846PHP1.81UWN1.60Jun-20n/cDec-19Source:Company data,Bloomberg,J.P.Morgan estimates.n/c=no change.All prices as of 12 Aug 19.Philippine PropertyReality bites:POGO party winding down,shift to defensives;D/G MEG,FLI to UW&U/G SMPH to OWPhilippinesPropertyJeanette Yutan AC(63-2)878-Bloomberg JPMA YUTAN J.P.Morgan Securities Philippines,Inc.Jelline Gaza,CFA(63-2)878 J.P.Morgan Securities Philippines,Inc.Cusson Leung,CFA(852)2800-J.P.Morgan Securities(Asia Pacific)LimitedSee page 27 for analyst certification and important disclosures,including non-US analyst disclosures.J.P.Morgan does and seeks to do business with companies covered in its research reports.As a result,investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report.Investors should consider this report as only a single factor in making their investment decision.We turn less constructive on the PH real estate sector.Our base case is a trend reversal for resi sales take-up and a deceleration of office leasing growth,driven by the impact of a serious turn in the POGO clampdown.We think a bear-case scenario where POGOs comes to a grinding halt is a tail risk,as sovereignty lines prevent China from pushing an absolute ban.Our preference is retail landlords like RLC and SMPH,given their high domestic consumption-led retail earnings stream and relatively low Chinese exposure.Our preference order:SMPHRLCALIMEGFLI.China finally speaks.The Chinese government,in a statement,explicitly urged the PH government to clamp down on PH casinos,POGOs;this is to protect Chinese citizens from employment abuse and to crack down on gambling-related crimes committed by Chinese,including money laundering.POGO clampdown gets serious.We see this as Chinas assertive approach in curbing POGOs in the PH without infringing on sovereignty issues.Recall,a PH inter-agency was created in May to clamp down on illegal POGOs,collect personal income taxes from Chinese workers,andstiffen the granting of visa and work permits.We think this will make it more expensive and tougher for POGOs to operate in the PH.Two-pronged setback.The turn of events,in our view,will deal the sector two setbacks.Office:Office demand growth decelerates on slower POGO take-up.A second-order negative impact hinges on the passage of the TRABAHO bill.The silver lining is the declining supply pipeline.Residential:Sales take-up reverses to a downward trajectory,driven by a tapering of Chinese demand and a second-order negative impact on residential capital values,which have zoomed up 20-100%in the last one and half years across key Metro Manila areas.No winners,all losers.We downgrade MEG to a non-consensus UW,given its material Chinese exposure,both in resi and office.We downgrade FLI to UW,given its high reliance on POGO office tenants and high office earnings contribution.ALI remains N,as a reversal of real estate capital values will inadvertently drag its development business growth.RLC(retain OW)and SMPH(upgraded to OW)are our defensive picks,given their marginal Chinese exposure,relatively low development earnings and highly predictable retail earnings streams.Relevant past reportsOn POGOs:Cracking the whip on POGOs:well-founded worries or exaggerated noise?10 June 2019POGO:A game changer,20 June 2017On the sector:Impact of the ban on new Metro Manila ecozone,27 June 2019Encouraging sector outlook but mind the bottom-up risks,18 Feb 2019On impact of tax reform:Lower House approved watered down TRAIN 2,11 Sept 2018Taking stock of TRAIN 2,7 Feb 20182Asia Pacific Equity Research13 August 2019Jeanette Yutan(63-2)878-Whats changed?POGO clampdown turns seriousWe think the crackdown on POGOs(Philippine offshore gaming operators)is turning serious.We see the Chinese governments explicit statement and the measures implemented by a PH inter-agency since 2Q19 as part of Chinas assertive approach in curbing POGOs in the PH without infringing on sovereignty issues.The Chinese Embassy in the Philippines released an explicit statement regarding gambling in the Philippines its first time making such an explicit statement in 15 years,when Chinese POGOs first set foot in the country on 8 August 2019.The statement came immediately after PAGCOR unveiled plans to create two“self-contained”POGO hubs located in Cavite and Clark will be exclusive to Chinese.We believe the explicit statement alongside the numerous PH inter-agency measures implemented beginning in 2Q19,including the toughening of immigration rules(granting of work permits)and strict enforcement of individual income tax collection,among others,are telltale signs that the clampdown efforts are resolute.The key takeaways are as follows:The statement expressed concern over PAGCORs plan to create“self-contained”POGO hubs exclusively for Chinese in Clark,Pampanga and Cavite.The concern stems from potential infringement of the basic rights of Chinese citizens.The statement strongly emphasized that any form of gambling,including online gaming,gambling overseas and the opening of casinos that target Chinese as primary customers,is illegal.The statement raised the issues such forms of gambling present in the PH,including POGOs and Philippine casinos leading to cross-border money laundering(with explicit mention of PH real estate as a conduit),increased numbers of Chinese working illegally in the PH,and rising cases of crimes against Chinese in the PH(kidnappings,etc.)among others.The Chinese government emphasized that it has the right and will aim to prosecute Chinese and Chinese companies for gambling-related crimes committed in the PH.It urged the PH government to help it“prevent and punish the Philippine casinos,POGOs and other forms of gambling entities for their illegal employment of Chinese citizens and crack down related crimes that hurt Chinese citizens”;it appealed to the PH government to strengthen law enforcement cooperation with them to jointly combat gambling-related crimes such as money laundering,illegal employment of Chinese,kidnapping,extortion,torture,murder,etc.The POGO crackdown has turned serious,in our viewThe Chinese govt released a strongly worded statement about POGOs for the first time in 15 yearsWe think these are part of Chinas approach to make POGOs more expensive and difficult to grow in the PH without infringing on PHs sovereignty3Asia Pacific Equity Research13 August 2019Jeanette Yutan(63-2)878-What are the key implications?Two-pronged setback The turn of events will deal the real estate sector two setbacks,in our view.It will have an adverse impact on the office leasing and residential development segments,both of which benefitted greatly from the rapid rise of Chinese demand in the last two to three years.Table 1:How did POGOs impact the Philippine real estate sector?How did the sector benefit from POGOs/Mainland Chinese buying?ResidentialPOGO demand mopped up high RFO inventory at the onset of 2016,a product of aggressive building in the early 2010s.Rental rates skyrocketed in POGO-preferred locations(Pasay and Alabang),which resulted in a steep capital value uptrend.Prices in“more prime”locations such as the Makati and Fort Bonifacio central business districts followed suit.Residential demand grew 20%/25%in 2017/18,eclipsing the low-to mid-single-digit increase in the prior five years.Developers became more aggressive in new launches to cater to the renewed buying appetite for the sector.OfficeOffice sector was on the verge of oversupply in 2016 amid multi-years of 1mn sqm of expected annual additional space.It didnt help that the appetite of IT-BPM firms dampened amid the Duterte Administrations pivot to China(and away from the U.S.),delayed PEZA approvals,plans to reform tax incentives and rising threats from automation.Legalization of POGOs in Sep-16 plugged the gap;comprising 25-36%of office absorption over FY17-1H19.Today,POGOs occupy 5%of Metro Manila office stock and a bigger 6.5%of office space outside the countrys capital.Source:J.P.Morgan,Company data,Leechiu Property Consultants.Table 2:Mainland Chinese and POGO exposure to residential and office segmentsSales take-upAs a%ofResi revenuesResi profitOffice space occupiedOffice profitFY18-1Q19total salesat risk of backoutscontribution#by POGOscontribution#(US$mn)take-up2020E2020E%of stockin sqm2020EALI2549%3%52%9%10215%FLI7613%5%56%20%9435%MEG52117%10%36%*14%15136%RLC7019%8%24%3%1630%SMPH24420%6%23%0%09%Total1,16514%10%373Source:Company data,J.P.Morgan estimates.Assumes percentage of completion and a four-year construction cycle.*After adjusting to VAT and JV share of RWM in Westside City.#Pertainsto EBIT for MEG and RLC,EBITDA for ALI and SMPH and gross profit for FLI.What is our base case?Growth tapersOur base case is that POGO remains status quo,but growth is materially curbed amid PH-China efforts to control,regulate and tax the operators and Chinese employees.PAGCOR reported that three POGO operators folded in 2Q19 on concerns that they might be over-taxed by the government.PAGCOR is also reportedly eyeing to tap European and U.K.POGOs to diversify away from the predominantly Chinese operators.We also expect Chinese appetite for residential projects to potentially taper,while developers could see a heightened risk aversion against Chinese demand and hold off on new launches targeted at the Chinese buyers.Negative impact on residential and office leasing segmentsPOGO growth tapers as PH-China efforts to control,regulate become unrelentingChinese appetite for residential projects also tapers as developers could hold off if Chinese demand weakens4Asia Pacific Equity Research13 August 2019Jeanette Yutan(63-2)878-Trend reversal for residential sales take-upWe expect residential demand to reverse to a declining trajectory in 2020.We cut our pre-sales take up growth assumption for FY19/FY20 from+11%/+6%to+2%/-4%.The reversal of the sales take-up trend will be driven by a material tapering of Chinese appetite for PH real estate condos and a higher risk aversion by developers in aggressively launching projects aimed at Chinese buyers.More importantly,we expect a second-order impact on real property prices/capital values,as weaker demand will adversely impact the future pre-sales trajectory.This is considering that ASP growth drove a majority of the last three years pre-sales growth(see Figure 5 to Figure 8).Developers that have registered strong take-up growth driven by aggressive launches in the Pasay or Bay area,where Chinese demand is robust,such as MEG and SMPH,could see a material pullback in their future resi reservation sales momentum.ALIs prudent risk management could pay off,as it has the lowest residential take-up exposure to Chinese.Figure 1:Quarterly sales take-up trendSource:Company data,J.P.Morgan estimates.Figure 2:Aggressive residential new launchesPhp bn(based on J.P.Morgan universe)Source:Company data,J.P.Morgan calculations.Figure 3:Residential sales take-up growth forecastSource:Company reports and J.P.Morgan estimates.Figure 4:Slowdown in residential demandPhp bn(based on J.P.Morgan universe)Source:J.P.Morgan estimates,Company data.-4%1%12%26%9%20%21%-11%1%1%5%-3%-2%-6%-2%32%24%32%10%16%39%16%24%11%6%-15%-5%5%15%25%35%45%1Q133Q131Q143Q141Q153Q151Q163Q161Q173Q171Q183Q181Q19167139193334341-16%38%73%2%-25%0%25%50%75%100%050100150200250300350FY15AFY16AFY17AFY18AFY19 TargetALIMEGSMPHRLCFLI%y/y(RHS)23%6%21%18%21%20%16%37%29%49%25%25%-2%1%2%10%10%2%-4%2%-7%-8%0%-4%-1%3%-7%-8%-10%-5%Ayala LandFilinvest LandMegaworldRobinsons LandSM PrimeIndustry-wide201720182019E2020E2021E55 102 107 167 180 207 213 220 265 331 338 324 85%5%55%8%8%3%3%20%25%2%-4%-10%0%10%20%30%40%50%60%70%80%90%-50 100 150 200 250 300 350 40020092010201120122013201420152016201720182019E 2020EALIFLIMEGRLCSMPH%y/yResidential pre-sales trajectory to head south on material weakness of Chinese appetite for PH real estateSecond-order impact on residential property prices could exacerbate the weak pre-sales trajectoryMEG,SMPH could see a reversal of fortune;ALIs prudent risk management limits its exposure to Chinese5Asia Pacific Equity Research13 August 2019Jeanette Yutan(63-2)878-Figure 5:Sharp acceleration in residential capital valuesASP in Php 000/sqm,%increase(Mar-18 vs.Jul-19)Source:Leechiu Property Consultants.Figure 6:Entry prices in Metro Manila condos per locationASP in Php 000/sqm,%increase(Mar-18 vs.Jul-19)Source:Leechiu Property Consultants.Figure 7:High-end condo prices in Metro Manila per locationASP in Php 000/sqm,%increase(Mar-18 vs.Jul-19)Source:Leechiu Property Consultants.Figure 8:Faster resi rent growth for POGO-preferred citiesPhp/sqm/month;4Y CAGR on ratesSource:Leechiu Property Consultants.Deceleration of office leasing growthOur base case is premised on POGO growth being undermined,given the turn of events.This means that POGO office take-up will taper off with slower organic growth of existing POGO licensees.We think this could cap the office rent escalation,as well;we have lowered our rent escalation assumption to near flat for FY19-FY20 from 3-5%.POGO office take-up has doubled per annum over the last three years,absorbing close to 700k sqm of space to date.POGO office absorption was up by almost 2.5x in 1H19,to 242k sqm,equivalent to IT-BPM take-up of 244k sqm and 82%of its FY18 actual demand.Another potential headwind to the office segment is the impact of the TRABAHO bill being pursued by the government.The Finance Department is aiming to pass the bill,which will rationalize fiscal incentives and reduce corporate income tax rates in 2H19.We think the passage of the bill would yield a negative impact to IT-BPM locators.Please see Taking Stock of TRAIN 2,7 Feb 2018,and Lower House approves watered down TRAIN 2,11 Sep 2018,for an in-depth analysis of how the tax package would impact PH equities,including the real estate sector.We think developers like FLI with scarce PEZA-(Philippine Economic Zone Authority)accredited space and high POGO office exposure will be most negatively POGO office take-up weakens as POGO growth slowsOffice lease rate escalation is expected to slow,tooTax reform package 2 is another office headwind and could cap the growth of IT-BPMFLI is the most exposed to POGOs,followed by MEG,but the latter has a high%of space that is PEZA-accredited6Asia Pacific Equity Research13 August 2019Jeanette Yutan(63-2)878-affected.MEG has a high POGO exposure relative to peers,but 63%of its office space leased to POGO is PEZA-accredited.Developers with scarce PEZA-accredited space and significant exposure to POGOs(FLI)shoul