Company Report PHILIPPINE EQUITY RESEARCH

Phil. Long Distance Co.: Key meeting takeaways

Field Notes

28 SEPTEMBER 2010 SHARE DATA Rating Ticker Fair Value (Php) Current Price

HOLD TEL 3,725.00 2,622.00

Upside (%)

24.90

ABSOLUTE PERFORMANCE (%) 1M 3M YTD TEL 7.11 9.48 2.56 PSEi 15.85 22.56 35.06

MARKET DATA (Php) Market Cap 489,783.10 Mil Outstanding Shares 52 Wk Range 3 Mo Ave Daily T/O

186.80 Mil 2,320-2,707 389.85 Mil

Protecting cellular business. PLDT believes it can withstand the intense competition in the cellular industry. Despite the competitive pricing introduced to the industry, the company still managed to consistently maintain its market share in terms of revenue. In fact, market share actually improved by 1.5 percentage points from 57.3% in 1Q07 to 58.7% in 2Q10. Management added that the 5.9 percentage point market share improvement of Digitel came only at the expense of its biggest competitor, Globe. Going forward, PLDT believes it can continue to protect its cellular business. First, the company introduced the Red Mobile brand to directly compete with Digitel. Red Mobile gives the company an avenue to offer unlimited plans without sacrificing the quality of service to Smart and Talk & Text subscribers. This is achieved by separating and limiting the bandwidth allotted for Red Mobile subscribers. Red Mobile already has a subscriber base of 1.1Mil, which the company estimates to be ~25% of active Digitel subscribers. Second, PLDT is also encouraging subscribers to switch to voice calls over text messaging. The company makes use of its ability to segment subscribers based on usage patterns to offer specific promos to a targeted market. As a result, the company is able to encourage certain subscribers to use voice calls more often without cannibalizing revenue from subscribers who already use voice calls more often. Note that while cellular data revenue declined 14% in 1H10 due to bucket and unlimited plans, cellular voice data offset the drop with a 15% growth. Growth to come from broadband business and Meralco investment. With the flattish growth of its cellular and fixed line business, PLDT hopes to grow its business through its investments in broadband and power. The broadband business remains full of potential. PC penetration remains low at only 18% of urban households and 7% of nationwide households. Given significant size of the untapped market, the company believes that growth will be dictated by the ability to roll-out infrastructure rather than competitive pricing. PLDT believes it has a significant advantage in this regard given its already huge fixed line network. Meanwhile, PLDT should also receive higher earnings contribution from Meralco. In the nearterm, earnings growth from the power distribution business should be driven by high sales volume growth and PBR rate hikes. In the long-term, Meralco is also looking for ways to enter the profitable power generation business. Nevertheless, management notes that earnings from these business segments still pale in comparison to the cellular and fixed line businesses. As a result, management is sticking to its fullyear guidance of only slight growth in core earnings this year. High dividend payout likely to be maintained. PLDT also indicated that it will maintain its 100% dividend payout. Management believes it can replicate the 100% dividend payout ratio last year given the slight growth in earnings and no major investments in sight. Based on our computations, this would translate to a dividend yield of 8.6% in FY10 and 8.8% in FY11.

Financial Data Year to December 31 (Php Mil) Service Revenues % change y/y EBIT % change y/y EBIT margin EBITDA % change y/y EBITDA margin Core Income % change y/y Core income margin Core EPS (in Php) % change y/y

RESEARCH CONTACT

Paul Jeffrey Lu [email protected]

Relative Valuations P/E (X) Dividend yield (%) ROE Source: PLDT, COL estimates

2008 142,873 5.46 63,976 16.70 44.78 87,633 5.69 61.34 38,151 8.53 26.70 199.1 6.14

2009 145,647 1.94 60,587 (5.30) 41.60 86,194 (1.64) 59.18 41,138 7.83 28.25 209.7 5.36

2010E 151,550 4.05 63,303 4.48 41.77 90,897 5.46 59.98 42,406 3.08 27.98 222.0 5.87

2011E 155,859 2.84 64,162 1.36 41.17 93,036 2.35 59.69 43,722 3.10 28.05 229.0 3.14

2012E 157,982 1.36 63,065 (1.71) 39.92 92,952 (0.09) 58.84 43,548 (0.40) 27.57 228.1 (0.39)

13.17 7.63% 31.97

12.50 8.31% 38.49

11.81 8.56% 42.02

11.45 8.82% 43.54

11.50 8.79% 43.58

28 SEPTEMBER 2010

INVESTMENT RATING DEFINITIONS

BUY

HOLD

SELL

Over the next six to twelve months, we expect the share price to increase by 15% or more.

Over the next six to twelve months, we expect the share price move within a range of +/- 15%.

Over the next six to twelve months, we expect the share price to decline by more than 15%.

TOP PICK DEFINITION

A stock that is included in our “Top Pick” list has to meet the following criteria: 1.) It must belong to a sector with neutral to positive outlook; 2.) It must have double digit earnings growth for the current and the succeeding fiscal year; 3.) Its share price appreciation potential must be above 15% as of the date it was included in the list; and 4.) It must have an upward intermediate term trend.

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TEL /Field Notes/ page 2