Equity Research May 13th, 2019 Monthly Andean Strategy Update Envisioning a better second half in Chile In April, the Andean region performed below LatAm markets (+0.1% in USD CREDICORP CAPITAL RESEARCH terms), with Colombia, Chile and Peru posting negative performance (-2.3%, - 1.0% and -0.7% in USD terms, respectively). The Andean region performed poorly compared to other EM markets, including Asia, Brazil and Mexico. Daniel Velandia, CFA We are moving our position in Chile to an Overweight on the back of a +(571) 3394400 ext. 1505 more favorable balance of risks relative to Colombia and Peru, but [email protected] earnings and macro dynamics have not changed. • Although we revised our 2019E GDP growth for Chile from 3.3% to 3.0%, Carolina Ratto we still expect it to grow above potential in 2H19. +(562) 2446 1768 • Market dynamics have not changed, with low activity from local and foreign [email protected] investors. The market has suffered from some overhang due to two large capital market events: Enel Am’s capital raise and Cencosud’s real estate Tomás Sanhueza IPO. This will continue until June when both operations take place. +(562) 2446 1751 • Although the short term looks soft, we see a higher downside risk in Peru [email protected] and profit-taking in Colombia, which sets a more enabling context for changing our position in Chile to an Overweight. In particular, we expect a Sebastián Gallego, CFA stronger 2H19 for Chile in earnings and macro figures. +(571) 3394400 ext. 1594 • Valuations are still discounted, even when stressing earnings growth of [email protected] relevant sectors such as Pulp, Retail and Banks. Taking profits in Colombia; shifting to Neutral as we have observed a Daniel Córdova positive absolute/relative performance on a YTD basis. +(511) 416 3333 Ext. 33052 [email protected] • The COLCAP index has climbed 14.3% in USD terms (as of May 7th, 2019), compared to 9.0% and 0.9% from Peru and Chile, respectively. • In addition to a take profit strategy, we see that global volatility has recently picked up again; this has translated into a pressure for the local FX. • We have taken profits in Colombian banks (Bancolombia and Davivienda), which were the core of our equity strategy in the local market. Recall that PFBancolombia and Davivienda have climbed 26.0% and 19.2% in USD terms (as of May 7th, 2019), respectively. • We continue to monitor recent noise coming from a potential new law that seeks to eliminate debit/credit card fees in the banking sector. • We have removed Davivienda from our Top Picks, and we have maintained Cementos Argos and Nutresa as our preferred choices in Colombia. • Despite the neutral stance, we highlight that Colombia continues to rank second in LatAm when analyzing inflows to equity ETFs (only behind Brazil). We are downgrading our recommendation for Peru from Neutral to Underweight due to increased uncertainty about metal prices and liquidity events on one of its large cap stocks. • The US President’s statements about his animus towards a trade deal with China has created uncertainty regarding commodity prices. • FTSE Russell reclassified Credicorp’s stock (BAP) as a USA national; as passive investment funds track this index, selling pressures on the stock could continue. • Private consumption has continued to grow at a moderate pace, public investment contracted less than anticipated in 1Q19 and there are some IMPORTANT NOTICE (US FINRA RULE 2242) This document is intended for INSTITUTIONAL INVESTORS and is not subject to all of the independence and signals of a mild acceleration in private investment. disclosure standards applicable to debt research reports prepared for retail investors. Credicorp Capital may do or seek to do business with companies • Companies under coverage continue to trade at a discount against historical covered in its research reports. As a result, investors should be aware that the firm averages, which disappears when excluding mining companies. may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in1making their • We have maintained Ferreycorp and InRetail as our Top Picks. investment decision. Refer to important disclosures on page 30 to 33, Analyst Certification on Page 30. Additional disclosures on page 33. Actualizar Contents Monthly Andean Strategy Update Chile: The market still not ready to take off, but downside seems limited 5 Top Picks 7 Colombia: We have decided to take profits in Colombia, while adopting a more neutral stance within the local market 9 Top Picks 12 Peru: Despite an overall resilient economy, higher volatility in metal prices and specific market events could weigh on 13 sentiment this month Top Picks 15 Valuation Summary 17 Appendix: Monthly Summary 20 Top Winners / Losers of the Month 21 Traded Volume 24 Chile - Pension Funds: Monthly Flows 27 Peru - Pension Funds: Monthly Flows 28 Economic Forecasts 29 2 Actualizar LTM Andean Equities Performance (in USD) IPSA COLCAP SP BVL General Index MSCI Latam 110 105 100 95 90 85 80 75 70 May-18 Jul-18 Sep-18 Nov-18 Jan-19 Mar-19 May-19 Source: Credicorp Capital, & Bloomberg Andean Equities Fwd P/E (12 month rolling) vs 5Y historical average P/E FWD vs Historical 5Y Average 20.0x 30.0% 17.5x 18.0x 25.0% 16.0x 14.0x 13.9x 20.0% 14.0x 15.0% 12.0x 10.0% 10.0x 5.0% 8.0x 0.0% 6.0x -5.0% 4.0x -10.0% -12% -11% 2.0x -15.0% -17% .0x -20.0% Chile Peru Colombia Andean Equities Fwd EV/EBITDA (12 month rolling) vs 5Y historical average EV/EBITDA FWD vs Historical 5Y Average 8.7x 9.0x 30.0% 7.6x 8.0x 7.1x 25.0% 7.0x 20.0% 6.0x 15.0% 10.0% 5.0x 5.0% 4.0x -2% 0.0% 3.0x -5.0% 2.0x -10% -10.0% -13% 1.0x -15.0% .0x -20.0% Chile Peru Colombia Source: Credicorp Capital, & Bloomberg 3 Strategy Summary within Andean Context Long view Short view (12-to-18 months) (1-to -3 months) Chile Allocation: Overweight (+) Still appealing GDP growth close to potential (3.0% 2019E) The Enel Americas capital increase and (+) Safe haven on the regional landscape compared to riskier markets Cencosud's real estate IPO has generated an (+) Discounted valuations when compared to its history overhang that will limit flows in the short-term. Both (-) Upcoming two months will be probably soft due to capital market events events should take place in June. Once that (-) Negative impact of global risks happens, it all comes down to earnings growth that (-) No clear catalyst with lacking earning growth in short term we believe should ramp up in 2H19. The latter (-) Exposure to risks coming from Argentina and Brazil coupled with valuations that are still discounted reduces potential downside risk in the market. Strategy: We continue to favor a stock picking strategy of companies with solid fundamentals, earnings momentum and clear catalysts. Top picks: ILC, Engie Chile and Sigdo Koppers Colombia Allocation: Neutral (+) Recovery of the consumption and cement/construction sectors. The most important issues in the short term are: (+) Better operating/financial trends at the banking sector 1Q19 results, oil prices, exchange rate (+) Higher inflows coming from local institutional players performance, corporate governance issues/news, (-) A potential law that seeks to eliminate credit/debit card fees rebalancing process (MSCI at the end of May), flows (-) Volatility across foreign markets related to the decree 959 of 2018, ETFs' flow (-) Twin deficits momentum. Strategy: We have decided to take profits and turn neutral in Colombia given the rally on a YTD basis. In any case, we maintain our target of 1,720 points for the COLCAP index towards the year end. Given that we have taken profits across the banking sector, we remain confident upon other key sectors/stories such as private consumption and cement & construction. Top picks: Nutresa and Cementos Argos Peru Allocation: Underweight (+) Private consumption kept growing at a moderate pace. We expect InRetail and IFS to post strong results in (+) Public investment fell less than anticipated during 1Q19. 1Q19. Engie shows an attractive discount vs. T.P., (-) Uncertainty regarding the final outcome of trade negotiations between the US and and is supported bya strong 2019 revenues outlook. China has increased. Cementos Pacasmayo is trading at multiples more (-) FTSE announced change of nationality status for Credicorp. than one standard deviation below its 3-year average (-) Valuations excluding mining companies at their historical averages. and buying flows are timidly re-appearing. Meanwhile, Alicorp has good long-term fundamentals. Strategy: Trading ideas: As commodity price short-term risks have increased, we favor stocks such as InRetail, Cementos Pacasmayo, Engie, IFS, and Ferreycorp, linked to the upcycle of mining investment. At the same time, private Alicorp. consumption maintains a healthy growth, supporting names such as InRetail. Top Picks: InRetail and Ferreycorp. 4 Chile The market is still not ready to take off, but downside seems limited Two relevant capital In April, the Chilean market posted a negative return in both USD (-1.0%) and CLP market events have (-1.4%). The local market continued to post the same dynamics seen in March, almost generated a strong completely erasing the outperformance seen in January 2019. Flows are still way below overhang in the the historical average of the market (-6.8% lower than Apr-18). Local investors continue market. to show low activity levels, which, in our view, can be ascribed to the two relevant capital market events that should take place in June 2019: (i) the USD 3.0bn capital increase of Enel Americas and (ii) the IPO of the real estate division of Cencosud, which is expected to amount to USD 1.0bn.