Equity Research Me xico

RETAILERS Sector Note January 15, 2018

www.banorte.com Favorable performance despite a challenging 2019 @analisis_fundam

. We consider the retail sector should continue to post a favorable operating performance and that the companies that comprise it could Valentín Mendoza be the most defensive within a challenging 2019 Auto Parts/ Consumer Discretionary / Real Estate/ Retail . [email protected] We continue to favor Walmex due to its leadership and execution; Chedraui, given its attractive valuation; and Lacomer, resulting from Sector: Retail / View: Positive its growth outlook, although its marketability should be considered Stock Rating PT2019 . We are introducing our PT 2019 of MXN$ 58.00 for Walmex, MXN$ Chdraui Buy P$52.00 25.00 for Lacomer and MXN$ 52.00 for Chedraui, with a BUY Lacomer Buy P$25.00 Soriana Hold P$33.00 rating. For Soriana, we have a MXN$ 33.00 PT, rated HOLD Walmex Buy P$58.00

We do not expect a change in momentum for the sector. We consider the EV/Ebitda EV/Ebitda retail sector in Mexico could continue to post a positive performance in 2019, Stock TTM 19E in light of a favorable context for consumption due to the following: (1) lower Chdraui 7.0x 5.6x expected inflation for this year (3.5%e vs 4.8%e in 2018); (2) a labor market Lacomer 11.0x 11.4x that will remain solid, close to full employment; (3) credit growth for the Soriana 6.5x 6.1x Walmex 14.5x 13.0x private sector above the GDP; (4) the expectation that remittances will continue to present favorable growth rates; (5) positive real growth rates for Total EBITDA EBITDA wages; and (6) the additional push to consumption by an increase of SSS% Sales% growth Margin 2019E disposable income in Mexican households through transfers, with the 2019E 2019E 2019E implementation of several new social programs, as well as by tax reductions in Chdraui 4.0% 19.3% 20.6% 5.9% Lacomer 6.7% 13.7% 2.0% 7.9% several areas of the country. With this in mind, we expect consumption to Soriana 2.3% 2.2% 4.7% 7.2% remain the main growth engine of the economy in 2019, although it is worth Walmex 5.0% 6.8% 8.6% 10.0% noting that our economic research department anticipates a slight slowdown in the GDP growth rhythm in 2019 (1.8%e vs 2.1%e in 2018).

We have fine- tuned our estimates and included, into our valuation models, the new 2019 expectation for the 10-year bond from our fixed-income and foreign exchange research department (9.2%e), which has pressured the sector’s WACC by 130bps on average. We consider Walmart’s successful commercial execution and an exposure of nearly 35% of revenue to C and D segments could prove to be beneficial in view of an increase of disposable income in households. In turn, LaComer’s growth outlook still looks interesting, while we continue to think that Chedraui’s valuation stands very attractive and could benefit from the economic spill that could derive from a greater budget allocation to Pemex as well as from the construction of the Mayan train, due to its geographical exposure. Finally, we believe greater commercial aggressiveness by Soriana could limit its margin recovery, while we continue to consider that the revitalization of revenue will be on a gradual basis; This document is provided for the reader’s convenience only. The translation from the original Spanish version therefore, we recommend investors to be cautions and have a long-term was made by Banorte’s staff. Discrepancies may possibly arise between the original document in Spanish vision. and its English translation. For this reason, the original research paper in Spanish is the only official document. The Spanish version was released before the English translation. The original document entitled “COMERCIALES: Desempeño favorable pese a un 2019 retador” was released on January 8, 2019. Document for distribution among public 1

Consumption, main engine of the economy. We consider the economic context should be favorable for consumption and support the sector’s solid performance, as: (1) we expect inflation to yield to 3.5%e from 4.8%e in 2018 (4.7% current), which in our opinion, should support the purchasing power of families and promote traffic in stores, offsetting a lower increment of the average sales ticket from the pass-through of price increases towards consumers; (2) we believe the labor market will remain solid, close to full employment, even though the unemployment rate may increase a little in 2019 (3.4%e vs. the current 3.3%); (3) the wages’ growth at positive rates, especially considering the 16.2% minimum wage increase that came into effect at the beginning of the year on a national scale and a 100% increase in the northern border region; (4) we believe the expansion of bank credits towards the private sector could be higher than the GDP; (5) the solid dynamism of remittances flow, which we expect to continue posting favorable growth rates, supported by the anti-migratory rhetoric of the U.S.; (6) an increase of disposable income in Mexican households, through transfers, with the implementation of several priority projects by the Federal Government, such as pensions for the elderly and the Jóvenes construyendo el futuro program for young adults and the reduction of taxes in the northern border region, which have been included in the 2019 budget. To that effect, it is worth noting that according to The National Household Income and Expenditure Survey (ENIGH, for its acronym in Spanish) carried out in 2016 by the INEGI, transfers represented 15.6% of a family’s current income, while 43% of such transfers is derived from retirement, pension and compensation income; and (7) the expectation that a large part of this increase in income in Mexican households could translate into a greater consumption, relies on the fact that Mexican families spend 35% of their income on food, beverage and tobacco (the highest expenditure item), according to ENIGH 2016, where in turn, 78% of said resources are allocated for the consumption of food and beverage within the home.

Inflation rate- Mexico Unemployment rate- Mexico Wages’ real growth- Mexico %yoy %yoy %yoy 8 5.5 3 2 7 5 0.5 6 1 4.5 0 5 4 -1 4 4.7 3.3 -2 3.5 3 -3

2 3

Jan-14 Jan-15 Jan-16 Jan-17 Jan-18

Jul-16

Jul-14 Jul-15 Jul-16 Jul-17 Jul-18

Oct-17

Apr-15

Jan-14

Jan-14 Jan-15 Jan-16 Jan-17 Jan-18

Jun-14 Feb-16 Mar-18

Sep-15 Dec-16

Nov-14 Aug-18 May-17 Wages' real growth (%) Annual inflation rate (%) Seasonally adjusted unmployment rate (%) Source: Datastream, Banorte

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Commercial banking credit to the private Remittances- Mexico Consumer confidence- Mexico sector- Mexico Right axis %yoy cumm. LTM., Left axis million pesos points Left axis %yoy., right axis billion pesos. 40.0 80,000 21 $6.00 110 99.6 30.0 60,000 100

16 $4.00 Billions 20.0 90 40,000 80 10.0 11 $2.00 70 0.0 20,000 60 6 $0.00 -10.0 0

Jan-14 Jul-15 Jan-17 Jul-18

Jul-14 Jul-15 Jul-16 Jul-17 Jul-18

Jan-15 Jan-16 Jan-17 Jan-18 Jan-14 Jul-15 Jan-17 Jul-18 Jan-14 Commercial banking credit to the private… Remittances, MXN million Δ%yoy-Commercial banking credit to … Δ%yoy Remittances (cummulative LTM) Consumer Confidence

Source: Datastream, Banorte

Household’s income-Distribution by source %

2% Scholarships from the 9% 5% government and institutions 11% 8% Income coming from other countries 16% 43% 11% 64% In-kind transfers 14%

Benefits from Property rental 17% government's projects Estimation of hose rental Transfers Income from work Source: INEGI “Encuesta Nacional de Ingresos y Gastos de los Hogares 2016”, Banorte

Household’s expenses-Distribution of expenses in Mexican households %

-1%

5%3% 3% Tobacco 6% 35% 22% 7%

9% Food and beverage for consumption outside 12% home 19% Food and beverage for 78% consumption at home

Food, beverage and tobacco Transportation Educational services Living place Personal care Cleaning supplies Dressing Clothing Health care Source: INEGI “Encuesta Nacional de Ingresos y Gastos de los Hogares 2016”, Banorte

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Relative valuation

RELATIVE VALUATION Market Cap Enterprise Value EV/EBITDA EV/EBITDA DIVIDEND STOCK PRICE P/Book P/E P/E 2018E P/E 2019E EV/EBITDA (US$MM) (US$MM) 2018E 2019E YIELD

WALMART DE MEXICO SAB DE CV P$50.52 45,563 44,606 5.8x 24.8x 24.6x 22.7x 14.5x 14.2x 13.0x 1.5% ORGANIZACION SORIANA S.A.B-B P$27.51 2,557 3,836 0.8x 12.5x 14.1x 13.1x 6.5x 6.3x 6.1x GRUPO COMERCIAL CHEDRAUI SA P$38.50 1,917 2,406 1.3x 17.2x 15.0x 11.0x 7.0x 6.7x 5.6x 1.1% LA COMER SAB DE CV P$20.97 1,176 1,040 1.1x 21.1x 28.1x 28.6x 11.0x 11.8x 11.4x

Average 12,803 12,972 2.2x 18.9x 20.5x 18.9x 9.8x 9.8x 9.0x 1.3% Mexico Median 2,237 3,121 1.2x 19.2x 19.8x 17.9x 9.0x 9.3x 8.8x 1.3%

ATACADAO DISTRIBUICAO COMERC BRL 18.66 9,965 10,458 2.9x 22.9x 22.0x 18.8x 10.5x 10.2x 8.9x CIA BRASILEIRA DE DIS-PREF BRL 84.01 6,036 7,960 2.1x 31.2x 23.2x 19.9x 10.1x 10.3x 9.5x CENCOSUD SA CLP 1,330.40 5,600 10,272 1.0x 10.3x 18.4x 15.6x 7.0x 9.6x 9.2x

Average 7,201 9,563 2.0x 21.5x 21.2x 18.1x 9.2x 10.1x 9.2x Latinamerica Median 6,036 10,272 2.1x 22.9x 22.0x 18.8x 10.1x 10.2x 9.2x

WALMART INC $95.20 276,581 332,136 3.9x 19.7x 19.7x 20.0x 10.7x 10.2x 10.2x 2.2% COSTCO WHOLESALE CORP $208.55 91,864 90,703 7.0x 28.3x 27.1x 25.0x 15.3x 14.4x 13.4x 1.1% TARGET CORP $69.61 36,325 49,347 3.3x 13.3x 12.8x 12.4x 7.5x 7.6x 7.5x 3.7%

Average 134,923 157,395 4.7x 20.4x 19.9x 19.1x 11.2x 10.7x 10.4x 2.3% US Median 91,864 90,703 3.9x 19.7x 19.7x 20.0x 10.7x 10.2x 10.2x 2.2%

KONINKLIJKE AHOLD DELHAIZE N 22.59 € 30,624 32,481 1.8x 13.4x 15.0x 13.9x 6.9x 6.7x 6.4x 2.8% CARREFOUR SA 15.70 € 14,194 29,775 1.5x 16.4x 13.7x 15.9x 7.5x 6.9x 2.9% JERONIMO MARTINS 10.61 € 7,645 8,225 4.0x 17.0x 16.2x 15.0x 7.5x 7.4x 6.9x 5.8% SAINSBURY (J) PLC £266.50 7,473 7,885 0.8x 21.1x 12.9x 12.4x 5.2x 4.3x 4.1x 3.8% CASINO GUICHARD PERRACHON 35.99 € 4,524 19,644 0.7x 13.4x 11.4x 11.1x 9.1x 8.6x 8.7% AXFOOD AB SEK 153.50 3,614 3,576 8.1x 21.0x 20.5x 20.6x 11.6x 11.5x 11.3x 4.6% LENTA LTD-REG S RUB 3.13 1,525 3,069 1.3x 7.3x 7.6x 6.5x 5.6x 5.3x 4.9x

Average 9,943 14,951 2.6x 15.9x 14.6x 13.4x 9.1x 7.4x 7.0x 4.8% Europe Median 7,473 8,225 1.5x 17.0x 15.0x 13.7x 7.5x 7.4x 6.9x 4.2%

AEON CO LTD ¥2,210.50 17,717 35,661 1.7x 60.1x 53.2x 47.3x 8.2x 8.2x 7.8x 1.5% LOTTE SHOPPING CO KRW 203,500.00 5,123 9,878 0.5x 13.0x 8.4x 7.3x 6.4x 2.6%

Average 11,420 22,770 1.1x 60.1x 53.2x 30.1x 8.3x 7.8x 7.1x 2.0% Asia Median 11,420 22,770 1.1x 60.1x 53.2x 30.1x 8.3x 7.8x 7.1x 2.0%

Average 30,001 36,998 2.6x 21.3x 20.0x 17.9x 9.5x 8.9x 8.3x 3.2% Global Median 7,473 10,272 1.7x 20.3x 17.4x 15.0x 8.4x 8.2x 7.8x 2.8% Source: Banorte, Bloomberg

OPERATING INDICATORS EBITDA EBITDA Market Cap Enterprise Value SALES 2019E EBITDA ND/EBITDA STOCK PRICE 2019E MARGIN ROA TTM ROE TTM (US$MM) (US$MM) (US$MM) GROWTH 2019E 2019E (US$MM) 2019E

WALMART DE MEXICO SAB DE CV P$50.52 45,563 44,606 30,587 3,048 10.0% -2.9% -0.4x 12.6% 24.1% ORGANIZACION SORIANA S.A.B-B P$27.51 2,557 3,836 7,306 522 7.2% -6.4% 1.6x 3.0% 6.6% GRUPO COMERCIAL CHEDRAUI SA P$38.50 1,917 2,406 6,407 380 5.9% 7.8% 1.0x 3.6% 8.1% LA COMER SAB DE CV P$20.97 1,176 1,040 1,004 84 7.9% -4.4% -1.9x 3.3% 3.8%

Average 12,803 12,972 11,326 1,009 7.8% -1.5% 0.1x 5.6% 10.6% Mexico Median 2,237 3,121 6,857 451 7.6% -3.7% 0.3x 3.4% 7.3%

ATACADAO DISTRIBUICAO COMERC BRL 18.66 9,965 10,458 15,605 975 6.3% 15.3% -0.8x 5.4% 14.6% CIA BRASILEIRA DE DIS-PREF BRL 84.01 6,036 7,960 14,153 733 5.2% 7.9% 0.4x 2.4% 8.9% CENCOSUD SA CLP 1,330.40 5,600 10,272 15,218 1,073 7.0% 3.5% 3.6x 3.8% 2.5%

Average 7,201 9,563 14,992 927 6.2% 8.9% 1.0x 3.9% 8.7% Latinamerica Median 6,036 10,272 15,218 975 6.3% 7.9% 0.4x 3.8% 8.9%

WALMART INC $95.20 276,581 332,136 528,914 32,614 6.2% -0.5% 1.3x 2.4% 19.3% COSTCO WHOLESALE CORP $208.55 91,864 90,703 163,074 6,363 3.9% 8.4% -0.5x 7.8% 26.9% TARGET CORP $69.61 36,325 49,347 77,677 6,399 8.2% 2.3% 1.6x 7.6% 25.5%

Average 134,923 157,395 256,555 15,126 6.1% 3.4% 0.8x 5.9% 23.9% US Median 91,864 90,703 163,074 6,399 6.2% 2.3% 1.3x 7.6% 25.5% 35,408 41,853 67,519 4,831 6.5% 3.5% 0.6x 4.3% 11.7% KONINKLIJKE AHOLD DELHAIZE N 22.59 € 30,624 32,481 73,669 4,882 6.6% 3.7% 0.8x 5.9% 12.0% CARREFOUR SA 15.70 € 14,194 29,775 89,330 3,913 4.4% 8.2% 0.8x -3.2% 4.1% JERONIMO MARTINS 10.61 € 7,645 8,225 20,727 1,105 5.3% 6.7% 0.2x 6.5% 23.9% SAINSBURY (J) PLC £266.50 7,473 7,885 37,415 1,813 4.8% 3.1% 0.8x 1.3% 7.1% CASINO GUICHARD PERRACHON 35.99 € 4,524 19,644 43,535 2,123 4.9% 5.8% 2.2x 0.4% 3.5% AXFOOD AB SEK 153.50 3,614 3,576 5,426 306 5.6% 1.7% -0.2x 13.7% 38.7% LENTA LTD-REG S RUB 3.13 1,525 3,069 6,734 559 8.3% 8.8% 2.1x 6.2% 20.3%

Average 9,943 14,951 39,548 2,100 5.7% 5.4% 1.0x 4.4% 15.7% Europe Median 7,473 8,225 37,415 1,813 5.3% 5.8% 0.8x 5.9% 12.0%

AEON CO LTD ¥2,210.50 17,717 35,661 77,469 4,281 5.5% 5.3% 3.4x 0.3% 5.1% LOTTE SHOPPING CO KRW 203,500.00 5,123 9,878 17,445 1,311 7.5% 15.4% 2.7x 0.8% -1.5%

Average 11,420 22,770 47,457 2,796 6.5% 10.4% 3.1x 0.5% 1.8% Asia Median 11,420 22,770 47,457 2,796 6.5% 10.4% 3.1x 0.5% 1.8%

Average 30,001 36,998 64,826 3,815 6.4% 4.7% 1.0x 4.4% 13.3% Global Median 7,473 10,272 20,727 1,311 6.2% 5.3% 0.8x 3.6% 8.9% Source: Banorte, Bloomberg

4

CHDRAUI

The transition following Fiesta Mart´s integration

. We expect profitability to remain stable, as greater commercial aggressiveness would offset the positive effect of capturing synergies and improved expense control

. Our investment thesis for Chedraui remains intact. We still consider that the valuation is very attractive and unjustified, while geographical diversification should be positive

. We reiterate our 2019 PT at MXN$$ 52.00 with a BUY rating, after BUY Current Price $38.50 fine-tuning our estimates and pressuring the WACC by 40bps, from PT 2019 $52.00 a 0.6pp rate increase in the 10-year bond Dividend 2018 0.45 Dividend Yield (%) 1.2% Focus on integration. 2019 growth will still benefit from the acquisition of Upside Potential 36.2% Max – Min LTM (P$) 50.00 – 35.51 Fiesta Mart, as well as potentially from its geographical exposure given the Market Cap (US$m) 1,920.1 economic spill derived from greater budget allocation to Pemex, and from the Shares Outstanding (m) 963.9 Float 15.8% construction of the Mayan train. However, despite a greater SSS momentum Daily Turnover (P$ m) 14.4 (+4.0%), we expect profitability to remain flat, which would be positive Valuation metrics TTM EV/EBITDA 7.0x considering the aggressive plan to open new stores. This would be explained P/E 17.2x by greater commercial aggressiveness to boost LfL sales, offset by the first synergy captures between Fiesta Mart and El Súper (with the consolidation Relative performance to Mexbol into a single corporate service), as well as by a strict expense control in LTM Mexico. Our base scenario assumes an exchange rate depreciation towards 40% levels of MXN$ 22.50 per dollar by the end of 2019, therefore the 30% 20% geographical diversification of the company will be beneficial for earnings, 10% due to a favorable forex conversion effect over the earnings of Bodega Latina. 0% CHDRAUI currently trades at 201E 5.6x, representing a discount above 28% -10% -20% vs. the median of comparable companies, being the most attractive valuation -30% within the retail sector in Mexico, from our view point. We have tuned our Jan-18 Apr-18 Jul-18 Oct-18 Jan-19 MEXBOL CHDRAUIB estimates and pressured the WACC by 40bps reflecting a higher interest rate

(+0.6pp to 9.2%), after which we reiterate our BUY recommendation with a

2019E PT of MXN$52.00.

Financial Statements Valuation and financial metrics M XN, million 2016 2017 2018E 2019E 2016 2017 2018E 2019E Rev enues 88,529 94,583 115,670 138,015 EV/EBITDA 7.4x 6.9x 6.7x 5.6x Operating Income 4,254 4,418 4,926 6,175 P/E 19.0x 17.8x 15.0x 11.0x EBITDA 5,747 6,039 6,782 8,181 P/Book 1.4x 1.3x 1.1x 1.0x EBITDA Margin 6.5% 6.4% 5.9% 5.9% Net Income 1,953 2,079 2,477 3,373 ROE 7.5% 7.5% 8.0% 9.3% Net Margin 2.2% 2.2% 2.1% 2.4% ROA 3.7% 3.8% 3.7% 4.6% EBITDA/ Interest ex penses 8.1x 6.9x 6.9x 7.9x Total Assets 53,279 55,006 67,567 72,996 Net Debt/EBITDA 0.9x 0.7x 1.2x 1.0x Cash 943 1,522 3,588 4,109 Debt/Equity 0.2x 0.2x 0.3x 0.3x Total Liabilities 26,341 26,574 34,263 34,080 Debt 5,855 5,775 11,427 12,153 Common Equity 26,938 28,432 33,305 38,916 Source: Banorte with data from M SE

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CHDRAUI–Financial Statement Revenue & EBITDA Margin MXN, million MXN, million Income Statement Year 2016 2017 2018E 2019E CAGR 160,000 6.5% 6.6% Net Revenue 88,529 94,583 115,670 138,015 13.4% 6.4% 140,000 6.3% Cost of goods sold 70,313 74,916 91,017 108,761 13.2% 6.4% Gross profit 18,216 19,666 24,653 29,253 14.2% 120,000 6.2% General expenses 13,924 15,258 19,241 21,100 11.4% 100,000 5.9% Operating Income 4,254 4,418 4,926 6,175 11.8% 80,000 5.9% 6.0% Operating Margin 4.8% 4.7% 4.3% 4.5% -1.4% 60,000 Depreciation 1,493 1,621 1,856 2,006 7.4% 5.8% 40,000 EBITDA 5,747 6,039 6,782 8,181 10.6% 5.6% 20,000 EBITDA Margin 6.5% 6.4% 5.9% 5.9% Interest income (expense) net (1,182) (1,181) (1,171) (1,174) -0.2% 0 5.4% Interest expense 616 664 292 349 -19.3% 2015 2016 2017 2018E 2019E Interest income 19 42 58 50 6.4% Revenue EBITDA Margin Other income (expenses) (577) (595) (1,014) (949) Exchange Income (loss) (9) 36 77 74 27.0% Unconsolidated subsidiaries Net Income before taxes 3,073 3,238 3,755 5,001 15.6% Provision for Income taxes 1,063 1,120 1,251 1,600 12.6% Discontinued operations Net Income & ROE Consolidated Net Income 2,010 2,117 2,503 3,401 17.1% MXN, million Minorities 57 38 27 28 Net Income 1,953 2,079 2,477 3,373 17.5% Net Margin 2.2% 2.1% 2.4% 4,000 8.8% 10.0% EPS 2.026 2.157 2.569 3.499 17.5% 3,500 7.3% 7.4% 7.5% 7.0% 8.0% Balance Sheet (Million pesos) 3,000 Total Current Assets 12,967 14,125 17,830 19,114 10.6% 2,500 6.0% Cash & Short Term Investments 943 1,522 3,588 4,109 39.3% 2,000 Long Term Assets 40,312 40,880 49,738 53,882 9.6% 1,500 4.0% Property, Plant & Equipment (Net) 29,898 30,829 36,072 40,221 9.3% 1,000 Intangible Assets (Net) 500 522 910 910 20.3% 2.0% Total Assets 53,279 55,006 67,567 72,996 9.9% 500 Current Liabilities 18,419 18,513 19,779 18,917 0.7% 0 0.0% Short Term Debt 1,404 688 472 518 2015 2016 2017 2018E 2019E Accounts Payable 14,018 14,597 18,380 16,637 4.5% Long Term Liabilities 7,922 8,061 14,483 15,163 23.4% Net Income ROE Long Term Debt 4,451 5,088 10,956 11,635 Total Liabilities 26,341 26,574 34,263 34,080 8.6% Common Stock 26,938 28,432 33,305 38,916 11.0% Noncontrolling Interest 38 27 28 Total Equity 26,938 28,150 32,984 38,541 11.0% Net Debt & Net debt to EBITDA ratio Liabilities & Equity 53,279 55,006 67,567 72,996 9.9% MXN, million Net Debt 4,881 4,156 7,839 8,044 24.6%

Cash Flow (Million pesos) 2016 2017 2018E 2019E 9,000 1.4x 1.2x Cash Flow from Operating Activities 8,000 before Taxes 2,675 6,600 6,061 7,306 1.0x 1.2x 7,000 Cash Flow from Operating Activities 2,675 6,600 4,084 (2,917) 0.8x 1.0x 6,000 Cash Flow from Investing Activities (1,760) (3,857) (8,096) (3,084) 0.7x 0.7x 0.8x Cash Flow from Financing Activities (3,027) (1,120) 4,550 (784) 5,000 Change in Cash Balance 563 8,224 6,598 521 4,000 0.6x

3,000 0.4x 2,000 1,000 0.2x 0 0.0x 2015 2016 2017 2018E 2019E

Net Debt Net Debt/ EBITDA

Source: Banorte, BMV

6

2019 Estimates

We estimate Chedraui’s revenue will reach MXN$ 138.0 billion in 2019, up 19.3% year-on year. It is worth mentioning that 9.8pp of such growth would be explained by the consolidation of Fiesta Mart as of April of 2018, as well as by a favorable 450bp FX conversion effect, over Bodega Latina earnings, in view of an expected 11.5% depreciation in the average exchange rate to MXN$ 22.50. Furthermore, we project that SSS in Mexico to grow 4.0% yoy, while expecting that the opening of 38 stores in our country would translate into a 6% sales floor increase. Meanwhile, in the U.S., we expect LfL sales to increase 1.9% in local currency and the opening of 2 El Super units which would boost the sales floor by 0.7%. Additionally, a greater commercial aggressiveness, mainly in Fiesta Mart, would pressure the gross margin by 10bps to 21.2%, although on an EBITDA basis, we expect the margin to remain stable at 5.9%. Such performance would be explained by the capture of the first synergies with Fiesta Mart, through the consolidations of operations into a single corporate roof (vs. 2 current offices), as well as by the strict expenditure control in Mexico, which should offset the new unit effect. Therefore, the company’s EBITDA would grow 20.6% yoy to MXN$ 8.1 billion. By region, we estimate sales in our country to grow 11.3% to MXN$ 79.9 billion, while EBITDA would stand at MXN$ 5.6 billion (+18% yoy) with a 40bp corresponding margin expansion to 7.0%. On the other hand, for Bodega Latina (U.S.A) we expect revenue to reach MXN$ 57.1 billion (+33.3% yoy), while EBITDA would grow 28.3% to MXN$ 1.8 billion, resulting in a 20bp margin contraction to 3.2%. Moreover, the real-estate business would generate MXN$ 916 million in revenue and MXN$ 685 million in EBITDA. On a net profit basis, we forecast MXN$ 3.3 billion in 2019, which equals an annual 36.2% increase, explained by an operating expansion, as well as by a stable Net Interest Expense and a lower tax effective rate, resulting from an increase in proportion of U.S. earnings (where the tax rate is lower) over the total. Finally, we expect the company to disburse MXN$ 4.2 billion in capital expenditures (Capex), thanks to the MXN$ 2.9 billion investment to open new stores and MXN$ 1.3 billion for store maintenance and remodeling.

Valuation and MXN$ 52.00 2019 TP

Our MXN$ 52.00 PT implies a 7.2x 2019E EV/EBITDA multiple, similar to the current multiple and that of the 3-year average, but still with a discount close to 6.5% against the 7.8x median of comparable companies (currently 28% at 2019E 5.6x) From our viewpoint, profitability leveling the appropriate execution of an organic expansion plan should be catalysts for a revaluation which would, at least, cut back the current discount by half (6.7x).Within our DCF valuation we used a 12.0% Weighted Average Cost of Capital (WACC), which was estimated with a 0.9 Beta, a 9.2% Risk-Free Rate (10-year bond in Mexico), a 5.5% market premium and the residual value was estimated using a 7.5x EV/EBITDA exit multiple, similar to the median of comparable peers.

7

LACOMER

Growth will continue to be attractive in 2019

. La Comer’s performance should continue strong this year, anticipating the most aggressive growth within the retail sector in Mexico, in an adjusted comparable basis

. We have set our 2019 PT at MXN$ 25.00, reiterating our BUY rating. This represents a 13.9x 2019E EV/EBITDA multiple, similar to the 3-year average but above the current multiple

. The aggressive growth strategy, focused towards upper BUY Current Price $20.97 socioeconomic classes results interesting, given improved margins, PT 2019 $25.00 low penetration and the segment’s defensive features Dividend 2018 Dividend Yield (%) Profitability will be pressured due to the extraordinary benefit reported in Upside Potential 19.2% Max – Min LTM (P$) 23.84 – 17.05 2018, although considering an adjusted comparable basis; the company Market Cap (US$m) 1,178.3 would continue to report margin expansion. We trust that in 2019, La Shares Outstanding (m) 1,086.00 Float 43.6% Comer’s margins could be pressured due to the absence of extraordinary Daily Turnover (P$ m) 19.0 benefits like those reported in 2017 and 2018. However, the execution of its Valuation metrics TTM EV/EBITDA 11.0x aggressive expansion plan would be expedited, maintaining double-digit growth P/E 21.1x rates and registering the sector’s most attractive profitability improvement –on an adjusted comparable basis-. We continue to believe that development Relative performance to Mexbol towards the high-end segment should favor a better sales mix, thus boosting the LTM gross margin by 50bps, which in turn should partially counteract the effect of 20% 15% the elevated comparative basis from the above-mentioned non-recurring benefit 10% 5% and from the 1.66pp expense proportion increase, in connection with the 0% opening of new stores and higher electricity prices. This should allow a 20bp -5% -10% EBITDA margin expansion, considering a comparable base but would represent -15% -20% a 100bp yoy contraction to 7.9%. In addition, we consider that lower sensibility -25% towards the medium-high segment should be a defensive factor for the Jan-18 Apr-18 Jul-18 Oct-18 Jan-19 MEXBOL LACOMUBC company’s earnings. Finally, our MXN$ 25.00 2019 PT represents a 13.9x

2019E EV/EBITDA multiple, similar to the 3-year average (13.6x), supported by attractive growth and improved profitability.

Financial Statements Valuation and financial metrics M XN, million 2016 2017 2018E 2019E 2016 2017 2018E 2019E Rev enues 14,757 16,635 19,026 21,630 EV/EBITDA 20.8x 14.7x 11.8x 11.4x Operating Income 416 771 953 866 P/E 44.0x 29.1x 28.1x 28.6x EBITDA 938 1,374 1,686 1,719 P/Book 1.1x 1.1x 1.0x 0.9x EBITDA Margin 6.4% 8.3% 8.9% 7.9% Net Income 518 782 811 796 ROE 2.5% 3.8% 3.7% 3.3% Net Margin 3.5% 4.7% 4.3% 3.7% ROA 2.2% 3.2% 3.0% 2.7% EBITDA/ Interest ex penses 8.1x 6.9x 6.9x 7.9x Total Assets 23,438 24,585 26,996 29,359 Net Debt/EBITDA -3.4x -1.9x -1.7x -1.9x Cash 3,225 2,545 2,885 3,182 Debt/Equity 0.0x 0.0x 0.0x 0.0x Total Liabilities 3,331 3,747 3,657 4,112 Debt 0 0 0 0 Common Equity 20,107 20,837 23,339 25,247 Source: Banorte with data from M SE

8

LACOMER–Financial Statements Revenue & EBITDA Margin MXN, million MXN, million Income Statement Year 2016 2017 2018E 2019E CAGR 25,000 10.4% 12.0% Net Revenue 14,757 16,635 19,026 21,630 9.1% 8.9% 10.0% Cost of goods sold 11,148 12,423 14,011 15,820 8.4% 20,000 8.3% 7.9% Gross profit 3,610 4,213 5,015 5,810 11.3% 6.4% 8.0% General expenses 3,184 3,627 4,284 4,944 10.9% 15,000 Operating Income 416 771 953 866 3.9% 6.0% Operating Margin 2.8% 4.6% 5.0% 4.0% -4.8% 10,000 Depreciation 522 603 732 853 12.3% 4.0% EBITDA 938 1,374 1,686 1,719 7.7% 5,000 2.0% EBITDA Margin 8.3% 8.9% 7.9% Interest income (expense) net 123 124 151 272 30.0% 0 0.0% Interest expense 4 4 5 -100.0% 2015 2016 2017 2018E 2019E Interest income 113 167 147 242 13.3% Revenue EBITDA Margin Other income (expenses) Exchange Income (loss) 14 (39) 9 29 -191.4% Unconsolidated subsidiaries Net Income before taxes 539 895 1,105 1,138 8.3% Provision for Income taxes 87 113 293 341 44.6% Discontinued operations 65 Net Income & ROE Consolidated Net Income 387 782 811 796 0.6% MXN, million Minorities Net Income 518 782 811 796 0.6% Net Margin 4.7% 4.3% 3.7% 3.8% 1,000 3.5% 4.0% EPS 0.477 0.720 0.747 0.733 0.6% 3.2% 3.5% 800 2.6% Balance Sheet (Million pesos) 3.0% Total Current Assets 5,921 5,777 6,543 7,321 8.2% 600 2.5% Cash & Short Term Investments 3,225 2,545 2,885 3,182 7.7% 2.0% Long Term Assets 17,518 18,807 20,453 22,038 5.4% 400 1.5% Property, Plant & Equipment (Net) 9,622 10,863 12,731 14,316 9.6% 1.0% Intangible Assets (Net) 6,278 6,278 6,278 6,278 200 Total Assets 23,438 24,585 26,996 29,359 6.1% 0.0% 0.5% Current Liabilities 3,252 3,660 3,327 3,783 1.1% 0 0.0% Short Term Debt 2015 2016 2017 2018E 2019E Accounts Payable 2,217 2,722 2,971 3,378 7.5% Long Term Liabilities 79 87 330 330 55.7% Net Income ROE Long Term Debt Total Liabilities 3,331 3,747 3,657 4,112 3.1% Common Stock 20,107 20,837 23,339 25,247 6.6% Noncontrolling Interest Total Equity 20,107 20,837 23,339 25,247 6.6% Net Debt & Net debt to EBITDA ratio Liabilities & Equity 23,438 24,585 26,996 29,359 6.1% MXN, million Net Debt (3,225) (2,545) (2,885) (3,182) 7.7%

Cash Flow (Million pesos) 2016 2017 2018E 2019E 0 0.0x Cash Flow from Operating Activities -0.5x before Taxes 481 1,213 1,505 1,748 (500) Cash Flow from Operating Activities 546 1,204 1,383 (309) (1,000) -1.0x Cash Flow from Investing Activities (1,229) (1,626) (1,058) (1,142) -1.5x (1,500) Cash Flow from Financing Activities (77) (58) 69 -2.0x Change in Cash Balance (279) 733 1,899 297 (2,000) -1.7x -1.9x -1.9x -2.1x -2.5x (2,500) -3.0x (3,000) -3.5x (3,500) -3.4x -4.0x 2015 2016 2017 2018E 2019E

Net Debt Net Debt/EBITDA

Source: Banorte, BMV

9

2019 Estimates

According to our projection model, La Comer’s total revenue would grow 13.7% yoy to MXN$ 21.6 billion. This would be explained by a 6.7% increase in SSS, while new openings would contribute with 700 bps, with the launching of 8 new stores (2 City Market, 4 Fresko and 2 La Comer formats). Such performance would represent an increase against this year’s 4 net additions. In the most recent conference call with investors, the company indicated that it expects to open between 8 and 10 stores per year with the purpose of achieving 100 units under operation by 2022. Furthermore, we believe that the 2 new City Markets and the Fresko format store opened in 2018, added to the 2019 openings, should result in a more favorable sales mix, as the higher sales volume could translate into better retail conditions, therefore we estimate a 50bp year-on-year gross margin improvement. Furthermore, we consider this may partially offset the effect of an elevated comparative basis, and a 160bp expense proportion increase in connection with the opening of new stores and higher electricity prices. To this effect, it should be stresses that in 2018 and 2017 the company acknowledged extraordinary benefits of MXN$ 230 million and MXN$ 194 million, respectively, related to the sale of land. These, on average, added 120bps to the company’s margins, therefore in the absence of such non- recurring benefits, we forecast a 100bp EBITDA margin contraction to 7.9%. Said performance, in an adjusted basis, would imply a 20bp yoy expansion. Consequently, EBITDA would reach MXN$ 1.7 billion, increasing 2.0% year- on-year (+17.8% yoy in a comparable basis). It is worth noting that, once again, we expect La Comer to post the most aggressive adjusted growth levels of the retail sector in Mexico. On a net profit basis, we expect a slight 1.9% yoy contraction to MXN$ 796 million, due to the normalization of the effective income tax rate towards the statutory rate of 30% (+3.5pp vs. 2018e). Finally, we estimate 2019 capital investments to reach MXN$ 1.3 billion.

Valuation and MXN$ 25.00 2019 PT

Our PT was estimated using a 9.2% risk free rate, a 1.0 Beta, a 5.5% market premium and an 11.5x exit multiple, above the sector’s average. At this price, LACOMER would trade at 13.9x 2019E EV/EBITDA, slightly above the three- year average of the LTM multiple (13.6x), higher than the current multiple (11.0x) and greater than that of the convenience store average sector in Mexico and global-wide (9.8x and 9.5x, respectively), and would be justified by the company’s growth, the expectation of improved margins headed towards double-digit figures in the medium terms (world class), as well as by its sound and debt-free financial structure (-1.9x 2019E ND/EBITDA). However, it would represent a slight discount against our Walmex 15.0x 2019E EV/EBITDA multiple. Finally, the potential yield over our PT rises to 19.2%, therefore we reiterate our BUY recommendation.

10

SORIANA

2019 is expected to bring on new challenges

. We estimate the execution of aggressive promotions will boost a greater SSS expansion in 2019, but will still stand the lowest among the retail sector in Mexico

. Thus, we expect a modest recovery in earnings, but the development of implemented strategies will limit margin recovery

. We introduce our 2019 PT at MXN$ 33.00, which implies a 6.9x 2019E EV/EBITDA multiple, similar to the current multiple (6.5x). For now, we rate Soriana as HOLD HOLD Current Price $27.51 PT 2019 $33.00 We continue to recommend caution when investing in the stock. Although Dividend 2018 the implementation of aggressive promotions to recover consumer preference Dividend Yield (%) Upside Potential 20.0% may translate into greater SSS growth rates (+2.2% 2019E vs. +0.5% in Max – Min LTM (P$) 40.96 – 25.55 2018E), these would still be the lowest among the sector. In addition, we Market Cap (US$m) 2,561.8 Shares Outstanding (m) 1,800 consider that the development of implemented strategies will limit margin Float 13.8% recovery, as the effect of a greater operating leverage from the increase of LfL Daily Turnover (P$ m) 5.6 Valuation metrics TTM sales, would be practically offset by the pressure in the company’s gross EV/EBITDA 6.5x margin derived from price investments to boost traffic. Thus, after tuning our P/E 12.5x estimates and incorporating the new rate expectation for 2019, we have set our 2019 PT at MXN$ 33.00, which implies a 6.9x 2019E EV/EBITDA multiple, Relative performance to Mexbol slightly above the current multiple (6.5x). Although the valuation seems very LTM 5% attractive and the potential yield against our PT is interesting, we continue to 0% suggest caution when investing in this issuer, as the risk balance still seems -5% -10% unsuitable to us, due to the uncertainty that lingers as to the acceptance of the -15% -20% migration of Comercial Mexicana stores to the Mega Soriana store format by -25% consumers. In consequence, we would rather wait to confirm the turning point -30% -35% in earnings that justifies a revaluation for the company. For now, rate Soriana -40% Jan-18 Apr-18 Jul-18 Oct-18 Jan-19 as HOLD. MEXBOL SORIANAB

Financial Statements Valuation and financial metrics M XN, million 2016 2017 2018E 2019E 2016 2017 2018E 2019E Rev enues 149,522 153,632 154,044 157,362 EV/EBITDA 6.1x 5.6x 6.3x 6.1x Operating Income 8,376 9,164 7,745 8,107 P/E 11.9x 10.8x 14.1x 13.1x EBITDA 11,840 12,415 10,744 11,253 P/Book 0.9x 0.8x 0.7x 0.6x EBITDA Margin 7.9% 8.1% 7.0% 7.2% Net Income 4,171 4,588 3,520 3,779 ROE 8.0% 8.1% 5.4% 5.0% Net Margin 2.8% 3.0% 2.3% 2.4% ROA 3.2% 3.5% 2.6% 2.6% EBITDA/ Interest ex penses 8.1x 6.9x 6.9x 7.9x Total Assets 128,396 129,317 135,021 143,146 Net Debt/EBITDA 2.0x 1.6x 1.7x 1.6x Cash 2,718 3,666 2,794 2,152 Debt/Equity 0.5x 0.4x 0.3x 0.3x Total Liabilities 74,267 70,442 64,611 63,030 Debt 25,956 22,940 20,536 20,484 Common Equity 54,129 58,875 70,410 80,116 Source: Banorte with data from M SE

11

SORIANA–Financial Statements Revenue & EBITDA Margin MXN, million MXN, million Income Statement Year 2016 2017 2018E 2019E CAGR 180,000 8.5% Net Revenue 149,522 153,632 154,044 157,362 1.7% 8.1% 160,000 7.9% Cost of goods sold 116,361 119,272 119,803 122,856 1.8% 140,000 8.0% Gross profit 33,161 34,360 34,241 34,506 1.3% 120,000 General expenses 24,825 25,631 26,559 26,455 2.1% 7.5% 100,000 7.2% Operating Income 8,376 9,164 7,745 8,107 -1.1% 7.0% 80,000 6.8% Operating Margin 5.6% 6.0% 5.0% 5.2% -2.8% 7.0% Depreciation 3,464 3,251 3,000 3,146 -3.2% 60,000 EBITDA 11,840 12,415 10,744 11,253 -1.7% 40,000 6.5% EBITDA Margin 7.9% 8.1% 7.0% 7.2% 20,000 Interest income (expense) net (1,892) (2,197) (2,053) (2,022) 2.2% 0 6.0% Interest expense 1,767 2,453 2,213 2,104 6.0% 2015 2016 2017 2018E 2019E Interest income 245 208 214 137 -17.6% Revenue EBITDA Margin Other income (expenses) (136) -100.0% Exchange Income (loss) (236) 49 (53) (55) -38.5% Unconsolidated subsidiaries 78 (28) (304) (355) -266.0% Net Income before taxes 6,561 6,938 5,388 5,730 -4.4% Provision for Income taxes 2,353 2,319 1,837 1,916 -6.6% Discontinued operations Net Income & ROE Consolidated Net Income 4,208 4,619 3,551 3,814 -3.2% MXN, million Minorities 37 31 31 35 -2.2% Net Income 4,171 4,588 3,520 3,779 -3.2% Net Margin 2.8% 3.0% 2.3% 2.4% 5,000 7.8% 9.0% EPS 2.317 2.549 1.955 2.100 -3.2% 7.4% 7.7% 8.0%

4,000 7.0% Balance Sheet (Million pesos) 5.0% 4.7% 6.0% Total Current Assets 35,580 37,848 38,559 41,155 5.0% 3,000 5.0% Cash & Short Term Investments 2,718 3,666 2,794 2,152 -7.5% 4.0% Long Term Assets 92,817 91,470 96,463 101,991 3.2% 2,000 Property, Plant & Equipment (Net) 69,738 69,983 75,349 80,877 5.1% 3.0% Intangible Assets (Net) 21,910 20,224 19,965 19,965 -3.1% 1,000 2.0% Total Assets 128,396 129,317 135,021 143,146 3.7% 1.0% Current Liabilities 37,264 38,329 35,363 34,782 -2.3% 0 0.0% Short Term Debt 4,554 5,537 6,256 7,204 16.5% 2015 2016 2017 2018E 2019E Accounts Payable 28,047 27,876 26,588 25,005 -3.8% Long Term Liabilities 37,003 32,113 29,248 28,248 -8.6% Net Income ROE Long Term Debt 21,402 17,403 14,279 13,279 -14.7% Total Liabilities 74,267 70,442 64,611 63,030 -5.3% Common Stock 54,129 58,875 70,410 80,116 14.0% Noncontrolling Interest 37 31 31 35 -2.2% Total Equity 54,338 58,640 70,116 79,782 13.7% Net Debt & Net debt to EBITDA ratio Liabilities & Equity 128,396 129,317 135,021 143,146 3.7% MXN, million Net Debt 23,238 19,274 17,742 18,332 -7.6%

Cash Flow (Million pesos) 2016 2017 2018E 2019E 25,000 2.0x 2.5x Cash Flow from Operating Activities 1.7x 1.6x before Taxes 3,909 4,436 3,410 11,198 20,000 1.6x 2.0x Cash Flow from Operating Activities 4,736 7,109 7,402 (7,588) 15,000 1.5x Cash Flow from Investing Activities (1,068) (1,704) (2,065) (2,019) 10,000 1.0x Cash Flow from Financing Activities (2,673) (5,675) (4,687) (2,233) Change in Cash Balance 4,903 4,166 4,060 (642) 5,000 0.5x

0 0.0x -0.7x (5,000) -0.5x (10,000) -1.0x 2015 2016 2017 2018E 2019E

Net Debt Net Debt/EBITDA

Source: Banorte, BMV

12

2019 Estimates

We expect Soriana to reach MXN$ 157.3 billion in revenue in 2019. Such figure would represent a 2.2% yoy increase, explained mainly by a 2.3% SSS expansion, while we anticipate that the store efficiency program and allocating resources towards debt payment instead of investing in new units should translate into a 0.3% sales floor increase, thanks to the opening of 2 Soriana Super and 2 Soriana Express. As we have previously highlighted, we consider that with the purpose of recovering part of its customers that were lost following shortage problems in several stores, the company would implement aggressive promotions to try to boost traffic. With this in mind, we project a 30bp gross margin decline, to stand at 21.9%. Meanwhile, we consider that a greater operating leverage, related to higher growth in LfL sales, combined with expense control and lower pressures on energy prices, should translate into a 0.5pp drop in the expense to sale ratio. Therefore, we expect Soriana’s EBITDA margin to recover 20 bps yoy to 7.2%, resulting in MXN$ 11.2 billion in EBITDA in 2019, which equals a 4.7% year-on-year growth. As for net profit, we forecast a 7.4% yoy increase to MXN$3.7 billion, as the operating growth would include a Net Interest Expense 1.5% lower, as a lower leverage should translate into a lower interest payment. Finally, we estimate capital investments in 2019 to reach MXN$2.1 billion (vs. 2018e MXN$2.1 billion).

Valuation and MXN$33.00 2019 PT

Our PT was estimated using a 9.2% risk-free rate, a 0.9 Beta, a 5.5% market premium and a 7.0x exit multiple, below the sectors median (7.8x). At this price, SORIANA would trade at 6.9x 2019E EV/EBITDA, slightly above the current 6.5x multiple, and above the last year’s average (6.2x). This valuation, in addition, would stand below the median of the convenience store sector in Mexico (9.0x) and global-wide (8.4x), and would be justified due to the challenging situation faced by the company, as well as to its higher leverage (1.6x 2019E ND/EBITDA vs, the sector’s 0.8x median). Furthermore, it would represent a 54% discount against our 15.0x Walmex target multiple, similar to the average maintained during the previous year. Finally, the potential yield against our PT rises to 20.0%; however, we continue to suggest caution when investing in the issuer and consider a long- term investment horizon, as the risk balance still seems unsuitable. Consequently, for now rate Soriana as HOLD.

13

WALMEX

World-class margins to reach double-digit

. Once again, we believe the company will stand out over its competitors, benefited by its high exposure to the C-D segment through discount formats such as Bodega (~34% TS)

. Improvement in profitability both in Mexico and in Central America would lead the EBITDA margin to double-digits (10%e), while the successful commercial execution would increase its market share

. We introduce our 2019 PT at MXN$ 58.00, which implies a 15.0x BUY Current Price P$50.52 2019E EV/EBITDA multiple, below the 3-year average. In view of PT 2019 P$58.00 the potential return, we have upgraded our rating to BUY Dividend 2018 1.84 Dividend Yield (%) 3.6% The best card to play the retail sector in Mexico. Once again, we consider Upside Potential 18.4% Max – Min LTM (P$) 57.49 – 42.94 that Walmex’s leadership should be translated into earnings above its Market Cap (US$m) 45,641.0 competitors, even given the outlook of an economic slowdown. This would Shares Outstanding (m) 17,461.4 Float 30% result from the successful execution of its commercial strategy, where the Daily Turnover (P$ m) 820.5 attractive price differential over its competitors would push up sales. In Valuation metrics TTM EV/EBITDA 14.5x addition, we believe that in 2019, Walmex’s focus towards the low-income P/E 24.8x segment, through its discount formats like Bodega (~34% of company sales), as well as the company’s sales mix in which nearly 65% of income comes Relative performance to Mexbol from the sale of food and beverage items, should be key factors for a favorable LTM performance, by benefitting from an increase in available income in Mexican 25% 20% households, through transfers, with the implementation of several priority 15% 10% projects by the Federal Government, such as pensions for the elderly and the 5% 0% Jóvenes construyendo el futuro program included in the 2019 Economic -5% -10% package. To this effect, we expect SSS growth, combined with a strict expense -15% -20% control to translate into a higher operating leverage, driving, thus, world-class -25% margins towards double-digit territory for the first time in 10 years (EBITDA Jan-18 Apr-18 Jul-18 Oct-18 Jan-19 MEXBOL WALMEX* margin 10%e). With this in mind, we have set our 2019 PT at MXN$ 58.00 and in view of an attractive potential yield, we have upgraded our recommendation to BUY.

Financial Statements Múltiplos y razones financieras MXN, million 2016 2017 2018E 2019E 2016 2017 2018E 2019E Rev enues 532,384 573,265 616,670 658,854 FV/EBITDA 17.3x 15.5x 14.2x 13.0x Operating Income 39,454 43,838 48,150 52,762 P/U 26.4x 22.1x 24.6x 22.7x EBITDA 50,148 55,473 60,449 65,664 P/VL 5.3x 5.5x 5.6x 4.8x EBITDA Margin 9.4% 9.7% 9.8% 10.0% Net Income 33,352 39,865 35,804 38,889 ROE 20.9% 24.4% 22.5% 22.8% Net Margin 6.3% 7.0% 5.8% 5.9% ROA 11.6% 13.5% 11.3% 11.1% EBITDA/ intereses 8.1x 6.9x 6.9x 6.9x Total Assets 287,930 295,256 315,680 349,104 Deuda Neta/EBITDA -0.3x -0.4x -0.4x -0.4x Cash 27,976 35,596 41,164 42,492 Deuda/Capital 0.1x 0.1x 0.1x 0.1x Total Liabilities 135,722 157,428 166,681 166,681 Debt 15,295 15,053 15,986 16,548 Common Equity 167,026 159,534 158,252 182,422 Source: Banorte with data from M SE

14

WALMEX–Financial Statements Revenue & EBITDA Margin Cifras nominales en millones de pesos MXN, million Income Statement Year 2016 2017 2018E 2019E CAGR 700,000 10.0% 10.2% Net Revenue 532,384 573,265 616,670 658,854 7.4% 9.8% 10.0% Cost of goods sold 414,900 445,570 476,046 508,571 7.0% 600,000 9.7% 9.8% Gross profit 117,483 127,695 140,624 150,283 8.6% 500,000 9.4% 9.6% General expenses 77,833 83,684 92,412 97,391 7.8% 400,000 9.4% Operating Income 39,454 43,838 48,150 52,762 10.2% 9.2% Operating Margin 7.4% 7.6% 7.8% 8.0% 2.6% 300,000 8.9% 9.0% Depreciation 10,694 11,645 12,300 12,902 6.5% 200,000 EBITDA 50,148 55,473 60,449 65,664 9.4% 8.8% 100,000 EBITDA Margin 9.4% 9.7% 9.8% 10.0% 8.6% Interest income (expense) net (322) (548) (169) (209) -13.4% 0 8.4% Interest expense 2015 2016 2017 2018E 2019E Interest income 570 1,030 1,282 1,697 43.8% Revenue EBITDA Margin Other income (expenses) (1,317) (1,587) (1,783) (1,901) 13.0% Exchange Income (loss) 383 9 332 (5) -123.9% Unconsolidated subsidiaries Net Income before taxes 39,132 43,290 47,981 52,553 10.3% Provision for Income taxes 10,623 10,900 12,176 13,664 8.8% Discontinued operations 4,842 7,475 Net Income & ROE Consolidated Net Income 31,367 24,916 35,804 38,889 7.4% MXN, million Minorities (0) Net Income 33,352 39,865 35,804 38,889 5.3% Net Margin 6.3% 7.0% 5.8% 5.9% 45,000 30.0% EPS 1.910 2.283 2.050 2.227 5.3% 25.0% 40,000 22.6% 21.3% 25.0% 35,000 20.0% Balance Sheet (Million pesos) 30,000 17.4% 20.0% Total Current Assets 104,023 106,876 117,153 123,673 5.9% 25,000 Cash & Short Term Investments 27,976 35,596 41,164 42,492 14.9% 15.0% Long Term Assets 183,908 188,379 198,527 225,430 7.0% 20,000 Property, Plant & Equipment (Net) 136,350 134,963 145,722 172,625 8.2% 15,000 10.0% 10,000 Intangible Assets (Net) 1,919 1,995 1,882 1,882 -0.6% 5.0% Total Assets 287,930 295,256 315,680 349,104 6.6% 5,000 Current Liabilities 93,957 107,828 127,384 136,124 13.2% 0 0.0% Short Term Debt 614 449 334 382 -14.6% 2015 2016 2017 2018E 2019E Accounts Payable 65,558 80,099 91,233 97,474 14.1% Long Term Liabilities 26,947 27,894 30,044 30,557 4.3% Net Income ROE Long Term Debt 14,681 14,603 15,652 16,166 3.3% Total Liabilities 120,904 135,722 157,428 166,681 11.3% Common Stock 167,026 159,534 158,252 182,422 3.0% Noncontrolling Interest (0) Total Equity 167,026 159,534 158,252 182,422 3.0% Net Income & ROE Liabilities & Equity 287,930 295,256 315,680 349,104 6.6% MXN, million Net Debt (12,681) (20,544) (25,178) (25,944) 26.9%

Cash Flow (Million pesos) 2016 2017 2018E 2019E 2015 2016 2017 2018E 2019E Cash Flow from Operating Activities 0 0.0x before Taxes 29,045 9,511 24,070 63,758 -0.1x (5,000) Cash Flow from Operating Activities 36,114 24,731 28,225 (10,166) -0.1x Cash Flow from Investing Activities (13,487) 3,923 (16,598) (20,040) (10,000) -0.2x Cash Flow from Financing Activities (30,523) (44,366) (26,541) (32,224) -0.3x -0.2x Change in Cash Balance 21,149 (6,201) 9,156 1,328 (15,000) -0.3x -0.3x (20,000) -0.3x -0.4x -0.4x -0.4x (25,000) -0.4x (30,000) -0.5x -0.4x Net Debt Net Debt/EBITDA

Source: Banorte, BMV

15

2019 Estimates

According to our projections model, Walmex’s total revenue would grow 6.8% yoy to MXN$ 658.8 billion. This would be explained by a 5.0% SSS increment, as new store openings-for which we expect an acceleration with a 2.5% sales floor expansion with the opening of 135 stores (105 in Mexico and 30 in CA)- would contribute to the retailer’s performance with180bps.It is worth stressing that in the case of operations in Central America, the FX expected depreciation (MXN$ 22.50) would boost the earnings of said region due to a favorable conversion effect. Meanwhile, we expect the expansion of LfL sales, added to a strict expense control, to be translated into a greater operating leverage, with which the EBITDA margin would expand 20bps to reach double-digit territory (10%e), for the first time in 10 years. Therefore, EBITDA would escalate 8.6% yoy to MXN$ 65.6 billion. As for net profit, we expect an 8.8% yoy increase to MXN$38.8 billion, as lower foreign exchange gains would pressure the net financing cost. Finally, we estimate the company will disburse MXN$ 21.7 billion in capital expenditures (+4.0% yoy vs. the 2018 guidance of MXN$20.9 billion) reflecting a higher store opening rhythm, as well as aggressive investments for the unleashing of its omni- channel strategy.

Valuation and MXN$ 58.00 2019 PT

Our PT was estimated using a 9.2% risk-free rate, 0.9 Beta, 5.5% market premium and a 15x exit multiple, slightly below the five-year average of the LTM multiple (15.2x). At this price, Walmex would trade at 15.0x 2019E EV/EBITDA, below the average of the last three-year current multiple (15.6x). It is worth noting that currently the issuer trades at a 7.1% discount (14.5x LTM EV/EBITDA) against the three-year average, which we perceive as attractive, especially considering the company’s leading role in the retail sector in Mexico, its world-class profitability, free cash flow generation, zero leverage and elevated marketability. The potential yield against our PT rises to 14.8% (18.4% including a 3.6%e dividend yield), therefore we have upgraded our recommendation to BUY.

16

Annex

DCF Chedraui DCF SENSITIVITY ANALYSIS

2019e 2020e 2021e 2022e 2023e 2024e M U L T I P L E 52.31 (+) EBITDA 8,181 9,043 9,884 10,983 12,189 12,487 7.4x 7.5x 7.7x 7.8x (-) Changes in Working Capital (1,616) (2,081) (2,471) (2,746) (3,047) (3,122) 0.8 52.33 53.46 54.59 55.71 B 0.9 51.77 52.88 54.00 55.11 (-) Capex (4,258) (4,396) (4,402) (4,435) (4,463) (4,687) E 0.9 51.21 52.31 53.42 54.52 (-) Taxes (1,302) (1,446) (1,977) (2,197) (2,438) (2,497) T (=) Free Cash Flow 1,006 1,120 1,034 1,606 2,240 2,181 A 1.0 50.65 51.75 52.84 53.93 (+) Perpetuity 0 0 0 0 0 93,655 1.0 50.11 51.19 52.27 53.35 (=) Total Free Cash Flow 1,006 1,120 1,034 1,606 2,240 95,837

YE19 M U L T I P L E Risk-free Rate (RF) 9.2% (+) Cash Flow's Present Value 5,633 52.31 7.3x 7.5x 7.8x 8.0x Equity Risk Premium 5.5% (+) Perpetuity's Present Value 53,209 11.5% 51.76 53.64 55.53 57.41 W Beta 0.9 = Enterprise Value 58,843 11.7% 51.11 52.97 54.83 56.70 A CAPM 14.2% (-) Net Debt (8,044) C 12.0% 50.47 52.31 54.15 55.99 (-) Non-controlling Interest (375) C 12.5% 49.21 51.01 52.81 54.61 Cost of Debt 5.8% (+) Other Investments 13.0% 47.99 49.75 51.51 53.27 Tax Rate 30.0% (=) Equity Value 50,424 Net Cost of Debt 4.0% Shares Outstanding 964

Debt / Capitalization 21.5% Price Target MXN$ 52.31

WACC 12.0% Exit multiple FV/EBITDA 7.5x Source: Banorte DCF La Comer DCF SENSITIVITY ANALYSIS

2019e 2020e 2021e 2022e 2023e 2024e M U L T I P L E 24.71 (+) EBITDA 1,719 2,073 2,411 2,811 3,270 3,800 11.4x 11.5x 11.7x 11.8x (-) Changes in Working Capital (41) (66) (72) (84) (98) (114) 0.9 24.96 25.24 25.51 25.78 B 1.0 24.71 24.97 25.24 25.51 (-) Capex (1,384) (1,563) (1,752) (1,849) (1,899) (1,955) E 1.0 24.45 24.71 24.98 25.24 (-) Taxes (268) (311) (386) (450) (523) (608) T (=) Free Cash Flow 26 133 201 428 750 1,123 A 1.1 24.20 24.46 24.72 24.98 (+) Perpetuity 0 0 0 0 0 43,887 1.1 23.95 24.21 24.47 24.72 (=) Total Free Cash Flow 26 133 201 428 750 45,010

YE19 M U L T I P L E Risk-free Rate (RF) 9.2% (+) Cash Flow's Present Value 1,551 24.71 11.3x 11.5x 11.8x 12.0x Equity Risk Premium 5.5% (+) Perpetuity's Present Value 22,106 14.2% 24.74 25.19 25.64 26.09 W Beta 1.0 = Enterprise Value 23,658 14.5% 24.50 24.95 25.39 25.84 A CAPM 14.7% (-) Net Debt 3,182 C 14.7% 24.27 24.71 25.15 25.60 (-) Non-controlling Interest 0 C 15.2% 23.82 24.25 24.68 25.12 Cost of Debt 0.0% (+) Other Investments 15.7% 23.38 23.80 24.23 24.65 Tax Rate 30.0% (=) Equity Value 26,840 Net Cost of Debt 0.0% Shares Outstanding 1,086

Debt / Capitalization 0.0% Price Target MXN$ 24.71

WACC 14.7% Exit multiple FV/EBITDA 11.5x Source: Banorte DCF Soriana DCF SENSITIVITY ANALYSIS 2019e 2020e 2021e 2022e 2023e 2024e M U L T I P L E 32.97 6.5x 7.0x 7.5x 8.0x (+) EBITDA 11,253 12,680 13,527 14,530 15,648 16,931 0.8 30.85 33.66 36.47 39.28 (-) Changes in Working Capital (4,821) (5,140) (5,681) (6,103) (6,572) (7,111) B 0.8 30.53 33.31 36.10 38.89 (-) Capex (2,156) (2,180) (2,177) (2,035) (2,733) (2,705) E T 0.9 30.21 32.97 35.74 38.50 (-) Taxes (2,767) (2,477) (3,652) (3,923) (4,225) (4,571) A 0.9 29.90 32.64 35.38 38.12 (=) Free Cash Flow 1,509 2,883 2,016 2,470 2,118 2,544 1.0 29.59 32.30 35.02 37.74 (+) Perpetuity 0 0 0 0 0 117,672 (=) Total Free Cash Flow 1,509 2,883 2,016 2,470 2,118 120,216

M U L T I P L E YE19 32.97 6.5x 7.0x 7.5x 8.0x Risk-free Rate (RF) 9.2% (+) Cash Flow's Present Value 8,895 10.7% 31.09 33.91 36.74 39.56 Equity Risk Premium 5.5% (+) Perpetuity's Present Value 69,125 W 11.0% 30.65 33.44 36.23 39.03 Beta 0.9 = Enterprise Value 78,021 A CAPM 13.9% (-) Net Debt (18,332) C 11.2% 30.21 32.97 35.74 38.50 (-) Non-controlling Interest (334) C 11.5% 29.78 32.52 35.25 37.98 Cost of Debt 8.5% (+) Other Investments 11.7% 29.36 32.06 34.76 37.47 Tax Rate 30.0% (=) Equity Value 59,355 Net Cost of Debt 6.0% Shares Outstanding 1,800

Debt / Capitalization 33.4% Price Target MXN$ 32.97

WACC 11.2% Exit multiple FV/EBITDA 7.0x Source: Banorte

17

DCF Walmex DCF SENSITIVITY ANALYSIS

2019e 2020e 2021e 2022e 2023e 2024e M U L T I P L E 57.87 14.5x 15.0x 15.5x 16.0x (+) EBITDA 65,664 72,778 81,477 88,231 95,424 103,081 0.8 57.58 59.14 60.70 62.26 (-) Changes in Working Capital 3,244 4,240 4,481 4,853 5,248 5,669 B 0.9 56.96 58.50 60.04 61.58 (-) Capex (21,737) (21,204) (21,502) (17,384) (17,617) (17,846) E 0.9 56.34 57.87 59.39 60.91 (-) Taxes (13,409) (15,015) (16,703) (18,087) (19,562) (21,132) T 1.0 55.74 57.24 58.75 60.25 (=) Free Cash Flow 33,761 40,798 47,753 57,612 63,494 69,772 A (+) Perpetuity 0 0 0 0 0 1,550,333 1.0 55.14 56.63 58.11 59.60 (=) Total Free Cash Flow 33,761 40,798 47,753 57,612 63,494 1,620,106

YE19 M U L T I P L E Risk-free Rate (RF) 9.2% (+) Cash Flow's Present Value 184,518 57.87 14.5x 15.0x 15.5x 16.0x Equity Risk Premium (RM) 5.5% (+) Perpetuity's Present Value 799,918 13.7% 57.47 59.02 60.58 62.14 Beta 0.9 = Enterprise Value 984,436 W 13.9% 56.90 58.44 59.98 61.52 CAPM 14.2% (-) Net Debt 25,944 A 14.2% 56.34 57.87 59.39 60.91 (-) Non-controlling Interest 0 C C 14.4% 55.79 57.30 58.80 60.31 Cost of Debt 0.0% (+) Other Investments 14.7% 55.25 56.74 58.23 59.72 Tax Rate 30.0% (=) Equity Value 1,010,380 Net Cost of Debt 0.0% Shares Outstanding 17,461

Debt/ Capitalization 0.0% Price Target MXN$ 57.87

WACC 14.2% Exit multiple EV/EBITDA 15.0x Source: Banorte

18

Certification of Analysts. We, Gabriel Casillas Olvera, Delia Maria Paredes Mier, Alejandro Padilla Santana, Manuel Jiménez Zaldívar, Tania Abdul Massih Jacobo, Katia Celina Goya Ostos, Juan Carlos Alderete Macal, Víctor Hugo Cortes Castro, Marissa Garza Ostos, Miguel Alejandro Calvo Domínguez, Hugo Armando Gómez Solís, Gerardo Daniel Valle Trujillo, José Itzamna Espitia Hernández, Valentín III Mendoza Balderas, Santiago Leal Singer, Francisco José Flores Serrano, Francisco Duarte Alcocer and Leslie Thalía Orozco Vélez, certify that the points of view expressed in this document are a faithful reflection of our personal opinion on the company (s) or firm (s) within this report, along with its affiliates and/or securities issued. Moreover, we also state that we have not received, nor receive, or will receive compensation other than that of Grupo Financiero Banorte S.A.B. of C.V for the provision of our services. Relevant statements. In accordance with current laws and internal procedures manuals, analysts are allowed to hold long or short positions in shares or securities issued by companies that are listed on the Mexican Stock Exchange and may be the subject of this report; nonetheless, equity analysts have to adhere to certain rules that regulate their participation in the market in order to prevent, among other things, the use of private information for their benefit and to avoid conflicts of interest. Analysts shall refrain from investing and holding transactions with securities or derivative instruments directly or through an intermediary person, with Securities subject to research reports, from 30 calendar days prior to the issuance date of the report in question, and up to 10 calendar days after its distribution date.

Compensation of Analysts.

Analysts’ compensation is based on activities and services that are aimed at benefiting the investment clients of Casa de Bolsa Banorte Ixe and its subsidiaries. Such compensation is determined based on the general profitability of the Brokerage House and the Financial Group and on the individual performance of each analyst. However, investors should note that analysts do not receive direct payment or compensation for any specific transaction in investment banking or in other business areas. Last-twelve-month activities of the business areas. Grupo Financiero Banorte S.A.B. de C.V., through its business areas, provides services that include, among others, those corresponding to investment banking and corporate banking, to a large number of companies in Mexico and abroad. It may have provided, is providing or, in the future, will provide a service such as those mentioned to the companies or firms that are the subject of this report. Casa de Bolsa Banorte or its affiliates receive compensation from such corporations in consideration of the aforementioned services.

Over the course of the last twelve months, Grupo Financiero Banorte S.A.B. C.V., has not obtained compensation for services rendered by the investment bank or by any of its other business areas of the following companies or their subsidiaries, some of which could be analyzed within this report.

Activities of the business areas during the next three months.

Casa de Bolsa Banorte, Grupo Financiero Banorte or its subsidiaries expect to receive or intend to obtain revenue from the services provided by investment banking or any other of its business areas, by issuers or their subsidiaries, some of which could be analyzed in this report. Securities holdings and other disclosures.

As of the end of last quarter, Grupo Financiero Banorte S.A.B. of C.V. has not held investments, directly or indirectly, in securities or derivative financial instruments, whose underlying securities are the subject of recommendations, representing 1% or more of its investment portfolio of outstanding securities or 1 % of the issuance or underlying of the securities issued.

None of the members of the Board of Grupo Financiero Banorte and Casa de Bolsa Banorte, along general managers and executives of an immediately below level, have any charges in the issuers that may be analyzed in this document.

The Analysts of Grupo Financiero Banorte S.A.B. of C.V. do not maintain direct investments or through an intermediary person, in the securities or derivative instruments object of this analysis report. Guide for investment recommendations.

Reference

BUY When the share expected performance is greater than the MEXBOL estimated performance. HOLD When the share expected performance is similar to the MEXBOL estimated performance. SELL When the share expected performance is lower than the MEXBOL estimated performance. Even though this document offers a general criterion of investment, we urge readers to seek advice from their own Consultants or Financial Advisors, in order to consider whether any of the values mentioned in this report are in line with their investment goals, risk and financial position.

Determination of Target Prices

For the calculation of estimated target prices for securities, analysts use a combination of methodologies generally accepted among financial analysts, including, but not limited to, multiples analysis, discounted cash flows, sum-of-the-parts or any other method that could be applicable in each specific case according to the current regulation. No guarantee can be given that the target prices calculated for the securities will be achieved by the analysts of Grupo Financiero Banorte S.A.B. C.V, since this depends on a large number of various endogenous and exogenous factors that affect the performance of the issuing company, the environment in which it performs, along with the influence of trends of the stock market, in which it is listed. Moreover, the investor must consider that the price of the securities or instruments can fluctuate against their interest and cause the partial and even total loss of the invested capital.

The information contained hereby has been obtained from sources that we consider to be reliable, but we make no representation as to its accuracy or completeness. The information, estimations and recommendations included in this document are valid as of the issue date, but are subject to modifications and changes without prior notice; Grupo Financiero Banorte S.A.B. of C.V. does not commit to communicate the changes and also to keep the content of this document updated. Grupo Financiero Banorte S.A.B. of C.V. takes no responsibility for any loss arising from the use of this report or its content. This document may not be photocopied, quoted, disclosed, used, or reproduced in whole or in part without prior written authorization from Grupo Financiero Banorte S.A.B. of C.V. History of PT and Ratings Stock Date Rating PT

19

GRUPO FINANCIERO BANORTE S.A.B. de C.V.

Research and Strategy

Gabriel Casillas Olvera Chief Economist and Head of Research [email protected] (55) 4433 - 4695

Raquel Vázquez Godinez Assistant [email protected] (55) 1670 - 2967

Economic Analysis

Delia María Paredes Mier Executive Director of Economic Analysis [email protected] (55) 5268 - 1694 Katia Celina Goya Ostos Senior, Global Economist [email protected] (55) 1670 - 1821 Juan Carlos Alderete Macal, CFA Senior Economist, Mexico [email protected] (55) 1103 - 4046 Miguel Alejandro Calvo Economist, Regional [email protected] (55) 1670 - 2220 Domínguez Francisco José Flores Serrano Economist, Mexico [email protected] (55) 1670 - 2957 Lourdes Calvo Fernández Analyst (Edition) [email protected] (55) 1103 - 4000 x 2611

Fixed income and FX Strategy

Alejandro Padilla Santana Head Strategist – Fixed income and FX [email protected] (55) 1103 - 4043 Santiago Leal Singer FX Senior Strategist [email protected] (55) 1670 - 2144 Leslie Thalía Orozco Vélez Fixed Income and FX Strategist [email protected] (55) 1670 - 1698

Equity Strategy

Director Equity Research — Manuel Jiménez Zaldivar [email protected] (55) 5268 - 1671 Telecommunications / Media Victor Hugo Cortes Castro Technical Analysis [email protected] (55) 1670 - 1800 Equity Research – Conglomerates / Financials/ Marissa Garza Ostos [email protected] (55) 1670 - 1719 Mining / Petrochemicals Equity Research – Airlines / Airports / Cement José Itzamna Espitia Hernández [email protected] (55) 1670 - 2249 / Infrastructure / REITs Equity Research – Auto Parts/ Consumer Valentín III Mendoza Balderas [email protected] (55) 1670 - 2250 Discretionary / Real Estate / Retail Francisco Duarte Alcocer Analyst [email protected] (55) 1670 - 2707 Jorge Antonio Izquierdo Lobato Analyst [email protected] (55) 1670 - 1746 Itzel Martínez Rojas Analyst [email protected] (55) 1670 - 2251

Corporate Debt

Tania Abdul Massih Jacobo Director Corporate Debt [email protected] (55) 5268 - 1672

Hugo Armando Gómez Solís Senior, Corporate Debt [email protected] (55) 1670 - 2247 Gerardo Daniel Valle Trujillo Analyst, Corporate Debt [email protected] (55) 1670 - 2248

Wholesale Banking

Armando Rodal Espinosa Head of Wholesale Banking [email protected] (55) 1670 - 1889 Alejandro Eric Faesi Puente Head of Global Markets and Institutional Sales [email protected] (55) 5268 - 1640 Alejandro Aguilar Ceballos Head of Asset Management [email protected] (55) 5268 - 9996 Head of Investment Banking and Structured Arturo Monroy Ballesteros [email protected] (55) 5004 - 1002 Finance Head of Transactional Banking, Leasing and Gerardo Zamora Nanez [email protected] (81) 8318 - 5071 Factoring Jorge de la Vega Grajales Head of Government Banking [email protected] (55) 5004 - 5121 Luis Pietrini Sheridan Head of Private Banking [email protected] (55) 5004 - 1453 René Gerardo Pimentel Ibarrola Head of Asset Management [email protected] (55) 5268 - 9004 Ricardo Velázquez Rodríguez Head of International Banking [email protected] (55) 5004 - 5279 Víctor Antonio Roldan Ferrer Head of Corporate Banking [email protected] (55) 5004 - 1454