Making a Comeback: Initiate with OP

Positivo Fred Mendes LatAm TMT 27 November 2019 7.610000000000

Making a Comeback: Initiate with OP  Positivo is a personal computer and mobile phone company focused on the low- end market, with a ~75% market share in its niche, which is highly correlated to GDP.  Our positive view is based on: (i) cyclical upturn in Brazil, with PC market set to 350 rebound 5% in 2020; (ii) public biddings’ pent up demand and (iii) growth avenues through Accept, Positivo’s server seller and HaaS (hardware as a service). 300  Its valuation is appealing at 5.3x EV/EBITDA for YE20, a 25% discount to global peers, but with higher growth and an opportunity to expand margins. 250  Initiate coverage with an Outperform rating and a R$9.50 TP for YE20. 200 We see Positivo as an appealing case to play potential macro recovery. The company is mainly focused on the sale of PCs/laptops (~60% of revenue) and mobile phones (~22% 150 of revenue). During Brazil’s economic crisis, the company held onto its market share despite a greater impact on its niche market: income classes “C” and “D” (~75% market 100 share). Now, with a potential macro recovery in Brazil, we expect that the overall PC/laptop market should grow by 5% in 2020, while Positivo should also gain market share as low- 50 income consumers tend to benefit the most from improvements in employment and GDP. Nov-18 Feb-19 May-19 Aug-19 Nov-19 Also, Positivo has new avenues of growth: Accept (a server seller) and HaaS (hardware as a service), which are reporting revenue growth at above 30%, vs. 5% for Positivo, and Positivo IBOV higher margins of 16%+, vs. 6-8% for Positivo consolidated. Finally, Positivo´s valuation is appealing at 5.3x EV/EBITDA for 2020, a ~25% discount to global peers, but with higher growth. All in all, we initiate coverage with an OP rating and a YE20 TP of R$9.50. Ticker: POSI3 BZ Rating: Outperform Accept and HaaS are avenues of growth. In 2018, Positivo acquired Accept, which Target: R$9.50 customizes and sells servers, through a full earn-out transaction. Given its large scale and Upside: 25% distribution channels, Positivo was able to leverage Accept’s business, reporting net revenue of R$160mn in 2018, vs. R$90mn in 2017, and we forecast ~R$220mn for FY19. Accept also has higher margins, at 16-19%, vs. 6-8% for Positivo. The other opportunity (R$ mn) 2018A 2019E 2020E lies in Positivo’s hardware as a service business (HaaS), in which it rents its equipment for EPS (R$) -0.01 0.14 0.58 an average period of 3 years. Although the payout time is longer, at 1.5 years, the EBITDA margins are much higher, at 30-39%, and we forecast revenue growth of 30%+ for the EBITDA 121 137 161 coming years. Furthermore, there is high demand for this product, but given its capital- P/E - 54.6 13.2 intensive nature, growth relies on Positivo’s capital structure that is decreasing leverage. Both projects offer opportunities to boost growth and lift margins. EV/EBITDA 7.3 6.4 5.3 P/BV 1.3 1.3 1.2 The core business is a grind-it-out game. Positivo’s core markets, PCs and mobile phones are highly competitive and face low margins, as global players (Dell, Apple, and Dividend Yield % 0.0% 0.0% 0.5% Samsung) tend to dominate the market, particularly among high-end consumers. However, * As reported by the company Positivo’s efficient production and focus on the low end (income classes “C” and “D”) have led to a dominant market share of 75% in its niche. We therefore see two opportunities for Positivo: (i) further growth and greater market share based on macro improvement, and (ii) Key Figures 27-Nov-19 pent-up demand in the public sector that has been sidelined since 2012, when it Local Price (R$) 7.61 represented ~50% of net revenue, vs. ~20% currently. Nonetheless, we are seeing signs of public bidding processes starting to gain traction, as Positivo last month won a process Price Range - 52 wk (R$) 2.19 - 7.61 in São Paulo state for 65k units, representing R$205mn in revenue, while other bids are in Shares Outstanding (mn) 86 the pipeline, representing R$3bn. We see public biddings as an upside risk to the case that we do not incorporate yet in our model. 3-month ADTV (R$mn) 5.6 Market Cap (R$mn) 658 Valuation. Despite the stock’s ~240% gain YTD, vs. ~23% for the IBOV, we see Positivo trading at an appealing EV/EBITDA of 5.3x for 2020, a ~25% discount to global peers. In EV (R$mn) 950 our view this discount as unwarranted, as Positivo has better growth potential with an P/BV 1.3 opportunity to increase margins. Current Net Debt (R$mn) 293 Risks: (i) End of tax benefits; (ii) increasing competition as global players try to enter the Net Debt/2019 EBITDA 1.6x low end of the market; and (iii) relatively low liquidity, with ADTV of ~R$5mn.

Fred Mendes, CFA Guilherme Haguiara [email protected] [email protected] +55 (11) 3847 9259 +55 (11) 3847 9258

Bradesco S.A. Corretora de Títulos e Valores Mobiliários (Bradesco BBI) does and seeks to do business with companies covered in its research reports.As a result, investors should be aware that Bradesco Corretora and its affiliates may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. For full disclaimer and definitions, please refer to the end of this report. COMPANY REPORT Bradesco BBI Equity Research 27 November 2019

Business overview:

Figure 1: Gross revenue breakdown by product Figure 2: Gross revenue breakdown by channel

80% 17% 63% 39% 60% Notebook 1% 53% 55% 53% Desktop 3% 48% Smartphones 40% 26% 28% 24% 26% Feature phones 24% 26% Edu Tech gross revenue 19% 20% 19% 21% 20% 12% Others gross revenue 0% FY16 FY17 FY18 9M19 3Q19 21% Retail Government Corporate Source: Company data, Bradesco BBI

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Positivo back in the game?

What to expect: Macro tailwinds and market trends

We are assuming coverage of Positivo with an Outperform rating and a DCF-based TP of R$9.50 for YE20, implying upside potential of 25%. The company outlook is likely to benefit from macro improvement, as it has historically been substantially exposed to the Brazilian economy. According to consensus figures, Brazil’s GDP growth should accelerate to 2% YoY in 2020, from 1% in 2019, which should translate into a better environment for Positivo to grow.

Figure 3: Positivo’s Revenue vs. GDP - Growth YoY

Source: Company data, Bradesco BBI estimates, IPEA

A better consumer environment should drive performance in Positivo’s retail sales. According to consensus, Brazil’s unemployment rate should drop to 11.1% in 2020, while the Selic target rate is expected to be at 4.5%. These two factors combined bode well for Brazilian consumers, and thus for Positivo’s retail sales. As an example, we believe lower interest rates and falling unemployment in Brazil could lead retailers to accept a greater number of installments, making consumers more likely to purchase PCs.

Figure 4: Retail Sales vs. Private Consumption

Source: Company data, Bradesco BBI estimates, Bloomberg, IPEA

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Government spending should remain under control, but with pent-up demand from public institutions. While household consumption growth should accelerate, government spending has less room to grow. Nevertheless, we believe there is pent-up demand in the public sector following several years of more contained government spending. Thus, we believe there could be room for growth in sales to public institutions, as there is the need to replace old PCs or add new ones to meet needs.

Figure 5: Public Consumption vs. Positivo’s Public Revenue

Source: Company data, Bradesco BBI estimates, Bloomberg, IPEA

Improving macro trends to support retail and corporate growth…

Positivo’s positioning in a cyclical industry means macro tailwinds should follow in 2020. The PC market in Brazil is significantly impacted by economic downturns, which led to a challenging period for PC manufacturers during the country’s recession. Conversely, an improvement in macro conditions should also raise the tide for the PC market, as consumption of discretionary goods picks up. According to consensus, Brazil is starting to show economic recovery, with expected GDP growth of 1% for 2019 and acceleration to 2% in 2020, which could boost Positivo’s sales in all segments.

Figure 6: Brazil PC Market vs. GDP growth

Source: Company data, IDC, Bradesco BBI estimates,

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Positivo is well positioned in the Brazilian PC market to capitalize on a recovery. Between 2012 and 2018, Positivo delivered sales figures broadly in line with the overall Brazilian PC market, maintaining an average market share of 15.2%. That said, Positivo’s market share has declined over the course of 2019, reaching 13.9% in 3Q19. In our view, this dynamic reflects Positivo’s “minimum price and margin policy”, along with lower demand from public institutions.

Figure 7: Positivo vs. Brazil PC Market

Source: Company data, IDC, Bradesco BBI estimates,

Brazil’s retail PC market should continue progressing in tandem with household consumption. Historically, we have seen the Brazilian PC retail market growth maintain a close link with overall household consumption. As we do not expect this link to change, we believe acceleration in household consumption growth (cons: +1.4% YoY in 2019 and +2.2% in 2020) would represent a tailwind for the PC market in Brazil. Considering our assumption of Positivo’s market share remaining stable, its retail sales should grow in line with the market. However, there is upside to Positivo’s market share as it aims to increase its presence in smaller retailers (Tier 3), which we leave as an optionality, as it is too soon to gauge how positive the initiative could be, due to the complexity involved in reaching this type of distribution channel. All in all, we forecast Positivo’s retail PC sales growing 2.7% in FY20.

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Figure 8: Brazil PC Retail Market Growth vs. Private Consumption Growth - YoY

Source: Company data, IDC, Bradesco BBI estimates,

The corporate market represents an interesting growth opportunity for Positivo, in our view, in light of its relatively low ~6% share of the Brazilian corporate PC market in volume terms. This market segment should also benefit and accompany GDP growth with favorable macro conditions for companies to grow, which should see a resurgence in IT investments. In addition, companies usually seek suppliers that can provide them with all the products they need, such as desktops, monitors, notebooks, and servers when opening bidding for IT infrastructure. With the acquisition of Accept, Positivo has now a complete portfolio to enter corporate bidding processes, with better chances of success. All in all, we think the corporate PC market will accompany macro trends, and we expect Positivo to keep up with this growth, while securing market share gains, as an upside risk to our numbers.

Figure 9: Brazil PC Corporate Market Growth vs. GDP Growth - YoY

Source: Company data, IDC, Bradesco BBI estimates,

Positivo can leverage its strategic position in entry-level products. Positivo’s core business is focused on entry-level products, with desktops and notebooks accounting for around 60% to 75% of revenue, followed by feature and smartphones, with approximately 20%. Within these product categories, Positivo focuses on the lower end of the pyramid, with entry-level products for consumers in income classes “C” and “D”, while its global competitors focus on higher-end products. As a result, Positivo is able to maintain a large market share in this niche, having reached a ~76% share in notebooks under R$1,200 in 3Q19. All in all, we expect Brazil’s macro conditions, with improving economic growth, as well as lower unemployment and interest rates, to boost consumption in these income classes and benefit Positivo’s retail sales.

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Figure 10: Brazil – Positivo vs. Total Computer Market

Source: Company data, IDC, Bradesco BBI estimates

…while pent up demand from public institutions should materialize

No surge in government spending is expected, but there are still opportunities to grow. While there are expectations of an economic recovery and better GDP growth going into 2020, a significant pick-up in government spending is unlikely. According to consensus, government spending growth should remain muted in 2020 at +0.2%. Despite a challenging period for public institution sales in 9M19 (-24% YoY), Positivo said 4Q19 should already deliver better public institution sales, as a greater number of bidding contracts have been and are expected to be signed. In addition, we believe there is pent-up demand for PCs by public institutions due to limited purchases over the last several years (2012-18 CAGR of - 10%). As the Brazilian PC market for public institution grows, we expect Positivo to follow this trend and potentially expand market share. We believe that these factors could lead to Positivo growing sales to public institutions by 15% in FY20.

Figure 11: Brazil PC Gov. Market Growth vs. Public Consumption Growth - YoY

Source: Company data, IDC, Bradesco BBI estimates,

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New growth avenues

Accept Accept provides strong growth on the path to consolidation. In 2018, Positivo acquired an 80% stake in Accept, which sells servers and, according to Exame magazine, the company was among the fastest growth stories in Brazil that year. This deal marked Positivo’s entry into the server market. Following the acquisition, Accept was able to maintain a strong growth rate, up +86% YoY in 9M19.

Integration should allow for both cost and commercial synergies. Positivo’s acquisition of Accept brings about synergy gains on both opex and revenue lines. On the cost side, Accept will be able to leverage Positivo’s global sourcing contracts for processors, operating software, and others, as well as more favorable conditions for hedging its FX exposure. On the commercial front, Positivo is now able to add servers to its product portfolio. As a result, it can participate in larger corporate biddings, since some companies request proposals that encompass a complete IT portfolio, and not only PCs. Therefore, this may allow Positivo to compete in more bidding processes and potentially expand its market share in the Brazilian corporate PC market.

Positivo should also benefit from Accept’s higher margins. Accept’s servers have a higher value-added compared to traditional PCs, and we believe that margins for server sales could reach the mid-teens. As Accept’s sales continue to grow at an accelerated rate within Positivo’s sales mix, it should benefit consolidated margins going forward.

Hardware as a Service (HaaS) Positivo as a Service: A new market, with higher margins. Positivo as a Service (PaaS) is Positivo’s HaaS (hardware as a service) offering, which was launched in 2017. In 9M19, it saw revenue growth of 94% YoY, reaching R$23mn, vs. R$12mn in 9M18. PaaS could add a recurring component to Positivo’s revenue mix, including more visibility on cash flows. In addition, it provides higher margins compared to traditional PC sales, reaching an EBITDA margin of up to 30-35%. We expect PaaS to remain an attractive growth driver for Positivo, as corporate clients follow the trend of replacing capex with opex when building its IT infrastructure, which can be more tax efficient.

Mobile phone segment presents less growth opportunities

Positivo’s mobile phone operation is closer to reaching maturity. Positivo launched its cellphone operation after the smartphone boom began, and then was hit by the recession in Brazil, thus seeing very volatile results in the first five years. This operation includes both feature phones and smartphones, which is the main driver for mobile phones revenues due to higher average prices and greater consumer appeal. Since launching its mobile phone business 2012, although Positivo has been able to gain some market share, this is a much more concentrated market compared to the PC market, with the top 3 players securing ~80% of the market. Thus, we expect Positivo’s market share to remain stable in the 3% to 4% range.

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Figure 12: Brazil – Positivo vs. Brazil’s Mobile Phone Market (# Sales Volumes)

Source: Company data, Bradesco BBI estimates, IPEA

According to IDC studies and Positivo’s management team, the Brazilian mobile phone market has reached a stable growth period. The stage of growing penetration has basically run its course, and now the market is made up of replacement devices. Given that people only buy new phones when they want an upgrade or their previous phone has broken, if there is a better macro outlook and greater consumer confidence, the mobile phone market has some room to improve. However, it is expected to react to a lesser degree than the PC market, and thus this segment will likely start posting more stable growth going forward.

Figure 13: Mobile Phone Sales vs. Private Consumption

Source: Company data, Bradesco BBI estimates, IPEA

Volatility in mobile phone sales should diminish. Positivo’s mobile phone sales have historically been highly volatile and this makes it difficult to set a baseline. However, the segment seems to be becoming more mature, and is experiencing less volatility than before. As a result, we can expect a decrease in volatility for Positivo’s mobile sales going forward, which should be driven by smartphone sales.

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Figure 14: Mobile Phone Sales – Becoming less volatile

2,500 2,330 140% 127% 120% 2,000 97% 95% 100% 1,620 1,535 1,538 80% 1,500 Thousands 1,196 60%

40% 1,000 20% 527 1% 500 -5% 0% -20% -30% - -40% 2014 2015 2016 2017 2018 2019e Mobile Phone Sales (# units) Mobile Phone Sales Growth

Source: Company data, Bradesco BBI estimates, IPEA

The Brazilian IT Law

PC and mobile phone manufacturers in Brazil currently enjoy tax benefits. PC and mobile phone manufacturers in Brazil are able to benefit from favorable tax conditions through the IT Law. The law grants tax benefits of up to 95% related to Tax on Industrialized Products (IPI), which, without the benefit, is 15% for mobile phones and PCs, and drops to 3% and 0.75%, respectively, with the benefit. However, the World Trade Organization (WTO) has asked the Brazilian government to eliminate the tax benefit, which would impact the industry as a whole. Recent developments in the proposed bill have shown that it would have the same effect, but in the form of a general credit for federal taxes based on companies’ gross revenue and investments in R&D.

Figure 15: Tax Benefit Requirements

Source: Company data, Bradesco BBI

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Figure 16: Basic Production Process

Source: Company data, Bradesco BBI

Earnings forecasts and valuation

Macro tailwinds to support resumption of top-line growth Figure 17: Key Financial Forecasts for Positivo Fiscal year ending December 31 Constant Unit FY15 FY16 FY17 FY18 FY19e FY20e FY21e FY22e PC results PC sales - # k 970 687 792 939 769 809 853 870 PC sales, % y/y % (40.7%) (29.1%) 15.3% 18.5% (18.2%) 5.2% 5.4% 2.0% PC avg. price BRL 1,524 1,708 1,613 1,660 1,722 1,791 1,820 1,849 PC avg. price, % y/y % 30.1% 12.1% (5.5%) 2.9% 3.7% 4.0% 1.6% 1.6% PC gross revenue - BRLm 1,478 1,174 1,278 1,559 1,324 1,448 1,552 1,609 PC gross revenue, % y/y % (22.9%) (20.6%) 8.9% 22.0% (15.1%) 9.4% 7.2% 3.7%

Mobile phone results Mobile phone sales - # k 1,195 2,330 1,534 1,537 1,539 1,474 1,480 1,486 Mobile phone sales, % y/y % 126.8% 94.9% (34.2%) 0.2% 0.1% (4.2%) 0.4% 0.4% Mobile phone avg. price BRL 213 265 320 261 307 333 338 344 Mobile phone avg. price, % y/y % 1.1% 24.7% 20.6% (18.5%) 18.0% 8.3% 1.7% 1.7% Mobile phone gross revenue - BRLm 254 618 491 400 473 490 501 511 Mobile phone gross revenue, % y/y % 129.2% 143.1% (20.6%) (18.4%) 18.1% 3.7% 2.1% 2.1%

Consolidated results Revenue - BRLm 1,843 1,746 1,914 1,951 1,923 2,073 2,195 2,267 Revenue, % y/y % (20.9%) (5.3%) 9.6% 2.0% (1.4%) 7.8% 5.9% 3.3% EBITDA (adjusted) - BRLm 8 152 126 121 137 161 172 177 EBITDA, % y/y % (93.4%) nm (16.8%) (4.5%) 13.4% 18.0% 6.5% 3.3% EBITDA margin % 0.4% 8.7% 6.6% 6.2% 7.1% 7.8% 7.8% 7.8% EBITDA margin, bps y/y bps (454) 828 (210) (42) 93 68 5 (0) Net profit (reported) - BRLm (80) 9 (48) (0) 12 50 47 45 Net profit (reported), % y/y % nm nm nm (99.0%) nm 314.6% (6.1%) (3.0%) Source: Company data, Bradesco BBI estimates

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Following a challenging period during which Positivo was significantly impacted by the recession in Brazil, we expect better macro conditions to fuel growth going forward.

Retail PC sales. We expect growth in retail PC sales to start to accelerate in 2020 as economic conditions become more favorable for consumers. After a 18% decline in FY19 and considering that the market should start catching up, we expect retail PC sales to grow 2.7% in FY20, and maintain above-GDP growth rates as macro conditions hold steady at a better level.

PC sales to public institutions. While PC sales to public institutions are a volatile market due to dependence on the opening of public bidding, we assume pent-up demand should result in more growth opportunities for Positivo. Thus, we believe PC sales to public institutions should grow 15% in FY20, as public biddings are expected to pick up following a slow 2H19.

Corporate PC sales. The better macro outlook should lead to greater business confidence in Brazil, allowing for IT investments by the corporate market to resume. Thus, we believe corporate PC sales growth of 1.3% in FY20 should represent a turning point following a challenging FY19 for the segment. Growth in the corporate segment should accelerate to above-GDP rates from FY21 onwards, provided macro conditions remain healthy.

Notebook & desktop prices. Prices for PCs can vary largely based on the devices’ configurations and segment sales mix, as well as FX fluctuations. That said, we conservatively expect average USD prices for PCs to remain broadly stable in the coming years.

Mobile phones. Considering the maturity and concentration of the smartphone market in Brazil, we expect timid growth going forward for Positivo’s smartphone offerings as they become more linked to replacement of devices. As for feature phones, we expect a 10% decline in FY20 as consumers trade out of feature phones, with basically flat growth after that.

Opex. We expect cost of raw materials as a % of revenue to remain at a stable level as Positivo passes on FX volatility to prices. In addition, Positivo hedges its USD exposure in costs as a means to mitigate volatility. As for selling expenses, we see variable expenses broadly stable going forward, while Positivo should be able to capture some operating leverage on G&A.

EBITDA. Positivo should be able to capture slightly better EBITDA margins going forward, as a result of improving sales growth, opex discipline, and the company’s minimum margin policy.

Outperform rating for Positivo, with a R$9.50 TP Setting a R$9.50 TP for YE20, with an Outperform rating. Considering our expectations for Positivo, we set a DCF-based YE20 TP of R$9.50 for POSI3 shares, implying 25% upside from current levels and justifying our Outperform rating on the stock. To arrive at this target price, we use a 15.6% cost of equity, which includes an illiquidity premium considering the stock’s relatively low trading volume (3-mo. ADTV of ~US$1.1mn).

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Figure 18: Derivation of Target Price for POSI3 Shares Fiscal year ending December 31 Constant Unit FY21e FY22e FY23e FY24e FY25e FY26e FY27e FY28e FY29e FY30e FCFE buildup EBITDA (adjusted) - BRLm 172 177 186 199 205 209 218 233 240 247 Cash financial results - BRLm (63) (72) (75) (77) (77) (78) (79) (80) (81) (82) Income tax paid - BRLm (23) (22) (24) (28) (30) (31) (33) (37) (39) (41) Change in net operating assets - BRLm (35) (20) (29) (38) (22) (19) (30) (44) (28) (24) Other op. cash flow adjustments - BRLm ------Cash from operating activities BRLm 51 63 57 56 76 82 76 72 92 100 Net capex - BRLm (24) (25) (26) (28) (29) (29) (31) (33) (34) (34) Debt issuance/(repayment) - BRLm ------Other FCFE adjustments - BRLm (12) (12) (13) (14) ------Free cash flow to equity BRLm 15 26 18 15 47 53 46 39 59 66

Cost of equity derivation Risk free rate (USD) 2.5% % Country risk 220 bps Market risk premium 4.0% % Beta 1.5 Liquidity premium 2.5% % Cost of equity (USD) 13.4% % Inflation differential 2.0% % Cost of equity (BRL) 15.6% % Perpetuity grow th rate 6.1% %

Price target derivation FY20e Cash flow NPV 156 BRLm Terminal value NPV 172 BRLm FCFE NPV 328 BRLm (+) cash and equivalents 466 BRLm (+) associates/JVs (@ 0.4x P/B) 20 BRLm (-) minority buyout (@ 0.4x P/B) 4 BRLm Equity value 818 BRLm Shares outstanding, EOP 86 # m POSI3 target price 9.50 BRL Source: Company data, Bradesco BBI estimates

Illiquidity premium to the cost of equity. Currently, Positivo has a ~30% free float and a ~US$150mn market cap, which could be classified as a small cap company on Bovespa, with a relatively low ADTV. Therefore, we believe this warrants an illiquidity premium to POSI3 shares’ cost of equity. The rationale for the discount was based on Aswath Damodaran’s theory on “The Cost of Illiquidity”, where he lists solutions for valuation models that are pricing illiquid assets.

Our analysis pointed to a ~2.5% illiquidity premium. In order to gauge the illiquidity factor for our analysis, we calculated the average relation between the MSCI BZ and MSCI Small Cap BZ indexes’ returns, respectively, with PE/VC (LatAm) and PE/VC (EM & LatAm). Then, we calculated a simple average of the % ratio between the indexes mentioned above, and found a ~2.5% illiquidity premium which we applied to our cost of equity, in order to discount Positivo’s cash flows for the valuation of its shares.

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Figure 19: Computer Hardware Comp. Table Mkt cap ADTV EV/Sales Revenue EV/EBITDA EBITDA EV/OpCF OpCF P/E EPS '18-21e '18-21e '18-21e '18-21e USDm USDm '19e '20e CAGR '19e '20e CAGR '19e '20e CAGR '19e '20e CAGR Positivo 156 1.3 0.5 0.4 7.6% 6.1 5.3 25.7% 7.0 6.1 28.1% 20.5 13.2 113.8% Dell 36,464 124.0 0.9 0.9 NA 7.5 7.6 NA 8.9 8.8 NA 8.1 7.4 NA HP 29,327 262.2 0.5 0.5 0.2% 6.0 6.2 0.6% 6.9 7.1 (0.2%) 8.8 8.7 5.3% Lenovo 8,211 22.2 0.2 0.2 2.0% 4.3 2.7 14.0% 5.7 3.0 20.1% 11.3 9.9 14.9% Inspur 2,231 38.7 2.1 1.7 21.9% 14.3 10.5 32.7% 24.2 15.9 58.1% 20.0 15.3 28.4% Acer 1,839 4.5 0.2 0.1 1.2% 7.5 6.3 8.4% 7.8 6.5 9.0% 17.1 15.4 7.1% Asus 5,672 11.0 0.3 0.3 (0.2%) 9.9 8.2 0.4% 14.5 10.3 1.9% 14.7 13.2 49.4% Quanta 7,785 19.4 0.3 0.3 2.6% 10.9 9.9 13.2% 16.1 13.6 38.7% 14.8 13.3 8.9% Computer Hardware 91,685 483.3 0.4 0.4 2.0% 7.5 7.0 13.2% 8.3 8.0 20.1% 14.7 13.2 14.9% Source: Company data, Bradesco BBI estimates, Bloomberg

Positivo’s multiples look attractive vs. global peers. When comparing Positivo’s multiples to its global hardware peers, we see it trading at encouraging levels, even after the stock’s strong performance YTD (~+240%). While we acknowledge part of this difference can be attributed to the company’s smaller size and lower liquidity, we believe the discount is too large as the outlook for Positivo improves going forward.

Investment Risks Potential changes to the Brazilian IT Law

Brazil’s tax benefits to the IT sector are under the WTO’s scrutiny. The WTO has filed an appeal alleging unfair competition caused by the IPI benefit for IT goods in Brazil, and gave the Brazilian government until the end of 2019 to make the necessary regulatory changes, otherwise other countries would be allowed to implement countermeasures against Brazil.

Figure 20: Positivo – Current Tax Benefits Taxes Without Tax Benefit With Tax Benefit Term Cellphones Computers Cellphones Computers IPI - Curitiba 3% 0.75% 2029 IPI - Manaus 15% No 0% 0% (ZF) deadline IPI - Curitiba No 12/18% 0% IPI - Manaus deadline (ZF) Avg reduction Avg reduction No II - Manaus (ZF) Full tax Full tax 40% 40% deadline Source: Company data, Bradesco BBI, Planalto do Governo

The solution being discussed by the govt. is the 4.805/2019 bill (PL) that would calculate a tax credit based on gross revenue in order to be used on Federal taxes, which would have the same effects from the IPI tax benefit. The tax credit is conditioned to a minimum 4% investment in R&D and each project’s approval at the Ministry of Science, Technology, Innovation and Communication. For now, the bill project would generate a 14.84% credit based on gross revenue until 2025, then 13.84% until 2027 and 12.85% until 2030 with the extinction of the benefit. However, a new development has shown that the tax credits would only be given in each quarter and would be based on R&D investments. Due to the urgency of the matter and the Congress’ commitment on delivering the bill until the end of 2019, the new proposed PL could be voted on November 27th and then pass through the Senate and the Federal government. All in all, we believe the development on a R&D basis credit

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shouldn’t have any significant changes in effect as the Government’s goal is to maintain the same levels of benefits.

Figure 21: Positivo’s Industrial Plants’ production capacity Industrial plants capacity CWB Manaus ZF Total PC's (%) 20% 80% 100% Mobile phones (%) 0% 100% 100% Source: Company data, Bradesco BBI

Figure 22: Computer & Technology Goods Law – Possible Scenario Taxes After PL 4.805 / 2019 Term Mobile phones Computers IPI - Curitiba 15% IPI - Manaus (ZF) 0% No deadline ICMS - Curitiba 0% No deadline ICMS - Manaus (ZF) II - Manaus (ZF) Avg reduction 40% No deadline 14.84% 2024 General Tax Credit based on 13.84% 2026 gross revenue 12.85% 2029 Source: Company data, Bradesco BBI, Planalto do Governo

Eventual negative effects could be reduced if the company decides to put on action a plan to transfer the entire production to their plant on Zona Franca de Manaus, where the benefit has no deadline and wasn’t targeted by WTO. All in all, the exposure to sectorial benefits can be a potential risk to Positivo, but would also impact competing manufacturers.

Positivo’s results are exposed to seasonality and volatility. The company has been focusing on delivering more consistent results, however even with a solid market share position, it relies on macro conditions. As we stated before, Positivo’s core business’ sales are highly correlated with GDP, thus, for now the company should also follow the positive expectations regarding Brazil’s economy. However, this strong correlation is also a potential risk for the company due to potential downswings in the Brazilian economy, which implies that if the economy starts to shrink again Positivo will also follow that trend.

Figure 23: Positivo – Volatility Map FY14 FY15 FY16 FY17 FY18 FY19e Retail PC sales 1,056 581 456 505 609 500 Public institutions PC sales 435 269 155 191 207 167 Corporate PC sales 144 119 76 96 124 102 Smartphone sales 362 532 1,501 1,023 804 849 Feature phone sales 165 664 828 512 734 690 Total Net Revenue 2,332 1,843 1,746 1,914 1,951 1,923 Source: Company data, Bradesco BBI

COGS exposure to dollar. Considering that a large portion of Positivo’s raw materials are exposed to the USD, the company has a high level of exposure to FX volatility. Historically, when macro conditions are stable the company has managed to deliver good control of FX using hedge tools. However, periods of currency volatility make it more difficult for Positivo to implement its hedging strategy and adjust product prices in a timely manner.

15 COMPANY REPORT Bradesco BBI Equity Research 27 November 2019

Positivo at a glance

Strong geographic footprint in Brazil. The company has two manufacturing plants: one in Manaus in Amazonia state, and one in Curitiba in Paraná state. Amazonia has advantageous tax benefits for industrial plants and Paraná is where the company’s headquarters are located. Meanwhile, its server operation, Accept, is located in Bahia state. Positivo has more than 250 technical assistance offices and around 12k outlets spread throughout the Brazilian retail market.

Figure 24: Manufacturing footprint

Source: Company data, Bradesco BBI

To keep innovating and supporting its core business, Positivo has been expanding into new business opportunities. As Positivo’s core business, selling computers and cell phones, has strong seasonal and macro effects, the company has been expanding its reach into new revenue opportunities. To maintain its tax benefits, Positivo is required to invest 5% of its gross revenue in R&D, part of which it can allocate in startups through the Positivo Tecnologia FIP fund, which is a positive trend in terms of innovation. Recently, it has invested in two agritech startups, Agrosmart and @tech, showing a general interest in innovation, not only in technology itself, but also in applications for traditional markets. Positivo’s strategy to expand its reach into other markets can be exemplified by the acquisition of Accept and the launch of Positivo as a Service (PaaS), which are already solidified businesses.

Positivo has recently launched its newest project, Positivo Casa Inteligente, a range of IoT products for smart homes. The project had a very successful start with large sales contracts, and has also shown strength with products being sold through the Amazon website, having closed a deal to sell Positivo’s IoT products in combination with Amazon’s intelligent virtual assistant, Alexa. Management remains uncertain about sell-out figures, but has already stated that even with target consumers being in income classes “C” and

16 COMPANY REPORT Bradesco BBI Equity Research 27 November 2019

“D”, the products have also reached classes “A” and “B”, representing greater potential than expected. If Positivo Casa Inteligente’s products accompany the smart homes market’s strong growth trend, while being broadly accepted by consumers, the project could have great revenue potential for the company.

According to analysis by A.T. Kearney, the global market for smart homes has large potential, and is currently worth ~US$15bn, potentially reaching US$405bn by 2030, and representing a 25% CAGR 2015-2030. Positivo expects to solidify its position in the security, automation, and connectivity market, which could bring CAGRs of 28%, 30%, and 27%, respectively, also according to A.T. Kearney’s analysis. All in all, while we believe it is still too soon to gauge the revenue potential, and thus Positivo’s new initiative is still not included in our model’s assumptions, it could represent upside potential to our R$xxx TP.

Figure 25: Smart homes – Global market size by application (2015 – 2030) CAGR by application (2015 - 2030) Media entertainment 27% Health and wellness management 31% Convenience and Comfort 22% Energy and Resource management 30% Security Management 28% Source: A.T. Kearney analysis

Figure 26: Smart homes – Global market size by application (2015 – 2030)

Global Market 405 CAGR: 25% 32.7

67.1

263 18.8

48.3 188.4

130.9 3.4 0.9 55.7 1.1 55 8 31.1 14 9 22.8 1.1 3.5 61.5 1.6 9.5 42 2015 2020e 2025e 2030e Source: A.T. Kearney analysis

17 COMPANY REPORT Bradesco BBI Equity Research 27 November 2019

Positivo’s board structure. The company has a large board structure, reaching a total of nine members, two of which are independent – including the chairman. The part of the board composed of Positivo’s insiders also makes up the majority of big stockholders, including the CEO, Helio Rotenberg, who holds more than 15% of the company’s shares.

Figure 27: Positivo’s Board Market Name Previous Professional Experience Board Time Experience

Alexandre Silveira Dias • Partner & Investment Committee Member - Victoria Capital Partners 26 years 1 year Chairman of the Board & • CEO - Anhanguera. Google in Brazil, DIRECTV in Argentina, Independent Board Member Uruguay & Peru

Pedro Santos Ripper • Director - DiamondCluster in Barcelona, Promon Tecnologia • President - Cisco in Brazil 23 years 2 years Independent Board Member • VP - Oi SA

Carlos Augusto Moreira • CFO - HJ Heinz, Positivo Group 19 years 1 year Advisory Board Member • VP - Positivo Tecnologia

Marcel Martins Malczewski • Co-founder - Bematech 33 years 1 year Advisory Board Member • Chairman of Board - Copel S.A.

Helio Bruck Rotenberg • Positivo Group since 1988 • Computer’s Science Course Director - Positivo Colleges 36 years 13 years Board Member • Led the creation of Positivo Tecnologia in 1989

Giem Raduy Guimaraes • CEO - Posigraf 25 years 6 years Board Member • Board Member at Positivo Group since 2013

Rodrigo Cesar Formighieri • Positivo Group, Posigraf, Positivo Tecnologia (2003 - 2007) 16 years 2 years Board Member • Partner - Unique Investimentos, Oblivion Vapery

Samuel Ferrari Lago • Positivo Group (1983-2007) 36 years 12 years Board Member

Rafael Moia Vargas • Grupo Positivo (2 years) 7 years 1 year Board Member • Partner - Libero Adminstração de Bens

Source: Company data, Bradesco BBI

18 COMPANY REPORT Bradesco BBI Equity Research 27 November 2019

Positivo’s management structure. Helio Rotenberg is Positivo’s CEO, having been at the company for over 30 years. He was also the leading director in the creation of Positivo Tecnologia. Meanwhile, Paulo Junqueira Filho has more than 25 years of market experience, having already led Unicasa Móveis to its IPO, and has been Positivo’s CFO and Director of Investor Relations (DIR) for a year. The company has one VP for each segment, and, in our view, Positivo has an experienced management team that can focus on innovation and financial stabilization.

Figure 28: Positivo’s Management Market Company Executive Directors Previous Professional Experience Experience Time

Helio Bruck Rotenberg • Positivo Group since 1988 • Computer’s Science Course Director - Positivo Colleges 36 years 30 years CEO • Led the creation of Positivo Tecnologia in 1989 Paulo Junqueira Filho • CFO – Inframerica • CFO & DRI – Unicasa Móveis (led the company’s IPO) 25 years 1 year CFO & DIR • CAO LatAm – CNH Industrial • DRI – Imcopa S.A. Marielva Andrade Dias • Civil Engineer responsible for several constructions in Paraná 36 years 27 years VP - Govern & Strategic • Founder – Andrade Dias Construção Civil Ltda. Accounts

Norberto Maraschin Filho • Manager – Booz Allen Hamilton (2001 – 2009) VP - Consumer and Mobility • Strategy and New Business – Positivo Tecnologia (2009) 21 years 10 years Business • CEO – Positivo BGH, Argentina (2011 – 2014)

Mauricio Roorda • Several Positions – Shell, Unibanco, Tim, HSBC • New Business Director – Positivo Tecnologia 35 years 8 years VP - Operations • VP – Products & Marketing Alvaro Luis Cruz • Marketing Director – Qmágico (2013 – 2016) • Country Manager – Mind Group International (2019 – 2012) 20 years 2 years VP - Educational Technology • CEO – Lego Education Brazil (2007 – 2009) • COO – Lego ZOOM Int. Denmark / Brazil (2007 – 2009) Source: Company data, Bradesco BBI

19 COMPANY REPORT Bradesco BBI Equity Research 27 November 2019

Positivo’s ownership structure. In our view, the ownership structure has its pros and cons. While it is more than 70% concentrated in the partners, this shows dedication to the company’s goals, and also opens room for Positivo to try another follow-on offering. An equity offering could be extremely favorable to the company’s strategy for innovation, a diversified portfolio, widening acquisition opportunities, and to ensure better control of cash flow generation.

Figure 29: Ownership Structure

1.6%

Controlling Shareholders Stocks in Treasury 70.7% 27.7% Free-Float

Source: Company data, Bradesco BBI

Figure 30: Controlling Partners Breakdown – Individuals & Families

13.0% 15.3%

Rotenberg - Helio Bruck Libero Vargas Cixares Ferrari Lago Guimaraes 14.1% 14.1% Formighieri

14.1%

Source: Company data, Bradesco BBI

20 COMPANY REPORT Bradesco BBI Equity Research 27 November 2019

Key Figures for Positivo

Figure 31: Income Statement Income Statement (in BRL mn) FY18 FY19e FY20e FY21e FY22e Revenue 1,951 1,923 2,073 2,195 2,267 Cash COGS (1,430) (1,389) (1,485) (1,572) (1,624) Cash gross profit 521 535 588 623 643 Cash gross margin % 26.7% 27.8% 28.4% 28.4% 28.4% Cash S,G&A (406) (396) (427) (451) (466) Other op. income/(expense) 6 (2) - - - EBITDA (adjusted) 121 137 161 172 177 EBITDA margin % 6.2% 7.1% 7.8% 7.8% 7.8% Depreciation and amortization (33) (39) (35) (33) (31) EBIT (adjusted) 88 98 126 139 147 EBIT margin % 4.5% 5.1% 6.1% 6.3% 6.5% Net exceptionals (10) (3) - - - Income from associates/JVs (3) (7) - - - Net interest (47) (57) (28) (44) (53) FX gain/(loss) (8) 12 - - - Other financial results (14) (20) (18) (19) (19) Pre-tax profit 6 21 80 76 74 Income tax expense (11) (3) (24) (23) (22) Effective tax rate % 104.5% 17.1% 30.6% 30.2% 30.0% Minority interests - (5) (5) (6) (6) Abnormal items - - - - - Net profit (reported) (5) 13 51 48 46 Net margin % (0.2%) 0.7% 2.4% 2.2% 2.0% Source: Company data, Bradesco BBI estimates

Figure 32: Balance Sheet Balance Sheet (in BRL mn) FY18 FY19e FY20e FY21e FY22e Cash and equivalents 393 449 466 468 482 Accounts receivable 235 227 244 259 267 Inventories 535 532 567 602 622 Net fixed assets 93 125 113 104 99 Goodwill 37 37 37 37 37 Other assets 496 481 513 542 558 Total assets 1,790 1,851 1,939 2,012 2,065

Accounts payable 449 447 476 506 523 Gross debt 610 661 661 661 661 Other liabilities 220 215 240 254 261 Minority interest 1 6 11 17 23 Shareholders equity 509 522 550 574 597 Total liabilities and equity 1,790 1,851 1,939 2,012 2,065 Source: Company data, Bradesco BBI estimates

21 COMPANY REPORT Bradesco BBI Equity Research 27 November 2019

Figure 33: Cash Flow Statements Cash Flow statement (in BRL mn) FY18 FY19e FY20e FY21e FY22e EBITDA (adjusted) 121 137 161 172 177 Cash financial results (99) (69) (46) (63) (72) Income tax paid - (3) (24) (23) (22) Change in net operating assets (84) 29 (39) (35) (20) Other op. cash flow adjustments (2) (7) - - - Cash from operating activities (65) 87 52 51 63 Net capex (19) (19) (23) (24) (25) Free cash flow (83) 68 29 26 38 Net change in other investments - - - - - Net (acquisitions)/disposals 8 - (10) (12) (12) Other investing cash flows - - - - - Cash from financing activities 80 (12) (3) (12) (12) Total cash flows 5 56 16 2 14 Source: Company data, Bradesco BBI estimates

Figure 34: Key Indicators Leverage and return calculations FY18 FY19e FY20e FY21e FY22e Net leverage Short-term debt 520 517 517 517 517 Long-term debt 91 145 145 145 145 Gross debt 610 661 661 661 661 Cash and equivalents 393 449 466 468 482 Net debt 217 212 196 193 180 LTM EBITDA 121 137 161 172 177 Net debt-to-EBITDA 1.8x 1.6x 1.2x 1.1x 1.0x

ROIC EBIT (adjusted) 88 98 126 139 147 Annualization factor 1 1 1 1 1 Annualized EBIT (adjusted) 88 98 126 139 147 Statutory tax rate 34.0% 34.0% 34.0% 34.0% 34.0% Annualized NOPAT 58 64 83 92 97 Operating invested capital, avg. 635 686 706 733 754 ROIC 13.8% 14.2% 17.8% 19.0% 19.4%

ROE Net profit (adjusted) 2 15 51 48 46 Annualization factor 1 1 1 1 1 Annualized net profit 2 15 51 48 46 Shareholders equity, avg. 508 515 536 562 585 ROE 0.4% 2.9% 9.4% 8.5% 7.9% Source: Company data, Bradesco BBI estimates

22 COMPANY REPORT Bradesco BBI Equity Research 27 November 2019

Analyst Certification

Each analyst responsible for the preparation and content of this report hereby certifies, pursuant to SEC Regulation AC and applicable laws and regulations of other jurisdictions, that:

(i) the views expressed herein accurately and exclusively reflect his or her personal views and opinions about the subject company(ies) and its or their securities; (ii) no part of his or her compensation was, is, or will be paid directly or indirectly, related to the specific recommendation or views expressed by that analyst in this report; and pursuant to Brazilian securities exchange commission (Comissão de Valores Mobiliários – CVM) Instruction 598/18:

(i) the recommendations indicated in this report solely and exclusively reflect his or her personal opinions, and were prepared independently and autonomously, including in relation to Bradesco Corretora and its affiliates; (ii) his or her compensation is based on the profitability of Bradesco Corretora and its affiliates, which includes investment banking revenues;

Company disclosures pursuant to Brazilian securities exchange commission (Comissão de Valores Mobiliários – CVM) Instruction 589/18:

(i) Banco Bradesco S.A. owns indirectly 5% or more, regading its subisidiaries, of equity securities issued by Cielo S.A. and Fleury S.A.. BRADESPAR S.A., whose controlling group is comprised of the Same shareholders which control Banco Bradesco S.A., owns 5% or more of equity securities issued by VALE S.A..

(ii) Ágora, Bradesco Corretora, Bradesco BBI and Bradesco Group companies have relevant financial and commercial interests in relation to the subject company(ies) or the subject security(ies);

(iii) Bradesco BBI is participating as Coordinator in the public offering distribution of JSL S.A.

(iv) Bradesco BBI participated as Coordinator in the public offering of equity and/or debt securities or/ and provided any other type of service for the following companies within the past 12 months: AES Tiete Energia S.A., Atacadão S.A., B3 S.A. - Brasil, Bolsa, Balcão., Banco BTG Pactual S.A., Banco Inter S.A.; BRF S.A., Cesp - Companhia Energética De São Paulo, Cielo S.A., Companhia Brasileira de Distribuição, Companhia De Locação Das Américas - Unidas, CPFL Energia S.A., Eletropaulo Metropolitana Eletricidade De São Paulo S.A., Energisa S.A., Engie Brasil Energia S.A., Estacio Participações S.A., Gol Linhas Aéreas Inteligentes S.A., Grupo SBF S.A., Guararapes Confecções S.A.,Hapvida Participações e Investimentos S.A., Helbor Empreendimentos S.A., Instituto Hermes Pardini S.A., Iochpe Maxion S.A., IRB Brasil Resseguros S/A, JHSF Participações S.A., JSL S.A., Kroton Educacional S.A., Light Serviços De Eletricidade S.A., LPS Brasil - Consultoria de Imóveis S.A., Magazine Luiza S.A., Minerva S.A., Movida Participações S.A., Multiplan Empreendimento Imobiliário S.A., Natura Cosméticos S.A., Notre Dame Intermédica Participações S.A., Petróleo Brasileiro S.A., Raia Drogasil S.A., Randon S.A. Implementos e Participações., Rumo S.A., São Carlos Empreendimentos e Participações S.A., Suzano S.A., Trisul S.A. and Usinas Siderurgicas de Minas gerais S.A, - Usiminas.

(v) Ágora and/or Bradesco Corretora participated in the public offering of equity and/or debentures for the following companies within the past 12 months: Banco do Brasil S.A., Banco Inter S.A., BR Properties S.A., Camil Alimentos S.A., CSHG Logística - Fundo De Investimento Imobiliário - FII, CSHG Real Estate - Fundo De Investimento Imobiliário - FII, Companhia de Sanemanto Básico do Estado de São Paulo - SABESP., Companhia De Transmissão De Energia Elétrica Paulista (CTEEP), Cyrela Brazil Realty S.A. Empreendimentos E Participações, Direcional Engenharia S.A., Engie Brasil Energia S.A., Grupo SBF S.A., Hapvida Participações e Investimentos S.A., Iguatemi Empresa de Shopping Centers S.A., JBS S.A., Klabin S.A., Light Serviços de Eletricidade S.A., Linx S.A., Malls Brasil Plural Fundo de Investimento Imobiliário, Marfrig Global Foods S.A., MRV Parcerias e Participações S.A., Notre Dame Intermédica Participações S.A., Petróleo Brasileiro S.A., Petrobras Distribuidora S.A., Raízen Energia S.A., São Martinho S.A., SLC Agrícola S.A., Transmissora Aliança De Energia Elétrica S.A. - TAESA, XP Malls Fdo Inv Imob FII and XP Log Fdo Inv Imob - FII.

(vi) Bradesco Corretora receives compensation for market making in the equity securities of Alpargatas S.A. (ALPA4). Fomento Economico Mexicano FEMSA (FMXB34), Helbor Empreendimentos S.A. (HBOR3) and Terra Santa Agro S.A. (TESA3). Important Disclosures Company-Specific regulatory disclosures

Bradesco Corretora and/or its affiliates beneficially own one or more of any class of common quity securities of the subject company(ies). The position 1 reflects information available as of the business day prior to the date of this report. Bradesco Corretora and/or its affiliates have managed or co-managed a public or Rule 144A offering of the subject company's(ies') securities in the 2 twelve months preceeding the date of this report

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Bradesco Corretora research ratings distribution

Rating Definition Coverage¹ BR²

Outperform Expected to outperform the analyst coverage list 43% 22%

Neutral Expected to perform in the range of the analyst coverage list 52% 19%

Underperform Expected to underperform the analyst coverage list 5% 9%

Under Review This indicates that both the target price and the rating are currently being revised. 0%

Restricted The analyst cannot express his/her views on the company. 0% (1) Percentage of companies under coverage globally within this rating category. As of 27-Nov-19 Bradesco Corretora had 214 companies under coverage globally. (2) Percentage of companies within this rating category for which [investment banking] services were provided within the past 12 months. Bradesco Corretora ratings Bradesco Corretora ratings are constantly revised and any temporary inconsistencies between the upside potential that gave rise to any such rating and the upside potential in connection with the target price are at all times deliberate. The official rating shall prevail.

Any differences between the rating and the target price may occur especially due to the analyst’s expectations to the effect that any short/medium term factors that cannot be priced-in yet might lead to inconsistencies between Bradesco Corretora valuation and the stock behavior. The factors Bradesco Corretora considered include, but are not limited to: Any expectations in connection with quarterly results, market conditions, ownership issues and any expectations involving mergers and acquisitions. The ratings reflect only the analyst’s expectation on the future performance of the relevant stock. A “Outperform” rating does not necessarily represent that the analyst approves of the company and its management whilst a “Underperform” rating does not necessarily means that the analyst has a negative view on the company. Within Bradesco Corretora coverage universe there are sound companies, with good fundamentals as per the market consensus, and fair priced stock, and would not be Bradesco Corretora investment pick. Price target and rating history Price target, rating history chart(s), valuation/method used to determine price target, and our policy for managing conflicts of interest in connection with investment research are available upon request. You may obtain this information by contacting your representative or by sending an email to [email protected].

23 COMPANY REPORT Bradesco BBI Equity Research 27 November 2019

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