AYALA LAND INCORPORATED

AYALA LAND INCORPORATED 2013 - COMPANY PROFILE AND FINANCIAL STATEMENT ANALYSIS BILLY BASCON KRIEK DALUGDUG ARMAND AKEE PAPA FRANCHELLE MAMARIL KARMI ORTIZ Contents I. Industry Overview and Prospects... 3 A. Overview of the property sector... 3 B. Property Sector in the Philippines... 3 C. Industry prospects... 7 II. Company Overview... 9 A. History... 9 B. Description... 9 C. Business Portfolio... 10 D. Segment Information... 12 E. Corporate Governance Practices... 13 F. Awards Received... 14 III. Company Business Strategy... 16 IV. Financial Reporting Practices... 17 A. Summary of Significant Accounting Policies... 17 B. Significant Judgments and Estimates... 18 V. Quantitative and Qualitative Analysis... 19 A. Financial Statements... 19 B. ROE and DuPont Decomposition... 24 C. Comparative Analysis... 24 D. Relative Valuation... 27 E. Fundamental Valuation... 27 VI. Investment Recommendation... 28 References:... 29

2

I. Industry Overview and Prospects A. Overview of the property sector The real estate or property industry concerns the interaction between owners, users and renters from the demand side of the business and the developers and renovators from the supply end. Developers prepare raw land for structures that acts as products while renovators supply available refurbished buildings to the market. Facilitators generally include banks, real estate brokers, lawyers, and the like, which assist the purchase and sale of these real estate properties. 1 Real estate investing involves the purchase, ownership, and management of real estate property with the intention of realizing earnings through rent, sale or resale. Improvement, remodeling or renovation of realty property as sold at a profit is considered a short- term investment strategy known as real estate development. Having this dual nature as an investment good and consumption good, it is not uncommon for people to over- invest in real estate. While real estate is durable as it lasts over long periods of time and land is practically indestructible, it is significant to note that it is an asset in form with limited liquidity relative to other investment and is as well capital intensive with high dependence on cash flow. It requires long time delays as needed to finance, design, and construct due to slow rate of change in demand and covers high transaction costs such as real estate fees, legal fees, and land transfer taxes. Immobility of the real estate market in terms of location also dictates that it adjusts with the customers moving to dwelling units rather than movement of goods and thus influenced by potential externalities inherent in a specific location. More so, indicators of cost of living such as GDP, changes in inflation and interest rates directly affect demand and market performance. Every real estate is unique due to location, structure and financing and as expected, eventually depreciates. This makes pricing difficult and requires market equilibrium to operate across multiple quality levels. The market is typically divided into residential, commercial, and industrial segments. B. Property Sector in the Philippines The year 2012 marked a banner year for the Philippine s property market, with 52,000 condo units sold in Metro Manila alone. More remarkable expansion was recorded in 2013, with continued growth in all segments. The country s real estate market is backed up by low interest rates and increased overseas remittances. Considering continuous 1 http://en.wikipedia.org/wiki/real_estate_economics 3

expansions, local developers now face the challenge of strategic positioning as to secure and maintain industry leadership. While the Philippine property market is not monopolized by one firm alone, it is noticeable that a few major players dominate the market. Overview of the country s top 5 listed property firms in terms of market capitalization (as of November 21, 2014) are as follows 2 : 1. AYALA LAND INC. In 2012 alone, ALI launched a total of 67 projects that amounted to PhP 90 billion in 2012 alone having net profit of PHP6.6 billion in the first three quarters of that year. Though initially into high- end construction real estate, it has explored mass housing and now leads in having a full spectrum of commercial and residential development. Brands: [Residential] Ayala Land Premier, Alveo, Avida, Amaia, Bella Vita [Commercial and Industrial] Nuvali, FTI, Laguna Technopark [Services] Makati Development Corporation Projects in progress: Vertis North (Quezon City), Arca South (Taguig), The Circuit (Makati), Alataza (San Jose del Monte, Bulacan) 2. SM PRIME HOLDING INC. In 2013, SM Prime announced the consolidation of the conglomerate s real estate businesses, which will rival Ayala Land s foothold as the country s largest and most diversified real estate Company. The transformed SM Prime will operate 47 malls across the Philippines with a gross floor area (GFA) of 5.8 million square meters and 6 in China with a combined GFA of ~800,000 square meters; 17 high- rise condominium projects and will turn over 34,482 units from 2013 up until 2018; and total land bank of 920 hectares. Subsidiaries: SM Land Commercial Properties Group, Highlands Prime, SM Development Corporation Recent projects: Mall of Asia complex that includes Shore and Sea Residences (Pasay City), Tagaytay Highlands, Costa del Hamilo s Pico de Loro Cove 2 http://www.zipmatch.com/real- estate- news- and- advice/philippine- real- estate- news/the- philippines- top- real- estate- developers 4

3. MEGAWORLD CORPORATION Cited as the largest developer of residential condos, Megaworld has the most number of units built in the span of the years 2010 up to 2016. It has launched 40,000 units from the period 2001 to 2011. Helmed by the Philippines third richest man, Andrew Tan s Megaworld Corporation introduced the live- work- play- learn concept to Filipinos with his 18- hectare Eastwood City that houses 15 condos, 7 ongoing residential projects and 9 corporate buildings. As of 2013, Megaworld has 10 more townships in various stages of development, with a combined land area of 253 hectares. Township and stand alone projects: Eastwood City (Libis, Quezon City), McKinley Hill (Fort Bonifacio, Taguig City), Forbes Town Center (Fort Bonifacio, Taguig City), Newport City (Pasay City), Mactan Newtown (Cebu City), Greenbelt Hamilton, Paseo Heights, Three Central 4. ROBINSONS LAND CORPORATION Robinsons Land Corporation (RLC) is the real estate arm of JG Summit, one of the country s largest conglomerates. As of December 31, 2013, RLC has a total landbank of 573.9 hectares, a bulk of which are intended for its residential segments. Currently the co mpany operates 32 shopping malls, 8 completed buildings with approximately 193,000 sqm of net leasable space, 6 hotels, and 59 residential projects. Brands: [Residential] Luxuria, Residences, Communities, Homes [Hotels] Crown Plaza Galleria, Holiday Inn Galleria, Summit Hotels, Go Hotels Recent Projects: The Radiance at Manila Bay, Magnolia Residences 5. VISTALAND & LIFESCAPES INC. Manny Villar s Vista Land reported an 18% increase in its net income for the first half of 2013 (to Php2.6 billion from Php2.2 billion) compared to the same period in 2012. The Company s estimated full- year sales are about Php46 billion. Vista Land is the country s largest homebuilder, having constructed more than 200,000 homes in 67 cities and municipalities across the Philippines. Brands: Brittany, Crown Asia, Camella, Communities Philippines, Vista Residences Recent Projects: Crosswinds, The Hudson at the Fort, Avant at the Fort 5

Including the aforementioned property companies, the table below presents the property firms publicly listed with the Philippine Stock Exchange (PSE). Table I- 1. Property Sector of the Philippine Stock Exchange, as of 21 November 2014 Company Name Symbol Closing Outstanding Free Float Free Float Market % Weight in Price Shares (%) Capitalization Property Sector AYALA LAND, INC. ALI 35.2 14,189,657,454 50 249,737,971,190.40 44.51 SM PRIME HOLDINGS, INC. SMPH 17.32 27,819,137,294 27 130,093,413,652.40 23.19 MEGAWORLD CORPORATION MEG 5.08 32,170,204,057 33 53,930,130,082.12 9.61 ROBINSONS LAND CORPORATION RLC 25.2 4,093,830,685 39 40,234,167,993.60 7.17 VISTA LAND & LIFESCAPES, INC. VLL 6.19 8,538,740,614 46 24,313,210,027.77 4.33 BELLE CORPORATION BEL 5.1 10,559,382,799 39 21,002,612,389.20 3.74 FILINVEST LAND, INC. FLI 1.61 24,249,759,506 39 15,226,423,994.88 2.71 STARMALLS, INC. STR 7.28 8,425,981,155 15 9,201,171,426.72 1.64 CENTURY PROPERTIES GROUP INC. CPG 1.05 11,672,637,690 33 4,044,568,959.90 0.72 CEBU HOLDINGS, INC. CHI 5.2 1,920,073,623 39 3,893,909,307.60 0.69 GLOBAL- ESTATE RESORTS, INC. GERI 1.8 10,986,000,000 13 2,570,724,000.00 0.46 EMPIRE EAST LAND HOLDINGS, INC. ELI 0.87 14,676,199,167 17 2,170,609,857.33 0.39 ROCKWELL LAND CORPORATION ROCK 1.82 6,116,762,198 13 1,447,225,936.52 0.26 SUNTRUST HOME DEVELOPERS, INC. SUN 1.29 2,250,000,000 39 1,131,975,000.00 0.2 STA. LUCIA LAND, INC. SLI 0.83 8,546,450,000 10 709,355,350.00 0.13 ARANETA PROPERTIES, INC. ARA 1.45 1,561,110,070 31 701,718,976.90 0.13 IRC PROPERTIES, INC IRC 1.66 999,888,964 38 630,729,959.62 0.11 Source: Philippine Stock Exchange (www.pse.com.ph) as of 21 November 2014, 3:46 p.m. Other major players in the Philippine property market are DMCI Homes of DMCI Holdings and Federal Land of GT Capital Holdings, which are not publicly listed. 6

C. Industry prospects Several factors have contributed to the growth of the local property industry, which is primarily demand- driven. The major factors are stable economic growth, low interest rates, and increasing investments of overseas Filipino workers. Chart I- 1. Remittances by Overseas Filipinos, in million US dollars 30,000 25,000 20,000 15,000 10,000 5,000 - First Quarter Second Quarter Third Quarter Fourth Quarter 2009 2010 2011 2012 2013 2014 Source: Bangko Sentral ng Pilipinas, www.bsp.gov.ph Adding on to demand is the expansion of business- process outsourcing facilities and the associated influx of expatriate workers. The research conducted by Colliers International 3 as of Q3 2014 further describes the country s current real estate market. Philippine Economy During Q2 of 2014, Philippine GDP recorded a 6.4% YoY growth, the highest in Southeast Asia as supported by the growth in the manufacturing and real estate sectors by 10.8% and 8.9%, respectively. Domestic consumption expanded by 5.3% due to the continued increase in OFW remittances, despite quarterly inflation rate of 4.3% and low lending rates of 4.4-6.9%. The growth in the real estate sector, however, poses a huge risk as well, most especially for the banking industry that provides financing to the consumers and developers. In July, preemptive measures from the Central Bank to impose a mandatory adoption of a prudential real estate stress test (REST) limit that combines a macroprudential overlay of a severe stress test scenario, the principle of loss absorbency through capital ratio thresholds and heightened supervisory response. The Central Bank is also expected to release its real estate price index by 2015 for prices monitoring. 3 http://www.colliers.com/- /media/files/marketing%20reports 7

Land Values Land values in the metro reached its highest in 17 years primarily due to the recent sale of GSIS lots in Fort Bonifacio as well as the purchase JAKA Tower in Makati CBD by Ayala Land. Land values are estimated to further grow by 6.5-8.5% in the next 12 months. Table I- 2. Estimated Land Values, in Pesos per square meter 4Q- 2013 3Q- 2014 Change Low High Low High Low High Makati CBD 317,015 365,995 310,000 560,000-2% 53% Ortigas Center 109,700 179,665 118,000 190,000 8% 6% Fort Bonifacio 211,630 309,080 250,000 500,000 18% 62% Source: Colliers International Philippines Research Office, Residential and Retail forecasts 200,000 sqm additional office space is still expected to be developed by year- end meeting the year s forecast of 480,000 sqm Developers are also optimistic that can deliver approximately 1 million sqm of office space for the next 2 years. Despite the high occupancy rates as well as the growth in rental rates, an average of 9,000 units are still expected to be delivered within the next 3 years with majority of the units located in Makati CBD, Fort Bonifacio, and Ortigas Center. Total retail stock of Metro Manila is 5.8 million sqm, with an additional 167,000 sqm. slated for delivery by year- end. SM Holdings and Ayala Land are still expected to lead retail supplies until 2017 due to the growth and span of their upcoming projects. Moreover, due to the uptick of vacancy in major shopping malls, pre- commitments from local and foreign retailers are also anticipated to arise. 8

II. A. History Company Overview The history of Ayala Land is closely entwined with the history of the Ayala Group of Companies. What started out in the 1800s as a small agribusiness Company established by Domingo Roxas and Antonio de Ayala, the Ayala Group has gradually diversified its business reach by uncovering potential growth opportunities from various sectors and industry segments. One of the first manifestations of this foresight was the unveiling of the Ayala Master Plan, a 25 year urban development program for Makati that paved the way for the city to become the country s premier financial and business district. In the years to come, Ayala Land continued its relentless search for new spaces to develop, most of which are considered as well- known residential, commercial and industrial areas in the country. As of the end of 2013, the Company believes that, at present, there is no other single property Company that has a significant presence in all sectors of the property market. 4 B. Description Ayala Land, Inc. (ALI) is the real estate arm of the Ayala Group of Companies, one of the most prominent conglomerates in the Philippines. The Company is known for its residential, commercial and industrial space development as well as for its mall and hotel operations, construction, and property management services. Ayala Land was spun off from Ayala Corporation and subsequently incorporated on June 30, 1988 to enhance management focus on AC s real- estate business. 5 The Company launched its IPO in 1991 and soon became involved in all sectors of the real- estate industry. As of August 29, 2014, the Company has a market capitalization of 468 billion pesos. The Company is the most diversified property Company in the Philippines, and the largest by market capitalization. As shown on Table I- 1 above, as of 21 November 2014, the Company is valued at about PhP249.7 billion, accounting for 44% of the value of the Philippine stock market s property sector almost twice as large as the next- largest firm, SMPH. Ayala Corporation owns 48.9% of the Company while the remaining 51.1% is free float. As of 31 January 2014, 39.4919% of the Company s common equity is owned by foreign investors. 4 Ayala Land, Inc. 14 April 2014. SEC Form 17- A. p. 1. 5 Ibid., p. 10. 9

C. Business Portfolio Ayala Land s business can be divided into 5 major components 6 : 1. Estates 2. Residential Business 3. Shopping Centers and Offices 4. Hotels and Resorts 5. Construction and Property Management Estates. Tagged by the Company as growth centers, estates are strategic land parcels acquired by Ayala Land that are transformed to integrated, mixed- use properties. Ayala Land has over 31 growth centers as of December 31, 2013. Some of their most prominent estates and their respective 5 year CAPEX are presented below: Estate Location 5- Year Capital Expenditure (in PHP) Makati 142 billion Makati 66 billion Taguig 80 billion Quezon City 32 billion In 2013, 33% of Ayala Land s net income came from the Company s new growth centers. Residential Business. The Company s residential development products, through its 5 brands, cater the needs of different market/income segments. The 5 brands as well as the household market that they cater are presented in the subsequent page. 6 Ayala Land, Inc. 2013 Annual Report 10

Brand Socio- economic Class Household Income (PhP) % of Total Households No. of Households AAA AA A 250K up 180K- 250K 120K- 180K 0.1% 0.1% 0.5% 18K 29K 98K B 50K- 120K 5.7% 1,217K C+ 30K- 50K 10.6% 2,281K C/C- 15K- 30K 25.2% 5,936K DE Below 15K 57.8% 12,387K Shopping Centers and Offices. Shopping centers form part of the Company s commercial development products. In 2013, the Company has increased its gross leasable area (GLA) through the launch of an additional 249,000 sqm. Meanwhile, the Ayala Land Offices Group, through its various headquarters and technohubs, grew its office GLA to 562,000 sqm. Some of the Company s shopping centers and offices are as follows: Shopping Centers Offices 6750 Ayala Avenue Ayala Life- FGU Ayala Alabang Ayala Life- FGU Center Makati Makati Stock Exchange Tower One and Exchange Plaza High Street South Corporate Plaza 11

Hotels and resorts. The Company s hotels and resorts businesses have proven to be a key player in 2013. From its island resorts to its branded hotels, Ayala Land saw YoY growth in this business to 64% in the year 2013. Construction and Property Management. The Company s subsidiary and contruction arm, Makati Development Corporation serves 100% of Ayala Land s projects. 7 The Company s construction business accounted for 6% of Ayala Land s revenues in 2013. Meanwhile, the Company s property management services accounted for 2% of the revenues, with over 162 managed properties. Expansion Outside Metro Manila. The Company has also expanded its activities outside Metro Manila. Of its 8,453 hectares of landbank, 549 are in Metro Manila; however, larger areas are being developed outside the Metro. For instance, 1,198 hectares are in Bulacan/Pampanga area and 841 are in Visayas/ Mindanao. Some of the current projects in these areas are shown below: D. Segment Information Table II- 1 below shows the detailed segment information for the Company s various business segments as of 31 December 2013. It is clear that residential development remains the Company s main business, with about PhP174 billion of assets. It has the 7 http://www.makatidevcorp.com.ph/aboutus_history.html 12

lion s share of revenues, at about PhP42 billion in 2013. This segment is also responsible for more than half of the Company s operating profit, at approximately PhP11 billion. Operating profit margin, however, is highest at 41% for corporate businesses, which consist of development and lease or sale of office buildings, sale of industrial lots, and lease of factory building. It is noteworthy that four out of seven business segments have double- digit operating profit margins exceeding 25%. Table II- 1. Ayala Land Segment Information as of 31 December 2013, in million Pesos Shopping Centers Corporate Businesses Residential Development This segment information is relevant in showing the Company s diversification strategy. Although residential development is responsible for more than half of operating profit and most of the Company s revenue, it still means that 57% of sales comes from businesses which are not strictly housing- unit sales. For example, shopping centers and construction together are responsible for 44% of consolidated revenue, which is already more than the 43% attributable to residential development. E. Corporate Governance Practices Strategic Landbank Management and Visayas/ Mindanao Construction Hotels and Resorts Property Management and Others Total Revenue 10,437 3,357 42,221 12,183 22,955 4,017 2,838 98,008 Operating Expenses 7,315 1,982 31,246 8,939 20,878 3,702 2,825 76,887 Operating Profit 3,122 1,375 10,975 3,244 2,077 315 13 21,121 Total Segment Assets 68,788 29,667 174,421 96,456 28,891 20,807 4,245 423,275 Total Segment Liabilities 20,830 10,391 97,522 49,174 26,131 12,263 3,203 219,514 Operating Profit Margin 30% 41% 26% 27% 9% 8% 0% Total Asset Turnover 15% 11% 24% 13% 79% 19% 67% Share of Consolidated Revenue* 11% 3% 43% 12% 23% 4% 3% Share of Consolidated Operating Profit* 15% 7% 52% 15% 10% 1% 0% * Before intersegment adjustments and cancellations Source: ALI Annual Report 2013, Consolidated Financial Statements - Note 30 The Company s corporate governance practices are embedded in the Articles of Incorporation and By- Laws, their amendments and Manual of Corporate Governence. 8 As per the Company s annual report, Ayala Land is led by a Board consisting of nine members who hold office for a minimum of one year until such time that their successors are nominated, qualified and elected in accordance with he Company s By- Laws. The Board represents a mix of general business, industry, legal and finance competencies, with each director capable of adding value and rendering independent judgment in relation to the formulation of sound corporate policies. Total* 8 Ayala Land, Inc. 2013 Annual Report, p. 58 13

F. Awards Received GOVERNANCE and SUSTAINABILITY Platinum Award for All Around Excellence, Corporate Governance, Social Responsibility, Environmental Responsibility and Investor Relations The Asset Magazine Overall Best Managed Large Capital Company Asiamoney Best Overall Developer Euromoney Corporate Governance Asia Recognition Award for Best Environmental Responsibility 3rd Asian Excellence Awards Triple A CFO of the Year Mr. Jaime E. Ysmael The Asset The only Philippine Company included in the Dow Jones Sustainability Index for 2013 Excellence in Ecology and Economy Awards Citation Philippine Chamber of Commerce Inc. (PCCI) Best Submissions from the Philippines (Country Award) APREA Best Practices Awards Best Investor Relations by a Philippine Company (Certificate of Excellence) IR Magazine Best Managed Company (2 nd place) Finance Asia Best in Corporate Governance (3 rd place) Finance Asia Asia s Best Investor Relations Professional (3 rd place) Ms. Pamela Ann T. Perez Institutional Investor Top 25 Ranking IR Magazine Southeast Asia PROPERTY Real Estate Personality of the Year Mr. Antonino T. Aquino 2013 Philippine Property Awards RESIDENTIAL Best Housing Development Ridgeview Estates Nuvali 2013 Philippine Property Awards (Highly Commended) Best Mid- Range Condo Development in Metro Manila - Avida Towers 9th Avenue Bonifacio Global City 2013 Philippine Property Awards (Winner) Best Condo Development in Cebu City - Avida Towers Riala 2013 Philippine Property Awards (Highly Commended) Best Residential Agent - Alveo Land 2013 Philippine Property Awards (Winner) 14

SHOPPING CENTERS Gold Medal New Media Integrated Digital Campaign ICSC Asia Pacific Shopping Centers Awards (Glorietta) Silver Medal Traditional Marketing Public Relations and Events ICSC Asia Pacific Shopping Centers (Alabang Town Center) Best Commercial Architectural Design - Marquee Mall 2013 Philippine Property Awards (Highly Commended) HOTELS AND RESORTS Best Hotel Architectural Design - Fairmont Makati, Raffles Makati and Raffles Residences 2013 Philippine Property Awards Community Benefit Award, Tourism for Tomorrow World Travel and Tourism Council (El Nido) Best Eco- Friendly Initiative (Miniloc Island) AsiaRooms Hotel Awards 2013 Best Leisure Hotel and Resort (Lagen Island) Smart Travel Asia Best in Travel Poll 2013 9 Top Beach Resorts in South China Sea (El Nido Resorts) CNN Travel Citation World s 100 Best Beaches CNN Travel Citation Hottest Travel Destination of 2013 Travel+Leisure 46 Places to Go in 2013 (Pangulasian Island) New York Times 2013 Best New Hotels (Pangulasian Island) CondeNast Traveler Top 2013 Destinations to Watch (Pangulasian Island) CondeNast Traveler CONSTRUCTION AND PROPERTY MANAGEMENT Kapatiran WISE- TAV (26 Awards), MOU Signing (3 Awards), Certificate of Compliance (2 Awards), Safety Milestone (6 Awards) Department of Labor and Employment (DOLE) Perfect Safety Record (9 Awards), Award of Distinction (2 Awards), Award of Merit (7 Awards), Award of Excellence (2 Awards), Award of Honor (1 Award) Safety Organization of the Philippines (SOPI) Safety award winners - UP- Ayala Land TechnoHub, 6750, Tower One and Exchange Plaza, Solaris, and TriNoma Safety Organization of the Philippines (SOPI):National Fire Brigade Competition Winner of 95 Awards in Building Fire Safety Compliance, Building Fire Brigade, and Corporate Fire Safety Programs 2013 MAFSAFI Fire Safety Compliance Program Silver awardees - TriNoma, Harbor Point, UP- Ayala Land TechnoHub and NUVALI Evoliving Center 27TH Apolinario Mabini Awards for Persons with Disability Bronze awardees - Abreeza Mall, Glorietta 5, Bonifacio High Street, The District Imus and One Legazpi Park 27TH Apolinario Mabini Awards for Persons with Disability 15

III. Company Business Strategy The Company focuses on 5 major areas for its strategic plan: (1) growth, (2) margin improvement, (3) capital efficiency, (4) organizational development and (5) brand building. Based from its latest briefings to investors and analysts, Ayala Land s new business plan aims to achieve a 20% annual growth rate from 2013 to 2020. This annual growth rate will help the Company achieve its target of PHP40 billion net income after tax by the year 2020. Ayala Land has come up with general strategies to achieve this goal. Source: Ayala Land 9M 2014 Analyst s Briefing 16

IV. Financial Reporting Practices The following summarizes Ayala Land s financial reporting practices: A. Summary of Significant Accounting Policies 1. Accounting Standards Used, and Bases of Preparation and Consolidation The consolidated financial statements of the Company are prepared under the Philippine Financial Reporting Standards (PFRS), using historical cost except for financial assets at fair value through profit or loss (FVPL) and available- for- sale securities that have been measured at fair value. They are presented in Philippine Peso (PhP), which is also the Company s functional currency. The basis of consolidation is whether or not the Company has control over the subsidiary, which the Company achieves if and only if it has: Power over the investee (i.e., existing rights that give it the current ability to direct the relevant activities of the investee) Exposure, or rights, to variable returns from its involvement with the investee; and The ability to use its power over the investee to affect its returns When the Company has less than a majority of voting rights, it considers all relevant facts and circumstances in determining control, including: The contractual arrangement with the other vote- holders of the investee Rights arising from other contractual arrangements The Company s voting rights and potential voting rights The Annual Report consolidate the financial statements of 49 subsidiaries in real- estate, six in hotels/resorts, four in property management, two in entertainment, one in construction, and eleven in other businesses. In most cases, these subsidiaries in turn own or control other companies, which are in addition to the count here. 2. Revenue- Recognition Criteria Revenue is recognized to the extent that it is probable that the economic benefits will flow to the Company and the revenue can be reliably measured. 9 9 ALI Annual Report 2013. Consolidated Financial Statements, Note 2. 17

For real estate sales, the Company assesses whether it is probable that the economic benefits will flow to the Company when the sales prices are collectible. Collectibility of the sales price is demonstrated by the buyer s commitment to pay, as well as they buyer s credit standing and the age and location of the property. Revenue from sales of completed real estate projects is accounted for using the full accrual method, or the percentage- of- completion method, based on several criteria, particularly on whether the Company has material obligation under the sales contract to complete the project. If the criteria are not fully met, then the deposit method is used, under which the collections received are booked under Other Current Liabilities. Cost of real estate sales is recognized consistent with the revenue recognition method applied. The percentage- of- completion method is measured principally on the basis of the estimated completion of physical proportion of the contract work. B. Significant Judgments and Estimates 10 1. Operating Leases In the financial statements, operating- lease commitments are broken down into those where the Company is the lessor or the Company is the lessee. It is the lessor if it has determined that it retains all significant risks and rewards of ownership of the properties, considering, among others, the length of the lease term as compared with the estimated life of the assets. It is the lessee if the significant risks and rewards are retained by the owner of the property. 2. Distinction between investment properties and inventories The Company also distinguishes between investment properties and inventories. Investment property, in general, comprises land and buildings which are not used by the Company in its operations, nor for sale in the ordinary course of business, but are held principally to earn rental income and for capital appreciation. Inventory is principally a residential or industrial property that the Company intends to sell before or upon completion of construction. The Company evaluates each property individually in making its judgment. The Company also determines whether a property will be classified as real estate inventories or land and improvements. In making this judgment, the [Company] considers whether the property will be sold in the normal operating cycle (real estate inventories) or whether it will be retained as part of the [Company] s strategic landbanking activities for development or sale in the medium or long- term (land and improvements). 11 10 ALI Annual Report 2013. Consolidated Financial Statements, Note 3. 11 ALI Annual Report 2013. Consolidated Financial Statements, Note 3, p. 37. 18

3. Allowance for impairment losses Allowance for impairment losses is maintained based on the result of the individual and collective assessment under PAS 39. The Company is required to obtain the present value of estimated cash flows using the receivable s original effective interest rate. Impairment loss is determined as the difference between the receivables carrying balance and the computed present value. Factors considered in individual assessment are payment history, past due status and term. [ ] The methodology and assumptions used for the individual and collective assessments are based on management s judgment and estimate. Therefore, the amount and timing of recorded expenses for any period would differ depending on the judgments and estimates made for the year. 12 V. Quantitative and Qualitative Analysis A. Financial Statements Below are the consolidated financial statements of the company as of 31 December 2013: 12 ALI Annual Report 2013. Consolidated Financial Statements, Note 3, p. 38. 19

Statement of Financial Position 20

We highlight the following changes in the Company s balance sheet over the past three reporting years. On the assets side, there has been a marked increase in accounts receivable and inventories, which the Company discloses to be due to its expanding residential development business. Other current assets have also shown a large increase, from PhP7 billion in 2011 to PhP19 billion in 2013. This is due to the current practice of temporary (as opposed to permanent) License to Sell being issued by the HLURB. For projects with temporary LTS, all payments, inclusive of down payments, reservation, and monthly amortization, among others, made by the buyer within the selling period shall be deposited in an escrow account, and then booked under other current assets. 13 Under non- current assets, it is worthy of note that Land and Improvements increased by PhP30 billion in 2012. Of this amount, PhP24.3 billion is accounted for by the winning bid of the Company for the FTI property in Taguig. 14 On the liabilities side, the movements are consistent with an expanding business, particularly the increase in trade payables and deposits. But it is also worthy to note that long- term debt has increased dramatically from PhP32 billion in 2011 to PhP86 billion in 2013, as the Company increases its leverage to improve ROE and to take advantage of the excellent capital- market opportunities available in the Philippines in the past few years. Despite the increase in debt, the cost of borrowings is actually down from 7.9% in 2009 to 5.1% in 2013 and an estimated 4.4% in 2014. 15 Shareholders equity shows increasing paid- up capital, as the excess of proceeds in share issuances over the par value is booked under this account, indicating favorable share prices over the past few years. 13 ALI Annual Report 2013, Consolidated Financial Statements Note 9. 14 ALI Annual Report 2013, Consolidated Financial Statements Note 11. 15 ALI Investor Presentation, October 2014. 21

Statement of Comprehensive Income 22

What is notable from the income statement is that revenue has dramatically increased, from about PhP45 billion to PhP76 billion over three years, and the associated expenses rose as well, from about PhP30 billion to PhP52 billion. Both figures revenue and expense increased by approximately 70%. It is also noteworthy that actuarial losses on pension liabilities have been increasing since 2011. In 2013, this figure amounted to PhP391 million, of which PhP217 million is due to changes in economic assumptions primarily driven by lower interest rates globally. Statement of Cash Flows Table V- 1. Statement of Cash Flows Abridged (in million PhP) 2013 2012 2011 Net Cash from Operations 27,239 8,423 9,913 Net Cash used in Investing Activities (69,952) (54,915) (15,026) Net Cash from Financing Activities 38,557 51,328 12,791 Net Cash Flow (4,156) 4,836 7,678 Source: ALI Annual Report, Consolidated Financial Statements As noted above, PhP24.3 billion of the increase in land and improvements in 2012 came from the FTI property, which is reflected in the PhP30- billion increase in cash 23

used in investing activities for that year. Short- term debt drove the financing mode in 2012, which was repaid in 2013. Proceeds from capital stock subscriptions amounted to PhP15 billion in 2012 and PhP10 billion in 2013. Operating cash flow in 2013 was driven primarily by higher net income as well as higher accounts payable, observed as the company expands towards its target of PhP40 billion net income by 2020. B. ROE and DuPont Decomposition Ayala Land Inc. has a high ROE at 11.31% and in order to see where the values came from, we have decomposed the ROE into 3 segments, efficiency, profitability, and leverage. We used the Total Asset Turnover Ratio as an indicator of efficiency which is a low value since the Company produced Php0.26 of income per Peso of its asset. We can attribute this low efficiency to the property industry since the firm needs a high asset base in order to support its operations. The Company has a high profit margin which is an indicator of profitability which drives the value of the ROE higher. The equity multiplier of ALI is 2.79. This indicates that the Company is highly financed by debt. This pushes the value of the Company. ALI has done it by engaging in debt instruments at a low cost. Table V- 2. Return on Equity ALI MEG SMPH VLL RLC Total Asset Turnover 0.26 0.18 0.19 0.26 0.22 Profit Margin 15.4% 32.34% 27.22% 25.28% 28.11% Equity Multiplier 2.79 1.73 1.99 1.67 1.51 ROE 11.31% 9.79% 10.28% 10.99% 9.32% Source: Bloomberg, authors calculations As can be seen above, ALI s winning ROE is due to higher leverage, but it can also be noted that asset turnover is also high compared to peers. C. Comparative Analysis Based on the chart of profitability margins below, Ayala Land is the leader in terms of giving returns to its owners. The Company generated the highest return on equity even though trailing behind the other firms in terms of Profit Margin and Return on Assets. 24

Chart V- 1. Comparative Return Measures, 2013 Return Measures - 2013 ALI MEG SMPH VLL RLC 35.0% 30.0% 25.0% 20.0% 15.0% 10.0% 5.0% 0.0% 32.3% 27.2% 28.1% 25.3% 15.4% 11.3% 11.0% 6.5% 9.8% 5.7% 9.3% 4.1% 5.2% 6.1% 10.3% Profit Margin Return on Assets Return on Equity Source: Bloomberg, authors calculations Chart V- 2. Comparative Leverage, as of 31 December 2013 ALI MEG SMPH VLL RLC 2.50 2.00 2.16 2.08 1.50 1.17 1.11 1.00 0.80 0.50 0.39 0.27 0.37 0.33 0.24 0.00 Debt Ratio Degree of Operating Leverage Source: Bloomberg, authors calculations Ayala Land (ALI) has a high Debt Ratio which indicates that the Company is highly leveraged. In terms of Operating Leverage, ALI is in the middle of the group and has a degree of operating leverage (DOL) close to one, which means that the Company is good at controlling its fixed cost and EBIT will closely follow the changes in the Company s sales. 25

Chart V- 3. Comparative Asset Turnover, as of 31 December 2013 ALI MEG SMPH VLL RLC 0.60 0.50 0.40 0.30 0.20 0.47 0.41 0.26 0.50 0.31 0.26 0.18 0.19 0.26 0.22 0.10 0.00 Fixed Asset Turnover Total Asset Turnover Source: Bloomberg, authors calculations Ayala Land Inc. ranked 2nd in terms of Fixed Asset Turnover and ranked 1st in term of Total Asset Turnover among the top 5 property firms that are listed. This indicates that the Company is the most efficient in using its assets to generate revenue. Chart V- 4. Comparative Liquidity, as of 31 December 2013 ALI MEG SMPH VLL RLC 4.50 4.00 3.50 3.00 2.50 2.00 1.50 1.00 0.50 0.00 3.80 3.88 2.44 2.07 1.45 1.51 1.50 1.23 0.95 1.02 0.48 0.34 0.42 0.28 0.05 Current Ratio Quick Ratio Cash Ratio Source: Bloomberg, authors calculations In terms of liquidity, Ayala Land is on the average. As the Company s debt maturity has lengthened and interest rates have gone down, it has kept its liquidity at a minimum. Low liquidity also indicates that the Company has invested a bulk of its money on long- term projects, which is the nature of property business. 26

D. Relative Valuation Based on the computed relative valuation techniques, the market has priced the earnings of Ayala Land Inc. higher than its competitors. These values don t necessarily mean that the price of the common shares of Ayala Land Inc. is overvalued. The market put a higher price on the common shares of ALI because the market is expecting the growth potential of the firm to be high. In addition, the Company s share price to cash flow is relatively cheaper than that of its peers. Table V- 1. Price Multiples as of 6 November 2014 ALI MEG* SMPH VLL RLC P/E 36.96 7.11 22.89 9.76 22.28 P/Cashflow 16.91-24.08 6.00 19.94 * Negative Free Cash Flow per Basic Share Source: Bloomberg E. Fundamental Valuation We have computed the intrinsic value of the stock of Ayala Land Inc. (ALI) using the Free Cash Flow to Equity (FCFE) Model. We have first calculated the Free Cash Flow to the Firm and deducted the Market Value of debt in order to come up with the FCFE. We have used the Weighted Average Cost of Capital (WACC) as the discount rate in order to arrive at the intrinsic value. In addition, we have used the Sustainable Growth Rate of the Company which is at par to the Philippine s long- term growth rate. The figures we have arrived at are based on the following key assumptions: The Company s target of PhP 40 billion net income after tax in 2020 will be achieved. The Average Annual Growth Rate of revenue (about 20%), as well as average capital expenditures (about PhP20 billion), over the past five years will be maintained. 27

Table V- 3. Firm Valuation using FCFE Model FY 2014E FY 2015F FY 2016F FY 2017F FY 2018F FY 2019F NOPAT 20,230.72 24,212.29 28,977.48 34,680.49 41,505.91 49,674.62 Net Investment 20,000.00 20,000.00 20,000.00 20,000.00 20,000.00 20,000.00 FCFF 230.72 4,212.29 8,977.48 14,680.49 21,505.91 29,674.62 PV Factor 1.00 0.93 0.87 0.81 0.76 0.71 PV of FCFF 230.72 3,928.47 7,808.42 11,908.41 16,269.55 20,936.66 Terminal Value 690,494.09 Market Value of Debt 118,931.00 FCFE 632,645.32 Shares Outstanding 14,189.66 Expected Price 44.58 WACC = 7.22% g= 4% Source: Bloomberg, authors calculations VI. Investment Recommendation We recommend to Buy ALI stock. Price appreciation is expected over 2 to 3 years. We believe that the target price of PhP44.6 per share is justified by the expansion plans of Ayala Land, which is only consistent with the favorable macroeconomic prospects of the Philippine economy. We believe that the Company s management has the skills and experience to handle this expansion effectively to the long- term benefit of shareholders, as evidenced by its new management plan of Vision 20/20. We further believe that the Company s diversified structure is the right strategy to meet any excessive supply in the residential development business. In summary, our recommendation is based on three factors: Philippine macroeconomy, management skill and experience, and diversification. 28

References: Ayala Land, Inc. 14 April 2014. SEC Form 17- A Ayala Land, Inc. April 2014. Annual Report 2013. Ayala Land Inc. October 2014. Investor Presentation Ayala Land Inc. November 2014. Analyst s Briefing Bloomberg. http://www.ayalaland.com.ph/ http://www.makatidevcorp.com.ph/aboutus_history.html http://www.reuters.com/ http://en.wikipedia.org/wiki/real_estate_economics http://www.investopedia.com/terms/i/investment- property.asp http://www.colliers.com/- /media/files/marketing%20reports http://pse.com.ph/stockmarket/marketinfo- marketactivity.html?tab=1&indexname=property http://www.zipmatch.com/real- estate- news- and- advice/philippine- real- estate- news/the- philippines- top- real- estate- developers 29