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Industry Report: Construction
Group 1
I. MACROECONOMIC ANALYSIS
ECONOMY AND GDP
Strengths- Favorable macroeconomic
environment- Competitive wage levels- Relatively large domestic
market
Weaknesses- Relatively high corporation
tax- High level of red tape- Poor infrastructure
Opportunities- Improve business and
consumer confidence will boost investment and consumption
Threats- Weak governance and
corruption pose a threat to political stability
Philippines: Emerging EconomyGDP as of 2013: Php 11,554.89 Billion
Services57%
Industry32%
Agriculture11%
GDP Composition
Infrastructure Level: Poor/UndevelopedEase of Doing Business: 95th
Service Sector57.2%
Agriculture11.2%
Industry Sector31.6%
Manufacturing, Mining and Quarrying, and
Utilities22.7%
Construction 8.9%
ECONOMY AND GDP
Service Sector• Grew by 6.0% in the fourth quarter.• Growth in services improved relative to the 2014 third quarter growth with a recovery in
public administration, transport and communications, and stronger growth in real estate, renting, and business activities, which include BPOs
Industry Sector• Grew by 9.2% in the fourth quarter-
highest I the last 6 quarters.• Construction pulled up a double-digit
growth– both public and private sectors sped
up implementation of projects, with public construction reversing its negative growth
– Private construction, major developers remained bullish due to continued strong demand for office, retail, and residential space.
• But manufacturing remained as its biggest growth driver.
ECONOMY AND GDP
2007-2008 A strong rebound took place in 2010 but the pace of growth eased somewhat in 2011
2010-2011 Growth in the Philippine economy slowed markedly during the Great Recession
2012 Real GDP grew by 6.8% as buoyant investment, particularly in construction, and robust consumption propelled the economy.
Remittances also soared.
2013 Real GDP growth was 7.2% despite a major earthquake and the effects of Super Typhoon Yolanda. The economy was driven by strong gains in consumption and services, and supported by investment in
manufacturing.
2014 In 2014, the pace of growth dipped to 6.1%.
Source: Euromonitor International from national statistics/OECD/IMF
• The GDP of the Philippines has been growing with an average rate of above 6% from 2010 to 2014
• It is the 2nd fastest growing economy in the Asia
• The growing economy has been fostering the boom of the construction industry
MONETARY POLICY, INFLATION, AND INTEREST RATE
• Bangko Sentral ng Pilipinas (BSP) has been focusing on the reduction and stabilizing a low inflation in the economy
• There has been a downward trend on the inflation rate from 2010-2014
• Interest rates was at its lowest during 2013 and early 2014, giving a boost in housing loans that drives the demand for housing construction
FISCAL POLICY
DepEd
DPWH
DILG
DND
DA
DOH
DAR
DOTC
DSWD
DENR
• One of the main focus of the government’s policy is Infrastructural Development
• The top 3 government agencies that received the highest budget are committed into developing public facilities. These agencies are: DepEd, DPWH, and DILG
• DepEd, with its K-12 implementation, has been focusing on the construction of new school facilities throughout the country.
• DPWH, together with the MMDA, plans to develop Metro Manila’s traffic system by paving new roads and providing more transportation infrastructures throughout the metropolis.
INDUSTRY ANALYSIS: CONSTRUCTION
SCOPE OF THE ANALYSIS
The Construction sector, as defined by the 2009 Philippine Standard Industrial Classification, includes general construction and specialized construction activities for buildings and civil engineering works. It includes new work, repair, additions and alterations, the erection of prefabricated buildings or structures on the site and also construction of a temporary nature.
• Houses, Condominiums,• Buildings, Warehouses,• Offices, etc.
General Construction
• Roadway, Bridges, • Airport, Seaport,• Railways, etc.
Civil Engineering
Works
• Site Preparation,• Demolition, • Irrigations, etc.
Specialized Construction
The 2009 PSIC excludes manufacturers and retailers of construction materials as well as those businesses that are engaged in buying, selling, or renting of real properties (Real Estate).
However, because of the relatedness of Real Estate and Construction, the analysis will consider the performance of Real Estate sector as supplementary information in the evaluation of Construction sector’s prospects and projections.
Therefore, in the analysis of this Sector, all businesses that are engaged in any construction activities, primarily or partially, would be considered as part of the Industry.
INDUSTRY OVERVIEW
• The Industry exhibited a momentum in growth during 2012, boosting by 23% in value
• The Industry remains robust due to the favorable economic conditions, contributing Php 293.1 Billion to the economy during 2013
• Although Industry growth slowed in first half of 2014 due to halted Government Projects, it bounced back later on as Public Spending continued
• ADB described the Industry as “Bright”
Distribution of PCAB Licensed Contractors for CFY 2014-2015 By Category
This is according to Construction Industry Authority of the Philippines
• The number of licensed contractors as of December 2014 was 6,614
• 398 (6%) are large-sized contractors (AAA & AA) • 34 % are medium-sized (A & B) contractors • The rest (C, D, Trade/E) composes the 60% of the
contractors1 2 3 4
050,000,000,000
100,000,000,000150,000,000,000200,000,000,000250,000,000,000300,000,000,000350,000,000,000
0.00%1.00%2.00%3.00%4.00%5.00%6.00%7.00%8.00%
Construction Output and GDP Growth
Construction Output (in Php Billions)GDP Growth
CURRENT INDUSTRY CYCLE: BOOM TO GROWTH
INDUSTRY DEMAND AND SUPPLYPolitical The government has given focus on capital goods and infrastructural development to
sustain economic growthThe economy is in preparation for the upcoming ASEAN Integration, making the Construction Industry a crucial sector for the government
Economic Philippines has become a hotspot for investments among foreign investors, driving the demand for stocks and properties, which in turn fuels the IndustryPhilippines has attracted international companies into outsourcing business processes in the country, thus making a huge demand for office space supply
Social OFWs, expatriates, and young professionals have been driving the demand for new houses and condominiumsFilipinos are embracing vertical living – Euromonitor International
Technological Rehabilitation plans for near-obsolete transportation infrastructures are being carried out by DOTC throughout Metro ManilaIncreasing demand for internet connection and electricity in rural areas continues to provide construction projects for the Industry
Environmental Rising calamity occurrence are expected to ensure the Industry’s importance in the long termReconstruction efforts in places affected by typhoon Yolanda has boosted economic growth despite the destructive effects of the calamity
Legal Corporate foreign ownership limit (40%) has been protecting local Construction businesses from external competitionPhilippine Overseas Construction Board (POCB) was mandated to support overseas contractors and give grants and incentives to such businesses
1.) POLITICAL• Philippine Development Plan 2011-2016
aims to accelerate infrastructure development
• Manila plans to double spending on infrastructure to 5% of GDP by 2016.
• Infrastructure has been an important priority of the Aquino Administration throughout the nation
• The government will continue to plan PPP projects beyond 2016 in order to sustain the economic growth of the country
Summary of Costs:Transport Dream Plan (2030) in Php Millions
Sub-total (Rail: Main and secondary)
1,206,245
Sub-total (Road)
391,107
Sub-total (Expressway)
399,325
Sub-total (Road-based Public Transport)
68,360
Sub-total (Traffic Management)
6,109
Sub-total (Airports)
486,951
Sub-total (Ports)
52,085
TOTAL
2,610,450
Recently Awarded PPP Projects
Southwest Terminal of the Integrated Transport System
DOTC Php 3.15 Billion
The LRT Line 1 Cavite Extension and Operation & Maintainance Project
DOTC 44.64 Billion
Mactan-Cebu International AIrport Passenger Terminal Building
DOTC 34.44 Billion
Automatic Fare Collection System (AFCS) DOTC 2.24 Billion
The Modernization of Philippine Orthopedic Center DOH 5.62 Billion
The PPP for School Infrastructure Project (PSIP) DepEd 16.42 Billion
The PPP for School Infrastructure Project (PSIP) Phase II
DepEd 3.86 Billion
Daanghari-SLEX Link Road DPWH 2.22 Billion
NAIA Expressway DPWH 23.90 Billion
• Most private partners in PPPs are in Construction and/or Real Estate sector.
• The total proposed cost for Transport Dream Plan 2012 - 2030 is Php 2.6 Trillion. This would result to a proposed annual cost of about Php 144 Billion.
• This billions of fund for infrastructural development will be funneled to the Construction Industry.
2.) ECONOMIC
Google, Accenture, Citigroup , JPMorgan and HSBC are some of the global firms that drives the office space demand to rise
Demands from BPO Industry Growth
• Continued strong demand for office spaces by the BPO sector and the resurgence of demand from the traditional corporate offices are going to lead to a shortage in supply by 2015 as demand exceeds supply
• The growth of the BPO Industry has lead to the boom in office space construction, not just in Metro Manila but also in other major cities like Cebu and Davao.
• 466,354 square meters (sqm) of office space was built during 2014
• About 1.85 million sqm of office space is expected to be added between 2015 and 2017 in the Makati, Bonifacio Global City, Ortigas and Quezon City business districts in Metro Manila, according to Colliers.
Foreign Investments
• Philippines has received an investment grade level from different credit rating agencies
• This resulted to foreign investments that has been driving the demand in real properties, and is likely to continue in the future because of the favorable outlook
• With ASEAN Integration coming near, property prices are expected to soar because of the additional influx of demand coming from other members of the ASEAN.
3.) SOCIAL• OFWs, expatriates, and young professionals are driving the demand for real properties
• As of 2012, there are more than 65,155 foreign nationals residing in the Philippines – Bureau of Immigrations
• Expatriates choosing to stay in the country are most likely to buy/lease luxury condominiums
• Filipinos are embracing vertical living – Euromonitor Passport
• In response to the increasing consumerism lifestyle of Filipinos, there has been a steady rise in the number of commercial/retail space development in cities
Trend in Urban Area Expansion in Metro Manila
NCR alone has an estimated population of 11.9 Million as of 2011. As a result of the rapid urban expansion of the region towards the surrounding provinces, Metro Manila has become informally considered as Mega Manila. Mega Manila includes NCR and the provinces of Bulacan, Rizal, Cavite, and Laguna. It has an estimated total combined population of 24.1 Million.
• This huge population has resulted to an increasing housing backlog. Housing backlog, as of 2011, was at 3.6 Million throughout the country. It is forecasted to reach 5.8 Million in 2016. This would require more affordable housing projects for the part of the government to shelter the poorest population.
• On the other hand, those who are earning enough to afford better housing would in turn add up to the demand for 2nd class market for houses and condominiums.
• This demand is supported by lower interest rates and reduction of minimum down payment for housing loans.
RAPID URBANIZATION IN THE PHILIPPINES HAS RESULTED TO A CHANGE IN HOUSING TREND
TECHNOLOGICAL
According to the Department of Public Works and Highways (DPWH), the Philippines may adopt new construction trends in Japan, particularly on the latest technology on roads and bridge construction.
The construction and engineering technologies from Japan through the Japan International Cooperation Agency (JICA) will help the Philippines build disaster-resilient infrastructures that would mitigate the effects of climate change.
ENVIRONMENTALIn 2011, the Philippines witnessed the highest number of weather related natural disasters globally (30 occurrences)According to forecasts, the Philippines will experience more calamities from 2015-2020 compared to historical rate
Reconstruction efforts help sustain the growth of the Industry in the long-term
4 out of the top 5 most frequent disasters in the country directly affects buildings, roads, and other structures (except Armed Conflict). Regular maintenance and continuous reconstruction efforts and improvements of calamity-prone structures in the country will provide a good opportunity for the Industry in the long run.
Fire Earthquake Flood Armed Conflict Landslide0
20
40
60
80
100
120
140
160
Top 5 Disaster in Terms of Frequency
LEGAL
Philippine Contractors
Accreditation Board (PCAB)
Philippine Overseas
Construction Board
(POCB)
Construction Manpower
Development Foundation
(CMDF)
Philippine Domestic
Construction Board (PDCB)
to assume the functions of the abolished Philippine Licensing Board for Contractors under RA 4566 (Contractors License Law)
to formulate, policies, plans, programs and strategies for developing the Philippine overseas construction industry; regulate and control the participation of construction contractors in overseas construction projects; and administer the grant of incentives for Filipino overseas contractors
to formulate an overall construction manpower development plan and strategies and develop and implement manpower training programs for the construction industry; among others.
to formulate, recommend and implement policies, rules, regulations and guidelines and adjudicate disputes arising from public construction projects.
The Construction Industry is a strictly regulated sectorThere are 4 bodies that regulates every aspect of the Industry, as mandated by law
STRATEGIC ANALYSIS
New Entrants
Strictly Regulated Industry
Relatively High Risk, High Initial Investment
Substitutes
High Product Differentiation
Industry has Knowledge
and Technology Advantage
Industry
Highly Competitive
Peers
Intense Technological Competition
Suppliers
Low Concentration
of Building Material Suppliers
Huge Amount of Available Work Force
Buyers
Medium Concentration of Buyers and
Customers
High Demand From Public and Private
Sector
LOW NEUTRAL HIGH
STRATEGIC ANALYSIS
Threat of New Entrants: NEUTRAL
• High number of aspiring entrants are being filtered by strict regulations
• Industry is High-risk capital-intensive
Threat of Substitutes: LOW
• Products have high differentiation (i.e design, technology, etc.)
• Customers cannot duplicate the Industry’s expertise and proprietary technology, should customers chose to do so themselves
Intense Competition: HIGH
• Due to the relatively high initial costs and payment-by-completion nature of projects, not all survives
• The competition is heavily driven by technology and innovation
Bargaining Power of Suppliers: LOW
• There are a lot of available building materials in the market
• Construction companies are practicing the economies of scale and wholesale purchasing/bulk buying
Bargaining Power of Buyers: NEUTRAL
• Government hold great bargaining power• However, this is being counterweighted by
the huge number of private customers
LOW NEUTRAL HIGH
INDUSTRY PEERS
COMPANY NAME TICKER REVENUES
Ayala Land Corporation ALI 81,523 Million
DMCI Holdings, Inc. DMCI 68,107
SM Prime Holdings Inc. SMPH 61,332
Megaworld Corporation 36,242
Vista Land & Lifescapes, Inc VLL 24,038
Robinsons Land Corporation RLC 17,066
Filinvest Land, Inc. FLI 13,817
EEI Corporation EEI 11,332
Asiabest Group International Inc. ABG 8,354
1. Ayala Land Corporation (ALI)
Ayala Land, Inc. (ALI) was organized in 1988 when Ayala Corporation decided to spin off its real estate division into an independent subsidiary to enhance management focus on its real estate business. ALI has organized its operations into several business lines namely, property development, commercial leasing, and services. The Company has more than 50 subsidiaries across these businesses, of which the notable ones include: Alveo Land Corporation; Avida Land Corporation; Amaia Land Corporation; Laguna Technopark, Inc; and Ayala Property Management Corporation. In 2013, the Company commenced operations of Holiday Inn & Suites Makati as well as its Seda Hotels in Bonifacio Global City, Cagayan de Oro and Davao. Seda Hotel Nuvali was opened in March 2014.
Php 81,523 Million
325 Billion (for the year 2013)
INDUSTRY PEERS2. DMCI Holdings, Inc. (DMCI)
DMCI Holdings, Inc. (DMC) was incorporated on March 8, 1995 as a holding company to consolidate all construction business, construction component companies, and related interests of the Consunji family. The Company was listed on the Philippine Stock Exchange on December 18, 1995. The Company's subsidiaries include D.M. Consunji, Inc., which is engaged in general construction services; DMCI Project Developers, Inc., which is engaged in construction business; Semirara Mining Corporation, which is engaged in the exploration, mining, development and sales of coal resources on Semirara Island in Caluya, Antique; DMCI Power Corporation, which is engaged in the business of power generation that designs, constructs, invests in and operates power plants; and DMCI Mining Corporation, which is engaged in ore and mineral mining and exploration.
Php 68,107 Million
124 Billion (for the year 2013)
3. SM Prime Holdings Inc. (SMPH)
SM Prime Holdings, Inc. (SMPH) was incorporated on January 6, 1994.The Company has now four business units, namely, malls, residential, commercial, and hotel and convention centers. The Company's main sources of revenues include rental income from leases in mall and food court, cinema ticket sales and amusement income from bowling and ice skating; property development and sales and sale of condominium units; development and leasing of office buildings and operations and management of buildings and other land holdings; and developing and managing various hotels and convention properties of the SM Group.
Php 61,332 Million
336 Billion (for the year 2013)
CONCLUSION