(14 August 2006. Pasay City, Philippines)  Holding company, SM Investments Corporation reported an 85% growth in net income for the first six months of 2006 to Php5.1 billion boosted by extraordinary gains from the sale of marketable securities during the period and Global Depository Receipts in the first quarter.

Excluding extraordinary items, net recurring income expanded by 26% for the first half to Php2.9 billion on the strength of the retail merchandising business, and mall operations. SM also gained from improved efficiencies which kept a tight lid on operating expenses and improved margins. Worth noting also is while interest expenses declined by 5% to Php1.5 billion, provision for income tax during the period grew by 27.6% due to a mandatory increase in corporate income tax rates from 32% to 35% which took effect last November 2005.

Consolidated revenues increased by 11.1% during the first half of this year to Php27.8 billion. Merchandise sales which contributes 70% to total revenues, grew by 7%. Rental income which accounts for 17.5% of revenues, grew 17% to Php4.9 billion. Revenues from cinema operations rose 16% to Php1.1 billion, while management and other fees and dividends increased 50% to Php0.4 billion and 31% to Php0.6 billion, respectively. Operating expenses, on the other hand, grew by only 7.5% to Php5.9 billion. Despite the faster growth in expansion-related expenses such as personnel cost and depreciation, these were largely offset by a decline in expenses in light, water, and maintenance expenses, and marginal increases in rent and outside services. Cost savings, particularly in electricity consumption, amid sharp increases in oil prices, continues to be priority for management.

As a result, operating income grew by 18% to Php6.4 billion. This translates to an operating margin of 23% during the period from 21.6% same period last year. EBITDA increased by 18.6% to Php7.7 billion, with EBITDA margin improving from 26% last year to 28% as of end-June this year.

SM President Mr. Harley Sy said, “We are encouraged by the continued growth, profitability, and stability of SM, especially now that it has evolved into one of the country’s largest conglomerates. New doors constantly open for us and we approach them with cautious optimism. We always look for new avenues to improve our products and services to meet the demands of the Filipino community, who we thank for showing strong faith in SM as a group.

SM Investments’ Business Profile, January to June 2006

% of Revenues

 % of Net Income

Retail Merchandising 

73%

 28%

Shopping Malls 

20%

 50%

Real Estate

 2%

3%

Banking, Financial
   Services and others 

5%

19%

 Total

100%

  100%

In terms of its four major lines of business, SM still derives the bulk of its revenues from retail operations with a contribution of 73% to total revenues. Next is mall operations with a revenue contribution of 20%.

Real estate which a relatively new but emerging segment for SM, contributed 2%. Sales revenues during the period, in fact, grew more than 9 fold as portions of the high-rise residential condominium projects of SM Development Corporation (SMDC) and Highlands Prime, Inc. (HPI) were completed, and sales which went higher than expected were booked during the period.

In terms of net income, shopping malls accounted for 40%, retail for 28%, and real estate for 3%. Banking and financial services and others accounted for 5.3% of total revenues and 19% of net income.

SM Executive Vice President for Finance, Mr. Jose T. Sio said, “The difference in revenue and net income profiles underscore the importance of SM’s upward integration toward higher value-added businesses in mall operations, banking, and real estate as they emerge and provide SM with opportunities to take advantage of wider margins. The retail operations, on the other hand, provides the essential liquidity to fuel the growth and stability of the whole group.

RETAIL MERCHANDISING

Consolidated retail sales grew 7.3% to Php19.4 billion as departments stores further expand their operations. But overall sales growth was tempered by the increase in the value added taxes from 10% to 12% starting February this year. Operating income for the sector increased by 60% as cost cutting measures tempered the growth in operating expenses.

Following the announcements last June 2006 to acquire SM Supermarkets and SM Hypermarkets through Supervalue, Inc. and Super Shopping Market, Inc., the transaction is undergoing a mandatory 1 review by the Securities and Exchange Commission. Consolidation of the financial results of these two companies will therefore be executed on full completion of the transactions.
 
SM Department Stores

SM Department Stores, which is 93% held by SM, generated sales of Php19.4 billion during the period on account of its continued expansion nationwide. Its gross floor area increased by 8% in 2005 and 15% in 2006 to a total of 336,589 square meters (sqm). They opened stores this year in SM City Sta. Rosa, SM City Clark, and the Mall of Asia. The small growth in operating expenses of 2% allowed the departments stores to grow its net income by 44% to Php788 million.

EBITDA for department stores increased by 47% to Php1.3 billion, with EBITDA margin improving from 5% last year to 7% as of end-June this year.

SM Department stores will continue to focus on streamlining its operations, achieving better margins and expanding further. One more store is scheduled to open this year in Lipa, Batangas,  and 3 stores are scheduled next year in Bacolod, Negros Oriental; Tarlac, Tarlac; and Taytay, Rizal.

MALL OPERATIONS

SM Prime Holdings, Inc. (SMPH)

SM’s 53% owned SMPH, saw a 9% increase in net income from mall operations at Php2.6 billion despite the 21% increase in EBITDA to Php4.4 billion, again due to the mandatory increase in corporate income tax rates from 32% to 35%.

Gross revenues increased by 17% to Php6.1 billion after getting a boost from the opening of new SM Supermalls, namely, SM City San Lazaro, SM Supercenter Valenzuela, SM Supercenter Molino in 2005, and SM City Sta. Rosa, SM City Clark and the now famous Mall of Asia this year. Operating expenses grew at a lower rate of 14% to Php2.5 billion resulting in a 20% growth in operating income to Php3.5 billion.

SMPH’s second quarter was highlighted by the opening of its largest mall in the country, the Mall of Asia. Unlike previous SM malls, the Mall of Asia was designed to become a total shopping, entertainment and tourism destination. It features the first IMAX cinema in the country and an Olympic-sized skating rink. Located on a 60-hectare property overlooking Manila Bay, the 386,000 square meter complex consists of four buildings linked by elevated walkways – the Main Mall, the North Parking Building, the South Parking Building, and the Entertainment Center Building. 

SMPH is scheduled to open two more malls this year: SM Supercenter Pasig and SM City Lipa. A supercenter is a smaller structure, which mainly houses a hypermarket and a mix of junior anchor stores, food outlets and boutiques, while an SM City is a full-blown mall with a complete mix of a department store, a supermarket and/or hypermarket, junior anchor stores, food outlets, boutiques, and amusement facilities.

By yearend, SMPH will have 27 malls  with a gross floor area of 3.6 million sqm. Next year, SMPH plans to open another 4 to 5malls with a gross floor area of approximately 300,000 sqm.

BANKING AND FINANCIAL SERVICES

Banco De Oro (BDO)

SM’s main banking arm, Banco de Oro, now the 5th largest bank in terms of resources, reported profits of Php1.3 billion, up 6% during the first half. Net interest income grew by 15% to Php3.8 billion, funded by the 44% hike in deposits to Php201 billion. Net loans and other receivables grew by 33% to Php115.4 billion, while non-performing loans (NPL) declined even further from Php4.9 billion to Php4.6 billion, for an NPL ratio of 4.4%.

Non-interest income amounted to Php1.8 billion for the first half of the year despite revaluation losses due to a rising interest rate environment in the second quarter of this year. Exclusive of treasury trading activities and the one-time charge from the consolidation of the credit card subsidiary, non-interest income grew 20% during the period.

Operating expenses for the period was up 25% on account of the consolidation of United Overseas Bank branches and the credit card subsidiary into the parent bank. There were also product and branch expansion efforts undertaken by BDO. From 185 branches as of year-end 2005, total number of branches as of the first half of 2006 stood at 224, with 27 more branch licenses scheduled for redeployment.

Total resources for the first half of 2006 stood at Php284.3 billion, up sharply by 45%. The growth is attributable to a 51% increase in Investment Securities of Php119.5 billion. The bank’s first half results translate to a return on average equity of 12% and a return on average assets of 1%.

REAL ESTATE AND PROPERTY DEVELOPMENT

Revenues from the sale of real estate saw a dramatic increase from Php48 million in the first half of 2005 to Php450 million this year. This stems from the successful launch of SM’s high-rise residential condominium projects both in Metro Manila and in Tagaytay Highlands undertaken by SM Development Corporation and Highlands Prime, Inc.
SM Development Corporation (SMDC)

Fifty-nine per cent owned SMDC reported profits of Php119 million, lower than last year’s first half profits of Php354 million, which had a boost from unrealized mark to market gains from investments in securities.

Operating income, however, grew more than nine-fold to Php47 million derived from the sale of residential condominiums worth Php806 million, up 153% from last year’s Php318 million.

Chateau Elysee, a French Mediterranean-inspired ‘condoville’ is adjacent to SM City Bicutan in Parañaque. It is composed of six clusters of which the first two clusters have been completed. Cluster one, Concorde, has 228 units of which 199 units have been sold as of end June 2006. Cluster 2, Lafayette, has 384 units of which 205 units have been sold. Cluster 3, Eifel, has 400 units and is just 6% complete, but has pre-sold 26 units. Each cluster comes with one-, two-, or three-bedroom units with floor areas of 20, 40, and 60 sqm respectively.

Chateau features a clubhouse courtyard, a 25-meter swimming pool, a gym, jogging trail and a social hall.

Second project, Mezza Residences, is located just across SM City Sta. Mesa. It has four 38-storey towers connected by a retail podium making the project contiguous. Sales are therefore booked on the basis of the percent completion of the whole project. Only towers 1 and 2 have been launched. They each have 420 units with one-, two-, or three-bedroom cuts of 20, 40, and 60 sqm respectively. Mezza has pre-sold 349 units as of end June 2006. The project is expected to be 15% complete by end of 2006.

Mezza will provide for its residents a landscaped community deck, a 25-meter swimming pool, a  jogging path, a health station, a lawn picnic area, a Zen garden, and retail shops at the podium level.

Highlands Prime, Inc. (HPI)

HPI is also a high-rise residential developer that is currently niched in Tagaytay Highlands. It reported an 11% increase in net income at Php54 million.

Its first project, Woodridge with 138 units has been completed and all units sold. Its next project, the Horizon has 220 units of which 19 units have been pre-sold. The project is 74% complete as of end June 2006.

The Horizon which is adjacent to the Tagaytay Midlands golf course has 12 buildings and features an exclusive putting green, an infinity pool, children’s playground, and landscaped gardens.

Still to be launched is Woodridge Park. It will have 10 buildings with a total of 119 units with a choice of three, four or five bedroom units. Penthouse units will have fireplaces, while the loft units will have high cathedral ceilings. The area will have picnic groves, a children’s playground, and landscaped gardens.
SM Central Business Park (CBP)

One of SM’s more ambitious projects is the CBP located in Pasay City where the Mall of Asia is located. The 60-hectare project is an urban development that will consist of SM’s anchor projects, hotels, office and residential towers, and a ferry terminal that will take shape over a period of 10 to 12 years.

The first anchor project is SM Prime’s Mall of Asia which occupies a land area of 19.5 hectares. It was completed and launched May 21 of this year.

Next to rise and scheduled for completion by July 2007 is the OneEcomCenter, a hub for business process outsourcing (BPO) firms. The 105,857 square meter building will sit on a 1.17 hectare lot on the right of the Mall of Asia. The building will have a total of 71,934 square meters available for lease. Seven floors will be allotted for office space, and the ground floor for commercial use.

Third is the 46,600-square meter MAITrade Expo and Convention Center which is located on the left side of the Mall of Asia. This is a 3-storey building with a gross floor area of 46,647 sqm. Level 1 is the Exhibition area that can be converted into 4 halls. Level 2 will have a bridgeway & commercial area, and Level 3 will have 6 halls and 9 meeting rooms. There will be parking for up to 440 vehicles.
The fourth anchor project is a sports arena to be built behind the convention center. Plans are now being drawn up for this project.

Hamilo Coast Project

Finally, SM’s most unique large-scale development is Hamilo Coast. This is an ecotourism project to develop 5,700 hectares of land by the sea in Nasugbu, Batangas. This will span 20 to 30 years of development to convert 13 coves into resort and retirement villages, just 2 and a half hours away from Metro Manila. Hamilo’s first cove is targeted to be launched in the first quarter of 2006.

Phase one of the project is Cutad Cove which covers 40 hectares of resort village development. The masterplan of Cutad Cove, which is designed by Dubai-based Cadiz International, includes provisions for a beach club, clusters of residential condominiums, two hotels, restaurants, retail facilities, and sports facilities for golf, swimming, scuba diving, and trekking. The estimated launch date for the project is first quarter of 2007.

SM’S OTHER INITIATIVES

SM also recently announced its plan to simplify its corporate structure to align subsidiaries, affiliates and other assets within their respective lines of business or interests. The project will be substantially completed by end of this year and is expected to result in higher operational and cost efficiencies for SM and its subsidiaries. It also aims to unlock the true value and the future earnings capability of SM as this will provide greater funding flexibility for the company’s different lines of business.

— End —

For further information, please contact:
Ms. Corazon P. Guidote
Vice President for Investor Relations
SM Investments Corporation
Email: [email protected]
Tel. 831-1000 local 1157