Second Quarter 2004 Grupo Carso (GCARSO) Marcela Martínez Suárez [email protected] (52-55) 5169-9384

August 3, 2004 HOLD

GCARSO A1 / GPOVY GCarso Turns in a Strong Report, with Results Price: Mx / ADR Ps 48.10 US$ 7.65 Coming in above Expectations

Price Target Ps 53.00 • Industrial divisions continue to improve, particularly Risk Level Medium Condumex, Nacobre, and Frisco. Quarterly results came in slightly above our estimates. Industrial divisions have led the 52 Week Range: Ps 48.91 to Ps 31.02 way, although Sanborns and also posted improvements Shares Outstanding: 814.9 million in same-store sales. During 2Q04, sales rose 19.9% (4.1% Market Capitalization: US$ 3.42 billion above our estimate), as a result of strong performance at both Enterprise Value: US$ 5.45 billion the industrial and retail divisions. Operating margin Avg. Daily Trading Value US$ 1.3 million rebounded as copper price increases were transferred onto

Ps/share US$/ADR clients, and also thanks to contract renewals at the industrial 2Q EPS 1.54 0.27 division, specifically Condumex, Nacobre, and Frisco. For its T12 EPS 3.60 0.63 part, retail margins should trend upward as available income levels improve. Considering GCarso's results and positive T12 EBITDA 12.91 2.25 outlook, we increased our 12-month price target to Ps 53.00, T12 Net Cash Earnings 9.86 1.72 which coupled with a Ps 0.70 dividend, translates into an Book Value 30.14 5.26 11.64% yield, leading us to recommend the stock as a T12 2004e HOLD. P/E 13.37x • Condumex (28% of revenues): In earlier reports we had P/BV 1.60x commented that Condumex, through its subsidiary P/NCE 4.88x Swecomex, had been awarded a US$ 120 million contract to EV/EBITDA 5.94x 5.20x build three oil platforms. Pemex had been quite inactive T12 1Q04 during the past 10 years, but now that activity has resumed, ROE 12.2% 20.5% the oil company will be building 47 platforms in total. Bids ROA 12.2% 12.2% have already been conducted for 22 out of the total of 47 Interest Coverage Ratio 4.98x 7.71x platforms. Recently, Swecomex was awarded a US$350 Total Debt to EBITDA 1.78x 1.73x million contract to build two additional oil platforms. Of the five platforms to be built by Swecomex, one will be delivered T12 = Trailing 12 months as of June 30, 2004 during 2H04, two during 1H05, and the other two during ENTERPRISE VALUE (EV) = Mkt cap.+ Net Debt+ Min.Int. 2H06. We believe that Swecomex should continue to win NCE=Net income+Montry Loss+Fx Loss+Depr.+Deffered Tax bids, thus making for interesting revenue potential. During ROA=T12m Op.Profit to Avg. Assets 2Q04, all of Condumex' divisions posted strong results. ROE=T12m Net Profit to Avg. Equity Telecom recorded strong volume growth, particularly in GCARSO A1 IBMV copper wire and fiber optics (up 27% and 112%, 54.20 respectively), while installation services rose 69%. Construction and energy saw increases in construction 49.92 11, 035 cable and copper wire volumes, declines in aluminum wire, and growth in metal and capital good volumes. Autopart and automotive cable volumes grew 21.2% and 4.1%, while 45.63 10, 088 harness volumes declined 4.1% vs. 2Q03. As such, Condumex' sales grew 40.1% to Ps 4.6 billion. Operating 41.35 9,141 margin expanded by 2.2 pp to 12.7%. The outlook for 2004 seems positive, thanks to economic reactivation. 37.07 8,194 • Nacobre (10% of revenues): The copper division posted 32.78 7,247 significant recovery in both volumes and prices. As a result of changes in sales strategies, the aluminum division saw improvements in profitability. Also, the PVC division 28.50 6,300 reported improvements in sales mix. As such, Nacobre's sales J-03 A-03 O-03 N-03 D-03 F-04 M-04 A- 04 J-04 grew 25.5%, while operating profit and EBITDA rose 155.9% and 84.6%, respectively. This division has a positive

MATERIAL DISCLOSURES AT THE END OF THIS REPORT. The information contained herein has been obtained from sources that we believe to be reliable, but we make no representation as to its accuracy or completeness. Neither Casa de Bolsa nor Banorte Securities International Ltd. accepts any liability for any losses arising from any use of this report or its contents. 1 Second Quarter 2004 Grupo Carso (GCARSO) Marcela Martínez Suárez [email protected] (52-55) 5169-9384

August 3, 2004 HOLD

INCOME STATEMENT outlook, due to favorable copper prices and the market (millions of constant pesos as of June 30, 2004) segments that this division is targeting. 1H04 1H03 Change 2Q04 2Q03 Change • Frisco (5% of revenues): Frisco's revenues were up Net Sales 31,360 26,940 16.4% 16,456 13,721 19.9% 23.3%, driven by higher agricultural, industrial, Gross Profit 8,450 7,404 14.1% 4,344 3,725 16.6% mining, and intermodal volumes at . Operating EBITDA 5,212 4,297 21.3% 2,704 2,129 27.0% profit rose 331.7%, while the margin expanded by 14.1 Operating Profit 4,021 3,178 26.5% 2,105 1,567 34.3% pp to 19.7%. Minera Tayahua saw stronger production ICF 355 761 -53.4% 169 176 -4.0% volumes and higher prices. Interest Expense 1,085 1,230 -11.8% 403 692 -41.8% Interest Income 533 206 159.1% 401 79 405.5% • Porcelanite (5% of revenues): Sales grew 8.5% to a Foreign Exchange Loss 74 28 159.3% 185 -424 #N/A total of Ps 803 million, driven by stronger dynamics in Monetary Loss -271 -292 -7.0% -17 -13 33.8% the low-income housing construction sector. At the Other Financial Expenses 44 240 -81.5% 3 74 -95.5% operating level, results dropped 3%, as installed Pretax Income 3,622 2,177 66.4% 1,933 1,317 46.7% capacity expansions at the Guanajuato plant led to Taxes 1,466 997 47.1% 714 578 23.5% stronger operating expenses. The company is optimistic Non-Cons. Subsidiaries 519 438 18.4% 284 235 20.9% about its performance during 2004, and has in fact Minority Interest 487 361 35.2% 246 194 26.7% started to build a plant in Sonora with a monthly Net Income 2,187 1,258 73.9% 1,256 779 61.2% capacity of 1 million meters. Gross Margin 26.9% 27.5% 26.4% 27.1% • Cigatam (19% of revenues): This division had an Ebitda Margin 16.6% 15.9% 16.4% 15.5% unusually strong quarter, an event that will hardly Operating Margin 12.8% 11.8% 12.8% 11.4% repeat itself in the future. Revenues and operating Net Margin 7.0% 4.7% 7.6% 5.7% profit were up by 17.4% and 33%, while the margin

expanded from 6% to 6.8%. We believe this division A/R Turnover (days) 71 66 Inventory Turnover (days) 93 91 will continue to perform well through the end of the A/P Turnover (days) 37 33 year, although results will not be as strong as this WC net of debt to Sales 26.7% 23.1% quarter's, given that this division operates in a mature industry. BALANCE SHEET • GSanbor (31% of revenues): Sales, operating profit, (millions of constant pesos as of June 30, 2004) and EBITDA grew 9.8%, 6.6%, and 7.4%, Jun-04 Dec-03 Jun-03 respectively. (For more information, please refer to Total Assets 69,077 68,281 65,322 our quarterly earnings report on GSanbor.) Cash & Equivalents 1,865 2,449 1,367 Other Current Assets 24,644 23,163 20,089 • Company management’s strategy is to consolidate Long Term 2,366 1,792 2,115 its position in the Mexican market, and concentrate Fixed (Net) 35,766 36,333 37,385 its efforts on strategic assets, both of which should lead Deferred 3,824 3,935 3,850 to stronger results under a context of economic Other 612 609 516 reactivation. Total Liabilities 38,050 37,442 35,917 Short Term Debt 6,451 8,055 8,286 Other Current Liab. 9,735 9,498 9,010 Long Term Debt 12,292 10,055 9,670 Other Liabilities 9,573 9,834 8,951 Shareholders Equity 31,027 30,838 29,405 Minority Interest 6,466 6,405 6,042

FINANCIAL ANALYSIS Current Ratio 1.6x 1.5x 1.2x ST Debt to Totl Debt 34.4% 44.5% 46.1% Foreign Liab/Totl Liab 34.9% 33.6% 29.8% Net Debt/Total Equity 54.4% 50.8% 56.4% Totl Liab./Totl Equity 122.6% 121.4% 122.1%

MATERIAL DISCLOSURES AT THE END OF THIS REPORT. The information contained herein has been obtained from sources that we believe to be reliable, but we make no representation as to its accuracy or completeness. Neither Casa de Bolsa Banorte nor Banorte Securities International Ltd. accepts any liability for any losses arising from any use of this report or its contents. 2

GC ARSO SPECULATIV E BUY Ma r c e la Ma r t in ez ' S ummar y Re co mmen d at io n $55.00 In itia l Op ini on : S PECULAT IV E BUY $50.00 SELL 14% $45.00

$40.00

$35.00 Up gr a de d t o HOLD 36% $30.00 BU Y Ta r ge t Price Ps$ 50.10 $25.00

$20.00

$15.00 S PECUL AT IV E BUY BUY 50% $10.00 3 3 4 3 3 4 0 0 0 04 0 03 0 0 ------t- r g n c-02 b b- n e ec-03

Oc 0% 10% 20% 30% 40% 50% D Fe Ap Ju D Fe Apr Ju Au

Analyst Certification I, Marcela Martínez Suárez, hereby certify that the views expressed in this research report accurately reflect my personal views about the subject company(ies), its (their) affiliate(s) and its (their) securities. I also certify that I have not been, am not, and will not be receiving direct or indirect compensation in exchange for expressing the specific opinion(s) in this report. Material Disclosures Casa de Bolsa Banorte and its affiliates, including Grupo Financiero Banorte, provide a vast array of services in addition to investment banking, such as corporate banking, among others, to a large number of corporations in and abroad. The reader should assume that Casa de Bolsa Banorte or its affiliates receive compensation for those services from such corporations. Under Mexican laws currently in force, Research Analysts are permitted to directly hold long positions in shares of companies listed on the Bolsa Mexicana de Valores and mutual funds. However, Research Analysts must keep observance of certain bylaws that regulates their participation in the market preventing, among other things, misuse of private information in their own benefit.

Analyst compensation Analyst compensation is based on activities and services intended for the benefit of investor clients of Casa de Bolsa Banorte and its affiliates. Compensation is determined on the basis of individual performance and impacted by overall firm profitability. However, investors should note that our analysts do not receive any direct compensation for any specific transaction in investment banking.

Investment Banking Activities over the Past Twelve Months Casa de Bolsa Banorte or its affiliates have received compensation for investment banking services from the following companies or their affiliates, which may be the subject of analysis in this report: Alfa, Cablemas, , Corporación GEO, DeMet, G. Acción, Grupo Financiero Banorte, Hylsamex, Hipotecaria Nacional, Jugos Del Valle, Su Casita, Urbi, Xignux.

Investment Banking Activities during the Next Three Months Casa de Bolsa Banorte or its affiliates expect to receive or intend to seek compensation for investment banking services from companies or their affiliates that may be discussed in this report.

Guide to Investment Ratings RATING is a parameter that indicates the expected total RETURN over the next twelve months. The total return required for a given rating depends on each stock's level of RISK. The following table outlines the parameters used to determine the rating given in the document attached hereto. These parameters are placed under revision on a regular basis, and modified as a function of several factors, including interest rate levels and future expected interest rate performance, as well as equity market trends and volatility.:

Risk/Rating Low Medium High BUY >13.5% >16.5% >19.5% HOLD <13.5% > 9.0% < 16.5% > 11% < 19.5% > 13% SELL <9.0% <11% <13% Risk takes into account three factors: 1) relative volatility to the local index, 2) the stock's marketability, 3) the company’s financial strength. With these factors we construct a "Risk Index", which is used to group securities to three levels of risk: Low, Medium and High. Although this document offers a general investment criterion, we urge readers to seek the counsel of their own Financial Consultants or Advisors, should any given security mentioned herein fit the reader’s investment goals, risk profiles, and financial positions.

Determining Price Targets In calculating price targets, Casa de Bolsa Banorte uses a combination of methodologies that are generally accepted among financial analysts, including, but not limited to, analysis of multiples, discounted cash flows, sum-of-parts, or any other method that might be applied on a case-by-case basis. There can be no assurance that price targets calculated by Casa de Bolsa Banorte will be attained, as this depends on numerous endogenous and exogenous factors affecting both the company’s performance and trends in the stock market on which it is listed.

THE INFORMATION CONTAINED HEREIN HAS BEEN OBTAINED FROM SOURCES THAT WE BELIEVE TO BE RELIABLE, BUT WE MAKE NO REPRESENTATION AS TO ITS ACCURACY OR COMPLETENESS. NEITHER CASA DE BOLSA BANORTE, S.A. DE C.V. NOR BANORTE SECURITIES INTERNATIONAL ACCEPTS ANY LIABILITY FOR ANY LOSS ARISING FROM ANY USE OF THIS REPORT OR ITS CONTENTS.

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