Decoding China’s “New ” + Giant Ecosystems LatAm Retail and Internet Sector Note - May 2018

Fabio Monteiro Luiz Guanais [email protected] [email protected] btgpactual.com /BTGPactual /BTGPactual +55 11 3383 2006 +55 11 3383 2755 Summary

03 China trip: Internet DNA as a driving force of retail revolution

04 A few thoughts about Chinese e-commerce …and our reading for Brazil and Mexico

07 Delving deep into Chinese ecosystem

15 China snapshot - The O2O experience

22 The main players in China’s booming e-commerce

LatAm Retail and Internet BTG Pactual Affiliate Research - Banco BTG Pactual S.A.

Fabio Monteiro [email protected] +55 11 3383 2006

Luiz Guanais [email protected] +55 11 3383 2755

of the BTG Pactual Equity Research team

LatAm Retail and Internet - Equity Research 2 China trip: Internet DNA as a driving force of retail revolution Napoleon once said: “Let China sleep. When China (41% of global total by market value), such as Didi wakes up, the world will be shaken.” Of course, (US$50bn valuation), mostly supported by at least China woke up many years ago to become the one of the giant ecosystems. world’s second largest economy (so far), with GDP of US$11.2 trillion. All eyes on China and its secular growth trend… but it isn’t a copy-paste trend! We herein provide our feedback from our recent trip The secular growth trend in the Chinese market is to China, where we met leading Chinese and global set to persist in the coming years, with a burgeoning companies in the e-commerce ecosystem. Our initial presence of mobile commerce and payments, takeaway was that, from a retail and e-commerce impressive digitalization of people’s daily lives, and perspective, China is changing global dynamics. market consolidation by players who have created a bona-fide ecosystem to attract consumers and sellers Our 1-week trip focused on internet and technology to their platforms. and the main goal was to form an initial view on what internet players (to differing degrees of scale Meanwhile, looking specifically to Brazil and Latin and success) are doing and the main technology America, although e-commerce in the region is still at its trends, hopefully giving us an initial reading on early stages, there are already a few successful players, Brazil, Mexico and the rest of Latin America. with market share ranging from 10%-25%, but that already hold relevant organic traffic and a fulfillment More than bringing definite answers, decoding structure to support growth in the coming years. China’s ecosystem means diving into “New Retail”, which will eliminate the boundary between offline Yes, companies such as B2W (BTOW3 - Buy), Magazine and online commerce, with integrated channels, a Luiza (MGLU3 – Buy) and MercadoLibre (MELI - Buy) seamless consumer experience and an increasingly have all invested (or have plans to invest) in logistics cashless and card-less society. Chinese “New Retail” and payments solutions to increase buyers’ and seller’s harnesses convenience, a personalized experience stickiness (such as the Chinese titans did), which, like a and big data analysis, focusing on consumer déjà vu experience with China’s case, should lead to a experience - a trend we expect to spread (to differing consolidation of the online market in the hands of a few degrees) around the world in the coming years. potential winners in the region.

Favorable ecosystem created a competitive However, we do not expect that this consolidation edge to succeed. will lead to the creation of complete ecosystems that China is already a global e-commerce leader, with dominate consumers’ daily lives, such as in China, GMV of US$1 trillion, accounting for 23% of total given these Latin American companies should face retail sales, which compares to 9.0% in the US, competition from players in different segments (such 2.2% in India, 1.7% in Mexico and 4.3% in Brazil. The as Cielo and PAGS in the payments front), while there is Chinese e-commerce market grew 24% in 2017, still a high dependency of Brazil Postal Service (Correios) as per Euromonitor, and 2017-20 growth should to deliver e-commerce purchases (and private players be 14% p.a. The drivers of China’s success are: (i) still do not have the capacity to absorb this pent-up the country’s massive base of young consumers, demand). Thus, Latin American e-commerce should (ii) significant investments in infrastructure, (iii) be a history of consolidation but not full integration of open source technology, which allows for fast services under the same platform. technological advancement and (iv) a physical retail sector in its early stages. Meanwhile, Latin America isn’t an easy environment Over time, China has created a favorable ecosystem for a foreign player to start operations from scratch, dominated by Alibaba, and (to a lesser thus creating further opportunities for Brazilian (and extent) , ranging from payments to logistics, LatAm) companies to partner up with Chinese players. which now paves the way for innovation that However, given compelling opportunities in other translates into growth (and what growth!). A great Asian markets, we believe China’s focus (in the case of LatAmexample Retail is theand numberInternet - ofEquity unicorns Research in the country the online channel) is still a long way from Latin America.3 A few thoughts about Chinese e-commerce …and our reading for Brazil and Mexico

4 LatAm Retail and Internet - Equity Research One of the objectives of this report is to share Based on the above-mentioned highlights for the our main thoughts about e-commerce in China Chinese internet ecosystem, an easy conclusion is and have a reading for Brazil, Mexico and the rest that Latin American countries are not even close of Latin America. We present below our main to China in terms of e-commerce development, thoughts, considering the meetings, store visits and it should take a long time to catch up in the and overall experience we had in China (which will e-commerce, payments and logistics businesses. be explored in details along the report): This is an opportunity for the players that are more capable to occupy the space and gain share in a  E-commerce is a high growth market with supposedly high-growth market. increasing penetration: China is connected, from taxi drivers to large supermarkets, e-commerce Most of the large e-commerce players in Latam represents 23% of retail sales, much above were originally large retailers that moved into American and European average, and, despite the e-commerce. In Brazil, for example, B2W, a high penetration, prospects for e-commerce Magazine Luiza, Via Varejo, Walmart, which are the growth are still high. largest players, are all linked to large retail groups. Only B2W has double digit market share (19% of  Huge ecosystems dominating the e-commerce’s GMV in Brazil) and launched its e-commerce market: E-commerce is dominated payments platform (Ame Digital) a month ago, by three groups – Alibaba, Tencent and Baidu, which still with limited number of services and products. have morphed into huge ecosystems, comprising Magazine Luiza has much superior growth and businesses such as e-commerce, mobile payment, above-average service levels (per Reclame Aqui), logistics, ride sharing, games, video, search, news but still have not launched its payments platform. and social media. These three groups have a The other players need to catch up given many combined market cap of over US$1 trillion. internal and/or governance issues.

 Mobile payment is impressively penetrated Very few players are pure online players. in all types of business: two players – and MercadoLibre (29% of e-commerce’s GMV in Brazil) WeChat Pay – dominate the market, with market started as a pure marketplace, with technology share of 88%. These players are linked to Alibaba DNA. , which has less than 1% of and Tencent, the main ecosystems in China. e-commerce’s GMV in Brazil, is still in the early stages of its strategy in Mexico and Brazil, and should have  Strong support for startups and unicorns, difficulties to understand the specificities of taxes, especially those focused in sharing economy, consumer finance and logistics (Inditex, Walmart AI (artificial intelligence), and content: Tech and many other successful international retailers environment in China with strong support from are struggling in Brazil for a long time…). the whole ecosystem helps the creation of startups and the development of unicorns, such as Didi (ride  E-commerce penetration: In Latin America, sharing) and Sensetime (AI / facial recognition), e-commerce penetration is increasing, but still valued at US$50bn and US$4.5bn, respectively. representing a much smaller part of retail sales compared to China, south Korea, the UK and the US.  Cross boarder commerce in China is growing Brazil has a 4.3% penetration as a % of retail sales, the significantly: Cross boarder commerce jumped to largest in Latin America, and we think it can reach US$100bn in 2017 from US$54bn in 2015, bigger high single digit penetration in 5 years. Mexico and than the whole e-commerce in Germany and in Argentina have 1.7% and 2.7%, respectively, with line with the UK. Alibaba ( Global) and JD good potential to grow as well. This is, by the way, (JD Worldwide) are expanding their businesses to one of the main reasons behind our secular growth almost all the countries in the world. call for e-commerce in the region.

LatAm Retail and Internet - Equity Research 5  Winner ecosystems: We do not believe LatAm countries will have a dominant player in e-commerce with a similar scope compared to Alibaba or Tencent. Currently, e-commerce is still small and most platforms are just starting its ventures in payments, logistics, advertising. Thus, most of the money is still flowing through the main commercial banks (Banco do Brasil, Itaú, Bradesco), most of the payments are made through the main acquirers (Cielo, Rede, Getnet), and logistics for e-commerce needs to develop a lot, with private players investing in capacity and starting to gain share over the postal service (Correios).

 Mobile payment: As we mentioned before, B2W just launched Ame Digital, a payment platform inspired in Alipay and WeChat Pay. It should take time for the platform to gain scale, even though the downside risk is limited and the potential is huge. MercadoPago – launched by MercadoLibre in 2004 – has a strong penetration, but MELI just started to add other products and services besides factoring receivables and processing payments. The other e-commerce players have not launched their platforms yet. Overall, we think it is early to do a strong bet on possible winners, and new entrants (such as Paypal, Pagseguro), incumbent acquirers (Cielo, Stone and others), and banks are also interested in gaining importance in this business as well.

 Support for startups and unicorns: So far, we have not seen an ecosystem in LatAm helping entrepreneurs and startups to develop (like in the Sillicon Valley or in China). There are a few successful cases in Brazil such as Movile/iFood, VTEX, 99, but this is very little compared to the 65 unicorns in China, which account for 41% of the combined valuation for unicorns in the world (US$814bn).

 Cross boarder commerce: Cross boarder commerce is irrelevant in the region. Brazil buys R$9bn abroad from websites such as Aliexpress, Amazon US, Wish, JD Worldwide and eBay. However, the country is selling almost nothing through international platforms. There are a few brands such as Melissa and Havaianas selling thourgh JD, but there is potential for much more.

6 LatAm Retail and Internet - Equity Research Delving deep into Chinese ecosystem

LatAm Retail and Internet - Equity Research 7 Napoleon once said about China: “Let China sleep. Aspects that help explain China’s differentials as a When China wakes up, the world will be shaken”. global internet player include: the role of government, education levels, the huge amount of investments, Of course, China woke up many years ago to become Chinese entrepreneurship, the competence and the second largest economy (so far), with GDP of success of internet platforms that became “national US$11.2 trillion. However, as it was our first visit, our champions”, and a booming economy. initial impression was that China is indeed changing global dynamics, as Napoleon anticipated. China is already an e-commerce leader, with GMV of US$1 trillion. E-commerce represents 23% of Our 1-week trip focused on internet and technology total retail sales, the largest penetration in the and the main goal was to form an initial view on world, which compares to 9.0% in the US, 2.2% what internet players (to differing degrees of scale in India, 1.7% in Mexico and 4.3% in Brazil. The and success) are doing and the main technology Chinese e-commerce market grew 24% in 2017, as trends, hopefully giving us an initial reading on per Euromonitor, and 2017-20 growth should be Brazil, Mexico and the rest of Latin America. 14% per year.

We also know that China is very different to Latin We visited the following companies: America and that our region may never be like China.  : largest marketplace in China, with 52% market share. Market cap: US$500bn  JD.com: largest B2C player in China and

1. JD.com unmanned store second largest marketplace, with 33% market share. Market cap: US$51bn  Huawei: world’s largest telecom and IT solution provider. Revenues: US$100bn  Didi: largest ride-sharing player in China and world’s second most valuable unicorn (valued at US$50bn)  Ctrip: China’s largest online travel agency. Market cap: US$23.5bn  LianLian: third largest payments player in China  Sensetime: world’s most valuable AI unicorn (valued at US$4.5bn)  So Young: world’s largest beauty service platform

We also had the opportunity to experiment JD’s unmanned store (same concept as AmazonGo), Hema Fresh, a “New Retail” store and an effective example of online-to-offline (O2O) experience, and Y-Fresh, another unmanned store owned by Yiguo.

JD.com unmanned store: In the case of JD’s unmanned convenience store, the pilot store we visited is being tested since last fall by the 10k employees at its HQ.

Source: 1. BTG Pactual

8 LatAm Retail and Internet - Equity Research 2. JD.com unmanned store

The company also launched two unmanned online. An employee immediately runs around the convenience stores in January in , now store with mobile devices and an optimized “in- open to the public at Joy City mall in in store route”, picking up products from shelves and the province, and at Sunrise Shopping putting them in shopping bags with digital tags. Center in in the province. They After the purchase is finished, the shopping bag is put expect to open approximately 100 unmanned on hangers that lift the bags to the ceiling and onto stores this year alone. the overhead conveyor belts, which take the bags to the delivery area. Delivery can be made in up to 30 The concept requires consumers to scan a QR minutes if the consumer lives within a 3km radius. code upon entrance. Stores are using RFIDs and ceiling cameras with facial and image recognition  Products are fresh and consumers can choose and heat mapping technologies to track each live seafood from the tanks, fresh fish or beef, take customer’s movement and product selection. them home or get them cooked onsite and eat at These innovations will help the company to offer the seating area inside the store. personalized promotions and ads, and will help the inventory management process as well.  Price tags are digital and prices can be easily changed (similar to Lojas Americanas store in Leblon Hema Fresh: Founded by a former executive of district in Rio and Pão de Açúcar store in Iguatemi JD Logistics, the first store was opened in January Faria Lima mall in São Paulo). Consumers can also 2016. Alibaba acquired the company shortly after scan QR codes on the tags for product information. and the current store count is 25. Hema Fresh stores are a hybrid of offline retailer,  Payment is made via Alibaba’s Alipay. Stores are food service and online retailer. With an average cashless and consumers must download the app. of 3,000 sqm, it is a true (above-average) O2O Consumers’ data are gathered online and offline shopping experience. and Hema Fresh offers personalized promotions. Unmanned checkouts are easy to use (similar to A few highlights on Hema Fresh: CVS in the US and Sainsbury’s in the UK).

 An effective 020 (online to offline) and shipping from store example. Consumers place their orders

Source: 2. BTG Pactual

LatAm Retail and Internet - Equity Research 9 4. Hema Fresh - select products 3. Hema Fresh - store front using an app

5. Hema Fresh - digital checkout 6. Hema Fresh - product pick up

7. Hema Fresh - delivery bag scan 8. Hema Fresh - conveyor belts

Source: 3, 4, 5, 6, 7 and 8. BTG Pactual

10 LatAm Retail and Internet - Equity Research 9. Y-Fresh - store front

Y-fresh: a 10-15 sqm unmanned store that looks training. Already home to hundreds of small like a container. Mix is similar to a convenience store. businesses, the hub invites the most famous and professional incubators around the world to choose Owned by Yiguo, a player originally focused on B2B projects and organizes meetings with investors for in the fruit niche. It entered e-commerce operating startups in different stages. the fresh fruit platform for Alibaba (Tmall), receiving a US$300mn investment from Tmall. Finally, we visited Fosun (leading private equity player with total investments of US$64bn) and CICC The experience was good. To enter the store, (one of the largest investment banks in China) and consumers need to scan a QR code via Alipay or had the opportunity to touch base with venture WeChat Pay apps. After selecting the products, the capitalists and startups at a cocktail event held at customer puts them in a basket for recognition. Brazil’s embassy in Beijing. Customers pay via one of the mobile payments platforms. If the customer forgets to pay for a With such a diversified list of meetings and product and decides to leave the store, the door experiences, we learned a lot of things about doesn’t open and advises the customer that there internet and e-commerce in China. The main is an unpaid product. highlights are:

We also visited Dream Town, a startup hub  China is connected, from taxi drivers to large near Alibaba’s headquarters. It offers successful supermarkets, from mom-and-pop stores to applicants free office space, cash subsidies and big chains, and most individuals have access to the internet;

Source: 9. BTG Pactual

LatAm Retail and Internet - Equity Research 11 10. Top 10 countries by number of internet users (mn) - 2016 14. Chinese mobile e-commerce GMV - US$bn 11. Smartphone penetration in China E E E 15. Penetration of mobile e-commerce (as a % of online GMV)

E E E E E E E E  Growth prospects for e-commerce are  Mobile payment is impressively penetrated still relevant; in all types of business. Two players dominate

12. Chinese e-commerce GMV - US$bn this market: WeChat Pay (owned by TenCent) and Alipay. AR - AR - We here mention the example of Alibaba and its payments division, Alipay. Born in 2004, Alipay was first created as the payment department of , the B2C platform of Alibaba Group. It was right after eBay acquired Eachnet. E E E com in China, and Taobao saw this acquisition as a

13. Penetration of e-commerce - by country (2017) major threat to its marketplace business. Alibaba and Alipay spun-off in 2011. Alibaba pays Alipay an annual fee for payment processing and Alipay pays Alibaba annual fees for royalty and software technology. After the spin-off, , Alibaba’s founder, ended up with a 46% stake in Alipay. In 2011, Yahoo (at the time with a 40% stake in Alibaba) disclosed to its shareholders that Alibaba  Mobile commerce is strong, representing had spun off Alipay to comply with the rules, the majority of e-commerce; causing its shares to drop 12%, and that Jack Ma (founder and then CEO of Alibaba) only informed Yahoo about the spinoff five weeks after the event.

Source: 10, 12, 14 and 15. BCG, BTG Pactual. 11 and 13. Statista, BTG Pactual.

12 LatAm Retail and Internet - Equity Research In February this year, Alibaba Group Holding  Brazil and Latin America are not priorities said that it had agreed to buy a 33% stake in Ant for most players that we visited. They all Financial Services Group. Alibaba’s reunion with Ant acknowledge the relevance of the region. Financial is also seen as preparation for the affiliate’s But distance, language barriers and the huge anticipated public listing in addition to fueling its opportunities/growth potential in Asia and other global acquisition drive. countries mean Chinese players aren’t looking closely at our region. There are exceptions, of While no cash is changing hands, Ant Financial will course. This year, Didi acquired Brazil’s 99 Taxis, end royalty payments to Alibaba that were worth while Fosun acquired the asset management firms more than US$300mn in the last fiscal year. Rio Bravo and Guide Investimentos (subsidiary of Banco Indusval).  E-commerce is dominated by three groups, which have morphed into huge ecosystems: This is definitely an opportunity for us in Latin Alibaba, Tencent and Baidu. These three groups America. There are many ideas that are being have a combined market cap of over US$1 trillion. successfully implemented in China and that can be The vast majority of the companies we visited replicated in Brazil, and “tropicalization” is not really have a direct link to one of these three players. The easy for foreigners, creating the opportunity for exceptions were Huawei and LianLian. investors to partner with Chinese groups or create similar companies in Latin America. Our understanding is that the Chinese government is not a shareholder in any of these three large groups,  Unicorns (startups with valuation of over which led state-owned companies to underperform. US$1bn) are all over the place. Official data from However, the Chinese Science Ministry recently CB Insight says that of the 197 unicorns in the announced that the nation’s first wave of open AI world, 65 are in China and 116 are in the US. platforms will rely heavily on Baidu for driverless cars, Didi is one of the largest unicorns, with a valuation Tencent for AI (Artificial Intelligence) in healthcare of US$50bn. It grew by acquiring other players and and Alibaba for smart cities. using local knowledge to achieve its dominant position. Uber was a relevant player in China but We’ve been seeing a few moves by these groups to decided to leave the country. invest in and/or capitalize state-owned companies - Unicom is a recent example - as a way to support 16. Unicorns - China vs. US industries that the government considers strategic. These moves can also be seen as a way to revert bad results at some state-owned companies, with the private groups helping with management ideas, experienced managers on Boards of Directors, and strategies to increase productivity and reduce losses. So far, we haven’t seen any real moves in that direction, but it is a possibility. Meanwhile, the government and domestic regulators have increased their scrutiny of online uantity aluatin platforms in response to what they consider to be cyber-security violations in their social media/ messaging platforms.

Source: 16. BCG, BTG Pactual.

LatAm Retail and Internet - Equity Research 13 Valuation One big difference between Didi and Uber is in the Company Country Industry (US$bn) intention to create an ecosystem. In order to reduce Uber US 68,0 On-Demand churn, Didi is planning to provide additional services that go far beyond its core business of ride sharing. Didi Chuxing China 50,0 On-Demand The portfolio of Didi’s ecosystem may include offering financing for drivers to purchase their cars Xiaomi China 46,0 Hardware and car rentals. Meituan China 30,0 E-commerce Dianping Sensetime (largest AI platform company) is another unicorn we visited, with a valuation of US$4.5bn, Airbnb US 29,3 E-commerce based on a US$600mn Series C investment round Other SpaceX US 21,5 announced in March 2018. With 1,500 employees Transportation (800 in R&D and 150 AI PhDs), it focuses on four Palantir US 20,0 Big Data Technologies pillars; face recognition, image recognition, autonomous driving and human-machine WeWork US 20,0 Facilities interaction. The Chinese government says AI is the Digital Media/ new engine for industry upgrades and wants China Toutiao China 20,0 AI to become an AI innovation center for the world.

Lu.com China 18,5 Fintech  AI and IOT are present in the strategy of many Pinduoduo China 15,0 E-commerce of the companies we visited, from startups to large groups like Alibaba, JD and Huawei. Facial Pinterest US 12,3 Social recognition was the most cited AI application and is increasingly a reality in the country. When Uber entered the Chinese market, it soon learned it had to change its core product. At first, customers had to validate information before opening an account. This presented a major obstacle for many potential Chinese users. Uber China recognized this disadvantage in its business approach and, just in time for the formal launch in February 2014, added the option of payment via Alipay (it later partnered up with Baidu for a map service).

But Uber had to spend a huge amount of money to compete against the market leader, Didi, and attract more users to its platform, which became unsustainable.

14 LatAm Retail and Internet - Equity Research China snapshot The O2O experience

LatAm Retail and Internet - Equity Research 15 We provide below a detailed analysis on the 19. Chinese e-commerce sector GMV (US$bn) AR - Chinese e-commerce market, including the variables that paved the way for the creation of a AR - favorable ecosystem. China is already the largest e-commerce market, setting the benchmark for the present and future of global retailing. Its 710mn internet users account for as many as India and the US combined, and with E E E online spending getting closer to US levels. 20. China is the world’s 2nd most Internet-driven economy 17. Top 10 countries by number of internet users (mn) - 2016 hare internet-drien ttal

18. Penetration of e-commerce - by country (2017) A major development in China e-commerce has been the shift from C2C to a B2C dominated model as this market has evolved. 21. Share of B2C and C2C in China’s market by GMV

With a forecasted double-digit CAGR in the coming years, online retailing is expected to grow from ~20% of retail sales in 2017 to 25% by 2020, according to PWC. Thanks to higher disposable incomes and improving living standards, consumers in China’s lower-tier The drivers of Chinese success are: (i) the country’s cities and rural areas have seen rising purchasing massive base of young consumers, (ii) significant power, leading demand to trade-up. With further investments in infrastructure, (iii) open source urbanization, lower-tier markets are expected to be technology, which allows for fast technological the major driving factor over the forecasted period advancement and (iv) a physical retail sector still in in China. its early stages.

In terms of retail stage of development, market maturity was still low when China entered the Internet era, with many underserved segments and room for development in traditional industries.

Source: 17, 18 and 20. BCG, BTG Pactual. 19. Euromonitor, BTG Pactual. 21. iResearch, BTG Pactual.

16 LatAm Retail and Internet - Equity Research 22. When e-commerce started in China, offline retail had low cover- 25. Penetration of devices for internet access (2015) age and was highly fragmented 1,105 Retail floor space per thousand ppl (m2, 2005)

18

23. Most markets occupied by fragmented and inefficient independent channels ile estLat alet rceries sales channel readn Mobile shopping behavior in China is more frequent than store visits. Indeendent Retail 26. Shopping frequency - in-store (China - 2017)

aily hained eely Retail nthly A e times a year nce a year One of the trends of the “New Retail” era, with China eer at the forefront, is consumers’ mobile-first behavior. As the lines between e-commerce, mobile and social media have blurred, China has seen a broader convergence between online and offline retail. 27. Shopping frequency - in-store (Global - 2017) Quoting Jack Ma, Alibaba’s executive chairman: aily “Commerce as we know it is changing in front of eely our eyes. “E-commerce” is rapidly evolving into “New nthly Retail.” The boundary between offline and online A e times a year commerce disappears as we focus on fulfilling the nce a year personalized needs of each customer”. eer 24. Retail m-commerce sales in China (US$bn) and penetration as a % of total e-commerce 28. Shopping frequency - online via PC (China - 2017) aily eely nthly A e times a year nce a year eer

Source: 22. National Bureau of Statistics, Euromonitor, BCG, BTG Pactual. 23, 24 and 25. BCG, BTG Pactual. 26, 27 and 28. PWC, BTG Pactual.

LatAm Retail and Internet - Equity Research 17 29. Shopping frequency - online via PC (Global - 2017) 32. China’s digital ecosystem - building a strong competitive advantage

Independent Alibaba Tencent Baidu Companies aily TaoBao: eely China`s nthly biggest mobile commerce JD: Direct A e times a year platform, with sales integrated e-commerce nce a year entertainment platform, JD Suning, and social eer Digital manages such Gome, features. - Commerce functions as Vipshop. merchan- ~5% share Tmail: China`s dising and largest pricing. third-party ~15% share platform for 30. Shopping frequency - online via mobile (China - 2017) brands and retailers. ~80% share aily Alipay: China`s WeChat Pay: eely largest online Payments Baidu Wallet: nthly third-party platform Payments China UMS, payment integrated system from 99bill, Payments A e times a year system, with into popular largest search ChinaPnR. more than messaging engine. ~25% share nce a year 450 million app. ~20% share eer users. ~20% share ~50% share WeChat: Messaging app with integrated shopping fea- tures (a much 31. Shopping frequency - online via mobile (Global - 2017) expanded Whatsapp) : ~800 million China`s monthly aily biggest media Social users. platform - - eely Media (Twitter-like). QQ: Popular ~400 million nthly messaging monthly users A e times a year app with greater focus nce a year on integrated games/blog- eer ging (similar to Whatsapp) ~550 million monthly users IQIyi, PPS: China`s LeTV, Sohu, Vídeo , . Tecent Video. China is a must-play market, having created a favorable leading video . Streaming ~20% share ~15% share (and multichannel) ecosystem that now paves the way platform. ~25% share ~20% share for innovation that translates into growth of its local Baidu: China`s companies, such as the case of Alibaba (US$500bn : biggest Mobile search . Search search engine - market cap) and JD.com (US$51bn). engine. ~5% share (similar to ~5% share Google). A holistic data chain covering sales, payments, logistics ~75% share and finance, it offers insights into consumers’ demand trends and can help optimize product planning and The ecosystem built especially by Alibaba and Tencent supply chain, also benefiting inter-channel integration was so important that any company wanting to and a better customer experience. succeed in China must pick one of them as its platform for tapping into the wallet of Chinese consumers.

Source: 29, 30 and 31. PWC, BTG Pactual. 32. BCG, BTG Pactual.

18 LatAm Retail and Internet - Equity Research 33. Alibaba vs. Tencent Chinese companies are playing catch-up by buying inventions, brands and distribution globally. China’s Alibaba Tencent big three internet giants, Alibaba, Baidu and Tencent, Payments Alipay WeChat Pay have spent nearly US$40bn since 2016.

E-commerce Taobao, Tmall JD.com, Vipshop 35. Selected investments since January 2016

Target Amount Acquisi- Social Weibo WeChat, QQ Country Sector company (US$bn) tion date Browsers UC Browser Q Q Browser Intime China Retail 2.6 Jan. 2017 Video Youku, Tudou

Retail Suning, Hema Younghui, Carrefour Didi China Transport 4.5 May. 2016

Cloud Ali Cloud Tencent Cloud Food Alibaba Ele.com China 1.2 Apr. 2018 delivery Travel Fliggy LY

Southeast E-com- Bike Sharing Ofo Mobike Lazada 1 Apr. 2016 Asia merce Enterprise Ding Talk WeChat Enterprise productivity Lyft China Transport 1 Jan. 2016 Maps Autonavi Tencent Maps

Online Banking MyBank WeBank iQiyi China 1.5 Feb. 2017 Video

O2O demand Koubei, ELE.ME Meituan Dianping Baidu Uber China Transport 2 Aug. 2016 China E-commerce with Chinese characteristics implies integration between online and offline (O2O) E-com- Flipkart India 1.4 Apr. 2017 channels, with the online ecosystem deeply merce connected into consumers’ daily life. Automo- Tesla US 1.8 Apr. 2017 34. The digital life of Chinese consumers (% of time spent) biles

cial etr China Online edia nsumtin Musica China 2.7 Jul. 2016 music Instant essain Corp hin amin Tencent Didi China Transport 4.5 Aug. 2016 rsin earch Online anin and Supercell Finland 8.6 Jun. 2016 inancial ayments gaming ain e- Ticket Meituan China 3.3 Oct. 2017 icrlin booking

Lufax China Financial 1.2 Jan. 2016

Source: 33. Companies, BTG Pactual. 34. E-marketer, BTG Pactual. 35. WSJ, BTG Pactual.

LatAm Retail and Internet - Equity Research 19 To illustrate the importance of a favorable ecosystem, 37. China third-party mobile payment - market share (2017) in 2017 Chinese unicorns accounted for 29% of the Aliay Aliaa world’s unicorns by quantity and 41% by valuation. ehat ay encent 36. Unicorns - China vs. US iana thers nin ile ay allet Lianlian ay

As per Forrester Research, the volume transacted in mobile payments in China is 70x greater than that registered in the world’s #2 market for such uantity aluatin technology, the US.

38. TPV surging to 70x that of the US by 2016 Valuation Company Country Industry rd-arty mile (US$bn) ayment alue n Uber US 68.0 On-Demand

Didi Chuxing China 50.0 On-Demand

Xiaomi China 46.0 Hardware Meituan China 30.0 E-commerce Dianping

Airbnb US 29.3 E-commerce Mobile payments directly replaced cash payments Other and grow strongly in China. SpaceX US 21.5 Transportation Palantir 39. Payment method in China US 20.0 Big Data Technologies WeWork US 20.0 Facilities Digital Media/ ash Toutiao China 20.0 AI redit ard ile Lu.com China 18.5 Fintech nline ther Pinduoduo China 15.0 E-commerce

Pinterest US 12.3 Social The pillars of the Chinese ecosystem have also China had 540 million mobile payment users in 2017. allowed its companies to develop a strong cross- Although Chinese consumers still mainly use cash border segment, with Chinese cross-border as a means of payment, it has laid the foundations e-commerce transactions soaring 27% y/y to in recent years for a more cashless society, with US$100bn in 2017. fierce competition between Alipay and WeChat Pay (controlled by Tencent).

Source: 36 and 39. BCG, BTG Pactual. 37. iResearch, BTG Pactual. 38. Forrester, BTG Pactual.

20 LatAm Retail and Internet - Equity Research With consumers’ increasing demand for imported products from cross border e-commerce platforms, a growing number of internet retailers, including Tmall, JD.com and Suning.com, have started to expand their business to cross-border e-commerce.

For instance, Alibaba launched Tmall Global as its cross-border e-commerce platform, attracting many overseas manufacturers and retailers to join its marketplace.

40. Cross-border transactions in China (US$bn) and y/y growth

E

41. Market share - cross-border e-commerce (2017)

alacm mallcm icm cm umeilalcm iahnshucm amtucm thers

Source: 40 and 41. E-marketer, BTG Pactual.

LatAm Retail and Internet - Equity Research 21 The main players in China’s booming e-commerce

22 LatAm Retail and Internet - Equity Research We provide below a snapshot of the Chinese 45. Chinese e-commerce market share (2017) internet sector, which includes some of the companies we visited during our 1-week trip. mallcm cm thers icm unincm

Alibaba - market cap (US$500bn) Alibaba has China’s largest e-commerce (selling goods online) platform, with 52% market share in 46. Alibaba’s ecosystem terms of gross merchandise value (GMV) and 507 million monthly active users (MAUs) in 2017.

It mainly monetizes via online advertising. Its online advertising revenue accounted for 70.0% of China’s total e-commerce retail revenue in FY17 (ended March), making it the largest online advertising platform with 29.8% market share in 2016.

42. Alibaba’s sales (US$mn)

AR -

47. Alibaba’s nationwide logistics network

43. Alibaba’s EBITDA (US$mn) and EBITDA margin

Nationwide Fulfillment Network is Already Established

48. Fulfillment network - Alibaba

44. Alibaba’s FCF (US$mn)

Source: 42, 43, 44, 46, 47 and 48. Company, BTG Pactual. 45. E-marketer, BTG Pactual.

LatAm Retail and Internet - Equity Research 23 51. JD’s FCF (US$mn)

JD - market cap (US$51bn) The #2 marketplace player in China, controlled by Tencent, with 33% share and ~300 million active customers (growing at a 40% pace per year). The company also offers online and in-person payment options and customer services. It operates approximately 210 warehouses with an aggregate 52. JD’s active customer accounts (millions) gross floor area of ~4 million square meters in over 50 cities. 70% of JD’s GMV comes from its B2C platform, with 5k brands, while the remaining 30% comes from ~170k sellers, and a take rate ranging from 3%-10%. 49. JD’s sales (US$mn) AR -

53. JD’s nationwide logistics network

50. JD’s EBITDA (US$mn) and EBITDA margin

-

-

Source: 49, 50, 51, 52 and 53. Company, BTG Pactual.

24 LatAm Retail and Internet - Equity Research 56. China online travel vs. total market size (US$bn)

2016 2020E

1,013 CTrip - market cap (US$23bn) 674 Ctrip.com is a leading provider of accommodation reservation, transportation ticketing, package 253 tour and corporate travel management and other 97 travel-related services in China. Online Offline It has experienced rapid growth since its inception in 1999 and is now China’s largest travel company. 57. China vs. US online travel penetration (2016) Ctrip covers approximately 500,000 hotels in China and approximately 750,000 hotels abroad. There are just a handful of OTAs in China, with Ctrip, Qunar and Meituan-Dianping being the main ones. Ctrip and Qunar are particularly popular with app users, a growing segment of the market.

54. CTrip’s sales (US$mn)

AR - 58. CTrip ecosystem

55. CTrip’s EBITDA (US$mn) and EBITDA margin

-

Source: 54, 55, 57 and 58. Company, BTG Pactual. 56. Ctrip, BTG Pactual.

LatAm Retail and Internet - Equity Research 25 Other companies visited during the week in China

LianLian Pay - China’s 3rd Biggest Payment Player: With around 150 million users, the -licensed LianLian International is the fourth Huawei - World’s Biggest Telecom Solution largest non-banking third party payment processor Provider: Huawei is a global information and in China. The company was founded in 2003 and technology (ICT) solution provider, ranked 83 in is known by the name Lianlian Yintong Electronic Fortune Global 500 ranking, and with a footprint in Payment Co., Ltd. more than 170 countries. What makes the company unique is its broad range of offerings that include The company now processes payments in 19 wireless telecommunications infrastructure, currencies and has established firm business enterprise networking, cloud-based solutions and relationships with all the domestic banks in China. services, and consumer devices. Huawei has 200k It is also one of the top mobile payment companies employees and revenues of US$100bn, despite still in China. LianLian processes billions worth of being a non-listed company. payments between merchants and consumers of international retail giants such as eBay, Amazon, and Ali Express.

Didi - China’s Biggest Ride-Sharing Player: Didi Chuxing is a mobile transportation platform, offering a full range of commuting options to 400 cities in SenseTime - World’s Most Valuable AI Unicorn: China, and is a dominant player in its segment (with SenseTime develops face recognition technology ~100% share). The company offers a full range of that can be applied to payment and picture mobile tech-based mobility options for close to 300 analysis, which could be used, for instance, in bank million users across over 400 Chinese cities, including card verification and security systems. taxi hailing, private car hailing, Hitch (social ride- sharing), DiDi Chauffeur, DiDi Bus, DiDi Test Drive, Ranked fifth in China Money Network’s China AI Top DiDi Car Rental, and DiDi Enterprise Solutions. 10 Ranking in 2017, SenseTime currently provides its face recognition technology to over 300 companies In January 2018, Didi announced that it acquired including China Mobile Communication Co, China control of 99 Taxis in Brazil, sending technology UnionPay, Huawei Technologies Co. Ltd., Xiaomi Inc. engineers to Brazil and sharing its expertise. and JD.com Inc. Founded in 2014, it announced in March this year a US$600mn Series C investment Didi has a valuation of more than US$50bn, making round (which, with series A and B, totals a US$1bn it one of Asia’s largest startups. investment in the company), valuing it at over US$4.5bn

26 LatAm Retail and Internet - Equity Research SoYoung - World’s Biggest Beauty Service China International Capital Corporation Platform: The Beijing-based company, which Limited: Founded in 1995, it is one of China’s has 25mn active users in its SoYoung app, has leading investment banking firms that engages 25k clinics and thousands of plastic surgeons in in investment banking, securities, investment its platform. It’s trying to tap an aesthetic medical management, and other financial services primarily services market forecast to double to US$11.3bn with institutional clients. In 2017, Chinese tech over the next five years, according to a prospectus giant Tencent Holdings agreed to buy a 5% stake from Union Medical Healthcare Ltd. SoYoung has a in CICC, creating a partnership between two of the valuation of US$500mn-US$1bn country’s tech and finance majors.

Fosun - China’s Biggest Private Investment Group: Fosun International Limited is a Chinese international conglomerate and investment company, with market cap of US$20bn and US$2.1bn net income in 2017. Founded in 1992, the company is headquartered in and was incorporated in Hong Kong in 2004. It owns five listed companies in the Chinese mainland and has stakes in 20 others. In 2013, Fosun teamed up with Alibaba and other parties in a logistics project valued at about 5 billion (US$816mm).

LatAm Retail and Internet - Equity Research 27 Appendix 60. Organic traffic (% Direct + mail) Amazon’s unsuccessful history in China Despite being in China for over ten years, after acquiring Joyo.com in 2004 (biggest bookseller in China), Amazon has struggled due to a lack of local knowledge and privacy issues in the country. Indeed, most tech giants made the classic mistake of replicating their successful business model at home in China. me mailcm andan Aman icm cm unincm aa

Amazon brought the same design and mindset 61. Organic traffic (% Direct + mail + unpaid search) it used for American customers, with very few adjustments for the local market. The model of working with major distributors and manufacturers, which was a success in Amazon’s operations in the US, Germany and UK, wasn’t enough in China, quickly earning it the undesirable reputation of being more expensive in a market where consumers are ultra price-sensitive.

In addition to having its own Chinese store at mailcm me unincm Aman cm andan aa icm Amazon.cn, at the start of 2015 Amazon opened a store on rival Alibaba’s Tmall platform, where it pays 62. Amazon’s distribution network in China (fulfillment centers) a commission to the Chinese e-commerce giant.

59. B2C e-commerce market share – China (2017)

mallcm cm icm unincm me ihadian andan Aman thers

In 2016, it started offering its Prime free-shipping service in China, ratcheting up attempts to compete with Alibaba Group. However, Prime’s fast, free delivery and its discounts don’t stand out in China because local companies can match or surpass Amazon’s offerings. In addition, Prime is also without Prime Video in China due to government censorship, further weakening the program’s value.

Source: 59. E-marketer, BTG Pactual. 60 and 61. Similar Web, BTG Pactual, as of 05/16/2018. 62. Company, BTG Pactual.

28 LatAm Retail and Internet - Equity Research Disclaimer

This report has been prepared by Banco BTG Pactual S.A. (“BTG Pactual S.A.”), a Brazilian regulated bank. BTG Pactual S.A. is the responsible for the distribution of this report in Brazil. BTG Pactual US Capital LLC (“BTG Pactual US”), a broker-dealer registered with the U.S. Securities and Exchange Commission and a member of the Financial Industry Regulatory Authority and the Securities Investor Protection Corporation is distributing this report in the United States. BTG Pactual US is an affiliate of BTG Pactual S.A. BTG Pactual US assumes responsibility for this research for purposes of U.S. law. Any U.S. person receiving this report and wishing to effect any transaction in a security discussed in this report should do so with BTG Pactual US at 212-293-4600, 601 Lexington Ave. 57th Floor, New York, NY 10022. This report is being distributed in the United Kingdom and elsewhere in the European Economic Area (“EEA”) by BTG Pactual Europe LLP (“BTG Pactual UK”), which is authorized and regulated by the Financial Conduct Authority of the United Kingdom. This report may also be distributed in the United Kingdom and elsewhere in the EEA by BTG Pactual S.A. and/or BTG Pactual US. BTG Pactual UK has not: (i) produced this report, (ii) substantially altered its contents, (iii) changed the direction of the recommendation, or (iv) disseminated this report prior to its issue by BTG Pactual US. BTG Pactual UK does not distribute summaries of research produced by BTG Pactual US. BTG Pactual Chile S.A. Corredores de Bolsa (“BTG Pactual Chile”), formerly known as Celfin Capital S.A. Corredores de Bolsa, is a Chilean broker dealer registered with Comisión para el Mercado Financiero (CMF) in Chile and responsible for the distribution of this report in Chile and BTG Pactual Perú S.A. Sociedad Agente de Bolsa (“BTG Pactual Peru”), formerly known as Celfin Capital S.A. Sociedad Agente e Bolsa, registered with Superintendencia de Mercado de Valores (SMV) de Peru is responsible for the distribution of this report in Peru. BTG Pactual Chile and BTG Pactual Peru acquisition by BTG Pactual S.A. was approved by the Brazilian Central Bank on November 14th, 2012. BTG Pactual S.A. Comisionista de Bolsa (“BTG Pactual Colombia”) formerly known as Bolsa y Renta S.A. Comisionista de Bolsa, is a Colombian broker dealer register with the Superintendencia Financeira de Colombia and is responsible for the distribution of this report in Colombia. BTG Pactual Colombia acquisition by BTG Pactual S.A. was approved by Brazilian Central Bank on December 21st, 2012. BTG Pactual Argentina is a broker dealer (Agente de Liquidación y Compensación y Agente de Negociación Integral ) organized and regulated by Argentinean law, registered with the Exchange Commission of Argentina (Comisión Nacional de Valores) under license Nro. 720 and responsible for the distribution of this report in Argentina. Additionally, the Brazilian Central Bank approved the indirect controlling participation of Banco BTG Pactual S.A. in BTG Pactual Argentina on September 1st, 2017. References herein to BTG Pactual include BTG Pactual S.A., BTG Pactual US Capital LLC, BTG Pactual Europe LLP, BTG Pactual Chile and BTG Pactual Peru and BTG Pactual Colombia and BTG Pactual Argentina as applicable. This report is for distribution only under such circumstances as may be permitted by applicable law. This report is not directed at you if BTG Pactual is prohibited or restricted by any legislation or regulation in any jurisdiction from making it available to you. You should satisfy yourself before reading it that BTG Pactual is permitted to provide research material concerning investments to you under relevant legislation and regulations. Nothing in this report constitutes a representation that any investment strategy or recommendation contained herein is suitable or appropriate to a recipient’s individual circumstances or otherwise constitutes a personal recommendation. It is published solely for information purposes, it does not constitute an advertisement and is not to be construed as a solicitation, offer, invitation or inducement to buy or sell any securities or related financial instruments in any jurisdiction. Prices in this report are believed to be reliable as of the date on which this report was issued and are derived from one or more of the following: (i) sources as expressly specified alongside the relevant data; (ii) the quoted price on the main regulated market for the security in question; (iii) other public sources believed to be reliable; or (iv) BTG Pactual’s proprietary data or data available to BTG Pactual. All other information herein is believed to be reliable as of the date on which this report was issued and has been obtained from public sources believed to be reliable. No representation or warranty, either express or implied, is provided in relation to the accuracy, completeness or reliability of the information contained herein, except with respect to information concerning Banco BTG Pactual S.A., its subsidiaries and affiliates, nor is it intended to be a complete statement or summary of the securities, markets or developments referred to in the report. In all cases, investors should conduct their own investigation and analysis of such information before taking or omitting to take any action in relation to securities or markets that are analyzed in this report. BTG Pactual does not undertake that investors will obtain profits, nor will it share with investors any investment profits nor accept any liability for any investment losses. Investments involve risks and investors should exercise prudence in making their investment decisions. BTG Pactual accepts no fiduciary duties to recipients of this report and in communicating this report is not acting in a fiduciary capacity. The report should not be regarded by recipients as a substitute for the exercise of their own judgment. Opinions, estimates, and projections expressed herein constitute the current judgment of the analyst responsible for the substance of this report as of the date on which the report was issued and are therefore subject to change without notice and may differ or be contrary to opinions expressed by other business areas or groups of BTG Pactual as a result of using different assumptions and criteria. Because the personal views of analysts may differ from one another, Banco BTG Pactual S.A., its subsidiaries and affiliates may have issued or may issue reports that are inconsistent with, and/or reach different conclusions from, the information presented herein. Any such opinions, estimates, and projections must not be construed as a representation that the matters referred to therein will occur. Prices and availability of financial instruments are indicative only and subject to change without notice. Research will initiate, update and cease coverage solely at the discretion of BTG Pactual Investment Bank Research Management. The analysis contained herein is based on numerous assumptions. Different assumptions could result in materially different results. The analyst(s) responsible for the preparation of this report may interact with trading desk personnel, sales personnel and other constituencies for the purpose of gathering, synthesizing and interpreting market information. BTG Pactual is under no obligation to update or keep current the information contained herein, except when terminating coverage of the companies discussed in the report. BTG Pactual relies on information barriers to control the flow of information contained in one or more areas within BTG Pactual, into other areas, units, groups or affiliates of BTG Pactual. The compensation of the analyst who prepared this report is determined by research management and senior management (not including investment banking). Analyst compensation is not based on investment banking revenues, however, compensation may relate to the revenues of BTG Pactual Investment Bank as a whole, of which investment banking, sales and trading are a part. The securities described herein may not be eligible for sale in all jurisdictions or to certain categories of investors. Options, derivative products and futures are not suitable for all investors, and trading in these instruments is considered risky. Mortgage and asset-backed securities may involve a high degree of risk and may be highly volatile in response to fluctuations in interest rates and other market conditions. Past performance is not necessarily indicative of future results. If a financial instrument is denominated in a currency other than an investor’s currency, a change in rates of exchange may adversely affect the value or price of or the income derived from any security or related instrument mentioned in this report, and the reader of this report assumes any currency risk. This report does not take into account the investment objectives, financial situation or particular needs of any particular investor. Investors should obtain independent financial advice based on their own particular circumstances before making an investment decision on the basis of the information contained herein. For investment advice, trade execution or other enquiries, clients should contact their local sales representative. Neither BTG Pactual nor any of its affiliates, nor any of their respective directors, employees or agents, accepts any liability for any loss or damage arising out of the use of all or any part of this report. Notwithstanding any other statement in this report, BTG Pactual UK does not seek to exclude or restrict any duty or liability that it may have to a client under the “regulatory system” in the UK (as such term is defined in the rules of the Financial Conduct Authority). Any prices stated in this report are for information purposes only and do not represent valuations for individual securities or other instruments. There is no representation that any transaction can or could have been effected at those prices and any prices do not necessarily reflect BTG Pactual internal books and records or theoretical model-based valuations and may be based on certain assumptions. Different assumptions, by BTG Pactual S.A., BTG Pactual US, BTG Pactual UK, BTG Pactual Chile and BTG Pactual Peru and BTG Pactual Colombia and BTG Pactual Argentina or any other source, may yield substantially different results. This report may not be reproduced or redistributed to any other person, in whole or in part, for any purpose, without the prior written consent of BTG Pactual and BTG Pactual accepts no liability whatsoever for the actions of third parties in this respect. Additional information relating to the financial instruments discussed in this report is available upon request. BTG Pactual and its affiliates have in place arrangements to manage conflicts of interest that may arise between them and their respective clients and among their different clients. BTG Pactual and its affiliates are involved in a full range of financial and related services including banking, investment banking and the provision of investment services. As such, any of BTG Pactual or its affiliates may have a material interest or a conflict of interest in any services provided to clients by BTG Pactual or such affiliate. Business areas within BTG Pactual and among its affiliates operate independently of each other and restrict access by the particular individual(s) responsible for handling client affairs to certain areas of information where this is necessary in order to manage conflicts of interest or material interests. Any of BTG Pactual and its affiliates may: (a) have disclosed this report to companies that are analyzed herein and subsequently amended this report prior to publication; (b) give investment advice or provide other services to another person about or concerning any securities that are discussed in this report, which advice may not necessarily be consistent with or similar to the information in this report; (c) trade (or have traded) for its own account (or for or on behalf of clients), have either a long or short position in the securities that are discussed in this report (and may buy or sell such securities), with the securities that are discussed in this report; and/or (d) buy and sell units in a collective investment scheme where it is the trustee or operator (or an adviser) to the scheme, which units may reference securities that are discussed in this report. United Kingdom and EEA: Where this report is disseminated in the United Kingdom or elsewhere in the EEA by BTG Pactual UK, this report is issued by BTG Pactual UK only to, and is directed by BTG Pactual UK at, those who are the intended recipients of this report. This report has been classified as investment research and should not be considered a form of advertisement or financial promotion under the provisions of FSMA 2000 (Sect. 21(8)). Dubai: This research report does not constitute or form part of any offer to issue or sell, or any solicitation of any offer to subscribe for or purchase, any securities or investment products in the UAE (including the Dubai International Financial Centre) and accordingly should not be construed as such. Furthermore, this information is being made available on the basis that the recipient acknowledges and understands that the entities and securities to which it may relate have not been approved, licensed by or registered with the UAE Central Bank, Emirates Securities and Commodities Authority or the Dubai Financial Services Authority or any other relevant licensing authority or governmental agency in the UAE. The content of this report has not been approved by or filed with the UAE Central Bank or Dubai Financial Services Authority. United Arab Emirates Residents: This research report, and the information contained herein, does not constitute, and is not intended to constitute, a public offer of securities in the United Arab Emirates and accordingly should not be construed as such. The securities are only being offered to a limited number of sophisticated investors in the UAE who (a) are willing and able to conduct an independent investigation of the risks involved in an investment in such securities, and (b) upon their specific request. The securities have not been approved by or licensed or registered with the UAE Central Bank or any other relevant licensing authorities or governmental agencies in the UAE. This research report is for the use of the named addressee only and should not be given or shown to any other person (other than employees, agents or consultants in connection with the addressee’s consideration thereof). No transaction will be concluded in the UAE and any enquiries regarding the securities should be made with BTG Pactual CTVM S.A. at +55 11 3383-2638, Avenida Brigadeiro Faria Lima, 3477, 14th floor, São Paulo, SP, Brazil, 04538-133.