Elektra (ELEKTRA) Marcela Martínez Suárez Marcela.Martinez.Suarez@Cbbanorte.Com.Mx (52-55) 5169-9384

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

August 5, 2004 SELL

ELEKTRA * / EKT Grupo Elektra Prepays 2008 Senior Notes – Strong Price: Mx / ADR Ps 68.25 US$ 22.98 Performance at All Divisions

Price Target Ps 71.00 Risk Level High • Elektra is now consolidating the Bank's results. Our comments are based on figures presented by Grupo 52 Week Range: Ps 77.20 to Ps 31.65 Elektra. During 2Q04, sales were up 20.5%, as a result of Shares Outstanding: 236.7 million strong performance at the Bank and the retail division. Market Capitalization: US$ 1.41 billion New personnel hired resulted in an 0.8-pp contraction in Enterprise Value: US$ 2.04 billion operating margin. Operating profit and EBITDA, Avg. Daily Trading Value US$ 1.4 million however, were up 12.5% and 11%, respectively. Retail Ps/share US$/ADR store formats are posting strong results, and the "Nobody 2Q EPS 1.39 0.49 Undersells Elektra" slogan has attracted more consumers. T12 EPS 6.19 2.16 The group's valuation, as measured by the EV/EBITDA T12 EBITDA 15.55 5.42 multiple, is at 6.35x, and should drop to 5.8x by year-end T12 Net Cash Earnings 11.93 4.16 2004. Our price target of Ps 71 represents a 5.54% Book Value 28.86 10.06 nominal yield, including a Ps 1.033 dividend. The above, T12 2004e coupled with the fact that Elektra is a high-risk stock, P/E 11.02x leads us to recommend Elektra as a SELL. P/BV 2.37x • Consolidated revenues were up 20.5%, as a result of P/NCE 5.72x EV/EBITDA 6.35x strong performance in merchandise sales and at Banco Azteca. Growth in merchandise sales was attributable to T12 1Q04 positive performance across all store formats (Elektra ROE 23.2% 19.3% 15.4%, Salinas y Rocha 9.9%, and Bodega de Remates ROA 11.7% 10.3% 6.1%). These results have been driven by Elektra's Interest Coverage Ratio 5.19x 3.09x "Nobody Undersells Elektra" pricing strategy. At Banco Total Debt to EBITDA 4.42x 4.12x Azteca, revenue growth was due to accessible consumer T12 = Trailing 12 months as of June 30, 2004 financing for clients. The following table shows a ENTERPRISE VALUE (EV) = Mkt cap.+ Net Debt+ Min.Int. breakdown of revenues by division, in Ps Mn: NCE=Net income+Montry Loss+Fx Loss+Depr.+Deffered Tax 2Q03 2Q04 % Change ROA=T12m Op.Profit to Avg. Assets Total Revenues 5,146 6,203 20.5% ROE=T12m Net Profit to Avg. Equity Merchandise Sales 3,811 4,349 14.1% Elektra * IBMV 84.70 18, 653 Banco Azteca 677 1,453 115.7% Other revenues 661 401 (39.3%)

75.35 16, 594 • Operating profit rose 12.5%, but the margin contracted 66.00 14, 535 by 0.8 pp, as new personnel was hired and trained for Grupo Elektra's new business units—Afore Azteca and 56.65 12, 476 Seguros Azteca—and also for the company's door-to-door selling program and new distribution centers. 47.30 10, 417 • Retail division (70.1% of revenues). In 2Q04, divisional 37.95 8,358 results continued to be driven by the "Nobody Undersells Elektra" sales strategy, as well as other seasonal 28.60 6,299 campaigns, such as "Weekly Payments Get Smaller at J-03 A-03 O-03 N-03 D-03 F-04 M-04 A- 04 J-04 Elektra", "Elektra Pesos", and door-to-door selling. Latin American operations also improved substantially. As such, sales volumes were up, while divisional sales rose 14.1%. It is important to note that this division posted a

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

August 5, 2004 SELL

INCOME STATEMENT 7.2% increase in contribution to same-store sales, as (millions of constant pesos as of June 30, 2004) well as 6% growth in sales floor space. 1H04 1H03 Change 2Q04 2Q03 Change Net Sales 11,686 9,927 17.7% 6,203 5,146 20.5% • Banco Azteca (23.4% of revenues). Banco Azteca Gross Profit 5,133 4,206 22.0% 2,733 2,166 26.2% continued to grow at a strong pace, in benefit of the EBITDA 1,808 1,633 10.8% 986 889 11.0% Mexican middle-low class. In 2Q04, the bank posted Operating Profit 1,299 1,091 19.1% 718 638 12.5% net earnings of Ps 90.9 million, up 139.2% vs. 2Q03. ICF 373 524 -28.7% 287 146 97.5% Strong performance was attributable to interest Interest Expense 477 439 8.6% 326 194 68.5% income due to strong volumes and the positive mix of Interest Income 51 46 10.5% 23 28 -16.9% consumer financing extended at Grupo Elektra's Foreign Exchange Loss -30 168 #N/A -10 -10 -3.3% Monetary Loss -22 -38 -40.6% -6 -10 -40.0% stores and other channels. This division has a Other Financial Expenses 0 0 #N/A 0 0 #N/A promising future, particularly due to the population Pretax Income 926 567 63.3% 430 493 -12.6% segment being serviced by the Bank. Taxes 185 144 28.2% 100 66 50.6% Non-Cons. Subsidiaries -1 15 #N/A -1 78 #N/A • Credimax (consumer loans) and Credimax Efectivo Minority Interest -0 2 #N/A -0 1 #N/A (personal loans): Combined Credit Portfolio. Both Net Income 741 436 70.0% 329 504 -34.6% products account for 93.6% of Banco Azteca's credit portfolio. During 2Q04, Banco Azteca continued to Gross Margin 43.9% 42.4% 44.1% 42.1% install kiosks at other retail outlets, and increased the Ebitda Margin 15.5% 16.4% 15.9% 17.3% number of desks to 421 as of 2Q04—a strategy that Operating Margin 11.1% 11.0% 11.6% 12.4% has allowed the bank to expand its client base. As of Net Margin 6.3% 4.4% 5.3% 9.8% 2Q04, Banco Azteca recorded a total of 3.063 million combined active accounts, representing 5.4% growth. A/R Turnover (days) 124 93 Gross consumer loans grew 23.6% to Ps 7.9 billion. Inventory Turnover (days) 93 83 Personal loans accounted for 18% of total consumer A/P Turnover (days) 81 74 WC net of debt to Sales 73.3% 42.5% loans as of 2Q04, growing by 270 bp vs. 15.3% in 1Q04. Banco Azteca's collection rate remained BALANCE SHEET steady at 98%. The Group feels very optimistic about (millions of constant pesos as of June 30, 2004) this subsidiary's future development, and we would Jun-04 Dec-03 Jun-03 not be surprised if perhaps one year from now, Banco Total Assets 27,771 28,539 18,448 Azteca starts to operate as a Financial Group and is Cash & Equivalents 9,098 12,098 3,579 separately listed on the MSE. Other Current Assets 11,431 9,459 7,764 Long Term 997 1,026 1,075 • Positive outlook. For the retail division, Elektra Fixed (Net) 4,314 4,062 3,835 expects 6-8% and 8-10% real increases in sales and Deferred 1,306 1,359 1,358 EBITDA, respectively, in 2004, and also intends to Other 626 536 838 strengthen its position in Central and South American Total Liabilities 20,896 21,883 12,554 markets. The bank also has a promising future, Short Term Debt 13,535 14,881 5,308 Other Current Liab. 3,402 3,145 2,908 especially considering fast-paced growth in deposits. Long Term Debt 2,731 2,614 3,028 The bank’s portfolio is expected to grow to US$ 500 Other Liabilities 1,228 1,244 1,310 million, with deposits increasing 70% vs. the close. Shareholders Equity 6,875 6,656 5,894 Capex are expected to total around US$100 million, Minority Interest 43 66 68 US$35 million of which have already been invested in the bank and in the Afore. The remainder will be FINANCIAL ANALYSIS invested in 25 new store openings, as well as in store Current Ratio 1.2x 1.2x 1.4x maintenance, conversions, and shutdowns. ST Debt to Totl Debt 83.2% 85.1% 63.7% Foreign Liab/Totl Liab 1.7% 15.3% 28.2% Net Debt/Total Equity 104.3% 81.1% 80.7% Totl Liab./Totl Equity 303.9% 328.8% 213.0%

ELEK TRA Dow ngrading Dow n grade d t o Ma r c e la Ma r t in ez ' S ummar y Re co mmen d at io n Target Price to HOLD $90.00 NEUTRAL Ps $ 55 Target Price $80.00 Ps $ 50 SELL 14% $70.00

$60.00

$50.00 HOLD 36% $40.00

$30.00 Upgrading Up gr a de d t o TGT Price to $20.00 SPECULA TIV E SP ECUL AT IV E BUY Ps$ 71 BUY 50% BU Y $10.00 2 3 3 1 2 4 0 04 002 0 2 200 200 20 200 200 200 2 / / / 2 7/ 4/ 0 5/ 7/ 3 1 1 15 25/ 4/ 8/ 9/ / / 0% 10% 20% 30% 40% 50% 4/ 1/ 5/ 11 12

Analyst Certification I, Marcela Martínez Suárez, hereby certify that the views expressed in this research report accurately reflect my personal views about the subject company(ies), its (their) affiliate(s) and its (their) securities. I also certify that I have not been, am not, and will not be receiving direct or indirect compensation in exchange for expressing the specific opinion(s) in this report. Material Disclosures

Casa de Bolsa Banorte and its affiliates, including Grupo Financiero Banorte, provide a vast array of services in addition to investment banking, such as corporate banking, among others, to a large number of corporations in Mexico and abroad. The reader should assume that Casa de Bolsa Banorte or its affiliates receive compensation for those services from such corporations. Under Mexican laws currently in force, Research Analysts are permitted to directly hold long positions in shares of companies listed on the Bolsa Mexicana de Valores and mutual funds. However, Research Analysts must keep observance of certain bylaws that regulates their participation in the market preventing, among other things, misuse of private information in their own benefit. Analyst compensation Analyst compensation is based on activities and services intended for the benefit of investor clients of Casa de Bolsa Banorte and its affiliates. Compensation is determined on the basis of individual performance and impacted by overall firm profitability. However, investors should note that our analysts do not receive any direct compensation for any specific transaction in investment banking. Investment Banking Activities over the Past Twelve Months Casa de Bolsa Banorte or its affiliates have received compensation for investment banking services from the following companies or their affiliates, which may be the subject of analysis in this report: Alfa, Cablemas, CEMEX, Corporación GEO, DeMet, G. Acción, Grupo Financiero Banorte, Hylsamex, Hipotecaria Nacional, Jugos Del Valle, Su Casita, Urbi, Xignux. Investment Banking Activities during the Next Three Months Casa de Bolsa Banorte or its affiliates expect to receive or intend to seek compensation for investment banking services from companies or their affiliates that may be discussed in this report. Guide to Investment Ratings RATING is a parameter that indicates the expected total RETURN over the next twelve months. The total return required for a given rating depends on each stock's level of RISK. The following table outlines the parameters used to determine the rating given in the document attached hereto. These parameters are placed under revision on a regular basis, and modified as a function of several factors, including interest rate levels and future expected interest rate performance, as well as equity market trends and volatility.:

Risk/Rating Low Medium High BUY >13.5% >16.5% >19.5% HOLD <13.5% > 9.0% < 16.5% > 11% < 19.5% > 13% SELL <9.0% <11% <13% Risk takes into account three factors: 1) relative volatility to the local index, 2) the stock's marketability, 3) the company’s financial strength. With these factors we construct a "Risk Index", which is used to group securities to three levels of risk: Low, Medium and High. Although this document offers a general investment criterion, we urge readers to seek the counsel of their own Financial Consultants or Advisors, should any given security mentioned herein fit the reader’s investment goals, risk profiles, and financial positions. Determining Price Targets In calculating price targets, Casa de Bolsa Banorte uses a combination of methodologies that are generally accepted among financial analysts, including, but not limited to, analysis of multiples, discounted cash flows, sum-of-parts, or any other method that might be applied on a case-by-case basis. There can be no assurance that price targets calculated by Casa de Bolsa Banorte will be attained, as this depends on numerous endogenous and exogenous factors affecting both the company’s performance and trends in the stock market on which it is listed. THE INFORMATION CONTAINED HEREIN HAS BEEN OBTAINED FROM SOURCES THAT WE BELIEVE TO BE RELIABLE, BUT WE MAKE NO REPRESENTATION AS TO ITS ACCURACY OR COMPLETENESS. NEITHER CASA DE BOLSA BANORTE, S.A. DE C.V. NOR BANORTE SECURITIES INTERNATIONAL ACCEPTS ANY LIABILITY FOR ANY LOSS ARISING FROM ANY USE OF THIS REPORT OR ITS CONTENTS.