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FEMSA Initiation of coverage April 10, 2019

www..com Challenges for KOF reflected on valuation @analisis_fundam

Manuel Jiménez . We are initiating coverage of FEMSA with a HOLD rating and a Director Equity Research PT2019 of MXN$192.00, which implies a 12.6x 2019E FV/EBITDA [email protected]

multiple, similar to current valuation Valentín Mendoza Sub-director . The diversification of the business portfolio focused on consumption [email protected] represents a defensive quality, which we consider attractive in view Jorge Izquierdo of an economic slowdown scenario and local uncertainty Analyst [email protected] . However, challenges faced by KOF due to the possible termination of

the Heineken business relationship in and the recent approval HOLD of a VAT in could limit rerating, in our view Current price MXN$178.35 PT 2019 MXN$192.00 Attractive growth in OXXO vs. a challenging year for KOF. FEMSA Dividend per unit 2019e MXN$3.50 Dividend (%) 2.0% operates with a diversified business portfolio through Femsa Comercio Upside potential 9.6% (OXXO, pharmacies, gas stations and other strategic businesses), Coca-Cola Max – Mín LTM 187.0 – 161.6 Femsa and stock ownership in Heineken. The aggressive opening of new Market Cap (US$m) 30,508.6 Units outstanding (m) 3,578 OXXO stores will continue in and South America without Float 59.3% compromising its leadership in EBITDA per sqm, given a high operating Daily turnover (MXN$m) 465.1 Valuation metrics LTM* efficiency. Nevertheless, KOF faces challenges ahead due to the possible FV/EBITDA 12.7x termination of the business relationship with Heineken to distribute in P/E 25.0x

Brazil and a drop in volume in Colombia resulting from a new VAT imposed on carbonated and beer production. With a Sum of the Parts approach, we are Relative performance to MEXBOL (LTM) introducing our PT2019 of MXN$192.00, which implies a 12.6x 2019E 20% FV/EBITDA multiple, similar to the current valuation (12.7x) and 15% 10% representing an 8% discount vs. the last three-year average (13.8x). It should 5% 0% be mentioned that 45% of the company’s estimated value comes from the -5% -10% proximity (OXXO) division, 27% from its equity ownership in Heineken -15% -20% (14.8%) and 24% from KOF. In our opinion, challenges that lie ahead for -25% -30% KOF could limit a rerating for the time being. 04/18 07/18 10/18 01/19 04/19

MEXBOL FEMSAUBD Financial Statements Valuation and Financial metrics

2017 2018 2019E 2020E 2017 2018 2019E 2020E

Revenue 451,808 483,513 520,170 568,256 EV/EBITDA 12.7x 12.7x 11.8x 10.7x Operating Income 40,510 42,184 43,768 48,736 P/E 15.1x 25.0x 23.2x 21.3x EBITDA 60,284 61,927 64,447 71,054 P/BV 2.5x 2.5x 2.4x 2.3x EBITDA Margin 13.34% 12.81% 12.39% 12.50% Net Income 42,226 25,557 26,340 28,871 ROE 12.5% 7.6% 7.9% 8.2%

Net Margin 9.35% 5.29% 5.06% 5.08% ROA 7.2% 4.4% 4.6% 4.9% EBITDA/ Interest 6.3x 8.9x 11.0x 12.4x

Total Assets 588,541 576,381 590,663 604,202 Net Debt/EBITDA 0.7x 1.1x 1.0x 0.7x Cash 96,944 62,047 60,877 63,767 Debt/Equity 0.4x 0.4x 0.4x 0.3x

Total Liabilities 251,629 240,839 244,489 244,485 This document is provided for the reader’s convenience Debt 138,107 131,300 128,505 119,273 only. The translation from the original Spanish version was made by Banorte’s staff. Discrepancies may Common Equity 250,291 257,053 265,198 275,573 possibly arise between the original document in Spanish Source: Banorte and its English translation. For this reason, the original research paper in Spanish is the only official document. The Spanish version was released before the English translation. The original document entitled “Valuación que refleja los retos de KOF y del entorno” was released 1 on April 4, 2019. Document for distribution among public

FEMSA– Financial Statements Revenue & EBITDA Margin MXN, million MXN, million

Year 2017 2018 2019e 2020e CAGR

605,000 16% Net Revenue 451,808 483,513 520,170 568,256 7.9% Cost of goods sold 285,361 304,163 327,999 359,906 8.0% 505,000 15% Gross profit 166,447 179,351 192,171 208,350 7.8% 13.7% 405,000 13.3% 14% General expenses 125,185 135,444 147,183 158,586 8.2% 12.8% 12.5% Operating Income 40,510 42,184 43,768 48,736 6.4% 305,000 12.4% 13% Operating Margin 9.0% 8.7% 8.4% 8.6% -1.5% Depreciation 19,774 19,742 20,679 22,318 4.1% 205,000 12% EBITDA 60,284 61,927 64,447 71,054 5.6% 105,000 11% EBITDA Margin 13.3% 12.8% 12.4% 12.5% Interest income (expense) net (2,380) (7,363) (3,710) (5,163) 29.5% 5,000 10% Interest expense 11,108 9,848 9,254 8,959 -6.9% 2016 2017 2018 2019e 2020e Interest income 1,512 2,903 3,148 2,927 24.6% Revenue EBITDA Margin Other income (expenses) 2,290 (176) 736 726 -31.8% Exchange Income (loss) 4,926 (242) 1,660 143 -69.3% Unconsolidated subsidiaries 7,924 6,252 8,827 9,800 7.3% Net Income before taxes 39,286 33,947 48,885 53,373 10.8% Provision for Income taxes 10,495 10,537 14,560 15,772 14.5% Discontinued operations 211 3,201 0 0 Net Income & ROE Consolidated Net Income 37,024 32,351 34,325 37,600 0.5% MXN, million Minorities (5,202) 7,614 7,898 8,725 -218.8% Net Income 42,226 25,557 26,427 28,876 -11.9% Net Margin 9.3% 5.29% 5.08% 5.08% 16.9% 45,000 19.0% EPS 2.360 1.428 1.477 1.614 -11.9% 40,000 17.0% 35,000 Balance Sheet (Million pesos) 15.0% 30,000 Total Current Assets 181,188 177,607 179,991 187,930 1.2% 25,000 10.5% 13.0% Cash & Short Term Investments 96,944 62,047 60,973 63,868 -13.0% 10.0% 20,000 10% Long Term Assets 407,353 398,774 410,774 416,379 0.7% 11.0% 15,000 Property, Plant & Equipment (Net) 116,712 108,602 120,603 126,220 2.6% 9.0% 9.9% Intangible Assets (Net) 112,935 107,183 107,183 107,183 -1.7% 10,000 7.0% Total Assets 588,541 576,381 590,764 604,309 0.9% 5,000 Current Liabilities 105,022 101,464 108,453 117,790 3.9% 0 5.0% Short Term Debt 17,552 14,079 14,621 14,730 -5.7% 2016 2017 2018 2019e 2020e Accounts Payable 66,163 65,669 70,119 76,601 5.0% Net Income ROE Long Term Liabilities 146,607 139,375 136,036 126,696 -4.7% Long Term Debt 120,555 117,222 113,884 104,543 -4.6% Total Liabilities 251,629 240,839 244,489 244,485 -1.0% Common Stock 336,912 335,542 346,275 359,824 2.2% Noncontrolling Interest (5,202) 7,614 7,898 8,725 -218.8% Total Equity 250,291 257,053 265,275 275,655 3.3% Net Debt & Net Debt to EBITDA ratio Liabilities & Equity 588,541 576,381 590,764 604,309 0.9% MXN, million Net Debt 41,163 69,253 67,532 55,405 10.4%

Cash Flow (Million pesos) 2017 2018 2019e 2020e 120,000 2.5x Cash flow from operating activities 36,554 61,301 53,508 59,964 1.9x Cash flow from investing activities 28,596 (57,663) (20,878) (23,228) 100,000 2.0x Cash flow from financing activities (21,054) (23,011) (33,704) (33,841) 80,000 Change in cash balance 44,096 (19,373) (1,074) 2,895 1.1x 1.5x 60,000 Source: Banorte, MSE 1.0x 40,000 1.0x

20,000 0.7x 0.8x 0.5x

0 0.0x 2016 2017 2018 2019e 2020e

Net Debt Net Debt/EBITDA

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Sum of the parts valuation. Our 2019 target price, estimated using a sum of the parts valuation, results in MXN$192.00 per BD unit. This represents a potential yield of 7.6% over current prices and a 12.6x 2019E FV/EBITDA target multiple, below that of the last 3-year average (13.8x) and similar to the LTM FV/EBITDA multiple (12.7x). In our model, we estimated the value of each division by using the expected EBITDA for 2019 and an FV/EBITDA target multiple. The result was then altered by the participation of FEMSA in each division in order to reach the total value. In the case of Coca-Cola Femsa, we used our estimated EBITDA along with an implicit 9.4x multiple, which corresponds to our PT 2019.

SUM OF THE PARTS VALUATION Figures in millions EBITDA 2019E P$m FV/EBITDA Firm value P$m Share TOTAL P$/unit Coca-Cola Femsa $ 36,718 9.4x $ 344,988 47.2% $ 162,834 $ 45.51 Proximity division $ 20,568 15.0x $ 308,519 100.0% $ 308,519 $ 86.22 Health division $ 4,478 14.0x $ 62,698 100.0% $ 62,698 $ 17.52 Strategic business division $ 1,647 7.0x $ 11,526 100.0% $ 11,526 $ 3.22 Fuel division $ 673 8.0x $ 5,385 100.0% $ 5,385 $ 1.50 Value sum of the parts $ 550,963 Net Debt Femsa (52,730) (14.74) Total FEMSA $ 498,232 Heineken $ 187,697 $ 52.46 Equity value FEMSA $ 685,929 Number of units outstanding 3,578 PO 2019e $ 191.70 Source: Banorte

1) Proximity division, the target multiple used was 15.0x, which corresponds to the median of Femsa Comercio implicit multiple. We consider this to be a reasonable and conservative multiple when compared to Walmex last year’s average (15x), as profitability per square meter in terms of EBITDA generation has been, on average, 180bps higher in the past 5 years.

2) Health division, the multiple that was implemented was 14.0x, below the median (15.6x) of comparable companies. We applied a discount to the health division’s multiple, as such business is still not completely integrated into the logistics, commercial and administrative processes like its peers.

3) Strategic business division, the multiple that was used was 7.0x, slightly below the median (7.4x) of comparable companies.

4) Fuel division, the multiple that was used was 8.0x, below the median (8.9x) of comparable companies. The discount we considered in the target multiple is due to the fact that OXXO GAS operations are not vertically integrated like other comparable companies included in the sample.

5) Heineken, we estimated the shareholder value by suing a PT of €88.35 (consensus average), an exchange rate estimated by our FX team ($21.30 per dollar by 2019 year-end) and FEMSA’s stock ownership in Heineken (14.8%).

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The two large divisions that make up FEMSA are (1) Coca-Cola Femsa and (2) Femsa Comercio. In turn, the latter division is comprised of the following businesses: proximity, health and fuel, where the proximity division has contributed, on average, with 87% of Femsa Comercio’s total EBITDA in the last 4 years. We have performed an exercise to estimate an implicit FV/EBITDA multiple that corresponds to Femsa Comercio. The method used consisted in subtracting Femsa’s stock ownership in Heineken and KOF from its market value. Furthermore, net debt and EBITDA were recalculated excluding KOF’s corresponding contribution. Thus, we estimated our implicit multiple assuming that it is representative of the proximity division, which has historically contributed with more than 85% of Femsa Comercio’s EBITDA. Consequently, our estimated implicit multiple presented an average and a median of 15x during the last nine quarters, in line with the multiples of Walmex. FV/EBITDA Femsa Comercio implicit times, 4T16 – 4T18

18.00x

17.00x

16.00x 15x 15.00x

14.00x

13.00x

12.00x

11.00x

10.00x 4T16 1T17 2T17 3T17 4T17 1T18 2T18 3T18 4T18

FV/EBITDA COMERCIO Median

Source: Bloomberg, FEMSA, Banorte

Meanwhile, during the past three years, on average, FEMSA has been traded at 13.8x FV/EBITDA LTM, and 11.7x for the next 12-month estimated multiple. It has remained, since the beginning of 2018, below both metrics, reflecting financial markets uncertainty. FV/EBITDA LTM FV/EBITDA F12M times, 2016 to date times, 2016 to date

17.0x 14.0x

16.0x 13.0x 15.0x 13.8x 14.0x 12.0x 11.7x

13.0x 11.0x 12.0x 10.0x 11.0x

10.0x 9.0x Apr-16 Sep-16 Feb-17 Jul-17 Dec-17 May-18 Oct-18 Mar-19 Apr-16 Sep-16 Feb-17 Jul-17 Dec-17 May-18 Oct-18 Mar-19

FV/EBITDA LTM 3y average FV/EBITDA F12M 3y average

Source: Bloomberg, Banorte

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RELATIVE VALUATION Market Cap Firm Value FV/EBITDA FV/EBITDA DIVIDEND COMPANY PRICE P/BV P/E P/E 2019E P/E 2020E FV/EBITDA (US$MM) (US$MM) 2019E 2020E YIELD SEVEN & I HOLDINGS CO LTD JPY 4,257 33,917 34,206 1.5x 20.0x 18.7x 15.9x 5.9x 5.9x 5.7x 2.2% ALIMENTATION COUCHE-TARD -B CAD 79 33,222 30,103 3.8x 17.4x 17.1x 17.4x 11.2x 11.1x 11.4x 0.6% KONINKLIJKE N € 23.59 31,310 34,197 1.8x 15.3x 13.9x 13.3x 7.2x 6.8x 6.7x 3.0% PLC GBP 233 29,936 35,014 1.6x 20.6x 16.5x 13.8x 8.6x 7.8x 6.9x 1.4% CO USD 24.72 19,716 34,534 2.5x 11.7x 11.2x 10.3x 6.8x 6.4x 6.2x 2.3% LOBLAW COMPANIES LTD CAD 66 18,190 24,276 2.1x 19.1x 15.0x 13.8x 9.2x 8.3x 8.1x 1.8% CARREFOUR SA € 16.77 14,844 21,559 1.4x 14.5x 12.7x 8.4x 5.2x 4.9x 2.7% GRUPO NUTRESA SA COP 26,100 3,819 4,609 1.4x 23.5x 22.1x 20.1x 12.9x 11.9x 11.1x 2.3%

Proximity division average 23,119 27,312 2.0x 18.2x 16.1x 14.7x 8.8x 7.9x 7.6x 2.1% Proximity division median 24,826 32,150 1.7x 19.1x 15.8x 13.8x 8.5x 7.3x 6.8x 2.2%

PEPSICO INC USD 122 171,870 195,282 11.9x 22.1x 22.2x 20.5x 15.6x 14.9x 14.0x 3.0% AMBEV SA BRL 17 68,879 66,815 11.9x 22.1x 22.2x 20.5x 15.6x 14.9x 14.0x 3.0% KEURIG DR PEPPER INC USD 28 38,822 54,424 1.7x 9.9x 22.8x 19.7x 32.0x 16.4x 15.0x 2.2% COCA-COLA EUROPEAN PARTNERS USD 51 24,412 27,090 3.4x 20.0x 18.0x 16.5x 15.0x 12.2x 11.8x 2.5% COCA-COLA FEMSA SAB-SER L MXN 128 13,968 17,344 2.1x 24.5x 19.8x 17.2x 9.3x 8.7x 8.1x 2.8% SAB DE CV MXN 108 9,913 13,491 1.7x 21.9x 17.3x 15.2x 9.8x 8.4x 7.7x 2.0% COCA-COLA AMATIL LTD AUD 8.72 8,868 11,261 4.1x 15.7x 16.9x 16.1x 9.1x 9.0x 8.6x 6.7% COCA-COLA BOTTLERS JAPAN HOL JPY 2,819 5,226 5,558 0.9x 35.1x 46.4x 28.2x 9.9x 8.0x 7.1x 1.8% EMBOTELLADORA ANDINA-PREF B CLP 2,480 3,293 4,267 2.8x 21.1x 19.2x 16.7x 9.3x 8.6x 7.9x 2.9% NATIONAL BEVERAGE CORP USD 58 2,715 2,446 8.9x 18.0x 18.6x 17.3x 11.6x 12.0x 11.2x COTT CORPORATION CAD 20 2,001 2,377 1.7x 56.7x 41.2x 29.1x 12.5x 9.5x 8.9x 1.6%

Coca-cola average 31,815 36,396 4.6x 24.3x 24.0x 19.7x 13.6x 11.2x 10.4x 2.8% Coca-cola femsa median 9,913 13,491 2.8x 21.9x 19.8x 17.3x 11.6x 9.5x 8.9x 2.6%

CVS HEALTH CORP USD 54 69,757 136,923 1.2x 9.4x 7.8x 7.2x 20.3x 7.9x 7.5x 3.7% WALGREENS BOOTS ALLIANCE INC USD 64 60,083 75,747 2.3x 11.8x 9.9x 9.3x 9.5x 8.3x 8.0x 2.8% CARDINAL HEALTH INC USD 49 14,504 21,371 2.4x 14.5x 9.6x 9.0x 11.9x 7.7x 7.4x 3.9% RAIA DROGASIL SA BRL 64 5,487 5,651 6.1x 42.2x 36.8x 29.0x 19.3x 16.4x 13.4x

Health division average 37,458 59,923 3.0x 19.5x 16.0x 13.6x 15.2x 10.1x 9.1x 3.5% Health division median 37,294 48,559 2.4x 13.2x 9.8x 9.2x 15.6x 8.1x 7.8x 3.7%

PHILLIPS 66 USD 95.2 43,241 53,882 1.8x 8.2x 11.8x 8.4x 8.2x 7.4x 6.0x 3.4% MARATHON PETROLEUM CORP USD 60.7 40,803 76,518 1.2x 10.7x 10.0x 6.6x 9.5x 6.8x 5.4x 3.5% PARTICIPACOES SA BRL 47 6,783 8,995 2.7x 22.2x 18.1x 15.4x 12.8x 8.9x 7.9x 3.0% DELEK US HOLDINGS INC USD 36.4 2,819 3,748 1.7x 8.0x 9.0x 8.1x 4.6x 4.9x 4.9x 3.0%

Fuel division average 23,411 35,786 1.8x 12.3x 12.2x 9.7x 8.8x 7.0x 6.1x 3.2% Fuel division median 23,793 31,438 1.7x 9.5x 10.9x 8.3x 8.9x 7.1x 5.7x 3.2%

HUNT (JB) TRANSPRT SVCS INC USD 103.5 11,250 12,391 5.4x 18.9x 16.6x 14.9x 11.1x 8.7x 8.2x 1% XPO LOGISTICS INC USD 55.1 6,017 10,249 1.8x 17.0x 15.5x 12.4x 7.2x 6.2x 5.7x HYUNDAI GLOVIS CO LTD KRW 129,500.00 4,283 4,678 1.1x 11.1x 8.8x 8.1x 5.9x 5.6x 5.3x 3% SCHNEIDER NATIONAL INC-CL B USD 21.3 3,783 3,764 1.8x 14.0x 12.5x 12.0x 5.6x 5.2x 5.0x 1% TFI INTERNATIONAL INC CAD 40 2,570 3,767 2.2x 13.2x 10.6x 9.9x 7.3x 6.8x 6.5x 2% TIANJIN PORT CO LTD-A CNY 9.17 2,288 3,775 1.0x 25.4x 12.0x 8.8x 8.8x 1% ARAMEX PJSC AED 4.77 1,901 1,859 2.9x 14.2x 12.3x 11.0x 8.5x 8.0x 7.5x 3% HEARTLAND EXPRESS INC USD 19.4 1,585 1,424 2.6x 30.4x 20.1x 19.4x 7.5x 7.2x 7.1x 0% HUB GROUP INC-CL A USD 42.2 1,466 1,743 1.5x 14.6x 13.1x 12.2x 8.3x 7.2x 6.8x ID LOGISTICS GROUP € 145.20 919 967 5.1x 32.3x 23.7x 19.8x 14.9x 9.4x 8.3x UNIVERSAL LOGISTICS HOLDINGS USD 20.3 576 962 2.8x 10.8x 8.0x 7.3x 7.0x 5.5x 5.2x 2% GRUPO TRAXION SAB DE CV MXN 13 381 606 0.7x 16.8x 10.9x 8.4x 6.9x 5.6x 3.8x VRL LOGISTICS LTD INR 287.75 376 382 4.4x 28.3x 12.0x 1% DASEKE INC USD 5.4 345 1,034 0.9x 19.8x 6.8x 5.1x 4.8x RADIANT LOGISTICS INC USD 6.3 309 358 2.6x 31.3x 13.2x 12.0x 9.8x 8.8x 7.5x VALUE GROUP LTD ZAR 580.00 71 75 1.0x 6.9x 3.7x 6%

Strategic business division average 2,383 3,002 2.4x 19.1x 13.8x 12.3x 8.4x 7.0x 6.5x 2.1% Strategic business division median 1,526 1,584 2.0x 16.9x 12.8x 12.0x 7.4x 7.0x 6.7x 1.6%

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Investment Fundamentals

Business model strategically diversified with operations in defensive industries. The company operates in different markets through its multiple divisions: proximity, health, fuel and Coca-Cola Femsa. The proximity division has small format chains in Mexico, Colombia and . As for the health division, this business operates pharmacies in Mexico, Chile, Colombia and, shortly, in Ecuador. On the other hand, the fuel division has service stations under the name OXXO GAS and has presence only in Mexico, mainly in the northern part of the country. Finally, Coca-Cola Femsa produces, markets and distributes The Coca-Cola Company brand beverages in Mexico, , , , Uruguay, , Colombia, , Brazil and . Most of the revenue produced by the company, according to 2018 figures, comes from Mexico (68%), Brazil (14%), Chile (9%), Central America (7%) and Colombia (4%). The previously mentioned divisions operate in defensive industries and their performance is positively correlated to consumption activity, which is attractive against an environment of high volatility and local uncertainty.

It should be mentioned that there are positive factors that may improve consumption dynamism, and therefore, the company’s earnings. Several of these factors are social programs that have been implemented by the new government administration in Mexico, and the expectations of greater growth in Brazil, the two most important markets in terms of revenue for FEMSA.

Revenue distribution per division (2018) Revenue distribution per country (2018) % %

0.01% -4.5% 0.4% Mexico -5% Central America 9.0% 2% 9% Coca-Cola Femsa Brazil 4% 10.0% Proximity 38.8% Colombia Health 14% Argentina 11.0% Fuel Chile Other 68% 7% Uruguay Adjustments Venezuela 35.6% Consolidation adjustments

Source: FEMSA, Banorte

Global leadership and solid operations in the soft- industry. Coca- Cola Femsa is the leading seller, by sales volume, of The Coca-Cola Company brand . It has more than 100 thousand employees, 67 manufacturing plants and 344 distribution centers. Through its two main divisions, Mexico (including Central America) and South America, it services more than 396 million consumers on a daily basis; and sells approximately 4 billion-unit cases a year through 2.8 million points of sale.

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Extensive and diversified beverage portfolio. Coca-Cola Femsa’s portfolio comprises 169 brands focused on satisfying the preferences of different market segments. The portfolio includes carbonated beverages (colas and flavors), water and non-alcoholic beverages (coffee, tea, milk, dairy and energy isotonic drinks). Approximately 41% of the portfolio’s brands are beverages with zero or very low caloric content. Coca - Cola Femsa classifies its sales volumes by type of product: soft-drink, water, jug and others. In this context, it is important to mention that in 2018, KOFs EBITDA represented 59% of FEMSA’s consolidated EBITDA.

Proximity division focused on maintaining growth. The company has implemented an aggressive OXXO store opening strategy in recent years. Between 2013 and 2018, more than 1,000 stores per year have opened their doors, on average, that is one store every 7 hours. During such period, the CAGR was of 9%. Accordingly, OXXO has become the second largest retailer (in terms of revenue) and profitability reference per square meter in Mexico. Moving forward, the company has announced its intention to continue opening locations in Mexico and South America. In 2019, we expect 1,490 new stores, from which 1,360 will be opened in Mexico and 130 between Chile, and Colombia. Hence, the company would close 2019 with a total of 19,489 stores, representing an 8.3% increase from the total number in 2018. In addition, we anticipate that by 2020, the company could close the year with a total of 21,054 locations (+8% yoy). It should be noted that the performance upheld by the proximity division in terms of EBITDA average per square meter and its profitability is rather attractive, standing as the profitability leader vs. other companies of the industry. We estimate that the company will be able to maintain this profitability trend onwards, even despite the opening of new stores, due to its operating leverage and an efficient operating platform.

OXXO stores (2013-2020e) EBITDA and Margin per sqm (2018) MXN million, %

25,000 $12.0 11% 12% 10% 21,054 $10.0 10% 20,000 19,489 9% 17,999 $8.0 8% 16,526 7% 15,225 6% 15,000 14,061 $6.0 6% 12,853 $10.2 $8.9 11,721 $4.0 $8.8 4% 10,000 $2.0 $3.7 2% $2.5 5,000 $- 0% Soriana Chdraui Lacomer Walmex Femsa Proximity 0 2013 2014 2015 2016 2017 2018 2019E 2020E EBITDA / sqm EBITDA Margin / sqm

Source: FEMSA, Banorte

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Agreement to start distributing Grupo Modelo beer in OXXO stores. Recently, FEMSA announced that the proximity division, through its OXXO stores, reached an agreement to sell Grupo Modelo brand . Thus, the distribution of beer will begin in stores located in and Guadalajara as of April of 2019. The idea is to carry out this process gradually and step by step in order to distribute Grupo Modelo beer in all OXXO stores by the year 2022. We expect this agreement to formalize through the signing of a contract in 2Q19. Hence, we estimate such agreement will bring benefits in the short and medium terms given the good dynamism in advertising revenue. In view of greater competition for shelf space and advertising inside OXXO stores, the company could generate higher revenue, which favorably contributes to profitability as this type of revenue has high profit margins that positively influence the division’s consolidated margin. Furthermore, a higher supply of beer inside OXXO stores could generate growth in traffic and services fees.

Health division: expansion in Ecuador, synergies and process integration in Mexico. According to the company, the transaction to acquire the 620 pharmacies of Corporación GPF in Ecuador would finalize during the first weeks of April. EBITDA margins of the pharmacies acquired are estimated to stand at a range between 5% - 6%, similar to the margin levels of FEMSA pharmacies that operate under the Cruz Verde name in Chile, but higher than those of pharmacies under the name YZA in Mexico and other regional brands that operate with EBITDA margins between 1% - 2%. Thus, such consolidation should have a favorable effect over the division’s margins. In addition, synergies and process integration in Mexico should begin to reflect during 2019. Some of the processes that have been implemented to achieve a vertical structure are the following: (1) stop operating pharmacies under different names and integrate into a single brand (YZA), (2) have more negotiating power with suppliers by carrying out inventory orders as a whole and not each pharmacy separately. We estimate that the previously mentioned efficiencies should bring positive effects to the profitability of the health division in Mexico.

Higher ROIC than WACC in FEMSA Comercio. The FEMSA Comercio division is comprised of the proximity, health and fuel businesses, such divisions present an average return on invested capital of 30%, 20% and 30%, respectively. It is important to point out that the three divisions report a higher ROIC than their cost of capital. However, KOF’s return on invested capital remains lower than its cost of capital.

Solid financial structure and stable CAPEX demand. The company has maintained a sound and solid financial structure in recent years, as part of its disciplined control to allocate capital more efficiently. It should be mentioned that most of FEMSA’s debt corresponds to KOF. In this context, it is important to highlight that the sale of part of FEMSA’s holdings in Heineken, the recent sale of KOF’s operations in the and the use of part of the resources to pay off debt have contributed to maintain ND/EBITDA ratio levels low. However, additional debt to carry out acquisitions in Central America during 2018 by KOF has partially offset such effect, sending the ND/EBITDA ratio to levels of 1.0.

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As for CAPEX, investment amounts have remained stable during the 2013 – 2018 periods as a proportion of total sales (6% on average). In this sense, we expect the trend to continue due to expansion plans by the proximity and health division, representing 55% of total projected CAPEX in 2019.

CAPEX (2013-2020e) Net Debt / EBITDA MXN million, % Times (Includes derivatives effect)

0 10% 1.8x 1.6x 1.6x (5,000) 8% 1.3x 1.4x 1.2x (10,000) 1.1x 6% 1.2x 1.0x (15,000) 4% 1.0x (20,000) 0.8x 2% 0.4x (25,000) 0.6x (30,000) 0% 0.4x 2013 2014 2015 2016 2017 2018 2019E 2020E 2013 2014 2015 2016 2017 2018

Capex Capex % of Revenue ND/EBITDA

Source: FEMSA, Banorte

Attractive dividend distribution. FEMSA is a company that has continuously distributed dividends to its shareholders for the past 13 years. The stated goal is to distribute higher dividends than those of the previous period, at least with an increment in line with inflation levels. Some of the features that need to be considered is that any dividends received by the company from its stake in KOF and Heineken are completely distributed among FEMSA investors, adding to those decreed by FEMSA.

Historic dividends distribution Historic dividend yield MXN million, % %

47% 50% 3.5% 3.2% 3.1% $10,000 44% 42% 45% 40% 41% 3.0%

$8,000 40% 2.5% 34% 32% 35% 2.0% 1.6% 1.6% $6,000 1.4% 1.4% 26% 23% 30% 1.4% 1.4% 24% 1.5% 1.1% 1.2% 1.1% $4,000 22% 22% 25% 19% 1.0% 0.8% 20% $2,000 0.5% 15%

$- 10% 0.0% 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Dividends FEMSA Payout ratio Dividend Yield

Source: FEMSA, Banorte

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App development and use of data analysis to make the decision-making process more efficient. FEMSA has become progressively involved in the use of technology to help the decision-making process and to offer better customer service. In particular, the proximity division has made use of apps such as Mi , Shop-net and oxxo pay to provide a better shopping experience. More detailed information on the functioning of said apps can be found in the description per division section of this document. In this framework, it should be stated that the alliance with Amazon has made it simpler for customers to buy online and then pick up their purchases at the nearest Oxxo location. Furthermore, the use of data analysis has allowed the company to get to know its customers better and thus, make informed decisions on prices, product mixes and packaging, particularly in the Coca-Cola Femsa division, which may contribute to improve profitability in the short to medium term.

Experienced management team. One of Coca-Cola Femsa’s strength is that it has a solid management team, which has allowed the company to face important challenges and adapt to changing trends of the industry. The following includes a brief description of the company’s main directors:

 José Antonio Fernández Carbajal: FEMSA’s Board of Directors Chairman and Coca-Cola FEMSA’s Board of Directors Chairman. He has more than 30 years’ experience in the company.  Eduardo Padilla Silva: FEMSA’s CEO/Managing Director, in January of 2018 he was appointed to the position he presently holds and has more than 20 years’ experience within the company  John Santa María Otazua: CEO/Managing Director of Coca-Cola Femsa and has more than 23 years’ experience in the company  Alfonso Garza Garza: Head of strategic business with more than 33 years’ experience in the company  Javier Gerardo Astaburuaga: Head of corporate development with more than 35 years’ experience in the company

Risk Factors

Pressure in operating expenses due to a shift in OXXO’s employment scheme. Currently, the company is carrying out changes within its employee hiring system of the proximity division. Previously it had used a commission agent scheme, which produced greater personnel turnover, lower expenses related to social security and salaries linked to the performance of the particular OXXO store where the agent worked. The shift that is being implemented is focused on a gradual substitution of the commission agent scheme for one of line-level workers. The company expects to have lower staff turnover, but higher expenses related to social security. As at the end of 2018, 50% of total employees from the proximity division were commission agents and the rest line-level workers. In this context, higher expenses in salaries could pressure the division’s earnings. (Salary expenses constitute approximately 50% of operating expenses and 14% of total revenue).

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Greater cash management expenses in OXXO stores. In recent years, service revenue/commissions have risen significantly. In this sense, OXXO stores have been forced to move large amounts of cash on a daily basis. Hence, expenses related to cash management and transportation have grown substantially. Although such expenses do not represent a large part of the total of operating expenses, we expect certain pressures related to cash management to still exist in 2019 and it won’t be until 2020 when the necessary efficiencies take place.

Risk of not finding a partner to replace the distribution of Heineken . There is an ongoing dispute to determine whether Coca-Cola Femsa will continue to distribute Heineken beer in Brazil until 2022, or whether they will terminate the contract before the term. In our opinion, the end of such beer distribution business will take place during the second half of 2019. Regardless of the above-mentioned dates, there is a risk of not finding an appropriate partner to continue growing within the beer business in Brazil. We should mention that given an early cancelation of the contract on behalf of Heineken, KOF could receive an extraordinary payment, which has not been incorporated into our estimates. Finally, in 2018, income from beer in Brazil represented 8% of KOF’s total revenue and 3% of FEMSA’s total revenue.

Changes in the cost of concentrated syrup supplied by The Coca-Cola Company (TCCC). Concentrated syrup is supplied exclusively by TCCC and prices are fixed unilaterally. A price increase of such input could negatively hit the company’s profitability, as it constitutes roughly 35% of the sale’s cost. It is important to mention that the last time concentrated syrup costs were raised was during 3Q18. However, an additional increase during 2019 is expected, which could pressure profitability.

The expansion strategy could negatively affect margins. In recent years, the proximity and health divisions have broken into new Latin American markets through acquisitions of other small format retailers. Such strategy is expected to continue forward. These new acquired businesses are less profitable than OXXO, thus they may weaken the margins of FEMSA Comercio in the short and medium term.

Depreciation of the peso and other local currencies of countries where the company operates against the U.S. dollar. The depreciation of such currencies against the U.S. dollar may increase operating expenses and the cost of a single portion of raw materials, as these costs are paid or are determined in reference to the dollar. It should be mentioned that roughly 25% of KOF’s cost of sales is dollarized. Furthermore, the portion of debt in dollars would be negatively affected, which would have an adverse effect over the company’s financial situation and earnings. Finally, a depreciation of local currencies in in relation to the could negatively affect the conversion of earnings in these countries.

Adverse economic conditions. The markets where FEMSA operates are sensitive to economic conditions. A drop in economic activity could negatively affect store traffic and the average sales ticket per customer, which would result in a sales decline of the main product categories.

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Changes in regulation in the countries where the company operates. The company is subject to regulations in matters concerning labor, zoning, operations, establishment permits and health and safety. Aggressive changes in regulation or a stricter implementation of such legislation could increase the company’s operating expenses or impose restrictions on operations, which would have a negative effect on the performance of FEMSA. It should be stated that changes in fiscal regulation which result in higher tax payments would have a negative effect on its financial situation, earnings and forecasts. Similarly, any change of regulation in the field of energy could have adverse effects in the fuel division. Currently, gasoline and diesel prices follow the dynamics of the international market, a change in such structure could restrict the growth of the fuel division.

Substantial increments in the price of electrical energy. The performance of FEMSA Comercio’s points of sale may be negatively affected by increments in the price of electricity. A sharp increase of electricity rates derived from higher inflation, shortage or power cuts could adversely affect the company’s earnings and financial situation.

Changes in trends of institutional sales and supplier reliance of the health division. In some markets where this division operates, sales are highly dependent on institutional clients both from the public and the private sector. The performance of this division may be affected if it does not manage to maintain and increase its client base. Furthermore, such division, particularly in Mexico, acquires most of its inventory from a limited number of suppliers. Its negotiating power to maintain favorable conditions could affect the bottom line of this division.

Changes in commercial terms with suppliers and disruption of the fuel division’s supply chain. The company mostly acquires gasoline and diesel for its Pemex operations. Currently, the fuel market in Mexico is experiencing structural changes and greater trade openness. As the industry evolves and new suppliers enter the market, the commercial relationship with Pemex as well as the supply chain process could deteriorate.

2019 Estimates

Consolidate

By the end of 2019, we estimate revenue to grow 8% yoy to stand at MXN$520.1 billion. Such expansion would be attributed to the dynamism of revenue from FEMSA Comercio (MXN$310.8 billion) and Femsa strategic businesses (MXN$20.5 billion), divisions which would be presenting year-on- year increments of 16% and 8%, respectively. As for gross margin, we expect a 20bp- contraction to stand at 36.9%. In terms of EBITDA, we project a 4.1% year-on-year increase to close at MXN$64.4 billion. Thus, EBITDA margin would present a 40bp- contraction to stand at 12.4%. In 2019, from the total amount invested, 60% would be allocated to open and maintain OXXO stores, pharmacies and Femsa Comercio stations, 31.4% would be allocated for the expansion of more coolers and a better product mix of Coca-Cola Femsa.

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Finally, 8.6% would be used for maintenance of the Femsa strategic business division. Revenue distribution per division (2019e) EBITDA distribution per division (2019e) % %

3% 1%

Proximity Proximity 32% 36% Health Health 37% Fuel Fuel Coca - Cola Femsa 59% Coca - Cola Femsa Strategic Business 7% Strategic Business 10% 13% 1%

CAPEX distribution per division (2019e) %

9% Proximity

Health 47% 31% Fuel

Coca - Cola Femsa

9% Strategic Business 4%

Source: FEMSA, Banorte

Proximity Divison

By the closing of 2019, we estimate that revenue could grow 10.5% yoy to MXN$187.4 billion, representing 36% of the consolidated revenue. Such expansion would be the result of a 4.6% increase in SSS, which would be explained by an increment of 3.5% in the average sales ticket and 1.5% in store traffic, as well as by the opening of 1,490 new OXXO format stores (1,360 in Mexico and 130 in Latin America). With this in mind, we expect an 8.9% sales floor increase to 2,046,345sqm and the division to close the year with a total of 19,489 OXXO stores. (+8.3% yoy).

As for gross margin, we estimate a 20bp improvement to stand at 39.5%, explained mainly by a more favorable sales mix with higher revenue from the sale of advertising within the stores as well as from services fees. In this sense, it must be mentioned that according to our estimates, revenue from services represent, on average, 2%-3% of total revenue from proximity division and grew at a double-digit rate in the last year (20%).

Meanwhile, in terms of EBITDA, we anticipate a 6.2% year-on-year growth to MXN$20.5 billion. In this context, the EBITDA margin would contract 40bps

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to stand at 11%, resulting from pressure in operating expenses related to labor payments and cash management.

Health Division

By the closing of 2019, we project revenue could grow 34% yoy to MXN$69.4 billion, representing 13% of the consolidated revenue. Such expansion would be mainly attributed to the opening of 868 new pharmacies (248 organically and 620 acquired in Ecuador) and to a positive FX effect by converting the earnings from operations in Lain America into Mexican pesos. We expect the division to end the year with 3,229 pharmacies, which would represent a 37% increase over the previous year’s total number of pharmacies.

As for gross margin, we estimate it will remain stable at 31%. Meanwhile, in terms of EBITDA, we anticipate a 44% year-on-year growth to MXN$4.4 billion. In this sense, the EBITDA margin would expand 40bps to stand at 6.4%, as a result of partial efficiencies from operating processes in Mexico and the positive effect of integrating the 620 pharmacies in Ecuador which are expected to operate with EBITDA margins between 5% - 6%.

Fuel Division

By the closing of 2019, we project revenue could grow 15% yoy to MXN$53.9 billion, representing 10% of the consolidated revenue. Such expansion would result from a 3.5% increase in same station sales, an estimated average price per liter of MXN$17.3 (+3.7% yoy) and the opening of 80 new stations. In this sense, we expect the fuel division to close the year with 619 stations, which would imply a 15% increase over the number of stations last year. As for gross margin, we estimate it will remain unchanged, standing at 91%. Meanwhile, in terms of EBITDA, we expect an 8% year-on-year growth to MXN$673 million. Thus, EBITDA margin would contract 10bps to 1.2%, resulting from pressure in operating expenses related to the opening of new stations and expenses related to the implementation of new vapor recovery systems pursuant to new regulation.

Coca-Cola FEMSA Division

The assumptions for 2019 are modest: 1) we estimate that prices will increase in line with the expected inflation of each region and 2) that the company would stop perceiving revenue from the distribution of beer as of the second half of 2019.

Our 2019 estimates are the following: Sales volume would drop 6%, this without excluding the negative effects from Venezuela and the Philippines. Once these effects are excluded and we follow a comparable basis, we estimate that sales volume would grow 1.8% towards 2019. This modest expansion is explained by our expectation of a solid performance of volume growth in Mexico and Central America. As for revenue, we expect a 4% drop, while in terms of EBITDA; we anticipate a 1% yoy increase. When the effects from the Philippines and beer in Brazil are excluded from 2018 earnings, we estimate that towards 2019, revenue would decline 0.5% and EBITDA would

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rise 6% yoy. Regarding profitability, we expect an EBITDA margin of 19.8% (vs. 18.8%), which would represent a 1% expansion without excluding the previously-mentioned effects. On a comparable basis, we expect a 40bp expansion. This expected increase in profitability is explained, to greater extent, from the following assumptions: (1) modest volume growth in Mexico (+2%) and price increments at least in line with inflation, (2) operating efficiencies in costs due to technological improvements in production processes and (3) a positive effect in sales costs from the termination of the Heineken beer distribution contract in Brazil as of the second half of 2019. Finally, we estimate that payments of existing debt maturities will be executed to reduce the level of leverage and provide financial flexibility to the company.

Based on our projections, we estimate an investment amount (CAPEX) of MXN$7.6 billion in 2019. Such investment would be allocated to increase the number of coolers in points of sale and offer a better product mix. Said amount would represent a 17% decline yoy. It should be mentioned that the expected amount would equal 4% of revenue produced during 2019, while it has fluctuated historically between 5% and 7%. Currently, the company’s production capacity is appropriate and satisfies the demand in regions where it operates; hence it does not require new investment to increase capacity.

For more information on the estimates of the division, please review our Coverage Initiation Report of Coca-Cola Femsa.

Description per division

Proximity Division

This division participates in the retail sector through its OXXO stores, which follow a 105 sqm store format on average. As for competition, this division faces other brand names such as 7-Eleven, Circle-K, independent retail chains and small corner shops that operate in the informal market. In particular, informal small neighborhood shops often avoid fiscal supervision and regulation, which allows them to sell some of their products at lower prices in relation to the market’s average. Conversely, one of the competitive advantages that is being developed by this division is the use of apps, moving towards the electronic channel to provide better customer service. One of these apps is called Mi OXXO, which consists in the delivery of snacks, beverages or any product that the customer wants directly to his/her home. Furthermore, the app called Oxxo pay is designed to offer its customers the option of buying online anywhere and make the corresponding payments at an OXXO store using a credit card or cash. Finally, the app shop-net allows its customers to pay in restaurants with the use of their cell phone with the purpose of obtaining promotions and discounts in certain establishments.

Regarding the performance and investment in stores, it is important to mention that the average investment range for an OXXO store is between MXN$2.5 million and MXN$3.0 million and the maturity curve is reached, on average,

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one and a half years after having initiated operations. On the other hand, every year an average of 30-35 OXXO stores close. A crucial element in the operation of OXXO stores are the distribution centers. Currently there are 20 distribution centers in Mexico and one in Colombia. On average, every distribution center services 1,000 stores, except the one in , which provides service to 1,300 stores. As for logistics, FEMSA strategic businesses provide the necessary services to transport merchandise from the distribution centers to the stores. In terms of the operations, each unit has a staff between 6 and 7 employees (3 shifts consisting of 2 workers and one store leader). It must me noted that currently the company is changing its hiring scheme. The system that was traditionally used consisted in hiring commission agents, which is conducive to higher personnel turnover, lower expenses related to social security and salaries linked to the performance of the particular OXXO store where the agent worked. The shift that is being implemented is focused on a gradual substitution of the commission agent scheme for one of line-level workers. The company expects to have lower staff turnover, but higher expenses related to social security. It should be stated that currently 50% of employees are line-level workers, and that salary payments represent approximately 50% of operating expenses and 14% of total revenue. Finally, we estimate that during 2019 the EBITDA margin will be pressured 40bps due to higher expenses related to labor and cash management in OXXO stores. However, by 2020 we anticipate a 70bp EBITDA margin improvement due to a favorable comparative base (assuming that most of the employees have already integrated into the line-level worker scheme) and an efficient control to transport cash from OXXO stores.

OXXO stores (2013-2020e) Revenue and EBITDA Margin (2013-2020e) %, MXN million

25,000 11.8% 11.7% $250,000

21,054 11.6% 11.4% 11.4% $200,000 20,000 19,489 11.3% 17,999 11.4% 11.2% 16,526 11.2% 11.0% 15,225 $150,000 15,000 14,061 12,853 11.0% 10.8% 11,721 10.7% 10.8% $100,000 10,000 10.6% $50,000 10.4% 5,000 10.2% $- 2013 2014 2015 2016 2017 2018 2019E 2020E 0 2013 2014 2015 2016 2017 2018 2019E 2020E Revenue EBITDA Margin

Source: FEMSA, Banorte

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Revenue per sqm (2015-2019E) EBITDA per sqm (2015-2019E) MXN million MXN million

$420.0 $40.0 $36.8 $36.1 $35.0 $2.6 $350.0 $35.7 $2.5 $34.6 $72.2 $30.0 $2.9 $63.5 $3.7 $4.3 $280.0 $62.8 $2.7 $60.8 $25.0 $4.0 $3.9 $8.8 $8.9 $210.0 $33.1 $99.7 $106.9 $20.0 $2.2 $5.0 $7.3 $78.8 $88.7 $55.8 $15.0 $3.5 $140.0 $7.5 $8.1 $8.9 $9.3 $88.8 $92.5 $6.1 $68.0 $79.7 $83.9 $10.0 $70.0 $5.0 $81.2 $85.8 $87.6 $89.8 $91.6 $9.3 $9.7 $9.9 $10.2 $10.1 $- $- 2015 2016 2017 2018 2019E 2015 2016 2017 2018 2019E

Femsa Proximity Walmex Lacomer Chdraui Soriana Femsa Proximity Walmex Lacomer Chdraui Soriana

Source: FEMSA, Banorte

Health Division

FEMSA participates, through the health division, with the following brands: YZA and Farmacom in Mexico, Cruz Verde in Chile, Maicao in Colombia and is set to engage shorty in Ecuador. In Mexico, Femsa’s health division competes against other chains such as Farmacias Guadalajara, Farmacias del ahorro and Farmacias Benavides, as well as regional and independent pharmacies, supermarkets and other small and informal pharmacies. Regarding the dimensions and average investment per location, each unit consists of 88 sqm in floor space and requires an investment of MXN$1 million to open. In addition, CAPEX as a percentage of sales has represented 2% on average in the past 3 years and by 2019 and 2020 we expect it to increase to 3% resulting from the expansion in Ecuador. As for profitability in Mexico, on average, EBITDA margins fluctuate between 1% - 2%. This is due to the fact that there is no integrated structure in the division and the aggressive competition in the country. We anticipate that during 2019, the benefits of the strategy in operating, logistics and commercial processes in Mexico will begin to be evident. The main characteristics of this strategy are: (1) the operation of pharmacies under a single brand (YZA) and (2) an increase in negotiating power and improvement of terms with suppliers by carrying out inventory orders as a whole and not each pharmacy separately, as it was previously done. In Chile, FEMSA operates under the name Cruz Verde and relevant competitors are Farmacias Ahumada and Salcobrand. As for profitability in this region, on average, EBITDA margins range between 5% - 6%. Furthermore, in Colombia, its main competitors are Farmatodo, Olimpica, Farmacenter, La rebaja and Colsubsidio. Finally, the acquisition of 620 pharmacies in Ecuador is expected to materialize by the second half of 2019. These are estimated to present EBITDA margins similar to those of Chile. These acquisitions should contribute favorably in the division’s consolidated EBITDA margin. (See graph of pharmacies and EBITDA Margin)

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Pharmacies (2015-2020e) Revenue and EBITDA Margin (2015-2020e) %, MXN million

4,000 8.0% $95,000 3,426 7.2% 3,500 3,229 $80,000 7.0% 6.4% 3,000 $65,000 2,361 6.1% 6.0% 2,500 2,225 2,120 6.0% 5.6% 5.5% $50,000 1,900 2,000 $35,000 1,500 5.0% $20,000 1,000 4.0% $5,000 500 2015 2016 2017 2018 2019E 2020E 0 2015 2016 2017 2018 2019E 2020E Ventas totales Margen EBITDA

Source: FEMSA, Banorte

Fuel Division

The main competitors faced by the company are small independent service station operators, regional chains such as Corpogas, Hidrosina, Petro-7, Orsan and international players such as British Petroleum, Shell, Chevron and . The division’s business model has allowed the generation of an attractive ROIC. The model consists in offering a monthly payment to the owners of operating stations in exchange for allowing FEMSA to operate and manage the stations under the OXXO GAS brand. Such scheme allows FEMSA to operate service stations without having to make substantial investments. In this sense, it is important to point out that that Capex as a percentage of total sales of the last three years has stood, on average at 1%. Moving forward, we project CAPEX to stand at 2% as a percentage of total sales. This 100bp increase would result from the acquisition of new stations, remodeling and change of image to operate under the OXXO gas brand. Finally, we consider this 100bp CAPEX increase is important given the division’s low margins.

Gas stations (2015-2020e) Revenue and EBITDA Margin (2015-2020e) %, MXN million

800 1.6% 1.6% $75,000 727 1.5% 700 $60,000 619 1.4% 1.3% 1.3% 1.2% 600 539 1.3% $45,000 1.2% 500 452 1.1% 1.1% 1.1% $30,000 382 400 1.0% 307 $15,000 0.9% 300 0.8% $- 200 2015 2016 2017 2018 2019E 2020E 2015 2016 2017 2018 2019E 2020E Revenue EBITDA Margin

Source: FEMSA, Banorte

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Coca-Cola Femsa

This division is the global-wide leading bottling company for TCCC products and therefore operates within a highly competitive environment. Its main competitors are soft-drink bottling companies, including bottlers for Pepsi products and other bottling companies for local brands and low-cost beverages. This division also competes in beverage categories other than soft-drinks, such as water, juice-based beverages, coffee, tea, milk, dairy products, isotonic drinks, energy drinks and herbal-based beverages. KOF’s two largest geographic divisions are the following: Mexico and Central America Division. Operations cover Mexico, (including corporate operations), Guatemala, Nicaragua, Costa Rica and Panama. The population that is serviced in the previously mentioned countries consists of approximately 94 million consumers. It has 24 bottling plants and 197 distribution centers.

Operations in Mexico Operations in Central America

Sourcee: KOF, Banorte

Revenue distribution per region (2018) Historical volume and estimates % Millions of units cases 2200 2156 2150 2110 16% 2100 2064

2050 2026 2018 2000 84%

1950

1900 2016 2017 2018e 2019e 2020e Mexico Central America

Source: KOF, Banorte

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South America. Operations cover Brazil, Argentina and Colombia, Uruguay and Venezuela. The population that is serviced in the previously mentioned countries consists of approximately 179 million consumers. It has 24 bottling plants and 114 distribution centers. It should be mentioned that the deconsolidation of Coca-Cola FEMSA’s operations in Venezuela took place as of December 31st of 2017. Furthermore, as of July of 2018, earnings from operations in Argentina are entered as a hyperinflationary subsidiary into the accounting books.

Operations in Brazil Operations in Colombia

Source: KOF, Banorte

Historical volume and estimates Revenue distribution per country (2018) Millions of unit cases %

1320 2% 1308 1310 1300 1299 1300 11% 18% 1290 1280 1273 1270 1260 1260 69% 1250 1240 1230 2016 2017 2018e 2019e 2020e Colombia Brazil Argentina Uruguay

Source: FEMSA, Banorte

For further information on Coca-Cola Femsa, visit the link of our Coverage Initiation Report

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Strategy

Proximity Division

This division’s strategy is focused on maintaining an aggressive OXXO store opening approach in Mexico. Additionally, store openings at a slower pace in countries such as Chile, Colombia and Peru are one the division’s current aims. In this context, it is important to highlight that the efficient operating leverage has allowed it to maintain a solid and attractive EBITDA margin per square meter, positioning it as the retail leader, in terms of profitability per square meter in Mexico. Moreover, the development of apps to improve supply and quality of services is a strategy that the division has been implementing as pilot programs in the northern part of the country. Moving forward, we consider that this strategy may be implemented in the rest of the country and in other South American countries where operations already exist. Finally, an important point that is worth mentioning is Oxxo’s strategic alliance with Amazon. Such alliance allows customers to buy online through Amazon and then pick up the products ordered at any Oxxo store that better suits the customer’s needs. The relevant point in this alliance is the added value that Oxxo’s distribution capacity and geographical presence has to enter into the e-commerce business to a greater degree. Onwards, we believe that the company would be capable of exploiting such competitive advantage.

Health Division

This division’s strategy is focused on consolidating a comprehensive structure into operating and commercial processes in Mexico. We estimate that such goal will be met during 2019. As for operations in South America, the transaction to acquire 620 pharmacies from GPF Corporacion in Ecuador will be concluded during the second quarter of the year. Thus, this division will have presence in four countries: Mexico, Chile, Colombia and Ecuador. We anticipate that EBITDA margins from the 620 acquired pharmacies will stand between 5%-6%, similar to that of the pharmacies in Chile. Against this backdrop, the implemented strategy is focused on expanding operations in South America and improving the profitability of pharmacies in Mexico.

Fuel Division

Most of this division’s stations are located in the northern part of the country. Moving forward, the strategy is to keep renting existing gasoline stations, remodel them and then operate them under the OXXO GAS brand name. A relevant point that should be mentioned is that the strategy is focused on consolidating a brand that is perceived by consumers as a completely honest name. In this framework, we consider that this brand may consolidate in the short to middle term. Finally, the company has mentioned that it has no intentions to integrate vertically. However, it does not dismiss the idea of achieving strategic alliances in order to have the appropriate infrastructure to store energy products.

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Coca-Cola Femsa

One of the main goals of the company is to continue having a leading position global-wide and focus its efforts on improving earnings in the regions where it currently operates, mainly Brazil and Mexico. In this sense, it is important to point out that the company’s business strategy consists of three fundamental cornerstones:

Strategic portfolio. The widely diversified product portfolio and with different presentations has allowed the company to satisfy the needs of its customers in regions where it currently operates. The range of products offered in the different points of sale has played a fundamental role in satisfying the expectations and trends of a changing market. Currently, there are important efforts made to increase the number of healthy products in the portfolio (At present, 41% of the brands are products of low caloric content), extend the number of coolers in certain regions and increase the percentage of returnable products, making emphasis on a strategic market segmentation.

Implementation of technology to transform operations. The company has dedicated resources and significant efforts to integrate its operations making use of technology related to Big Data and data analysis. It is important to highlight that the implementation of technology into the company’s operations has been a constant effort and its main purpose is to generate efficiencies in costs, improve inventory management and offer a more sophisticated service to its customers. During 2017, different technological improvements were fully integrated into the operation and have allowed a more detailed analysis of the level of prices and volume of each region. In addition, improved technologies in the supply chain and digital commercial strategy have been recently integrated. Through the implementation of JDA Supply Chain Planning and Transportation Management solutions, the supply chain was transformed in order to optimize processes, reduce costs and improve profitability. These solutions have allowed the company’s operating network to be perfectly integrated with downstream operating planning tools that combine supply chain and transportation processes. As a result, the company has the capacity to visibly plan deliveries to the 344 distribution centers down to the hour, which is paramount to ensure that a more sophisticated and timely service is met for the company’s clients. Betting on greater use of technology for its operations will allow the company to make strategic decisions and face market changes and trends.

Cultural transformation. The company has implemented strategies with the purpose of improving the organizational culture and development of its human capital. The company’s transformation depends greatly on the talent, satisfaction, team work and motivation of its members.

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FEMSA

Coca-Cola FEMSA FEMSA Strategic Heineken Femsa COMERCIO Business 14.8% 47.2% 100% 100%

Corporate27.8% The Coca- StructureProximity Health Cola Company Division Division Fuel Division FEMSA carries out commercial activities through its main subsidiary companies,25% Public as is shown in the following diagram:

FEMSA

Coca-Cola FEMSA FEMSA strategic Heineken Femsa COMERCIO business 14.8% 47.2% 100% 100%

27.8% The Coca- Proximity Health Cola Company Division Division Fuel Division

25% Public

Some important points are the following:

 47.2% ownership of Coca-Cola Femsa corresponds to 63% of shares with voting privileges.

 On September 18, 2017, the company announced the sale of 5.24% of combined interest in Heineken, comprising a combination of existing issued ordinary shares of both Heineken N.V. and Heineken Holding N.V. The sale consisted of: 22,485,000 million shares of Heineken N.V. representing 3.90% of the issued share capital at a price of €84.50 per share, producing total resources worth approximately €1.9 billion euros and 7,700,000 million shares of Heineken Holding N.V. representing 2.67% of the issued share capital at a price of €78.00 per share, producing total resources with approximately €600 million euros. Following the sale, Femsa’s shareholding in Heineken N.V. has reduced from 12.53% to 8.63% and in Heineken Holding N.V. from 14.94% to 12.26%, providing for an overall decrease of Femsa’s economic interest in Grupo Heineken from de 20% to 14.76%.

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Share structure and corporate rights Number of shares per serie

Serie Corporate rights

D-L Limited voting right 4,322,355,540

9,246,420,270 D-B Limited voting right 4,322,355,540

B Full voting right

D-L D-B B

Source: FEMSA, Banorte

Units structure Number of units

Unit Shares per unit

 2 shares serie D-L BD (FEMSA UBD)  2 shares serie D-B 1,417,048,500  1 share serie B 2,161,177,770

B (FEMSAUB)  5 shares serie B

BD (FEMSA UBD) B (FEMSAUB)

Source: FEMSA, Banorte Both units, BD and B, are listed in the MSE. BD units are listed in the NYSE as ADS’s under the name FMX. (ADS = 10 units)

Shares’ ownership %

40.7%

59.3%

Float Control trust

Source: MSE, FEMSA, Banorte

24

Certification of Analysts. We, Gabriel Casillas Olvera, Delia Maria Paredes Mier, Alejandro Padilla Santana, Manuel Jiménez Zaldívar, Tania Abdul Massih Jacobo, Katia Celina Goya Ostos, Juan Carlos Alderete Macal, Víctor Hugo Cortes Castro, Marissa Garza Ostos, Miguel Alejandro Calvo Domínguez, Hugo Armando Gómez Solís, Gerardo Daniel Valle Trujillo, José Itzamna Espitia Hernández, Valentín III Mendoza Balderas, Santiago Leal Singer, Francisco José Flores Serrano, Francisco Duarte Alcocer, Jorge Antonio Izquierdo Lobato and Leslie Thalía Orozco Vélez, certify that the points of view expressed in this document are a faithful reflection of our personal opinion on the company (s) or firm (s) within this report, along with its affiliates and/or securities issued. Moreover, we also state that we have not received, nor receive, or will receive compensation other than that of Grupo Financiero Banorte S.A.B. of C.V for the provision of our services.

Relevant statements. In accordance with current laws and internal procedures manuals, analysts are allowed to hold long or short positions in shares or securities issued by companies that are listed on the and may be the subject of this report; nonetheless, equity analysts have to adhere to certain rules that regulate their participation in the market in order to prevent, among other things, the use of private information for their benefit and to avoid conflicts of interest. Analysts shall refrain from investing and holding transactions with securities or derivative instruments directly or through an intermediary person, with Securities subject to research reports, from 30 calendar days prior to the issuance date of the report in question, and up to 10 calendar days after its distribution date.

Compensation of Analysts.

Analysts’ compensation is based on activities and services that are aimed at benefiting the investment clients of Casa de Bolsa Banorte Ixe and its subsidiaries. Such compensation is determined based on the general profitability of the Brokerage House and the Financial Group and on the individual performance of each analyst. However, investors should note that analysts do not receive direct payment or compensation for any specific transaction in investment banking or in other business areas. Last-twelve-month activities of the business areas. Grupo Financiero Banorte S.A.B. de C.V., through its business areas, provides services that include, among others, those corresponding to investment banking and corporate banking, to a large number of companies in Mexico and abroad. It may have provided, is providing or, in the future, will provide a service such as those mentioned to the companies or firms that are the subject of this report. Casa de Bolsa Banorte or its affiliates receive compensation from such corporations in consideration of the aforementioned services.

Over the course of the last twelve months, Grupo Financiero Banorte S.A.B. C.V., has not obtained compensation for services rendered by the investment bank or by any of its other business areas of the following companies or their subsidiaries, some of which could be analyzed within this report.

Activities of the business areas during the next three months.

Casa de Bolsa Banorte, Grupo Financiero Banorte or its subsidiaries expect to receive or intend to obtain revenue from the services provided by investment banking or any other of its business areas, by issuers or their subsidiaries, some of which could be analyzed in this report. Securities holdings and other disclosures.

As of the end of last quarter, Grupo Financiero Banorte S.A.B. of C.V. has not held investments, directly or indirectly, in securities or derivative financial instruments, whose underlying securities are the subject of recommendations, representing 1% or more of its investment portfolio of outstanding securities or 1 % of the issuance or underlying of the securities issued.

None of the members of the Board of Grupo Financiero Banorte and Casa de Bolsa Banorte, along general managers and executives of an immediately below level, have any charges in the issuers that may be analyzed in this document.

The Analysts of Grupo Financiero Banorte S.A.B. of C.V. do not maintain direct investments or through an intermediary person, in the securities or derivative instruments object of this analysis report. Guide for investment recommendations.

Reference

BUY When the share expected performance is greater than the MEXBOL estimated performance. HOLD When the share expected performance is similar to the MEXBOL estimated performance. SELL When the share expected performance is lower than the MEXBOL estimated performance. Even though this document offers a general criterion of investment, we urge readers to seek advice from their own Consultants or Financial Advisors, in order to consider whether any of the values mentioned in this report are in line with their investment goals, risk and financial position.

Determination of Target Prices

For the calculation of estimated target prices for securities, analysts use a combination of methodologies generally accepted among financial analysts, including, but not limited to, multiples analysis, discounted cash flows, sum-of-the-parts or any other method that could be applicable in each specific case according to the current regulation. No guarantee can be given that the target prices calculated for the securities will be achieved by the analysts of Grupo Financiero Banorte S.A.B. C.V, since this depends on a large number of various endogenous and exogenous factors that affect the performance of the issuing company, the environment in which it performs, along with the influence of trends of the stock market, in which it is listed. Moreover, the investor must consider that the price of the securities or instruments can fluctuate against their interest and cause the partial and even total loss of the invested capital.

The information contained hereby has been obtained from sources that we consider to be reliable, but we make no representation as to its accuracy or completeness. The information, estimations and recommendations included in this document are valid as of the issue date, but are subject to modifications and changes without prior notice; Grupo Financiero Banorte S.A.B. of C.V. does not commit to communicate the changes and also to keep the content of this document updated. Grupo Financiero Banorte S.A.B. of C.V. takes no responsibility for any loss arising from the use of this report or its content. This document may not be photocopied, quoted, disclosed, used, or reproduced in whole or in part without prior written authorization from Grupo Financiero Banorte S.A.B. of C.V. Historial de PO y Recomendación Stock Date Recommendation PT FEMSA UBD April 04, 2019 HOLD MXN$192.00

25

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

Research and Strategy

Gabriel Casillas Olvera Chief Economist and Head of Research [email protected] (55) 4433 - 4695

Raquel Vázquez Godinez Assistant [email protected] (55) 1670 - 2967

Economic Analysis

Delia María Paredes Mier Executive Director of Economic Analysis [email protected] (55) 5268 - 1694 Katia Celina Goya Ostos Senior, Global Economist [email protected] (55) 1670 - 1821 Juan Carlos Alderete Macal, CFA Senior Economist, Mexico [email protected] (55) 1103 - 4046 Miguel Alejandro Calvo Economist, Regional [email protected] (55) 1670 - 2220 Domínguez Francisco José Flores Serrano Economist, Mexico [email protected] (55) 1670 - 2957 Francisco Duarte Alcocer Analyst, Global Economist [email protected] (55) 1103 - 4000 x 2707 Lourdes Calvo Fernández Analyst (Edition) [email protected] (55) 1103 - 4000 x 2611

Fixed income and FX Strategy

Alejandro Padilla Santana Head Strategist – Fixed income and FX [email protected] (55) 1103 - 4043 Santiago Leal Singer FX Senior Strategist [email protected] (55) 1670 - 2144 Leslie Thalía Orozco Vélez Fixed Income and FX Strategist [email protected] (55) 5268 - 1698

Equity Strategy

Director Equity Research — Manuel Jiménez Zaldivar [email protected] (55) 5268 - 1671 Telecommunications / Media Victor Hugo Cortes Castro Technical Analysis [email protected] (55) 1670 - 1800 Equity Research – Conglomerates / Financials/ Marissa Garza Ostos [email protected] (55) 1670 - 1719 Mining / Petrochemicals Equity Research – Airlines / Airports / Cement José Itzamna Espitia Hernández [email protected] (55) 1670 - 2249 / Infrastructure / REITs Equity Research – Auto Parts/ Consumer Valentín III Mendoza Balderas [email protected] (55) 1670 - 2250 Discretionary / Real Estate / Retail Jorge Antonio Izquierdo Lobato Analyst [email protected] (55) 1670 - 1746 Itzel Martínez Rojas Analyst [email protected] (55) 1670 - 2251

Corporate Debt

Tania Abdul Massih Jacobo Director Corporate Debt [email protected] (55) 5268 - 1672 Hugo Armando Gómez Solís Senior, Corporate Debt [email protected] (55) 1670 - 2247 Gerardo Daniel Valle Trujillo Manager, Corporate Debt [email protected] (55) 1670 - 2248

Wholesale Banking

Armando Rodal Espinosa Head of Wholesale Banking [email protected] (55) 1670 - 1889 Alejandro Eric Faesi Puente Head of Global Markets and Institutional Sales [email protected] (55) 5268 - 1640 Alejandro Aguilar Ceballos Head of Asset Management [email protected] (55) 5268 - 9996 Head of Investment Banking and Structured Arturo Monroy Ballesteros [email protected] (55) 5004 - 1002 Finance Head of Transactional Banking, Leasing and Gerardo Zamora Nanez [email protected] (81) 8318 - 5071 Factoring Jorge de la Vega Grajales Head of Government Banking [email protected] (55) 5004 - 5121 Luis Pietrini Sheridan Head of Private Banking [email protected] (55) 5004 - 1453 René Gerardo Pimentel Ibarrola Head of Asset Management [email protected] (55) 5268 - 9004 Ricardo Velázquez Rodríguez Head of International Banking [email protected] (55) 5004 - 5279 Víctor Antonio Roldan Ferrer Head of Corporate Banking [email protected] (55) 5004 - 1454