On 2 June 2017, a lone gunman stormed into Resorts World Manila casino, and started opening fire with his assault rifle and setting gambling tables ablaze. At least 36 people were confirmed dead from the attack. Banking and gaming stocks crashed, dragging down the local stock market. Question is – How should we position ourselves? Where are the bright spots?
One important point to note is that the attack was probably motivated by heavy gambling debts and not terrorism. The Philippines police has identified the gunman as Jessie Carlos Javier, a 42-year-old Filipino man, who had a gambling problem and was heavily indebted. Carlos had intended to rob the casino for cash, but instead stole gaming chips as he was unable to access any cash. He later committed suicide by setting himself on fire and shooting himself. Hence, while this event may strike fear in the market, it is likely to be viewed as an isolated event and not terrorist attack.
According to leading broker CLSA, the fundamentals and outlook of the Philippines economy are still very positive. For one, the demand for business process outsourcing (BPO) services in the Philippines is tremendous, with BPO revenue expected to hit USD39 billion by 2022, representing a CAGR of 9.3% growth from 2016.
The remittances from overseas Filipino workers (OFW) have also been robust, despite the fact that the Middle East was the top three contributors to OFW remittances and that the sluggish oil prices may have an impact on these oil producing countries. As a reference, 1Q17 OFW remittances was up 7.7% YoY, beating CLSA 2017 estimates.
In addition, the gaming sector in the Philippines is the fastest growing among global gaming districts such as Macau and Singapore. Notably, Philippines gross gaming revenue (USD3.2 billion) has already surpassed Atlantic City (USD2.6 billion) in 2016, and is just behind Singapore (USD4.2 billion). Between 2009 and 2017, local and foreign GGR were estimated to have clocked a CAGR of 17% and 49%, respectively.
Looking ahead, the imminent passing of the package 1 of the Comprehensive Tax Reform Program is expected to be structurally positive for the Philippines economy. In view of this, CLSA has revised up its PCOMP target for 2018 to 8,600 (7.2% upside from current level).
CLSA Conviction BUYs
Ayala Corporation, Metro Pacific, PLDT, Jollibee, Universal Robina Corp, Security Bank, Semirara and Megawide