Equity Research Me xico

CHDRAUI Quarterly Report May 3, 2019

www..com A start to the year with no surprises @analisis_fundam

. On an IFRS 16 adjusted basis, Chedraui reported in line with our estimates, showing pressures in profitability as growth in expenses Valentín Mendoza Auto Parts/ Consumer Discretionary / offset gross margin gains Real Estate/ [email protected] . SSS growth in exceeded that of Walmex (5.7% vs 4.7%), which coupled with El Super’s 1.9% increase and the acquisition of BUY Fiesta Mart, led to a +33.6% TS expansion (-2.8% vs BNTe) Current Price $37.46 PT 2019 $49.00 . The lease liabilities over leverage effect (+MXN$22.6 billion qoq), Dividend 2019 Dividend Yield (%) elevated the company’s ND/EBITDA ratio to 4.7x from 1.3x in 4Q18 Upside Potential 30.8% Max – Min LTM (MXN$) 50.00 – 35.51 EBITDA margin pressures in Mexico and in Bodega Latina. On an IFRS Market Cap (US$m) 1,893.9 Shares Outstanding (m) 963.9 16 adjusted basis, Chedraui reported 1Q19 figures that were in line with our Float 15.8% forecasts in operating terms but came out weaker at net level. LfL sales Daily Turnover (MXN$ m) 11.0 Valuation metrics TTM growth in Mexico (+5.7% vs 5.4%e and 4.7% from Walmex), coupled with an EV/EBITDA 9.7x additional 1.9% from El Súper and a 19.2% sales floor increase, boosted TS P/E 18.8x by 33.6% yoy to MXN$31.1 billion (-2.8% vs BNTe). Meanwhile, improved gross profitability by El Súper and a stable margin in Mexico -despite Relative performance to Mexbol commercial aggressiveness- supported a 50bps gross margin expansion to LTM 30% 21.6%, resulting in a 36.7% profit increment. However, the expansion of units 25% 20% in Mexico (still not mature), a negative Easter Week calendar effect and a 15% 10% higher contribution from Bodega Latina to the company's results- with a 5% 0% higher expenses structure- rose expenses by 45.2%, pressuring the EBITDA -5% -10% margin by 80bps to 6.0%.Thus, EBITDA grew 16.9% year-on-year to -15% -20% MXN$1.8 billion (-0.2% vs BNTe). Finally, net profit fell 24.2%, hit by a -25% abr-18 jul-18 oct-18 ene-19 abr-19

156% higher Net Interest Expense resulting from higher interest payments and MEXBOL CHDRAUIB greater FX losses.

Financial Statements Valuation and financial metrics MXN, million 2017 2018 2019E 2020E 2017 2018 2019E 2020E Revenues 94,583 116,031 137,220 148,444 EV/EBITDA 9.5x 9.7x 8.7x 7.8x

Operating Income 4,418 4,547 5,093 5,881 P/E 18.9x 19.0x 16.5x 14.7x EBITDA 6,039 6,541 7,737 8,576 P/Book 1.3x 1.2x 1.1x 1.0x

EBITDA Margin 6.4% 5.6% 5.6% 5.8%

Net Income 2,079 2,064 2,399 2,733 ROE 7.5% 7.1% 7.5% 7.6% Net Margin 2.2% 1.8% 1.7% 1.8% ROA 3.8% 3.0% 3.0% 3.3%

EBITDA/ Interest expenses 6.9x 6.9x 7.9x 7.9x Total Assets 55,006 68,244 79,027 83,940 Net Debt/EBITDA 0.7x 1.4x 1.2x 0.8x

Cash 1,522 1,737 1,998 2,560 Debt/Equity 0.2x 0.4x 0.3x 0.3x Total Liabilities 26,574 38,680 44,702 44,702 Debt 5,775 10,990 11,590 9,711 This document is provided for the reader’s convenience only. The translation from the original Spanish version Common Equity 28,432 29,564 34,325 37,240 was made by Banorte’s staff. Discrepancies may possibly arise between the original document in Spanish Source: Banorte with data from MSE 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 “Un inicio de año sin sorpresas” was released on April 30, 2019. 1 Document for distribution among public

CHDRAUI – Results 1Q19 Revenue & EBITDA Margin MXN, million MXN, million Diff% vs Concept 1Q18 1Q19 Chg % 1Q19e Estim. Revenue 23,289 31,125 33.6% 32,030 -2.8% 7.4% 40,000 8.0% Operating Income 1,174 1,407 19.9% 1,202 17.1% 6.8% 35,000 7.0% Ebitda 1,594 2,292 43.8% 1,867 22.7% 5.5% 5.6% Net Income 573 434 -24.2% 648 -33.0% 30,000 5.0% 6.0% Margins 25,000 5.0% Operating Margin 5.0% 4.5% -0.5pp 3.8% 0.8pp 20,000 4.0% Ebitda Margin 6.8% 7.4% 0.5pp 5.8% 1.5pp 15,000 3.0% Net Margin 2.5% 1.4% -1.1pp 2.0% -0.6pp EPS $0.59 $0.45 -24.2% $0.67 -33.0% 10,000 2.0% 5,000 1.0% 0 0.0% Income Statement (Million pesos) 1Q18 2Q18 3Q18 4Q18 1Q19 Year 2018 2018 2019 Change Change Revenue EBITDA Margin Quarter 1 4 1 % yoy % qoq

Net Revenue 23,289.2 34,534.1 31,125.0 33.6% -9.9% Cost of goods sold 18,369.3 27,580.9 24,401.7 32.8% -11.5% Gross profit 4,919.9 6,953.2 6,723.2 36.7% -3.3% General expenses 3,745.3 6,129.4 5,315.8 41.9% -13.3% Net Income & ROE Operating Income 1,174.3 1,093.9 1,407.4 19.9% 28.7% MXN, million Operating Margin 5.0% 3.2% 4.5% (0.5pp) 1.4pp Depreciation 419.5 630.3 884.3 110.8% 40.3% EBITDA 1,593.8 1,724.2 2,291.7 43.8% 32.9% 700 7.7% 7.8% EBITDA Margin 6.8% 5.0% 7.4% 0.5pp 2.4pp Interes income (expense) net (287.6) (530.3) (740.8) 157.6% 39.7% 600 7.4% 7.6% Interest expense 63.9 198.8 473.0 >500% 137.9% 500 7.3% 7.4% Interest income 18.1 9.5 9.9 -45.1% 5.0% 400 Other income (expenses) (230.1) (334.1) (215.1) -6.5% -35.6% 7.0% 7.0% 7.2% Exchange Income (loss) (11.7) (6.8) (62.6) 432.9% >500% 300 7.0% Unconsolidated subsidiaries N.A. N.A. 200 Income before taxes 886.7 563.6 666.7 -24.8% 18.3% 100 6.8% Income taxes 301.5 162.8 229.7 -23.8% 41.1% Discontinued operations N.A. N.A. 0 6.6% Consolidated Net Income 585.2 400.8 437.0 -25.3% 9.0% 1Q18 2Q18 3Q18 4Q18 1Q19 Minorities 12.3 (26.5) 2.9 -76.4% N.A. Net Income 572.9 427.4 434.1 -24.2% 1.6% Net Income ROE Net margin 2.5% 1.2% 1.4% (1.1pp) 0.2pp EPS 0.594 0.443 0.450 -24.2% 1.6%

Balance Sheet (Million pesos) Total Current Assets 14,904.6 18,411.3 17,914.4 20.2% -2.7% Net Debt & Net debt to EBITDA ratio Cash & Short Term Investments 2,247.7 1,737.4 1,567.7 -30.3% -9.8% MXN, million Long Term Assets 40,617.5 49,832.7 69,773.3 71.8% 40.0% Property, Plant & Equipment (Net) 30,676.2 34,475.9 34,137.6 11.3% -1.0% 4.7x Intangible Assets (Net) 519.9 2,600.0 2,531.9 387.0% -2.6% 40,000 5.0x Total Assets 55,522.1 68,244.1 87,687.7 57.9% 28.5% 35,000 4.5x Current Liabilities 18,611.2 23,560.7 23,410.3 25.8% -0.6% 4.0x 30,000 Short Term Debt 563.4 507.4 3,706.9 >500% >500% 3.5x Accounts Payable 16,791.0 22,081.6 18,622.3 10.9% -15.7% 25,000 3.0x Long Term Liabilities 8,074.6 15,119.7 36,707.5 354.6% 142.8% 20,000 2.5x Long Term Debt 4,993.1 10,482.5 31,936.8 >500% 204.7% 2.0x 15,000 1.4x 1.2x 1.3x Total Liabilities 26,685.8 38,680.4 60,117.8 125.3% 55.4% 1.5x 10,000 Common Stock 28,836.3 29,563.7 27,569.9 -4.4% -6.7% 0.5x 1.0x Noncontrolling Interest 12.3 (26.5) 97.4 >500% N.A. 5,000 0.5x Total Equity 28,149.5 29,323.6 27,472.5 -2.4% -6.3% 0 0.0x Liabilities & Equity 55,522.1 68,244.1 87,687.7 57.9% 28.5% 1Q18 2Q18 3Q18 4Q18 1Q19 Net Debt 2,853.5 8,577.0 34,076.1 >500% 297.3% Net Debt Net Debt to EBITDA Cash Flow (Million pesos) Operating Cash Flow before tax 1,434.7 2,731.7 533.7 Cash Flow from Operating Activities 1,434.7 2,731.7 (383.5) Cash Flow from Investing Activities (452.0) (3,154.7) (1,064.0) Cash Flow from Financing Activities (346.4) (831.0) 1,781.7 Change in Cash Balance 2,071.0 1,477.7 867.8

Source: Banorte, MSE.

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As expected, SSS surpassed Walmex’s performance. Chedraui’s total sales reached MXN$31.1 billion in 1Q19, rallying 33.6% year-on-year (-2.8% vs BNTe). Such performance is explained by a 10.7% surge in Mexico (MXN$18.3 billion), given a 5.7% SSS increase- exceeding those by ANTAD and Walmex-, to which we would have to add 500bps from the 6.1% sales floor expansion after the net opening of 35 new locations in the L12M. Moreover, sales in the U.S. practically doubled, growing 93.4% (+2.6pp from an FX conversion effect) to total MXN$12.5 billion during the quarter, thanks to the 1.9% upturn in LfL sales (in dollars), as well as to the contribution of 5 new El Super units and the integration effect of 61 Fiesta Mart stores (SF +134.6% yoy). Finally, rent-related revenue hiked 5.6% yoy to MXN$246 million, resulting from a 5.2% rise in the average rent per sqm and a 4.9% increase in gross leasable area (+17,002m2 yoy)

El Súper’s gross margin improvement boosted the consolidated indicator. During this quarter, Chedraui’s gross profitability expanded by 50bps to 21.6%, stemming from El Super’s gross margin improvement and better-than- expected profitability reported by Fiesta Mart, to which we would have to add a stable margin in Mexico-despite upholding aggressive prices-. Thus, the company’s gross profit grew 36.7%, above the increase in revenue.

Higher expenses pressured the EBITDA margin in Mexico and in the U.S. The company’s EBITDA grew 16.9% yoy to MXN$1.8 billion during the period (-0.2% vs BNTe). Thus, the EBITDA margin contracted 80bps to 6.0%, as a 45.2% rise in operating costs offset gross margin gains. These, in turn, are explained by the opening of 40 new locations in the L12M (and which have yet to reach maturity), in addition to the fact that Fiesta Mart’s consolidation increased the contribution of Bodega Latina to the company’s consolidated earnings- with a higher cost structure-. By region, the EBITDA margin in our country fell 80bps to 6.1%, translating into an EBITDA increment of just 0.1% Meanwhile, in the U.S., profitability eroded 40bps, leading the corresponding margin to 3.9% and resulting in an 82.2% EBITDA growth, due to the previously-mentioned reasons, but highlighting the sequential improvement of Fiesta Mart’s earnings as a result of the first operating synergies. Finally, it should be mentioned that EBITDA from the real-estate division remained stable at MXN$163 million, equaling a 680bp EBITDA margin contraction.

Sharp increase in Net Interest Expense pressured profitability. In terms of net profit, Chedraui reported a MXN$434 million gain (-24.2% yoy), below our MXN$648 million projection (-33.0% vs BNTe). Such result was due primarily to a 157.6% increase in Net Interest Expense- from higher interest costs and steeper FX losses.

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The effects of IFRS 16 on the Income Statement. Resulting from the implementation of IFRS 16, on leasing, Chedraui reported a MXN$429 million gain in EBITDA given the decline in operating costs from the recognition shift of leasing expenses. Therefore, considering such accounting changes, the figure stands at MXN$2.2 billion with the corresponding margin at 7.4% (+140bps). It should be noted that, being official figures, these figure in our comparative chart and differ over those that were mentioned in this report with comparative purposes.

A rise in leverage. By considering the effects of IFRS 16, the Company’s leverage rose to 4.7x ND/EBITDA from 1.3x in 4Q18. It should be indicated that such change is explained, primarily, by a MXN$25.3 billion qoq increase in interest-bearing debt (MXN$22.6 billion corresponding to lease liabilities) and a MXN$170 million sequential drop in cash, which were partially offset by a higher L12M EBITDA generation. Furthermore, it is worth highlighting that this indicator has yet to fully reflect the complete effect from the IFRS 16 implementation over the L12M EBITDA (~MXN$1. Billion). Upon considering it, leverage would stand at around 4.0x ND/EBITDA.

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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 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 CHDRAUI B 25/2/2019 Buy $49.00 CHDRAUI B 28/9/2018 Buy $52.00

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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 Francisco Duarte Alcocer Analyst, Global Economist [email protected] (55) 1103 - 4000 x 2707 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) 5268 - 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 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 Manager, 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