PSE Circular for Brokers No. 1951-99

August 6, 1999 PSE CIRCULAR FOR BROKERS NO. 1951-99 August 4, 1999 PHILIPPINE STOCK EXCHANGE, INC . PSE Center Exchange Road, Ortigas Center Pasig City Attention: Ms . Luisa W . Buenaventura Supervisor, Disclosure Department M a d a m : Pursuant to our conversation please be advised that we are submitting herewith the independent company analysis of BW Resources ("BW") as prepared by PCCI Securities Brokers Corp. ("PCCI-SBC"). This study has been prepared by PCCI-SBC using all figures and assumptions provided by us to them. We affirm all the figures and assumptions used herein. Their conclusions and recommendations, however, have been arrived at entirely on their own. Note that the study is intended for the clients of PCCI-SBC and not public circulation. However, since it embodies all facts, plans and programs of BW to date, we believe that it would be in the best interests of the market at large to submit this the PSE as a disclosure of BW. Thank you Sincerely, (SGD.) EDUARDO G. LIM, JR. President August 2, 1999 PHILIPPINE STOCK EXCHANGE Philippine Stock Exchange Plaza Ayala Tower 1 Ayala Avenue Makati City Attention: MS . MA . LUISA BUENAVENTURA Head Disclosures Department Gentlemen : We have been requested by BW Resources ("BW") to provide them our company study on BW. Please be advised that the study was independently prepared by our Research Department using all the figures and assumptions provided by BW in a series of interviews conducted over a period. The study is a part of our product base, which PCCI-SBC Research performs as a value added service to our clients. These are normally private and confidential in nature. The study has been prepared for circulation to professional investors based on information from sources believed to be reliable. We do not make representations as to its accuracy or completeness. Likewise, this study should not be construed as an offer or a solicitation of an offer to buy or sell any securities. Thank you and best regards Sincerely, (SGD.) FRANCISCO M. LIBORO Managing Director COMPANY BRIEF BW Resources Corp. LONG-TERM BUY July 30, 1999 P30.00 INVESTMENT CONSIDERATIONS KEY DATA Given the attention that BW Resources Corp. Stock Code: BW shares has been receiving of late, this paper Price: P30.00 aims to inform the investing public as to the earnings expectations of BW Resources Corp. Market Capitalization Do the earnings prospects of the company (at P30.00@): P13,500m justify its current stock price performance? Issued Shares: 450m Authorized Capital: 450m Earnings for the company would come from its 52-wk stats: prospective projects that include: High P31.00 the Sheraton Marina Complex and other real Low P1.76 estate developments; and, the possibility of infusing the Bingo activities of 1999 Ave. Daily Turnover: Best World Gaming and Entertainment Corp. 11,985,268 shares into BW Resources Corp. (i.e. Bingo Pilipino Major Shareholders: (on-line) and Bingo Bonanza) PCD Nominee Corp. (Fil) 87.43% STOCK PERFORMANCE The issue price has increased almost 9-fold, from (P2.85 in April to its current price of P30.00) in a span of three months. Value turnover has also reached unprecedented heights, with the stock topping the list in the previous weeks, over usual favorites TEL, MBT and AC. aisadc INVESTMENT STATISTICS * Year NI (P mil) EPS (P) PER (x) W/o Bingo W/Bingo W/o Bingo W/Bingo W/o Bingo W/Bingo 1998 (10.6) (10.6) 1999P^ 411.8 2,148.6 0.25 1.30 120.0 23.1 2000P 988.2 15,551.9 0.60 9.43 50.0 3.2 2001P 3,539.7 19,467.4 2.15 11.80 14.0 2.5 * Based on fully diluted O/S shares of 1650m ^ Income for 2H of year only whole-year operations expected for 2000 This document has been prepared for circulation to professional investors based on information obtained from sources believed to be reliable but we do not make any representations as to its accuracy or completeness. Likewise, this should not be construed as an offer or a solicitation of an offer to buy or sell any securities. CORPORATE BACKGROUND BW Resources Corp. ('BW', formerly known as Greater Asia Resources Corp.) is a company with interests in hotel, mall operations, residential community developments and gaming activities. At the moment its banner project is the Sheraton Marina Complex, located in Malate, Manila. Aside from having hotel and mall businesses, the complex will house casino operations of the Philippine Amusement and Gaming Corp. (PAGCOR). Once completed, it will be the site of the corporate offices of both, PAGCOR and Best World Gaming and Entertainment Corp. Aside from this, BW has other real estate projects located in Quezon City, Pampanga and Tagaytay. The purchase of the Tivoli Properly Royale in Quezon City is near completion. Tivoli is an exclusive residential community cum recreational area, with a country club and sports and recreational facilities such as, golf driving range, bowling alley, tennis and racquet sports, basketball gym, water sports, and an air conditioned shooting range. Prospective earnings from the sale of lots and club memberships are seen to reach from P1.4bn to P1.6bn for the coming year. The company also owns around 51has. in Tagaytay, which is being conceptualized as a resort-community project. Development on this front has yet to take-off. Another project under negotiation is the planned development of a residential community in Rightland Properties located in Pampanga. THE BANNER PROJECT Presently, BW's major project is the Sheraton Manila Complex (SMC) which showcases the company's focus on developing hotel and leisure centers. It has signed an agreement with PAGCOR for the latter to be SMC's anchor tenant. The lease area, which consists of the gaming area and office spaces, will cover around 50,000 sqm. An additional 15,000 sqm will be allocated for 'Caesar's' casino, which is owned by Starwood Sheraton and will be solely used for foreign high-rollers and junket tours. While another 15,000 sqm. is assigned for the Central Drawing Bingo Operations of BWGEC. The Sheraton Marina Complex would boast of. . . a deluxe-hotel, to be managed by Sheraton Hotel and Resorts: and, an entertainment center/arcade with a PAGCOR operated casino The SMC shall be jointly developed with Megaworld Holdings, Inc., which has recently concluded its asset-for-share swap with the Company. The deal involved the transfer of Megaworld's Malate property (which will be the site of the complex) in exchange for 1.2 billion shares of BW. An increase in the authorized capitalization of BW to P15bn from its current P450m is underway to accommodate the Megaworld deal and other future investments. The Complex will have a 9 to 10-storey entertainment mall, which would include the gaming area, corporate offices and a Bingo Central Drawing place. The deluxe-class hotel, which will be managed by Sheraton Hotel and Resorts, will occupy around 32 floors and have a total of 320 rooms. The project is being positioned as a family destination, with the integration of a hotel, shopping arcade, and recreational/leisure facilities. Construction of this project has already started with the substructure, as well as five (5) floors of the main building already complete. The company will develop the remainder on a turnkey basis with a foreign contractor postponing actual expenditure until the time of completion. Funding sources considered by the company would be private placements and/or commercial borrowings. Apart from its entry into the casino business. BW is currently having talks with Best World Gaming and Entertainment Corp. (BWGEC), for a possible merger. This would spell the infusion of BWGEC's Bingo operations into the company. BWGEC acquired from PAGCOR last year its franchise and license to operate a nationwide on-line Bingo. Furthermore, BW Resources Corp. is currently negotiating to purchase a controlling stake in Bingo Bonanza. Bingo Bonanza is a traditional and conventional bingo operation, operating at present in 26 malls, mostly at SM Malls, Robinson's Malls, Sta. Lucia Mall and Manuela. For this year, operations in 12 more malls are targeted to reach a total of 38 mall operations for this year. Eventually, the target is to operate in 100 malls in the medium-term. Bingo Bonanza has been very popular and successful and it can complement the grassroots and nationwide reach of BWGEC. FINANCIAL HIGHLIGHTS . . . earnings to initially come in from prospective sales of Tivoli Royale Prospective revenues for this year and the next are expected from the sale of its property interests (specifically the Tivoli Royale subdivision once negotiations for its acquisition pushes through). Assuming that the company will fully sell its lots and club memberships, BW is seen to earn around P411m and P988m in 1999 and 2000, respectively. Some additional revenue from rentals and parking fees are also expected by next year, as the Casino operations are slated to start operations by that time and will occupy the completed floors of the development. Please note that possible earnings from other projects still under negotiation are not included, as there are no specifics on these at the moment. . . . then from Marina project by year 2001. . . The Company expects to feel the full effects of its banner project by the year 2001 yet, when !he Sheraton Marina Complex would have been completed. Initial estimates show that majority of its revenues will come from its food and beverage sales (contributing around 77%), followed by mall operations and hotel fees. Significant revenues are expected from F&B operations given the captured market from foreign junket tours and local high-rollers that the hotel and gaming activities are seen to attract. The details are as follows: . . . posting an average net income growth of around 200% to the P3.5bn level by 2001. BW Resources Corp. Income Statement 1st yr. of Op Revenues Mall Operations 1,185.0 Hotel Operations 655.2 Food and Beverages 7,360.7 Rental 144.0 Parking 175.2 Total Revenues 9,520.0 Operating Expenses Food and Beverage 2,944.3 Rental 13.8 G&A 1,246.8 Depreciation 77.0 Prof. & Mgt. Fees 32.6 Total Expenses 4,314.6 Net Income Before Tax 5,205.4 Provision for Tax 1,665.7 Net Income 3,539.7 The bottomline would be around P3.5bn, translating to an EPS of P2.15 on a fully diluted basis (1,650m shares = current O/S of 450m plus 1.2bn shares of Megaworld). Based on the current price of P30.00 per share, this represents a PE multiple of only 14.0x, which is definitely cheaper than current market PE of 20.0x (discount of 43%). Note that these valuations are still based on its current holdings, but what if the merger with BWGEC pushes through within the year? Combined BW and BWGEC Operations Given the possible infusion of Bingo operations. BW performance is seen to improve further, bringing income to a P16bn earnings level by 2000. The Bingo operations are already underway, with around 1,100 terminals already in place. The company targets 10,000 terminals within 12 months, and is seen to rake in an average of around P33,000 worth of ticket sales per terminal per day. On the first year of operations, the Bingo business is already expected to earn (net profit) around P9.5bn. cdt BWGEC Income Statement 1999P 2000P 2001P Sales 10,518.9 107,801.7 126,000.0 Less Prizes 5,259.4 53,900.8 63,000.0 Pagcor Share 2,103.7 21,560.4 25,200.0 Commission 841.5 8.624.1 10,080.0 Net Sales 2,314.2 23,716.4 27,720.0 Advertising/Mktg. 75.3 59.3 G&A 290.5 2,382.2 3,028.7 Depreciation 40.8 160.3 187.0 Interest Expense 37.5 75.4 Total 444.1 2,677.2 3,215.7 Operating Income 1,870.1 21,039.2 24,504.3 Other Income 801.8 1,225.8 NIBT 2,671.9 22,264.9 24,504.3 Provision for Tax 935.2 7,792.7 8,576.5 Net Income 1,736.8 14,472.2 15,927.8 If the merger with BWGEC is consummated this year, holdings would be posting gains of 271% by next year, and by almost four-fold in the following year. (Valuation based on prospective sector PE) Assuming the vending in of operations by this year , the merged company would show an EPS of P1.30 and P9.43 in 1999 and 2000, representing a PER of 23.1 and 3.2x, respectively. Comparing year 2000 valuations to estimated sector market PE of 11.9x gives an upside for BW shares of 271% for an equivalent share price of P112.22. Also, BW's earnings are expected to reach P19bn in 2001, on a consolidated basis. At that level, EPS would increase further by 25% to P11.80, giving a PER of only 2.5x based on the current issue price of P30.00. COMBINED Income Statement BW & BWGEC 2001P Revenues Bingo Sales 126,000.0 Mall Operations 1,185.0 Hotel Operations 655.2 Food and Bev 7,360.7 Rental 144.0 Parking 175.2 Total Revenues 135,520.0 BW & BWGEC 2001P Operating Expenses Prizes 63,000.0 Pagcor Share 18,900.0 BIR franchise Tax 6,300.0 Commission 10,080.0 Food and Beverage 2,994.3 Rental 13.8 G&A 4,275.5 Depreciation 264.0 Prof. & Mgt. Fees 32.8 Total Expenses 105,810.3 Net Income Before Tax 29,709.7 Provision for Tax 10,242.2 Net Income 19,467.4 Assumptions used in projections: (Based on data supplied by BW) 1. Start of operations of whole SMC by year 2001. 2. PAGCOR casino operation to start early next year (2000). 3. Prospective Hotel Occupancy rate for year 2001 of 70%. 4. Total of 320 hotel rooms used at average rate of $370 per day per room. 5. Foreign exchange rate used: P40.00; $1.00 6. Total mall area to cover around 80,000 sqm at average lease rate of 1,200/sqm. 7. 30-year depreciation period. 8. Acquisition of Tivoli property to be finalized by next month, with 100% sale of lots and club memberships by year 2000. 9. Cumulative total of 10,000 on-line Bingo terminals in the period covered, with average daily sales of around P33,000 per terminal. 10. Prospective earnings from Bingo Bonanza not included in projections. RECOMMENDATION The prospective price appreciation brings about substantial rewards for the investor. A stable stream of earnings is expected by the company to come from the Sheraton Marina Complex development, with its casino and hotel/mall operations, and are yet to start operations early next year and year 2001. Meanwhile, the possible infusion of the on-line Bingo activities of Sister Company, BWGEC, into the company remains a plus. Although the assured stability of earnings is yet to be felt given that the company is still in start up operations, the field on which it has chosen to focus on, gaming, is of longstanding popularity and profitability. Given this we recommend a Long-term Buy on BW shares .