Grupo Comercial Chedraui Jerónimo Cobián | Consumer Goods Analyst December 14, 2020 │ Company Update [email protected] Ext. 1193

Appealing Investment Opportunity Enrique Mendoza | Sr. Analyst [email protected] Reiterating ‘Outperform’; YE2021 PT Of P$38.00 Actinver: (55) 1103 6600

Updated Outlook. We have revised our coverage on CHEDRAUI, CHEDRAUI Outperform updating our operating and financial estimates for the pandemic and post- crisis eras. We are considering the effects of the Covid-19 on CHEDRAUI’s Local Ticker: CHDRAUIB local and foreign operations through alternate scenarios, in order to be more Last Price: 29.60 realistic (accurate) in an environment of high uncertainty and lower medium Price Target YE2021: 38.00 and long-term visibility; therefore, we have revised our forecasts through all Expected Return: 28.4% horizons. At the current price levels that CHEDRAUI is trading, we find the name as an appealing investment opportunity, with: (1) a highly defensive Dividend Yield 2021E: 2.3% profile, (2) dollarized income, (3) a healthy financial position, and (4) further Total Potential Return: 30.7% growth potential in terms of presence and profitability. Liquidity: Medium The Story Has Been Enhanced. The sanitary crisis has accelerated the Market Cap. (P$ M) 28,532 company’s growth, at the same time it has improved its long-term Enterprise Value (P$ M): 57,774 fundamentals, in our view. Year-to-date CHEDRAUI’s shares have 52-Week Price Range (P$): (22.34 - 29.6) performed +9.1 vs. 2019, at the same time, so far throughout the pandemic, Free Float: 16.0% the company has been able to increase its revenues, EBITDA, and net Avg. Daily Trade (P$ M): 41.9 income by 13.4%, 17.5%, and 58.3%, respectively, showing a clear signal of CHEDRAUI’s well-positioning across the industry amidst a very tough economic environment. Furthermore, for the next five years, we would Share Price vs. MEXBOL (IPC) expect the name to keep increasing steadily its number of stores under 110 operation, mainly relying on its strengthened financial position resulted from the company’s operations’ sound performance amid the sanitary crisis. 105 Moreover, CHEDRAUI’s profitability should experience further 100 improvements, mainly through the total integration of the Fiesta operation 95 (acquired in 2018) to El Super’s business model. Net, we reiterate our 90 positive long-term stance on the name, at the same time we would expect a revaluation of CHEDRAUI’s shares in the coming future. 85 Return Index 80

Currently Trading Below Its Replacement Value. Under another 75 approach aside from our price target (i.e., intrinsic value), we find CHEDRAUI’s current valuation as highly attractive, as its EV per m2 70 Dec-19 Feb-20 May-20 Jul-20 Sep-20 Nov-20 (~P$33,696) implies a considerable discount vs. its cost per m2 (~P$47,599), therefore, trading ~29% below its replacement value. CHEDRAUI MEXBOL (IPC)

Introducing PT YE2021 Of P$38.00 /Share. Our valuation implies a 28.4% potential capital appreciation and a 2.3% dividend yield over CHEDRAUI’s last price, which implies a total potential return of 30.7%. Our price target was determined through the weighted average of the fair values reached in 2 models with different scenarios: (1) central and (2) alternate, to which we applied different macro and operating assumptions.

Estimates and Valuation 2019A 2020E 2021E 2022E Total Revenues (P$ M) 129,443 144,813 138,161 143,685 EBITDA (P$ M) 9,127 10,524 10,181 10,827 EBITDA Margin (%) 7.1% 7.3% 7.4% 7.5% Maj. Net Income (P$ M) 1,518 2,361 2,276 2,641 Net Margin (%) 1.2% 1.6% 1.6% 1.8% EPS (P$) 1.57 2.45 2.36 2.74 P/E (x) 16.6x 12.1x 12.5x 10.8x EV/EBITDA (x) 6.4x 5.5x 5.6x 5.2x P/B (x) 1.0x 0.9x 0.8x 0.8x ND/EBITDA (x) 3.5x 2.8x 2.8x 2.5x

actinverresearch.com Disclaimer: https://goo.gl/6b8m3o Table of Contents

Grupo Comercial Chedraui Overview ...... ……... 3-6 Investment Thesis .……………………………...……………. 3-6 Key Investment Highlights .………….………...….…………. 3-4 Risks To Investment Thesis ..…………..……...……………. 5-6 The Story Has Been Enhanced ………………………...... 7-8 Further Growth Ahead …………………………..…………... 7-8 Other Qualitative Drivers Not Yet Considered ...………….. 8 Source: Company reports, Actinver The Integration Of Fiesta Mart ………………….….…….…. 8 Revised Outlook & Forecasts ....……………………..…... 9-12 Before & After The Pandemic ………………..……………... 9 Expectations During & Post-Covid ………...……………...…. 9 Central Scenario …..…..……………………..……………...…. 10-11 Alternate Scenario ………….………………..……………...…. 11-12 Valuation: Methodologies, Key Assumptions & Scenarios …………………………..……..…………..……... 13 Forecasted Financials - Central Scenario ……....……... 14-16 Forecasted Financials - Alternate Scenario …....……... 17-19

2 actinverresearch.com Grupo Comercial Chedraui Overview

CHEDRAUI is currently the third-largest Mexican self-service retailer and the only one operating in the United States (~42% of total revenues); also, it manages a real estate business (~1% of total revenues). The company mainly targets the low and middle-socioeconomic spectrum, continually implementing margin reinvestments to offer one of the lowest prices in the industry. Furthermore, its formats portfolio is well-diversified in terms of size and price: (1) Chedraui (low-prices ), (1.1) Selecto Chedraui (premium hypermarket), (2) Súper Chedraui (low-prices ), (2.1) Selecto Súper Chedraui (premium supermarket), (3) Súper Che (convenience), and (4) Supercito (convenience). Currently, the company operates 314 stores (1,483,305 m2) in and 123 units (352,861 m2) in the U.S. (437 stores covering 1,836,166 m2 in total). In 2010, when the company went public, WALMEX was 7 times bigger than CHEDRAUI in terms of sales, today, the proportion vs. the self-service leader has been narrowed to 5 times through both organic and inorganic growth. Note that, we believe that the company has the potential to surpass (in terms of consolidated revenues) in the near-term the current second-largest Mexican self-service retailer, , proving once again the continuous growth of its operations.

Investment Thesis

Key Investment Highlights:

Defensive Profile A proven defensive business model, with a diversified format portfolio covering all socioeconomic levels (mostly focused on a low-price offering). Therefore, it is less likely to experience weak results due to adverse economic environments, at the same time, it can capitalize on uptrends from economic cycles. Moreover, the company has solid operations in Mexico and in the U.S. to keep capitalizing from the ongoing sanitary crisis.

Appealing Valuation Attractive valuation of CHEDRAUI, currently trading at an implied 28.4% discount to our year-end 2021 price target (i.e., intrinsic value) of P$38.00 / share (page 13), plus an additional 2.3% return from dividends. Also, it trades 5.3% below its last 12-month P/E multiple (13.2x), which we consider a conservative approach to measure CHEDRAUI’s discount in the market, as it doesn't fully incorporate major qualitative variables, in our view. Moreover, CHEDRAUI also trades at a ~29% below its replacement value, clearly reflecting the significant discount of the share price vs. its fair value, at the moment. It is worth mentioning that, since CHEDRAUI´s IPO (2010) the company has tripled its EBITDA, from P$3,375 M in 2010 to P$10,565 M in 2020E. In the same period, CHEDRAUI has more than doubled its number of stores under operation, as in 2010 the company had 190 stores and currently operates 437 stores (3Q-2020); however, despite the continuous growth of CHEDRAUI’s operations, the share price currently trades 14.0% below its initial public offering price (P$34.00 /share).

Further Profitability Expansion Potential The company is currently working towards achieving the full integration (i.e., cost and expense efficiencies) by 2023 of its most recent acquisition (2018), Fiesta Mart, which should enable the company to expand its current profitability. Before the Covid pandemic, CHEDRAUI posted a 7.1% EBITDA margin (2019), which in our sense should improve to a stable 7.6% after Fiesta’s total integration (central scenario).

3 actinverresearch.com Seasoned Management Team CHEDRAUI has a proven and experienced management team in the development, acquisition, commercialization, and operation of self-service stores in Mexico, and over 24 years of experience in the United States. They have been able to successfully manage the business through each part of the self-service industry cycle. Since its foundation in 1920, the company has become one of the industry leaders, currently being the third-largest self- service chain among the Mexican market and one of the most important chains for the Mexican-Americans in the United States.

Healthy Financial Position The company has a healthy financial position, with a Net Debt / EBITDA standing at 0.7x (L12M) without considering lease liabilities and at 3.3x (L12M) IFRS-16 adjusted. So far throughout the sanitary crisis, the company has been able to improve its financial position following solid operating results across the board, which will enable CHEDRAUI to keep growing its presence and seize opportunities throughout key regions to reinforce its presence for the coming years.

Sustained Growth Prospects Based on the aforementioned statements of our investment thesis, we estimate (central scenario) CAGRs for the 2021-2026 period of 4.1%, 4.7%, and 10.3% for revenues, EBITDA, and net income, respectively. Net, we would expect a revaluation of CHEDRAUI’s P/E multiple from 12.5x (2021E) to 16.4x (implicit multiple to our year-end 2021 price target of P$37.70 /share) in the short-term. At the same time, we reiterate our positive long-term stance on the name.

4 actinverresearch.com Potential Risks To Our Investment Thesis:

Evolution Of The Covid-19 Pandemic New Covid-19 waves or outbreaks that could lead to new confinement measures and/or a setback in the reopening of the local economy, and consequently aggravating the economic performance and slowing down its recovery process. On this regard, we have developed an alternate scenario for CHEDRAUI, in which we precisely assume a second Covid-19 wave in Mexico during the fall-winter season.

Potential Economic Slowdown CHEDRAUI’s operations are largely linked to Mexico’s and the U.S.’ economic cycles. Decelerations in both economies could negatively impact the purchasing power and spending confidence of consumers, primarily the low and middle-income classes, which are CHEDRAUI’s main market niche. Note that, we are partially accounting for a softening in the economic activity in our alternate scenario. Also, the economic conditions in the U.S. have a strong influence on economic conditions in Mexico (e.g., remittances). That being said, a weak performance by the Mexican and/or the U.S. economies could adversely affect CHEDRAUI’s s operating and financial results.

Non-Accretive Acquisitions The company could acquire complementary companies or businesses that may result in difficulties regarding the integration of acquisitions and inefficient capital allocation. CHEDRAUI may not be able to successfully integrate the acquired operations, including their personnel, financial systems, distribution, operations, and other general operations. If the company fails to successfully integrate acquisitions, its business could be negatively affected.

Strong Competition The Mexican self-service industry is characterized by having an intense competition and increasing pressure on profit margins. The number and type of competitors and the level of competition experienced by individual stores varies depending on the location. Competition occurs primarily on prices and to a lesser extent on location, merchandise selection, quality of merchandise (mainly on perishables), service, store conditions, and promotions. CHEDRAUI faces strong competition from national, international , and convenience store operators, including WALMEX, SORIANA, LA COMER, and other Mexican/international self-service stores. Additional competitors could enter the Mexican and/or the U.S. market in the future, either through joint ventures or directly. In each region in which the company operates, it competes with numerous local and regional businesses, as well as small grocery stores and street markets (i.e., informal economy). Also, competitors' adoption of innovative store formats, aggressive pricing strategies, and self- service sales methods, such as the internet, illegal imports, and the informal market, could cause CHEDRAUI to lose market share and affect the business’ operating and financial results.

New Store Openings The industry’s further growth potential depends on new store openings. The implementation of the company’s expansion plan involves considerable expenses before generating the target stabilized profitability levels and could suffer from lower than expected ramp-up phases, higher expenses, and/or lower prices, which may have an impact on profitability. New store openings depend on a wide number of factors, including the company’s ability to find and secure the best locations, hiring and training qualified personnel, the current number, and future competitors in the areas where the new stores will be located. Also, the company could have difficulties to open new stores due to potential construction restrictions or regulatory risks.

5 actinverresearch.com Equity Market Volatility Equity market volatility amidst a highly uncertain economic environment may prevent CHEDRAUI’s price to reach its fundamental (intrinsic) value (i.e., our price target). This has been particularly evident in the ongoing local market conditions, in which most names trade at lower multiples or significant discounts to their intrinsic/fundamental values.

Local Political Uncertainty Uncertainty regarding the execution of the local political agenda, particularly during the 2020-2021 electoral process in the country (the largest in history), which began on Sep. 7, 2020, and concludes on Jun. 6, 2021.

Regulatory Noise & Potential Changes In-Laws Local regulatory uncertainty (e.g., energy sector), which may prevent new investments to enter Mexico and limit growth in the consumers' purchasing power and confidence. Higher electricity tariffs represent a risk (low) to self- service chains’ profitability.

Mexico Insecurity Concerns Further local insecurity concerns, bearing in mind its high correlation to weak economic environments.

6 actinverresearch.com The Story Has Been Enhanced CHEDRAUI—Revenues Breakdown L12M (%) Further Growth Ahead (Qualitative Thoughts)

0.6% We highlight CHEDRAUI’s long-term prospects at the same time the most recent positive results amid the Covid-19 pandemic (revenues, EBITDA, and net income growing YoY by +13.4%, +17.5%, and +58.3%, respectively) prove once again the resilience and well-positioning of the business to keep growing steadily in the coming years. Note that, for further detail (qualitative and 42.4% 57.0% quantitative) on our forecasts please refer to pages 10-19.

Mexico. In the local market, we believe CHEDRAUI has further expansion potential as: (1) it operates 314 stores, while direct competitors like WALMEX and SORIANA have 2,599 and 797 units under operation, respectively; (2) operates in 25 of 32 states across Mexico (i.e., expansion potential in the north Mexico United States Real Estate region); and (3) there is enough space to keep opening new stores in CHEDRAUI’s key operations (e.g., south and central regions). Source: Company reports, Actinver

CHEDRAUI—Stores Under Operation Vs. Largest Local Peers CHEDRAUI—314 Stores In Mexico (3Q-2020)

3,000 2599 2,500

2,000

1,500 1,000 797

500 314

0 3Q20A CHEDRAUI WALMEX SORIANA Source: Companies reports, Actinver

United States. In our view, the company’s operation in the U.S. (42.4% of Source: Company reports, Actinver total sales) should keep adding value in the long-term considering: (1) the integration of Fiesta (page 8); (2) its expansion potential, as the company currently operates only in few cities across 6 states; and (3) its dollarized income, naturally offering a long-term hedge vs. the MXN depreciation vs. the CHEDRAUI—123 Stores In The U.S. (3Q-2020) USD.

CHEDRAUI—Profitability Evolution (P$ M, %)

12,000 8.5% 10,000 7.5% 8,000 6.5% 6,000 5.5% 4,000 4.5% 2,000 3.5% 0 2.5% 2017A 2018A 2019A 2020E 2021E 2022E 2023E

Consolidated EBITDA EBITDA Margin (Consolidated) EBITDA Margin (Mexico) EBITDA Margin (U.S.) Source: Company reports, Actinver EBITDA Margin (El Super) EBITDA Margin (Fiesta)

Source: Company reports, Actinver

7 actinverresearch.com The Integration Of Fiesta Mart (Loading…)

On April 30th, 2018, CHEDRAUI acquired Fiesta Mart for US$265 M, a CHEDRAUI—Fiesta Mart company with 63 stores in the state of Texas, United States, specifically operating in the cities of Houston, Dallas, and Austin. During the 2Q18, Fiesta posted a 4.0% EBITDA margin (1Q-2018 figures are not disclosed), which gradually contracted to 3.7% and 0.9% in the 3Q18 and 4Q18, respectively, showing pressures across the first steps of its integration to El Super’s business model. During 2019, the operation filled improvements by expanding its margin by 50 bps (3.4%) vs. the approximate figure of 2018. Afterward, during the 1Q20-3Q20, Fiesta has already reached a 4.8% avg. margin (+140 bps vs. 2019); although the solid performance of Fiesta’s profitability may indeed be largely attributable to the surge of sales amid the pandemic coupled with a stable costs and expenses structure, we would expect slight sequential improvements (even after sales normalize) quarter over quarter through the 2021-2023 period, reaching a 7.0% EBITDA margin just as El Super (i.e., fully integrating Fiesta) by the end of 2023 (central scenario). Note that, the improvement of Fiesta’s margins are based on costs & expenses efficiencies, such as implementing new financial & operating systems and also executing optimizations in the business’ distribution network.

CHEDRAUI—The Evolution Of Fiesta’s Integration (P$ M, %)

7.5%

6.0%

4.5% Source: Company reports, Actinver

3.0%

1.5% 2018A 2019A 2020E 2021E 2022E 2023E

EBITDA Margin (Fiesta) EBITDA Margin (El Super)

Source: Company reports, Actinver

Other Qualitative Drivers Not Yet Considered In Our Valuation

Following CHEDRAUI’s management’s remarks during the 3Q-2020 earnings conference call concerning the recent strengthening of the company's financial position, we highlight some potential drivers which we are not yet considering in our valuation due to its still low visibility regarding its potential execution. (1) There is a probability that the company could grow its presence more rapidly vs. our current expectations, as the management expect to be able to seize growth opportunities (organic and inorganic) across key regions; (2) the company could achieve higher profitability (in its Mexican operation, in our view) vs. our current assumptions, as according to the management CHEDRAUI would be able to improve its gross margin through negotiating better terms with suppliers; if this happens to materialize, we could expect a higher EBITDA margin vs. our 7.6% (central scenario) for 2023, although in our sense it is to soon yet to assume any benefit from this front in our forecasts aside from Fiesta’s full integration. (3) Furthermore, CHEDRAUI could offer a higher dividend to investors; note that, the company’s last dividend payment (one exhibition during the 2Q-2020) accounted for P$0.4439 /shr., a 28% payout ratio according to the generated profits of 2019.

8 actinverresearch.com Revised Outlook & Forecasts

The Self-Service Industry Before & After The Pandemic

Before the pandemic (2019), we observed a noticeable deceleration in the Mexican consumption sector, following the softening of the Mexican economy (GDP -0.3% YoY). Concerning the above, job creation, income, private consumption, ANTAD’s, and CHEDRAUI’s same-store sales (SSS) experienced a slowdown. In addition to the weak performance of the economy, it is key to highlight that, the Mexican government implemented additional social programs to provide resources in a higher and more equitable manner to the lower socio-economic class; the nature of these strategies should have boosted results, in consequence of a higher purchasing power among the Source: Getty Images larger base of the Mexican population. However, these programs allowed withdrawing cash, which reshaped where and what consumers spend the money. Formerly, beneficiaries were only able to purchase consumer goods and general merchandise through grocery vouchers, which ensured purchases in certain self-service stores and other businesses.

Self-Service Industry—Public Companies

Source: Getty Images

Source: Companies reports, Actinver.

Expectations During & Post-Covid

Post the pandemic we would expect that the well-positioned companies (mostly public companies) across the industry to come out strengthened from the crisis, steadily growing its presence relying on their improved financial positions, and continuously gaining market share vs. the not-so-well-positioned players. Now, talking about our forecasts, we would first mention that we have developed 2 different models, each accounting for specific quantitative (macro and operational), as well as qualitative inputs according to the following scenarios: central and alternate. Our central scenario assumes a gradual recovery of the local economy, following the reopening of business activities according to the national epidemiological Covid-19 risk levels at the state level. We are not considering a resurgence of the virus during the fall-winter season, a material setback in the reopening process, or a new lockdown of the economy. On the other hand, our alternate scenario assumes a more challenging business environment, with a sharp resurgence of Covid-19 infections during the fall-winter season, amid the reopening process of the local economy and the seasonal flu period. Mexico would follow a situation similar to the one experienced in Europe (second virus wave), with new restriction measures.

9 actinverresearch.com Central Scenario

Revenues We are considering a natural normalization of CHEDRAUI’s same-store sales For further detail on our forecasts please refer to the (SSS) in Mexico and the U.S. during 2021, as we consider the consumer short- tables shown in the last section of this report (pages term trends (e.g., eat at home, home-office) sharply experienced during the 14-19). In the next section, you will find the key pandemic should gradually decelerate to some extent of the pre-sanitary crisis. highlights of our valuation of CHEDRAUI. Also, starting 2022, both Mexico’s and the U.S.’ SSS growth should be slightly below the local inflation rates (in-line with the past 3-years dynamism), reflecting a healthy performance post the 2020–2021 crisis. Furthermore, on the expansion front, we are assuming the company can open an average of 20 new stores per year for the 2021-2026 period in Mexico (with no new openings in the U.S.), growing its sales floor area (Mexico) in a 1.8% CAGR for the same period; note that, we would expect the company to keep mainly focusing on the Chedraui and Supercito store formats. As a result, we estimate a 4.1% CAGR for the 2021-2026E period.

EBITDA On the profitability front, we expect gradual EBITDA margin expansions during the 2021-2023 period (flat margins after that time), as the Fiesta business in the U.S. should continue its integration to El Super business model. We expect Fiesta to reach a 7.0% (just as El Super) EBITDA margin in 2023 (currently at 4.4% on a last 12-months basis), which will enable CHEDRAUI to expand its consolidated margin up to 7.6% from the 7.1% posted in 2018 (year of the acquisition of Fiesta); we are assuming a 7.3% and 7.4% margins for 2020 and 2021, respectively. Note that, we based our view on slight gross margin expansions (reflecting a stable sales mix and continued investments in prices) and year to year operating margin expansions resulted from efficiencies (i.e., integration to a more profitable business model) in CHEDRAUI’s Fiesta operation. We estimate a 4.7% CAGR (above sales) for the 2021-2026E period.

Net Income For the bottom-line, as a direct result of the company’s operating improvements in its foreign business (2021-2023) and the reduction of its leverage (i.e., lower interest expenses) during the 2020-2026 period, we would anticipate the net margin to reach 2.2% in 2026, +60 bps vs. 2021. Net, we expect a 10.3% CAGR for the 2021-2026E period.

CHEDRAUI—Revenues (P$ M, %) CHEDRAUI—EBITDA (P$ M, %)

160,000 25.0% 11,000 10,827 7.6% 144,833 143,685 138,161 10,524 140,000 20.0% 129,443 10,500 7.5% 10,181 120,000 15.0% 10,000 7.4% 100,000 10.0%

80,000 5.0% 9,500 7.3% 9,127 60,000 0.0% 9,000 7.2% 40,000 -5.0% 8,500 7.1% 20,000 -10.0%

0 -15.0% 8,000 7.0% 2019A 2020E 2021E 2022E 2019A 2020E 2021E 2022E

Consolidated Revenues Δ SSS Mexico Δ SSS U.S. Consolidated EBITDA EBITDA Margin

Source: Company reports, Actinver Source: Company reports, Actinver

10 actinverresearch.com CHEDRAUI—Net Income (P$ M, %) CHEDRAUI—Leverage (x)

3,000 2.0% 4.0x 2,641 3.5x 3.5x 2,500 2,361 2,276 1.8% 3.0x 2.8x 2.8x 2.5x 2,000 1.6% 2.5x 1,518 1,500 2.0x

1.4% 1.5x 1,000 1.0x 1.2% 500 0.5x

0 1.0% 0.0x 2019A 2020E 2021E 2022E 2019A 2020E 2021E 2022E

Net Income Net Margin Net Debt/EBITDA

Source: Company reports, Actinver Source: Company reports, Actinver

Alternate Scenario

Revenues Our alternate scenario would imply a tougher 4Q20-1Q21 period as compared For further detail on our forecasts please refer to the to our central scenario for the overall economic activities, however, due to the tables shown in the last section of this report (pages self-service industry’s highly defensive profile amid the pandemic, we are 14-19). In the next section, you will find the key expecting higher sales during the resurgence of the virus (4Q20-1Q21) vs. our highlights of our valuation of CHEDRAUI. central assumptions. On the other hand, we estimate a slower economic recovery, which should result in lower growth rates compared to our central forecasts in 2022. For the expansion front, we are assuming similar average new store openings (4 less units per year) vs. our central scenario, growing its sales floor area (Mexico) in a 1.4% CAGR for the same period and in-line with our central scenario, as we expect the same new openings of CHEDRAUI’s largest formats through both scenarios. As a result, we estimate a 3.4% CAGR for the 2021-2026E period.

EBITDA On the profitability front, we expect margins to be slightly lower vs. our central scenario, as we are assuming more conservative forecasts in Fiesta’s integration to El Super business in the United States. We estimate Fiesta to reach a 6.5% EBITDA margin (50 bps below El Super’s profitability) in 2024 and stable levels onwards. Therefore, we would anticipate CHEDRAUI to expand its consolidated margin up to 7.4% (below central assumptions) by 2026. Note that, we are supporting our alternate view on lower costs and SG&A efficiencies vs. our central scenario, given a slower and less profitable integration (potential risk) of the Fiesta operation (acquired in 2018 with a ~2.9% avg. EBITDA margin) vs. initial expectations. We estimate an 4.1% CAGR (above sales) for the 2021-2026E period.

Net Income For the bottom-line, as a direct result of the company’s operating improvements in its foreign business (2021-2023) and the reduction of its leverage (i.e., lower interest expenses) during the 2020-2026 period, we would anticipate the net margin to reach 2.0% in 2026, +40 bps vs. 2021. Net, we expect a 8.8% CAGR for the 2021-2026E period, below our central scenario mainly due to lower growth rates at the operating level throughout the 2021- 2026 period.

11 actinverresearch.com CHEDRAUI—Revenues (P$ M, %) CHEDRAUI—EBITDA (P$ M, %)

160,000 25.0% 11,000 7.5% 145,185 141,987 137,272 10,538 140,000 129,443 20.0% 10,500 10,406 7.4% 120,000 15.0% 10,002 10,000 100,000 10.0% 7.3% 80,000 5.0% 9,500 9,127 60,000 0.0% 7.2% 9,000 40,000 -5.0% 7.1% 8,500 20,000 -10.0%

0 -15.0% 8,000 7.0% 2019A 2020E 2021E 2022E 2019A 2020E 2021E 2022E

Consolidated Revenues Δ SSS Mexico Δ SSS U.S. Consolidated EBITDA EBITDA Margin

Source: Company reports, Actinver Source: Company reports, Actinver

CHEDRAUI—Net Income (P$ M, %) CHEDRAUI—Leverage (x)

2,500 2,372 2,379 1.8% 4.0x 2,188 3.5x 3.5x 2,000 2.8x 1.6% 3.0x 2.8x 2.7x 1,518 1,500 2.5x 1.4% 2.0x

1,000 1.5x

1.2% 1.0x 500 0.5x

0 1.0% 0.0x 2019A 2020E 2021E 2022E 2019A 2020E 2021E 2022E

Net Income Net Margin Net Debt/EBITDA

Source: Company reports, Actinver Source: Company reports, Actinver

12 actinverresearch.com Valuation: Methodologies, Key Assumptions, & Scenarios

CHEDRAUI: Valuation Sensitivity & Price Target $ 55 Our CHEDRAUI’s year-end 2021 price target of P$38.00 /share was determined through the weighted average of the fair values reached in each of $ 50 2 models: central (50% probability) and alternate (50% probability), to which we applied different macro and operating assumptions. $ 45 $ 42.10 In each model we used a blended valuation methodology consisting of: i) $ 40 discounted cash flows (DCF) and ii) target multiple (P/E). For each method, a $ 38.00 25% and 75% weight, respectively, was applied for the calculation of their $ 35 independent fair values (central and alternate). $ 33.90 $ 30 With a 50% weight on the central scenario’s P$42.10 /shr. fair value and a $ 25 50% weight on the alternate’s P$33.90 /shr. fair value, we obtained our CHEDRAUI’s year-end 2021 price target of P$38.00 /share. $ 20 Dec-16 Dec-17 Dec-18 Dec-19 Dec-20 Dec-21

CHEDRAUI’s Historical P/E Multiple

30x 25x +1σ: 18.7x 20x 5-Yr Avg.: 15.2x 15x -1σ: 11.7x 10x 11.6x 5x Dec-15 May-16 Oct-16 Mar-17 Aug-17 Jan-18 Jun-18 Nov-18 Apr-19 Sep-19 Feb-20 Jul-20 Dec-20

Source: Bloomberg, Actinver

Central Scenario (50% Probability) Macro forecasts: Mexico’s GDP of -9.1% in 2020 and +3.8% in 2021; U.S. GDP of -3.7% in 2020 and +4.0% in 2021; year-end local inflation at 3.5% in 2020 and 3.9% in 2021; year-end FX at P$20.50 /US$ in 2020 and P$20.90 in 2021; local reference rate at 4.25% and 4.00% for YE2020 and YE2021, respectively. Qualitative input: We assume a gradual recovery of the local economy, following the reopening of business activities according to the national epidemiological Covid-19 risk levels at the state level. We are not considering a resurgence of the virus during the fall- winter season, a material setback in the reopening process, or a new lockdown of the economy. Valuation assumptions: We are using a 14.47% cost of equity (Ke) based on Damodaran’s model: i) adjusted risk-free rate (RFR) of 3.42% based on a 6.20% Mx 10-YR sovereign bond (RFR) and a country risk premium (CRP) of 2.15%; ii) adjusted equity risk premium (adj. ERP) of 7.37% based on an Mx ERP of 6.88% in US$ and a long-term inflation spread of 1.30%; iii) a 1.50 adjusted Beta (reflecting the share’s low liquidity). Our DCF model incorporates a 9.09% WACC, with a 5-year explicit period. In our multiple valuation methodology, we applied a 13.0x target P/E multiple to our blended 2022 earnings forecasts, based on our estimated earnings CAGR (10.10%) plus the average dividend yield (2.90%) for the 2021-2026 period.

Alternate Scenario (50% Probability) Macro forecasts: Mexico’s GDP of -9.8% in 2020 and +2.8% in 2021; U.S. GDP of -4.2% in 2020 and +3.3% in 2021; year-end local inflation at 3.5% in 2020 and 3.9% in 2021; year-end FX at P$20.00 /US$ in 2020 and P$20.50 in 2021; local reference rate at 4.00% for YE2020 and unchanged throughout YE2021. Qualitative input: We assume a more challenging business environment, with a sharp resurgence of Covid-19 infections during the fall-winter season, amid the reopening process of the local economy and the seasonal flue period. Mexico would follow a situation similar to the one experienced in Europe (second virus wave), with new restriction measures. Valuation assumptions: We are using a 15.00% cost of equity (Ke) based on Damodaran’s model: i) adjusted risk-free rate (RFR) of 3.40% based on a 6.75% Mx 10-YR sovereign bond (RFR) and a country risk premium (CRP) of 2.75%; ii) adjusted equity risk premium (adj. ERP) of 7.73% based on an Mx ERP of 7.48% in US$ and a long-term inflation spread of 1.30%; iii) a 1.50 adjusted Beta (reflecting the share’s low liquidity). Our DCF model incorporates a 9.42% WACC, with a 5-year explicit period. In our multiple valuation methodology, we applied a 11.4x target P/E multiple to our blended 2022 earnings forecasts, based on our estimated earnings CAGR (8.80%) plus the average dividend yield (2.60%) for the 2021-2026 period.

13 actinverresearch.com Forecasted Income Statement (Extended)—Central Scenario Figures In P$ Millions, Otherwise Noted

Period 2019A 2020E 2021E 2022E Δ 19/18 Δ 20/19 Δ 21/20 Δ 22/21 CAGR (21-26E)

Income Statement

Revenues 129,443 144,813 138,161 143,685 11.6% 11.9% -4.6% 4.0% 4.1% Cost of Sales 101,491 112,856 108,261 112,371 Gross Profit 27,952 31,957 29,900 31,314 13.1% 14.3% -6.4% 4.7% 4.3% Gross Margin 21.6% 22.1% 21.6% 21.8% 29 bps 47 bps -43 bps 15 bps Operating Expenses 22,657 25,497 23,869 24,682 Other Income (Expense) (281) 226 231 239 Operating Profit 5,576 6,686 6,262 6,871 8.0% 19.9% -6.4% 9.7% 6.4% Operating Margin 4.3% 4.6% 4.5% 4.8% -14 bps 31 bps -9 bps 25 bps Depreciation 3,551 3,837 3,919 3,956 EBITDA 9,127 10,524 10,181 10,827 10.5% 15.3% -3.3% 6.3% 4.7% EBITDA Margin 7.1% 7.3% 7.4% 7.5% -7 bps 22 bps 10 bps 17 bps

Net Financial Expenses (3,111) (3,160) (2,963) (3,044) Financial Income 183 193 161 166 -19.6% 5.0% -16.2% 3.1% Interest Gain 29 99 161 166 FX Gain 120 60 0 0 Derivatives Gain 34 34 0 0 Gain in Value of Instruments 0 0 0 0 Other Financial Income 0 0 0 0 Financial Expenses 3,294 3,352 3,125 3,210 11.5% 1.8% -6.8% 2.7% Interest Paid 2,008 1,861 1,699 1,706 FX Losses 64 147 0 0 Derivatives Losses 337 347 354 354 Loss in Value of Instruments 0 0 0 0 Other Financial Expenses 885 997 1,072 1,151

Results form JVs 0 0 0 0 Profit Before Taxes 2,465 3,527 3,298 3,827 1.2% 43.1% -6.5% 16.0% Taxes 977 1,117 1,022 1,186 Cash Taxes 1,261 404 1,022 1,186 Deffered Taxes (284) 713 0 0 Profit from Continuing Operations 1,488 2,410 2,276 2,641 Profit from Discontinued Operations 0 0 0 0 Minority Participation (29) 49 0 0 Net Profit 1,518 2,361 2,276 2,641 -7.3% 55.6% -3.6% 16.0% 10.3% Net Margin 1.2% 1.6% 1.6% 1.8% -24 bps 46 bps 2 bps 19 bps Tax Rate 39.6% 31.7% 31.0% 31.0%

14 actinverresearch.com Forecasted Balance Sheet Statement—Central Scenario Figures In P$ Millions, Otherwise Noted

Period 2019A 2020E 2021E 2022E Δ 19/18 Δ 20/19 Δ 21/20 Δ 22/21 CAGR (21-26E)

Balance Sheet

Total Assets 87,391 73,886 74,846 76,380 -1.0% -15.5% 1.3% 2.0% 3.7% Current Assets 18,599 23,997 23,946 25,547 1.3% 29.0% -0.2% 6.7% 9.4% Cash & Equivalents 984 4,660 4,535 5,710 Short Term Investments 0 0 0 0 Receivables 1,412 1,577 1,657 1,645 Other Receivables 2,254 2,362 2,519 2,561 Inventories 13,471 14,761 14,710 15,092 Other Current Assets 479 637 526 539 Long Term Assets 68,792 49,889 50,900 50,834 -1.6% -27.5% 2.0% -0.1% 0.5% Receivables LT 279 184 307 315 Investment in Associated Companies 9,518 9,651 9,651 9,651 Property, Plant & Equipment 32,965 33,186 33,419 33,784 Investment Assets 0 0 0 0 Biological Assets 0 0 0 0 Intangible Assets 4,465 4,795 5,432 4,975 Deferred Taxes 1,197 1,198 1,198 1,198 Other LT Assets 1,150 875 893 911 Right of Use Assets 19,218 19,333 19,676 19,843

Total Liabilities 59,983 41,420 39,933 40,480 -2.3% -30.9% -3.6% 1.4% 3.6% Current Liabilities 24,969 28,428 28,723 28,752 3.9% 13.9% 1.0% 0.1% 3.0% Bank Loans (ST) 1,768 1,496 1,496 1,496 Debt Securities (ST) 0 583 583 583 Other ST Liabilities w/cost 0 0 0 0 Suppliers 21,474 24,533 24,846 24,783 Taxes Payable (ST) 506 749 590 588 Other ST Liabilities 1,221 1,066 1,207 1,302 Lease Liabilities (ST) 560 564 574 578 Long Term Liabilities 35,014 12,992 11,210 11,728 -6.3% -62.9% -13.7% 4.6% 4.9% Bank Loans (LT) 8,733 8,985 7,210 7,725 Debt Securities (LT) 0 0 0 0 Other LT Liabilities w/cost 0 443 437 439 Taxes Payable (LT) 2,857 3,533 3,533 3,533 Other LT Liabilities 347 31 30 31 Lease Liabilities (LT) 21,761 21,891 22,280 22,468

Consolidated Equity 27,409 32,466 34,913 35,900 2.2% 18.5% 7.5% 2.8% 3.8% Controlling Interest 27,396 32,527 34,979 35,967 Minority Equity 12 (61) (65) (67)

15 actinverresearch.com Forecasted Cash Flow Statement—Central Scenario Figures In P$ Millions, Otherwise Noted

Period 2019A 2020E 2021E 2022E

Cash Flow Statement

Profit Before Taxes 2,465 3,527 3,298 3,827 Non Cash Items 0 0 0 0 Investment Activity Related Items 0 3,955 3,919 3,956 Depreciation and Amortization 3,550 3,955 3,919 3,956 Gain (Loss) on Sale of P, P & E 0 0 0 0 Write-Down (Reversal) 0 0 0 0 Partic. In Associates and JV 0 0 0 0 Dividends Collected 0 0 0 0 Interest Gains 0 0 0 0 FX Gains 0 0 0 0 Other Items 0 0 0 0 Financing Activities 0 0 0 0 Accrued Interests 0 0 0 0 FX Gains 0 0 0 0 Gain on Derivative Instruments 0 0 0 0 Other Items 0 0 0 0 Lease Payments 0 0 0 0 Pre-Tax Cash Flow 0 7,482 7,217 7,783 Working Capital Changes 5,237 1,602 (1,037) (1,575) Cash Flow from Operations 4,845 9,083 6,180 6,208

Cash Flow from Investment (2,866) (2,853) (5,013) (4,329) Permanent Investments 0 0 0 0 Sale of Permanent Investments 0 0 0 0 CapEx (3,790) (2,449) (4,145) (4,311) Sale of P, P & E 1,039 (231) 0 0 Temporary Investments 0 (4) (18) (18) Sale of Temporary Investments 0 0 0 0 Investment In Intangible Assets (159) (94) (850) 0 Sale of Intangible Assets 0 0 0 0 Acquisition of Businesses 0 0 0 0 Sale of Businesses 0 0 0 0 Dividends Collected 2 2 0 0 Interests Collected 42 58 0 0 Decr. (Inc.) in Advances and Loans to Third Parties 0 0 0 0 Other Items 0 0 0 0

Cash Flow from Financing (2,349) (3,684) (849) (822)

Net Incr. (Decr.) in Cash and T.I. (268) 3,601 318 1,058 FX Gain (Loss) in Cash and T.I. 102 6 (443) 118 Net Cash and T.I. Beginning of Period 1,252 984 4,660 4,535 Net Cash and T.I. End of Period 984 4,660 4,535 5,710

16 actinverresearch.com Forecasted Income Statement (Extended)—Alternate Scenario Figures In P$ Millions, Otherwise Noted

Period 2019A 2020E 2021E 2022E Δ 19/18 Δ 20/19 Δ 21/20 Δ 22/21 CAGR (21-26E)

Income Statement

Revenues 129,443 145,166 137,272 141,987 11.6% 12.1% -5.4% 3.4% 3.7% Cost of Sales 101,491 113,133 107,565 111,242 Gross Profit 27,952 32,033 29,707 30,745 13.1% 14.6% -7.3% 3.5% 3.8% Gross Margin 21.6% 22.1% 21.6% 21.7% 29 bps 47 bps -43 bps 1 bps Operating Expenses 22,657 25,561 23,813 24,491 Other Income (Expense) (281) 229 228 234 Operating Profit 5,576 6,701 6,121 6,488 8.0% 20.2% -8.6% 6.0% 5.6% Operating Margin 4.3% 4.6% 4.5% 4.6% -14 bps 31 bps -16 bps 11 bps Depreciation 3,551 3,837 3,881 3,918 EBITDA 9,127 10,538 10,002 10,406 10.5% 15.5% -5.1% 4.0% 4.1% EBITDA Margin 7.1% 7.3% 7.3% 7.3% -7 bps 21 bps 3 bps 4 bps

Net Financial Expenses (3,111) (3,159) (2,950) (3,040) Financial Income 183 193 153 141 -19.6% 5.1% -20.8% -7.4% Interest Gain 29 99 153 141 FX Gain 120 60 0 0 Derivatives Gain 34 34 0 0 Gain in Value of Instruments 0 0 0 0 Other Financial Income 0 0 0 0 Financial Expenses 3,294 3,351 3,103 3,181 11.5% 1.7% -7.4% 2.5% Interest Paid 2,008 1,860 1,677 1,676 FX Losses 64 147 0 0 Derivatives Losses 337 347 354 354 Loss in Value of Instruments 0 0 0 0 Other Financial Expenses 885 997 1,072 1,151

Results form JVs 0 0 0 0 Profit Before Taxes 2,465 3,542 3,171 3,448 1.2% 43.7% -10.5% 8.7% Taxes 977 1,121 983 1,069 Cash Taxes 1,261 409 983 1,069 Deffered Taxes (284) 713 0 0 Profit from Continuing Operations 1,488 2,421 2,188 2,379 Profit from Discontinued Operations 0 0 0 0 Minority Participation (29) 49 0 0 Net Profit 1,518 2,372 2,188 2,379 -7.3% 56.3% -7.7% 8.7% 8.8% Net Margin 1.2% 1.6% 1.6% 1.7% -24 bps 46 bps -4 bps 8 bps Tax Rate 39.6% 31.7% 31.0% 31.0%

17 actinverresearch.com Forecasted Balance Sheet Statement—Alternate Scenario Figures In P$ Millions, Otherwise Noted

Period 2019A 2020E 2021E 2022E Δ 19/18 Δ 20/19 Δ 21/20 Δ 22/21 CAGR (21-26E)

Balance Sheet

Total Assets 87,391 73,971 74,406 75,496 -1.0% -15.4% 0.6% 1.5% 3.2% Current Assets 18,599 24,050 23,376 24,651 1.3% 29.3% -2.8% 5.5% 8.8% Cash & Equivalents 984 4,666 4,089 5,022 Short Term Investments 0 0 0 0 Receivables 1,412 1,581 1,646 1,626 Other Receivables 2,254 2,368 2,503 2,530 Inventories 13,471 14,797 14,615 14,940 Other Current Assets 479 638 522 533 Long Term Assets 68,792 49,921 51,030 50,845 -1.6% -27.4% 2.2% -0.4% 0.2% Receivables LT 279 185 305 311 Investment in Associated Companies 9,518 9,651 9,651 9,651 Property, Plant & Equipment 32,965 33,193 33,088 33,440 Investment Assets 0 0 0 0 Biological Assets 0 0 0 0 Intangible Assets 4,465 4,819 5,895 5,334 Deferred Taxes 1,197 1,198 1,198 1,198 Other LT Assets 1,150 875 893 911 Right of Use Assets 19,218 19,333 19,598 19,685

Total Liabilities 59,983 41,311 39,303 39,772 -2.3% -31.1% -4.9% 1.2% 3.6% Current Liabilities 24,969 28,493 28,551 28,483 3.9% 14.1% 0.2% -0.2% 2.7% Bank Loans (ST) 1,768 1,496 1,496 1,496 Debt Securities (ST) 0 583 583 583 Other ST Liabilities w/cost 0 0 0 0 Suppliers 21,474 24,593 24,686 24,533 Taxes Payable (ST) 506 751 586 581 Other ST Liabilities 1,221 1,068 1,199 1,289 Lease Liabilities (ST) 560 564 571 574 Long Term Liabilities 35,014 12,818 10,751 11,288 -6.3% -63.4% -16.1% 5.0% 5.8% Bank Loans (LT) 8,733 8,811 6,753 7,287 Debt Securities (LT) 0 0 0 0 Other LT Liabilities w/cost 0 443 435 438 Taxes Payable (LT) 2,857 3,533 3,533 3,533 Other LT Liabilities 347 31 29 30 Lease Liabilities (LT) 21,761 21,891 22,192 22,290

Consolidated Equity 27,409 32,661 35,103 35,724 2.2% 19.2% 7.5% 1.8% 2.8% Controlling Interest 27,396 32,722 35,168 35,791 Minority Equity 12 (61) (66) (67)

18 actinverresearch.com Forecasted Cash Flow Statement—Alternate Scenario Figures In P$ Millions, Otherwise Noted

Period 2019A 2020E 2021E 2022E

Cash Flow Statement

Profit Before Taxes 2,465 3,542 3,171 3,448 Non Cash Items 0 0 0 0 Investment Activity Related Items 0 3,955 3,881 3,918 Depreciation and Amortization 3,550 3,955 3,881 3,918 Gain (Loss) on Sale of P, P & E 0 0 0 0 Write-Down (Reversal) 0 0 0 0 Partic. In Associates and JV 0 0 0 0 Dividends Collected 0 0 0 0 Interest Gains 0 0 0 0 FX Gains 0 0 0 0 Other Items 0 0 0 0 Financing Activities 0 0 0 0 Accrued Interests 0 0 0 0 FX Gains 0 0 0 0 Gain on Derivative Instruments 0 0 0 0 Other Items 0 0 0 0 Lease Payments 0 0 0 0 Pre-Tax Cash Flow 0 7,498 7,052 7,366 Working Capital Changes 5,237 1,615 (1,065) (1,473) Cash Flow from Operations 4,845 9,113 5,988 5,892

Cash Flow from Investment (2,866) (2,853) (5,190) (4,278) Permanent Investments 0 0 0 0 Sale of Permanent Investments 0 0 0 0 CapEx (3,790) (2,456) (3,779) (4,260) Sale of P, P & E 1,039 (224) (298) 0 Temporary Investments 0 (4) (18) (18) Sale of Temporary Investments 0 0 0 0 Investment In Intangible Assets (159) (94) (1,095) 0 Sale of Intangible Assets 0 0 0 0 Acquisition of Businesses 0 0 0 0 Sale of Businesses 0 0 0 0 Dividends Collected 2 2 0 0 Interests Collected 42 58 0 0 Decr. (Inc.) in Advances and Loans to Third Parties 0 0 0 0 Other Items 0 0 0 0

Cash Flow from Financing (2,349) (3,684) (850) (794)

Net Incr. (Decr.) in Cash and T.I. (268) 3,631 (52) 821 FX Gain (Loss) in Cash and T.I. 102 (18) (525) 112 Net Cash and T.I. Beginning of Period 1,252 984 4,666 4,089 Net Cash and T.I. End of Period 984 4,666 4,089 5,022

19 actinverresearch.com