Report of the President

Fellow Shareholders,

The encouraging macroeconomic indicators in 2021 demonstrate how government, businesses, and consumers have adapted to the disruption arising from the pandemic. Despite the extended period of lockdowns resulting from surges in infections as a new coronavirus variant would arise, our economy managed to achieve decent growth, resulting in an overall improvement in the business environment.

At Ayala, our diversified portfolio provides a natural mechanism to mitigate the adverse impact and capitalize on opportunities arising from the global health and economic crisis. Combined with a strong balance sheet and ample funding capacity, our portfolio has allowed us to ride out the unprecedented challenges of the crisis, adjust to the evolving landscape, and prime ourselves for economic recovery.

We continued to do our part to help revitalize the country’s economic activity. In 2021, we augmented our investment program across the Ayala group, deploying ₱228 billion in combined capital expenditure and investments, 36 percent higher than the previous year. A significant portion of this amount was directed towards the capacity expansion of Ayala Land, Globe, ACEN, as well as the investments made at the Ayala parent level.

In 2021, we mapped out a three-point strategic agenda for 2023 as we viewed the disruption in the business environment as an opportune time to strengthen and recalibrate our portfolio and reposition ourselves for a postpandemic economic recovery.

FINANCIAL PERFORMANCE

We have seen most of our businesses performing better in our second year into the pandemic. Ayala Land, BPI, Globe, and ACEN continued to be the core drivers of our earnings

While Ayala Land and BPI were the most vulnerable to the extended period of hard lockdowns, both businesses adapted to the evolving environment. Despite limited mobility, Ayala Land was able to capture the fairly resilient demand in its residential business and stable office leasing segment. BPI, on the other hand, normalized its loan loss provisions as asset quality improved. In addition, it continued to leverage its digital leadership in banking, rapidly growing its digital ecosystem.

Meanwhile, being well-positioned to unlock the value from the heightened focus on digitalization and decarbonization, Globe and ACEN sustained their stable performance during the year, leveling out the challenges in Ayala Land and BPI which are highly sensitive to mobility restrictions. Further, gains from various initiatives we executed, including the strategic partnership with the Razon group in Manila Water, the divestment of one of our thermal assets, and the entry of a new investor in Mynt, supported our profitability in 2021.

All these drove the 62 percent expansion in our net income to ₱27.8 billion in 2021.

THREE-POINT STRATEGIC AGENDA FOR 2023

In 2021, we mapped out a three-point strategic agenda for 2023 as we viewed the disruption in the business environment as an opportune time to strengthen and recalibrate our portfolio and reposition ourselves for a post-pandemic economic recovery.

Our portfolio consists of diversified businesses across three pillars—core value drivers, emerging businesses, and portfolio investments. Our core value drivers Ayala Land, BPI, Globe, and ACEN are established franchises that have captured the strong momentum in the Philippine economy over the past decade. We have emerging businesses in healthcare and logistics where we intend to create a more meaningful presence to take advantage of the promising potential in these spaces. Finally, our portfolio investments—Manila Water, AC Industrials, AC Infrastructure, iPeople, and AC Ventures— enable us to participate in a variety of growing industries. The diversified nature of our portfolio has positioned us well to withstand the effects of the pandemic.

However, with the changes in the business landscape, we are taking a close look at these investments to create a portfolio that can deliver sustainable value and impact in the medium and long term.

Through 2023, we have committed to:

Support the continued expansion of our core value drivers Ayala Land, BPI, Globe, and ACEN, which we believe are well positioned to take advantage of the fundamental shifts prompted by the pandemic.

Scale up our emerging businesses AC Health and AC Logistics to create new sources of growth and value.

Sharpen our portfolio with an increased focus on value realization to fund future investments and strengthen our balance sheet, targeting to raise US$1 billion in proceeds by 2023.

Let me expand on each of these points:

Support the continued expansion of our core value drivers Ayala Land, BPI, Globe, and ACEN, which we believe are well positioned to take advantage of the fundamental shifts prompted by the pandemic.

The past two years have pushed megatrends such as digitalization and decarbonization to the spotlight and are redefining the banking, telco, and power industries.

Digitalization

BPI and Globe are benefitting from the accelerated digital adoption across many consumer touchpoints, establishing their leadership in digital finance in the country. BPI has rapidly grown the share of transactions towards online platforms as it strengthens its digital leadership in banking. It is introducing seven digital banking platforms designed to serve particular segments such as retail, corporate, microfinance, securities trading, SMEs, high net worth individuals, and the broad market. Four of the seven platforms are operational, while three will be launched within 2022.

The bank has rapidly grown its digital engagement and propensity, with 58 percent of its client base enrolled in its digital platforms and 20 percent in active user growth. With an expanded digital client base, enhancements in the platforms, and new products and partners, fees generated from digital transactions grew 30 percent. Digital customers generate more than twice the revenue of a non-digital customer across deposits, credit cards, loans, and other bank products such as investments and insurance.

Globe, on the other hand, continues to harness GCash as the number one finance app in the Philippines and is now part of the daily routines of many Filipinos. In 2021, its registered users nearly doubled to 55 million. Its gross transaction value more than tripled from its 2020 level to ₱3.8 trillion, exceeding its outlook of ₱3 trillion. In addition, GCash has made significant headways in financial services across savings, lending, investments, and insurance products. With the scale it continues to build, GCash has reached positive full-year EBITDA and achieved profitability three years ahead of target.

The massive success of GCash has clearly shown Globe’s ability to seize opportunities in adjacent spaces where it can leverage the assets and expertise of its core telco business and transform itself into a digital solutions group. Aside from fintech, it has a growing portfolio of assets in healthtech, e-commerce, and adtech under its corporate builder 917Ventures and corporate venture capital arm Kickstart, which are well-positioned to serve the needs of both the B2C and B2B segments.

On the core telco business, Globe continues with its aggressive network build to keep up with strong demand and further boost the internet quality and coverage in the country. It has earmarked ₱89 billion in capital spending for 2022.

Synergies in digital finance

With both digital platforms poised to serve a huge unbanked population and contribute to the country’s financial inclusion agenda, we are deepening the synergies between GCash and BPI. BPI is ramping up its presence in GCash, with an array of its financial products now present in the platform.

BPI has rapidly grown its digital engagement, with 20% in active user growth.

Decarbonization

Meanwhile, ACEN is at the forefront of energy transition by pivoting its generation portfolio towards 100 percent renewable energy and spinning off all its thermal capacity by 2025. Its subsidiary ACE Enexor was designated as the energy transition platform, which will entail transitioning thermal assets into cleaner technologies. ACEN currently has a total of 3,300 megawatts of renewables capacity. This is expected to reach over 4,000 megawatts in 2022. As it aspires to be the largest listed renewables platform in Southeast Asia, ACEN expects to reach its goal of assembling 5,000 megawatts of renewables capacity earlier than its 2025 timeline.

In addition, a first in the ASEAN region, ACEN is adopting a framework called the Energy Transition Mechanism or ETM for the early retirement and transition of SLTEC by 2040 or 15 years ahead of its technical life. ETM is an innovative model which uses low-cost and long-term funding to accelerate the retirement of coal plants and develop renewable energy to replace them.

Within the first half of 2022, ACEN will launch a new growth strategy and targets for 2030.

Beneficiaries of the reopening of the economy

While Ayala Land and BPI have been adversely affected by the pandemic, they are also well-positioned for a strong rebound as hard lockdowns are lifted, and economic activity fully resumes.

In Ayala Land, despite the challenges from mobility restrictions, it saw sustained demand in its residential segment throughout the pandemic. For 2022, Ayala Land sees an overall improvement in demand, albeit still below pre-pandemic levels.

It is targeting to launch four new estates located in Cavite, Batangas, Bulacan, and ₱100 billion worth of residential projects. In commercial leasing, with the reduction of quarantine measures to the lowest level, Ayala Land expects improved mobility to drive higher foot traffic and tenant sales to its malls. In hotels and resorts, it is preparing for higher occupancy and patronage from business travelers and a return of in-person events. The relaxed flight restrictions are also expected to attract more local and foreign tourists to its resorts. In offices, we foresee stable operations to continue given their prime locations, driven by BPO and headquarter tenants. We also expect overall occupancy to improve as the workforce increasingly returns onsite.

With the improved health situation and favorable prospects for recovery, Ayala Land is budgeting ₱90 billion in capital expenditures this year. Around half is allocated to the residential business, with the rest to estate development, land acquisition, and commercial leasing operations.

In BPI, the bank views 2022 to be a recovery year. It anticipates elevated global and domestic inflation, which will lead to higher interest rates. It estimates that the Bangko Sentral ng Pilipinas will raise interest rates successively within the year. With higher interest rates expected to take place in the second semester, BPI sees an expansion in net interest margin of 15 to 20 basis points. We expect the bank’s loan growth to improve from the 5 percent posted in 2021 to around 7 percent to 10 percent in 2022. This will be driven by strong growth across credit card and personal loans, microfinance, and corporate loans. On non-performing loans, BPI expects benign formation from the current 2.5 percent to a maximum of 3 percent NPL ratio.

Overall, BPI estimates earnings growth this year of mid-teens, driven by higher revenues and lower provisions. This is despite an increase in operational expenses as the bank ramps up its technology spending.

While we are priming ourselves for the reopening of the economy, we are mindful of the impact of the Russia-Ukraine conflict on domestic economic recovery. In particular, we are carefully monitoring how the surge in oil prices will affect domestic interest rates, inflation, and global supply chains.

The past two years have pushed megatrends such as digitalization and decarbonization to the spotlight and are redefining the banking, telco, and power industries.

Vertis North is Ayala Land’s central business and lifestyle district in the northern part of Metro Manila.

Scale up our emerging businesses AC Health and AC Logistics to create new sources of growth and value.

We are also building on our long-held tradition of business-building to create new legs of growth from which we can derive future sources of earnings and value, while applying a disciplined approach towards capital allocation.

We aim to establish a significant presence in healthcare and logistics, two industries that are undergoing critical transformation. Both industries are highly fragmented, making them ripe for potential industry consolidation. In particular, the pandemic has exposed the massive underinvestment in the country’s healthcare system, the reason we entered this space. AC Health is scaling up its portfolio to take advantage of the momentum taking place around the healthcare ecosystem. We have allocated around ₱12 billion in AC Health since 2015 to assemble a portfolio of assets in primary care and multispecialty clinics, hospitals, retail pharmacy, pharma distribution, and telehealth. AC Health is also constructing the country’s first specialty cancer hospital, which is set to open in 2023. We are now focusing on execution and on ensuring that the business achieves the desired scale and profitability. We expect AC Health to reach profitability by 2022, and nearly ₱1 billion pesos in net income by 2025.

In logistics, the sector has always played a key role in the country’s trade and economy. More than ever, the pandemic has exposed the massive underinvestment in the country’s logistics sector. We intend to be an active participant in addressing these challenges.

We have formed AC Logistics as Ayala’s vehicle for developing and managing an end-to-end platform that has the capability to service the supply chain requirements for industries in growth markets.

In November 2021, we signed an investment agreement to acquire a 60 percent interest in the AIR21 Group for ₱6 billion. Among the top five logistics companies in the country, AIR21 has eight platforms engaged in a broad range of logistics services, including express door-to-door service, international and domestic freight forwarding, warehousing, and waste logistics management. This opportunity will allow AC Logistics to have an immediate presence and end-to-end capability from a company with a strong brand and track record, solid market position, and revenue and income generating assets. We are awaiting regulatory approvals and completion of conditions precedents on the acquisition, with financial close expected by the first half of 2022.

Another initiative is in cold chain storage. AC Logistics forged a joint venture partnership with Glacier Megafridge, one of the largest integrated cold chain storage providers in the country, for the development of a cold storage facility in Cagayan De Oro City. The city is a trade hub of Northern Mindanao where large FMCG companies are also located. Construction of the facility is ongoing, with commercial operations expected to start by yearend.

These platforms complement our last mile delivery unit Entrego, which experienced accelerated growth from the rise of the digital economy. Entrego has gained a foothold serving major e-commerce players in the country and has ramped up significantly over the two past years.

Sharpen our portfolio with an increased focus on value realization to fund future investments and strengthen our balance sheet, targeting to raise US$1 billion in proceeds by 2023.

We have a renewed focus on sharpening our portfolio, taking into account the changes in the business landscape. We are working towards achieving a robust and agile portfolio that can deliver optimal returns across its components. In particular, we have an increased emphasis on value realization to fund future investments and further strengthen our balance sheet. Since 2021, we have been exercising varying forms of value realization across the portfolio, with a target to raise US$1 billion in proceeds by 2023. This is being executed through a combination of strategic partnerships and divestments of assets that are no longer strategic to our portfolio or do not meet the desired scale and profitability. As of March 2022, we have realized 61 percent or around US$614 million from the transactions we have executed in ACEN through the sale of secondary shares to GIC and the follow-on offering and from Manila Water through the sale of secondary shares to the Razon group. We have also executed a property-for-share swap with Ayala Land, which involved transferring five of our assets to Ayala Land in exchange of its primary common shares. Further, we have started the divestment of some of our passive investments in AC Ventures, which is an ongoing exercise. More recently, we divested our entire stake in the Muntinlupa- Cavite Expressway Project to the Villar group.

To realize the remainder of our target, we are working on divesting our remaining thermal assets, our interest in the LRT 1, and some of our non-core businesses.

We have so far reinvested around US$360 million of the value realization proceeds into value-accretive opportunities. Since last year, we have been taking advantage of attractive valuations to buy back Ayala and Ayala Land shares. Going forward, proceeds will be redeployed to fund other investments and pay down debt. We hope to improve our gearing level and evaluate our dividend payout in step with the growth of our businesses.

GCash is the number one finance app in the country with 55 million users.

We have a renewed focus on sharpening our portfolio, taking into account the changes in the business landscape. We are working towards achieving a robust and agile portfolio that can deliver optimal returns across its components.

CLIMATE AMBITION ROADMAP

In October 2021, the Ayala group announced its commitment to achieve net-zero greenhouse gas emissions by 2050. We engaged South Pole, a leading project developer and global climate solutions provider that works with private organizations and governments worldwide.

Together with South Pole, we are assessing and quantifying the emissions across our business units spanning the three scopes: direct emissions, indirect emissions from generation of purchased electricity, and all other indirect emissions across the value chain. Subsequently, we will develop a roadmap with targets aligned with science towards our net-zero ambition. We expect to complete the roadmap by the end of 2022. We will regularly update our stakeholder community as we execute on key milestones in this long-term ambition.

2022 OUTLOOK AND INVESTMENT PROGRAM

With the improving macroeconomic fundamentals, de-escalation of quarantine measures to the lowest status, and high rate of inoculation, we are hopeful that 2022 will be the start of our country’s recovery. The Ayala group aims to continue its investment programs and for 2022, we have allocated up to ₱285 billion in combined capital expenditure and investments to execute on the growth initiatives across our businesses. A significant portion of this amount was earmarked to support the growth initiatives of Ayala Land, Globe, and ACEN. At the parent level, our planned investments amount to up to ₱24 billion, which we have allocated for our emerging businesses as well as opportunities for buyback and other potential investments.

We are, however, mindful of the current geopolitical risk and its impact on our domestic economy, our recovery, and investment programs.

GOING FORWARD

As we continue to execute on this new growth strategy for Ayala, I would like to thank our Board of Directors for its guidance and strong engagement across our many endeavors, our management and employees for their extraordinary commitment, and our shareholders and all our stakeholders for their continued trust and support to the institution.

Fernando Zobel de Ayala
President & CEO