Equity Research & Strategy

Mexico

Top picks Special Note January 22, 2016

www..com Attractive stocks in a challenging environment www.ixe.com.mx @analisis_fundam

. This year began with a high degree of risk aversion. However, we Manuel Jiménez Director Equity Research believe that the recent selloff in the equity market opens up Telecommunications/Media opportunities for long-term investors to take long positions in good- [email protected] looking stocks Marissa Garza . Given the current highly-volatile scenario, we believe that equity Senior Equity Research Analyst Conglomerates/Financials/Mining/Chemicals portfolios should be more exposed to consumer stocks, as well as [email protected] airports, and exports-related firms Marisol Huerta . We have picked five stocks, among the companies we have under Senior Equity Research Analyst coverage, that could outperform in 1H16 because of their expected Food/Beverages/Retail [email protected] earnings growth, solid financial structure, and attractive valuation José Espitia The recent correction in equity markets open up investment Equity Research Analyst opportunities. YTD the world market capitalization has declined 11%, Airports/Cement/Infrastructure/Fibras [email protected] amounting a loss of US$10tr. This has been the worst start of the year in the history of some markets. Risk apetite has remained low among investors Valentín Mendoza Equity Research Analyst because of the uncertainty regarding the economic slowdown in China and the Auto Parts slump in global commodity prices. The Mexbol fell sharply following its [email protected] international peers, dragging valuation levels downward as well. Up to day, the index trades at 9.45x FV/EBITDA, a discount of 1.8% against the L3Y average. We believe that the recent selloff implies an interesting window of opportunity with compelling valuation levels, below historical averages.

Which are our top picks? Based purely on fundamental criteria, we have chosen five stocks that we believe are the best investment ideas for this year, among Mexican stocks. We’ve favored companies with expected operational growth either related to sectorial dynamics, or specific corporate strategies, companies whose financial structure could improve, firms currently trading at unusually low valuation levels, or a combination between these factors. So, our top picks 2016 are: , , Asur, Nemak and Soriana.

Why these companies? Alsea is attractive because of its potential growth and synergies, while the leverage ratio is expected to decrease; Alpek has shown a sustained recovery in its results and is implementing operating efficiencies. Besides, the stock trades at attractive valuation levels; Asur has a strong positioning to support the expected growth within the sector and has a solid cash flow generation, along with a compelling dividend yield; Nemak competes in a sector that should continue to observe quite positive dynamics, particullary as the expected growth in NAFTA’s vehicle production should bolster results, while the impact of the exchange rate depreciation is positive for growth and valuation purposes; Soriana because we expect that the integration of Comerci’s operations will boost the company’s performance.

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ALPEK January 21, 2016

2016: On the road to recovery Marissa Garza Senior Equity Research Analyst . Alpek is strongly positioned to start 2016. The sustained recovery in Conglomerates/Financials/Mining/Chemicals [email protected] its results and the US dollar strength should be favorable for the company performance

. The firm’s strategy to maximize operating efficiencies and the vertical integration strengthening will help to compensate volatility in BUY crude oil prices, deriving in better margins Current Price P$21.99 PT2016 P$29.50 Dividend (%) 3.0% . Alpek trades at attractive valuation levels. Our PT 2016 of P$29.50 Upside Potential 37.2% implies a 2016E FV/EBITDA multiple of 7.9x, which is below the Maximum – Minimum LTM 26.96-15.51 three-year average of 8.2x. We maintain our BUY rating Market Cap (US$m) 2,502.9 Shares Outstanding (m) 2,778 Positive outlook. We believe that the Company results in the last three Float 17.9% Daily Turnover (P$m) 31.6 quarters showed an important inflection point. The margins recovery should continue in 2016 supported by the strategies implemented by the firm. We acknowledge the possibility of having inventory devaluation charges because Relative performance to Mexbol of the crude oil prices slump; nevertheless, we think that those should be (LTM) compensated by the favorable dynamics in the PTA/PET industries, along with 80% 70% the important strategies focused on maximizing operating efficiencies. 60% Especially, we think that the increase in the PTA formula in North America 50% 40% should continue being favorable for the results until 1Q16, at least. Moreover, 30% 20% the cost-savings derived from the cogeneration plant in Cosoleacaque and the 10% better-than-expected margins in polypropylene (PP) and expanded polystyrene 0% -10% (EPS) should continue, given the decrease in the offer in in North America. It Jan-15 Apr-15 Jul-15 Oct-15 Jan-16

MEXBOL ALPEKA is important to mention as well, that Alpek is one of the few companies in the country in which the effect of the Mexican peso’s depreciation is positive for the results, since most of the operations are US dollar-denominated, which not only implies really compelling growth rates but also derives in an attractive valuation.

Financial Statements Financial Ratios and Multiples (MXN, million) 2013 2014 2015E 2016E 2013 2014 2015E 2016E Revenues 90,061 86,072 84,963 100,886 FV/EBITDA 8.5x 11.2x 7.0x 6.3x Operating Income 2,926 3,739 7,604 8,774 P/E 178.2x 58.2x 13.9x 10.5x EBITDA 7,344 5,707 9,316 11,241 P/Book 1.9x 1.8x 1.6x 1.5x EBITDA Margin 8.15% 6.63% 10.96% 11.14% Net Income 261 801 3,345 4,417 ROE 1.1% 3.1% 11.6% 14.0% Net Margin 0.29% 0.93% 3.94% 4.38% ROA 0.4% 1.2% 4.6% 5.6% EBITDA/Interest expenses 7.1x 6.4x 9.2x 9.7x Total Assets 58,128 65,371 72,423 78,742 Net Debt/EBITDA 1.3x 1.8x 1.3x 1.5x Cash 4,737 5,744 6,823 3,121 Debt/Equity 0.6x 0.6x 0.7x 0.6x Total Liabilities 31,040 35,526 39,163 42,056 Debt 14,509 15,993 18,749 19,552 Common Equity 24,018 25,949 28,834 31,555 Source: Company reports and Banorte-Ixe

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Aggressive investment plans. Alpek has aggressive investment plans for the next three years. Those include several projects to maximize operating efficiencies, leveraging the advantages of using natural gas, ethane and propane in North America (vertical integration) as well as continuing the analysis of strategic alliances and acquisitions. The total estimated amount for these investments could reach up to US$2bn (including a possible agreement with Pemex for the integration towards the MEG-US$1bn, even though the date has not been defined yet) in order to increase EBITDA by ~US$500m (nearly doubling the 2015E EBITDA of US$585m). The most outstanding projects are the PET/PTA plant in Corpus Christi (1Q17), the EPS operations acquired from BASF and the MEG supplying agreement (the main input for PET/PTA) with Huntsman. Regarding the cogeneration plant in Altamira, the estimated required investment amounts US$350m with a capacity of 350MW and it is expected to be fully operational in 1H18. Alpek has also started implementing selective expansion initiatives, mainly related to the EPS business, that imply a capacity expansion of 75,000 annual tons in Altamira’s plant. Furthermore, they have signed and agreement with BASF in to acquire the EPS plant in Concón, which has a capacity of 20,000 annual tons. It’s been estimated that expansion in Altamira will start operations by the end of 2017 while for Concón the acquisition should be completed early this year. Thus, Alpek’s EPS production capacity will increase by ~40%, once both initiatives conclude. Regarding the polyester fiber business, the company has started and expansion plan of 110,000 annual tons in the plant of Pearl River, leveraging the on-site infrastructure. The expectation is that this project, which aims to increase the capacity for Central America, will start operations by the end of this year.

Estimates. In 2016 we expect solid results for the Company with estimated revenues of US5.9bn (P$100.8bn) and EBITDA of US$658m (P$11.2bn). These figures represent YoY growth rates of 10.4% & 12.0% against our 2015 estimates, respectively. We believe that the announced projects should support better results. We also think that it’s quite positive that Alpek is dynamically strengthening its operations within an environment that remains challenging because of the low crude oil prices and high volatility.

Alpek maintains a solid financial structure. The net debt to EBITDA ratio in 3Q15 was 1.3x. Even when considering the aggressive investment plans of the company, according to our estimates we could expect that the Net Debt to EBITDA ratio will increase to 1.5x in 2016.

Attractive valuation. Currently, Alpek trades at 7.0x FV/EBITDA, a very attractive level, in our view. Our price target for 2016 of P$29.50 implies a 2016E FV/EBITDA multiple of 7.9x, which is below the average of this ratio in the last three years (8.2x) and above the current level.

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ALSEA January 21, 2016

Defensive, with a strengthening strategy Marisol Huerta Senior Equity Research Analyst . Alsea’s latest acquisitions could derive in sustainable revenue and Food/Beverages/Retail [email protected] EBITDA growth, along with improvements in its profitability and significant cash flow generation

. International operations will have the highest growth, given the BUY opportunities abroad. We estimate that such revenues will grow to Current Price P$59.04 50% of total sales by 2020, from currently at 38% PT2016 P$67.00 Dividend 0.50 Dividend (%) 0.8% . Given the high market volatility, we consider Alsea as a defensive Upside Potential 13.5% stock that will continue to have solid growth by increasing its market Maximum – Minimum LTM 61.6-38.72 share, via new store openings as well as other commercial strategies Market Cap (US$m) 2,670 Shares Outstanding (m) 820 Float 36% Harvesting profits from the latest acquisitions. Our 2016 estimates for Daily Turnover (P$m) 91.3 Alsea’s performance involve double-digit growth rates at operational level. We expect the top line to grow 13% YoY and EBITDA to increase 16.5%. We’re optimistic about Alsea’s profitability with an estimated margin Relative performance to Mexbol expansion of 50bps due to ’s market share increase in the casual dining (LTM) business, after the purchase of Vips and El Portón. We also forecast organic 60% growth related to improvements in consumption in Mexico. We see larger 50% 40% potential growth within the international operations ( & Latin America) 30% because of the commercial strategies implemented by the firm on its different 20% brands, further market penetration and economic recovery. We also remain 10% 0% positive about the firm’s operating performance because of the cost-saving -10% strategies implemented. Jan-15 Apr-15 Jul-15 Oct-15 Jan-16 MEXBOL ALSEA* Price target 2016 of P$67.00 rated BUY. Our PT implies a 2016E

FV/EBITDA multiple of 15.3x, in line with the LTM average and an upside potential of 13.1% along with a dividend yield of 0.8%. We believe that smaller acquisitions in Europe and Latam, and better economic dynamics are key drivers that could bolster the stock valuation levels.

Financial Statements Financial Ratios and Multiples (MXN, million) 2013 2014 2015E 2016E 2013 2014 2015E 2016E Revenues 15,719 22,787 31,831 35,782 FV/EBITDA 16.6x 18.2x 14.8x 12.6x Operating Income 1,115 1,469 2,343 2,643 P/E 41.2x 55.3x 59.5x 33.7x EBITDA 2,038 2,802 4,175 4,864 P/Book 6.5x 4.2x 5.6x 5.7x EBITDA Margin 12.97% 12.30% 13.12% 13.59% Net Income 681 667 787 1,389 ROE 15.7% 7.6% 9.4% 16.8% Net Margin 4.33% 2.93% 2.47% 3.88% ROA 5.5% 2.3% 2.5% 4.5% EBITDA/ Interest expense 10.1x 5.7x 5.5x 4.7x Total Assets 12,459 29,048 30,960 31,117 Net Debt/EBITDA 2.1x 3.6x 2.4x 1.9x Cash 663 1,113 2,434 3,041 Debt/Equity 1.0x 1.0x 1.1x 1.0x Total Liabilities 7,878 19,313 21,649 21,932 Debt 5,044 11,239 12,313 12,132 Common Equity 4,581 9,735 9,312 9,185 Source: Company reports and Banorte-Ixe

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2016 Mexico’s estimates. We expect that Alsea’s economies of scale with the acquisition of Vips & El Portón will be reflected in its profitability. Same-store sales in Mexico will grow above the sector’s average rate (+7.0% YoY) driven by an increase in the casual dining’s market share, commercial strategies in each and every brand –i.e. the loyalty program (rewards card), coupons and cross-branding promotions-, along with the reconfiguration of some of the company’s formats. On a consolidated basis, we estimate that Alsea’s revenues will grow 9.0% YoY and EBITDA will increase by 11%, meaning a margin expansion of 30bps (24%) in Mexico.

In , the brand positioning strengthens and the market share increases. In the Argentinean, Colombian & Chilean markets we estimate double-digit growth related to a further market penetration, organic growth and maturation within the new formats (PF Chang in ). Same- store sales in the region will grow 18%, and total revenues will increase 30% while EBITDA will advance 50% YoY.

Strong performance in Europe. European market remains with great potential growth because of the strategies implemented by the firm on its different brands. Such strategies will bolster sales and profitability. Moreover, the consumption recovery and a stronger brand positioning will boost regional sales & EBITDA contributions by 3pp to reach 20% in 2016 (vs 17% in 2015).

Debt structure. Alsea’s leverage ratio still reflects the acquisition of Vips and Grupo Zena. Nonetheless, the refinancing strategies implemented during 2015 will improve the firm’s financial structure in 2016. We expect that the net debt to EBITDA ratio will decrease to 1.9x from 2.2x in 2015. We believe that the US dollar appreciation will not be detrimental for the company’s performance because 80% of Alsea’s debt is denominated in Mexican pesos while 19% is euro-denominated.

Valuation. Our PT2016 of P$67.00 implies a 2016E FV/EBITDA multiple of 15.3x, in line with the LTM average. Alsea’s upside potential is 13.1% from the current price (P$59.40) while the total expected return amounts 13.9%, considering an estimated dividend of P$0.50 (very alike to the dividend paid in 2015). This multiple also implies a 16% premium against the current average ratio within the sector in Mexico (13.0x). We consider that this valuation level is fair given the expected EBITDA growth in 2016 of 16.9% YoY. In spite of the fact that Alsea’s growth in 2016 will be slower after concluding the integration of the acquired business in Mexico & Europe, we are positive about the company’s organic growth. In terms of Alsea’s cost structure, we think that the hedging strategies for the raw- material inputs will compensate the impact of the exchange rate. Furthermore, we acknowledge that possible acquisitions in Europe and Latin America could boost the company’s performance in the future.

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ASUR January 21, 2016

José Espitia Safe flight to continue in 2016 Equity Research Analyst Airports/Cement/Infrastructure/Fibras [email protected] . Asur will continue posting quite positive results in total passenger traffic, supported by a favorable environment within the sector. Mainly due to low crude oil prices BUY Current Price P$226.93 . The depreciation of the Mexican peso will continue to support PT2016 P$310.00 international passenger traffic (55.3% in 2015). Asur’s high Dividend P$5.3 Dividend (%) 2.0% profitability implies attractive cash flow generation and dividends Upside Potential 38.60% Current ADS Price US$122.50 . Our PT2016 of P$310.00 along with our estimated dividend yield, PT2016 ADS US$176.14 implies a compelling upside potential of 38.6%, therefore we are Maximum – Minimum LTM 278.5-192.0 Market Cap (US$m) 3,674.46 upgrading our rating for the stock to BUY Shares Outstanding (m) 300 Float 48% Strongly positioned for leveraging the favorable environment Daily Turnover (P$m) 86.8 within the sector and the positive outlook for passenger traffic. The

company’s business model is focused on maximizing aeronautic revenues and successfully implementing commercial and diversification strategies. Asur’s Relative performance to Mexbol high profitability implies a solid cash flow generation along with attractive (LTM) 40% dividend payments (dividend yield L5Y of 3.1%). In 2016 we estimate that 35% 30% total passenger traffic will grow 8.2%, operating revenues 10.5% (including 25% 20% both aeronautic and non-aeronautic) while we believe that EBITDA will grow 15% 12.1% YoY with an EBITDA margin of 71.4% vs 70.4%e in 2015 (excluding 10% 5% construction services). The solid financial structure allows the company to 0% -5% search for investment opportunities offshore, as the company did with Puerto -10% Jan-15 Apr-15 Jul-15 Oct-15

Rico’s airport, Luis Muñóz Marín (“LMM”). MEXBOL ASURB

We upgrade Asur to BUY, PT2016 of P$310.00, implying an upside potential of 36.6%, plus our estimated dividend yield of 2.0%, meaning a total expected return of 38.6% for this stock.

Financial Statements Financial Ratios and Multiples (MXN, million) 2013 2014 2015E 2016E 2013 2014 2015E 2016E Revenues 5,446 5,879 8,938 8,421 FV/EBITDA 21.2x 18.9x 15.3x 13.6x Operating Income 2,871 3,161 4,002 4,477 P/E 29.6x 29.8x 24.1x 22.6x EBITDA 3,289 3,615 4,473 5,015 P/Book 4.2x 3.6x 3.4x 3.1x EBITDA Margin 60.40% 61.49% 50.0% 59.6% Net Income 2,297 2,284 2,826 3,019 ROE 13.79% 12.83% 14.44% 14.36% Net Margin 42.17% 38.84% 31.62% 35.85% ROA 10.40% 10.02% 11.16% 10.94% EBITDA/ interest expenses -55.1x -91.4x -41.7x -31.0x Total Assets 21,416 23,925 26,574 28,581 Net Debt/EBITDA 0.5x 0.1x 0.1x 0.1x Cash 1,260 2,855 3,258 3,541 Debt/Equity 0.2x 0.2x 0.2x 0.2x Total Liabilities 5,132 5,173 6,281 6,861 Debt 2,841 3,187 3,710 3,799 Capital 16,284 18,751 20,293 21,721 Source: Company reports and Banorte-Ixe

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Several factors supporting the positive outlook for the sector. In our view, low crude oil prices -aviation fuel is the main cost for airlines- motivates them to open new routes, increase frequencies, or even expand fleets. We believe that, eventually, this could also derive in a possible reduction of the ticket price. It is important to mention that low-cost airlines are striving to increase market share by competing with first-class buses. We think that this trend will continue in the future, especially given the low crude oil price level.

On the other hand, the depreciation of the Mexican peso will probably benefit the company in two different ways: First, the current high exchange rate level could imply local tourists to avoid international traveling, while favoring onshore trips. Second, this factor should increase international passengers’ traffic (around 55.3% of the total in 2015) as Mexico became a cheaper destination for North American travelers (who are the main tourists for Mexico) and ultimately derive in larger commercial revenues.

We also believe that the new air service agreement between Mexico and the US (which still needs to be approved by the Mexican Senate) should favor airports by boosting passengers’ traffic, as such agreement would eliminate restrictions for airlines and, therefore, could trigger more frequent flights and the possibility of lower rates.

2016 estimates. Cancún, Asur’s main airport, (accounting with 75% of the total passengers in Mexico during 2015) continues having high hotel occupancy rates (84% in 2015), boosting Asur’s passenger traffic growth in 2015 by 12.9%. In 2016, we believe that total passenger traffic will grow 8.2% in the 9 airports located within Mexico. We also think that total revenues will decrease 5.8% YoY due to a fall of 46% in the construction revenues (with no impact in the cash flow), related to lower investments as per the Development Master Plan 2014-2018. On the other hand we expect that operating income will grow 10.5% while EBITDA will grow 12.1%. EBITDA margin will expand 5.9pp reaching 59.6% (vs 50%e in 2015) and excluding the revenues and expenses related to construction the margin will be 71.4% (vs 70.4%e in 2015).

Risks. The risks that we think could impact the company’s performance against our estimates are: climate affections/interruptions in Cancun’s airport, lower economic growth in Mexico and the US, a strong recovery in the oil prices (not very likely to happen), airlines leaving the Mexican market, appreciation of the Mexican peso (increasing tourist costs for foreigners), climatological disasters (such as hurricanes), epidemic diseases and worse perceived insecurity. Besides, we believe that the competition with Cuba, as a Caribbean touristic destination, could get tougher, given that the diplomatic relationships between Cuba and the US are improving. Also we think that the complex economic situation in Puerto Rico could affect passenger traffic in LMM airport (in which Asur owns 50% of the operations).

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NEMAK January 21, 2016

Favorable environment could imply a successful Valentín Mendoza Equity Research Analyst year Auto Parts [email protected] . 2016 should be favorable for Nemak due to: (1) The expected growth in vehicle production; (2) further appreciation of the US dollar; and

(3) the first emissions’ target of the new regulation BUY . The company’s positioning as the leading provider of aluminum Current Price P$22.67 components for the automotive industry should allow Nemak to PT2016 P$28.50 leverage growth opportunities ahead Dividend 0.40 Dividend (%) 1.8% . We maintain our BUY rating and PT 2016 of P$28.50 which implies a Upside Potential 27.5% Maximum – Minimum LTM 24.98-18.20 FV/EBITDA multiple 2016E of 7.5x, slightly below the average of the Market Cap (US$m) 3,752.89 Bloomberg’s estimated ratio of 7.9x Shares Outstanding (m) 3,080.75 Float 19.31% We expect a positive year. We believe that 2016 will bring several positive Daily Turnover (P$m) 66.5 factors for Nemak’s operating performance. On one hand, the expected growth in vehicle production within NAFTA countries and Europe -driven by low crude oil prices and further improvements in the economy-, will remain Relative performance to Mexbol dynamically strong. According to IHS estimates, the growth rates will be of (LTM) 4% and 1.9% YoY, respectively. On the other hand, this year an important 25% 20% target in the CAFE regulation must be met, as vehicles in the US must comply 15% with the efficiency target of 34.1mpg. We think that this fact could trigger an 10% accelerated penetration of aluminum components in cars to lighten the weight 5% of those models that does not comply with the new standard in order to avoid 0% economic fines. In particular, we consider that Volkswagen’s scandal, which -5% Jan-15 Apr-15 Jul-15 Oct-15 Jan-16 could end up with a fine of up to US$1.8bn for the company (only in the MEXBOL NEMAKA United States), will motivate other OEMs to double efforts to be compliant as authorities are expected to be tougher in their revisions. Finally, we believe that expected US dollar appreciation will bolster Nemak’s growth, implying a compelling valuation as well, given that the operations of the firm are US dollar-denominated, while financial reporting is on Mexican pesos.

Financial Statements Financial Ratios and Multiples (MXN, million) 2013 2014 2015E 2016E 2013 2014 2015E 2016E Rev enues 56,315 61,490 70,055 83,581 FV/EBITDA 11.1x 9.6x 7.5x 6.2x Operating Income 4,517 5,508 7,664 9,069 P/E 26.6x 20.6x 15.2x 11.6x EBITDA 7,655 9,232 11,947 13,934 P/Book 3.8x 3.3x 2.6x 2.1x EBITDA Margin 13.59% 15.01% 17.05% 16.67% Net Income 2,621 3,389 4,610 6,027 ROE 15.5% 17.0% 18.9% 20.1% Net Margin 4.65% 5.51% 6.58% 7.21% ROA 4.9% 5.7% 6.5% 7.8% EBITDA/ Interest ex pense 6.7x 9.7x 11.5x 15.7x Total Assets 53,270 59,091 70,591 77,226 Net Debt/EBITDA 2.0x 2.0x 1.7x 1.5x Cash 1,783 976 1,849 1,270 Debt/Equity 0.9x 0.9x 0.8x 0.7x Total Liabilities 34,809 37,593 43,407 44,514 Debt 16,710 19,703 21,751 21,697 Common Equity 18,449 21,481 27,184 32,712 Source: Company reports and Banorte-Ixe

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Profitability above the industry average in the medium term. Even though Nemak’s margins have expanded impressively during the last years, in 2016 we expect a slight contraction in the EBITDA margin (-0.3pp) due to a less- favorable (than 2015) environment for the company’s profitability because of: (1) The expected recovery in the aluminum price according to the Bloomberg’s consensus. Aluminum accounts for about 50% of Nemak’s cost of goods sold, and there is a monthly metal- price-lag for passing-through the variations to the customers and under a scenario of rising prices as the one expected in 2016, we believe this could be detrimental for the firm’s margins; (2) natural gas prices are expected to rise as well during the year. This commodity used for aluminum casting accounts for 3% of the company’s cost structure.

Nevertheless, we remain optimistic on Nemak’s profitability as we consider that a better sales-mix (with a larger contribution from more complex components), as well as the vertical integration of the machining, will boost margins in the long-run. Besides, in 2016 we believe that further depreciation of the Euro and the Mexican peso will partially compensate the negative impacts described above. However, it is from 2017 and on that we estimate a strong expansion in Nemak’s profitability, as the structural components’ contracts recently signed (which have better margins) will start to be produced. Moreover, we expect that the sales mix will continue to improve in the future, as the demand for more complex components such as complex transmission cases (of more than 6-speed) increases and a larger amount of the production is machined internally. It’s important to mention that, even though we believe that most of Nemak’s positive outlooks are for long-term investors, the company already has a better profitability than its peers, and especially, has attractive growth plans because of the estimated aluminum penetration in the automotive industry, which should start to be beneficial from this year on, making Nemaks worth to invest in now.

2016 Estimates. We expect a revenue growth of 8.9% YoY to reach US$4.8bn while for the EBITDA we estimate a yearly growth of 7.2% to US$805m. However, as we have mentioned, the expected Mexican peso depreciation will contribute to Nemak’s growth. On a Mexican pesos’ basis, we anticipate a revenue growth of 19.3% to P$83.6bn and an EBITDA growth of 16.6% to reach P$13.9bn and a margin of 16.7% in 2016.

Reducing leverage levels. We think that the larger EBITDA generation of the company in 2016 will decrease the Net Debt to EBITDA ratio to 1.5x from 1.8x in 3Q15, strengthening Nemak’s financial structure.

Maintaining our BUY rating and Price Target 2016 of P$28.50. Our PT implies a 2016E FV/EBITDA multiple of 7.5x, which is slightly below the average of the estimated multiple in Bloomberg of 7.9x. It also implies a premium of 22.9% against the peers’ median of 6.1x. We believe that paying this premium for Nemak is fair because of the company’s better profitability, growth plans and the expectation of further expansions in the long-term. The upside potential for Nemak is 27.5%, including an estimated dividend yield of 1.8% and, therefore, we maintain our BUY rating for the stock.

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SORIANA January 21, 2016

Comerci’s integration, the main driver in 2016 Marisol Huerta Senior Equity Research Analyst . The integration of 133 stores acquired from Comerci will be one of Food/Beverages/Retail [email protected] the main drivers supporting Soriana’s growth in 2016. We expect a yearly increase of 32% in revenues and of 52% in EBITDA

. We expect an expansion in the company’s profitablity with the BUY integration of CCM’s stores, because of their better margins (+8.8%) Current Price $38.28 vs Soriana’s (6.9%), along with the benefits of possible synergies PT2016 $50.00 Dividend 0.0 . After the acquisition, Soriana will become the second retailer in Dividend (%) 0.0% Mexico’s industry, with 811 fully operational stores and a market Upside Potential 30.6% Maximum – Minimum LTM 41.64 - 31.3 share of 24% (+7pp) Market Cap (US$m) 3,743 Shares Outstanding (m) 1,800 Comerci’s stores will bolster results. The acquisition of CCM assets on Float 14% Daily Turnover (P$m) 10.7 January 1st, 2016 is positive because it will generate very important synergies for the business, increasing profitability and sales volume due to economies of scale. Comercial Mexicana’s stores have better margins than Soriana’s (8.8% vs 6.9%). After the acquisition, Comerci’s operations account for 30% of Relative performance to Mexbol (LTM) Soriana’s revenues and 39% of the EBITDA. As per our estimates, we expect 15% a margin expansion of 110bps to reach 8% after the consolidation. The deal 10% was valued in P$35.4bn and was financed with short-term and long-term 5% credits, increasing SORIANA’s leverage ratio to 3.3x from 0.0x. The company 0% states that in 2018 this level will decrease to the same level prior the purchase, -5% due to cash flow generation, synergies and divestures of non-strategic assets. -10% -15% Jan-15 Apr-15 Jul-15 Oct-15

BUY rating and Price Target 2016 of P$50.00. Our PT2016 implies an MEXBOL SORIANAB upside potential of 30.6% from the current price (P$38.87). The 2016E

FV/EBITDA multiple (10.1x) is line with the average of the L3Y. In our view, Soriana is an attractive company to invest in because of the integration of Comerci’s stores in 2016 that will be beneficial.

Financial Statements Financial Ratios and Multiples (MXN, million) 2013 2014 2015E 2016E 2013 2014 2015E 2016E Rev enues 105,028 101,829 109,924 144,441 FV/EBITDA 10.7x 8.8x 9.0x 8.3x Operating Income 5,558 4,977 5,264 8,617 P/E 21.4x 17.0x 18.9x 12.3x EBITDA 7,534 7,060 7,535 11,506 P/Book 1.9x 1.4x 1.4x 1.8x EBITDA Margin 7.17% 6.93% 6.85% 7.97% Net Income 3,117 3,704 3,784 5,661 ROE 8.8% 8.0% 7.5% 14.8% Net Margin 2.97% 3.64% 3.44% 3.92% ROA 8.8% 4.6% 3.8% 5.1% EBITDA/ Interest ex pense 14.4x 16.5x 16.5x 16.5x Total Assets 79,010 80,720 100,416 111,949 Net Debt/EBITDA 0.4x -0.1x -0.5x 2.2x Cash 1,666 2,673 21,694 10,718 Debt/Equity 0.1x 0.0x 0.3x 0.0x Total Liabilities 26,939 34,319 49,907 73,646 Debt 1,948 1,948 17,781 36,195 Common Equity 43,400 46,400 50,509 38,303 Source: Company reports and Banorte-Ixe

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Soriana strengthens its footprint. After the acquisition of Comerci assets, Soriana will increase its market share in by 32%, while in the Metro Area will grow by 70%. Mainly, due to Comerci’s strong presence in the central area of Mexico. In the North, the expansion will reach 10% and in the South the footprint will increase by 21%. Moreover, Soriana will now enter into 15 new cities totaling 811 stores, and getting closer to its main competitor in terms of sales floor (Walmex who has 2,225 stores) by 76%, while also increasing the breach against the third competitor in the industry ( with 261 stores) by 253%. The acquisition will also increase sales floor by 34% in 2016. We believe that the retail sector has huge potential growth in the country, as the population is used to traditional commerce - where about 47% of total purchases happen-. Besides, we expect a possible recovery in consumption within the border area that will be beneficial for Soriana, as most of the company’s stores are located in Northern Mexico.

Better profitability. As we’ve outlined, some of the benefits of Comerci’s acquisition are related to an expected improvement in the company’s profitability. Mainly, due to the better margins that CCM’s stores have vs Soriana’s (8.9% vs 6.9%). Furthermore, the company will benefit from lower costs related to economies of scale. The synergies generated with Comerci are estimated to reach up to P$1bn (9% of the EBITDA) and we believe that about 40% of these synergies will happen within the first year after the fully integration. The company has implemented operating efficiencies in its existing stores by remodeling and implementation new systems such as SAP. We believe that these improvements will go on after the integration compensating the increasing costs related to the purchase. Under this scenario we expect an expansion in Soriana’s profitability of 110bps to reach an EBITDA margin of 8.0% (vs 6.9%e in 2015).

Financial leverage. The integration of CCM was valued in P$35.4bn. The deal was financed with short-term and long-term credits. Because of this the net debt to EBITDA ratio of Soriana will increase to 3.3x (vs 0.0x prior the purchase). We think that this might trigger cautiousness on Soriana’s performance among investors; however, instead we recommend to pay close attention to the company’s commitment to reduce the leverage levels within the first year after the acquisition to 1.8x (vs 2.2xe) -based on cash flow generation and the divesture of non-strategic assets by P$3bn-.

Valuation. Our PT2016 implies an upside potential of 28.6% from the current price (P$38.87). The 2016E FV/EBITDA multiple of 10.1x is in line with Soriana’s L3Y average. It is also slightly below the sector’s median of 10.8x. We believe that the expected higher profitability (EBITDA margin of 8.0%) that is below Walmex’ (9.9%) but above Chedraui’s (6.4%) is fair for our current valuation, given the expected growth after Comerci’s stores integration that will bolster revenues by 32% and EBITDA by 52% YoY. Besides, an expected improvement in same-store sales and the dynamics within the sector should support the upside for SORIANA’s stocks.

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Disclaimer

The information contained in this document is illustrative and informative so it should not be considered as an advice and/or recommendation of any kind. BANORTE is not part of any party or political trend.

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

Directorio de Análisis

Gabriel Casillas Olvera Chief Economist and Head of Research [email protected] (55) 4433 - 4695 Raquel Vázquez Godinez Assistant [email protected] (55) 1670 - 2967

Análisis Económico

Delia María Paredes Mier Executive Director of Economic Analysis [email protected] (55) 5268 - 1694 Alejandro Cervantes Llamas Senior Economist, Mexico [email protected] (55) 1670 - 2972 Katia Celina Goya Ostos Senior Global Economist [email protected] (55) 1670 - 1821 Miguel Alejandro Calvo Dominguez Economist, Regional & Sectorial [email protected] (55) 1670 - 2220 Juan Carlos García Viejo Economist, International [email protected] (55) 1670 - 2252 Rey Saúl Torres Olivares Analyst [email protected] (55) 1670 - 2957 Lourdes Calvo Fernández Analyst (Edition) [email protected] (55) 1103 - 4000 x 2611

Estrategia de Renta Fija y Tipo de Cambio

Alejandro Padilla Santana Head Strategist – Fixed income and FX [email protected] (55) 1103 - 4043 Juan Carlos Alderete Macal, CFA FX Strategist [email protected] (55) 1103 - 4046 Santiago Leal Singer Analyst Fixed income and FX [email protected] (55) 1103 - 2368

Análisis Bursátil

Director Equity Research — Manuel Jiménez Zaldivar [email protected] (55) 5268 – 1671 Telecommunications / Media Marissa Garza Ostos Equity Research Analyst [email protected] (55) 1670 - 1719 Senior Equity Research Analyst – Marisol Huerta Mondragón [email protected] (55) 1670 – 1746 Conglomerates/Financials/ Mining/ Chemistry José Itzamna Espitia Hernández Equity Research Analyst – Food/Beverages [email protected] (55) 1670 – 2249 Equity Research Analyst – Airports / Cement / Valentín III Mendoza Balderas [email protected] (55) 1670 – 2250 Infrastructure / Fibras Victor Hugo Cortes Castro Equity Research Analyst – Auto parts [email protected] (55) 1670 – 1800 María de la Paz Orozco García Analyst [email protected] (55) 1670 – 2251

Análisis Deuda Corporativa

Tania Abdul Massih Jacobo Director Corporate Debt [email protected] (55) 5268 – 1672 Hugo Armando Gómez Solís Analyst, Corporate Debt [email protected] (55) 1670 – 2247 Idalia Yanira Céspedes Jaén Analyst, Corporate Debt [email protected] (55) 1670 – 2248

Banca Mayorista

Armando Rodal Espinosa Head of Wholesale Banking [email protected] (81) 8319 - 6895 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 Velazquez Rodriguez Head of International Banking [email protected] (55) 5004 - 5279 Victor Antonio Roldan Ferrer Head of Corporate Banking [email protected] (55) 5004 - 1454

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