NEMAK a Less Challenging Environment Ahead @Analisis Fundam

Equity Research Me xico Company Note September 30, 2020 NEMAK www.banorte.com A less challenging environment ahead @analisis_fundam ▪ After the impact of COVID-19, Nemak’s outlook is poised for Consumer and Telecoms recovery. Meanwhile, the cost and expense reduction strategy implemented should be reflected into better margins Valentín Mendoza Senior Strategist, Equity ▪ Its spin-off from Alfa conglomerate will provide greater independence [email protected] for strategic decision-making. Likewise, when eventually only one Juan Barbier, CFA series of shares remains listed, marketability should improve Analyst [email protected] ▪ Through a discounted cash flow valuation model, we raised our PT2020 to MXN 7.60 vs. the MXN 7.00 previously, representing a 4.8x HOLD FV/EBITDA 2021E multiple. We reiterate our HOLD rating Current Price $6.78 PT 2020 $7.60 Dividend The worst is over now. After the strong impact on Nemak's results from the Dividend Yield (%) OEMs plants closure due to the COVID-19 pandemic, IHS Automotive has Upside Potential 12.1% Max – Min LTM ($) 9.54 – 3.25 revised upwards its vehicle production projections for 2H20 and 2021. This is Market Cap (US$m) 924.2 explained by a faster recovery in China and low inventory levels at the Detroit Shares Outstanding (m) 3,076.6 Float 19.24% 3, yet mainly at General Motors, after production ceased in 2Q20. Thus, IHS Daily Turnover ($m) 10.0 now estimates global vehicle production to sequentially recover to -5% y/y in Valuation metrics TTM FV/EBITDA 7.8x 3Q20 (vs. -43% in the previous quarter), while it is expected to recover 13% in P/E N.A. 2021 and 6% more in 2022. Consequently, Nemak's volumes should rebound significantly, while its US$125 million q/q savings (60% recurrent) –which Relative performance to Mexbol lowered the break-even point from 60% to 40%-, would support a significant LTM recovery in margins. Simultaneously, Nemak’s spin-off from Alfa -and with it, 20% 10% the independent listing of ‘Nemak Holding’ on the Mexican Stock Exchange-, 0% -10% would provide greater independence for decision making, allowing it to better -20% -30% leverage arising opportunities in the electric vehicle components and structural -40% applications segments. With this in mind, we have adjusted our estimates and -50% -60%Sep-19 Dec-19 Mar-20 Jun-20 Sep-20 through a discounted cash flow (DCF) valuation model, we raised our PT2020 -70% to MXN 7.60, representing a 4.8x FV/EBITDA 2021E multiple, though we MEXBOL NEMAKA reiterate our HOLD rating. Financial Statements Valuation and financial metrics MXN, million 2018 2019 2020E 2021E 2018 2019 2020E 2021E Revenues 90,327 77,363 66,373 74,864 EV/EBITDA 3. 3x 3.7x 7.1x 4.6x Operating Income 7,823 4,964 -69 3,203 P/E 6. 1x 8.4x -6.7x 31.0x EBITDA 14,105 11,958 7,396 10,849 P/Book 0. 6x 0.6x 0.6x 0.6x EBITDA Margin 15.6% 15.5% 11.1% 14.5% Net Income 3,464 2,493 -3,114 675 ROE 9.3% 7.1% -8.7% 1.8% Net Margin 3.8% 3.2% -4.7% 0.9% ROA 3.7% 2.8% -2.9% 0.6% EBITDA/ Interest expenses 7. 5x 7.6x 3.9x 4.6x Total Assets 93,258 88,744 109,232 109,592 Net Debt/EBITDA 1. 8x 1.9x 4.2x 2.7x Cash 3,555 5,883 16,029 16,304 Debt/Equity 0. 8x 0.8x 1.3x 1.2x Total Liabilities 57,154 54,800 71,938 71,943 This document is provided for the reader’s convenience Debt 29,187 28,605 47,348 45,288 only. The translation from the original Spanish version was Common Equity 36,104 33,943 37,295 37,649 made by Banorte’s staff. Discrepancies may possibly arise between the original document in Spanish and its English Source: Banorte with data from MSE 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 entorno menos adverso hacia adelante” was released on September 29, 2020. 1 Document for distribution among public NEMAK – Financial Statements Revenue & EBITDA Margin MXN, million MXN, million Year 2018 2019 2020E 2021E CAGR 100,000 16.0% 15.6% 15.5% 18% Net Revenue 90,327 77,363 66,373 74,864 -6.1% 14.5% 16% Cost of goods sold 76,878 66,276 60,103 65,790 -5.1% 80,000 14% Gross profit 13,449 11,087 6,270 9,074 -12.3% 11.1% 12% General expenses 5,746 5,328 5,576 5,872 0.7% 60,000 10% Operating Income 7,823 4,964 (69) 3,203 -25.7% 8% Operating Margin 8.7% 6.4% -0.1% 4.3% -21.0% 40,000 Depreciation 6,166 5,788 7,460 7,646 7.4% 6% EBITDA 14,105 11,958 7,396 10,849 -8.4% 20,000 4% EBITDA Margin 15.6% 15.5% 11.1% 14.5% 2% Interes income (expense) net (2,220) (1,368) (3,207) (2,160) -0.9% 0 0% Interest expense 1,883 1,583 1,889 2,334 7.4% 2017 2018 2019 2020e 2021e Interest income 93 85 117 273 43.0% Other income (expenses) 35 163 (5) (6) -155.6% Revenue EBITDA Margin Exchange Income (loss) (465) (33) (1,430) (92) -41.6% Unconsolidated subsidiaries 136 41 (46) (78) -183.0% Income before taxes 5,739 3,638 (3,322) 965 -44.8% Income taxes 2,276 1,145 (208) 289 -49.7% Discontinued operations Net Income & ROE Consolidated Net Income 3,464 2,493 (3,114) 675 -42.0% MXN, million Minorities Net Income 3,464 2,493 (3,114) 675 -42.0% Net margin 3.8% 3.2% -4.7% 0.9% 5,000 15.0% EPS 1.125 0.810 (1.012) 0.220 -42.0% 9.6% 7.1% 4,000 9.3% 10.0% Balance Sheet (Million pesos) 3,000 Total Current Assets 27,405 25,403 36,168 39,202 12.7% 2,000 5.0% Cash & Short Term Investments 3,555 5,883 16,029 16,304 66.1% 1,000 1.8% Long Term Assets 65,853 63,341 73,065 70,390 2.2% 0 0.0% Property, Plant & Equipment (Net) 51,629 48,140 54,989 52,315 0.4% (1,000) 2017 2018 2019 2020e 2021e Intangible Assets (Net) 5,287 5,647 6,582 6,582 7.6% (2,000) Total Assets 93,258 88,744 109,232 109,592 5.5% -5.0% (3,000) Current Liabilities 26,544 25,332 31,673 33,240 7.8% -8.7% Short Term Debt 2,834 2,684 11,490 10,991 57.1% (4,000) -10.0% Accounts Payable 23,258 21,765 18,730 20,511 -4.1% Long Term Liabilities 30,610 29,468 40,264 38,703 8.1% Net Income ROE Long Term Debt 26,353 25,921 35,858 34,297 9.2% Total Liabilities 57,154 54,800 71,938 71,943 8.0% Common Stock 36,104 33,943 37,295 37,649 1.4% Noncontrolling Interest Total Equity 36,104 33,943 37,295 37,649 1.4% Net Debt & Net debt to EBITDA ratio Liabilities & Equity 93,258 88,744 109,232 109,592 5.5% MXN, million Net Debt 25,632 22,722 31,319 28,984 4.2% Cash Flow 2018 2019 2020E 2021E 4.2x 35,000 4.5x Cash Flow from Operating Activities 12,942 11,833 1,733 7,773 30,000 4.0x Cash Flow from Investing Activities (8,222) (4,673) (5,267) (5,716) 2.7x 3.5x Cash Flow from Financing Activities (4,647) (4,629) 12,092 (2,656) 25,000 3.0x FX differences in cash & equivalents (275) (202) 2,845 1,151 20,000 1.9x Change in Cash Balance (202) 2,328 11,402 552 1.9x 1.8x 2.5x 15,000 2.0x 1.5x 10,000 1.0x 5,000 0.5x 0 0.0x 2017 2018 2019 2020e 2021e Net Debt Net Debt/EBITDA Source: Banorte, MSE. 2 Nemak, independent from Alfa. As a result of Alfa's new strategy, launched with the objective of detonating value for its shareholders, the conglomerate will split its participation in Nemak (75.24%). The objective is to become totally independent from its auto parts subsidiary, seeking to maximize the potential value of the business, and creating a new company called ‘Nemak Holding’. The latter would basically hold Alfa's stake in Nemak and will be listed on the Mexican Stock Exchange, tentatively before October 17th. After that, Alfa's shareholders will receive 1 new share of ‘Nemak Holding’ for each share they hold in the conglomerate. Initially the shares of both companies would be listed on the stock exchange; however, eventually they would seek to merge both entities (Nemak and ‘Nemak Holding’). Likewise, it is worth noting that the price of the new listed share of the holding company would be the result of dividing the market value of Nemak’s shares held by Alfa by the number of shares outstanding in the conglomerate. Accordingly, Alfa's shares outstanding are 64.2% higher than those of Nemak, so the price of the ‘Nemak Holding’ company's shares would be ~54% lower than that of NEMAK A, corresponding to MXN 3.11 as of today.

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