Venezuela – a Potential Driver for Colombian Growth

Venezuela - A Free Option for Colombian Corporate Growth ANALYST CERTIFICATIONS AND REQUIRED DISCLOSURES BEGIN ON PAGE 12 April 29, 2019 Venezuela – A Free Option for Colombian Corporate Growth

Venezuela was once the second most important destination of Colombian exports after the United States, representing around 17% of our exports in 2007-2008. However, the economic situation of our neighbor led Colombian companies to stop trading, given the hard times for currency repatriation and payments.

Since January 2019, this country is facing a political turmoil after Juan Guaidó, president of the Venezuelan National Assembly, proclaimed himself interim president. The political uncertainty of the neighboring country peaked after dozens of countries backed Guiadó as interim president of Venezuela, including the US and the European Union, opening the door for a political transition that leads us to deeply analyze the effects for the Colombian market.

A Venezuela turnaround story will be a watershed moment for the Colombian economy. Colombian GDP could be boosted by 0.8% per year, without considering the potential expansion of Colombian corporations.

Most sectors would benefit, and many companies listed on the BVC would have a growth free option if the Venezuelan economy recovers. On this front, Grupo Nutresa, Avianca Holdings, Fabricato, Enka, and Cementos Argos would be on the positive side of the equation since they had a direct or indirect operation in Venezuela. This doesn’t mean they are the only ones: infrastructure, utilities, textiles, food, and retail could take the lead to recover the industrial production of a country which vastly lacks investment. Additionally, financial institutions would benefit from a potential growth in loans to companies that would expand its footprint to Venezuela.

Other sectors such as oil and gas could be affected in the short term, taking into consideration that, in our view, the first step for taking Venezuela to a healthy level is to increase oil production to previous levels, that means, moving from around 800kboed to 2.7mn-3mn bopd, which will probably have a negative impact on oil prices, taking Ecopetrol to the negative side of the equation.

Despite all of this, the bet is clear, a change of course for Venezuela will bring opportunities for Colombian companies in most sectors and for most names, something that will change dramatically the medium- and long-term view of the Colombian economy.

Figure 1. Evolution of the trade balance with Venezuela (USDmn FOB)

8.000 1.140,44 7.000 Analysts 6.000 6.070,69 Name: Jairo Julián Agudelo Restrepo 5.000 Phone: (574) 6047048 4.000 E-mail: jjagudel@bancolombia.com.co 502,55 3.000 Name: Juliana Aguilar Vargas, CFA 2.000 291,41 124,54 Phone: (574) 6047045 2.555,96 1.000 E-mail: [email protected] 1.422,88 354,29 0 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Name: Federico Perez Garcia

Exports Imports Commercial Balance Phone: (574) 6048172 E-mail: [email protected] Source: Grupo Bancolombia, DANE. Venezuela – A Potential Driver for Colombian Growth

Additionally, most Colombian corporations that had direct operations in Venezuela left the country, some after making their own decision but some due to expropriations, while just a few were able to maintain their direct exposure, something that we see as a potential growth driver in the medium term, as they could take the lead in an eventual change of course.

Table 1. Colombian exports by region (% of total)

Region 94-06 07 08 09 10 11 12 13 14 15 16 17 18

Aladi 24% 30% 30% 26% 21% 21% 23% 23% 23% 26% 25% 27% 27% CAN 9% 7% 7% 7% 8% 6% 6% 6% 6% 8% 8% 7% 8% MERCOSUR 11% 19% 19% 14% 6% 6% 7% 7% 7% 7% 6% 5% 5% European Union 18% 14% 12% 14% 13% 16% 15% 16% 17% 17% 16% 14% 12% US 41% 33% 37% 39% 42% 39% 36% 31% 26% 28% 32% 28% 25% Venezuela 9% 17% 17% 12% 4% 3% 4% 4% 4% 3% 2% 1% 1% Germany 4% 2% 2% 1% 1% 1% 1% 1% 1% 1% 1% 1% 1% Ecuador 5% 4% 4% 4% 5% 3% 3% 3% 3% 4% 4% 4% 4% Belgium 2% 1% 1% 1% 1% 1% 1% 1% 1% 1% 1% 1% 1% Peru 4% 3% 2% 2% 3% 2% 3% 2% 2% 3% 3% 3% 3% Japan 2% 1% 1% 1% 1% 1% 1% 1% 1% 1% 1% 1% 1% Mexico 2% 2% 2% 2% 2% 1% 1% 1% 2% 3% 3% 4% 4% Others 31% 36% 34% 37% 42% 49% 50% 55% 60% 55% 52% 56% 59%

Source: Grupo Bancolombia, DANE.

Table 2. Colombian exports to Venezuela by product group (USDmn FOB ave.)

Product / year 05-07 08-10 11-13 14-16 17-18 Total 2,400 3,855 2,187 1,220 337 Animals & animal prod. 308 549 120 28 7

Food & beverage, tobacco 210 230 167 238 67 Chemical products 247 399 256 337 109 Textiles and clothing 313 684 258 47 10 Vehicles 525 157 36 11 5

Other groups 797 1,836 1,350 559 139

Source: Grupo Bancolombia, DANE. Economic Impact of a Turnaround in Venezuela

In light of the above, what would happen to the Colombian economy if Venezuela goes through a political change? Would it be positive for Colombian corporations? On the one hand, there’s the potential impact of the reactivation of our direct exports to Venezuela and exports to our commercial partners that would also experience a positive impact on their exports to Venezuela, while at the same time there will be a positive impact on our corporations flexing their investment muscle in the Venezuelan market, where the lack of industry and infrastructure is evident.

With the intention of calculating and answering the previous questions, our macro research team carried out a regression analysis to estimate the potential impact on our economy of a potential recovery of the Venezuelan economy. It is important to note that this analysis was based on past events and the relevance the Venezuelan market had on the economic performance of our trading partners in previous years.

In conclusion, Venezuela came to represent more than 1pp to the economic performance of our commercial partners. In the same line, 1pp of additional growth in our commercial partners (including Venezuela) represented more than 0.77pp in the Colombian economic growth rate.

In other words, a full recovery of the Venezuelan economy could increase our potential GDP growth rate from 3.5% to around 4.3%. This without including a potential expansion if our corporations take the lead and the advantage of expanding into the Venezuelan territory.

Figure 2. Evolution of GDP performance Figure 3. Venezuela’s contribution to Colombia’s partners

Partners GDP (with Venezuela) Contribution Growth Colombian GDP 2.0% 25% Partners GDP (without Venezuela) 20% 1.5% 15% 7.5% Venezuela's contribution 1.0% 10% 5.5% 5% 3.5% 0.5% 0% 1.5% 0.0% -5%

-0.5% -10% -0.5% -15% -2.5% -1.0% -20% -4.5% 1981 1985 1989 1993 1997 2001 2005 2009 2013 2017 1981 1985 1989 1993 1997 2001 2005 2009 2013 2017

Source: Grupo Bancolombia, IMF. Source: Grupo Bancolombia, IMF.

As shown in figures 1 and 2, the Venezuelan economy had its golden years in the period 2004-2008, when its imports from our commercial partners were at its highest, representing on average 1.3% of our partners’ GDP performance. Additionally, in the period 2007-2008, Venezuela represented around 17% of Colombian total exports, its highest since 1994.

Overall, it doesn’t take a genius to infer that a political change in Venezuela will be highly positive for the Colombian economy and its equity market. However, uncertainty and volatility remains, as this type of political and economic structural change (if it took place) doesn’t happen overnight. Despite this, markets moves on expectations, for which companies with direct exposure to Venezuela, or a potential advantage from previous relations, should remain in the mind of investors as at any given moment they could start going upward if fundamentals move in the right direction. Equity Market – Which Stocks would Benefit the Most from a Venezuelan Turnaround?

The Colombian equity market was negatively affected by the economic performance of Venezuela and its economic decisions that affected the property of direct investments but also trading as FX repatriation difficulties, and high inflation, created a chaos for accountability and financial forecast.

There could be more, but so far, the companies that were negatively affected by the Venezuelan economic collapse were:

Cementos Argos: Cementos Andino’s Cement Plant Expropriation

Cemargos’ operation in Venezuela, Cemento Andino, was Table 3. Cementos Andino’s est. value (USDmn) expropriated by the government in 2007 and the company never received payment for this plant, which has a total cement capacity of Venezuela 1mn tons/year. If the situation in Venezuela normalizes, Cemargos could receive the owed payment for this plant and, although it is still Cement capacity (mn tons) 1.0 very early to quantify the potential payment, any additional cash the company could receive will help with their deleverage strategy. EV/ton (USD) 319.6

Assuming the multiple EV/ton of cement paid in recent transactions Est. plant value (USDmn) 319.6 in Latam of USD319/ton, the value of the cement plant of Cemargos 50% of total value 159.8 in Venezuela could be close to USD320mn. However, being operated by the Venezuelan government for more than a decade, it is hard to 30% of total value 95.9 estimate the real value of the plant at this time given its maintenance status. 10% of total value 32.0

Additionally, another option for Cemargos would be to regain Source: Grupo Bancolombia, Cementos Argos. control of the operation, investing to take it to optimal levels, and take advantage of a required infrastructure investment in Venezuela, something that will create value in our view.

Grupo Nutresa: Ready to take the Lead on Venezuelan Consumption

The operation in Venezuela comprises two companies: Hermo, the cold cuts company, and Cordialsa, a distribution company. While the former was an acquisition (1996) made to enhance Grupo Nutresa’s cold cuts exposure in the region, the latter was founded (1995) to export and distribute products (mainly cookies, chocolates, and coffee). As of today, Cordialsa figures are not material, leaving Hermo as the most relevant, leading in market share in the country with one production plant, three offices, and more than 500 employees.

Currently, Nutresa’s financial results are not impacted by the performance of the Venezuelan operation, since in 3Q16 the company decided to register that investment as a financial asset on the balance sheet, eliminating the volatility in financial results (as shown in figures 4 and 5) due to the FX depreciation and hyperinflation of the Venezuelan market.

Figure 4. Nutresa’s consolidated sales by region 2009 Figure 5. Nutresa’s consolidated sales by region 2018 Central Others; Central America; 7.8% America; Others; 9.6% 1.4% 16.0% Mexico; 2.4% USA; 7.3%

Venezuela Mexico; ; 7.9% 3.6% Colombia; Colombia; 63.6% 72.3% Chile ; 8.1%

Source: Grupo Bancolombia, Grupo Nutresa. Source: Grupo Bancolombia, Grupo Nutresa. However, as shown in figure 6, Venezuela sold more than USD273mn in 2013, with our estimated EBITDA of USD38mn for a 14% EBITDA margin. It’s worth noting that numbers shown are calculated by Grupo Bancolombia and as such could have a deviation from real values.

With this in mind and trying to give investors an idea of the value this operation could have on valuation, we ran a relative valuation, based on our own assumptions presented before. The first one was using average yearly sales of about USD200mn prior the crisis, with a P/Sales multiple for Latam food processing peers of 0.9x, which gives us an equity value of USD180mn. The other one was using our estimated EBITDA prior the crisis of USD28mn and a EV/EBITDA multiple for its peers of 11x, resulting in an equity value of USD308mn, assuming no debt. Both approaches explain our final outcome of USD244mn, deriving in a potential impact on our TP of COP1,644, +5.3%.

Figure 6. Sales and EBITDA evolution - Hermo (USDmn) Table 4. Valuation summary (USDmn)

P/S average Latam food processing companies 0.9x Hermo average sales prior crisis 200 300 273 Hermo value by P/Sales multiple 180 10% 250 223 221 190 8% 200 164 P/EBITDA Latam food processing companies 11x 146 6% 150 112 Hermo average EBITDA prior crisis (14% margin) 28 4% 100 79 80 61 Hermo’s value by P/EBITDA multiple 308 50 31 31 38 2% 23 20 27 16 11 11 9 - 0% 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Average valuation 244 Sales EBITDA Stake in total Sales Impact on Nutresa’s TP in COP 1,644 Impact on Nutresa’s TP in % 5.3%

Source: Grupo Bancolombia estimations, Grupo Nutresa. Source: Grupo Bancolombia, Grupo Nutresa.

It is worth mentioning that the operation of Hermo, which currently has spare capacity, and the potential recovery of Cordialsa Venezuela (not included in our valuation) could deliver a higher valuation as the potential expansion of both operations is clear, given the lack of industry and investment in our neighboring country.

Additionally, a change of course in the Venezuelan economy will probably give a high boost in domestic consumption as the current scarcity of food is bringing hard times for the Venezuelan population.

Grupo Exito: Previous Exposure through Cativen

Back in 2010, Grupo Exito had a direct exposure to the Venezuelan market through its 28.62% stake in Cativen, where the major shareholder was Grupo Casino. At that time, Grupo Casino was able to reach an agreement with the Venezuelan government through which Grupo Exito sold its stake for USD90.5mn, boosting 4Q10 financial results.

Even though Grupo Exito did not have control of the operation, Grupo Casino had direct investments and knowledge of the market, which could be a potential growth driver in a different political scenario, taking into consideration that Grupo Exito is Grupo Casino’s investment arm in the region, and most importantly, that GPA (Brazilian Grupo Pao de Azucar) has an excellent balance sheet position for taking expansion opportunities. Currently, the supermarkets that were operated by Casino under the names of Exito and Cada are named Bicentenario. Enka de Colombia: Innovation that could Take the Lead amidst a Venezuelan Recovery Figure 7. Enka’s sales to Venezuela (USD 000) Enka’s exports to Venezuela peaked during 2014, representing 15% of total sales, highly material for its financial results. However, given the 30,000 hard times for currency repatriation, Enka’s accounts receivable was 24,113 25,000 not directly with Venezuela but with the international holding company of its clients in Switzerland and the US, which gives the 20,000 17,150 15,407 company the security of payments from an external source that was 15,000 13,220 not affected by FX repatriation. 10,622 10,000 The holding company oversaw payments but products were sent to its 4,346 5,000 2,486 subsidiary in Venezuela, up to a point where the holding company 1,254 957 1,262 601 decided to stop sending products to its subsidiary in 2016. 0 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 By division, resins and industrial yarns were the divisions with the highest exposure to Venezuela, with industrial yarns being one of the Source: Grupo Bancolombia, Enka de Colombia, Treid. most profitable ones.

Figure 8. Enka’s sales by destination - 2014 Figure 9. Enka’s sales by destination - 2018

Argentina; 3% Peru; 4% Others; Argentina; Venezuela; 7% 0% 15% EE.UU / Canada; Peru; Others; 7% 10% 2% Colombia; 50% Colombia; EE.UU / 54% Canada; Brazil; 23% 6% Brazil; 20%

Source: Grupo Bancolombia, Enka de Colombia. Source: Grupo Bancolombia, Enka de Colombia.

According to management, the recovery of Enka’s sales to Venezuela will highly depend on the degree of reliability of payments with the divisions of PET, EKO PET, nylon tire cord fabrics, and fibers, while at the same time, an indirect positive impact will come from the recovery of the Colombian textile industry, in which the divisions of fibers and filaments would take the lead.

Fabricato: Good News for a Once Material Market Figure 10. Fabricato’s sales to Venezuela (USD 000) Fabricato was one of the textile companies whose operation was impacted the most by the Venezuelan collapse. In 2008, Fabricato 40,000 36,866 exported USD36mn to its Venezuelan distribution company Fabritexca 35,000 30,010 Venezuela, representing 12.5% of total sales, with an increase of 23% 30,000 vs. 2007. However in 2009, when the Venezuelan government put an 25,000 import break to Colombian exports, exports decreased by 65%. 20,000 15,749 15,000 12,820 13,472 Today, Fabricato’s export to Venezuela do not reach USD100k, 10,465 10,000 5,504 irrelevant for the performance of financial results, however, any 3,823 5,000 change in Venezuelan government could lead to a recovery of 934 290 273 95 Fabricato’s exports and financial results. 0 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Source: Grupo Bancolombia, Fabricato, Treid. It should also be kept in mind that Fabricato has been in the process of adjusting its basket of products to become more profitable and pay attention to the divisions that were technological updated, and that produced value-added products, for which some of the divisions that had exposure to Venezuela are no longer part of the company.

From current divisions, denim and knit are the ones with the highest previous exposure to Venezuela and the ones that should take the lead in any intention of recovering the Venezuelan market. However, according to the company, the process will be slow, as old contacts are probably out of the market, or maybe some of them are still in business, something Fabricato will have to verify and figure out the best paying option for not taking former risks.

Figure 11. Fabricato’s sales by destination - 2008 Figure 12. Fabricato’s sales by destination - 2018

Mexico; 1.1% Others; Ecuador; 13.6% Others; 2.1% Peru; 18.0% 1.3% Brazil; Venezuela; 1.8% Ecuador; 12.5% 7.7% Colombia; 70.6% Colombia; 71.2%

Source: Grupo Bancolombia, Fabricato. Source: Grupo Bancolombia, Fabricato.

Avianca Holdings: A Potential Market to Expand Operations

At the end of 2014, the unremitted cash Avianca Holdings had in Table 5. Avianca’s passengers carried to Venezuela Venezuela accumulated to approximately USD281mn (VEF1,944mn), representing 43.9% of total cash and cash equivalents. From that # of passengers % of % of South amount, USD250mn and USD30.8mn were related to 2013 and 2014 carried total America operations, respectively. In 2015, Avianca Holdings recognized a loss 2013 535,971 2.2% 25.3% of USD234mn on its P&L related to the exchange rates in Venezuela, given the lack of currency repatriation at the official exchange rate, 2014 226,405 0.9% 12.3% eliminating the risk on its financial results from Venezuelan operations. This negative impact was offset by the cash obtained in 2015 296,771 1.1% 15.1% the 30% selling stake in Lifemiles to Advent International for 2016 284,487 1.0% 13.4% USD343.7mn, keeping financial indicators in line with its credit rating at that time. 2017 139,345 0.5% 6.5%

In the following years, Avianca decided to eliminate the route Bogota- 2018 0 0% 0% Valencia (Venezuela) in 2015 and started to decrease its exposure to the Venezuelan market, closing operations in July 2017. Source: Grupo Bancolombia, Avianca Holdings 20-F.

Table 9 shows the evolution of Avianca Holdings’ operation in Venezuela in terms of passengers, since we lack the information in terms of revenues. However, we can confirm that the impact on revenues was harsher, taking into consideration that for example, in 2013, South America represented 19.7% of passenger revenue but only 8.8% of total passengers carried.

With all of this in mind, if Venezuela’s turnaround is positive, Avianca Holdings could have a source of expansion given that i) since 2014, around 16 airlines have ceased operations to and from Caracas, isolating the country from international markets, and ii) Avianca could increase routes and destinations with the three hubs currently operated (Bogota, San Salvador and Lima), and with the alliance with Copa Holdings and United Airlines. Financial Sector: Ready to Support Colombian Expansion to Venezuela

Faced with a possible recovery of the Venezuelan economy, the financial sector could also be positively impacted as Colombian companies will require more debt to leverage their operation and expansion boundaries to Venezuela, which would increase demand for credit from banks in the business segment.

Taking into account the additional GDP increase of 0.8% with the potential economic recovery in Venezuela, the variation in the gross loan portfolio of banks would increase 128bps compared to the initial scenario with an average nominal GDP of 6.5% and assuming that the loan portfolio will maintain a growth of 1.5x nominal GDP. With this in mind, the growth of the loan portfolio will rise from 10.1% to 11.4% on average.

Figure 13. Financial sector’s gross loan portfolio forecast

12,0%

11,5%

11,0%

10,5%

10,0%

9,5%

9,0%

8,5% 2019E 2020E 2021E 2022E 2023E

Gross loan portfolio Gross loan portfolio adjusted to Venezuela

Source: Grupo Bancolombia.

Additionally, current debt levels of Colombian corporations are in good shape with a continued deleveraging strategy during the last two years, with net debt/EBITDA falling from a maximum level of 2.9x on 2Q16 to 1.6x at the end of 2018. However, it’s worth bearing in mind that a big share of that decrease came from the oil industry, with Ecopetrol moving from 2.8x to 1x. The manufacturing sector has the same trend but at a lower pace.

Figure 14. Net debt/EBITDA evolution ex - financials Figure 15. Net debt/EBITDA evolution – ex financials and oil

4.00 4.00 3.6 3.6 3.50 3.50 3.1 3.1 3.0 3.0 3.0 3.0 3.0 2.9 3.0 2.9 2.8 2.9 2.8 2.8 2.9 2.8 2.8 2.8 2.8 2.8 2.7 3.00 2.8 2.8 2.7 3.00 2.6 2.6 2.7 2.6 2.6 2.7 2.50 2.3 2.50 2.3 2.00 2.00 1.6 1.5 1.6 1.5 1.50 1.50 1.00 1.00 0.50 0.50

0.00 0.00

2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 2Q17 3Q17 4Q17 1Q18 2Q18 3Q18 4Q18

4Q16 1Q17

Source: Grupo Bancolombia. Source: Grupo Bancolombia. Ecopetrol and Canacol: Could Suffer from a Recovery in Venezuela?

In our view, both companies could suffer from a potential recovery in Venezuela. Figure 16. OPEC Proven Oil Reserves, 2017 Ecopetrol from a potential increase in oil production that could affect prices and increase the gap between the price of product basket sold by Ecopetrol vs. Brent, Others; and Canacol from the potential competition if Venezuela comply with the bilateral 11.8% agreement signed in 2007 of sending gas to Colombia, given its higher reserves. Venezuela; UAE; 8.1% 24.9% Venezuela is currently producing (march 2019) around 890,000 bopd, less than February production in Colombia of around 893,000 bopd, going down from a Kuwait; 8.4% maximum of 3.7mn bopd on 1970, or 3.34mn bopd on 2001, allowing Ecopetrol to take advantage of some destinations as a share of Venezuelan production is heavy Iraq; 12.1% Saudi Arabia; oil, same as Ecopetrol’s. 21.9% IR Iran; 12.8% With this in mind, Ecopetrol could experience a negative impact on two fronts, the first one is a possible increase in competition, taking into consideration that Venezuela will try to expand production in order to obtain the resources needed for Source: Grupo Bancolombia, OPEC. taking its economy to a higher level, impacting the basket price differential in heavy oil against the Brent. The second source of impact will come from a potential decline in oil prices as a strong increase in oil production from Venezuela could bring more than 2.5mn bopd to the market, pressuring prices downward, similar to the increase in production from Iran when the US lifted sanctions.

For Canacol, the impact will come from a different source. Currently, Colombia and Venezuela have a bilateral agreement in which Venezuela should be exporting natural gas to Colombia given its high reserves, something that is not working at this time. However, in the same case as oil exports, Venezuela would be willing to comply with this agreement with the intention of increasing its resources, something that will increase competence in the natural gas sector in Colombia, decreasing prices and affecting profitability for natural gas producers such as Canacol.

It is hard to estimate the impact on both sides taking into consideration that i) Venezuela is part of the OPEC, something that could put a limit to its production expansion given their decision of control production for having stable and higher oil prices, and ii) because the recovery of production will not happen overnight, it will take time for Venezuela to recover its refineries to increase production to previous levels.

Figure 17. Colombian and Venezuelan oil production, bopd

Colombia Venezuela 3,000 2,682 2,702 2,710 2,684 2,686 2,685 2,687 2,600 2,590 2,500 2,355 2,078 2,000 1,527 1,500 1,028 1,014 1,030 1,050 938 968 912 1,000 806 880 890 893 690 546 604 500

- 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 Feb

Source: Grupo Bancolombia, OPEC, Colombian Minister of Mining Fixed Income Equity Research

Manuel Rey Ayala Jairo Agudelo Restrepo MD - International Institutional Head of Equity Research Investors [email protected] [email protected] +574 6047048 +571 353 5205 Diego Buitrago Aguilar Energy Analyst Economic Research [email protected] +571 7463984 Juan Pablo Espinosa Arango Head of Economic Research Federico Perez Garcia [email protected] Consumption & Industry Analyst +571 7463991 ext. 37313 [email protected] +574 6048172 Diego Fernando Zamora Díaz Senior Economist Andrea Atuesta Meza [email protected] Financial Sector Analyst +571 7463997 ext. 37319 [email protected] +571 7464329 Arturo González Peña Quantitative Analyst Juliana Aguilar Vargas, CFA [email protected] Cement & Infrastructure Analyst +571 7463980 ext 37385 [email protected] +574 6047045 Santiago Espitia Pinzón Macroeconomic Analyst Valentina Martinez Jaramillo [email protected] Junior Analyst + 571 7463988 ext. 37315 [email protected] +574 6048906 Bryan Hurtado Campuzano International Analyst [email protected] Research Assistant +571 7463980 ext. 37303 Alejandro Quiceno Rendón Juan Manuel Pacheco Perez Research Editor Markets Analyst [email protected] [email protected] +574 6048904 +571 7464322 ext. 37380

Juan Camilo Meneses Cortes Central Banking and Financial System Analyst [email protected] +571 7463994 ext. 37316

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Important US Regulatory Disclosures on Subject Companies. This material was produced by Analysis Bancolombia solely for information purposes and for the use of the recipient. It is not to be reproduced under any circumstances and is not to be copied or made available to any person other than the recipient. It is distributed in the United States of America by LXM LLP USA and elsewhere in the world by Valores Bancolombia or an authorized affiliate of Valores Bancolombia. This document does not constitute an offer of, or an invitation by or on behalf of Valores Bancolombia or its affiliates or any other company to any person, to buy or sell any security. The information contained herein has been obtained from published information and other sources, which Valores Bancolombia or its Affiliates consider to be reliable. None of Valores Bancolombia accepts any liability or responsibility whatsoever for the accuracy or completeness of any such information. All estimates, expressions of opinion and other subjective judgments contained herein are made as of the date of this document. Emerging securities markets may be subject to risks significantly higher than more established markets. In particular, the political and economic environment, company practices and market prices and volumes may be subject to significant variations. The ability to assess such risks may also be limited due to significantly lower information quantity and quality. By accepting this document, you agree to be bound by all the foregoing provisions.

LXM LLP USA assumes responsibility for the research reports content in regards to research distributed in the U.S. LXM LLP USA or its affiliates has not managed or co-managed a public offering of securities for the subject company in the past 12 months, has not received compensation for investment banking services from the subject company in the past 12 months, does not expect to receive and does not intend to seek compensation for investment banking services from the subject company in the next 3 months. LXM LLP USA has never owned any class of equity securities of the subject company. There are not any other actual, material conflicts of interest of LXM LLP USA at the time of the publication of this research report. As of the publication of this report LXM LLP USA, does not make a market in the subject securities. TERMS OF USE

RATING SYSTEM:

The investment recommendation on the issuers under coverage by Analysis Bancolombia is governed by the rating system presented below, subject to the following criteria:

The upside potential is the percentage difference between the target price of securities issued by a particular issuer and their market price. The target price is not a forecast of the price of a stock, but a fundamental independent valuation made by Analysis Bancolombia, which seeks to reflect the fair price the market should pay for the shares on a given date.

Based on an analysis of the relative upside potential amongst the securities of companies under coverage and the COLCAP index, the ratings of the assets are determined as follows:

Overweight: when the upside potential of a stock exceeds by 5% or more the return potential of the COLCAP index. Market Weight: when the upside potential of a stock does not differ by more than 5% from the return potential of the COLCAP index. Underweight: when the upside potential of a stock is 5% or more below the return potential of the COLCAP index. Under Review: the company’s coverage is under review and therefore there’s no rating or target price.

Additionally, at the discretion of the analyst, the speculative qualification that complements the recommendation will continue to be used, taking into account the risks seen in the performance of the asset, its future development and the volatility the movement of the stock may show.

The fundamental potential of the index is determined based on the methodology established by the BVC for the calculation of the COLCAP index, considering the target prices published by Analysis Bancolombia. This will be made with the Colcap basket on the dates of calculation May and November of every year. For the companies part of the index but not covered, the consensus of market analysts will be used.

Currently, Analysis Bancolombia has 20 companies under coverage, distributed as follows:

Overweight Market Weight Underweight Under Review

Number of issuers with ratings of: 10 7 1 2 Percentage of issuers with ratings of: 50% 35% 5% 10%