JP Morgan Latam 2011

Latin America Equity Research
12 November 2010

LatAm Year Ahead 2011
Stay Invested
Head of Latin America Research Ben Laidler AC
(1-212) 622-5252 [email protected] J.P. Morgan Securities LLC

Contents Strategy .........................................................5 Sectors.........................................................49 Economics and Commodities ....................113 LatAm Data................................................135
For a complete list of contributors to this report, please see table of contents on page 3.

See page 158 for analyst certification and important disclosures, including non-US analyst disclosures.
J.P. Morgan does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.

Ben Laidler (1-212) 622-5252 [email protected]

Latin America Equity Research November 2010

LatAm Year Ahead 2011 — Stay Invested
What to own
• Brazil • Colombia • Argentina • Off-Index • Discretionary • Financials • Telecoms Focus on sectors within countries rather than country recommendations.

What to avoid
• Chile • Peru • Materials • Utilities • Staples A detailed view of our country and sector recommendations within LatAm is available on page 14. For more detail please see country and sector pages.

10 Top Analyst Picks
(See page 16)
Country Brazil Brazil Mexico Brazil Brazil Mexico Mexico Mexico Brazil Brazil Top Picks Vale PDG Realty Cemex Bradesco Santander Brasil Corporacion Geo ICA Grupo Mexico Copasa Brasil Foods SA To PT (%) 49.4 41.6 35.7 34.9 34.7 32.3 32.1 31.1 29.0 26.9

10 Stocks to Avoid
(See page 17)
Country Colombia Chile Mexico Mexico Brazil Brazil Chile Colombia Peru Brazil Stock to avoid Ecopetrol SQM Grupo Financiero Inbursa Telmex SA Fibria CPFL Energia IAM Bancolombia Buenaventura Eletropaulo To PT (%) (36) (28) (24) (21) (13) (6) (4) (2) (1) 0

Source: J.P. Morgan. Note: To PT = Returns to analyst price target from 28 Oct 2010.

The year-ahead process
The goal of this document is to present our key strategy themes for 2011 using most- and least-favored stocks from J.P. Morgan’s LatAm equity research team. This 150+ page handbook includes strategy sections from our country strategists as well as overviews on the outlook for each major company sector and the analysts’ top picks and stocks to avoid for the year ahead. Analysts were asked to pick 1-2 large cap stocks that should lead performance in 2011 as well as a large cap stock they expected to underperform. We are positive LatAm into 2011. Macro fundamentals are robust, credit conditions very supportive, EM fund inflows expected to remain strong. Valuations are not stretched, and the earnings backdrop robust. Risks range from the fiscal and interest rates outlook in Brazil, to the security situation in Mexico, and the presidential elections in 2011 in Argentina and Peru. Capital control risks also remain real, especially in Brazil.

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Ben Laidler (1-212) 622-5252 [email protected]

Latin America Equity Research November 2010

Table of Contents
Strategy
LatAm Strategy (Ben Laidler) .......................................................................... 6 EM Equity Strategy (Adrian Mowat)............................................................... 18 Brazil Strategy (Emy Shayo Cherman).......................................................... 30 Mexico Strategy (Ben Laidler) ....................................................................... 32 Chile Strategy (Brian P Chase)...................................................................... 34 Colombia Strategy (Brian P Chase)............................................................... 36 Peru Strategy (Brian P Chase) ...................................................................... 38 Argentina Strategy (Brian P Chase) .............................................................. 40

Sectors
Agribusiness, Pulp & Paper (Debbie Bobovnikova, CFA).............................. 44 Financials (Saul Martinez) ............................................................................. 50 Financials (SMid) (Frederic de Mariz)............................................................ 56 Food, Beverages & Tobacco (Alan Alanis) .................................................... 62 Homebuilders (Adrian E Huerta).................................................................... 70 Metals & Mining (Rodolfo R. De Angele, CFA) .............................................. 78 Oil, Gas & Petrochemicals (Sergio Torres).................................................... 86 Retail & Healthcare (Andrea Teixeira, CFA) .................................................. 92 Telecom, Media & Technology (Andre Baggio, CFA) .................................. 100 Utilities (Anderson Frey, CFA) ..................................................................... 106

Economics and Commodities
Global Economic Outlook (Bruce Kasman) ................................................. 115 Brazil Economics (Fabio Akira).................................................................... 122 Mexico Economics (Gabriel Casillas) .......................................................... 123 China Economics (Qian Wang/Grace Ng/Lu Jiang)..................................... 124 China Infrastructure (Qian Wang/Grace Ng/Lu Jiang) ................................. 126 China FAI (Qian Wang/Grace Ng/Lu Jiang) ................................................ 130 Market Forecasts......................................................................................... 131 J.P. Morgan FX............................................................................................ 132 Commodities Forecasts............................................................................... 133

Appendix
LatAm Data.................................................................................................. 135 Note: All ratings and prices are as of the close on October 28, 2010, unless otherwise noted.
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Ben Laidler (1-212) 622-5252 [email protected]

Latin America Equity Research November 2010

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Ben Laidler (1-212) 622-5252 [email protected]

Latin America Equity Research November 2010

Strategy

Ben Laidler (1-212) 622-5252 [email protected]

Latin America Equity Research November 2010

LatAm Strategy
We are positive LatAm into 2011. Macro fundamentals are robust, credit conditions very supportive, EM fund inflows expected to remain strong. Valuations are not stretched, and the earnings backdrop robust. Risks range from the fiscal and interest rates outlook in Brazil, to the security situation in Mexico, and the presidential elections in 2011 in Argentina and Peru. Capital control risks also remain real, especially in Brazil. We are overweight Brazil relative to MSCI LatAm index, as valuations are reasonable, flows returning, and market overhangs – such as the Petrobras offering and the presidential election – are lifting. We also see outperformance from Colombia and Argentina. We are neutral Mexico, and underweight Chile. We focus on domestic stocks for which we see good growth and reasonable valuations, such as financials and homebuilders. Fundamentals to remain robust: 2010 and 2011 GDP growth expectations have been rising, and are above long-term potential GDP growth. This has been supporting the earnings revision cycle. Inflation expectations have also been rising, and Central Banks are expected to gradually tighten policy in 2011, within the constraint of appreciating currencies but partly offset by output gaps remaining in some countries. Long-term REERs point to the undervaluation of the Mexican Peso, and overvaluation of the Brazilian Real. For more on economics team’s view, please see Latin America Outlook Presentation.
LatAm GDP outlook
2010e Forecast Current Jan-10 forecast 4.4 5.7 4.0 8.5 6.2 7.5 5.0 5.5 3.0 4.5 2.0 2.5 3.5 4.5 5.5 8.2 1.0 -2.2 2011e Forecast Current Jan-10 forecast 3.4 4.1 3.0 5.5 4.0 4.5 5.0 6.0 4.0 4.1 3.0 3.0 2.5 3.5 6.0 6.0 2.5 1.0 Long-term potential GDP growth 3.4 3.5 4.0 4.2 4.5 3.0 2.5 6.0 3.0

Ben Laidler AC
(1-212) 622-5252 [email protected] J.P. Morgan Securities LLC Bloomberg JPMA LAIDLER <GO>

LatAm inflation outlook
2010e Forecast in Current Jan-10 forecast 7.2 7.3 9.0 10.5 4.7 5.4 2.5 3.8 3.8 2.7 4.0 3.4 5.1 4.8 2.0 2.4 40.0 33.0 2011e Forecast in Current Jan-10 forecast 6.8 7.3 10.0 12.0 4.6 5.1 3.0 3.4 4.0 4.0 3.8 3.8 4.0 4.0 2.5 2.5 40.0 35.0

Latin America Argentina Brazil Chile Colombia Ecuador Mexico Peru Venezuela

Source: J.P. Morgan Economics.

Credit conditions remain supportive: This could support a meaningful multiple rerating and increased equity fund flows and is already altering corporate behavior. The strong outperformance of EM corporates has significantly improved relative valuations. The lower LatAm cost of equity has pushed up ‘fair value’ for stocks. Regional corporates are responding by releveraging and stepping up M&A activity, and financials are boosting capital. EM corporates are seeing strong fund inflows. This is a mirror of what equities are seeing. We believe the drivers here are sustainable into 2011, with risk-free rates likely to stay very low, EMBI spreads tight, and the EM growth premium high. See our recent note for details: LatAm Strategy – Credit rally supports equities.
LatAm ‘fair value’ vs 12m fwd P/E
15.0 13.0 11.0 9.0 7.0 5.0 03 03 04 05 06 07 08 09 10

LatAm Argentina Brazil Chile Colombia Ecuador Mexico Peru Venezuela

Source: J.P. Morgan Economics.

12 mth Fw d PE
Source: MSCI, IBES, Datastream.

Gordon Grow th

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Ben Laidler (1-212) 622-5252 [email protected]

Latin America Equity Research November 2010

Implied P/E – LatAm corp’s & equities
21.0 18.0 15.0 12.0 9.0 6.0 3.0 0.0 2001 2003 2004 Cembi Latin HY

P/E: CEMBI Latin IG - 19.5x CEMBI Latin - 17.4x CEMBI Latin HY- 12.6x MSCI LatAm - 11.9x
2005 2006 2007 MSCI LatAm 2008 CEMBI LatAm Broad 2009 2010 Cembi Latin IG

Source: J.P. Morgan, MSCI, Datastream. * 12m fwd MSCI LatAm P/E and inverse of J.P. Morgan CEMBI Corporate Bond Yields.

EM fund flows continue strong: Year-to-date equity fund flows into EM have exceeded US$70 billion, above the previous record of US$64bn in 2009. These flows have been focused on ETF products and on EM and Asia funds. Flows into LatAm, as proxied by LatAm funds, have been poor. Fund flows should continue strong, as both global equity allocations increase, EM allocations within global equities are built, and LatAm flows within EM recover as Brazil ‘overhangs’ lift. This is a phenomenon across the asset class and has arguably been more powerful in corporate and FX markets so far. We generally see this as another source of upside risk to multiples. Risk here is from issuance, which has been high. Please see our weekly fund flows product for details: Herd Instinct.
GEM fund cumulative US$bn flows
120 90 60 30 0 (30) (60) Jan Feb Mar Apr May Jun
Source: EPFR Global.

2010 LatAm fund flows, US$mn
2,500 1,500 500 (500) (1,500) (2,500) Jan 10 Feb 10 Apr 10 May 10 Jul 10 Aug 10 Oct 10 ETF Flow s Total Flow s

Source: EPFR Global, J.P. Morgan.

2006

2007

2008

2009

2010 69.7 64.4 40.8 22.4 (39.4)

Jul

Aug Sep Oct Nov Dec

Capital control risks: Virtually every EM CB has intervened, and a number already have controls. Pressure will likely continue, as we expect more FX appreciation, with US$ weakness to persist and EM inflows to build. We see ‘real’ capital controls, such as unremunerated reserve requirements and minimum holding periods, as unlikely. An increase in transaction costs – such as Brazil’s 2% equity IOF – is a last resort, but arguably near inevitable in this flows environment. It is not enough to change our positive view on Brazil, where the potential upside beats a moderate potential transaction cost increase. For details see our report: The threat from capital controls.

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Ben Laidler (1-212) 622-5252 [email protected]

Latin America Equity Research November 2010

Other risks: Brazil fiscal and rates outlook. In the short term we await to see the composition of Dilma Rousseff’s first cabinet and the outlines of fiscal policy going forward. This is important as an early indication of the policy direction of the new administration at a time when inflation expectations are drifting higher and the economy is growing above potential. Mexico security concerns. Investor angst here is high. We see this as an unfortunate issue that detracts from growth (1-1.5%pa) at a bad time, with the economy weak. We believe greater concerns here are likely overdone, with violence localized and largely between cartels. The risk is that this spreads to Mexico City or cartels decide to openly target the State and civilians. The electoral calendar in 2011 is significant. Peru presidential elections are in April, with three centrist candidates leading in the polls and leftist Ollanta Humala currently 4th. He is likely to rise somewhat (and this could unnerve markets) though unlikely to ultimately prevail. Argentina also goes to the polls in October. The political environment has been thrown open by the unexpected death of ex-President Kirchner. This potentially opens the way for a more market-friendly candidate, possibly from within the Peronist party. Valuations are not stretched: We do not see LatAm valuations as demanding, with most metrics within historical ranges or at discounts to peers’. LatAm is currently trading on 11.9x 12m forward P/E, compared to 11.6x for emerging markets and 11.5x for global equities. This 12m forward P/E is at the top end of the region’s 15-year average. As highlighted before, the current regional cost of equity would argue for significant multiple expansion from these levels. When comparing EM countries we are also careful to adjust for index composition. This makes commodity-heavy indices such as Brazil more expensive and staples-heavy indices such as Mexico and Chile somewhat cheaper.
15-year MSCI LatAm 12m fwd P/E
15.00 13.00 11.00 9.00 7.00 5.00 95 97 98 99 00 01 02 03 04 05 06 07 08 10 EM Latam
Source: IBES, MSCI, J.P. Morgan.

Sector-neutral P/E
Chile Mexico Indonesia Korea South Africa EM Turkey India Brazil China Taiwan Russia Sector-Neutral P/E 16.0 14.5 14.8 9.9 11.8 11.9 11.4 17.7 12.3 14.3 15.6 11.8 12 Mth Fwd P/E 17.8 15.3 15.3 10.0 11.7 11.6 10.9 17.0 11.1 12.0 12.9 6.6 Diff (1.8) (0.9) (0.5) (0.0) 0.2 0.3 0.5 0.6 1.2 2.3 2.8 5.2

Source: MSCI, IBES, J.P. Morgan. Sector-neutral P/E multiplies the country sector P/E by the MSCI Emerging Markets Index sector weight.

LatAm enjoyed a strong earnings recovery cycle in 2010. We expect this to stabilize in 2011. LatAm earnings growth (local currency) is forecast at 21% for next year versus 15% for developed markets. This is a high number, and we see risks as balanced. Commodity earnings have been easing – especially in steels and Petrobras. Domestic earnings have been moving higher as GDP expectations are raised, and earnings remain below all-time highs despite higher nominal GDP growth. Forecasts for Mexico and Brazil are very similar (~20-21%).
LatAm EPS growth expectations
EPS Growth Expectations % 2010e 2011e 2012e 29.4 52.5 5.0 27.3 31.6 13.1 26.5 27.1 17.8 23.4 22.7 17.6 16.3 21.6 11.5 15.8 21.4 16.1 20.3 20.9 13.5 9.0 20.4 16.3 30.6 17.2 14.0 29.4 15.7 11.2 29.8 15.4 17.1 36.2 15.3 13.2 37.2 15.0 13.0 26.7 14.9 16.4 25.0 14.7 15.6 40.7 14.6 13.9 51.4 13.1 11.1 23.0 11.2 7.1 89.1 9.4 11.2 18.5 8.2 13.6 5.4 6.4 18.1 -4.8 3.3 5.7

Colombia Peru S.Africa India Brazil EM Latam Indonesia Mexico EM Malaysia Russia Global DW China EMEA EM Asia Korea Chile Taiwan Turkey Argentina Czech

Source: MSCI, IBES, J.P. Morgan.

Av erage

+1SD

-1SD

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Ben Laidler (1-212) 622-5252 [email protected]

Latin America Equity Research November 2010

MSCI LatAm EPS revision cycle
150.0 140.0 130.0 120.0 110.0 100.0 90.0 80.0 Feb-09 Jun-09 Oct-09 2011 EPS
Source: IBES, MSCI, J.P. Morgan.

1. The positive view is that lower risk-free rates are sustainable for 2011, as we forecast, and this justifies further multiple rerating. This could be significant. Our Gordon-growth ‘fair’ value target is near 15.0x earnings, over 30% above current multiples. This indicator has tracked well historically. Upside here is concentrated in Brazil. This targets 53% upside for the region and 70% for Brazil. Mexico is penalized by a potentially too aggressive 2.5% potential GDP growth.
Feb-10 Jun-10 2010 EPS Oct-10

MSCI Brazil domestic vs commodity 12m fwd earnings integer
180.0 150.0 120.0 90.0 60.0 Jan 07 Aug 07 Mar 08 Oct 08 May 09 Dec 09 Jul 10

2. The mid-case assumes current multiples are fair, at the top end of long-term historical ranges, and consensus earnings growth correct, at a reasonable premium to nominal GDP growth. This targets respectable 18% upside, with all countries closely clustered. This would be our Mexico base case. 3. The cautious view assumes both a derating and that earnings fall. A derating scenario back to long-term historical multiples (down 14%, from 12.0x to 10.5x earnings) and a 20% fall in index earnings versus current expectations, as we assume earnings growth only in line with nominal GDP growth. This shows 14% downside for the region, led by Colombia, with Chile defensive. Our baseline view is somewhere between the more bullish two scenarios, looking for even lower Treasury yields and tight EM spreads, whilst the relative Emerging growth and earnings premium remain high, continuing to attract flows and support multiples. QE2 and recent developed market data have reduced downside tail-risks.

Brazil Commodities
Source: IBES, MSCI, J.P. Morgan.

Brazil Domestics

Attractive risk/reward for 2011 justifies continued bullish positioning. We run three valuation scenarios for 2011. The MSCI LatAm potential upside is 53% and the potential downside 14%. For details see our report: Measuring the risk/reward.
Summary year-end 2011 target and index levels
LatAm Brazil Mexico Chile Colombia Argentina Peru Positive Target 122,500 122,000 39,500 5,450 16,000 2,300 41,300 % Upside 53 70 8 8 1 (31) 101

Mid-Case Target 94,500 84,500 42,500 5,700 18,000 3,950 24,500

% Upside 18 18 17 13 14 19 19

Cautious Target 69,000 61,500 31,600 4,700 10,600 3,275 16,500

% Upside (14) (14) (13) (6) (33) (1) (20)

Source: J.P. Morgan estimates.

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Ben Laidler (1-212) 622-5252 [email protected]

Latin America Equity Research November 2010

We remain overweight Brazil, with valuations significantly derated, strongly returning flows, and multiple overhangs (election, rate cycle, Petrobras, China slowdown) reduced. Fiscal policy and equity IOF risks remain but are manageable. The focus remains on domestic stocks, especially those with growth at reasonable multiples, such as financials and homebuilders. We have good growth visibility, the earnings revision cycle remains positive, and valuations ex-staples are all cheap/fair. Top-performing staples and retailers are expensive and will likely keep performing in this environment if they can continue delivering on earnings. However, this does not mean the risk/reward is attractive. We are selective and own CBD. We see cheap, underowned, but low-growth sectors – such as utilities and telecom – as value traps but have continued to selectively add where we see pockets of growth (such as NII Holdings and TSU). In our model portfolio, we are neutral energy (positive oil and E+P but cautious Petrobras), and underweight materials – we are positive Vale but own no Steels. The sector is cheap (though earnings are falling), underowned, and benefiting in the short term from perceived QE upside, though global growth remains subpar and the sector chronically oversupplied.
Brazil macro outlook

We are neutral Mexico. The market has performed well in the last month on signs of a bottoming in US growth expectations (we took our global growth numbers up for the first time since April) and moderate Mexican consumer acceleration. We do not see Mexico as underweight, with the market well supported by a gradual US growth reacceleration, high equity market correlation, undervalued currency, easy monetary policy, and valuations less expensive than they ‘seem’. However, the traditional drivers of Mexican outperformance are lacking – major market sell-off, strong US data surprise, or strong local consumer recovery. We focus on domestic recovery plays – Televisa, First Cash, AMX – and special situations – Cemex and ICA.
US Economic Activity Surprise Index
40.0 30.0 20.0 10.0 0.0 (10.0) (20.0) (30.0) (40.0) Jan 09 May 09 Sep 09 Jan 10 May 10 Sep 10

Source: Bloomberg, J.P. Morgan.

Mexico consumer confidence and formal employment

Source: J.P. Morgan Economics.

Brazil interest rate futures
13.0 12.5 12.0 11.5 11.0 10.5 10.0 9.5 Feb 10 Apr 10 Jun 10 Jan-11
Source: Bloomberg. Source: J.P. Morgan Economics, INEGI, IMSS.

Aug 10 Jan-12

Oct 10

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Ben Laidler (1-212) 622-5252 [email protected]

Latin America Equity Research November 2010

In the smaller markets, we struggle to see a sustainable second leg to the well-known (and very positive) Chilean story. Valuations are high, and the stocks we want to own (banks/discretionary) are even pricier. We do see further fundamental upside in Colombia on the ongoing reform agenda, investment grade outlook, and capital markets development, but would play this off index (through Copa and Pacific Rubiales) given high on-index valuations. We remain exposed to Argentina. Valuations have become expensive at first glance, but the outlook for real political change – however moderate – means the market still likely has upside. Penetration rates are low and nontraditional valuation metrics (franchise value, replacement cost) attractive. We stick with GF Galicia.
12 mth fwd P/E relative to MSCI LatAm: Smaller markets at premium to LatAm
3.7 3.2 2.7 2.2 1.7 1.2 0.7 0.2 Jan-03 Feb-04 Mar-05 Apr-06 May -07 Jun-08 Jul-09 Aug-10 Chile
Source: IBES, Datastream, MSCI.

Colombia pension fund equity exposure to rise on multifunds/demographics
Estimated End-2010 AUM 1 0.0 2 90.6 3 0.0 Total 90.6 Pro Forma 2011 AUM 1 4.5 2 53.4 3 32.6 Total 90.6 Equity 0.0 39.4 0.0 39.4 % NM 43.5% NM 43.5% Limit 0.0 40.8 0.0 40.8 % 20.0% 45.0% 70.0% 45.0% Cushion 0.0 (1.4) 0.0 (1.4) % NM -1.5% NM -1.5%

Equity 0.9 24.0 22.8 47.8

% 20.0% 45.0% 70.0% 52.8%

Limit 0.9 24.0 22.8 47.8

% 20.0% 45.0% 70.0% 52.8%

Cushion 0.0 0.0 0.0 0.0

% 0.0% 0.0% 0.0% 0.0%

Source: Superfinanciera and J.P. Morgan estimates.

Can Cristina maintain her currently positive image?

60.0% 40.0% 20.0% 0.0% J-08 M-08 S-08 J-09 M-09 S-09 J-10 M-10 S-10
Source: Management y Fit and J.P. Morgan.

Argentina

Peru

Colombia

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Ben Laidler (1-212) 622-5252 [email protected]

Latin America Equity Research November 2010

Latin America Model Portfolio by Country
Ticker Brazil Bradesco CBD Cetip Gafisa NII Holdings OGX PDG Realty Petrobras PN Santander Brasil TIM Participacoes Vale PN Mexico AMX Cemex First Cash ICA Televisa Chile Cencosud Colombia Copa Pacific Rubiales Argentina GF Galicia Peru EMF LATAM BBDC4 BZ PCAR5 BZ CTIP3 BZ GFSA3 BZ NIHD US OGXP3 BZ PDGR3 BZ PETR4 BZ SANB11 BZ TSU US VALE/P US AMX US CX US FCFS US ICA* MM TV US CENCOSUD CI CPA US PRE CN GGAL US Price* 245,843 36.5 66.1 19.1 14.3 42.6 22.9 22.2 27.0 25.0 34.1 28.9 33,431 58.0 9.2 29.5 33.3 22.9 5,971 3,717.2 3,120 50.6 33.4 254,619 15.1 3,376 79,524 Change 1M YTD (%) (%) 1.2 4.1 6.9 21.4 11.1 1.7 17.6 33.7 2.8 0.9 0.3 26.9 0.7 33.6 5.7 28.0 -1.4 -26.4 5.9 4.6 4.5 14.8 3.7 16.4 7.7 18.5 6.6 23.4 10.7 -19.1 10.4 32.9 8.2 9.2 21.1 10.3 3.9 38.6 14.0 116.1 6.5 58.1 -3.8 -7.1 18.0 116.4 21.7 65.0 51.9 162.8 14.8 47.9 3.1 11.3 Port. MSCI Weight (%) (%) 70.3 67.8 10.0 4.5 6.0 0.4 5.0 0.0 5.0 0.4 5.0 0.0 4.0 1.9 5.0 0.8 10.0 13.0 7.0 0.5 2.0 0.2 11.3 11.0 18.0 18.2 6.0 6.4 3.0 1.0 3.0 0.0 3.0 0.0 3.0 1.2 3.7 7.1 3.7 0.8 6.0 3.8 3.0 0.0 3.0 0.0 2.0 0.0 2.0 0.0 0.0 3.1 100.0 100.0 Dev. (%) 2.5 5.5 5.6 5.0 4.6 5.0 2.1 4.2 -3.0 6.5 1.8 0.3 -0.2 -0.4 2.0 3.0 3.0 1.8 -3.4 2.9 2.2 3.0 3.0 2.0 2.0 -3.1 0.0 P/E 10E (x) 12.9 14.1 30.5 31.2 17.0 25.5 nm 15.2 8.3 15.4 31.0 9.6 17.7 15.8 nm 17.2 31.1 22.4 19.6 38.9 25.9 10.6 37.2 14.9 24.8 19.9 14.2 P/E 11E (x) 10.6 12.7 24.9 23.5 12.7 13.0 nm 9.8 10.4 11.7 15.0 7.0 14.7 13.5 nm 14.7 22.5 17.5 17.6 30.3 17.0 7.7 13.8 14.0 17.6 15.1 11.6 EPS growth 10E 16.3 26.3 -7.7 22.0 31.3 -26.4 -96.4 67.8 -1.8 23.7 -41.9 202.0 9.0 -24.9 -233.3 23.7 -8.5 16.1 23.0 78.6 26.9 3.2 -266.7 5.4 24.5 27.7 15.8 ROE 10E (%) 13.7 21.8 6.9 38.2 9.3 8.9 2.1 13.3 10.3 11.6 5.2 23.3 16.5 25.0 -0.8 18.7 3.7 20.0 12.2 8.0 na na 18.2 na 14.5 13.9 Analyst

Saul Martinez Andrea Teixeira Frederic de Mariz Adrian E Huerta Andre Baggio Sergio Torres Adrian E Huerta Sergio Torres Saul Martinez Andre Baggio Rodolfo R. De Angele Andre Baggio Adrian E Huerta Ben Laidler Adrian E Huerta Rajneesh Jhawar Andrea Teixeira Jamie Baker Sergio Torres Saul Martinez

Source: Bloomberg, MSCI, J.P. Morgan estimates. All estimates are for the calendar year. Updated as of 3 November 2010.

Our LatAm model portfolio is a vehicle to express our strategy views on regional equity markets, sectors, and stocks. This portfolio will normally include stocks which will be constructed relative to the MSCI EM Latin America Index and will be updated on a regular basis through our ‘LatAm Key Trades’ publication. The portfolio is primarily driven by our fundamental analyst views, and we use our analysts’ published company valuation and estimates to support inclusion, but a strategy overlay is incorporated and hence the published strategy may on occasion differ from analyst views. Analyst ratings are driven by company attractiveness relative to their sector coverage, whereas we take a regional LatAm view. The portfolio can include: 1) non-Latin America listed stocks, to the extent the region is a significant company driver; and 2) stocks not currently covered by JPM analysts, to the extent these are heavily weighted MSCI Latin America Index companies, though these companies must always be incorporated at a neutral relative weighting so as to express no strategy or fundamental view. This portfolio has been run since November 2007. Year to date in 2010 the portfolio is up 22.0% compared to a rise for the MSCI LatAm index of 12.0%. This return is indicative only and is calculated on price returns only, excluding dividends but also excluding trading costs – which an invested portfolio would bear. Portfolio changes are implemented on the day of ‘Key Trades’ publication.

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Ben Laidler (1-212) 622-5252 [email protected]

Latin America Equity Research November 2010

Latin America Model Portfolio by Sector
Ticker Discretionary Gafisa PDG Realty Televisa Staples CBD Cencosud Energy OGX Pacific Rubiales Petrobras PN Financials GF Galicia Cetip Bradesco First Cash Santander Brasil Industrials Copa ICA Materials Cemex Vale PN Telecoms AMX NII Holdings TIM Participacoes Utilities EMF LATAM GFSA3 BZ PDGR3 BZ TV US PCAR5 BZ CENCOSUD CI OGXP3 BZ PRE CN PETR4 BZ GGAL US CTIP3 BZ BBDC4 BZ FCFS US SANB11 BZ CPA US ICA* MM CX US VALE/P US AMX US NIHD US TSU US Price* 667.8 14.3 22.2 22.9 628.8 66.1 3717.2 1161.3 22.9 33.4 27.0 1064.7 15.1 19.1 36.5 29.5 25.0 277.0 50.6 33.3 1219.1 9.2 28.9 588.6 58.0 42.6 34.1 383.9 79524.0 Change 1M YTD (%) (%) 2.1 9.2 2.8 0.9 5.7 28.0 21.1 10.3 3.4 21.9 11.1 1.7 14.0 116.1 2.6 -15.5 0.7 33.6 18.0 116.4 -1.4 -26.4 3.3 22.0 51.9 162.8 17.6 33.7 6.9 21.4 10.4 32.9 5.9 4.6 3.8 28.5 -3.8 -7.1 8.2 9.2 3.0 12.3 10.7 -19.1 3.7 16.4 3.6 8.1 6.6 23.4 0.3 26.9 4.5 14.8 2.3 9.2 3.1 11.3 Port. MSCI Weight (%) (%) 13.0 5.3 5.0 0.4 5.0 0.8 3.0 1.2 9.7 11.6 6.0 0.4 3.7 0.8 17.0 16.6 4.0 1.9 3.0 0.0 10.0 13.0 27.0 22.3 2.0 0.0 5.0 0.0 10.0 4.5 3.0 0.0 7.0 0.5 6.0 4.6 3.0 0.0 3.0 0.0 14.3 24.4 3.0 1.0 11.3 11.0 13.0 8.7 6.0 6.4 5.0 0.0 2.0 0.2 0.0 5.5 100.0 100.0 Dev. (%) 7.7 4.6 4.2 1.8 -1.9 5.6 2.9 0.4 2.1 3.0 -3.0 4.7 2.0 5.0 5.5 3.0 6.5 1.4 3.0 3.0 -10.1 2.0 0.3 4.3 -0.4 5.0 1.8 -5.5 0.0 P/E 10E (x) 17.6 17.0 15.2 22.4 24.0 30.5 38.9 10.9 nm 37.2 8.3 14.7 24.8 31.2 14.1 17.2 15.4 27.4 10.6 31.1 13.3 nm 9.6 12.4 15.8 25.5 31.0 11.7 14.2 P/E 11E (x) 13.8 12.7 9.8 17.5 19.8 24.9 30.3 10.2 nm 13.8 10.4 12.3 17.6 23.5 12.7 14.7 11.7 22.0 7.7 22.5 9.5 nm 7.0 10.7 13.5 13.0 15.0 10.7 11.6 EPS Growth 10E 27.9 31.3 67.8 16.1 21.5 -7.7 78.6 7.1 -96.4 -266.7 -1.8 19.6 24.5 22.0 26.3 23.7 23.7 24.6 3.2 -8.5 40.1 -233.3 202.0 15.4 -24.9 -26.4 -41.9 8.8 15.8 ROE 10E (%) 16.1 9.3 13.3 20.0 12.9 6.9 8.0 9.7 2.1 18.2 10.3 16.2 14.5 38.2 21.8 18.7 11.6 10.2 na 3.7 15.6 -0.8 23.3 27.1 25.0 8.9 5.2 8.7 13.9 Analyst

Adrian E Huerta Adrian E Huerta Rajneesh Jhawar Andrea Teixeira Andrea Teixeira Sergio Torres Sergio Torres Sergio Torres Saul Martinez Frederic de Mariz Saul Martinez Ben Laidler Saul Martinez Jamie Baker Adrian E Huerta Adrian E Huerta Rodolfo R. De Angele Andre Baggio Andre Baggio Andre Baggio

Source: Bloomberg, MSCI, J.P. Morgan estimates. All estimates are for the calendar year. Updated as of 3 November 2010.

LatAm Model Portfolio sector allocation relative to MSCI Emerging Latin America Markets Index

Discretionary Financials Telecoms Industrials Energy Staples Utilities Materials -12 -10 -8 -6 -4 -2 0 2 4 6 8 10

Source: MSCI, J.P. Morgan estimates. Updated as of 3 November 2010.

13

Ben Laidler (1-212) 622-5252 [email protected]

Latin America Equity Research November 2010

LatAm Model Portfolio country allocation relative to MSCI Emerging Latin America Markets Index

Brazil Colombia Argentina Mex ico Peru Chile -4.0 -3.0 -2.0 -1.0 0.0 1.0 2.0 3.0

Source: MSCI, J.P. Morgan estimates. Updated as of 3 November 2010.

Historical changes to model portfolio
Nov 10 Sep 10 Aug 10 Jul 10 Jun 10 May 10 Mar 10 Feb 10 Jan 10 Nov 09 Oct 09 Sep 09 Aug 09 Jun 09 May 09 Apr 09 Mar 09 Feb 09 Dec 08 Oct 08 Sep 08 Aug 08 Jul 08 Jun 08 Apr 08 Feb 08
Source: J.P. Morgan Strategy.

Bought TIM Participacoes Cetip, OGX, Cemex GF Galicia, Banrisul, Cencosud Televisa, Banorte Gafisa, Copa Holdings NIHD, Cemex, First Cash Financial BM&F Bovespa, Metalurgica Gerdau, Vivo, Pacific Rubiales None ICA, CBD Santander Brazil, Cielo, Lan Airlines OGX, Silver Wheaton Itauunibanco, Geo, ALL Gerdau, Gafisa BM&F Bovespa, Banco Macro Ternium, Grupo Mexico Lojas Renner, Banorte, Santander Banco do Brasil, ALL, Tenaris, Geo Banco Itau, Entel, Slc Agricola, Cemex Porto Seguro, Bradesco, Credicorp Asur, Walmex, Bradespar, Urbi GVT,PDG Realty Homex Embraer Petrobras PN ADR, CCR, CTC, Coeur d'Alene Banco do Brasil, Megacable Urbi, Rodobens, Gafisa, Telecom Argentina

Sold BM&F Bovespa Banrisul, Banorte, Urbi Lan Airlines, OGX, Banco Macro Cemex, Ternium Metalurgica Gerdau, Tenaris Vivo, Grupo Mexico, Banorte Cielo, Gerdau, Silver Wheaton None Cemex, Lojas Renner, Gafisa BM&F Bovespa, Banco do Brasil, Santander Chile ALL, Televisa Banco Bradesco, Urbi, TAM Bradespar, GVT Porto Seguro, Credicorp Copa Holdings, Femsa. Embraer, Walmex, Entel Bradesco, SLC, Ternium, Asur Unibanco, Urbi, Gafisa, Santander Chile Telecom Arg., CCR, Banco do Brasil Banorte, Lojas Renner, Homex CTC, Coeur d'Alene, Rodobens Megacable, Urbi VCP Petrobras ON, NETC, Silver Wheaton B2W Cesp, Company SA, Cyrela

14

Ben Laidler (1-212) 622-5252 [email protected]

Latin America Equity Research November 2010

Analysts’ Top Picks
Top picks
Name Brazil AES Tiete Banrisul Bradesco Brasil Foods Cetip Copasa DASA Hypermarcas OGX PDG Realty Santander Brasil Sao Martinho Tim Participacoes Vale Mexico America Movil Cemex Compartamos Corporacion Geo FEMSA First Cash Financial Grupo Mexico Grupo Televisa ICA Chile Antofagasta CCU Falabella Colombia Exito Millicom Pacific Rubiales Peru Credicorp Silver Wheaton Argentina Grupo Clarin Tenaris Share Price 23.5 18.0 34.8 24.4 18.0 26.4 20.6 28.0 21.7 10.6 24.5 21.6 32.2 31.8 57.1 8.8 85.9 39.3 52.9 29.4 40.4 22.2 32.5 1326.0 56.1 4849.5 23080.0 94.7 31.7 124.7 27.6 10.0 41.3 Price Target 27.0 20.0 47.0 31.0 20.0 34.0 18.0 30.0 20.3 15.0 33.0 13.0 40.0 47.5 72.0 12.0 100.0 52.0 59.0 34.5 53.0 27.5 43.0 1100.0 62.0 4556.0 17800.0 120.0 36.0 120.0 31.0 9.0 52.0 % Change to target 15.6 2.6 26.7 23.5 3.7 21.6 -13.7 7.9 -10.1 36.6 27.2 -43.5 17.6 40.4 21.6 22.4 8.7 32.5 5.2 14.5 25.4 17.5 26.9 -23.0 5.5 -4.5 -27.7 28.9 8.1 -5.9 -11.6 -10.0 14.8 Bloomberg Ticker GETI4 BZ BRSR6 BZ BBDC4 BZ BRFS3 BZ CTIP3 BZ CSMG3 BZ DASA3 BZ HYPE3 BZ OGXP3 BZ PDGR3 BZ SANB11 BZ SLCE3 BZ TSU US VALE US AMX US CX US COMPARTO MM GEOB MM FMX US FCFS US GMEXICOB MM TV US ICA* MM ANTO LN CCU US FALAB CI EXITO CB MICC US PRE CN BAP US SLW US GCLA LI TS US JPM Rating OW OW OW OW OW OW OW OW OW OW OW N OW OW OW OW OW OW OW OW OW OW OW OW OW N N OW OW N OW OW OW Analyst Anderson Frey Frederic de Mariz Saul Martinez Alan Alanis Frederic de Mariz Anderson Frey Andrea Teixeira Andrea Teixeira Sergio Torres Adrian E Huerta Saul Martinez Debbie Bobovnikova Andre Baggio Rodolfo R. De Angele Andre Baggio Adrian E Huerta Frederic de Mariz Adrian E Huerta Alan Alanis Ben Laidler Rodolfo R. De Angele Rajneesh Jhawar Adrian E Huerta Amos Fletcher Alan Alanis Andrea Teixeira Andrea Teixeira Jean-Charles Lemardeley Sergio Torres Saul Martinez John Bridges Rajneesh Jhawar Sergio Torres Mkt Cap, US$ MM 4,835 4,267 73,018 12,881 2,568 1,895 2,816 8,847 42,952 7,144 58,007 1,339 8,417 173,421 119,244 9,800 3,216 1,762 20,060 913 26,902 13,699 1,781 22,718 3,744 23,833 4,477 10,140 8,843 10,171 12,106 1,437 26,733 P/E (X) 2010E 10.7 11.2 13.5 26.3 29.4 6.4 24.2 28.3 nm 14.5 15.1 33.2 29.5 10.9 15.8 nm 19.7 12.2 13.1 17.1 17.2 22.0 30.4 16.5 15.1 38.5 55.5 14.2 35.2 17.2 38.3 3.4 20.1 P/E (X) 2011E 9.9 9.6 12.1 14.4 22.2 6.0 18.7 20.7 nm 9.4 11.5 22.5 14.3 7.7 13.4 nm 16.1 9.6 11.5 14.6 10.9 17.2 22.0 11.4 13.7 31.4 42.8 11.8 13.0 15.2 21.0 2.5 16.0 EPS 2010E 2.19 1.61 2.59 0.93 0.61 4.13 0.85 0.99 0.06 0.73 1.62 0.65 1.86 2.92 44.98 -0.16 4.36 3.23 4.05 1.72 0.19 12.54 1.07 80.30 3.70 125.92 415.58 6.69 0.90 7.23 0.72 2.92 2.06 EPS 2011E 2.38 1.88 2.88 1.70 0.81 4.39 1.10 1.35 0.02 1.13 2.13 0.96 3.84 4.13 52.72 0.02 5.34 4.08 4.61 2.01 0.30 16.02 1.48 116.50 4.08 154.40 539.80 8.00 2.43 8.20 1.31 4.00 2.59 Yield (%) 2011E 10.7 4.2 2.9 1.5 3.1 8.3 30.6 2.1 0.0 1.7 5.2 1.1 1.7 2.9 0.7 0.0 1.3 0.0 8.0 0.0 5.2 1.4 0.0 0.5 4.5 0.8 0.0 7.3 0.0 1.7 0.0 0.0 0.9 ROE (%) 2011E 181.4 19.0 21.2 8.8 45.3 12.0 31.2 7.6 0.6 19.2 14.4 11.1 10.0 23.3 26.1 0.1 34.8 22.0 11.0 17.9 24.6 23.0 4.9 116.5 21.6 13.0 4.3 26.1 34.1 22.1 18.5 12.7 14.8

Source: Bloomberg, J.P. Morgan estimates. J.P. Morgan ratings: OW = Overweight; N = Neutral; UW = Underweight.

15

Ben Laidler (1-212) 622-5252 [email protected]

Latin America Equity Research November 2010

Analysts’ Top Stocks to Avoid
Top stocks to avoid
Name Brazil Cyrela Brazil Realty Eletropaulo Fibria Minerva SA Panamericano Tele Norte Leste Usiminas Mexico Consorcio Ara Grupo Inbursa Organizacion Soriana Telmex SA Chile IAM SQM Colombia Bancolombia Ecopetrol Peru Buenaventura Argentina Edenor Share Price 22.8 29.9 30.0 6.1 7.7 48.5 21.0 7.6 53.9 37.2 15.2 747.0 51.5 66.0 4360.0 51.7 10.3 Price Target 29.0 30.0 26.0 8.1 10.0 57.0 26.0 9.0 41.0 31.0 12.0 720.0 37.0 65.0 2795.0 46.0 na % Change to target 30.3 0.0 -16.7 34.1 37.7 14.9 13.3 15.5 -21.6 -17.6 -24.3 -4.0 -29.4 -3.9 -39.9 -16.9 na Bloomberg Ticker CYRE3 BZ ELPL6 BZ FIBR3 BZ BEEF3 BZ BPNM4 BZ TMAR5 BZ USIM5 BZ ARA* MM GFINBURO MM SORIANAB MM TMX US IAM CI SQM US CIB US ECOPETL CB BVN US EDN US JPM Rating UW UW UW N UW N UW UW UW UW UW N N UW UW N UW Analyst Adrian E Huerta Anderson Frey Debbie Bobovnikova Alan Alanis Frederic de Mariz Andre Baggio Rodolfo R. De Angele Adrian E Huerta Saul Martinez Andrea Teixeira Andre Baggio Anderson Frey Brian P Chase Saul Martinez Sergio Torres John Bridges Anderson Frey Mkt Cap, US$ MM 5,536 3,229 8,587 376 1,043 7,699 14,775 829 14,247 5,536 14,410 1,561 13,799 13,322 102,728 15,262 485 P/E (X) 2010E 12.1 4.8 17.1 10.6 12.1 5.6 20.5 11.5 25.3 21.6 12.7 16.1 43.6 20.0 22.1 19.8 13.3 P/E (X) 2011E 9.9 8.4 96.9 5.8 7.2 6.7 11.1 9.9 21.0 18.9 13.2 16.1 30.4 17.9 14.9 14.6 12.2 EPS 2010E 1.88 6.29 1.76 0.58 0.64 8.60 1.02 0.66 2.13 1.72 18.51 46.36 1.18 3.30 197.47 2.61 0.77 EPS 2011E 2.31 3.54 0.31 1.05 1.07 7.21 1.88 0.77 2.57 1.97 17.30 46.36 1.69 3.68 292.19 3.55 0.84 Yield (%) 2011E 0.0 13.8 0.0 0.0 8.0 8.9 3.1 1.3 1.4 0.4 5.0 5.9 0.0 1.8 3.3 0.9 0.0 ROE (%) 2011E 20.1 18.0 5.0 10.8 16.4 14.9 8.8 10.1 12.2 9.7 37.0 8.1 24.6 18.4 34.5 26.5 7.0

Source: Bloomberg, J.P. Morgan estimates. J.P. Morgan ratings: OW = Overweight; N = Neutral; UW = Underweight.

16

Ben Laidler (1-212) 622-5252 [email protected]

Latin America Equity Research November 2010

Emerging Market Equity Strategy
The Drivers
1. The declining EM risk premium continues 2. Strong demand from EM credit continues 3. High nominal growth and nominal FX appreciation 4. DM neither a driver nor a drag

Potential Returns
MSCI EM end-2011 target 1500 (+25%) • Forward PE at 1500 is 13 (based on consensus 2012 EPS) • Current credit conditions, FX appreciation, earnings growth, and earnings estimate revisions provide upside Other targets KOSPI 2300, NIFTY 7000

Investment themes
1. 2. 3. 4. 5. 6. 7. 8. 9. China drifts away from the Asian growth model Structural OW on domestic demand FDI in non-China EM increases Growth premiums continue to expand CEMBI Surfers still riding in 2011 Warning flags: Real credit growth and core CPI Beware co-investing with governments Liquidity without a valuation anchor Higher REER bad for exporters’ margins

Risks
Market Risks • Lack of valuation cushion • Bond market volatility • High correlation Policy and Political risks • Capital controls • Anti-asset inflation policies • Trade wars • Leadership change in China, Thai and Philippines elections • Strained social contract Economic risks • Uncertain outlook for commodities • Unintended consequences of QE2 • Public sector debt stress in developed economies

Key issues for 2011 – Briefing notes
1. 2. 3. 4. 5. 6. Scale of emerging markets Capital controls and FX intervention Western-China-driven growth Strength of consumption in China China’s infrastructure investment Will China have a housing inventory problem?

Market Performance
MSCI EM and MSCI World performance
1250 1050 850 650 450 250 50 88 90 92 94 96 98 00 02 MSCI World 04 06 08 10 MSCI EM

Source: Bloomberg, 8 November 2010.

17

Ben Laidler (1-212) 622-5252 [email protected]

Latin America Equity Research November 2010

Emerging Market Equity Strategy
We are bullish on EM equities. Our end 2011 target for MSCI EM is 1500 (+25%). Based on consensus 2012 EPS the forward PE at 1500 is 13. Current credit conditions could support a larger re-rating (please see page 27 for potential returns). MSCI EM life high is 1338 (29 October 2007). What about the biggest bull market of your career? Between 11 March 2003 and 29 October 2007 MSCI EM increased from 270 to 1338; +395%, or an annualized return of 38%. On 2 March 2009 EM was 475. The index is 140% higher today. To match the 2003/7 bull market MSCI EM would need to be 2351 by 20 October 2013. This requires an annualized return of 21%. In last year’s Emerging Markets Year Ahead our end2010 MSCI EM target was 1200. The index is within 5% of this target. But the ride was not smooth; between 15 April and 25 May the index declined by 19% to 855. Zero interest rates, QE2, currency wars, and high correlation across asset classes are likely to lead to volatility in 2011. Even with this year’s volatility, EM volatility-adjusted returns are the highest for growth assets. Our asset allocation starts with long-term trends (EM consumer, China’s changing economic policy, sector RoEs and investment cycles, currencies, etc.) combined with short-term tactical allocation driven by market factors (relative valuations and performance, retail activity, consensus positioning). Benchmark composition often represents historical rather than future growth trends. We are bullish on the Brazilian and Chinese domestic economies yet have been underweight these markets in 2010. We have been overweight Brazilian and Chinese domestic demand but underweight the larger sectors, i.e., energy, materials and Chinese SoEs. As was the case in 2010, focus on sectors within countries rather than simple country asset allocation (see page 26). Investors are seeking carry, growth and momentum. Both emerging fixed income and equity markets offer this. For now it is foolish to fight the trend. But remember the risks (see page 31). QE2 is an experiment. China’s ability to rebalance the driver of growth from investment to consumption is also an experiment.

Monitor the data; core inflation, property sales, actual commodity demand rather than financial demand, etc.
MSCI EM performance
1400 1200 1000 800 600 400 200 Jan-00
Source: Bloomberg.

Jan-02

Jan-04

Jan-06

Jan-08

Jan-10

Valuations in EM trend rather than mean revert
42 37 32 27 22 17 12 7 Forw ard PE based on Consensus EPS 88 89 90 91 92 93 95 96 97 98 99 00 02 03 04 05 06 07 09 10
Source: Datastream, MSCI, IBES. Note: MSCI EM fwd PE based on trend and consensus EPS. The trend EPS is calculated by plotting a trend line through the log chart of MSCI EM realized EPS.

Forw ard PE based on Trend EPS

Higher risk-adjusted returns in EM
2.5 2.0 1.5 1.0 0.5 0.0 -0.5 -1.0

EM US

World

-1.5 Jun-07 Dec-07 Jun-08 Dec-08 Jun-09 Dec-09 Jun-10
Source: Bloomberg Note: EM, US and World: Three-month rolling returns adjusted for 90-day volatility.

18

Ben Laidler (1-212) 622-5252 [email protected]

Latin America Equity Research November 2010

There is limited statistical evidence of valuations mean reverting in EM (see figure on previous page). Investors should focus on factors that are currently driving a re- or derating. The rerating factors are: 1. 2. 3. 4. Expanding growth premium in a low-growth world Equities are cheap relative to sovereign and corporate bonds Accelerating investment and consumption growth in key EMs Lower relative risk profile of EM versus DM

EMBI and earnings yield spread between EM and DM
1600 1400 1200 1000 800 600 400 200 0 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10
Source: Bloomberg, MSCI.

Earnings Yield Spread betw een EM and DM (RHS)

6 5 4 3 2 1 0 -1

EMBI Spread (LHS)

Base Case
In the risk section on page 31 we highlight the risks to our base case. The declining EM risk premium continues Emerging economies survived the big ugly experiment of an extreme external demand shock and a credit crisis. This hit EM economies when they were a year into a tightening cycle. In passing this test and with the economies recovering ahead of developed economies, the risk premium demanded for EM should decline. Note that stock-specific risk (corporate governance, transparency, policy risk, etc.) is still higher. Strong demand for EM credit and carry continues Investor appetite for risk has slowly increased since 9 March 2009. The bias is corporate credit for yield and emerging markets for growth. EM US dollar and local currency credit offers both and is thus attracting large flows relative to its market cap. J.P. Morgan forecast for this to continue in 2011. We maintain our CEMBI surfer theme of favoring current account deficit markets. High nominal growth and nominal FX appreciation Data support positive nominal GDP revisions. These data include strong retail sales, car sales and loan growth. EM Central Banks are slowing FX appreciation but not reversing the trend. DM neither a driver nor a drag Focus on the local EM dynamics rather than swings in net exports. Economic expansion in the US and Euro Area resumed in 3Q09. J.P. Morgan forecast 2011 GDP growth of 2.5% and 1.5% for the US and Euro Area respectively. This growth may be politically unacceptable as it is too slow to reduce unemployment, but for EM, slow DM growth is a benign to positive backdrop. It is benign for external demand and positive as interest rates remain low.

EM net debt inflow (Cum. USD bn)
80 2010 60 40 20 0 2008 -20 Jan Feb Mar Apr May Jun
Source: J.P. Morgan estimates and EPFR Global.

59 2007 2009 34 31

-14

Jul Aug Sep Oct Nov Dec

EM net equity inflows (Cum. USD bn)
80 60 40 20 0 -20 -40 -60 Jan Feb Mar Apr May Jun
Source: EPFR Global.

2010

69

64 41

2009

2007

-40 2008 Jul Aug Sep Oct Nov Dec

19

Ben Laidler (1-212) 622-5252 [email protected]

Latin America Equity Research November 2010

Investment Themes
China drifts away from the Asian growth model China is a souped-up version of the Asian growth model. Investment rather than consumption drives growth. This requires a transfer of wealth from the household sector to the corporate sector through low wages, low return on savings and undervalued currency. 2010 policy and the 12th Five-Year Plan all point to a move toward consumption. This is a long-term positive. But it may mean that the growth in Chinese commodity demand is overestimated. Beneficiaries of the change are a small part of the benchmark, which may result in ongoing underperformance of MSCI China. Structural OW on domestic demand This is where the growth is (globally). We acknowledge that these stocks do trade at a premium and the call is consensus. Beware co-investing with governments A third of MSCI market cap is companies in which governments are the controlling shareholder. It can be profitable being a minority shareholder in these companies when the major shareholder offers favorable policies and is focused on returns. With today’s flood of capital into EMs, investor-friendly policies may not be a top priority and thus these companies could be at risk from politically expedient policies. SoEs are 79% of MSCI China market cap. Policies designed to boost consumption by increasing the household income-to-GDP ratio will reduce the ratio of profits to GDP. SoEs in our view are particularly vulnerable to policy risk. Our structural bias is to be underweight SoEs. Russian oils stocks’ underperformance is notable, with Rosneft, Lukoil and Gazprom unchanged year to date. In contrast, Russian financials are up 25% ytd. Gazprom, with one-sixth of the world’s oil reserves, has a 2011e PE of 4. Russian energy stocks are unlikely to rerate while the market fears higher taxes.

Household income growth lagging tax and profits
800% 700% 600% 500% 400% 300% 200% 100% 0% 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
Source: J.P. Morgan economics. Note: Income proxy is the change in urban per capita household income; Profits are the growth in aggregate industrial profits.

GDP Gov ernment Profits Income

748% 512% 343% 258%

EM and US as a share of global consumption
%
40 35 30 25 20 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010
Source: J.P. Morgan economics.

US

EM

Ownership structure in MSCI EM
MNC Institutional 27% 5% Gov ernment 30%

Family Cross
Source: MSCI, Datastream, J.P. Morgan Strategy.

19%

h

h ldi

20

Ben Laidler (1-212) 622-5252 [email protected]

Latin America Equity Research November 2010

FDI in non-China EM increases Higher labor cost, strengthening Renminbi and tensions between Japan and China improves the attractiveness of other emerging markets for FDI. The main beneficiaries are ASEAN, Turkey and Mexico. Note in table below that a small change in China’s share of FDI could lead to a large increase in FDI in ASEAN.
FDI into China and ASEAN
US$ billions 2007 2008 2009 China 138.4 147.8 78.2 Indonesia 6.9 9.3 4.9 Malaysia 8.6 7.2 1.4 Philippines 2.9 1.5 1.9 Thailand 11.3 8.6 6.0

CEMBI surfers still riding in 2011 Demand for EM credit remains strong (see Error! Reference source not found.). The yield on the emerging market corporate bond indices (CEMBI) is 5.3%; this is lower than the average investment grade bond yield in past decade (JULI). Our bias is to own current account deficit markets when credit conditions are favorable; OW India and Turkey.
EM equities cheap relative to bonds
20 17 14 11 8 5 01 02 03 04 05 06 07 08 09 CEMBI (1/y ld) Fw d PE

Source: CEIC.

Warning flags: Real credit growth and core CPI Central banks responding to inflation have always ended the bull market in EM. As of now EM central banks have maintained a pro-growth bias even when headline inflation is higher than the target level. Each week we publish a detailed table on inflation in our dashboards. The warning flags are a combination of higher real credit growth and rising core CPI. These conditions increase the probability of the central bank moving to a policy designed to slow growth in order to fight inflation. EM equities are growth assets. Lower growth and higher discount rates result in a derating.
Real credit growth and Core CPI
China Brazil Korea Taiwan India South Africa Russia Mexico Malaysia Indonesia Turkey Thailand Real Credit Growth %oya 15 14 3 4 9 2 0.1 3 11 14 16 4 Core CPI %oya 0.7 5 2 0.7 9 3 5 4 1.1 5 4 1.1

Source: MSCI, Bloomberg, J.P. Morgan Indices. Note: The inverse of the CEMBI yield is used to compare PEs with EM corporate bond yields.

Liquidity without a valuation anchor The range of valuations since late 2007 is extremely wide. Correlation of risk asset is high, indicating that asset-specific fundamentals are secondary to general market trend. Higher commodity prices are partly justified by monetary conditions rather than supply or demand. Equities are inexpensive relative to bonds but if economic activity improves then bonds are expensive.
Risk assets march in step: Correlation with MSCI US
0.8 0.6 0.4 0.2 0.0 -0.2 -0.4 -0.6 JPM TR Energy 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10
Source: Bloomberg, J.P. Morgan indices. Note: Three year correlation of monthly returns of MSCI US vs. JPMCI Energy, Precious metals and Industrial metals.

JPM Industrial Metals Index JPM Precious Metals TR

Source: CEIC, J.P. Morgan economics, Bloomberg and central bank websites, September 2010. Note: Credit growth as of June 2010 for China, Korea, Taiwan, India, Malaysia, Indonesia, Thailand and August 2010 for Brazil.

Growth premiums continue to expand Lack of developed world growth combined with low discount rates supports high growth premium. Maintain a structural bias to high growth themes; EM consumer. Compare valuations with other growth stocks rather than markets.

21

Ben Laidler (1-212) 622-5252 [email protected]

Latin America Equity Research November 2010

The lack of valuation anchors in equities, bonds, commodities and currencies means a wide range of possible returns and high volatility. It is critical to keep monitoring the fundamentals while acknowledging that the near term drivers of markets are dominated by momentum and casual relationships between asset classes. When implied volatility is low, consider buying protection. Remember that the 2003/7 EM bull market had five 15-20% corrections.
YTD Returns and Correlation with MSCI US
Topix Energy US cash GSCI TR Global Gov Bonds MSCI Europe EM FX US Fixed Income MSCI AC World EM Local Bonds US High Grade S&P500 MSCI EM EM $ Corp. EMBIG Gold
Source: Bloomberg.

Movement in major currencies
AUD ZAR BRL KRW IDR PLN CZK MXN HUF THB TRY SGD JPY MYR RUB INR TWD PHP CNY HKD -20 -10 0 10 20 30 40 50 60 70

Year to date return -6 -4 0.2 4 6 7 8 9 9 10 11 12 15 16 17 27

3 year correlation of monthly returns with MSCI US 0.8 0.6 -0.4 0.6 -0.3 0.9 0.8 0.2 1.0 0.5 0.4 1.0 0.9 0.6 0.7 0.1

Higher REER bad for exporters’ margins Capital-flows support EM FX appreciation. Nominal appreciation combined with inflation differentials results in a real effective exchange rate appreciation. In China there have been a number of large wage increases in foreign owned export factories. This is bad for margins. Avoid export industries in Brazil and China with a large labor cost.

Av g 05-07
Source: Bloomberg.

Mar low

22

Ben Laidler (1-212) 622-5252 [email protected]

Latin America Equity Research November 2010

Focus on sectors within countries rather than country recommendations
The table below provides a level summary of our views on sectors within countries. Financials is 26%, Materials is 15% and Energy is 14% of EM. All recommendations are relative to EM. The Industrials sector consists of an eclectic group of stocks. We do not rate the sector.
Key country and sector recommendations, performance and fundamentals
Country/Sector Wt Rec Demand Classification EM China China Financials China Energy China Telecom China Industrials China CS China Materials China CD Brazil Brazil Financials Brazil Materials Brazil Energy Brazil CS Korea Korea IT Korea Financials Korea Industrials Korea Materials Korea CD Taiwan Taiwan IT Taiwan Financials Taiwan Materials India India Financials India IT India Energy South Africa SA Materials SA Financials SA Cons Discr SA Telecom Russia Russia Energy Mexico Mexico Telecom Mexico CS Malaysia Indonesia Turkey Turkey Financials Thailand Chile Poland Philippines Hungary Czech Republic 100 18.5 7.2 3.2 2.1 1.5 1.1 1.0 1.0 16.2 4.3 4.0 3.7 1.4 13.4 3.4 2.1 2.3 1.9 2.1 10.5 6.0 1.6 1.4 8.1 2.3 1.3 1.1 7.4 1.9 1.9 1.0 1.0 6.0 3.3 4.3 1.6 1.1 2.8 2.3 1.8 1.1 1.7 1.7 1.6 0.5 0.4 0.4 -N N UW UW n/a OW UW OW N OW N UW N UW UW UW n/a N OW N N OW N OW OW OW OW N UW N OW OW N UW UW N UW OW N OW OW OW N N OW N N DD GPT DD 50% DD DD GPT DD DD GPT GPT DD GC/C DD 60% DD GPT GC GC/C DD GPT DD GCap GPT GPT DD DD DD GPT DD DD Jan 06 to date 64 149 215 144 111 92 303 132 133 146 159 201 130 185 28 11 -17 72 192 55 19 4 6 87 123 153 84 202 53 33 39 106 60 5 -20 58 86 100 108 227 55 78 101 145 19 123 1 25 Performance (USD Returns) EM low 12M to date 154 24 167 15 173 9 236 27 53 12 176 17 225 36 335 9 272 28 190 9 260 25 219 13 126 -18 227 29 163 32 155 23 92 5 226 51 270 43 283 70 102 21 97 16 117 11 114 37 186 39 209 48 171 50 140 23 182 36 210 31 162 35 320 58 147 25 154 10 115 -3 136 31 116 27 144 40 108 33 259 48 225 57 316 69 224 72 174 56 94 23 159 48 134 6 54 -10 PE YTD 17 12 10 21 14 15 14 8 11 7 21 11 -17 25 19 7 3 39 17 49 8 1 6 24 25 42 27 10 24 16 23 40 19 8 -2 21 24 19 32 36 43 50 58 41 19 40 4 -3 10E 13.5 14.3 12.9 12.6 12.9 14.9 22.7 17.0 18.4 13.5 14.6 11.5 11.6 23.5 10.6 9.5 10.6 13.9 10.1 10.6 14.1 12.6 19.6 16.8 20.8 24.9 24.8 16.5 14.6 19.5 12.3 17.0 12.9 7.8 5.6 17.8 13.5 23.2 17.7 17.4 11.6 10.7 15.2 19.7 13.7 18.8 12.9 10.8 11E 11.6 12.2 10.6 11.4 12.1 13.6 18.8 12.5 15.6 11.2 12.3 8.1 12.0 19.0 10.0 10.6 8.8 12.1 9.7 8.9 12.7 11.4 15.0 15.4 17.0 19.8 20.4 13.2 11.6 12.5 10.4 14.1 10.8 6.2 4.8 14.8 11.7 19.3 14.8 14.7 10.8 10.2 13.2 17.2 11.7 16.4 10.0 10.2 EPS Growth (%) 10E 11E 28.4 26.8 25.7 26.2 3.0 64.7 13.7 54.2 38.3 15.5 17.2 87.8 -15.0 21.3 46.7 82.8 61.7 42.3 22.9 9.2 86.7 125.1 29.0 28.9 19.8 17.5 15.8 40.1 28.0 236.8 14.9 19.3 18.5 44.0 25.9 7.4 13.7 -5.0 25.7 19.9 18.4 14.4 17.2 22.3 25.0 18.1 -3.4 -2.4 16.3 17.6 21.7 10.4 6.9 10.1 20.9 36.2 18.1 20.1 18.8 41.5 -3.1 23.6 5.3 -10.4 19.5 14.3 3.2 18.9 11.5 10.5 30.6 9.3 22.2 25.3 21.2 24.7 25.8 55.8 18.7 20.8 19.0 25.0 16.2 20.4 15.5 20.4 19.7 17.7 8.0 5.1 15.0 15.0 16.7 14.2 29.6 5.5 EPS CAGR (06-11) 8.4 14.1 26.2 10.4 9.3 10.5 17 2.5 13.4 9.2 10.7 14.6 0.7 16.2 10.3 11.0 1.6 9.9 13.7 27.4 4.3 3.4 20.1 -0.8 12.7 15.7 13.3 12.7 8.9 20.3 3.9 11.9 9.1 6.8 6.2 5.5 16.4 18.7 7.6 18 12.8 20 5.9 18.2 1.1 4.3 -4.9 8.7 EPS CAGR by SD 0.5 0.9 1.1 0.7 0.8 0.2 1.5 0.1 0.8 0.6 0.6 0.2 0.0 0.3 0.3 0.0 0.0 0.3 1.7 0.5 0.1 0.0 0.0 0.0 0.8 1.6 1.3 0.9 0.4 0.2 0.2 1.2 0.7 0.3 0.4 0.3 1.5 0.6 0.3 1.1 0.8 0.8 0.2 1.5 0.1 0.3 -0.2 0.6 PEG Ratio 1.7 1.1 0.5 1.3 1.4 1.7 1.2 7.6 1.5 1.5 1.4 1.1 13.4 1.7 1.0 0.8 8.0 1.4 0.7 0.4 3.5 4.1 1.1 NM 1.9 1.7 2.0 1.7 2.1 4.4 3.4 1.8 1.6 1.2 0.9 4.3 1.1 1.3 2.4 1.1 0.9 0.5 2.6 1.2 12.8 4.8 NM 1.2 DY (%) 10E 2.4 2.5 2.9 3.2 3.3 1.8 1.6 1.4 1.8 2.6 2.7 2.4 1.9 2.5 1.0 0.1 2.2 1.0 1.1 0.7 3.4 3.4 2.6 3.9 1.2 1.0 1.3 1.1 2.9 1.9 4.1 1.9 3.2 1.9 2.2 2.4 3.9 1.4 3.1 2.3 2.4 1.8 3.0 1.7 3.2 3.4 3.0 6.4 ROE (%) 10E 14.8 16.2 17.7 17.4 15.2 11.7 17.7 11.8 21.6 14.1 16.2 17.9 10.1 12.8 14.2 17.8 10.6 12.6 15.2 17.6 13.4 16.4 6.9 11.3 16.1 11.8 24.7 15.9 15.3 12.7 12.3 17.2 20.8 13.3 14.2 16.4 41.4 14.3 12.6 24.2 17.7 18.4 15.8 11.6 11.8 16.0 10.4 17.5

DD

Source: MSCI, IBES, Bloomberg, J.P. Morgan, 5 November 2010. Note: Outperformance of more than 2% vs. MSCI EM. Underperformance of more than 2% vs MSCI EM. DD=Domestic Demand, GPT=Global Price Takers, GC/C=Global Capex/Consumer, GC=Global Consumer, GCap=Global Capex.

23

Ben Laidler (1-212) 622-5252 [email protected]

Latin America Equity Research November 2010

Potential Returns and Earnings Estimates
End-2011 strategy team index forecasts • MSCI EM 1500 (+25%) Base case • Current MSCI EM forward PE 11.6 • 2012 MSCI EM EPS 112 (before currency appreciation) • EM FX appreciation 5% • 10% re-rating to forward PE 13 Statistical warning EM equity markets’ valuations trend rather than meanrevert. Indices also evolve with sector composition changing. The growth characteristics of stocks also change and thus their valuations. Prior to the mid-90s current account crisis, fixed exchange rates and high nominal growth supported high valuations. Investors should be suspicious of statistical justification for index targets. Pick your methodology To illustrate the impact of different methodologies on potential returns we calculate index targets using six assumptions: 1. Current earnings to bond yield ratio using September 2011 yield forecast and end-2011e PE.

Current forward PE with standard deviation ranges
Index EM EM Asia Latam EMEA China India Indonesia Korea Malaysia Philippines Taiwan Thailand Brazil Mexico Chile S Africa Russia Turkey Current Fwd PE 11.7 12.7 11.8 9.3 13.0 17.2 14.9 9.9 15.0 16.6 12.8 12.3 10.5 15.1 17.4 11.7 6.4 11.2 Avg 10Y 10.7 11.5 10.0 9.8 13.1 14.1 9.6 9.1 14.1 13.9 14.3 10.4 8.0 12.1 15.6 10.0 7.9 9.1 +1 SD 12.2 13.3 11.7 11.4 16.3 17.3 12.9 10.9 15.5 16.1 18.0 11.8 10.4 13.8 17.6 11.4 10.3 11.2 -1 SD 9.2 9.7 8.4 8.2 9.8 10.8 6.2 7.2 12.7 11.7 10.6 9.0 5.6 10.4 13.5 8.7 5.6 7.1 Top Decile 12.6 14.0 12.3 11.7 17.3 18.0 13.7 11.6 15.9 17.1 20.4 12.1 11.7 14.1 18.2 11.7 11.1 11.7 Bottom Decile 8.8 9.3 8.0 8.0 9.9 9.9 5.0 6.5 12.3 11.5 11.4 8.9 5.3 9.8 12.8 8.1 4.6 6.5

Source: MSCI, IBES, Datastream, 5 November 2010. Note: Current PE > +1SD in red.

Consensus Earnings Growth Forecast (%)
Index EM Brazil Chile China Czech Republic Hungary India Indonesia Korea Malaysia Mexico Peru Philippines Poland Russia South Africa Taiwan Thailand Turkey Consensus Earning Growth (%) 10E 11E 12E 30.6 17.2 14.0 18.4 21.0 11.0 23.1 12.0 11.0 26.7 14.9 16.4 (4.8) 3.3 5.7 (2.9) 29.8 21.9 23.4 22.7 17.6 20.3 20.9 13.5 51.4 13.1 11.1 29.4 15.7 11.2 2.9 28.9 13.1 27.3 31.6 13.1 22.2 12.2 14.8 23.9 16.9 9.3 29.8 15.4 17.1 26.5 27.1 17.8 89.1 9.4 11.2 19.1 18.7 15.9 18.5 8.2 13.6 EPS growth CAGR 11/ 06 8.2 9.0 18.3 14.3 9.1 (4.9) 10.6 18.3 8.6 7.8 5.7 8.4 4.4 1.1 6.8 9.0 5.4 7.2 12.9

5. Five-year average earnings to bond yield ratio using September 2011 yield forecast and end-2011e PE. 6. Current forward PE multiplied by 2012e EPS based on the lower of 2012e EPS growth or potential nominal GDP. 7. Current forward PE multiplied by 2012 EPS forecast. 8. Three-year average PE multiplied by 2012 EPS forecast. 9. Gordon Growth model theoretical PE multiplied by 2012e EPS. This generates PE in excess of 30 for six markets as local bond yields in these countries are very low relative to nominal GDP growth and RoE.

Source: MSCI, Datastream, IBES, J. P. Morgan, 5 November 2010.

24

Ben Laidler (1-212) 622-5252 [email protected]

Latin America Equity Research November 2010

Pick your methodology and thus your return: Percentage return to end-2011 targets based on multiple methodologies
Index Level Brazil Chile China India Indonesia Korea Malaysia Mexico Philippines Poland Russia South Africa Taiwan Thailand Turkey 249321 5942 73 839 4672 543 558 33913 774 1904 815 808 301 425 1038342 (1) Current EY/BY 14 13 15 25 10 4 14 18 29 12 20 16 6 8 15 (2) 5yr avg EY/BY 0 31 5 2 27 20 8 10 41 6 85 9 63 15 59 (3) FWD PE 2010 EPS = GDP 7 6 11 12 8 5 8 6 7 6 7 7 6 7 7 (4) Current FWD PE 14 13 18 29 14 11 14 18 20 12 20 22 14 24 15 (5) 3year average FWD PE 11 (1) 15 8 (7) 7 3 (6) (5) 2 42 (1) 42 (12) (15) Median Max Min Range of returns 14 33 12 27 34 16 11 24 47 10 79 23 57 36 74 (6) Gordon Growth PE (38) (21) 169 110 127 153 123 (2) 115 39 486 17 172 165 51

11 13 15 12 10 7 8 10 20 6 20 9 14 8 15

14 31 18 29 27 20 14 18 41 12 85 22 63 24 59

0 (1) 5 2 (7) 4 3 (6) (5) 2 7 (1) 6 (12) (15)

Source: MSCI, IBES, Datastream, Bloomberg, J.P. Morgan. 5 November 2010 Note: All returns are local currency; please email [email protected] for the assumptions.

Consensus EPS estimates and revisions since the beginning of 2010
Index EM Brazil Chile China Czech Hungary India Indonesia Israel Korea Malaysia Mexico Peru Phi Poland Russia S Africa Taiwan Thailand Turkey 08 58 15593 236 3.31 34.7 170 29 213 18 22 31 1446 63 30 148 111 57 7.0 19 70564 Actual 09 65 16618 247 3.76 34.7 106 34 224 21 35 25 1713 71 34 109 91 42 11 24 72915 Current Consensus EPS 10E 11E 12E 84 98 112 19678 23812 26435 303 339 376 4.79 5.51 6.41 33.0 34.1 36.0 103 134 163 42 51 60 269 325 369 27 31 37 49 55 61 32 37 41 1763 2272 2588 90 119 135 42 47 54 136 159 173 118 136 159 52 66 78 21 23 26 28 33 39 86436 93550 106291 Consensus EPS beginning of this Year 10E 11E 12E 77 93 104 17942 21381 25574 276 317 381 4.64 5.39 6.03 33.8 36.0 37.2 116 150 171 42 50 61 261 309 369 28 33 34 47 52 55 30 35 39 2063 2440 2834 89 102 111 41 46 70 116 144 158 98 144 151 56 71 85 17 22 24 27 31 35 78669 93247 108651 Revision in Consensus EPS (%) 10E 11E 12E 9.3 6.0 7.5 9.7 11.4 3.4 9.5 6.9 (1.2) 3.3 2.1 6.2 (2.4) (5.2) (3.1) (11.1) (11.1) (4.4) (0.5) 2.3 (1.1) 3.1 5.4 (0.0) (4.7) (4.5) 8.5 5.0 6.5 11.6 5.3 6.6 5.4 (14.6) (6.9) (8.7) 1.5 16.6 20.8 2.5 1.1 (22.6) 16.5 9.9 10.1 19.8 (5.8) 5.4 (6.6) (6.9) (8.0) 23.2 8.1 10.6 5.3 6.2 11.2 9.9 0.3 (2.2)

Source: MSCI, Datastream, IBES, J. P. Morgan, 5 November 2010.

25

Ben Laidler (1-212) 622-5252 [email protected]

Latin America Equity Research November 2010

Dissection of EM EPS growth
The objective Disaggregate the EM EPS growth into countries, sectors and key sectors in countries. Main observations on 2011e EPS growth • MSCI EM weighted and median EPS growth is 17%. This is 5% higher than our economists’ 2011 nominal GDP growth forecast of 12%. • • • Financials and materials are the highest contributors to 2011e earnings growth. The contribution of IT and healthcare is the lowest (see top table, next page). Two sectors contribute c20% of MSCI EM 2011e EPS growth; Brazilian steel and Russian oil & gas sectors (2011e EPS growth for Vale, Sider and Gazprom is estimated by IBES to be 41%, 44% and 23% respectively). Note that the weighted EPS growth for Taiwan electronic components is high at 62% (primarily due

to losses or low profits at AU Optronics, Chimei Innolux, Chunghwa picture tubes, E-Ink). The median EPS growth is 24% (see second table on next page). Dataset IBES EPS forecasts for MSCI EM constituents Calculation The index’s calendar year EPS is calculated using the profit-weight of the constituents. Index EPS = I x (∑ (C-EPS x FFS) / ∑ (FFS x P)) where C-EPS = Index constiuent’s EPS, FFS = free float shares for the constituents, I = index level and P = current market price. The check Median EPS growth of the index constituents: Reviewing the median helps identify sectors in which a single stock’s impact on weighted EPS growth is large. This could be due its large weight in the index or moving from loss to profit.

•

Emerging markets earning growth and contribution
Country Brazil Russia China South Africa Korea India Taiwan Mexico Indonesia Malaysia Thailand Poland Chile Peru Colombia Turkey Hungary Egypt Philippines Czech Republic Morocco Mkt Cap Weight 16.2 6.0 18.7 7.4 13.2 8.1 10.5 4.4 2.3 2.8 1.8 1.6 1.7 0.8 0.9 1.9 0.4 0.4 0.5 0.4 0.2 Earnings weights (%) 2010E 2011E 2012E 16.4 16.9 16.6 11.2 12.4 12.4 17.0 16.7 17.1 6.9 7.4 7.6 17.6 16.2 15.7 5.3 5.5 5.8 10.3 9.6 9.5 3.1 3.4 3.4 1.8 1.9 1.8 2.2 2.2 2.1 1.6 1.6 1.6 1.5 1.5 1.5 1.2 1.2 1.1 0.5 0.6 0.5 0.4 0.5 0.5 2.2 2.0 2.0 0.4 0.5 0.5 0.5 0.5 0.6 0.4 0.3 0.3 0.5 0.4 0.4 0.1 0.1 0.1 Index EPS Growth 2010E 2011E 2012E 18.4 21.0 11.0 29.8 15.4 17.1 26.7 14.9 16.4 26.5 27.1 17.8 51.4 13.1 11.1 23.4 22.7 17.6 89.1 9.4 11.2 2.9 28.9 13.1 20.3 20.9 13.5 29.4 15.7 11.2 19.1 18.7 15.9 23.9 16.9 9.3 23.1 12.0 11.0 27.3 31.6 13.1 29.4 52.5 5.0 18.5 8.2 13.6 (2.9) 29.8 21.9 32.7 19.6 42.9 22.2 12.2 14.8 (4.8) 3.3 5.7 4.1 10.7 9.2 Median EPS Growth 2010E 2011E 2012E 18.4 24.1 19.0 33.4 34.5 15.4 25.0 21.1 18.8 14.4 19.4 18.3 31.8 14.3 12.9 12.9 19.3 20.2 25.3 13.3 10.0 15.6 17.2 12.4 18.7 20.4 12.0 19.7 12.5 10.0 15.5 19.9 15.7 15.0 20.5 13.8 33.8 16.5 8.9 23.4 34.8 18.1 30.4 33.3 25.0 13.5 8.7 14.2 (0.9) 20.3 10.0 34.9 17.5 19.4 20.7 14.3 12.5 (7.8) 5.0 7.7 (0.4) 12.7 13.0 Contribution to Earning growth (%) 2010E 2011E 2012E 9 20 15 13 20 13 15 15 20 6 10 9 24 8 13 4 7 8 20 6 8 0 5 4 1 2 2 2 2 2 1 2 2 1 2 1 1 1 0 0 1 1 0 1 0 1 1 2 0 1 1 1 1 1 0 0 0 0 0 0 0 0 0

Source: IBES, Datastream, J.P. Morgan calculations. Note: Sorted by 2011e earning growth contribution.

26

Ben Laidler (1-212) 622-5252 [email protected]

Latin America Equity Research November 2010

EM Sectors’ earning growth and contribution
EM Sectors Financials Materials Energy Utilities Consumer Discretionary Telecommunication Services Industrials Consumer Staples Information Technology Health Care EM Mkt Cap Weight 26.3 14.6 14.3 3.4 6.8 7.8 7.3 6.7 11.9 0.8 100 Earnings weights (%) 2010 2011 2012 24.1 25.2 25.9 13.8 15.3 15.2 19.9 19.3 18.8 2.8 3.5 3.3 6.4 6.4 6.5 8.3 7.9 7.7 6.6 6.4 6.4 4.4 4.2 4.2 13.6 11.9 11.9 0.5 0.5 0.5 100.0 100.0 100.0 Index EPS Growth 2010 2011 2012 25.1 22.2 16.8 63.7 31.0 16.4 11.8 10.2 9.0 7.4 26.5 14.2 28.6 15.5 13.7 7.4 10.7 10.7 47.5 13.9 15.4 18.1 11.4 16.1 118.5 7.6 13.2 32.7 15.6 13.8 30.6 17.2 14.0 Median EPS Growth 2010 2011 2012 20.7 19.4 16.1 31.0 23.7 15.5 21.5 15.5 14.0 1.9 13.2 9.0 19.5 17.2 16.1 7.0 6.7 9.1 20.7 15.2 16.8 18.1 17.2 14.3 33.3 15.4 12.4 14.3 17.6 19.9 19.9 17.5 14.8 Contribution to Earning growth (%) 2010 2011 2012 19 31 31 21 24 14 13 15 16 -1 7 2 6 6 7 3 5 6 9 5 6 3 3 4 27 3 11 0 0 1 100 100 100

Source: IBES, Datastream, J.P. Morgan calculation. Note: Sorted by 2011e earnings growth contribution.

Countries’ sub-industry contributing 70% of EM earning growth
Country Sub-Industry Brazil Steel Russia Integrated Oil & Gas China Diversified Banks Russia Diversified Banks Brazil Diversified Banks Korea Diversified Banks South Africa Gold Taiwan Electronic Components Korea Electric Utilities Russia Div. Metals & Mining Brazil Homebuilding Mexico Wireless Telecom Mexico Construction Materials S Africa Wireless Telecom Russia Oil & Gas E&P China Life & Health Insurance Taiwan Electronic Mftg Services South Africa Diversified Banks Taiwan Diversified Banks S Africa Precious Metals India Diversified Banks India Steel China Real Estate Development Russia Steel South Africa Int Oil & Gas China Oil & Gas E&P Korea Construction & Eng. Poland Diversified Banks India It Consulting & Other svs Mexico Div Metals & Mining Indonesia Coal & Consumable India Oil & Gas R&M Korea Steel Thailand Diversified Banks Korea Auto Manufacturers Colombia Diversified Banks China Coal & Consumable Fuels Russia Wireless Telecom Taiwan Communications Equip Brazil Packaged Foods & Meats Mkt Cap Weight 3.8 2.9 4.5 1.0 3.7 1.2 0.9 0.9 0.2 0.4 0.5 1.5 0.2 0.9 0.4 1.6 0.9 0.7 0.8 0.6 1.3 0.5 0.9 0.3 0.7 1.2 0.6 0.7 1.3 0.3 0.3 0.9 0.9 0.6 1.0 0.2 0.9 0.4 0.5 0.3 Earnings weights (%) 2010 4.6 7.4 5.1 0.8 3.6 1.5 0.5 0.6 (0.1) 0.4 0.7 1.5 (0.2) 1.0 0.9 0.8 0.8 0.8 0.7 0.4 0.7 0.5 0.9 0.2 0.9 1.1 0.5 0.5 0.7 0.3 0.2 0.7 1.4 0.6 1.4 0.2 0.8 0.4 0.4 0.2 2011 5.6 7.3 5.1 1.3 3.6 1.9 0.7 0.8 0.2 0.6 0.8 1.5 0.0 1.0 0.9 0.8 0.9 0.9 0.8 0.5 0.7 0.5 0.9 0.3 0.9 1.1 0.5 0.5 0.7 0.4 0.3 0.7 1.3 0.6 1.3 0.2 0.7 0.4 0.4 0.2 2012 5.5 7.2 5.4 1.3 3.7 1.9 0.7 0.9 0.3 1.0 0.9 1.4 0.0 1.0 0.9 0.9 0.9 0.9 0.7 0.5 0.8 0.6 0.9 0.4 0.9 1.0 0.6 0.6 0.8 0.4 0.3 0.7 1.2 0.6 1.2 0.2 0.7 0.5 0.4 0.3 Index EPS Growth 2010 107 24.6 22.1 456 17.8 77.8 (377) (202) 623 NA 52.1 18.0 (194) 23.2 8.7 9.8 27.5 14.4 63.4 43.1 18.4 56.3 18.9 (571) 15.4 71.9 67.9 24.0 12.3 52.8 20.0 16.9 24.3 19.9 55.1 36.9 35.0 132.6 66.7 81.9 2011 42.0 15.6 17.5 95.0 19.1 43.6 82.8 61.0 (437) 84.6 37.8 14.3 (120) 20.0 21.1 24.2 21.8 21.9 25.0 48.3 23.0 33.3 17.2 61.7 17.2 12.8 28.8 29.0 19.1 45.5 58.0 19.0 9.1 21.0 8.7 66.3 14.5 27.5 29.0 61.5 2012 11.7 13.2 20.2 15.4 15.0 16.8 6.1 36.7 40.7 84.7 22.6 12.5 100.0 13.0 7.6 24.1 18.8 23.0 2.2 22.1 23.6 19.9 25.6 29.2 20.5 6.4 16.1 19.4 19.8 18.8 1.9 14.0 9.2 14.5 7.3 (8.2) 13.7 20.0 11.9 35.9 Median EPS Growth 2010 47.7 17.4 25.0 456 23.8 65.2 (3.7) 46.4 NM NM 64.6 18.0 NM 23.3 8.7 13.6 4.2 11.0 34.0 16.7 19.7 11.7 22.8 504 15.4 74.1 29.9 25.8 11.2 52.8 (10.3) 22.2 34.3 19.9 50.5 36.9 45.1 25.0 19.2 223.1 2011 41.1 4.1 17.4 95.0 17.1 15.0 79.1 24.2 NM 84.6 35.2 14.3 NM 15.8 21.1 25.4 18.5 20.2 25.0 41.2 22.9 20.0 19.4 55.5 17.2 22.5 13.8 28.2 18.5 45.5 52.3 17.4 7.0 25.9 9.7 66.3 13.7 35.6 47.7 46.2 2012 13.9 11.5 17.8 15.4 14.9 11.8 17.8 13.7 40.7 84.7 23.8 12.5 100.0 9.0 7.6 24.7 18.8 24.2 0.0 26.3 23.7 21.9 24.3 29.3 20.5 15.1 18.1 18.5 20.7 18.8 1.2 10.5 8.3 14.7 7.0 (8.2) 11.8 29.3 (13.8) 41.4 Contribution to Earning growth (%) 2010 2011 2012 10 11 5 6 7 7 4 5 7 3 4 1 2 4 4 3 4 2 3 2 0 4 2 2 (0) 2 1 0 2 4 1 1 1 1 1 1 (1) 1 0 1 1 1 0 1 0 0 1 1 1 1 1 0 1 1 1 1 0 0 1 1 0 1 1 1 1 1 1 1 2 1 1 1 0 1 1 2 1 0 1 1 1 0 1 1 0 1 1 0 1 0 0 1 0 0 1 1 1 1 1 0 1 1 2 1 1 0 1 (0) 1 1 1 1 1 1 1 1 0 0 1 1

Source: IBES, Datastream, J.P. Morgan calculation. Note: Sorted by 2011 earning growth contribution.

27

Ben Laidler (1-212) 622-5252 [email protected]

Latin America Equity Research November 2010

Risks to our strategy
Market risks
Lack of valuation cushion Our strategy is biased toward growth with good momentum but at a valuation premium. A growth premium is justified in a world where growth is in short supply. High valuations are vulnerable to a reversal in EM portfolio flows and stock-specific risk. Bond market volatility The Fed’s objective with QE2 is to lower bond yields. The result is that bonds are expensive relative to J.P. Morgan’s growth forecasts. Higher US growth could lead to a spike in bond yields. High correlation High correlation between risk assets may propagate volatility. A counter-trend rally in the US dollar may drive that volatility.

Politics: Elections and change of leadership in Brazil and China Leadership change in China will occur in 2012. The transition may result in confusion on policy. Brazil’s new president needs to maintain reform momentum and develop infrastructure.
2011 election calendar
Jan Feb Mar Apr Peru Presidential & Legislative Aug Philippines Subnational Legislative Dec Russia Parliamentary Thailand Parliamentary (Tentative)

May

Jun Vietnam Presidential Turkey Parliamentary Oct Argentina Presidential Poland Parliamentary

Jul

Sep

Nov

Policy and Political risks
Capital controls Strong foreign inflows and continued FX appreciation have prompted EM central banks to implement capital control measures. These include: 1) Increase in IOF tax on foreign purchase of fixed income instruments from 2% to 6% in Brazil; 2) One-month minimum holding period restriction on SBI bonds in Indonesia; 3) 15% withholding tax on foreign bond holders in Thailand; 4) Restrictions on forward currency positions of foreign bank branches and local banks in South Korea. For equity investors, controls designed to reduce the effective carry in fixed income markets are ok. Broader capital controls which reduce the ability of equity investors to buy and sell would be negative as they reduce liquidity and increase volatility. Anti-asset inflation policies Central banks are targeting asset prices in EM to counter asset inflation. These policies introduce economic and sector-specific risks. Note how poorly real estate stocks have performed in EM despite low interest rates. Trade wars High US unemployment, China’s large current account surplus and polarized politics in the US increase the risk of a trade war.

Source: IFES.

EM CPI and earnings yield
12 MSCI EM 12m Fw d PE EM CPI %oy a 11 (RHS inv erted) 10 (LHS) EM central banks' 9 av erage target range ceiling 8 7 6 5 4 3 Jan-02 Jun-03 Nov -04 Apr-06 Sep-07 Feb-09 Jul-10
Source: J.P. Morgan economics, IBES, MSCI, November 2010. Note: CPI data is to August 2010.

3 6 9 12 15

Strained social contract Political and regulatory risk is high. The corporate sector has emerged from the global recession and credit crunch stronger than the households. Note that profits as a share of GDP are near cyclical highs but unemployment is 10%. Policy makers constrained by high fiscal deficits are likely to redress this imbalance through higher taxes and increased regulation. This would add to business costs and delay normal investment decisions, threatening the recovery.

28

Ben Laidler (1-212) 622-5252 [email protected]

Latin America Equity Research November 2010

As is the case in the US, Chinese corporate share of GDP increased while the household share decreased. Labor disputes and subsequent large pay increases may start to reverse this trend. This rebalancing is healthy and should move China to a more sustainable growth model. But near term the result is likely lower profit margins.

Strained social contract: US profit share and unemployment
22 20 18 16 14 12 10 8 70 75 80 85 90 95 00 05 10 3 6 Unemploy ment rate (inv erted) 9 12 Profit share % sa 0

Economic risks
Uncertain outlook for commodities Our commodities and energy underweight is driven by a combination of long-term economic cycles and a potential inflection point in the growth of Chinese material demand. The timing is complicated by the large influence of financial investors on commodity markets. The timing risk in a bearish view on commodity companies is high. Industrial metal prices rallied since May while global leading indicators fell. Correlation of commodities to risk assets (equities) is high today. Momentum in a world of zero interest rates is an attractive attribute. An UW commodity call is unlikely to work at this point. When it does eventually, the correction may prove to be violent as financial investors exit. Unintended consequences of QE2 If QE2 results in a sharp increase in commodity prices it may choke off growth and ultimately be counterproductive. Peripheral Europe sovereign stress Greek, Irish and Portuguese bond spreads to German bunds are at record highs. Sovereign stress could disrupt risk appetite as it did in 2Q10. US state and municipal stress US states and municipalities are required to balance their budgets. The result may be rising unemployment as US local government downsizes. This would place a larger burden on the private sector to create jobs.

Source: J.P. Morgan. Note: Chart shows % share of gross value added, J.P. Morgan forecast for 2010.

Shares outstanding in commodity ETF
210000 180000 150000 120000 90000 60000 30000 Dec-07 May -08 Oct-08 Mar-09 Aug-09 Jan-10 Jun-10 Nov -10
Source: Bloomberg, DBCSO Index.

Peripheral stress in Europe
7 6 5 4 3 2 1 0 Jan 08 Jul 08 Jan 09 Jul 09 Jan 10 Jul 10 Ireland (LHS) Greece (RHS) 10 8 6 4 2 0

Source: Bloomberg Note: Spread of Greek and Irish 10-year bond yields to German bunds.

29

Ben Laidler (1-212) 622-5252 [email protected]

Latin America Equity Research November 2010

Brazil Strategy
Key country dynamics Domestic growth and China’s demand for commodities are the main drivers for Brazil in 2011, together with a clearer definition of policies to be adopted by the newly elected government. The exchange rate is an important focus, with capital control risks on the rise. Growth characteristics and how they are changing Credit growth at around 20% combined with the best labor market in a generation provides for a sturdy outlook for consumption in 2011. We forecast GDP of 4.5% in 2011, on top of 7.5% in 2010e. Strong growth is adding to inflation risks, and we expect a rise in interest rates in 2011. Although GDP is little influenced by commodities (exports = 11%), Brazil’s two largest companies are commodity driven. Over the next few years, investment (under 18% of GDP) will need to rise to meet the country’s need for more capacity and infrastructure. This would also allow for faster sustainable growth in the years to come. Drivers of returns – Multiples and growth Valuation is not an impediment to Brazil’s performance. The country is trading in line with the five-year average, with commodities cheaper than domestics but with the latter likely delivering more growth in the short/medium run. Flows are key for performance and are catching up in 4Q 2010 after being lackluster most of the year. With major hurdles behind (large capitalizations, elections) and DM prospects of a muddle-through, inflows into Brazilian equities are likely to be boosted in 2011. Recommendations We recommend exposure to domestic names and are focused on financials and homebuilders. Although we like discretionary, we feel that there are better entry points considering the strong performance of late. In financials, Bradesco is our top pick, a blue chip, large cap bank that can better withstand the rise in interest rates as about 30% of its business is insurance. In homebuilders, we like PDG: the stock is cheaper than peers’, benefits from the Agre acquisition are not fully priced, the company is fully exposed to the high-growth lower-income segment. On the commodity side, we likeVale: it is cheap, with risks mostly priced in already, while China appears to be rebounding. In the oil and gas sector, we recommend OGX as the better vehicle to get exposure to offshore as more of the company’s findings are turning into reserves.

Emy Shayo Cherman AC
(5511) 3048-6684 [email protected] Banco J.P. Morgan S.A. Bloomberg JPMA SHAYO <GO>

Household consumption rising above GDP (4Q/4Q rolling average)
8.0% 7.0% 6.0% 5.0% 4.0% 3.0% 2.0% 1.0% 0.0% -1.0% 1Q-03

1Q-04

1Q-05

1Q-06 GDP

1Q-07

1Q-08

1Q-09

1Q-10

Household Consumption

Source: IBGE.

Unemployment rate (%)
11 10 9 8 7 6 Jan-06 Jul-06 Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10
1.5 1.6 1.7 1.8 1.9 2.0 2.1 2.2 2.3 2.4 2.5 4/9/10

Source: IBGE.

BRL (rh, inverted scale) versus BZ Commodity Export Index (lh)
500 450 400 350 300 250 200 150 2/4/05 9/2/05 3/31/06 10/27/06 5/25/07 12/21/07 7/18/08 2/13/09 9/11/09 BZ Commodity Index BRL

Source: Bloomberg; J.P. Morgan.

Foreign Net Inflows into Brazilian Equities (secondary) R$bi
5 4 3 2 1 0 -1 -2 -3 Dec-09 Oct-09 Aug-09 Sep-09 Jun-09 Jul-09 Nov-09 -1.09 -2.10 Feb-10 Mar-10 Jan-10 Apr-10 -1.25 -1.08 -1.51 Aug-10 May-10 Sep-10 Jun-10 Oct-10 Jul-10 -0.15 -0.60 2.21 1.65 4.04 YTD 2010 = R$4.7 bi YTD 2009 = R$19.2 bi 3.15 1.14 0.93 3.51 3.14 1.60 0.51

Source: BM&FBovespa; Bloomberg.

30

Ben Laidler (1-212) 622-5252 [email protected]

Latin America Equity Research November 2010

Top picks and stocks to avoid
Price Top picks Bradesco PDG Realty VALE OGX Stocks to avoid Usiminas Eletropaulo Tele Norte Leste 34.8 10.6 31.8 21.7 21.0 29.9 48.5 Code BBDC4 PDGR3 VALE OGXP3 USIM5 ELPL6 TMAR5 Rating OW OW OW OW UW UW N Mkt cap (US$MM) 73,018 7,144 173,421 42,952 14,775 3,229 7,699 P/E (x) 10E 13.5 14.5 10.9 nm 20.5 4.8 nm 11E 12.1 9.4 7.7 nm 11.1 8.4 nm EPS 10E 2.59 0.73 2.92 0.06 1.02 6.29 8.60 11E 2.88 1.13 4.13 0.02 1.88 3.54 7.21 Div. yield 11E (%) 2.9% 1.7% 2.9% 0.0% 3.1% 13.8% 8.9% ROE 11E (%) 21.2% 19.2% 23.3% 0.6% 8.8% 18.0% 14.9%

Source: Bloomberg, J.P. Morgan estimates. Note: Share prices and valuations are as of October 28, 2010.

MSCI Brazil absolute and Relative to EMF Index
1400 1200 1000 800 600 400 200 0 Dec-02 Mar-04 May -05 Aug-06 Oct-07 Jan-09 Mar-10 Absolute Relativ e to MSCI EMF Index

MSCI fair value range
FWD PE PE (135082) (119256) (211296) (339385) (277670) (273109) (212792) (196127) 150000 250000 (326196) 350000 450000 (445307)

PB (89127) DY BY/EY BY/DY 50000 (124074)

Source: MSCI, Datastream.

Source: MSCI, IBES, Datastream, J.P. Morgan.

Currency outlook (BRL/USD)
3.0 2.8 2.6 2.4 2.2 2.0 1.8 1.6 1.4 Dec 04 Apr 06 Jul 07 Nov 08 Feb 10 Jun 11 Consensus J.P. Morgan J.P. Morgan forecast: end Dec 10: 1.70 end Mar 11 : 1.80 end Jun 11: 1.82

MSCI EPS integer over time
150 140 130 120 110 100 90 80 Feb-09 Jul-09 Dec-09 May -10 Oct-10 2010 2011

Source: Bloomberg, J.P. Morgan.

Source: MSCI, Datastream.

31

Ben Laidler (1-212) 622-5252 [email protected]

Latin America Equity Research November 2010

Mexico Strategy
Key country dynamics The key constraints on Mexican equities are structurally lower US GDP growth and a lackluster Mexican consumer rebound. This is offset by a cheap currency, easy monetary policy, a gradual reacceleration of US economic growth – at least into mid-2011 – and a high market correlation with US equities. Additionally, we view some concerns as currently overdone – such as the fiscal situation (oil production has stabilized) and security environment (violence localized) – whilst others are not – such as Mexico’s declining equity market relevance on lack of issuance. Growth characteristics and how they are changing Mexican GDP growth is set to slow next year (to 3.5% from an estimated 4.5% in 2010), along with the US (2.7% GDP growth to 2.5% in 2011e). Manufacturing and IP, which led the sharp growth recovery from the -6.5% seen in 2009, should slow and domestic demand increasingly come to the fore. Consensus MSCI Mexico earnings growth could be at risk, with expectations for 18% growth versus only 12% this year. Growth is expected to be led by staples and materials. Drivers of returns – Multiples and growth Mexico is trading at the high end of traditional valuation ranges, and we do not see room for significant multiple expansion. The valuation premiums to other markets are lower than they seem, often just reflecting Mexico’s high staples and telecom index composition. Whilst the traditional drivers of Mexican outperformance – 1) significant market weakness, 2) strong US macro surprise, 3) strong Mexico consumer recovery – look absent to us in 2011, we do expect respectable absolute performance. Local investors remain underweight the market and are seeing robust inflows. Foreign investors remain moderately overweight. Recommendations Our strategy focus is on stocks exposed to the strengthening domestic demand environment at reasonable valuations. We also like a number of special situations exposed to recovering infrastructure segments. We would avoid very defensive staples with high valuations and low gearing to the strengthening consumer.

Ben Laidler AC
(1-212) 622-5252 [email protected] J.P. Morgan Securities LLC Bloomberg JPMA LAIDLER <GO>

Contributions to GDP growth, 2008-2011e

Source: J.P. Morgan Economics.

Mexico 12 mth fwd PE
17.00 15.00 13.00 11.00 9.00 7.00 95 97 98 99 00 01 02 03 04 05 06 07 08 10 Mex ico
Source: MSCI, IBES, Datatsream.

Av erage

+1SD

-1SD

Mexico consumer confidence and formal employment

Source: J.P. Morgan Economics, INEGI, IMSS.

32

Ben Laidler (1-212) 622-5252 [email protected]

Latin America Equity Research November 2010

Top picks and stocks to avoid
Price Top picks America Movil Cemex Grupo Televisa ICA First Cash Financial Stocks to avoid Telmex Grupo Inbursa Consorcio Ara 57.1 8.8 22.2 32.5 29.4 15.2 53.9 7.6 Code AMX CX TV ICA* FCFS TMX GFINBURO ARA* Rating OW OW OW OW OW UW UW UW Mkt cap (US$MM) 119,244 9,800 13,699 1,781 913 14,410 14,247 829 P/E (x) 10E 15.8 nm 22.0 30.4 17.1 12.7 25.3 11.5 11E 13.4 nm 17.2 22.0 14.6 13.2 21.0 9.9 EPS 10E 44.98 -0.16 12.54 1.07 1.72 18.51 2.13 0.66 11E 52.72 0.02 16.02 1.48 2.01 17.30 2.57 0.77 Div. yield 11E (%) 0.7% 0.0% 1.4% 0.0% 0.0% 5.0% 1.4% 1.3% ROE 11E (%) 26.1% 0.1% 23.0% 4.9% 17.9% 37.0% 12.2% 10.1%

Source: Bloomberg, J.P. Morgan estimates. Note: Share prices and valuations are as of October 28, 2010.

MSCI Mexico absolute and relative to EMF Index
500 450 400 350 300 250 200 150 100 50 0 Dec-02 Mar-04 May -05 Aug-06 Oct-07 Jan-09 Mar-10 Absolute Relativ e to MSCI EMF Index

MSCI fair value range
FWD PER (17980) PER PBR DY BY/EY (24866) BY/DY 0 50000 100000 150000 (196457) 200000 250000 (25349) (14776) (125613) (29973) (25937) (22590) (20184) (33101) (41784)

Source: MSCI, Datastream.

Source: MSCI, IBES, Datastream, J.P. Morgan.

Currency outlook (MXN/USD)
16.0 J.P. Morgan forecast: 15.0 14.0 13.0 12.0 11.0 10.0 9.0 Dec 04 Apr 06 Jul 07 Nov 08 Feb 10 Jun 11 Consensus end Dec 10: 12.50 end Mar 11: 12.50 end Jun 11: 12.25 J.P. Morgan

MSCI EPS integer over time
105 100 95 90 85 80 75 70 Feb-09 Jul-09 Dec-09 May -10 Oct-10 2010 2011

Source: Bloomberg, J.P. Morgan.

Source: MSCI, Datastream.

33

Ben Laidler (1-212) 622-5252 [email protected]

Latin America Equity Research November 2010

Chile Strategy
Key country dynamics Chile will look to build on the momentum of an historic 2010, which saw the inauguration of center-right Piñera (after 20 years of the center-left Concertacion), an 8.8magnitude earthquake (5th largest in history), World Cup success (advancing to the round of 16), the country’s 200-year anniversary and the unprecedented extraction of 33 miners trapped underground for 68 days. Confidence is running high, and the country appears to be entering a period of renewal, which could accelerate the path to developed country status (possibly by the end of the decade). However, with expectations mounting, there is room for disappointment, especially if social/political differences get in the way of progress. Growth characteristics and how they are changing For the first time in recent years, Chile is expected to lead regional growth in the coming year on the back of an aggressive Piñera pro-growth agenda, accelerated by ongoing earthquake reconstruction efforts. This should be further helped by supportive demand dynamics out of China and expansionary fiscal policies (benchmark rate not likely to surpass 4.25% – lowest YE11e level in the region), not to mention micro-level incentives for investment by both locals and foreigners. Drivers of returns – Multiples and growth The top-down scenario remains attractive, but valuations are lofty at nearly 18x forward P/E, representing a 50% premium to LatAm, which is just ahead of historical levels (despite recent factors that are working to close the spread – such as the move to IFRS and regional expansion). As the Chile premium suggests, performance is largely tied to supportive domestic flows (and limited foreign ownership). This support was strong in 2010 given weakness elsewhere. In the event that key markets, such as Brazil, China and the US, perform well in 2011 (especially relative to domestic fixed income), this will likely limit domestic flows, specifically from pension funds, which may be forced to trim domestic equity positions to remain within their limits. Recommendations Although we like the Chile growth profile, we focus on names that are expanding abroad (Falabella, CCU). We also find copper play Antofagasta at an attractive valuation with significant growth potential. We avoid utility IAM, given strong relative outperformance in the utilities sector and potential Aguas Andinas share sale overhang. We also see limited upside after the speculative rise in SQM’s share price.

Brian P. Chase AC
56 2 425 5245 [email protected] Inversiones y Asesorias Chase Manhattan Ltda. Bloomberg JPMA CHASE <GO>

Business and consumer confidence returning to historical highs

65 55 45 35 25 J-06 S-06 M-07

Bus Conf

Cons Conf

J-08

S-08

M-09

J-10

S-10

Source: Adimark and ICARE.

Chile GDP growth (oya) catching back up to EM standards

13% 8% 3% -2% 85 87 89 91 93 95 97 99 01

EM

Chile

03 05 07

09 11E

Source: World Bank and J.P. Morgan.

Chile fwd P/E premium to LatAm at historical levels

2.4 2.1 1.8 1.5 1.2 0.9 0.6 94 96 97 98 99 00 01 02 03 04 05 06 07 09 10
Source: Datastream and J.P. Morgan.

Chile fwd P/E premium to EM vs. AFP % ownership of free float (RHS)

2.5 2.0 1.5 1.0 0.5 Feb-97

Premium to EM

% of Free Float

60% 40% 20% 0%

Jul-99

Dec-01

May -04

Oct-06

Mar-09

Source: Datastream, SAFP and J.P. Morgan.

34

Ben Laidler (1-212) 622-5252 [email protected]

Latin America Equity Research November 2010

Top picks and stocks to avoid
Price Top picks Falabella CCU Antofagasta Minerals Stocks to avoid IAM SQM 4849.5 56.1 1326.0 747.0 51.5 Code FALAB CCU ANTO IAM SQM Rating N OW OW N N Mkt cap (US$MM) 24,106 3,647 22,744 15,735 13,873 P/E (x) 10E 38.5 15.1 16.5 1,558 43.6 11E 31.4 13.7 11.4 16.1 30.4 EPS 10E 125.92 3.70 80.30 16.1 1.18 11E 154.40 4.08 116.50 46.36 1.69 Div. yield 11E (%) 0.8 4.5 0.5 46.36 0.0 ROE 11E (%) 13.0 21.6 116.5 5.9 24.6

Source: Bloomberg, J.P. Morgan estimates. Note: Share prices and valuations are as of October 28, 2010.

MSCI Chile absolute and relative to EMF Index
700 600 500 400 300 200 100 0 Dec-02 Mar-04 May -05 Aug-06 Oct-07 Jan-09 Mar-10 Absolute Relativ e to MSCI EMF Index

MSCI fair value range
FWD PER PER PBR DY BY/EY BY/DY 1000 2000 3000 4000 5000 6000 7000 (2906) (2181) (3979) (4293) (4068) (4723) (6797) (5772)

Source: MSCI, Datastream.

Source: MSCI, IBES, Datastream, J.P. Morgan.

Currency outlook (CLP/USD)
800 750 700 650 600 550 500 450 400 Dec 04 Apr 06 Jul 07 Nov 08 Feb 10 Jun 11 Consensus J.P. Morgan forecast: end Dec 10: 480 end Mar 11: 505 end Jun 11: 500

MSCI EPS integer over time
135 125 115 105 95 85 75 Feb-09 Jul-09 Dec-09 May -10 Oct-10 2010 2011

Source: Bloomberg, J.P. Morgan.

Source: MSCI, Datastream.

35

Ben Laidler (1-212) 622-5252 [email protected]

Latin America Equity Research November 2010

Colombia Strategy
Key country dynamics The long-term structural rerating story continues in 2011 with the implementation of a new pension multifund system and potential advancements in tax/fiscal reform, which will likely result in investment grade. This should continue to drive investment growth in the country. We are also likely to see improvements on the trade front, including restored relations with Venezuela and numerous pending trade agreements. With key FARC leaders out of the picture, Colombia will move a step closer to peace, which could yield additional dividends. We see the key risk as reform watered down in order to maintain political consensus. Growth characteristics and how they are changing Despite the structural improvements and macro-level progress, which is boosting investment, Colombia still faces challenges in achieving its full growth potential (JPM 2011e GDP growth at just 4.1%), primarily on the private consumption side. We believe this represents an opportunity for the Santos Administration, but major progress will take time, requiring a combination of job creation and investment diversity initiatives (via payroll tax reform and education/innovation programs). We also see access to credit as a key theme, with current caps limiting expansion in the lower-income segments (as well as for SMEs). Drivers of returns – Multiples and growth Colombia shares a similar dynamic with Chile, as supportive domestic flows (and limited foreign ownership) help prop up valuations (current premium well ahead of historical averages). This is furthered by local accounting rules and complicated cross-holding structures, not to mention hidden assets. While growth fundamentals may not justify current valuations, we see flow support continuing in 2011 on the back of the multifund switch and Andean stock exchange integration, which should keep valuations riding high. Recommendations We focus on selective growth opportunities at reasonable valuations (Pacific Rubiales, Millicom) and second-tierliquidity stocks that have lagged this year (Exito) but could benefit from supportive domestic/regional flows. We avoid the large/liquid names that have led 2010 outperformance (Bancolombia, Ecopetrol), especially as flows may be redirected to second tier names and a series of new listings.

Brian P. Chase AC
56 2 425 5245 [email protected] Inversiones y Asesorias Chase Manhattan Ltda. Bloomberg JPMA CHASE <GO>

Investment growth driving internal demand recovery

30.0 20.0 10.0 0.0 -10.0 -20.0 1Q08
Source: BanRep.

Internal Demand Inv estment Consumption

3Q08

1Q09

3Q09

1Q10

Exports likely to continue their gradual recovery

100% 50% 0% -50% Jan-08
Source: BanRep.

Import Grow th

Ex port Grow th

Jul-08

Jan-09

Jul-09

Jan-10

Jul-10

Colombia fwd P/E premium to LatAm above historical averages

3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0 94 96 97 98 99 00 01 02 03 04 05 06 07 09 10
Source: Datastream, Superfinanciera and J.P. Morgan.

Pension fund equity exposure to rise on multifunds / demographics
Estimated End-2010 AUM 1 0.0 2 90.6 3 0.0 Total 90.6 Pro Forma 2011 AUM 1 4.5 2 53.4 3 32.6 Total 90.6

Equity 0.0 39.4 0.0 39.4

% NM 43.5% NM 43.5%

Limit 0.0 40.8 0.0 40.8

% 20.0% 45.0% 70.0% 45.0%

Cushion 0.0 (1.4) 0.0 (1.4)

% NM -1.5% NM -1.5%

Equity 0.9 24.0 22.8 47.8

% 20.0% 45.0% 70.0% 52.8%

Limit 0.9 24.0 22.8 47.8

% 20.0% 45.0% 70.0% 52.8%

Cushion 0.0 0.0 0.0 0.0

% 0.0% 0.0% 0.0% 0.0%

Source: Superfinanciera and J.P. Morgan estimates.

36

Ben Laidler (1-212) 622-5252 [email protected]

Latin America Equity Research November 2010

Top picks and stocks to avoid
Price Top picks Pacific Rubiales Almacenes Exito Millicom Stocks to avoid Bancolombia Ecopetrol 31.7 23080.0 94.7 66.0 4360.0 Code PRE EXITO MICC CIB ECOPETL Rating OW N OW UW UW Mkt cap (US$MM) 9,070 4,520 10,460 13,419 102,932 P/E (x) 10E 35.2 55.5 14.2 20.0 22.1 11E 13.0 42.8 11.8 17.9 14.9 EPS 10E 0.90 415.58 6.69 3.30 197.47 11E 2.43 539.80 8.00 3.68 292.19 Div. yield 11E (%) 0% 0% 7.3% 1.8% 3.3% ROE 11E (%) 34.1% 4.3% 26.1% 18.4% 34.5%

Source: Bloomberg, J.P. Morgan estimates. Note: Share prices and valuations are as of October 28, 2010.

MSCI Colombia absolute and relative to EMF Index
2000 1800 1600 1400 1200 1000 800 600 400 200 0 Dec-02 Mar-04 May -05 Aug-06 Oct-07 Jan-09 Mar-10 Absolute Relativ e to MSCI EMF Index

MSCI fair value range
FWD PER (536) (2178)

PER

(1024)

(2693)

PBR

(897) (2725) (3357)

DY

(949)

0

500

1000

1500

2000

2500

3000

3500

Source: MSCI, Datastream.

Source: MSCI, IBES, Datastream, J.P. Morgan.

Currency outlook (COP/USD)
3,000 2,800 2,600 2,400 2,200 2,000 1,800 1,600 Dec 04 Apr 06 Jul 07 Nov 08 Consensus Feb 10 Jun 11 J.P. Morgan J.P. Morgan forecast: end Dec 10: 1800 end Mar 11: 1830 end Jun 11: 1850

MSCI EPS integer over time
200 170 140 110 80 2010 50 Feb-09 Jul-09 Dec-09 May -10 Oct-10 2011

Source: Bloomberg, J.P. Morgan.

Source: MSCI, Datastream.

37

Ben Laidler (1-212) 622-5252 [email protected]

Latin America Equity Research November 2010

Peru Strategy
Key country dynamics 1H11 will be dominated by the run-up to April presidential elections. Although we saw political overhang in 1H10, it has since started to dissipate as leftist candidate Humala is running 4th. The three currently leading candidates are all center-right, suggesting that it is unlikely we will see any meaningful changes to Peru’s market-oriented macroeconomic policy. We believe this will help cement the current economic consensus in the country. However, given Peru’s history of surprises on election day, we don’t rule out intensified noise and/or a renewed overhang leading up to the elections, especially considering that most polls don’t include rural areas, which tend to favor Humala. In addition, the emergence of Keiko Fujimori as the leading contender could reignite some historical social/political polemics. Growth characteristics and how they are changing After a return to Asia-level GDP growth in 2010 (JPMe GDP growth of 8.2%), we expect growth to taper off to 6% in 2011, mainly due to a pullback in stimulus and tighter monetary policy. However, with tame inflation, strong commodity prices, growing credit growh and the CB on hold, there is room for upside surprises. In addition, given strong economic ties to China, progress there will be a key determinant of the extent of growth. Drivers of returns – Multiples and growth Valuation premiums are a bit ahead of historical levels. However, they are still lower than other Andean peers’, primarily due to commodity exposure and liquid gaps (index top and bottom heavy). We believe that scarcity value in the liquid names (BAP, BVN, SCCO) is relevant and if polling data continue to suggest political continuity, it is likely to boost these names and possibly widen the premiums. We also see Peru as a beneficiary of Andean stock exchange integration, as domestic investors in Chile and Colombia look to diversify away from their home markets. Recommendations We focus on playing continued strong domestic growth and potentially positive election results through the only liquid domestic proxy, leading bank Credicorp. We also play precious metal momentum and our generally bullish stance on silver through Silver Wheaton. We avoid Buenaventura given strong outperformance recently, but acknowledge its reserve replacement track record and scarcity value as a liquid Peruvian name.

Brian P. Chase AC
56 2 425 5245 [email protected] Inversiones y Asesorias Chase Manhattan Ltda. Bloomberg JPMA CHASE <GO>

Poll figures have not changed much in past 15 months

30% 20% 10% 0% Jul-09
Source: Ipsos-Apoyo.

Fujimori

Castaneda

Toledo

Humala

Oct-09

Jan-10

Apr-10

Jul-10

Oct-10

Humala well behind in run-off scenarios

60% 40% 20% 0%

51% 28%

Fujimori Humala Castaneda

51% 29%

Scenario 1
Source: Ipsos-Apoyo.

Scenario 2

Recovery thus far led by investment

40.0 20.0 0.0 -20.0

Internal Demand Consumption

Inv estment

1Q06 3Q06 1Q07 3Q07 1Q08 3Q08 1Q09 3Q09 1Q10
Source: BCRP.

Peru fwd P/E premium ahead of historical averages

2.5 2.0 1.5 1.0 0.5 0.0 06 07 08 09 10

Source: Datastream and J.P. Morgan.

38

Ben Laidler (1-212) 622-5252 [email protected]

Latin America Equity Research November 2010

Top picks and stocks to avoid
Price Top picks Credicorp Silver Wheaton Stocks to avoid Buenaventura 124.7 27.6 51.7 Code BAP SLW BVN Rating N OW N Mkt cap (US$MM) 10,099 11,374 14,939 P/E (x) 10E 17.2 38.3 19.8 11E 15.2 21.0 14.6 EPS 10E 7.23 0.72 2.61 11E 8.20 1.31 3.55 Div. yield 11E (%) 1.7% 0% 0.9% ROE 11E (%) 22.1% 18.5% 26.5%

Source: Bloomberg, J.P. Morgan estimates. Note: Share prices and valuations are as of October 28, 2010.

MSCI Peru absolute and relative to EMF Index
1200 1000 800 600 400 200 0 Dec-02 Mar-04 May -05 Aug-06 Oct-07 Jan-09 Mar-10 Absolute Relativ e to MSCI EMF Index

MSCI fair value range
FWD PER (634) (3026)

PER

(1764)

(3495)

PBR

(970)

(2635)

DY

(751)

(2285)

0

500

1000 1500 2000

2500 3000 3500

4000 4500

Source: MSCI, Datastream.

Source: MSCI, IBES, Datastream, J.P. Morgan.

Currency outlook (PEN/USD)
3.5 3.3 3.1 2.9 2.7 2.5 Dec 04 Apr 06 Jul 07 Nov 08 Feb 10 Jun 11 J.P. Morgan forecast: end Dec 10: 2.78 end Mar 11: 2.84 end Jun 11: 2.82 Consensus J.P. Morgan

MSCI EPS integer over time
170 150 130 110 2010 90 70 Feb-09 Jul-09 Dec-09 May -10 Oct-10 2011

Source Bloomberg, J.P. Morgan.

Source: MSCI, Datastream.

39

Ben Laidler (1-212) 622-5252 [email protected]

Latin America Equity Research November 2010

Argentina Strategy
Key country dynamics All eyes will be on the political situation in 2011 ahead of October presidential elections. The outlook is highly uncertain as most candidates will likely have to reinvent themselves after the death of ex-President Nestor Kirchner. We see this as a potential opportunity for Cristina Fernandez Kirchner and Peronist dissidents (PJ) to unite, while key opposition groups (PRO and Radicals) now face the challenge of adjusting their campaign from a primarily anti-Kirchner stance to a more progressive form. We take a cautious stance and see a Peronist win as the base case but acknowledge that any move toward political/economic orthodoxy and subsequent reform would be a big catalyst for the market. Growth characteristics and how they are changing After accelerated growth in 2010 (JPMe GDP growth 8.5%), growth in 2011 will taper off (JPMe GDP growth 5.5%) as activity is curbed by rapidly rising inflation (JPMe proxy 25-30%). The use of fiscal resources should remain strong, especially in an election year and helped by what we expect to be robust agricultural commodity prices. Risks to growth (upside and downside) are largely tied to the global economy. Drivers of returns – Multiples and growth With the near-term “spread reduction trade” priced and the longer-term “election trade” accelerated on the death of Nestor Kirchner, we believe multiples are for the most part accurately reflecting the current balance of risks. We only see an opportunity for significant further multiple expansion in the event of a more orthodox political and economic environment, backed by a reform agenda. Although there is growing optimism for a move in that direction, we believe it is still too early to tell who will win in 2011 and whether or not a reform agenda can and will be implemented. Furthermore, while the focus is on politics, at the micro level we are likely to see slower growth and inflation thinning margins. Recommendations We focus on names with solid growth prospects in the coming year at attractive valuations that will likely benefit from the immediate political situation (Clarin and Tenaris). We avoid utilities, such as Edenor, which face an uncertain potential reform agenda. That said, the shares are likely to move on any signs of political progress.

Brian P. Chase AC
56 2 425 5245 [email protected] Inversiones y Asesorias Chase Manhattan Ltda. Bloomberg JPMA CHASE <GO>

Can Cristina maintain her currently positive image?

60.0% 40.0% 20.0% 0.0% J-08 M-08 S-08 J-09 M-09 S-09 J-10 M-10 S-10

Source: Management y Fit and J.P. Morgan.

Voting intentions suggest the 2011 race is wide open

50% 40% 30% 20% 10% 0%

39% 25% 6% 6%

5%

4%

3%

3%

2%

4%

Source: Management y Fit and J.P. Morgan.

Inflationary pressures starting to rise

30.00 20.00 10.00 0.00

J-04 S-04 M-05 J-06 S-06 M-07 J-08 S-08 M-09 J-10 S-10
Source: Indec and J.P. Morgan.

40

Co bo s Al fo ns in M D e acri Na rva ez Du ha lde Sc R e ioli ute m an n Ot he Un r de cid ed

CF K

Indec

Priv ate

Ben Laidler (1-212) 622-5252 [email protected]

Latin America Equity Research November 2010

Top picks and stocks to avoid
Price Top picks Grupo Clarin Tenaris Stocks to avoid Edenor 10.0 41.3 10.3 Code GCLA TS EDN Rating OW OW UW Mkt cap (US$MM) 1,437 26,237 494 P/E (x) 10E 3.4 20.1 13.3 11E 2.5 16.0 12.2 EPS 10E 2.92 2.06 0.77 11E 4.00 2.59 0.84 Div. yield 11E (%) 0% 0.9% 0% ROE 11E (%) 12.7% 14.8% 7.0%

Source: Bloomberg, J.P. Morgan estimates. Note: Share prices and valuations are as of October 28, 2010.

MSCI Argentina absolute and relative to EMF Index
1000 900 800 700 600 500 400 300 200 100 0 Dec-02 Mar-04 May -05 Aug-06 Oct-07 Jan-09 Mar-10 Absolute Relativ e to MSCI EMF Index

MSCI fair value range
FWD PER (4509706) PER (21956168) (66024799) PBR (13335147) ` (33410334) (64068241)

DY

(15631857)

(50289622)

400000

15400000

30400000

45400000

60400000

Source: MSCI, Datastream.

Source: MSCI, IBES, Datastream, J.P. Morgan

Currency outlook (ARS/USD)
4.6 4.4 4.2 4.0 3.8 3.6 3.4 3.2 3.0 2.8 Dec 04 Apr 06 Jul 07 Nov 08 Feb 10 Jun 11 Consensus J.P. Morgan forecast: end Dec 10: 4.05 end Mar 11: 4.15 end Jun 11: 4.15 J.P Morgan

MSCI EPS integer over time
110 100 90 80 70 60 50 Feb-09 Jul-09 Dec-09 May -10 Oct-10 2010 2011

Source: Bloomberg, J.P. Morgan.

Source: MSCI, Datastream.

41

Ben Laidler (1-212) 622-5252 [email protected]

Latin America Equity Research November 2010

42

Ben Laidler (1-212) 622-5252 [email protected]

Latin America Equity Research November 2010

Sectors

Ben Laidler (1-212) 622-5252 [email protected]

Latin America Equity Research November 2010

Agribusiness, Pulp and Paper
Key country dynamics Grain prices seem to be well supported at current levels even after a 30-60% rally since early July. Robust Chinese demand along with concerns over supply, especially in light of a La Nina year, should keep risk premiums high. As J.P.Morgan’s Soft Commodity Strategy team highlights, there’s a real possibility of corn prices hitting $7/bu in ’11, which would reverberate through the rest of the grain complex. Sugar prices continue to confound, having gone from 30c/lb to 13c/lb and back again in the course of 2010, with the only constant volatility. Any shortfall in Indian and Brazilian production estimates could take sugar prices higher still. That being said, we believe any supply squeeze would be relatively temporary and see sugar prices settling at closer to 15-18c/lb longer term. We remain structural bulls on pulp but cautious on 12M outlook. Pulp prices as of October were already 5% below their June peak, and we expect another ~17% decline through 2011 as pulp supply recovers from market- and weather-related downtime in ’09-’10 and as end demand remains lackluster. That being said, any significant improvement in developed world employment should lead to improved paper demand and poses upside risk to our outlook. Growth characteristics and how they are changing Growth in 2011 for our covered names will be more a function of commodity prices than of capacity expansions. Longer term, we see all of our companies as having a global cost advantage and expanding production through greenfields, debottlenecking and M&A. Drivers of returns – Multiples and growth We are not expecting multiples rerating as we do not see structural changes justifying it. Multiples should continue to reflect cyclical trends (peak multiples on trough earnings and vice versa). Near-term growth will remain dependent on commodity prices. Recommendations We highlight the Brazilian sugar and ethanol producer Sao Martinho (SMTO3/OW) as the best play on higher near-term sugar prices. We are UW on Fibria (FIBR3/FBR) as we believe pulp sector momentum will remain negative in ’11 and valuations are not yet attractive enough to justify owning at this point of the cycle.

Debbie Bobovnikova, CFA AC
(1-212) 622-3489 [email protected] J.P. Morgan Securities LLC Bloomberg JPMA BOBOVNIKOVA <GO>

Pulp inventories vs. prices
950 850 485046 5047 44 43 41 3534 34 32 30 29 2928 2726 27 28 27 2625 2625 25 50 45 40 35 30 25 20 Jan-08 Mar-08 May-08 Jul-08 Sep-08 Nov-08 Jan-09 Mar-09 May-09 Jul-09 Sep-09 Nov-09 Jan-10 Mar-10 May-10 Jul-10 Sep-10 Day s Inv entory (RHS)
Source: PPPC, RISI, J.P. Morgan.

36 34 750 3434 313232 650 550 450

BEK, $/tonne to Europe

Sugar stock/use vs. prices, 00/01-10/11
25 20 15 10 5 0 00/01 02/03 Price ($c/lb)
Source: USDA, Bloomberg and J.P. Morgan.

0% 10% 20% 30% 40% 04/05 06/07 08/09 10/11 Stock-to-Use (%)

Cotton stock/use vs. prices, 00/01-10/11
100 75 50 25 0 00/01 02/03 04/05 06/07 08/09 10/11 0% 20% 40% 60% 80%

Price ($/lb)
Source: USDA, Bloomberg and J.P. Morgan.

Stock-to-Use (%)

Soy stock/use vs. prices, 00/01-10/11
15 10 5 0 00/01 02/03 Price ($/bu)
Source: USDA, Bloomberg and J.P. Morgan.

0% 10% 20% 30% 04/05 06/07 08/09 10/11 Stock-to-Use (%)

44

Ben Laidler (1-212) 622-5252 [email protected]

Latin America Equity Research November 2010

Top picks and stocks to avoid
Price (R$) Top picks Sao Martinho Stocks to avoid Fibria 23.00 30.03 Code SMTO3 FIBR3 Rating OW UW Mkt cap (US$MM) 1,529 8,266 P/E (x) 10E* 22 17 11E* 9 97 EPS (R$) 10E* 1.06 1.76 11E* 2.55 0.31 Div. yield 11E* (%) 1.2% 0% ROE 11E* (%) 11.6% 5%

Source: Bloomberg, J.P. Morgan estimates. Note: SMTO3 share price and valuation are as of November 8, 2010. Note: * CY10E = SMTO FY11E, CY11E = SMTO FY12E. FIBR3 share price and valuation are as of October 28, 2010.

Paper and pulp absolute and relative to MSCI LatAm
500 450 400 350 300 250 200 150 100 50 0 Dec-02 Mar-04 May -05 Aug-06 Oct-07 Jan-09 Mar-10 Absolute Relativ e to MSCI EMF Index

Paper and pulp EPS integer
140 130 120 110 100 90 80 70 60 Feb-09 Jul-09 Dec-09 May -10 Oct-10 2010 2011

Source: MSCI, Bloomberg, IBES, Datastream, J.P. Morgan.

Source: MSCI, Bloomberg, IBES, Datastream, J.P. Morgan.

Paper and pulp 12 mth fwd PE
45 37 29 21 13 5 95 97 98 99 00 PE 01 02 03 Av g 04 05 06 07 08 10

Paper and pulp trailing PB
2 1.7 1.4 1.1 0.8 0.5 95 97 98 99 00 PB 01 02 03 Av g 04 05 06 07 08 10

+1SD

-1SD

+1SD

-1SD

Source: MSCI, Bloomberg, IBES, Datastream, J.P. Morgan.

Source: MSCI, Bloomberg, IBES, Datastream, J.P. Morgan.

45

Ben Laidler (1-212) 622-5252 [email protected]

Latin America Equity Research November 2010

Sao Martinho
SMTO.SA www.saomartinho.ind.br
Company description São Martinho is a top-five sugar and ethanol producer in Brazil. In the 2009/10 crop year, São Martinho crushed 13 mt of sugarcane, of which 65% was owned (40% came from third parties) and 40% was destined for sugar production (60% to ethanol). São Martinho operates 3 mills, 2 in São Paulo state and one in Goiás state. The company’s Goiás unit (Boa Vista mill) started up in the 2009 crop and will exclusively produce ethanol and electricity. São Martinho (SMTO3 BZ) shares are listed on Bovespa’s Novo Mercado. Investment case We see Sao Martinho as the best way to gain exposure to stronger global sugar and Brazilian ethanol prices. Given the diversification of the rest of its listed domestic peers, SMTO is now the most exposed operationally to S&E. In addition, we believe the company has interesting partnerships with both Petrobras (rated Neutral by JPM LatAm oil & gas analyst Sergio Torres) and with biotech producers, the latter potentially leading to new revenue streams. Potential for earnings upgrades Given the sharp rally in sugar and ethanol prices since midyear, there should be significant upside to consensus estimates if it is sustained. Our FY11E EBITDA of R$493m is 8% above consensus. Prospects for re-/derating We see Sao Martinho as a well-managed company, with good capital discipline and corporate governance. On the other hand, lack of share liquidity is a concern for many investors, as is the volatility of the sector, which we do not foresee changing in the near term. Hence we are not looking for a rerating. Price target and risks We have an OW rating on SMTO3 and a price target of R$29/sh for Dec.’11 based on a mix of: (1) DCF of R$27.5 using normalized sugar prices of 15c/lb and BRL of R$2.05 (equivalent to sugar prices of 18c/lb at spot BRL) and a WACC of 9.3% which incorporates a risk premium for lower share liquidity; (2) 5x multiple on FY12 EBITDA resulting in R$28.3; (3) replacement value analysis leading to R$27.1; and (4) recent M&A multiples of $100/tonne implying FV of R$36.1. Key risks to our rating and estimates on SMTO are: (1) evolution of sugar and ethanol prices; (2) stronger-than-expected BRL; (3) operational problems; (4) worse-than-expected economics of farnesene JV.
Company Data Price (R$) Date Of Price 52-week Range (R$) Mkt Cap (R$ mn) Fiscal Year End Shares O/S (mn) Price Target (R$) Price Target End Date Sao Martinho S.A. (SMTO3.SA;SMTO3 BZ) 2010A EPS Reported FY (R$) 0.82A Revenues FY (R$ mn) 1,183A EBITDA FY (R$ mn) 374A 2011E 1.06 1,293 493

Overweight
R$23.00 (08 Nov 10)

Price Target: R$29
End Date: Dec 2011 Brazil Agribusiness
Debbie Bobovnikova AC
(1-212) 622-3489 [email protected] J.P. Morgan Securities LLC Bloomberg JPMA BOBOVNIKOVA <GO>

Price performance
R$
24 20 R$ 16 12
Nov-09 Feb-10 May-10 Aug-10 Nov-10

Source: Bloomberg and J.P. Morgan.

Performance
1M Absolute (%) Relative (%)
Source: Bloomberg.

3M 46.9 18.1

12M 23.7 14.1

23.4 7.6

Priced as of the close on November 8, 2010; see our note out November 9 for further details.

23.00 08 Nov 10 23.00 12.55 2,599.00 Mar 113 29.00 31 Dec 11

2012E 2.55 1,562 646

2013E 2.04 1,427 535

2014E 1.79 1,386 488

Source: Company data, Bloomberg, J.P. Morgan estimates.

46

Ben Laidler (1-212) 622-5252 [email protected]

Latin America Equity Research November 2010

Sao Martinho: Summary of Financials
Income Statement Revenues Cost of goods sold SG&A Depreciation EBITDA EBITDA margin Financial income Financial expense FX & Monetary gains (losses) Other Nonoperarting income Equity income EBT Taxes Minority interest Extraordinary Net income Net income margin EPS Revenue growth EBITDA growth Net income growth FCF growth Operating Data, Ratios Capex Change in working capital Free cash flow Dividends Dividend % of net income Capex/depreciation CAPEX/sales Working capital Working capital/sales Shipments Avg price/t Cash COGS/t EBITDA/t Shipments chg Avg price/t chg Cash COGS/t chg EBITDA/t chg Capex Maintenance Expansion FY10A 1,183 928 412 262 374 31.6% 105 171 (3) 0 0 128 (32) 0 0 93 7.9% 0.82 52.8% 58.2% (233.4%) FY10A 313 12 35 18 19.7% 1.2 26.4% 242 1,906 621 353 196 25.9% 621 353 25.7% 313 217 96 FY11E 1,293 947 427 286 493 38.1% 14 69 0 0 0 163 (43) 0 0 120 9.3% 1.06 9.3% 32.0% 29.1% FY11E 174 (49) 202 15 12.7% 0.6 13.5% 290 1,781 726 368 277 (6.6%) 726 368 41.2% 174 114 60 FY12E 1,562 987 372 222 646 41.4% 42 43 0 384 (96) 0 288 18.4% 2.55 20.8% 31.0% 139.4% FY12E 320 10 239 30 10.4% 1.4 20.5% 280 1,936 807 395 334 8.7% 807 395 20.5% 320 160 160 FY13E 1,427 970 366 223 535 37.5% 54 46 0 307 (77) 0 230 16.2% 2.04 (8.7%) (17.1%) (20.0%) FY13E 282 4 189 72 31.3% 1.3 19.8% 276 1,917 744 390 279 (1.0%) 744 390 (16.3%) 282 167 115 FY14E 1,386 980 378 230 488 35.2% 66 53 0 269 (67) 0 202 14.6% 1.79 (2.9%) (8.9%) (12.3%) FY14E 290 3 145 58 28.5% 1.3 21.0% 272 2,005 691 374 243 4.6% 691 374 (12.9%) 290 175 116 Balance Sheet Cash Accounts receivable Inventories Other current assets Net PP&E Other assets Total assets Short-term debt Accounts payable Other current liabilities Long-term debt Deferred taxes Other liabilities Total liabilities Minority interest Shareholders' equity Liabilities + Equity FY10A 131 42 218 137 2,548 137 3,321 327 76 79 628 225 296 1,631 0 1,689 3,321 FY11E 708 40 293 127 2,426 127 3,825 327 80 90 619 219 296 1,632 0 2,193 3,825 FY12E 912 48 287 127 2,525 127 4,131 279 92 90 663 219 296 1,640 0 2,491 4,130 FY13E 1,117 44 285 127 2,584 127 4,388 253 90 90 777 219 296 1,725 0 2,663 4,388 FY14E 1,282 43 283 127 2,645 127 4,612 217 90 90 891 219 296 1,803 0 2,808 4,611

Net debt Net Debt/Capital Debt/Capital Net Debt/EBITDA Valuation, Macro EV/EBITDA P/E P/BV EV/tonne FCF yield Dividend yield ROE Net income margin Net revenue/Assets Assets/Equity ROIC Shares ADRs DCF WACC Perpetual Growth Cost of equity Cost of debt

825 31.2% 28.8% 2.2 FY10A 9.2 27.9 1.5 263 1.4% 5.5% 7.9% 35.6% 2.0 3.6% 113 27.47 9.3% 2.2% 11.8% 4.6%

239 7.6% 24.7% 0.5 FY11E 5.8 21.6 1.2 222 7.8% 5.5% 9.3% 33.8% 1.7 5.4% 113 -

30 0.9% 22.8% 0.0 FY12E 4.1 9.0 1.0 194 9.2% 11.6% 18.4% 37.8% 1.7 11.1% 113 -

(87) (2.4%) 23.5% (0.2) FY13E 4.7 11.3 1.0 181 7.3% 8.7% 16.2% 32.5% 1.6 8.0% 113 -

(175) (4.5%) 24.0% (0.4) FY14E 5.0 12.9 0.9 168 5.6% 7.2% 14.6% 30.1% 1.6 6.5% 113 -

Source: Company reports and J.P. Morgan estimates. Note: R$ in millions (except per-share data). Fiscal year ends Mar

47

Ben Laidler (1-212) 622-5252 [email protected]

Latin America Equity Research November 2010

Fibria
FIBR3.SA www.fibria.com.br
Company description Fibria was formed by the merger of VCP and Aracruz and is the leading market pulp producer in the world, with 11% global market share. It has 5.6mt of market pulp capacity at 5 sites in Brazil along with 540,000 ha of eucalyptus plantations. The company is controlled by the Votorantim Group (29%) and by the local development bank, BNDES (30%), and has recently migrated to the Novo Mercado level of the Bovespa, the highest corporate governance standard in Brazil. Investment case Despite our structurally optimistic view on the sector, we continue to see downside to near-term pulp prices and believe that neither sector momentum nor company valuations provide reasons for owning the stock at this point. Potential for earnings upgrades Fibria is highly sensitive to changes in pulp prices given its operational focus (>90% of profits) and levered balance sheet (4.7x ND/EBITDA as per last reported balance sheet). Every $30/t move in the pulp price leads to a 10% change in EBITDA. Our sense is that consensus estimates are assuming flat pulp prices for ’11, suggesting downside risk to estimates if we are right on the pulp cycle outlook. Prospects for re-/derating Cyclical stocks tend to trade at higher multiples on trough earnings and vice versa. Given our expectation of still an above average cyclical year in ’11 for prices (BEK avg of $800/t vs. normalized $750), we believe the stock should trade at or below a normalized multiple of ~8x. Price target and risks We rate Fibria UW and have a R$26 ($16) Dec-11 price target. Our price target is based on: (1) DCF analysis using 9.6% WACC (R$24/sh); (2) 8x target multiple on ’11E EBITDA (R$24/sh) and (3) replacement value (R$30.5/sh). Key upside risks to our UW rating include: (1) higher pulp prices; (2) weaker BRL; (3) potential divestiture of paper assets.
Fibria Celulose S.A. (FIBR3.SA;FIBR3 BZ) Company Data Price (R$) Date Of Price 52-week Range (R$) Mkt Cap (R$ mn) Fiscal Year End Shares O/S (mn) Price Target (R$) Price Target End Date 30.03 28 Oct 10 41.50 22.98 14,052.09 Dec 468 26.00 31 Dec 11 EBITDA FY (R$ mn) Bloomberg EBITDA FY (R$ mn) EPS Reported FY (R$)
Source: Company data, Bloomberg, J.P. Morgan estimates.

Underweight
R$30.03 (28 Oct 10)

Price Target: R$26
End Date: Dec 2011 Brazil Pulp and Paper
Debbie Bobovnikova, CFA AC
(1-212) 622-3489 [email protected] J.P. Morgan Securities LLC Bloomberg JPMA BOBOVNIKOVA <GO>

Price Performance
40 R$ 30 20
Oct-09 Jan-10 Apr-10 Jul-10 Oct-10

Source: Bloomberg.

Performance
1M Absolute (%)
Source: Bloomberg.

3M 5.8

12M 19.9

8.2

2009A 1,472 1,580 1.44

2010E 2,806 2,955 1.76

2011E 2,620 3,454 0.31

48

Ben Laidler (1-212) 622-5252 [email protected]

Latin America Equity Research November 2010

Fibria: Summary of Financials
Income Statement Revenues Cost of goods sold SG&A Depreciation EBITDA EBITDA margin Financial income Financial expense FX & Monetary gains (losses) Other Nonoperarting income Equity income EBT Taxes Minority interest Extraordinary Net income Net income margin EPS Revenue growth EBITDA growth Net income growth FCF growth Operating Data, Ratios Capex Change in working capital Free cash flow Dividends Dividend % of net income Capex/depreciation CAPEX/sales Working capital Working capital/sales Shipments Avg price/t Cash COGS/t EBITDA/t Shipments chg Avg price/t chg Cash COGS/t chg EBITDA/t chg Capex Maintenance Expansion FY09A 6,000 639 1,248 1,472 24.5% 487 (1,492) 2,775 0 0 1.44 FY09A 1,609 (121) (2,038) 1,609 FY10E 7,173 657 1,466 2,806 39.1% 143 (821) (22) 0 0 1.76 FY10E 1,247 200 1,467 1,247 FY11E 7,142 683 1,330 2,620 36.7% 20 (730) (435) 0.31 FY11E 1,400 50 560 1,400 FY12E 7,204 694 1,405 2,747 38.1% 51 (750) (362) 0.60 FY12E 2,409 (16) (377) 2,409 FY13E 7,853 754 1,534 3,019 38.4% 38 (766) (296) 0.99 FY13E 1,949 (71) 271 1,949 Balance Sheet Cash Accounts receivable Inventories Other current assets Net PP&E Other assets Total assets Short-term debt Accounts payable Other current liabilities Long-term debt Deferred taxes Other liabilities Total liabilities Minority interest Shareholders' equity Liabilities + Equity FY09A 3,898 842 948 671 28,324 94 18,290 10,015 FY10E 327 829 1,047 412 28,239 159 12,641 15,579 FY11E 851 857 1,027 398 28,827 158 12,685 16,124 FY12E 625 865 1,027 398 29,613 160 12,898 16,696 FY13E 906 942 1,077 398 30,437 174 13,080 17,338 -

Net debt Net Debt/Capital Debt/Capital Net Debt/EBITDA Valuation, Macro EV/EBITDA P/E P/BV EV/tonne FCF yield Dividend yield ROE Net income margin Net revenue/Assets Assets/Equity ROIC Shares ADRs DCF WACC Perpetual Growth Cost of equity Cost of debt

10,817 43.7% 6.4 FY09A 12.9 21.3 7.7% 9.8% 5.6% 3.8% -

10,387 39.5% 3.7 FY10E 8.6 17.5 (6.7%) 32.6% 5.3% 5.6% -

9,864 36.7% 3.8 FY11E 9.0 98.7 8.6% 118.6% 0.9% 4.6% -

10,311 37.3% 3.8 FY12E 8.7 51.1 2.6% 229.0% 1.7% 4.7% -

10,155 35.7% 3.4 FY13E 7.9 31.1 8.3% 376.6% 2.7% 5.1% -

Source: Company reports and J.P. Morgan estimates. Note: R$ in millions (except per-share data). Fiscal year ends Dec

49

Ben Laidler (1-212) 622-5252 [email protected]

Latin America Equity Research November 2010

Financials
Key country dynamics We continue to see mostly favorable credit dynamics in the region. In Brazil, Peru, Chile, and Argentina, we believe that credit growth should remain healthy in 2011. We are forecasting loan growth of 17%-19% for the banks we cover in these markets. Asset quality trends should also continue improving, albeit at a more moderate pace than in 2010. In addition, we are seeing rapidly improving credit trends in Mexico and Colombia, which we expect to continue. However, continued low benchmark rates could pose risk to NIMs in Mexico. In contrast with the positive credit trends, we have a cautious view of the Brazilian merchant acquiring business. We believe pressure on MDRs and POS rental rates should be meaningful in the coming years. What could be the positive drivers for banks? Operating dynamics remains favorable for Brazilian banks. We see good double-digit earnings growth driven by 15%-20% loan growth, some efficiency improvements, and lower credit losses. For Banorte, loan growth will likely re-emerge and delinquency rates should continue declining, thereby leading to healthy earnings growth of 26.5% in 2011, according to our estimates. We see continued high-20% ROEs for Santander Chile and Banco de Chile in an environment of moderate inflation and good economic growth. Bancolombia should generate ROE expansion (albeit from a relatively low high-teen range) as loan growth picks up and, possibly, interest rates rise. At Credicorp, strong loan growth and cost controls should offset lower trading gains and drive 13% earnings growth in 2011. Drivers of returns – Multiples and growth When regressing expected 2011 and 2012 ROEs against price-to-book value multiples for Latin American banks in our coverage universe, Santander Brasil, Itau Unibanco, Bradesco, and Banco do Brasil trade roughly 5%-20% below the fair price to book value predicted by the regression analysis. We expect a convergence of multiples across the region as the Brazilian banks continue posting good results and some of the “macro” overhangs related to the sector (election cycle, equity offerings) have been removed. Recommendations Overweight: Santander Brasil (top pick), Banco Bradesco, Banco Itaú Unibanco, Grupo Financiero Galicia, Bladex. Avoid: Grupo Financiero Inbursa, Bancolombia, Redecard, and Cielo.

Saul Martinez AC
(1-212) 622-3602 [email protected] J.P. Morgan Securities LLC Bloomberg JPMA MARTINEZ <GO>

Regression of risk-adjusted ROE to price-to-book value multiples: Brazilian banks are still trading below the regression line
6.0 5.0 4.0 P /B V 3.0 2.0 1.0 0.0 0.0% 2.0% 4.0% 6.0% 8.0% 10.0% 12.0% 14.0% 16.0% 18.0% 20.0% Bancolombia Macro GFGalicia GFInbursa GFNorte Banco do Brasil Santander Brasil Bladex Bradesco Credicorp Itau Unibanco

Santander Chile Banco de Chile

Risk Adjusted ROE (2011-2012)

Source: J.P. Morgan and Bloomberg, share price data as of October 28, 2010. Riskadjusted ROE calculated by subtracting est COE from forecast ROE in 2011 and 2012.

Share price performance in local currency – YTD: Latin American financials ex-Brazil were the main outperformers
81%

57% 56% 42% 42% 40% 38% 36% 29% 27% 22% 17%

13% 13% 10% 10%

7%

6%

6%

3%

3%

-5% -21% Itau Unibanco KBW bank Index Santander Brasil Santander Chile Inbursa Argentina Index Compartamos Porto Seguro Banco do Brasil Bradesco Banorte Banco de Chile Bancolombia Peru Index Chile Index Mexico Index Redecard Macro Credicorp Ibovespa Bladex Cielo S&P

Source: Bloomberg. Share price data through October 28, 2010. Credicorp’s share price is adjusted for the performance of the currency (Nuevo Sol).

50

Ben Laidler (1-212) 622-5252 [email protected]

Latin America Equity Research November 2010

Top picks and stocks to avoid
Price Top picks Santander Brasil Bradesco Stocks to avoid Bancolombia (ADR) R$24.57 R$34.96 $66.04 Code SANB11 BBDC4 CIB US Rating OW OW UW Mkt cap (US$MM) 54,565 76,854 13,007 P/E (x) 10E 15.0 13.5 20.0 11E 10.7 12.2 18.0 EPS 10E R$1.62 R$2.59 $3.30 11E R$2.13 R$2.88 $3.68 Div. yield 11E (%) 5.2 2.9 1.8 ROE 11E (%) 14.4 21.2 18.4%

Source: Bloomberg, J.P. Morgan estimates. Note: Share prices and valuations are as of October 28, 2010.

Financials absolute and relative to MSCI LatAm
1200 1000 800 600 400 200 0 Dec-02 Mar-04 May -05 Aug-06 Oct-07 Jan-09 Mar-10 Absolute Relativ e to MSCI EMF Index

Financials EPS integer
160 150 140 130 120 110 100 90 80 Feb-09 Jul-09 Dec-09 May -10 Oct-10 2010 2011

Source: MSCI, Bloomberg, IBES, Datastream, J.P. Morgan.

Source: MSCI, Bloomberg, IBES, Datastream, J.P. Morgan.

Financials 12 mth fwd PE
16 14 12 10 8 6 4 95 97 98 99 00 PE 01 02 03 Av g 04 05 06 07 08 10

Financials trailing PB
4.5 4 3.5 3 2.5 2 1.5 1 0.5 95 97 98 99 00 PB 01 02 03 Av g 04 05 06 07 08 10

+1SD

-1SD

+1SD

-1SD

Source: MSCI, Bloomberg, IBES, Datastream, J.P. Morgan.

Source: MSCI, Bloomberg, IBES, Datastream, J.P. Morgan.

51

Ben Laidler (1-212) 622-5252 [email protected]

Latin America Equity Research November 2010

Banco Santander Brasil
SANB11.SA www.santander.com.br
Company description Santander Brasil is Brazil’s 3rd-largest private bank, based on assets, loans, deposits. The bank serves individuals and corporates and has grown through acquisitions, notably of Banespa, in November 2000 and Banco Real from ABN AMRO in 2008. The bank IPO’d in October 2009. As of Sept 2010, the bank has assets of R$357bn, loans of R$153bn and equity of R$73.0 bn. Investment case As a leading financial institution, Santander should benefit from growth in penetration. In addition, earnings growth driven by volumes, cost saves, lower credit losses, coupled with capital optimization, should drive meaningful ROE expansion. We see adjusted IFRS ROE growing to 16.4% by 2012 from 1112% now. This should see P/BV expansion from its current 1.7x BV. Our 2011 price target of R$33 is based on a target 11E book value multiple of 2.2x. Potential for earnings upgrades There is a lack of consensus about which accounting standards sell-side analysts base financial projections for Santander Brasil on (IFRS or Brazilian GAAP). Hence, it is difficult to assess the extent earnings upgrades are possible. Our forecasts and the company’s primary reporting standard is IFRS. We forecast IFRS earnings growth of 28.8 % in 2011 and 17.3% in 2012. How much is already priced in? We do not believe the multiyear ROE expansion is adequately priced. In 2012, we expect the bank to generate adjusted IFRS ROE of 16.4%. Based on current ROEs vs P/BV multiples for publicly traded Latin American banks in our coverage universe, this ROE is consistent with a P/BV multiple of 2.1x. Price target and risks YE11 R$33/share, US$18/ADR (at JPM’s 2011 FX of R$1.8). We use a residual income model & regression of risk-adjusted ROE to P/BV. Key risks: resumption of asset quality deterioration; failure to realize cost synergies from Banco Real merger; slower loan growth recovery; business disruptions due to IT integration issues; negative ruling from federal government on deductibiltiy of goodwill amortization for tax purposes; negative actions taken by Santander Spain that could impact the growth and profitability of Santander Brasil.
Company Data Price (R$) Date Of Price 52-week Range (R$) Mkt Cap (R$ mn) Fiscal Year End Shares O/S (mn) Price Target (R$) Price Target End Date

Overweight
R$24.57 (28 Oct 10)

Price Target: R$33
End Date: Dec 2011 Brazil Financial Institutions
Saul Martinez AC
(1-212) 622-3602 [email protected] J.P. Morgan Securities LLC Bloomberg JPMA MARTINEZ <GO>

Price Performance
26 24 R$ 22 20 18
Oct-09 Jan-10 Apr-10 Jul-10 Oct-10

Source: Bloomberg.

Performance
1M Absolute (%) Relative (%)
Source: Bloomberg.

3M 12.7 -1.3

12M 9.0 -13.2

13.8 7.3

24.57 28 Oct 10 25.99 17.93 93,376.32 Dec 3,800 33.00 31 Dec 11

Banco Santander (Brasil) S.A. (SANB11.SA;SANB11 BZ) 2009A 2010E EPS - Recurring (R$) Q1 (Mar) 0.21 0.37A Q2 (Jun) 0.44 0.38A Q3 (Sep) 0.33 0.42A Q4 (Dec) 0.31 0.46A FY 1.31 1.62A EPS Reported FY (R$) 1.70 1.99A

2011E

2012E

2.13 2.56

2.57 3.00

Source: Company data, Bloomberg, J.P. Morgan estimates. Please note that EPS Recurring stands for EPS IFRS adjusted and EPS Reported stands for EPS IFRS.

52

Ben Laidler (1-212) 622-5252 [email protected]

Latin America Equity Research November 2010

Banco Santander (Brasil) S.A.: Summary of Financials
Income Statement Interest Income Interest Expense Net interest Income LL Provision Net Interest Income after Provision Fee Income Other Non Interest Income Personnel Expenses Non Interest Expenses Other Non Interest Expense Non-Operating Income/(Expenses) Non recurring income (losses) Pretax income Taxes Statutory Profit Sharing Minority Interests Extraordinary Net Income Recurring Net Income Dividends Operating Data, Ratios Per share analysis EPS EPADR BVPS Dividend per Share BVADR Dividend/ADR Growth EPS growth Fee income Non interest expenses Loan Deposits Ratios NIM Fees/Expenses PDL/Loans LL Reserves/Total Loans LL Reserves/NPL Cost/Income Loans/Deposits Loans/Assets Equity/Assets Dividend Payout FY09A FY10E FY11E FY12E FY13E Balance Sheet Securities Cash and Due from Banks Interbank Investment Loan and Leasing Operatings Other Receivables and Assets Permanent Asset Total assets Total deposits Demand deposits Savings deposits Interbank deposits Time deposits Interest bearing liabilities Other Current Liabilities Total Liabilities Shareholders' equity FY09A 82,816 27,269 152,163 17,984 35,739 315,971 170,636 27,178 48,893 246,707 69,265 FY10E 85,319 58,697 178,077 17,715 36,319 376,127 215,669 30,438 57,318 303,426 72,695 FY11E 98,828 73,371 210,876 19,521 32,964 435,560 246,667 33,273 79,680 359,619 75,934 FY12E FY13E 110,688 81,442 248,134 21,511 32,964 494,739 280,696 36,253 97,769 414,717 80,015 40,436 40,480 47,213 53,179 (18,269) (16,555) (19,862) (22,113) 22,167 23,925 27,351 31,067 (9,983) (8,520) (9,612) (10,818) 12,184 15,405 17,739 20,249 6,238 6,991 7,969 9,005 2,874 1,583 1,693 1,784 (10,947) (11,241) (11,803) (12,747) (5,615) (3,214) (3,131) (3,445) 3,403 240 150 150 8,137 9,763 12,616 14,997 (2,629) (2,190) (2,902) (3,599) 51 30 0 0 5,508 7,573 9,715 11,397 5,457 7,543 9,715 11,397 1,575 3,939 4,857 5,699 FY09A FY10A FY11E

FY12E FY13E Valuation, Macro P/E P/BV Dividend yield ROE ROA Shares ADRs

FY09A 14.5 1.8 1.7% 9.9% 1.5% 3,800 -

FY10A 12.3 1.7 4.2% 11.6% 1.9% 3,800 -

FY11E 9.6 1.6 5.2% 14.4% 2.1% 3,800 -

FY12E FY13E 8.2 1.5 6.1% 16.4% 2.2% 3,800 -

1.31 0.87 13.76 0.41 7.88 0.21

1.62 0.92 14.34 1.04 8.20 0.59

2.13 1.18 15.20 1.28 8.21 0.71

2.57 1.38 16.27 1.50 8.47 0.80

-

3.2% 5.5% (5.1%) (1.3%) (6.4%)

38.2% 12.1% 2.7% 15.9% 26.4%

28.8% 14.0% 5.0% 18.4% 14.4%

17.3% 13.0% 8.0% 17.7% 13.8%

-

9.6% 57.0% 6.7% 92.5% 101.7% 38.5% 89.2% 48.6% 21.9% 28.8%

9.4% 62.2% 5.7% 5.8% 102.0% 36.4% 82.6% 49.1% 19.3% 52.2%

9.2% 67.5% 5.1% 5.2% 102.0% 33.4% 85.5% 50.2% 17.4% 50.0%

8.9% 70.6% 4.8% 5.7% 102.0% 31.8% 88.4% 52.0% 16.2% 50.0%

-

Source: Company reports and J.P. Morgan estimates. Adjusted IFRS figures. Note: R$ in millions (except per-share data). Fiscal year ends Dec.

53

Ben Laidler (1-212) 622-5252 [email protected]

Latin America Equity Research November 2010

Bancolombia
CIB www.grupobancolomia.com
Company description Bancolombia is Colombia’s largest bank (23% loan share). It also owns Banagricola, El Salvador’s largest bank (31% share). The company also provides financial products in Panama, Peru, Brazil, the US and Spain. Investment case Bancolombia is the leader in the underpenetrated Colombian and El Salvador banking systems. Economic activity is improving and rates are unsustainably low in Colombia and likely to increase, benefiting earnings and profitability. We forecast local currency earnings growth of 19.2%, on average, from 2010 to 2012, and for ROEs to expand to 19.2% in 2012 from 17.9% in 2010. Newly elected President Santos has a market-friendly economic policy. This could lead to policy changes, such as modifications to the existing usury laws, that would increase the maximum interest rate that can be charged by banks. Potential for earnings upgrades Faster-than-expected economic growth and an increase in NIMs due to higher rates lead to upside risk to consensus local currency numbers. US$ earnings could also benefit if the Colombian peso remains strong. Our 2011 EPADR estimate incorporates an average COP/US$ exchange rate of 2,200 versus the November 4th exchange rate of COP1,818/US$. Prospects for re-/derating Even factoring in improving prospects, the bank is pricing ample improvement. The stocks trades 3.4x bv and 18.0x 12e local EPS (18x 12e US$ earnings). It is generating ROEs of about 18%. Our regression of ROE to P/B using a cross section of LatAm banks, shows this is consistent with a 2.8x P/B multiple. Ultimately, we feel Bancolombia benefits from scarcity value; being the only domestic-focused stock with a liquid ADR. Hence, it may be susceptible to the emergence of alternative domestic investment opportunities. Operationally, while good local currency earnings growth is likely, Bancolombia has lost share in consumer lending and struggled with costs. Price target and risks YE11 US$60/ADR (at JPM’s end-2011e FX of COP$2,200). We use a residual income model and regression of risk-adjusted ROE to P/B. Key risks: fasterthan-expected improvement in economic conditions; a faster-than-expected rebound in NIMs; value-creating acquisitions; and continued positive sentiment toward the country’s improving macroeconomic and political dynamics.
Bancolombia S.A. (CIB;CIB US) Company Data Price ($) Date Of Price 52-week Range ($) Mkt Cap ($ mn) Fiscal Year End Shares O/S (mn) Price Target ($) Price Target End Date 2009A 68.74 04 Nov 10 69.44 40.10 13,538.81 Dec 197 65.00 31 Dec 11 EPADR - Recurring ($) Q1 (Mar) Q2 (Jun) Q3 (Sep) Q4 (Dec) FY 0.65 0.68 0.72 0.64 2.77

Underweight
$68.74 (4 Nov 10)

Price Target: $65
End Date: Dec 2011 Colombia Financial Institutions
Saul Martinez AC
(1-212) 622-3602 [email protected] J.P. Morgan Securities LLC Bloomberg JPMA MARTINEZ <GO>

Price Performance
65 $ 55 45 35
Oct-09 Jan-10 Apr-10 Jul-10 Oct-10

Source: Bloomberg.

Performance
1M Absolute (%) Relative (%)
Source: Bloomberg.

3M 6.6 5.5

12M 56.1 48.2

2.9 -1.0

Priced as of the close on November 4, 2010; see our note out November 5 for further details.

2010E 0.89A 0.77A 1.03A 0.96A 3.65A

2011E

2012E

3.97

4.28

Source: Company data, Bloomberg, J.P. Morgan estimates.

54

Ben Laidler (1-212) 622-5252 [email protected]

Latin America Equity Research November 2010

Bancolombia: Summary of Financials
Income Statement FY09A FY10E FY11E FY12E Balance Sheet FY09A FY10E FY11E FY12E Interest Income 6,427,698 5,009,056 6,053,546 7,315,953 Interest Expense (2,625,416) (1,575,512) (2,049,436) (2,601,836) Net interest Income 3,802,282 3,433,543 4,004,110 4,714,117 LL Provision (1,153,374) (594,373) (694,071) (917,678) Net Interest Income after provision 2,648,908 2,839,170 3,310,040 3,796,439 Fee Income 1,506,273 1,573,672 1,762,513 1,956,389 Foreign Exchange and Trading transaction 380,676 495,949 547,232 547,232 Non Interest Income 198,761 193,658 183,975 193,174 Non Interest Expenses (3,000,674) (3,189,237) (3,489,950) (3,854,198) Non Operating results Pretax income 1,733,944 1,913,212 2,313,809 2,639,036 Taxes (462,013) (530,139) (654,172) (746,493) Statutory Profit Sharing Minority Interest (15,081) (17,260) (18,468) (19,761) Net Income 1,256,850 1,365,813 1,641,169 1,872,782 Recurring Net Income 1,170,050 1,365,813 1,641,169 1,872,782 Dividends Operating Data, Ratios Per share analysis EPS BVPS Dividend per Share Growth EPS growth Fee income Non interest expenses Loan Deposits Ratios NIM Fees/Expenses PDL/Loans LL Reserves/Total Loans LL Reserves/NPL Cost/Income Loans/Deposits Loans/Assets Equity/Assets Dividend Payout FY09A FY10A FY11E Securities 8,436,244 8,895,070 9,517,725 10,183,965 Loans, gross 42,041,974 47,811,195 55,561,779 64,647,131 Cash and due from Banks 7,372,359 5,417,489 5,742,538 6,144,516 Repurchase Agmt and Derivatives Loan loss reserves (2,431,667) (2,453,431) (2,497,502) (2,715,179) Other assets 6,445,455 7,225,066 7,663,474 7,719,250 Total assets 61,864,365 66,895,388 75,988,014 85,979,682 Total deposits 42,149,330 43,978,839 50,920,026 58,554,431 Other funding 5,428,960 5,890,742 6,479,816 7,127,798 Bonds and subordinated debts Other liabilities 7,253,246 9,118,253 9,572,115 10,048,671 Total liabilities 61,864,365 66,895,388 75,988,014 85,979,682 Shareholder's equity 7,032,829 7,907,555 9,016,057 10,248,783

FY12E Valuation, Macro P/E 4.28 P/BV 22.94 Dividend yield 1.46 ROE ROA 7.8% Shares 11.0% ADRs 9.6% 16.4% 15.0%

FY09A 23.1 3.9 1.6% 17.8% 1.9% 197

FY10A 18.8 3.5 2.0% 19.1% 2.2% 197

FY11E 17.3 3.4 1.9% 19.4% 2.3% 197

FY12E 16.1 3.0 2.1% 19.4% 2.3% 197

2.97 17.44 1.08

3.65 19.66 1.34

3.97 20.41 1.29

(2.6%) 14.7% 10.1% (5.8%) 4.4%

31.9% 4.5% 7.0% 13.7% 4.3%

8.8% 12.0% 9.9% 16.2% 15.8%

6.6% 53.3% 3.9% 5.8% 149.4% 49.7% 99.7% 68.0% 11.4% 36.3%

5.7% 52.0% 3.3% 5.1% 155.5% 55.0% 108.7% 71.5% 11.8% 36.8%

6.0% 53.0% 3.1% 4.5% 145.0% 52.6% 109.1% 73.1% 11.9% 32.5%

6.2% 53.7% 3.0% 4.2% 140.0% 50.5% 110.4% 75.2% 11.9% 34.2%

Source: Company reports and J.P. Morgan estimates. Note: $ in millions (except per-share data). Fiscal year ends Dec

55

Ben Laidler (1-212) 622-5252 [email protected]

Latin America Equity Research November 2010

SMid Cap Financials
Key country dynamics SMid caps should continue to experience above-system growth in 2011, especially in SME lending and microlending, on the back of favorable macroeconomic trends and low leverage. We like banks with solid balance sheets, especially good access to funding, as we view this is as a structural weakness of small banks (Figure 1). 2010 was about asset quality; in 2011, investor focus will be on possible pressure on margins. In our coverage of 6 SMid cap financials in Brazil and Mexico, we like Banrisul, Cetip and Compartamos. We base our preference for SMid caps on: 1) strong balance sheets (high BIS, high loan-loss coverage, stable funding, low debt ratio); 2) low risk of pricing/margin pressure; 3) best EPS growth; 4) M&A potential; 5) limited political/regulatory risk; 6) product diversification in 2011e adding new revenues sources; 7) attractive growth-adjusted valuations. Growth characteristics and how they are changing In Brazil, SME lenders (roughly half of Banrisul’s portfolio is small corporate) should see loan growth above 25% versus a system average of ~20%, adding to recent strong loan growth in Brazil (Figure 2). With loan growth and stable asset quality viewed as a given, investors will focus on margin compression (on the back of changes in mix and/or increased competition). We expect Cetip to see strong earnings growth (JPMe 34% growth in EPS in 2011) on the back of higher volumes. In Mexico, Compartamos should continue to grow, on the back of 1) the underpenetration of lending, especially for lower-income segments; 2) the benign regulatory environment (we don’t think problems in Indian microfinance will spill over to other markets); 3) contained competition. Drivers of returns – Multiples and growth Loan growth will be the main earnings driver, while inflows (especially from foreign investors) will continue to support valuations. Efficiency gains will also drive earnings growth, and we expect efficiency to improve (at Banrisul) or remain stable (at Cetip and Compartamos). Recommendations Overweight: Banrisul, Cetip, Compartamos. Stocks to avoid: PanAmericano.

Frederic de Mariz AC *
(55-11) 3048-3398 [email protected] Banco J.P. Morgan SA Bloomberg JPMA DEMARIZ <GO>

Figure 1: Brazil/Mexico: Access to funding remains a key bottleneck for small banks, hence our focus on balance sheet strength (market share of deposits of top 5 banks)
64% 39% 47% 53% 65% 69% 70% 76% 76% 77% 82% 86% 89%

31%

Argentina

Portugal

Spain

Italy

Colombia

France

Brazil

Chile

Peru
2009

USA

UK

Source: Central banks and J.P. Morgan.

Figure 2: Brazil: Loans-to-GDP ratio: We expect SME lending to play a key role in the next growth phase
50 45 40 35 30 25 20 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007

Source: Brazilian Central Bank.

* Registered/qualified as a research analyst under NYSE/NASD rules.

56

Sweden

Belgium

Mexico

Ben Laidler (1-212) 622-5252 [email protected]

Latin America Equity Research November 2010

Top picks and stocks to avoid
Price Top picks Banrisul Compartamos Cetip Stocks to avoid PanAmericano R$18.00 MXN85.93 R$17.95 R$7.73 Code BRSR6 COMPARTO CTIP3 BPNM4 Rating OW OW OW UW Mkt cap (US$MM) 3.949 3.032 2.387 1,110 P/E (x) 10E 11.6x 20.1x 29.8x 11.9x 11E 10.0x 16.4x 22.3x 7.2x EPS 10E 1.61 4.36 0.61 0.64 11E 1.88 5.34 0.81 1.07 Div. yield 11E (%) 3% 1% 1% 8% ROE 11E (%) 19.0% 34.8% 45.3% 16.4%

Source: Bloomberg, J.P. Morgan estimates. Note: Share prices and valuations are as of October 28, 2010.

Loan growth
35% 28% 27% 24% 44% 30% 25%

Non performing loans to total loans
10.2% 9.8% 6.8% 6.0% 2.4% 2.8% 10.5%10.2%

20%

17% 15%
2.5% 2.3%

ABC Brasil

Banrisul

BicBanco 2010e 2011e

Compartamos

PanAmericano

ABC Brasil

Banrisul

BicBanco 2010e 2011e

Compartamos

PanAmericano

Source: J.P. Morgan estimates.

Source: J.P. Morgan estimates.

Cost to income
50% 48% 26% 25% 51% 50% 50% 50%

EPS growth
66% 40% 24% 22% 17% 22% 16% 26% 20% 21% 34% 22% 22%

ABC Brasil

Banrisul

BicBanco 2010e 2011e

Compartamos

PanAmericano

ABC Brasil

Banrisul

BicBanco 2010e

Cetip 2011e

Compartamos

-16% PanAmericano

Source: J.P. Morgan estimates.

Source: J.P. Morgan estimates.

57

Ben Laidler (1-212) 622-5252 [email protected]

Latin America Equity Research November 2010

Banrisul
BRSR6.SA www.banrisul.com.br
Company description Banrisul is the largest of the small caps under our coverage. It is also the only small bank with access to retail funding. The bank is controlled by the state of Rio Grande do Sul (owns 57%) and has a dominant market share in its home state (17% loan market share). The bank offers a wide variety of loans, including individual (45% of total book, mostly payroll), corporate (32% of loans), real estate (8% of loans), and agribusiness (7% of loans). Banrisul is the 11th-largest bank by assets in Brazil and has a market share of 0.8% of total loans in the Brazilian banking system (largest bank, Banco do Brasil, has 21%). Investment case We have an Overweight rating on the stock (BRSR6) due to the bank’s strong funding structure (based on stable and cheap retail funding), good loan growth outlook (around 25% in 2010-12e), and solid coverage of nonperforming loans (ratio of loan-loss reserves to loans past due 60 days or more 226% in 2Q10). Potential for earnings upgrades We expect loan growth to be the main driver of earnings growth, as net interest margins and loan-loss provisions should remain relatively stable in the next 12 months. Additionally, improved operating efficiency (historically a weak point at Banrisul) should continue improving, mostly on the back of lower administrative expenses. Prospects for derating Lower-than-expected loan growth and the potential appointment of a new and heterodox management team at the bank could disappoint investors. Price target and risks Our Dec-11 price target of R$20 is based on a residual income methodology and a regression of ROE and P/BV multiples for banks. We assume a cost of equity of 13.1% and long-term earnings growth of 5%. Risks to our price target and OW rating include 1) political interference at the bank; 2) lower-thanexpected loan growth; 3) limited gains in efficiency.
Banrisul (BRSR6.SA;BRSR6 BZ) Company Data Price (R$) Date Of Price 52-week Range (R$) Mkt Cap (R$ mn) Fiscal Year End Shares O/S (mn) Price Target (R$) Price Target End Date 2008A 18.00 28 Oct 10 19.05 10.74 7,361.54 Dec 409 20.00 31 Dec 11 EPS - Recurring (R$) Q1 (Mar) Q2 (Jun) Q3 (Sep) Q4 (Dec) FY 0.30 0.46 0.27 0.00 1.03 2009A 0.26 0.25 0.36 0.45 1.32

Overweight
R$18.00 (28 Oct 10)

Price Target: $20
End Date: Dec 2011 Latin America SMid Cap Financials
Frederic de Mariz AC *
(55-11) 3048-3398 [email protected] Banco J.P. Morgan SA Bloomberg JPMA DEMARIZ <GO>

Price Performance
19 17 R$ 15 13 11
Mar-10 Jun-10 Sep-10

Source: Bloomberg.

Performance
1M Absolute (%)
Source: Bloomberg.

3M 29.7

12M 36.7

9.4

* Registered/qualified as a research analyst under NYSE/NASD rules.

2010E 0.30A 0.45A 0.43A 0.44A 1.61A

2011E

2012E

1.88

2.18

Source: Company data, Bloomberg, J.P. Morgan estimates.

58

Ben Laidler (1-212) 622-5252 [email protected]

Latin America Equity Research November 2010

Banrisul: Summary of Financials
Income Statement - Annual
Net interest income Provisions Noninterest income Total revenues Expenses Earnings before taxes Income taxes Profit sharing and minority interest Net income - Reported Nonrecurring income (losses) (AT) Net income - Core Diluted shares outstanding EPS - Reported EPS - Core Dividends

FY08A FY09A FY10E FY11E
1,722 (257) 539 2,004 (1,171) 704 (83) (30) 421 0 421 409 1.03 1.03 0.74 2,542 (423) 579 2,699 2,791 (534) 641 2,898 3,136 (608) 718 3,246 (2,065) 1,181 (366) (47) 768 0 768 409 1.88 1.88 0.75

Income Statement - Quarterly
Net interest income Provisions Noninterest income Total revenues Expenses Earnings before taxes Income taxes Profit sharing and minority interest Net income - Reported Nonrecurring income (losses) Net income - Core Diluted shares outstanding EPS - Reported EPS - Core Dividends

1Q10A 2Q10A 3Q10E 4Q10E
647 (154) 150 644 (462) 182 (48) (11) 122 0 122 409 0.30 0.30 0.10 711 (127) 157 741 (464) 277 (83) (11) 183 0 183 409 0.45 0.45 0.19 706 (130) 164 740 (472) 268 (80) (11) 177 0 177 409 0.43 0.43 0.18 727 (123) 170 774 (490) 283 (94) (11) 179 0 179 409 0.44 0.44 0.17

(1,846) (1,888) 853 1,010 (268) (305) (45) (45) 541 660 0 0 541 660 409 409 1.32 1.32 0.56 1.61 1.61 0.65

Balance Sheet
Securities Total gross loans Loan loss reserves Total net loans Total earning assets Total assets Total deposits Total liabilities Common equity Shareholders' equity

FY08A FY09A FY10E FY11E
6,111 11,453 971 10,483 24,495 25,205 14,256 22,126 3,079 3,079 7,408 13,414 1,017 12,398 28,197 29,084 16,370 25,676 3,408 3,408 8,418 17,023 1,177 15,846 32,037 33,222 19,275 29,420 3,802 3,802 8,839 21,109 1,469 19,640 35,142 37,981 22,076 33,719 4,262 4,262

Balance Sheet
Securities Total gross loans Loan loss reserves Total net loans Total earning assets Total assets Total deposits Total liabilities Common equity Shareholders' equity

1Q10A 2Q10A 3Q10E 4Q10E
7,760 14,766 1,082 13,684 28,913 29,864 16,520 26,384 3,480 3,480 8,091 15,442 1,039 14,403 29,980 31,099 17,145 27,509 3,590 3,590 8,253 16,060 1,109 14,951 30,997 32,028 18,093 28,334 3,694 3,694 8,418 17,023 1,177 15,846 32,037 33,222 19,275 29,420 3,802 3,802

Ratio Analysis (%)
Average loan growth Average earning assets growth Average deposit growth Avg loans / avg deposits Net interest margin Efficiency ratio Return on assets (ROA) Return on equity (ROE) Tangible common equity ratio BIS ratio NPAs / gross loans Net chargeoffs / average loans Loan loss reserves / loans Loan loss reserves / NPLs

FY08A FY09A FY10E FY11E
34.2% 19.3% 15.3% 85.9% 7.8% 4.7% 1.8% 14.3% 20.1% 14.2% 1.7% 8.5% 59.6% 20.5% 20.0% 14.8% 90.1% 9.7% 6.0% 2.0% 16.7% 17.5% 11.9% 2.2% 7.6% 63.9% 26.8% 24.0% 14.4% 14.4% 17.7% 15.0% 97.0% 105.0% 9.1% 5.5% 2.1% 18.3% 16.5% 10.2% 1.5% 6.9% 67.8% 8.9% 5.3% 2.2% 18.5% 15.7% 9.8% 1.5% 7.0% 71.0%

Ratio Analysis (%)
Average loan growth Average earning assets growth Average deposit growth Avg loans / avg deposits Net interest margin Efficiency ratio Return on assets (ROA) Return on equity (ROE) Tangible common equity ratio BIS ratio NPAs / gross loans Net chargeoffs / average loans Loan loss reserves / loans Loan loss reserves / NPLs

1Q10A 2Q10A 3Q10E 4Q10E
9.8% 3.2% 0.9% 98.0% 9.0% 5.9% 1.7% 14.2% 16.5% 11.3% 2.2% 7.3% 65.0% 4.8% 4.0% 3.8% 98.9% 9.5% 5.5% 2.4% 20.7% 15.7% 10.8% 1.7% 6.7% 62.4% 4.0% 2.7% 6.0% 97.5% 9.1% 5.5% 2.2% 19.4% 15.7% 10.4% 1.5% 6.9% 66.5% 6.0% 3.8% 7.0% 97.0% 9.1% 5.5% 2.2% 19.1% 15.5% 10.2% 1.3% 6.9% 67.8%

Source: Company reports and J.P. Morgan estimates. Note: R$ in Millions (except per-share data).

59

Ben Laidler (1-212) 622-5252 [email protected]

Latin America Equity Research November 2010

Banco PanAmericano
BPNM4.SA www.panamericano.com.br
Company description PanAmericano offers consumer loans to the lower-income segments of the population, making it an ideal play on rising income levels in Brazil. Roughly two-thirds of the bank’s loan portfolio are vehicle lending, with payroll and credit cards making up the rest of the portfolio. The bank has a network of 199 points of sale, 2.1 million clients and 12.1 million issued credit cards. The bank currently has a market share of 0.4% of loans in the Brazilian banking system (the leader, Banco do Brasil, has a market share of 21%). Investment case We have an out-of-consensus Underweight rating on the stock (BPNM4), due to 1) accounting issues and weak internal controls; 2) uncertainties around the new management team; 3) weaker funding structure than that of other banks in our coverage universe (roughly half of the funding comes from loan cessions, loan securitization and time deposits with a special guarantee), and 4) lower loan growth outlook in auto loans than in other loan segments. Potential for earnings upgrades The bank will continue to suffer from high loan loss provisioning levels (D-H ratio at 10.9% as of 2Q10). Also, tougher competition in the auto lending segment could put pressure on margins. Prospects for rerating We have a cautious view on the benefits that CEF could bring to PanAmericano. CEF announced the purchase of 37% of PanAmericano in Dec09. The stock could rerate if the new management team of PanAmericano were to articulate how the agreement with CEF could 1) improve the funding structure of PanAmericano and/or 2) bring revenue synergies. Price target and risks Our Dec-11 price target of R$10 is based on a residual income model and a regression analysis of ROE and P/BV. We consider a cost of equity of 13.1% and a long term earnings growth of 6%. Risks to our UW rating relate to a redefinition of the strategy of the bank by the new management team, an improvement in funding structure and significant revenue synergies with CEF.

Underweight
R$7.73 (28 Oct 10)

Price Target: $10
End Date: Dec 2011 Latin America SMid Cap Financials
Frederic de Mariz AC *
(55-11) 3048-3398 [email protected] Banco J.P. Morgan SA Bloomberg JPMA DEMARIZ <GO>

Price Performance
10.5 R$ 9.5 8.5 7.5
Apr-10 Jul-10 Oct-10

Source: Bloomberg.

Performance
1M Absolute (%)
Source: Bloomberg.

3M -23.9

12M -37.9

-23.4

* Registered/qualified as a research analyst under NYSE/NASD rules.

Company Data Price (R$) 7.73 Date Of Price 28 Oct 10 52-week Range (R$) 12.36 - 6.55 Mkt Cap (R$ mn) 1,888.78 Fiscal Year End Dec Shares O/S (mn) 244 Price Target (R$) 10.00 Price Target End Date 31 Dec 11

Banco PanAmericano (BPNM4.SA;BPNM4 BZ) 2008A 2009A EPS - Recurring (R$) Q1 (Mar) 0.28 0.29 Q2 (Jun) 0.36 0.06 Q3 (Sep) 0.27 0.19 Q4 (Dec) 0.04 0.23 FY 0.94 0.77
Source: Company data, Bloomberg, J.P. Morgan estimates.

2010E 0.18A (0.09)A 0.24A 0.28A 0.64A

2011E

2012E

1.07

1.19

60

Ben Laidler (1-212) 622-5252 [email protected]

Latin America Equity Research November 2010

Banco PanAmericano: Summary of Financials
Income Statement - Annual
Net interest income Provisions Noninterest income Total revenues Expenses Earnings before taxes Income taxes Profit sharing and minority interest Net income - Reported Nonrecurring income (losses) (AT) Net income - Core Diluted shares outstanding EPS - Reported EPS - Core Dividends

FY08A FY09A FY10E FY11E
1,777 (542) 180 1,415 (1,189) 99 (3) (0) 96 14 236 250 0.94 0.94 2,237 (730) 118 1,625 2,732 (744) 175 2,163 2,952 (768) 194 2,378

Income Statement - Quarterly
Net interest income Provisions Noninterest income Total revenues Expenses Earnings before taxes Income taxes Profit sharing and minority interest Net income - Reported Nonrecurring income (losses) Net income - Core Diluted shares outstanding EPS - Reported EPS - Core Dividends

1Q10A 2Q10A 3Q10E 4Q10E
697 (172) 39 565 (391) 126 (51) (0) 75 (79) 44 244 0.18 0.18 0.00 639 (250) 44 433 (397) (23) 11 (0) (11) (68) (21) 244 (0.09) (0.09) 0.19 691 (144) 45 592 (402) 150 (75) (0) 75 (50) 58 244 0.24 0.24 0.00 705 (177) 46 574 (377) 157 (78) (0) 79 (50) 69 244 0.28 0.28 0.00

(1,148) (1,566) (1,720) 257 410 472 (82) (193) (151) (0) (1) (1) 174 217 320 (205) (246) (246) 189 157 261 244 244 244 0.77 0.77 0.16 0.64 0.64 0.19 1.07 1.07 0.27

Balance Sheet
Securities Total gross loans Loan loss reserves Total net loans Total earning assets Total assets Total deposits Total liabilities Common equity Shareholders' equity

FY08A FY09A FY10E FY11E
736 6,631 522 6,108 8,900 8,976 4,413 7,789 1,188 1,188 1,377 8,784 578 8,206 10,363 11,591 6,922 10,277 1,314 1,314 1,862 10,317 704 9,613 12,481 13,725 0 12,228 1,497 1,497 1,881 11,865 829 11,036 14,688 15,216 0 13,523 1,693 1,693

Balance Sheet
Securities Total gross loans Loan loss reserves Total net loans Total earning assets Total assets Total deposits Total liabilities Common equity Shareholders' equity

1Q10A 2Q10A 3Q10E 4Q10E
1,161 8,984 577 8,407 11,346 11,812 7,115 10,424 1,388 1,388 1,826 9,183 660 8,524 12,064 12,583 7,476 11,212 1,371 1,371 1,844 9,642 671 8,972 12,852 13,053 0 11,624 1,429 1,429 1,862 10,317 704 9,613 13,438 13,725 0 12,228 1,497 1,497

Ratio Analysis (%)
Average loan growth Average earning assets growth Average deposit growth Avg loans / avg deposits Net interest margin Efficiency ratio Return on assets (ROA) Return on equity (ROE) Tangible common equity ratio BIS ratio NPAs / gross loans Net chargeoffs / average loans Loan loss reserves / loans Loan loss reserves / NPLs

FY08A FY09A FY10E FY11E
33.0% (12.8%) 20.1% 81.1% 20.0% 10.3% 2.9% 20.0% 24.2% 12.2% 5.0% 7.9% 11.2% 32.5% 46.4% 19.5% 89.9% 21.6% 9.5% 1.8% 15.1% 17.0% 10.5% 6.7% 6.6% 8.1% 17.5% 21.4% 25.0% 84.5% 21.9% 10.5% 1.2% 11.2% 17.6% 10.5% 5.8% 6.8% 7.5% 15.0% 11.7% 15.0% 84.5% 20.1% 9.9% 1.8% 16.4% 17.1% 10.2% 5.8% 7.0% 6.9%

Ratio Analysis (%)
Average loan growth Average earning assets growth Average deposit growth Avg loans / avg deposits Net interest margin Efficiency ratio Return on assets (ROA) Return on equity (ROE) Tangible common equity ratio BIS ratio NPAs / gross loans Net chargeoffs / average loans Loan loss reserves / loans Loan loss reserves / NPLs

1Q10A 2Q10A 3Q10E 4Q10E
29.9% 57.1% 28.7% 87.4% 24.6% 11.0% 1.5% 13.1% 14.8% 10.8% 6.4% 6.4% 2.1% 21.9% 36.4% 29.3% 79.8% 21.2% 11.3% (0.7%) (6.1%) 14.3% 10.9% 6.2% 7.2% 1.8% 20.7% 24.8% 34.4% 81.3% 21.5% 10.5% 1.8% 16.5% 18.0% 10.7% 6.0% 7.0% 1.8% 17.5% 21.4% 25.0% 84.5% 21.0% 9.5% 2.1% 18.8% 17.6% 10.5% 5.8% 6.8% 2.0%

Source: Company reports and J.P. Morgan estimates. Note: R$ in Millions (except per-share data).

61

Ben Laidler (1-212) 622-5252 [email protected]

Latin America Equity Research November 2010

Food, Beverages & Tobacco
Key sector dynamics LatAm beverage markets are mainly oligopolies with rational pricing and stable volume growth. Companies have seen aggregate sales CAGR of 12% last decade. They have little or no debt, robust margins and high ROICs. On the other side, LatAm food can be divided in two: packaged food companies with branded products, and meat/commodities beef companies with volatile margins (raw material and Fx). For tobacco, it is all about brands and pricing power while containing higher taxes and usage restrictions. Growth characteristics and how they are changing Economics, demographics and specific company strategies should keep driving organic LatAm staples growth, especially in beverages. For the food sector we expect a confluence of both organic and inorganic growth as we expect consolidation in the food space to continue. In our view, tobacco sector growth will be driven mostly via pricing and innovation and despite stable to declining volumes. Drivers of returns – Multiples and growth Emerging market staples are trading above developed markets’. This is a first. Plus, the LatAm staples group is already trading at a record premium of 70% over the rest of the LatAm MSCI. We don’t see this gap spreading further, but it should remain stable. A key valuation driver should be use of cash, specifically how much is returned to shareholders. These beverage and tobacco companies pose upside risks to increased dividends. Meat (beef) companies face a different challenges related to how to maintain or expand their low profitability and their delevering process. Recommendations Despite some relatively rich valuations we still see as an opportunity FMX (OW) for EPS growth, CCU (OW) for its relative value and Modelo (OW) for event-driven growth. Among food companies, we prefer processed food powerhouse and poultry exporter Brasil Foods (OW). This company has a solid growth outlook and material upside risk to merger synergies. On our sole tobacco company, Souza Cruz, we currently remain Neutral on valuation. In one sentence, our sector has high-quality names that are not cheap but pose selected opportunities with the right risk/reward balance.

Alan Alanis AC
(1-212) 622-3697 [email protected] J.P. Morgan Securities LLC Bloomberg JPMA ALANIS <GO>

Top 8 LatAm bevcos more than tripled revenues ($ bn) this decade Robust top-line CAGR of 12% in the last decade – most of which was organic

60 50 40 30 20 10

16

17

17

20

24

29

35

42

45

45

50

00

01

02

03

04

05

06

07

08

09 10E

S Source: Company reports and J.P. Morgan estimates for AmBev, FEMSA, Grupo Modelo, CCU, Coca-Cola FEMSA, Embotelladora Arca, Andina and Contal.

MSCI EM vs. Developed Market consumer staples, 12 mo. fwd P/E EM staples now trading at 15% premium vs. a 15-year avg. discount of 16%
35 25 15 5 Dec-95 Dec-97 Dec-99 Dec-01 Dec-03 Dec-05 Dec-07 Dec-09 MSCI DM Staples
Source: Datastream.

MSCI EM Staples

MSCI LatAm Consumer Staples vs. MSCI LatAm, 12 mo. fwd P/E LatAm staples now trading at 70% premium to the market
24 19 14 9 4 Dec-95 Dec-97 Dec-99 Dec-01 Dec-03 Dec-05 Dec-07 Dec-09 MSCI Latam Consumer Staples
Source: Datastream.

MSCI Latam

MSCI LatAm Consumer Staples (index constituents)
Company AmBev PN Walmex FMX BRFS Cencosud Natura CRUZ3 Hypermarcas Modelo Kimber CBD Bimbo JBS KOF Cosan Exito MRFG3 CCU Conchatoro Total Weights 18.6% 15.6% 11.7% 9.7% 6.2% 4.8% 4.0% 4.0% 3.6% 3.5% 3.2% 2.7% 2.4% 2.3% 1.9% 1.9% 1.4% 1.3% 1.2% 100%

Source: Datastream. In bold the names under our food, beverage and tobacco coverage.

62

Ben Laidler (1-212) 622-5252 [email protected]

Latin America Equity Research November 2010

Top picks and stocks to avoid
Price Top picks FEMSA Brasil Foods Stocks to avoid Minerva 26.4 23.5 40.4 Code CSMG3 GETI4 CPFE3 Rating OW OW UW Mkt cap (US$MM) 1,783 5,246 11,368 P/E (x) 10E 6.4 10.7 13.7 11E 6.0 9.8 13.9 10E 4.13 2.19 2.94 EPS 11E 4.39 2.38 2.90 Div. yield 11E (%) 8.3 10.7 5.4 ROE 11E (%) 12.0 181.4 25.3

Source: Bloomberg, J.P. Morgan estimates. Note: Share prices and valuations are as of October 28, 2010.

Food and beverages absolute and relative to MSCI LatAm
600 500 400 300 200 100 0 Dec-02 Mar-04 May -05 Aug-06 Oct-07 Jan-09 Mar-10 Absolute Relativ e to MSCI EMF Index

Food and beverages EPS integer
130 2011 120 110 2010 100 90 80 70 Feb-09 Jul-09 Dec-09 May -10 Oct-10

Source: MSCI, Bloomberg, IBES, Datastream, J.P. Morgan.

Source: MSCI, Bloomberg, IBES, Datastream, J.P. Morgan.

Food and beverages 12 mth fwd PE
22 20 18 16 14 12 10 8 95 97 98 99 00 PE 01 02 03 Av g 04 05 06 07 08 10

Food and beverages trailing PB
4 3.5 3 2.5 2 1.5 1 0.5 95 97 98 99 00 PB 01 02 03 Av g 04 05 06 07 08 10

+1SD

-1SD

+1SD

-1SD

Source: MSCI, Bloomberg, IBES, Datastream, J.P. Morgan.

Source: MSCI, Bloomberg, IBES, Datastream, J.P. Morgan.

63

Ben Laidler (1-212) 622-5252 [email protected]

Latin America Equity Research November 2010

Brasil Foods
BRFS3.SA www.perdix-international.com
World’s largest exporter of chicken Brasil Foods (BRFS3) is the merged entity of Perdigao and Sadia, the two leading poultry companies in Brazil. With $15bn in annual revenues, Brasil Foods is the fourth-largest protein co. in the world. It sells mainly poultry. Most BRFS sales are in the domestic Brazilian market, yet it is the global leader in chicken exports. Domestically, BRFS3 is the undisputed leader in processed foods, which have better margins than commodity proteins. The co. also sells pork, beef cuts, milk and other dairy products. Its operations are fully integrated, and it owns the largest number of consumer brands in Brazil. Undisputed leader in the growing Brazilian market Poultry has been the fastest-growing protein globally for well over a decade. Strong demand continues in Brazil and abroad. The premium in price of beef vs. chicken is well above the historical average. We expect beef prices to remain high; given this and recent increases in corn and soy prices, we estimate we are entering a year when prices for global poultry should increase. In this sense, Brasil Foods is well positioned to benefit from this situation. Potential for earnings upgrades – More synergies, less taxes For a LatAm meat company, Brasil Foods’ ’10e net debt to EBITDA of 1.9x is one of the lowest. Plus, once Brazil’s regulatory authority, CADE, approves the integration with Sadia, we believe the company is likely to positively surprise the market with synergies materially higher than its current guidance of R$500mn/year. Net net: with higher-than-expected FCF generation, we see upside risk to our ’11e EPS estimate of R$1.44 for BRFS3. Stock should at least maintain its valuation multiple Although at 8.5x ’11e EV/EBITDA and 17.0x ’11e P/E the stock does not look cheap, we believe these multiples have yet to capture the full value of the company given a) post integration BRFS will have unparalleled scale and pricing power in Brazil, b) that BRFS3 should be a key beneficiary of accelerated global growth in poultry market and, lastly, c) its potential to deliver higher-than-guidance synergies from the merger and yet-to-beaccounted tax benefits. Dec ’11 PT offers 27% potential upside – with some risks Using perpetuity growth of 3% and a WACC of 9.5%, our DCF model indicates a Dec ’11 PT of R$31 for BRFS3, implying 27% upside & a 2% div yield. Key risks are a) a weaker-than-expected rebound in poultry market; b) failure to deliver expected synergies; and c) Fx & grain price volatility.
Company Data Price (R$) Date Of Price 52-week Range (R$) Mkt Cap (R$ mn) Fiscal Year End Shares O/S (mn) Price Target (R$) Price Target End Date 24.42 28 Oct 10 26.65 19.80 21,305.80 Dec 872 31.00 31 Dec 11 BRF - Brasil Foods SA (BRFS3.SA;BRFS3 BZ) 2009A EBITDA FY (R$ mn) 1,222 EV/EBITDA FY 19.9 Revenues FY (R$ mn) 20,936 EPS Reported FY (R$) 0.28 P/E FY 88.5
Source: Company data, J.P. Morgan estimates.

Overweight
R$24.42 (28 Oct 10)

Price Target: R$31
End Date: Dec 2011 Latin America Food, Beverage and Tobacco
Alan Alanis AC
(1-212) 622-3697 [email protected] J.P. Morgan Securities LLC Bloomberg JPMA ALANIS <GO>

Price Performance
27 25 R$ 23 21 19
Oct-09 Jan-10 Apr-10 Jul-10 Oct-10

Source: Bloomberg.

Performance
1M Absolute (%)
Source: Bloomberg.

3M 8.6

12M 10.9

2.0

2010E 2,340 10.9 23,040 0.53 46.0

2011E 2,970 8.6 25,313 1.44 17.0

2012E 3,655 7.0 27,735 1.60 15.3

64

Ben Laidler (1-212) 622-5252 [email protected]

Latin America Equity Research November 2010

Brasil Foods SA: Summary of Financials
Income Statement - Annual
Revenues Cost of goods sold Gross profit SG&A LFL Operating income LFL EBITDA Interest, net Pretax income Equity income Income taxes Tax rate Net income - operating Non-operating income / (expense) Net income - reported (GAAP) Diluted shares outstanding EPS (LFL) EPS - reported (GAAP) EPS - consensus (I/B/E/S)

FY09A FY10E FY11E
20,936 23,040 25,313 (16,207) (16,867) (18,431) 4,729 6,173 6,881 (4,313) 416 1,222 588 740 0 (499) 67.3% 220 (263) 241 872 0.28 0.28 0.76 (4,639) 1,534 2,340 (698) 563 (71) 12.6% 460 (273) 463 872 0.53 0.53 0.80 (4,797) 2,084 2,970 (598) 1,633 (294) 18.0% 1,252 147 1,255 872 1.44 1.44 1.32

Income Statement - Quarterly
Revenues Cost of revenues Gross profit Other operating expenses Operating income EBITDA Interest, net Pretax income Equity income Income taxes Tax rate Net income - operating Non-operating income / (expense) Net income - reported (GAAP) Diluted shares outstanding EPS (LFL) EPS - reported (GAAP) EPS - consensus (I/B/E/S)

1Q10A 2Q10A 3Q10E 4Q10E
5,047 (3,768) 1,279 (1,008) 271 447 (156) 51 0 7 (13.7%) 53 (64) 53 872 0.06 0.06 0.12 5,532 (4,018) 1,514 (1,121) 393 587 (170) 151 1 (13) 8.6% 131 (72) 132 872 0.15 0.15 0.19 5,924 (4,338) 1,586 (1,198) 388 595 (211) 112 (20) 18.0% 86 (65) 87 872 0.10 0.10 0.27 6,537 (4,743) 1,794 (1,313) 482 710 (161) 249 (45) 18.0% 191 (72) 192 872 0.22 0.22 0.32

Balance Sheet and Cash Flow Data
Cash and cash equivalents Accounts receivable Inventories Current assets PP&E Goodwill Intangibles Total assets Short-term debt Current liabilities Long-term debt Total liabilities Shareholders' equity Net Income (including charges) D&A Other adjustments Change in working capital Cash flow from operations Capex Free cash flow Free cash flow / share Cash flow from investing activities Cash flow from financing activities Share buybacks Dividends

FY09A FY10E FY11E
4,244 1,787 3,101 10,446 9,275 3,792 25,714 2,914 5,877 5,884 12,575 13,135 241 806 1,173 3,007 1,198 0 0.00 894 (5,142) 0.03 2,967 2,149 3,350 9,683 9,382 3,825 25,681 1,926 5,149 5,715 12,118 13,558 463 807 (255) 887 887 1,005 1.15 (855) (1,310) 0.18 3,101 2,282 3,605 10,327 9,562 3,825 26,821 1,930 5,453 5,737 12,520 14,293 1,255 886 (208) 1,689 1,266 1,121 1.29 (1,266) (289) 0.36

Ratio Analysis
Reported sales growth organic growth volume change price / mix change FX Other Gross margin SGA / sales EBIT margin EBITDA margin Return on equity (ROE) Return on invested capital (ROIC) EBITDA growth EBIT growth Net income growth - operating EPS growth - operating Core operating cycle (days) Working capital as % of sales Net debt Net debt / EBITDA Net debt / capital (book) P/E Enterprise value / EBITDA Enterprise value / revenues FCF yield Dividend yield Market Cap / cash earnings CFO / FV

FY09A FY10E FY11E FY12E
(5.4%) (5.4%) 22.6% 2.0% 5.8% 1.8% (47.4%) (71.5%) 4,554 3.2 20.8% 89.4 19.9 0.8 0.0% 0.1% 10.0% 10.0% 26.8% 6.7% 10.2% 3.4% 91.5% 268.8% 92.4% 92.4% 15.2% 4,675 1.9 22.1% 46.5 10.9 1.1 4.7% 0.7% 9.9% 9.9% 27.2% 8.2% 11.7% 8.8% 26.9% 35.9% 171.0% 171.0% 14.6% 4,565 1.5 20.8% 17.2 8.6 1.0 5.2% 1.5% 9.6% 9.6% 27.2% 13.2% 9.1% 23.0% 0.0% 14.6% 4,467 1.2 19.4% 15.4 7.0 0.9 11.0% 1.6% -

Source: Company reports and J.P. Morgan estimates.
Note: R$ in millions (except per-share data). Fiscal year ends Dec

65

Ben Laidler (1-212) 622-5252 [email protected]

Latin America Equity Research November 2010

FEMSA
FMX www.femsa.com
A consumer conglomerate FEMSA (FMX) is a holding company with three major investments: (a) 100% ownership of Oxxo, a chain of +8k convenience stores in Mexico that is among the fastest-growing and most profitable retailers in the region. (b) 54% ownership and full management control of Coca-Cola FEMSA (KOF), the largest Coke bottler in Latin America. KOF sells Coke products in nine Latin American countries – including Mexico and Brazil – for the equivalent of what would be more than 1 out of 10 Coke products in the world. (c) 20% ownership of Heineken, a leading global beer company. At a very attractive discount to the sum of its parts FMX’s valuation gets a deep discount for its corporate structure. We believe this is unmerited and unsustainable. Both Heineken and KOF are listed, so taking their current prices, we see Oxxo with an implied EV/EBITDA multiple of only 7x. This is half the current valuation of Walmex, Mexico’s leading retailer. Yet Oxxo has faster growth, better margins and more scale versus its competitors. Furthermore, Oxxo keeps opening stores at a pace of almost 3 per day. Working capital of the business is a beauty – all they sell is cash, all they buy is on credit. Payback for store investments is ~ 3 years. From a net cash position, FMX balance sheet is getting even stronger We expect dividends coming from Heineken to increase, as well as those coming from KOF. On top of that, Oxxo should continue to grow and expand its margins regardless of the economic scenario. Catalysts include higher dividends and continued growth FMX (ex-KOF) is already sitting on +$500mn of net cash. So absent any large acquisition, shareholders of FMX have material upside risk on dividends (currently 2% for ’11e). Also, we see room for multiple expansion if KOF resumes double-digit growth next year. Price target and risks Our PT for FMX is based on the PT of Heineken (rated N by JPM European beverages analyst Mike Gibbs), our Dec 11 PT of $79 for KOF, and a 14x ’11e EBITDA for Oxxo (similar to Walmex’s historical average). We apply a 10% holdco discount to obtain a Dec ’11 PT of $59. Key risks are macro, particularly around Fx. Also, volatility of Heineken and KOF stock prices.

Overweight
$54.92 (28 Oct 10)

Price Target: $59
End Date: Dec 2011

Latin America Food, Beverage and Tobacco
Alan Alanis AC
(1-212) 622-3697 [email protected] J.P. Morgan Securities LLC Bloomberg JPMA ALANIS <GO>

Price Performance
56 52 $ 48 44 40
Oct-09 Jan-10 Apr-10 Jul-10 Oct-10

Source: Bloomberg.

Performance
1M Absolute
Source: Bloomberg.

3M 13%

12M 22%

3%

Overweight
Company Data Price ($) Date Of Price 52-week Range ($) Mkt Cap ($ mn) Fiscal Year End Shares O/S (mn) Price Target ($) Price Target End Date FEMSA (FMX;FMX US) 52.92 28 Oct 10 55.50 39.74 18,935.97 Dec 358 59.00 31 Dec 11 EPS Reported FY ($) P/E Majority FY EBITDA FY ($ mn) EV/EBITDA FY 2009A 2.11 26.0 2,736 7.0 2010E 2.90 18.9 2,462 8.8 2011E 3.38 16.2 2,529 7.8 2012E

Source: Company data, Bloomberg, J.P. Morgan estimates.

66

Ben Laidler (1-212) 622-5252 [email protected]

Latin America Equity Research November 2010

FEMSA: Summary of Financials
Income Statement FY09A FY10E FY11E FY12E Balance Sheet FY09A FY10E FY11E FY12E

Revenues Cost of goods sold SG&A Operating Profit (EBIT) EBIT Margin Depreciation EBITDA EBITDA margin Net Interest FX Gains (Losses) Monetary gains (losses) Other Nonoperarting income EBT Taxes Minority interest Extraordinary Net income Number of ADRs (million) EPADS Revenue growth EBITDA growth Gross Profit growth

14,506 14,266 14,826 (7,816) (8,170) (8,662) (4,695) (4,195) (4,157) 1,995 1,901 2,006 13.8% 13.3% 13.5% 741 560 523 2,736 2,462 2,529 18.9% 17.3% 17.1% 1,403 1,850 1,946 (441) (443) (490) 962 1,408 1,456
358 2.11 358 2.90 358 3.38

-

Cash Accounts receivable Inventories Other current assets Net PP&E Goodwill Other assets Total assets

1,350 2,475 901 443 1,137 720 366 393 5,326 3,211 1,679 737 16,160 11,964 678 207 2,777 1,867 13 13 2,585 1,520 257 133 13 13 7,293 5,081 8,867 11,701 16,160 16,782

3,349 471 812 425 3,457 1,003 13,354 178 1,886 14 1,300 131 14 4,781 13,213 17,994

-

Short-term debt Accounts payable Other current liabilities Long-term debt Pension plan and seniority premium Other liabilities Total liabilities Minority interest Shareholders' equity - Liabilities + Equity -

(0.9%) (1.7%) (1.7%) (10.0%) (1.2%) (8.9%)

3.9% 2.7% 1.1%

- Net debt - Net Debt/Equity Net Debt/Capital Net Debt/Annualized EBITDA

1,912 (749) (1,870) 21.6% (6.4%) (14.2%) 15.8% (5.6%) (12.7%) 0.7 (0.3) (0.7) FY09A FY10E 7.0 20.8 2.1 1.3 5.0% 8.8 13.6 1.6 1.3 6.5%

-

Operating Data, Ratios

FY09A

FY10E FY11E FY12E Valuation, Macro

FY11E FY12E 7.8 11.9 1.4 1.2 6.5% 10.7 -

Capex Change in working capital Free cash flow
Cash from Operating Activities Cash from Investing Activities Cash from Financing Activities Net change in cash Net cash at Beginning Net Cash at End

(1,012) 217 908
1,920 (1,012) 302 1,210 697 1,907

(713) (64) 1,191
1,904 (713) (1,058) 133 1,357 1,489

(680) (120) 1,180
1,859 (680) (495) 685 2,383 3,068

- EV/EBITDA - P/E - P/BV P/S - FCF yield Dividend yield - ROE Net income margin Net revenue/Assets Assets/Equity - ROIC DCF Assumptions WACC Perpetual Growth Cost of equity Cost of debt

0.6% 1.0% 10.8% 12.0% 6.6% 9.9% 0.9 1.2 1.8 1.0 12.8% 13.3%

1.5% 11.0% 9.8% 1.1 1.0 15.5%

-

Dividends Dividend % of net income Capex/depreciation CAPEX/sales Working capital Working capital/sales

(124) 12.9% 1.4 7.0% 287 2.0%

(200) (294) 14.2% 20.2% 1.3 1.3 5.0% 4.6% 1,945 2,979 13.6% 20.1%

Source: Company reports and J.P. Morgan estimates. Note: $ in millions (except per-share data). Fiscal year ends Dec

67

Ben Laidler (1-212) 622-5252 [email protected]

Latin America Equity Research November 2010

Minerva
BEEF3.SA www.minerva.com
A sophisticated Brazilian exporter of beef Minerva (BEEF3) is the 3rd-largest beef producer in Brazil, with a slaughtering capacity of ~9k head/day in 10e. It’s a pure beef player that gets 70% of its revenues from exports. Minerva’s main products are fresh and processed beef, but the company is also Brazil’s largest live cattle exporter. Meat packers are seeing profit margin compression International beef prices are increasing, but not at the same pace as rising cattle prices. In fact, Brazilian cattle prices are now more expensive than in the US and Australia, the other two big players in the international beef market. Also, we don’t see much space for beef producers to increase prices domestically to protect margins as the beef price premium over chicken is above the historical average. Substitution toward poultry may accelerate. Hence we have a bearish view on the overall beef sector. This industry outlook leads us to believe that BEEF3 should be a stock to avoid in ’11, despite its professional and sophisticated management team. Volatility of earnings may continue Minerva’s involvement in complex financial instruments such as derivative hedges clouds earning estimates. Thus, consensus EPS estimates vary by orders of magnitude. At +4x net debt to EBITDA, Minerva is among the most levered companies in LatAm staples. We see limited potential for earnings upgrades, as these are likely to remain volatile for this producer of meat as a commodity (low-margin business). It may take many consistent (good) quarters for rerating up At 6x ’11e EV/EBITDA and 9x ’11e P/E Minerva looks inexpensive (thus our Neutral rating); but it is likely to remain that way, in our view. There is downside risk to its margins due to continued high cattle prices. Its lack of operating leverage gives limited scope for rerating. Dec. ’11 PT offers nice upside, but with high risks – Remain N Using perpetuity growth of 3% and a WACC of 10.7%, our DCF model indicates a Dec 11 PT of R$8.1 for BEEF3, implying ~30% upside. This apparent high return poses high risks, thus our relative skepticism. Furthermore, outstanding warrants (BEEF11) likely to be exercised would be dilutive. Add to macro and Fx risks, other risks inherent to the meat packing industry, such as changes in trade restrictions and further sector consolidation.

Neutral
R$6.14 (28 Oct 10)

Price Target: R$8.10
End Date: Dec 2011

Latin America Food, Beverage and Tobacco
Alan Alanis AC
(1-212) 622-3697 [email protected] J.P. Morgan Securities LLC Bloomberg JPMA ALANIS <GO>

Price Performance
7.5 R$ 6.5 5.5
Oct-09 Jan-10 Apr-10 Jul-10 Oct-10

Source: Bloomberg.

Performance
1M Absolute (%)
Source: Bloomberg.

3M -10%

12M 1%

-11%

Neutral
Company Data Price (R$) Date Of Price 52-week Range (R$) Mkt Cap (R$ mn) Fiscal Year End Shares O/S (mn) Price Target (R$) Price Target End Date Minerva SA (BEEF3.SA;BEEF3 BZ) 6.14 28 Oct 10 7.92 - 5.31 649.23 Dec 106 8.10 31 Dec 11 EBITDA FY (R$ mn) Revenues FY (R$ mn) EV/EBITDA FY P/E FY EPS Reported FY (R$) 2009A 182 2,602 9.4 6.2 1.00 2010E 238 3,435 7.2 NM (0.08) 2011E 282 4,011 6.1 9.0 0.69 2012E 324 4,544 7.4 0.83

Source: Company data, Bloomberg, J.P. Morgan estimates.

68

Ben Laidler (1-212) 622-5252 [email protected]

Latin America Equity Research November 2010

Minerva SA: Summary of Financials
Income Statement - Annual
Revenues Cost of goods sold Gross profit SG&A LFL Operating income LFL EBITDA Interest, net Pretax income Equity income Income taxes Tax rate Net income - operating Non-operating income / (expense) Net income - reported (GAAP) Diluted shares outstanding EPS (LFL) EPS - reported (GAAP) EPS - consensus (I/B/E/S)

FY09A FY10E FY11E
2,602 (2,132) 470 (329) 141 182 (68) 73 7 10.0% 81 105 1.00 1.00 3,435 (2,769) 666 (467) 199 238 (186) 1 0 0.0% 1 135 (0.08) 0.16 4,011 (3,233) 778 (536) 242 282 (100) 123 (30) 24.0% 94 135 0.69 0.57

Income Statement - Quarterly
Revenues Cost of revenues Gross profit Other operating expenses Operating income EBITDA Interest, net Pretax income Equity income Income taxes Tax rate Net income - operating Non-operating income / (expense) Net income - reported (GAAP) Diluted shares outstanding EPS (LFL) EPS - reported (GAAP) EPS - consensus (I/B/E/S)

1Q10A 2Q10A 3Q10E 4Q10E
744 (611) 133 (92) 41 54 (65) (23) 0 0.0% (23) 105 (0.22) 0.09 888 (711) 177 (124) 53 62 (67) (17) 0 0.0% (17) 106 (0.16) 0.12 893 (718) 175 (124) 51 60 (30) 17 0 0.0% 17 135 0.12 0.15 909 (729) 180 (127) 54 63 (24) 25 0 0.0% 25 135 0.18 0.11

Balance Sheet and Cash Flow Data
Cash and cash equivalents Accounts receivable Inventories Current assets PP&E Goodwill Intangibles Total assets Short-term debt Current liabilities Long-term debt Total liabilities Shareholders' equity Net Income (including charges) D&A Other adjustments Change in working capital Cash flow from operations Capex Free cash flow Free cash flow / share Cash flow from investing activities Cash flow from financing activities Share buybacks Dividends

FY09A FY10E FY11E
424 199 270 1,216 765 2,073 1,546 527 81 41 (15) 153 (138) (138) (33) 0.00 682 189 281 1,553 849 2,486 1,800 686 1 39 (69) 0 (123) (122) 380 0.00 583 216 320 1,577 909 2,683 1,825 858 93 40 (79) 65 (100) (100) (63) -

Ratio Analysis
Reported sales growth organic growth volume change price / mix change FX Other Gross margin SGA / sales EBIT margin EBITDA margin Return on equity (ROE) Return on invested capital (ROIC) EBITDA growth EBIT growth Net income growth - operating EPS growth - operating Core operating cycle (days) Working capital as % of sales Net debt Net debt / EBITDA Net debt / capital (book) P/E Enterprise value / EBITDA Enterprise value / revenues FCF yield Dividend yield Market Cap / cash earnings CFO / FV

FY09A FY10E FY11E FY12E
22.7% 18.1% 5.4% 7.0% 15.4% 4.9% 18.9% 11.3% 21.1% 799 6.1 9.4 0.7 0.0% 32.0% 19.4% 5.8% 6.9% 0.1% 6.2% 30.5% 40.9% 18.0% 761 NM 7.2 0.5 0.0% 16.8% 19.4% 6.0% 7.0% 10.8% 6.6% 18.6% 21.7% 17.4% 820 8.8 6.1 0.4 13.3% 19.5% 6.1% 7.1% 11.8% 14.9% 15.2% 21.0% 17.2% 877 7.3 0.4 -

Source: Company reports and J.P. Morgan estimates.
Note: R$ in millions (except per-share data). Fiscal year ends Dec

69

Ben Laidler (1-212) 622-5252 [email protected]

Latin America Equity Research November 2010

Homebuilders
Key country dynamics We continue to prefer the Brazilian Homebuilders vs the Mexican names as we expect Brazil’s macroeconomic scenario to continue supporting the sector on the back of positive government participation and a robust growth outlook. Further, we believe the expected tightening in the Selic that could begin in 2011 represents only a marginal adjustment to government monetary policy and is already priced in. Despite cost pressures in Brazil, companies have been able to maintain margins given a positive outlook on housing prices. On the other hand, in Mexico companies are in a transition phase, moving more toward the AEL segment and also entering the informal sector (self employed and informal jobs) where there is high pent-up demand but not much mortgage availability yet. Moreover, the focus is now on free cash flow generation, which is still at question given its WC demands. Revenue growth should remain in the low double digits in the near term. Growth characteristics and how they are changing Despite the positive outlook for all income segments in Brazil, given attractive mortgage conditions and pent-up demand, the companies have been increasing their exposure to the lower-income segment to benefit from the government’s housing program and its shorter cycle. In Mexico, the sector is still recovering from the credit crisis, which reduced mortgage availability, especially from Fovissste and banks (which are focused on the middle-income and residential segments). As a result, companies remain focused on the AEL segment and are in fact increasing their exposure further due to its resilient characteristics. Drivers of returns – Multiples and growth We are not expecting multiple expansion in Brazil or in Mexico as in both countries companies are trading in line with their 12-month averages (around 10.0-11.0x), so earnings growth will drive the upside, in our view. However, we believe investors could pay a higher multiple in Mexico if the economic outlook improves and in Brazil if companies start to generate cash. Regarding growth, we assume a conservative view for all the companies. Recommendations PDG is the top pick among the BZ HB as its earnings have upside potential on the back of the Agre acquisition. Geo is our top pick among the MX HB given its strong growth and potential improvement in margins. We recommend that investors avoid Cyrela given current uncertainties about future results.
70

Adrian Huerta AC *
(52 81) 8152-8720 [email protected] J.P. Morgan Casa de Bolsa, S.A de C.V., J.P. Morgan Grupo Financiero.P. Morgan Securities LLC Bloomberg JPMA HUERTA <GO>

Selic should not have a negative impact on Brazilian homebuilders
300 250 200 150 100 50 May-06 Aug-06 Nov-06 Feb-07 May-07 Aug-07 Oct-07 Feb-08 Apr-08 Jul-08 Oct-08 Jan-09 Apr-09 Jun-09 Sep-09 Dec-09 Mar-10 Jun-10 Aug-10 Nov-10 Jan-11 Mar-11 May-11 Jul-11 Sep-11 Nov-11 BZ HB index Selic 17.0 15.0 13.0 11.0 9.0 7.0

Source: J.P. Morgan estimates and Bloomberg.

Working capital for MX continues to deteriorate Adj. Cash Conversion Cycle - In Days
500 400 300 200 100 0 1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 Geo Homex Urbi

Source: Company reports.

BZ HB vs IBOV
130 120 110 100 90 80 70 Mar-10 Jan-10 Feb-10 Jun-10 Aug-10 May-10 Sep-10 Oct-10 Oct-10 Apr-10 Jul-10 Apr-10 Jul-10 Ibov BZ HB

Source: J.P. Morgan estimates and Bloomberg.

MX HB vs Bolsa
120 100 80 60 40 20 Oct-07 Oct-08 Jan-07 Jan-08 Jan-09 Oct-09 Apr-07 Apr-08 Apr-09 Jan-10 Jul-07 Jul-08 Jul-09

Source: Bloomberg and J.P. Morgan estimates.

* Registered/qualified as a research analyst under NYSE/NASD rules.

Ben Laidler (1-212) 622-5252 [email protected]

Latin America Equity Research November 2010

Top picks and stocks to avoid
Price Top picks PDG Geo Stocks to avoid Cyrela R$21.18 Ps39.31 R$22.80 Code PDGR3 BZ GEOB MM CYRE3 BZ Rating OW OW UW Mkt cap (US$MM) 6,874 1,747 5,659 P/E (x) 10E 14.5 12.2 12.2 11E 9.4 9.7 9.9 EPS 10E 1.46 3.23 1.88 11E 2.26 4.08 2.31 Div. yield 11E (%) ROE 11E (%) 19.2% 22.0% 20.1%

Source: Bloomberg, J.P. Morgan estimates. Note: Share prices and valuations are as of October 28, 2010.

Homebuilders absolute and relative to MSCI LatAm
800 700 600 500 400 300 200 100 0 Dec-02 Mar-04 May -05 Aug-06 Oct-07 Jan-09 Mar-10 Absolute Relativ e to MSCI EMF Index

Homebuilders EPS integer
170 160 150 140 130 120 110 100 90 Feb-09 Jul-09 Dec-09 May -10 Oct-10 2010 2011

Source: MSCI, Bloomberg, IBES, Datastream, J.P. Morgan.

Source: MSCI, Bloomberg, IBES, Datastream, J.P. Morgan.

Homebuilders 12 mth fwd PE
18 15 12 9 6 3 95 97 98 99 00 PE 01 02 03 Av g 04 05 06 07 08 10

Homebuilders trailing PB
5 4.5 4 3.5 3 2.5 2 1.5 1 0.5 0 95 97 98 99 00 PB 01 02 03 Av g 04 05 06 07 08 10

+1SD

-1SD

+1SD

-1SD

Source: MSCI, Bloomberg, IBES, Datastream, J.P. Morgan.

Source: MSCI, Bloomberg, IBES, Datastream, J.P. Morgan.

71

Ben Laidler (1-212) 622-5252 [email protected]

Latin America Equity Research November 2010

Corporacion Geo
GEOB.MX www.corporaciongeo.com
Company description Geo is the largest homebuilder in Mexico, selling more than 56k units per year and focused mainly on lower-income housing, with revenues of more than Ps18 bn in 2009. The company has operations in 17 states and 56 cities. Investment case Geo is our top pick among the MX HB given its strong top-line growth of ~15% and its potential to improve operating margins. Also, the company has made significant progress on its debt profile and maintains the lowest net investment in land, which has helped it to post the highest ROEs among its peers at more than 20%. Potential for earnings upgrades In the 1H10, the company grew more than expected, with revenues +14% yoy vs 8-11% guidance. Further, Geo released a 5-year target growth plan recently, and it expects to build 100K homes by 2015 (12.5% CAGR) and to expand gross margins by 3pp and SG&A by 1pp; however, in our estimates we are only incorporating a 1pp increase in gross margins to be conservative. Prospects for re-/derating Despite the company’s robust growth plans, it trades at a discount to peers on P/E basis, given a lower net margin. This should change as Geo executes its growth plans, improves margins and starts to generate positive FCF. Price target and risks We ate Geo Overweight with a Dec-11 price target of Ps52, which is the average of our DCF-based valuation and our GGM-based valuation. The COE of 10.6% is based on a beta of 1.2, country risk of 1.6%, and a risk-free rate of 3.0%, resulting in a WACC of 10.9%. We see lower-than-expected growth in revenues as the main downside risk. The company needs to generate significant FCF in 2H10 in order to be neutral to slightly positive in FCF for the year. Negative FCF for the year likely will be taken negatively by investors.
Corporacion Geo (GEOB.MX;GEOB MM) 2008A EPS Reported FY (Ps) 2.75 Bloomberg EPS FY (Ps) 3.10 EBITDA FY (Ps mn) 4,119 Revenues FY (Ps mn) 17,453

Overweight
Ps39.31 (28 Oct 10)

Price Target: Ps52
End Date: Dec 2011

Mexico Homebuilders
Adrian E Huerta AC *
(52 81) 8152-8720 [email protected] J.P. Morgan Casa de Bolsa, S.A de C.V., J.P. Morgan Grupo Financiero Bloomberg JPMA HUERTA <GO>

Price Performance
41 38 Ps 35 32
Oct-09 Jan-10 Apr-10 Jul-10 Oct-10

Source: Bloomberg.

Performance
1M Absolute (%) Relative (%)
Source: Bloomberg.

3M 15 8

12M 9 -11

8 2

* Registered/qualified as a research analyst under NYSE/NASD rules.

Company Data Price (Ps) Date Of Price 52-week Range (Ps) Mkt Cap (Ps mn) Fiscal Year End Shares O/S (mn) Price Target (Ps) Price Target End Date

39.31 28 Oct 10 44.60 30.75 21,084.15 Dec 536 52.00 31 Dec 11

2009A 2.85 3.25 4,401 19,211

2010E 3.23 3.04 4,515 19,821

2011E 4.08 3.58 5,201 22,361

Source: Company data, Bloomberg, J.P. Morgan estimates. 'Bloomberg' above denotes Bloomberg consensus estimates.

72

Ben Laidler (1-212) 622-5252 [email protected]

Latin America Equity Research November 2010

Corporacion Geo: Summary of Financials
Income Statement - Annual Net Revenues Cost of goods sold Gross profit Gross margin SG&A Other Operating Expenses EBIT Depreciation EBITDA EBITDA margin, % Financial income Financial expense Other Nonoperating income Equity income EBT Taxes Minority interest Extraordinary Net income Net income margin EPS Net Revenue growth EBITDA growth Net income growth FCF growth Operating Data, Ratios Working Capital changes FCFF-firm Dividends Dividend % of net income FY08A 17,453 (11,662) 5,791 33.2% (1,672) 2,914 (277) 4,119 23.6% 102 (614) (7) 2,293 (731) (89) 1,473 8.4% 2.75 FY09A FY10E FY11E Balance Sheet FY08A FY09A FY10E FY11E 2,578 8,346 10,462 4,852 5,610 731 1,717 919 25,141 4,523 2,812 2,011 801 1,775 2,921 2735.8 1,775 14,821 942 10,320 25,141 4,866 52% 79% 118% 3,393 9,877 12,247 4,901 7,346 861 2,010 1,381 30,227 2,660 3,836 3,298 538 1,610 5,587 3616.6 1,610 18,609 1,749 11,618 30,227 4,853 49% 84% 110% 4,474 815 22,474 5,131 17,343 1,296 2,050 747 32,382 2,774 4,075 3,375 699 3,055 6,473 4013.6 3,055 21,690 1,487 10,339 32,029 4,773 54% 104% 106% 4,252 919 25,307 5,742 19,566 1,296 2,106 747 35,233 2,774 4,735 3,780 955 3,055 6,473 4013.6 3,055 22,350 1,487 12,530 34,880 4,995 45% 84% 96% 19,211 19,821 22,361 Cash (13,135) (13,442) (15,053) Accounts receivable 6,076 6,379 7,308 Inventories 31.6% 32.2% 32.7% Land bank (1,676) (1,864) (2,107) Real Estate & Construction - Others current assets 3,306 3,286 3,893 Net PP&E (276) (456) (503) Other assets 4,401 4,515 5,201 Total Assets 22.9% 22.8% 23.3% ST Loans 124 81 134 Accounts Payables (667) (660) (628) Suppliers (70) (60) (70) Land Payables - Other current liabilities 2,620 2,647 3,329 LT Debt (963) (794) (999) Deffered taxes (107) (119) (140) Other non current liabilities - Total Liabilities 1,529 1,734 2,191 Minority Interests 8.0% 8.7% 9.8% Shareholders Equity 2.85 3.23 4.08 Liabilities and Equity 3.2% 2.6% 13.4% (8.4%) FY10E (2,285) 1,337 12.8% 15.2% 26.4% 2.1% Net debt Net Debt/Equity Debt/Equity NetDebt/EBITDA

16.5% 10.1% 15.8% 6.8% 1.7% 3.8% (75.2%) (692.1%) FY08A (3,763) (247) FY09A (2,292) 1,461 -

FY11E Valuation, Macro (2,278) EV/EBITDA 1,365 land adj. - P/E land adj. P/BV P/CE 21,492 96.1% FCF yield 62,424 Dividend yield 358 Capex/Revenues Cash Earnings 9% Coverage EBIT/Interest) 4% ROE 15 ROIC 614 Shares 474 115 WACC 92 Perpetual Growth 514 Cost of equity 398 Cost of debt

FY08A FY09A FY10E FY11E 6.0 6.0 14.5 2.2 7.9 (1.2%) 0.0% 3.3% 2,651 6.7 5.4 5.4 14.0 2.1 7.3 7.0% 0.0% 3.0% 2,865 6.6 5.3 5.3 12.4 12.0 2.4 8.0 6.4% 0.0% 2.5% 2,587 6.8 4.7 4.7 9.8 9.5 1.9 7.7 6.6% 0.0% 2.5% 2,694 8.3

Working capital Working capital/sales Units Avg. price/Unit (Ps '000) Units chg Avg.price/Unit chg Days receivable Days inventory adj. (excl. land) Days payable adj. (excl. land) Cash Conversion Cycle Adj. Cash Conversion Cycle

15,996 91.7% 51,879 336 13% 3% 175 327 176 88 63 414 287

18,288 95.2% 56,559 340 9% 1% 188 340 204 107 92 421 300

19,214 96.9% 57,443 345 2% 2% 15 610 471 111 92 515 394

17.1% 15.9% 18.5% 22.0% 21.3% 20.1% 18.8% 16.9% 536 536 536 536
10.9% 4.0% 10.6% 11.2% -

Source: Company reports and J.P. Morgan estimates. Note: Ps in millions (except per-share data). Fiscal year ends Dec.

73

Ben Laidler (1-212) 622-5252 [email protected]

Latin America Equity Research November 2010

PDG Realty
PDGR3.SA www.pdgrealty.com.br
Company description PDG became the largest market cap (around USD6.9bn) company among the BZ HB after acquiring AGRE early in the year, thereby gaining exposure to the mid- and high-income segments and now having exposure to all income segments. The company is geographically diversified, has one of the best management teams among its peers, with a strong focus on cash flows and with management interest aligned with minority shareholders. Investment case We believe that the recent acquisition of AGRE will provide room for stronger top-line growth versus peers’ and will allow the company to deliver one of the highest operating margins in the industry. PDG also offers opportunities to improve AGRE’s lower ROEs through better operating efficiencies and lower financial expenses. Potential for earnings upgrades We believe that the company offers one of the highest potential upsides to earnings given the lack of track record for the combined company as PDG has only reported one quarter consolidating AGRE. We believe investors are still conservative on growth and margin assumptions for PDG. Prospects for re-/derating Currently PDG is trading at 9.4 P/E 11E, in line with Cyrela and Rossi and at a discount to MRV; however, we believe that if margins improve and growth accelerates, it could trade at least in line with MRV’s multiples. Price target and risks We rate PDG Overweight with a Dec-11 price target of R$30, which is the average of our DCF-based valuation and GGM-based valuation. The COE of 11.6% used is based on a beta of 1.3x, country risk of 2.1%, and a risk-free rate of 3.0%, resulting in a WACC of 10.5%. The main risks to our positive view are lower-than-expected synergies from the AGRE acquisition impacting our forecasts on growth and margins resulting in lower-than-expected results. Given its significant exposure to lower income, through Goldfarb, PDG can also be impacted by changes in MCMV policy and CEF execution capabilities.
PDG Realty (PDGR3.SA;PDGR3 BZ) Company Data Price (R$) Date Of Price 52-week Range (R$) Mkt Cap (R$ mn) Fiscal Year End Shares O/S (mn) Price Target (R$) Price Target End Date 21.18 28 Oct 10 22.73 12.32 11,675.24 Dec 551 30.00 31 Dec 11 EPS Reported FY (R$) EBITDA FY (R$ mn) P/E FY Revenues FY (R$ mn) Bloomberg EPS FY (R$)
Source: Company data, Bloomberg, J.P. Morgan estimates.

Overweight
R$21.18 (28 Oct 10)

Price Target: R$30
End Date: Dec 2011

Brazil Homebuilders
Adrian E Huerta AC *
(52 81) 8152-8720 [email protected] J.P. Morgan Casa de Bolsa, S.A de C.V., J.P. Morgan Grupo Financiero Bloomberg JPMA HUERTA <GO>

Price Performance
24 20 R$ 16 12
Oct-09 Jan-10 Apr-10 Jul-10 Oct-10

Source: Bloomberg.

Performance
1M Absolute (%) Relative (%)
Source: Bloomberg.

3M 15 10

12M 51 34

2

* Registered/qualified as a research analyst under NYSE/NASD rules.

2009A 0.87 417 24.4 1,984 0.93

2010E 1.46 1,366 14.5 5,332 1.50

2011E 2.26 1,878 9.4 7,498 2.19

74

Ben Laidler (1-212) 622-5252 [email protected]

Latin America Equity Research November 2010

PDG Realty: Summary of Financials
Income Statement - Annual Net Revenues Cost of goods sold Gross profit Gross margin SG&A Selling expenses G&A Depreciation EBITDA EBITDA margin, % Financial income Financial expense Other Nonoperating income Equity income EBT Taxes Minority interest Extraordinary Net income Net income margin EPS Net Revenue growth EBITDA growth Net income growth FCF growth Operating Data, Ratios Working Capital changes FCFF-firm Dividends Dividend % of net income Working capital Working capital/sales Launches (Co's share) Pre-sales (Co's share) Units Price/M2 Price/Unit Launches chg Pre-sales chg Units chg Price/M2 chg Days receivable Days inventory Days payable FY09A 1,984 (1,294) 690 29.0% (268) (129) (140) (5) 417 21.0% 79 (27) 21 371 (37) 4 0 338 17.0% 0.87 FY10E 5,332 (3,253) 2,080 33.0% (713) (316) (397) (43) 1,366 25.6% 230 (210) 0 1,023 (199) (21) 0 803 15.1% 1.46 FY11E 7,498 (4,724) 2,774 32.0% (886) (424) (462) (60) 1,878 25.0% 203 (106) 0 1,540 (265) (32) 0 1,244 16.6% 2.26 FY12E Balance Sheet 7,883 (4,966) 2,917 32.0% (937) (451) (486) (63) 1,990 25.2% 239 (111) 0 1,661 (278) (35) 0 1,348 17.1% 2.45 5.1% 6.0% 8.4% (514.6%) Cash Accounts receivable Inventories Land bank Real Estate & Construction Others current assets Net PP&E Other assets Total Assets ST Loans Accounts Payables Suppliers Land Payables Other current liabilities LT Debt Deffered taxes Other liabilities Total Liabilities Minority Interests Shareholders Equity Liabilities and Equity Net debt Net Debt/Equity Debt/Equity NetDebt/EBITDA FY09A 1,099 2,509 1,678 1,010 668 177 82 308 6,103 543 788 640 148 165 963 87.8 165 3,142 20 2,961 6,103 407 14% 51% 98% FY09A 15.6 24.4 1.5 FY10E 723 6,282 3,805 2,205 1,600 617 86 629 13,295 1,833 1,394 292 1,102 362 1,973 51.6 362 7,241 101 6,054 13,295 3,083 52% 64% 226% FY10E 6.6 14.5 1.0 FY11E 268 7,806 4,406 2,315 2,091 617 64 629 14,944 2,025 1,568 411 1,157 362 2,181 51.6 362 7,815 133 7,129 14,944 3,938 56% 60% 210% FY11E 5.3 9.4 0.9 FY12E 1,250 7,775 4,629 2,431 2,199 617 40 629 16,094 2,025 1,647 432 1,215 362 2,181 51.6 362 7,894 168 8,200 16,094 2,956 37% 52% 149% FY12E 4.5 8.7 0.8 -

61.1% 168.8% 40.6% 62.7% 227.7% 37.5% 85.3% 137.5% 54.8% 27.2% 1.3% (64.6%) FY09A (1,439) (1,048) 13.5% FY10E (2,201) (1,062) 10.5% FY11E (1,952) (376) 16.1% 10,644 142.0% 8,400 7,712 67,308 156 172 20% 17% 15% 4% 380 340 77

FY12E Valuation, Macro (113) 1,559 23.1% 10,757 136.5% 9,240 8,201 71,191 162 177 10% 6% 6% 4% EV/EBITDA P/E P/BV P/CE FCF yield Dividend yield Capex/Revenues Inventory/Revenues Assets/Equity Coverage (EBIT/Interest) ROE ROIC Shares

3,399 8,692 171.4% 163.0% 3,027 7,000 2,670 6,577 32,129 58,333 158 150 159 16% 47% 14% (29%) 462 473 147 165 131% 146% 82% (5%) 430 427 96

0.0% 0.0% 0.0% 0.0% 0.6% 0.7% 1.7% 2.7% (0.6%) (0.5%) (0.5%) (0.5%) 84.6% 71.4% 58.8% 58.7% 207.5% 223.3% 213.6% 200.4% 15.3% 12.4% 390 15.0% 12.8% 551 19.2% 15.2% 551
10.5% 3.0% 11.6% 8.6%

17.9% 14.6% 551

WACC Perpetual Growth 360 Cost of equity 340 Cost of debt 77

Source: Company reports and JPMorgan estimates. Note: R$ in millions (except per-share data). Fiscal year ends Dec

75

Ben Laidler (1-212) 622-5252 [email protected]

Latin America Equity Research November 2010

Cyrela Brazil Realty
CYRE3.SA www.cyrela.com.br
Company description Cyrela is the second-largest homebuilder in Brazil in market cap and is considered a premium player in the sector given its long track record. The company is a diversified player, acting on the lower-income segment via its “Living” brand, which launched more than 16k units in 2009, representing 40% of its total launches. Cyrela is present in 66 cities and 16 states, having one of best geographic diversifications, with a land bank of R$34.9bn in PSV. Investment case It is our stock to avoid given the lack of good results in 1H10 as the company launched only 24% of full-year guidance vs 40-50% from peers, and also due to weakening margins in recent quarters on the back of higher-than-expected costs. Potential for earnings upgrades We see limited room for positive earnings surprise in the short term, and given its increasing focus on the lower-income segment, margins are not likely to improve from the levels seen in recent quarters. It is important to flag that in the last 3 quarters Cyrela reported higher-than-expected project costs. Prospects for re-/derating Despite its weak results in 1H10 Cyrela is trading in line with peers at 9.9x P/E 11E and 2.3x P/BV. We believe these valuations already reflect a potential recovery in 2H10 and 2011 results. Price target and risks We rate Cyrela Underweight with a Dec-11 price target of R$29, which is the average of our DCF-based valuation and GGM-based valuation. The COE of 11.6% used is based on a beta of 1.30, country risk of 2.1%, and a risk-free rate of 3.0%, resulting in a WACC of 10.3%. The main upside risks to our price target and rating include better-than-expected margins as we are assuming a conservative approach on the name given the weak results in 2Q. We are also not incorporating company launch and presale guidance for 2012, which, if it follows plan, could result in higher-than-expected growth in the coming years.
Cyrela Brazil Realty (CYRE3.SA;CYRE3 BZ) 2009A EPS Reported FY (R$) 1.73 EBITDA FY (R$ mn) 921 P/E FY 13.2 Revenues FY (R$ mn) 4,088 Bloomberg EPS FY (R$) 1.70
Source: Company data, Bloomberg, J.P. Morgan estimates.

Underweight
R$22.80 (28 Oct 10)

Price Target: R$29
End Date: Dec 2011

Brazil Homebuilders
Adrian E HuertaAC
(52 81) 8152-8720 [email protected] J.P. Morgan Casa de Bolsa, S.A de C.V., J.P. Morgan Grupo Financiero Bloomberg JPMA HUERTA <GO>

Price Performance
24 R$ 20 16
Oct-09 Jan-10 Apr-10 Jul-10 Oct-10

Source: Bloomberg.

Performance
1M Absolute (%) Relative (%)
Source: Bloomberg.

3M -2 -7

12M 7 -10

-8 -9

* Registered/qualified as a research analyst under NYSE/NASD rules.

Company Data Price (R$) Date Of Price 52-week Range (R$) Mkt Cap (R$ mn) Fiscal Year End Shares O/S (mn) Price Target (R$) Price Target End Date

22.80 28 Oct 10 26.15 16.58 9,642.37 Dec 423 29.00 31 Dec 11

2010E 1.88 1,101 12.2 5,215 1.81

2011E 2.31 1,374 9.9 6,150 2.24

2012E 2.56 1,449 8.9 6,461 2.83

76

Ben Laidler (1-212) 622-5252 [email protected]

Latin America Equity Research November 2010

Cyrela Brazil Realty: Summary of Financials
Income Statement - Annual Net Revenues Cost of goods sold Gross profit Gross margin SG&A Selling expenses G&A Depreciation EBITDA EBITDA margin, % Financial income Financial expense Other Nonoperating income Equity income EBT Taxes Minority interest Extraordinary Net income Net income margin EPS Net Revenue growth EBITDA growth Net income growth FCF growth Operating Data, Ratios Working Capital changes FCFF-firm Dividends Dividend % of net income Working capital Working capital/sales Launches (Co's share) Pre-sales (Co's share) Units Price/M2 Price/Unit Launches chg Pre-sales chg Units chg Price/M2 chg Days receivable Days inventory Days payable FY09A 4,088 (2,639) 1,449 34.5% (572) (291) (281) (36) 921 22.5% 211 (225) 111 941 (73) (98) 0 729 17.8% 1.73 FY10E 5,215 (3,384) 1,830 33.8% (763) (412) (351) (52) 1,101 21.1% 303 (237) 5 1,054 (130) (104) 0 793 15.2% 1.88 FY11E 6,150 (3,966) 2,183 34.0% (875) (461) (414) (61) 1,374 22.3% 347 (265) 5 1,308 (147) (123) 0 975 15.9% 2.31 17.9% 24.8% 22.9% (258.4%) FY11E (276) 830 0 0.0% FY12E Balance Sheet 6,461 (4,168) 2,294 33.5% (914) (485) (430) (65) 1,449 22.4% 394 (224) 5 1,431 (154) (129) 0 1,081 16.7% 2.56 5.1% 5.5% 10.8% 56.3% Cash Accounts receivable Inventories Land bank Real Estate & Construction Others current assets Net PP&E Other assets Total Assets ST Loans Accounts Payables Suppliers Land Payables Other current liabilities LT Debt Deffered taxes Other liabilities Total Liabilities Minority Interests Shareholders Equity Liabilities and Equity Net debt Net Debt/Equity Debt/Equity NetDebt/EBITDA FY09A 1,666 4,917 3,362 2,256 1,106 293 241 60 10,551 392 306 292 306 1,948 2,231 177.5 1,948 6,445 253 4,105 10,551 957 25% 68% 104% FY09A 12.5 13.5 0.9 FY10E 1,002 6,429 3,856 2,579 1,276 402 276 72 12,049 537 464 357 464 2,302 2,337 194.9 2,302 7,239 339 4,810 12,049 1,871 42% 64% 170% FY10E 11.2 12.4 0.8 FY11E 1,882 6,739 4,055 2,708 1,346 402 282 72 13,444 574 542 421 542 2,394 2,499 204.7 2,394 7,735 462 5,710 13,444 1,192 23% 59% 87% FY11E 8.4 10.1 0.7 FY12E 3,036 6,550 4,258 2,844 1,415 402 288 72 14,620 574 569 443 569 2,489 2,499 214.9 2,489 7,944 591 6,676 14,620 37 1% 51% 3% FY12E 7.1 9.1 0.6 -

43.6% 27.6% 98.4% 19.6% 162.7% 8.8% 358.5% (62.9%) FY09A (2,072) (1,413) 0 0.0% 7,973 195.0% 4,465 4,088 26,417 0 207 18% 18% 439 465 227 FY10E (1,429) (524) 0 0.0% 9,820 188.3% 5,450 5,032 40,370 0 195 22% 23% 450 416 197

FY12E Valuation, Macro 130 1,297 0 0.0% EV/EBITDA P/E P/BV P/CE

10,252 10,239 FCF yield 166.7% 158.5% Dividend yield 6,268 6,894 Capex/Revenues 5,720 6,274 Inventory/Revenues 44,640 47,216 Assets/Equity 0 0 Coverage (EBIT/Interest) 203 15% 14% 400 373 179 209 10% 10% ROE ROIC Shares

(13.1%) (4.9%) 7.7% 12.0% 0.0% 0.0% 0.0% 0.0% (3.9%) (1.1%) (1.1%) (1.1%) 82.2% 73.9% 65.9% 65.9% 273.8% 269.5% 256.2% 240.3% 3.7 4.2 4.6 5.6 24.4% 11.3% 422 19.1% 11.6% 423 20.1% 12.4% 423
10.3% 3.0% 11.6% 8.1%

19.1% 11.8% 423

WACC Perpetual Growth 370 Cost of equity 373 Cost of debt 178

Source: Company reports and J.P. Morgan estimates. Note: R$ in millions (except per-share data). Fiscal year ends Dec.

77

Ben Laidler (1-212) 622-5252 [email protected]

Latin America Equity Research November 2010

Metals & Mining
Key sector dynamics The key themes for the metals and mining sector in 2011 should be (1) the outlook for China’s commodity demand, (2) the pace of global economic growth, (3) industry fundamentals, and (4) government regulations. China remains the center stage of global commodity demand and should be strong in 2011 (partially offsetting weakness in the developed world) – it should announce its 12th 5-year plan in 1Q11, which our China economist believes will re-emphasize its commitment to urbanization and infrastructure development. The outlook for different subsectors appears to be mixed, and we believe iron ore and copper will be outperformers in 2011 as their supply remains tight relative to steel, which should continue to be in gross overcapacity. Finally, government regulations should be a source of noise, especially for the miners, but further clarity should ease concerns. Growth characteristics and how they are changing Given J.P. Morgan expects the global economy to grow at 3.0% in 2011, the sector should continue to build on the growth shown in 2010. However, we highlight two key points: (1) Emerging economies should grow at a faster rate compared to the developed ones (5.8% vs. 1.9%), led by China (9.0%); and (2) The growth should be relatively moderate compared to 2010e. Drivers of returns – Multiples and growth We believe the main drivers of returns will be both sector/stock rerating/derating as well as changing earnings expectations for the different subsectors. We highlight steel as a sector in whixh we see risks of downward revision of earnings, and a potential derating as the industry could stabilize at a lower normal given slower recovery in demand as well as weaker margins. Iron ore and copper, on the other hand, should benefit from both upward revision of estimates and a potential rerating, mainly as the overhang of government influence eases as more clarity emerges on regulations. Recommendations Within miners, we recommend Vale (OW) and Grupo Mexico (OW) as the best vehicles to gain exposure to iron ore and copper, respectively, our favored commodities. We remain cautious on the steel sector, especially Brazilian flat steels, and see Usiminas (UW) as the most exposed to (1) the deteriorating pricing environment, and (2) higher raw material costs that we do not expect to subside meaningfully until 2014.

Rodolfo R. De Angele, CFA AC
(55-11) 3048-3888 [email protected] Banco J.P. Morgan S.A. Bloomberg: JPMA ANGELE <GO>

Global GDP should grow by 3.0% in ’11, driven by EMs, especially China
10% 8% % YoY 6% 4% 2% 0% 2010 Global Dev eloped markets Emerging markets 2011 China 4% 2% 7% 3% 2% 10% 6%

9%

Source: J.P. Morgan estimates.

World steel capacity utilization remains much below pre-crisis peak of 91%, even though production is close to pre-crisis levels
130 120 110 100 90 80 70 60 Jan-08 Apr-08 Jul-08 Oct-08 Jan-09 Apr-09 Jul-09 Oct-09 Jan-10 Apr-10 Jul-10 Global steel output World steel capacity utilization 100% 90% 80% 70% 60% 50%

Source: Bloomberg.

Brazilian flat-steel imports have stabilized at high levels
500 400 300 200 100 0 Jan-05 Jul-05 Jan-06 Jul-06 Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Flat-steel imports (LHS) Imports as a % of Apparent Consumption 35% 30% 25% 20% 15% 10% 5% 0%

Source: SECEX/MDIC, IAB (Brazilian Steel Institute) and J.P. Morgan.

In valuation terms, miners remain at a discount to the steelmakers
15.8 11.4 7.5 8.6 7.6 6.9 5.9 6.1 5.2 5.1 12.1 9.2

2010E Latam Steel Global Mining ex -Precious Global Steel Latam Precious Metals

2011E Latam Mining ex -Precious Global Precious Metals

Source: J.P. Morgan estimates.

78

Ben Laidler (1-212) 622-5252 [email protected]

Latin America Equity Research November 2010

Top picks and stocks to avoid
Price Top picks Vale Grupo Mexico Stocks to avoid Usiminas $31.80 Ps40.44 R$20.96 Code VALE GMEXICOB USIM5 Rating OW OW UW Mkt cap (US$MM) 163,216 25,453 12,386 P/E (x) 10E 10.2 17.5 21.2 11E 7.4 10.9 12.1 EPS 10E 2.92 0.19 1.02 11E 4.13 0.30 1.88 Div. yield 11E (%) 3.0 5.1 2.95.4 ROE 11E (%) 23.3 24.6 xx.xx

Source: Bloomberg, J.P. Morgan estimates. Note: Share prices and valuations are as of October 28, 2010. Vale price refers to ONs. Price for PNs was $28.29.

Metals & Mining absolute and relative to MSCI LatAm
1200 1000 800 600 400 200 0 Dec-02 Mar-04 May -05 Aug-06 Oct-07 Jan-09 Mar-10 Absolute Relativ e to MSCI EMF Index

Metals & Mining EPS integer
160 150 140 130 120 110 100 90 80 70 Feb-09 Jul-09 Dec-09 May -10 Oct-10 2010 2011

Source: MSCI, Bloomberg, IBES, Datastream, J.P. Morgan.

Source: MSCI, Bloomberg, IBES, Datastream, J.P. Morgan.

Metals & Mining 12 mth fwd PE
18 15 12 9 6 3 95 97 98 99 00 PE 01 02 03 Av g 04 05 06 07 08 10

Metals & Mining trailing PB
4 3.5 3 2.5 2 1.5 1 0.5 0 95 97 98 99

00 PB

01

02

03 Av g

04

05

06

07

08

10

+1SD

-1SD

+1SD

-1SD

Source: MSCI, Bloomberg, IBES, Datastream, J.P. Morgan.

Source: MSCI, Bloomberg, IBES, Datastream, J.P. Morgan.

79

Ben Laidler (1-212) 622-5252 [email protected]

Latin America Equity Research November 2010

Grupo Mexico
GMEXICOB.MX www.gmexico.com
Company description Grupo Mexico is one of the largest copper producers in globally, and has copper operation in Mexico, Peru and the US through its subsidiaries SCCO (80%) and Asarco (100%). The company has a $5.6B expansion plan in place that should increase its copper capacity by ~600kt to over 1.5Mtpy. It also has railroad operations in Mexico and controls a leading market share through its two subsidiaries Ferromex (56%) and Ferrosur (75%). Investment case We remain bullish on copper prices and see GMex as a unique copper growth story with large capex expansions in regions with relatively stable business environments. In addition, we view Asarco as a hidden asset in GMex’s portfolio, especially with copper above $8,000/t. Finally, GMex trades at a 31% discount to its NAV, which is unwarranted, in our view, and we believe it should trade at a ~15% discount that incorporates any concerns related to the “holding” nature of the company. Trading at 5.4x ’11e EBITDA, it remains cheap vs. SCCO at 8.9x and peers at 5.7x. Potential for earnings upgrades We remain 4% above consensus on ’11e EBITDA and believe consensus should move up as we see more upgrades on copper price assumptions. Prospects for re-/derating We see multiple potential catalysts for rerating of GMex shares over the next 12 months – a SCCO-Asarco merger and the IPO of the railroad business, which should bring transparency to GMex valuation. On the other hand, potentially any significant increase in hedging of copper production may cause a derating as investors may not get the desired exposure to copper prices. Price target and risks We base our price target and OW rating on GMex on an SOTP analysis – Dec’11 PT of Ps53.0 ($4.32/sh at JPMe FX rate for end-11 of Ps12.25/USD), assuming a holding company discount of 15%. The main downside risks are (1) weaker copper and moly prices; (2) appreciation of USD vs. MXN or PEN; (3) slower global growth, especially China; (4) recurrence of mining strikes; and (5) revocation of railroad concessions, weaker domestic economy, etc.
Grupo Mexico (GMEXICOB.MX;GMEXICOB MM) 2009A EPS - Recurring FY ($) 0.12 Revenues FY ($ mn) 4,785 EBITDA FY ($ mn) 2,126 EV/EBITDA FY 16.3 P/E FY 28.8
Source: Company data, Bloomberg, J.P. Morgan estimates.

Overweight
Ps40.44 (28 Oct 10)

Price Target: Ps53
End Date: Dec 2011

Mexico Metals & Mining
Rodolfo R. De Angele, CFA AC
(55-11) 3048-3888 [email protected] Banco J.P. Morgan S.A. Bloomberg: JPMA ANGELE <GO>

Price Performance
42 38 Ps 34 30 26
Oct-09 Jan-10 Apr-10 Jul-10 Oct-10

Source: Bloomberg.

Performance
1M Absolute (%) Relative (%)
Source: Bloomberg. Note: Prices as of close on 28th October, 2010. Performance in USD relative to Mexican Bolsa.

3M 22.4 11.8

12M 24.8 17.4

12.1 4.9

Company Data Price (Ps) Date Of Price 52-week Range (Ps) Mkt Cap (Ps mn) Fiscal Year End Shares O/S (mn) Price Target (Ps) Price Target End Date

40.44 28 Oct 10 42.00 25.52 314,825.40 Dec 7,785 53.00 31 Dec 11

2010E 0.18 7,981 3,768 8.2 17.5

2011E 0.30 10,599 5,588 5.4 10.9

2012E 0.40 12,828 7,323 4.1 8.1

80

Ben Laidler (1-212) 622-5252 [email protected]

Latin America Equity Research November 2010

Grupo Mexico: Summary of Financials
Income Statement
Revenues COGS ex D&A SG&A Depreciation EBITDA EBITDA margin Financial income Financial expense FX & Monetary gains (losses) Other Nonoperarting income Equity income EBT Taxes Minority interest Extraordinary Net income Net Income Recurring Net income margin (recurring) EPS EPS Recurring Revenue growth EBITDA growth Net income growth FCF growth

FY09A
4,785 (2,519) (140) (407) 2,126 44.4% 91 (130) 0 10 0 1,689 (559) (165) (80) 886 965 20.2% 0.11 0.12 (19.5%) (25.6%) (17.3%) (186.1%)

FY10E
7,981 (4,012) (201) (590) 3,768 47.2% 62 (302) 0 (11) 0 2,927 (1,045) (458) 28 1,452 1,424 17.8% 0.19 0.18

FY11E FY12E
10,599 (4,740) (270) (628) 5,588 52.7% 168 (341) 0 35 0 4,822 (1,760) (750) 26 2,338 2,312 21.8% 0.30 0.30 12,828 (5,178) (327) (648) 7,323 57.1% 168 (349) 43 0 6,536 (2,386) (1,017) 27 3,160 3,133 24.4% 0.41 0.40 21.0% 31.0% 35.2% 48.1%

FY13E
14,897 (5,998) (380) (707) 8,519 57.2% 168 (319) 50 0 7,711 (2,815) (1,200) 29 3,726 3,697 24.8% 0.48 0.47 16.1% 16.3% 17.9% 23.5%

Balance Sheet
Cash Accounts receivable Inventories Other current assets Total Current Assets Net PP&E Other assets Total assets
Short-term debt

FY09A FY10E FY11E FY12E
1,335 628 825 688 3,475 5,698 2,394 11,567 570 0 906 1,476 2,848 0 798 5,122 1,390 5,055 11,567 4,093 800 600 589 6,081 6,864 1,624 14,570 211 0 1,359 1,570 3,852 0 1,817 7,239 1,429 5,902 14,570 4,929 987 701 727 7,344 7,547 2,005 16,897 240 0 1,678 1,917 4,375 0 2,243 8,536 1,429 6,932 16,897 4,987 1,195 766 880 7,828 8,226 2,427 18,480 219 0 2,031 2,250 4,006 0 2,715 8,971 1,429 8,080 18,480

FY13E
5,518 1,388 887 1,022 8,815 8,737 2,818 20,370 211 0 2,358 2,569 3,850 0 3,152 9,571 1,429 9,369 20,370

Accounts payable Other current liabilities Total Current Liabilities Long-term debt Deferred taxes Other liabilities Total liabilities Minority Interests Shareholders' equity Liabilities + Equity

66.8% 32.8% 77.3% 48.3% 63.9% 61.0% (410.3%) (44.4%)

Net debt Net Debt/Capital Debt/Capital Net Debt/EBITDA

2,083 24.6% 40.3% 1.0

(30) (0.3%) 40.8% (0.0)

(314) (2.7%) 40.0% (0.1)

(761) (1,457) (6.2%) (10.8%) 34.3% 30.2% (0.1) (0.2)

Operating Data, Ratios
Capex Change in working capital Free cash flow Dividends Dividend % of net income Capex/depreciation CAPEX/sales Working capital Working capital/sales Shipments Avg price/t Cash COGS/t EBITDA/t Shipments chg Avg price/t chg Cash COGS/t chg EBITDA/t chg
Capex Maintenance

FY09A
599 1,170 (1,371) 445 50.3% 1.5 12.5% 1,354 28.3% 507 9,438 4,969 4,192 0.3% (19.8%) (13.7%) (25.8%)
599 176

FY10E
719 (547) 4,255 764 52.6% 1.2 9.0% 807 10.1% 482 16,570 8,329 7,823

FY11E FY12E
1,311 150 2,366 1,308 55.9% 2.1 12.4% 957 9.0% 645 16,441 7,353 8,669 1,327 110 3,505 2,012 63.7% 2.0 10.3% 1,067 8.3% 775 16,559 6,684 9,453

FY13E
1,218 170 4,329 2,436 65.4% 1.7 8.2% 1,236 8.3% 1,024 14,541 5,855 8,316

Valuation, Macro
EV/EBITDA P/E P/BV EV/tonne FCF yield Dividend yield ROE Net income margin Net revenue/Assets Assets/Equity ROIC Shares ADRs WACC Perpetual Growth Cost of equity Cost of debt

FY09A FY10E FY11E FY12E
16.3 26.4 5.0 4,386 (0.4%) 1.7% 17.5% 20.2% 41.4% 2.3 11.7% 7,785 9.9% 3.0% 8.2 17.9 53.3 4,267 1.4% 3.0% 24.6% 17.8% 54.8% 2.5 18.0% 7,785 5.4 11.0 45.4 3,136 0.8% 5.1% 33.7% 21.8% 62.7% 2.4 24.3% 7,785 4.1 8.1 39.0 2,565 1.1% 7.9% 39.1% 24.4% 69.4% 2.3 30.9% 7,785 -

FY13E
3.4 6.9 33.6 1,889 1.4% 9.6% 39.8% 24.8% 73.1% 2.2 33.4% 7,785 -

(5.0%) 33.8% 75.6% (0.8%) 67.6% (11.7%) 86.6% 10.8%
719 327 1,311 271

20.2% 32.2% 0.7% (12.2%) (9.1%) (12.4%) 9.0% (12.0%)
1,327 311 1,218 384

Expansion

423

392

1,040

1,015

834

Source: Company reports and J.P. Morgan estimates. Note: $ in millions (except per-share data). Fiscal year ends Dec.

81

Ben Laidler (1-212) 622-5252 [email protected]

Latin America Equity Research November 2010

Vale
VALEp www.vale.com
Company description The world’s 2nd-largest miner, largest iron ore producer, and 2nd-largest nickel producer also produces manganese, alloys, thermal & coking coal, bauxite, alumina, aluminum, copper, cobalt, fertilizers. Most operations are in Brazil, with presence in Canada (Inco), other LatAm, Africa, Indonesia, China. Investment case We remain bullish iron ore and China commodity demand. Given Vale’s costleadership, reserve quality and expected growth, we believe it is best leveraged to benefit from this tightness. The current share price fails to capture the potential, in our view. Our model suggests the current share price implies $53/t (FOB Brazil) for fines; low vs a current and YTD average of ~$120/t. At 4.9x ’11e EBITDA, Vale is cheap vs. respective historical and peer averages of 6.8x and 5.6x, and more than discounts higher capex and royalties/taxation concern. Potential for earnings upgrades Iron ore market remains very tight, and given the steep cost curve, marginal increase in demand can lift prices sharply and, in our view, presents the biggest potential for earnings upgrades. Similarly, higher prices for other commodities could add similar upside risks, and vice versa. Prospects for re-/derating Vale could rerate if concerns related to a slowdown in the global economy (double dip) mitigate and/or investor optimism on China demand improves further (announcement of China’s 12th 5-year plan could reinforce this). In addition, detailed disclosure of Vale’s capex plan as well as clarity on new regulations for the industry should help by removing potential overhangs. If these concerns continue or become more widespread, the stock may derate. Price target and risks We base our Overweight and price target for Vale PNs on a combination of DCF and an EV/EBITDA multiple of 7.5x, and use a WACC of 9.2% and 3% perpetuity growth. We then add a “voting share” premium of 14% (historical average) to arrive at our fair value for Vale ONs. Risks are a weaker-thanexpected global economy, especially China; harsher-than-expected government regulation; capex delay and/or cost run-ups; and higher operating costs.

Overweight
PN $28.29 (28 Oct 10)

Price Target (PN): $41.50
End Date: Dec 2011

Brazil Metals & Mining
Rodolfo R. De Angele AC
(55-11) 3048-3888 [email protected] Banco J.P. Morgan S.A. Bloomberg JPMA ANGELE <GO>

Price performance (PN - US$)
32 28 24 20 16 Oct-09 Feb-10 Jun-10 Oct-10

Source: Bloomberg

Performance
Absolute (%) Relative (%)

1M 4.3 3.1

3M 17.5 9.3

12M 32.3 12.5

Source: Bloomberg

O verw eight
C om pan y D ata P rice ($) D ate O f P rice 52-w eek R ange ($) M kt C ap ($ m n) Fiscal Year End S hares O /S (m n) P rice Target ($) P rice Target E nd D ate 28.29 28 O ct 10 29.67 19.89 151,784.75 D ec 5,365 41.50 31 D ec 11 C om . V ale do R io D oce (C VR D ) (V ALE p;V ALE /P U S) 2009 A E P S - R ecurring FY ($) 1.00 R evenues FY ($ m n) 23,311 E B ITD A F Y ($ m n) 9,629 E V /E B ITD A FY 17.7 P /E (U S D ) FY 28.8 2010E 3.02 41,995 24,188 7.0 9.5 2011E 4.13 54,963 34,785 4.8 7.0 2012E 4.62 61,085 38,832 4.1 6.2

S ource: C om pany data, B loom berg, J.P. M organ estim ates. (1) P/E m ultiples calculated assum ing 100% P N s. P/E m ultiples, considering O N s as w ell, are 10.3x, 7.4x and 6.6x for '10, '11 and '12, respectively. (2) Shares O /S in the 'C om pany D ata' table represents the total num ber of shares outstanding for V ale, i.e. O N s and PN s.

82

Ben Laidler (1-212) 622-5252 [email protected]

Latin America Equity Research November 2010

Vale PN: Summary of Financials
Income Statement
Revenues COGS ex D&A SG&A Depreciation EBITDA EBITDA margin Financial income Financial expense FX & Monetary gains (losses) Other Nonoperarting income Equity income EBT Taxes Minority interest Extraordinary Net income Net Income Recurring Net income margin (recurring) EPS EPS Recurring Revenue growth EBITDA growth Net income growth FCF growth

FY09A
23,311 (11,030) (1,130) (2,722) 9,629 41.3% 381 (1,558) 675 (2,503) 433 6,952 (2,100) (107) 171 5,349 5,178 22.2% 1.00 1.00

FY10E

FY11E

FY12E

FY13E

Balance Sheet
Cash Accounts receivable Inventories Other current assets Total Current Assets Net PP&E Other assets Total assets
Short-term debt

FY09A

FY10E

FY11E

FY12E

FY13E

41,995 54,963 61,085 57,600 (14,466) (16,483) (18,332) (19,099) (1,548) (2,026) (2,252) (2,124) (3,033) (3,744) (3,957) (4,136) 24,188 34,785 38,832 34,804 57.6% 63.3% 63.6% 60.4% 282 282 469 766 (2,076) (2,076) (2,646) (3,167) 119 (305) (304) (283) (2,633) (2,717) (2,874) (2,814) 1,169 1,308 1,358 1,088 18,640 27,895 31,189 26,744 (3,485) (6,695) (7,485) (6,419) (141) (332) (296) (286) (151) 0 0 0 16,033 22,176 24,766 21,127 16,184 22,176 24,766 21,127 38.5% 40.3% 40.5% 36.7% 2.99 4.13 4.62 3.94 3.02 4.13 4.62 3.94 30.9% 43.8% 38.3% 76.2% 11.1% 11.6% 11.7% 33.5% (5.7%) (10.4%) (14.7%) 2.7%

Accounts payable Other current liabilities Total Current Liabilities Long-term debt Deferred taxes Other liabilities Total liabilities Minority Interests Shareholders' equity Liabilities + Equity

11,040 19,359 31,110 51,339 63,607 3,120 7,633 9,987 11,090 10,460 3,196 4,589 5,305 5,845 6,093 3,938 3,986 5,215 5,791 5,462 21,294 35,567 51,617 74,065 85,622 68,810 79,416 89,816 99,256 105,611 12,175 22,528 27,231 28,775 26,319 102,279 137,512 168,664 202,097 217,553 2,982 4,071 4,071 4,071 4,071 2,309 3,862 5,054 5,612 5,293 3,890 6,080 7,955 8,834 8,332 9,181 14,014 17,080 18,517 17,696 19,898 26,844 33,589 40,350 45,294 12,703 23,014 24,980 31,493 29,134 41,782 63,871 75,649 90,359 92,124 3,562 4,811 6,890 8,277 9,291 56,935 68,830 86,125 103,461 116,137 102,279 137,512 168,664 202,097 217,553

(37.7%) 80.2% (52.8%) 151.2% (59.6%) 199.7% (124.3%) (480.9%)

Net debt Net Debt/Capital Debt/Capital Net Debt/EBITDA

11,840 14.2% 27.4% 1.2

11,555 11.1% 29.6% 0.5

6,549 5.0% 28.8% 0.2

(6,918) (14,243) (4.4%) (8.1%) 28.4% 28.2% (0.2) (0.4)

Operating Data, Ratios
Capex Change in working capital Free cash flow Dividends Dividend % of net income Capex/depreciation CAPEX/sales Working capital Working capital/sales Shipments Avg price/t Cash COGS/t EBITDA/t Shipments chg Avg price/t chg Cash COGS/t chg EBITDA/t chg
Capex Maintenance

FY09A
(11,024) 17 (1,958) (2,724) 50.9% 4.0 47.3% 4,055 17.4% 247,261 94 45 39 (16.5%) (25.4%) (10.9%) (43.5%)
(11,024) (2,158)

FY10E

FY11E

FY12E

FY13E

Valuation, Macro
EV/EBITDA P/E P/BV EV/tonne FCF yield Dividend yield ROE Net income margin Net revenue/Assets Assets/Equity ROIC Shares ADRs WACC Perpetual Growth Cost of equity Cost of debt

FY09A
17.7 28.4 1.8 727 (1.3%) 1.8% 9.4% 22.2% 22.8% 1.8 6.6% 5,365 5,365 9.2% 3.0% 11.1% 8.8%

FY10E
7.0 9.4 2.4 643 4.9% 2.0% 23.3% 38.5% 30.5% 2.0 18.8% 5,365 5,365

FY11E
4.8 6.8 1.9 576 8.6% 3.2% 25.7% 40.3% 32.6% 2.0 20.7% 5,365 5,365

FY12E
4.1 6.1 1.6 502 11.5% 4.9% 23.9% 40.5% 30.2% 2.0 19.1% 5,365 5,365

FY13E
4.4 7.2 1.4 439 11.8% 5.6% 18.2% 36.7% 26.5% 1.9 14.7% 5,365 5,365

(12,826) (15,384) (14,688) (11,822) (2,210) (1,232) (783) (110) 7,459 13,143 17,545 18,027 (3,000) (4,881) (7,430) (8,451) 18.7% 22.0% 30.0% 40.0% 4.2 4.1 3.7 2.9 30.5% 28.0% 24.0% 20.5% 6,265 7,497 8,280 8,390 14.9% 13.6% 13.6% 14.6% 281,284 308,962 330,012 363,340 149 178 185 159 51 53 56 53 86 113 118 96 13.8% 58.4% 15.3% 120.8% 9.8% 19.2% 3.7% 30.9% 6.8% 4.0% 4.1% 4.5% 10.1% (14.4%) (5.4%) (18.6%)

(12,826) (15,384) (14,688) (11,822) (2,270) (2,539) (3,051) (3,570)

Expansion

(8,866)

(10,557) (12,845) (11,637)

(8,251)

Source: Company reports and JPMorgan estimates. Note: $ in millions (except per-share data). Fiscal year ends Dec

83

Ben Laidler (1-212) 622-5252 [email protected]

Latin America Equity Research November 2010

Usiminas
USIM5.SA www.usiminas.com.br
Company description Usiminas is the largest flat-steel producer in Brazil, with ~9.5Mtpy of crude steel capacity. It has two plants – its original plant in Ipatinga and the plant of former Cosipa in the state of São Paulo. The company produces a broad range of steel products and is the main domestic supplier for the automotive and auto parts industries in Brazil. Aside from this, USI also owns iron ore mines and has interests in logistics and capital goods assets. Investment case We expect the outlook for Usiminas to continue to be challenging in the medium term, driven by deteriorating fundamentals for the Brazilian flat-steel industry. Imports into Brazil, in our view, are here to stay as Brazil lacks rolling capacity to supply the flat-steel demand in the domestic market, keeping prices as well as domestic premiums under pressure. In addition, the company should continue to suffer higher raw material costs, which we believe are unlikely to subside meaningfully until 2014. We see potential in USI’s mining unit, but there are challenges related to finding a viable solution for the port. Potential for earnings downgrades We believe there are downside risks to the consensus expectations for domestic steel prices, as premiums should remain under pressure, driven by continued strong inflow of imports and a strong Real. In addition, we expect raw material prices to remain tight, keeping margins under check. Finally, a potential delay in the recovery of heavy plates should cause further downside to earnings. Prospects for re-/derating Global steel supply discipline (resulting in higher prices) and any weakening in raw material costs should help rerate Usiminas. In addition, a solution to the port issues and/or a potential IPO of the mining unit could rerate the stock. Price target and risks We rate Usiminas UW based on our Dec 11 price target of R$26/share UPDATE, which is derived from a combination of DCF (80%) and multiples (20%). We use a WACC of 10.9%, perpetuity growth of 3% and target EV/EBITDA of 5.0x (historical average). The main upside risks are related to depreciation in BRL, higher international steel prices and potential increases in steel import duties.
Usiminas (USIM5.SA;USIM5 BZ) Company Data Price (R$) Date Of Price 52-week Range (R$) Mkt Cap (R$ mn) Fiscal Year End Shares O/S (mn) Price Target (R$) Price Target End Date 20.96 28 Oct 10 32.22 19.57 21,215.63 Dec 1,012 26.00 31 Dec 11 EPS - Recurring FY (R$) Revenues FY (R$ mn) EBITDA FY (R$ mn) Bloomberg EBITDA FY (R$ mn) EV/EBITDA FY P/E (USD) FY 2009A 1.10 10,924 1,715 1,537 16.3 24.6 2010E 1.02 14,183 3,230 3,113 7.8 23.4

Underweight
R$20.96 (28 Oct 10)

Price Target: R$26
End Date: Dec 2011

Brazil Metals & Mining
Rodolfo R. De Angele AC
(55-11) 3048-3888 [email protected] Banco J.P. Morgan S.A. Bloomberg JPMA ANGELE <GO>

Price performance (R$)
Price Performance
30 R$ 26 22 18
Oct-09 Jan-10 Apr-10 Jul-10 Oct-10

Source: Bloomberg.

Performance
1M Absolute (%) Relative (%)
Source: Bloomberg.

3M -9.3 -29.0

12M -8.3 -21.3

-17.8 -10.8

2011E 1.88 16,049 4,413 4,202 6.1 13.3

2012E 2.45 17,831 5,503 5,103 5.2 10.7

2013E 2.63 18,103 5,572 5.3 10.2

Source: Company data, Bloomberg, J.P. Morgan estimates. 'Bloomberg' above denotes Bloomberg consensus estimates.

84

Ben Laidler (1-212) 622-5252 [email protected]

Latin America Equity Research November 2010

Usiminas: Summary of Financials
Income Statement
Revenues COGS ex D&A SG&A Depreciation EBITDA EBITDA margin Financial income Financial expense FX & Monetary gains (losses) Other Nonoperarting income Equity income EBT Taxes Minority interest Extraordinary Net income Net Income Recurring Net income margin (recurring) EPS EPS Recurring Revenue growth EBITDA growth Net income growth FCF growth

FY09A
10,924 (8,465) (740) (975) 1,715 15.7% 378 (627) 818 251 40 1,599 (489) 0 128 1,239 1,111 10.2% 1.22 1.10 (30.4%) (71.5%) (62.8%) (110.9%)

FY10E

FY11E

FY12E

FY13E

Balance Sheet
Cash Accounts receivable Inventories Other current assets Total Current Assets Net PP&E Other assets Total assets
Short-term debt

FY09A FY10E FY11E FY12E FY13E
3,083 1,793 3,637 815 9,329 11,562 4,857 25,747 917 815 1,506 3,238 6,124 812 10,173 355 15,219 25,747 6,477 2,113 3,996 780 13,366 14,580 5,149 33,094 785 1,068 1,471 3,324 9,280 921 13,525 377 19,193 33,094 5,097 2,247 4,238 882 12,464 17,059 5,595 35,118 739 1,063 1,665 3,466 8,734 1,042 13,241 377 21,500 35,118 5,345 2,496 4,507 980 13,328 18,172 6,022 37,522 781 1,130 1,850 3,761 9,239 1,157 14,157 377 22,988 37,522 6,052 2,534 4,581 995 14,162 19,453 6,087 39,702 832 1,149 1,878 3,859 9,839 1,175 14,873 377 24,453 39,702

14,183 16,049 (10,119) (10,732) (870) (824) (822) (917) 3,230 4,413 22.8% 27.5% 394 618 (999) (1,326) (372) (270) (187) (211) 211 221 1,454 2,528 (419) (628) 0 0 0 0 1,035 1,901 1,035 1,901 7.3% 11.8% 1.02 1.88 1.02 1.88 29.8% 88.3% (16.4%) (522.6%) 13.2% 36.7% 83.6% (62.7%)

17,831 18,103 (11,413) (11,601) (826) (839) (1,073) (1,143) 5,503 5,572 30.9% 30.8% 478 499 (1,403) (1,494) (222) (27) (234) (238) 243 234 3,291 3,403 (810) (740) 0 0 0 0 2,481 2,663 2,481 2,663 13.9% 14.7% 2.45 2.63 2.45 2.63 11.1% 24.7% 30.5% (345.5%) 1.5% 1.3% 7.3% 36.7%

Accounts payable Other current liabilities Total Current Liabilities Long-term debt Deferred taxes Other liabilities Total liabilities Minority Interests Shareholders' equity Liabilities + Equity

Net debt Net Debt/Capital Debt/Capital Net Debt/EBITDA

3,957 17.8% 31.6% 2.3

3,588 12.3% 34.4% 1.1

4,376 14.1% 30.6% 1.0

4,675 14.2% 30.4% 0.8

4,619 13.2% 30.4% 0.8

Operating Data, Ratios
Capex Change in working capital Free cash flow Dividends Dividend % of net income Capex/depreciation CAPEX/sales Working capital Working capital/sales Shipments Avg price/t Cash COGS/t EBITDA/t Shipments chg Avg price/t chg Cash COGS/t chg EBITDA/t chg
Capex Maintenance

FY09A
2,061 811 364 700 56.5% 2.1 18.9% 4,164 38.1% 5,631 1,940 1,503 305 (21.5%) (11.4%) 22.2% (63.6%)
2,061 476

FY10E
3,392 (488) (1,540) 461 44.5% 4.1 23.9% 4,651 32.8% 7,065 2,007 1,432 457 25.5% 3.5% (4.7%) 50.1%
3,392 439

FY11E
3,396 (309) (574) 665 35.0% 3.7 21.2% 4,960 30.9% 7,407 2,167 1,449 596 4.8% 7.9% 1.2% 30.4%
3,396 466

FY12E
2,186 (400) 1,409 992 40.0% 2.0 12.3% 5,360 30.1% 7,805 2,285 1,462 705 5.4% 5.4% 0.9% 18.3%
2,186 506

FY13E
2,424 (86) 1,926 1,198 45.0% 2.1 13.4% 5,446 30.1% 8,007 2,261 1,449 696 2.6% (1.0%) (0.9%) (1.3%)
2,424 531

Valuation, Macro
EV/EBITDA P/E P/BV EV/tonne FCF yield Dividend yield ROE Net income margin Net revenue/Assets Assets/Equity ROIC Shares ADRs WACC Perpetual Growth Cost of equity Cost of debt

FY09A FY10E FY11E FY12E FY13E
16.3 22.4 1.5 4,928 1.6% 3.3% 8.1% 10.2% 42.4% 1.7 2.4% 1,012 10.9% 3.0% 7.8 21.3 1.2 3,838 (6.6%) 2.2% 5.4% 7.3% 42.9% 1.7 5.6% 1,012 6.1 12.1 1.1 3,759 (2.5%) 3.1% 8.8% 11.8% 45.7% 1.6 8.1% 1,012 5.2 9.8 1.0 3,599 6.0% 4.7% 10.8% 13.9% 47.5% 1.6 9.7% 1,012 5.3 9.3 1.0 3,498 8.2% 5.6% 10.9% 14.7% 45.6% 1.6 9.4% 1,012 -

Expansion

1,585

2,957

2,930

1,680

1,893

Source: Company reports and JPMorgan estimates. Note: R$ in millions (except per-share data). Fiscal year ends Dec.

85

Ben Laidler (1-212) 622-5252 [email protected]

Latin America Equity Research November 2010

Oil, Gas & Petrochemicals
It’s all about creating economic value. The value chain of oil production has many moving parts, but at the end of the day what matters here as in any other business is adding value to the base of capital employed. Production growth, backlog growth and asset growth matter little if the returns on new investments don’t cover the cost of capital, in our view. Bullish oil curve favors all; one must be selective An improved outlook for oil prices has emerged in tandem with global currency issues benefiting the earnings outlook of the sector as a whole. As always, we favor portfolios that can beat the performance of the underlying commodity. Services & equipment are now a large portion of our coverage, and there we focus on exposure to capex trends and superior earnings power relative to peers. Integrated oils: Petrobras and Ecopetrol are both national oil companies (NOCs) with the mandate to supply the domestic fuels market. This imposes significant pressure on their E&P segments to keep replenishing reserves. Historically PBR has done a great job, but we are worried about its ability to add value on the recent asset purchase for $43 billion. In the meantime Ecopetrol is expanding production of low-cost barrels and finding new ways to boost its exploration success. E&P: The appeal of independent E&P names keeps growing; emphasis remains on exploration. The market will operate in 2011 with 2 new players in Brazilian E&P, HRT and Karoon. The heavyweight remains OGX, which was our top pick in 2010. In Colombia, juniors are spreading, with adult names being scarce. Services & equipment: The cycle stage still appears to favor exploration over development, and the key is gaining exposure to capex trends. Tenaris is enhancing positioning with minimal investments but more importantly it stands to benefit from cost reductions. Lupatech is investing in value-neutral ventures in order to gain access to new sources of revenue. Petrochemicals: The change in scope of PBR’s Comperj project changed drastically the outlook for Braskem in the Brazilian market. Recommendations Our top picks for 2011 are Tenaris (TS US), the world’s most profitable OCTG producer, and Pacific Rubiales (PRE CN), the largest and most dynamic independent E&P producer in Colombia.

Sergio Torres AC
(1-212) 622-3378 [email protected] J.P. Morgan Securities LLC Bloomberg JPMA TORRES <GO>

Integrated oils EV/DACF

10E 9.5x 7.7x 18.3x 5.8x 6.1x 10E 9.8x 13.2x 25.6x 9.6x 9.4x

11E 9.5x 7.2x 14.1x 5.2x 5.4x 11E 12.2x 12.8x 17.9x 8.8x 8.2x

12E 10.4x 6.6x 12.5x 4.9x 5.0x 12E 12.2x 12.0x 14.9x 8.3x 8.0x

Petrobras Petrochina Ecopetrol Majors Sinopec P/E Petrobras Petrochina Ecopetrol Majors Sinopec

Source: J.P.Morgan estimates, Bloomberg.

E&P

EV/EBITDA OGX Pacific Rubiales Gran Tierra Energy Latam Peers Global Peers EV/BOE OGX Pacific Rubiales Gran Tierra Energy Latam Peers Global Peers

10E n.m 9.1x 5.0x 10.2x 28.2x 2P n.m 30.3 56.7 14.0 18.5

11E n.m 4.5x 3.9x 9.8x 7.3x 2P+2C 9.9 13.5 34.6 6.0 11.2

12E n.m 3.4x 3.1x 6.8x 20.4x JPMe 5.9 9.6 7.4 n.m 10.7

Source: J.P.Morgan estimates, Bloomberg.

Oil services & equipment EV/EBITDA

10E 11.3x 6.2x 8.1x 14.4x 10E

11E 7.9x 7.9x 6.2x 9.2x 11E 15.9x 12.3x 11.0x 16.8x

12E 7.0x 6.6x 4.8x 5.9x 12E 14.0x 10.2x 7.2x 13.3x

Tenaris Vallourec TMK Lupatech P/E Tenaris Vallourec TMK Lupatech

20.0x 25.3x 20.2x n.m

Source: J.P.Morgan estimates, Bloomberg.

86

Ben Laidler (1-212) 622-5252 [email protected]

Latin America Equity Research November 2010

Top picks and stock to avoid
Price Top picks Pacific Rubiales Tenaris Avoid Lupatech 31.69 41.33 21.55 Code PRE CN TS US LUPA3 BZ Rating OW OW N 604 Mkt cap (US$MM) P/E (x) 10E 36.4 11.4 16.8 11E 13.2 7.9 13.3 EPS 10E 0.90 2.11 0.11 11E 2.43 2.68 1.28 Div. yield 11E (%) ROE 11E (%) 15.2 13.3 1.0

Source: Bloomberg, J.P. Morgan estimates. Note: Share prices and valuations are as of October 28, 2010.

Energy absolute and relative to MSCI LatAm
2000 1800 1600 1400 1200 1000 800 600 400 200 0 Dec-02 Mar-04 May -05 Aug-06 Oct-07 Jan-09 Mar-10 Absolute Relativ e to MSCI EMF Index

Energy EPS integer
140 2011 130 120 110 100 90 80 70 Feb-09 Jul-09 Dec-09 May -10 Oct-10 2010

Source: MSCI, Bloomberg, IBES, Datastream, J.P. Morgan.

Source: MSCI, Bloomberg, IBES, Datastream, J.P. Morgan.

Energy 12 mth fwd PE
18 15 12 9 6 3 95 97 98 99 00 PE 01 02 03 Av g 04 05 06 07 08 10

Energy trailing PB
4.5 4 3.5 3 2.5 2 1.5 1 0.5 0 95 97 98 99 00 PB 01 02 03 Av g 04 05 06 07 08 10

+1SD

-1SD

+1SD

-1SD

Source: MSCI, Bloomberg, IBES, Datastream, J.P. Morgan.

Source: MSCI, Bloomberg, IBES, Datastream, J.P. Morgan.

87

Ben Laidler (1-212) 622-5252 [email protected]

Latin America Equity Research November 2010

Pacific Rubiales Energy
PRET.TO www.pacificrubiales.com
Pacific Rubiales is the largest independent E&P company in Colombia and the second-largest operator after NOC Ecopetrol. PRE has been a successful growth and value play since 2009. In our view, PRE’s low risk development story is already priced in, but we believe that the risk/reward is still attractive. PRE is our favorite stock to play the potential of heavy oil in Colombia. Low-risk exploration in attractive prospects should drive value in 2011. PRE has 2P reserves of 269 mn boe but has identified ~628 mn bbl of prospective oil resources in Colombia and Peru. PRE’s track record in exploration is over 80% success in Colombia, and it has recently acquired exploration licenses in onshore Guatemala that are believed to be exposed to a continuation of the onshore basins in Mexico. Our price target is not fully loaded. We are conservative in our NAV assumptions because we are only assuming half of the prospective resource estimated by PRE. Our estimates have upside from further drilling success that could confirm the company’s prospective figures, from the gas export project that could start in 2013 and from further analysis of the prospects in Guatemala and block CPO-12 in Colombia. The company still trading at compelling multiples. PRE is trading at 3.7x EV/EBITDA for 2011e. Our Dec’11 target price of C$36/share implies an EV/EBITDA exit multiple of 3.9x 2012e. With the company having doubled production in 2010 to 67 kboed (net after royalties), we expect production to grow 67% in 2011 and 22% in 2012, excluding exploration potential. Main risks: 1) unsuccessful exploratory drilling; 2) uncertainty over capital expenditures; 3) disappointing results at Rubiales field tests for secondary recovery; and 4) a decline in oil prices.

Overweight
C$31.69 (28 Oct 10)

Price Target: C$36
End Date: Dec 2011

Colombia Exploration & Production
Sergio Torres AC
(1-212) 622-3378 [email protected] J.P. Morgan Securities LLC Bloomberg JPMA TORRES <GO>

Price Performance
30 C$ 20 10
Nov-09 Feb-10 May-10 Aug-10 Nov-10

Source: Bloomberg, J.P.Morgan.

Performance
1M Absolute (%) 15
Source: Bloomberg, J.P. Morgan.

3M 29

12M 29

Company Data Price (C$) Date Of Price 52-week Range (C$) Mkt Cap (C$ mn) Fiscal Year End Shares O/S (mn) Price Target (C$) Price Target End Date

31.69 28 Oct 10 33.58 12.86 8,356.65 Dec 264 36.00 31 Dec 11

Pacific Rubiales Energy Corp (PRE.TO;PRE CN) 2009A EPS FY ($) (0.54) Bloomberg EPS FY ($) (0.40) P/E FY NM EBITDA FY ($ mn) 222 EV/EBITDA FY 33.8 ROE FY (10.2%) ROCE FY (10.2%)

2010E 0.90 1.05 35.1 898 7.6 18.2% 18.5%

2011E 2.43 2.49 13.0 1,705 3.7 34.1% 44.9%

2012E 2.39 2.96 13.2 1,976 2.7 24.1% 45.4%

Source: Company data, Bloomberg, J.P. Morgan estimates. 'Bloomberg' above denotes Bloomberg consensus estimates.

88

Ben Laidler (1-212) 622-5252 [email protected]

Latin America Equity Research November 2010

Pacific Rubiales: Summary of Financials
Income Statement - Annual
Revenues Cost of products sold Gross profit SG&A DD&A Other operating expenses Operating Income EBIT EBITDA Net interest income / (expense) Income applicable to minority interests Pretax income Taxes Tax rate (%) Reported net income Non-recurring items, disc ops Adjusted net income Average diluted shares outstanding EPS EPS growth rate (%) Dividend per share WTI crude price ($/bbl) Henry Hub natural gas price ($/mcf)

FY09A
639 (488) 151 (125) (196) (292) 26 26 222 (48) 2 (109) (46) (154) (154) 283

FY10E FY11E FY12E
1,633 3,132 3,452 (993) (1,931) (2,229) 640 1,200 1,223 (115) (160) (178) (396) (701) (797) (597) (1,231) (1,431) 525 1,040 1,045 525 1,040 1,045 898 (84) 0 430 (142) 288 288 283 1,705 (61) 0 999 (300) 699 699 283 1,976 (53) 0 1,011 (303) 708 708 283 2.39 1.2% 0.00 83.00 3.58

Income Statement - Quarterly
Revenues Cost of products sold Gross profit SG&A DD&A Other operating expenses Operating Income EBIT EBITDA Net interest income / (expense) Income applicable to minority interests Pretax income Taxes Tax rate (%) Reported net income Non-recurring items, disc ops Adjusted net income Average diluted shares outstanding EPS EPS growth rate (%) Dividend per share WTI crude price ($/bbl) Henry Hub natural gas price ($/mcf)

1Q10A
381 (196) 184 (62) (65) (131) 122 122 187 (14) 0 81 (49) 32 32 292 0.11 0.00 78.76 3.51

2Q10A
-

3Q10E
-

4Q10E
-

(0.54) 0.90 2.43 - (287.7%) 142.6% 0.00 0.00 0.00 61.66 3.44 79.50 3.50 86.00 3.65

Balance Sheet and Cash Flow Data
Cash and cash equivalents Other current assets Total current assets Net PP&E Other assets Total assets Total debt Total liabilities Minority interests Preferred stock Shareholders' equity Net Income DD&A Deferred taxes Other Cash earnings Change in working capital Cash flow from operations Capex Dividends Share buybacks (net) Change in debt Change in preferred stock Other uses of cash Change in cash Free cash flow

FY09A
399 21 594 1,991 177 2,763 621 1,262 1,501 (154) (196) 26 (87) 111 (393) 0 426 308 549

FY10E FY11E FY12E
568 21 763 1,991 177 2,932 621 1,262 1,670 288 (396) 525 0 695 (853) 0 0 167 325 1,363 21 1,558 1,991 177 3,727 651 1,292 2,436 699 (701) 1,040 0 1,380 (613) 0 30 797 30 2,377 21 2,572 1,991 177 4,740 651 1,292 3,449 708 (797) 1,045 0 1,486 (473) 0 0 1,013 0

Ratio Analysis
Valuation P/E (adjusted) P/CF Enterprise value/EBITDA EV/DACF Ratios Net debt/equity Net debt/capital Net coverage ratio ROE ROCE Yield and cash returns CFPS CF yield FCF yield Dividend yield Dividend payout ratio Buyback yield Total cash returns (%)

FY09A

FY10E

FY11E

FY12E

(59.9) 24.0 33.8 54.2

31.9 44.3 7.6 7.7

13.2 9.3 3.7 4.6

13.0 7.3 2.7 3.2

14.8% 29.3% 4.6 (10.2%) (10.2%)

3.2% 27.1% 10.4 18.2% 18.5%

(29.3%) 21.1% 24.8 34.1% 44.9%

(50.0%) 15.9% 25.7 24.1% 45.4%

1.31 0.71 3.39 4.30 (241.1%) 69.5% 136.8% 171.8% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 573.0% 31,588.8% 67,971.8% 69,153.6%

Mkt Cap (current) ($bn) Enterprise Value (current)

8.59 5,724

Source: Company reports and J.P. Morgan estimates. Note: $ in millions (except per-share data). Fiscal year ends Dec

89

Ben Laidler (1-212) 622-5252 [email protected]

Latin America Equity Research November 2010

Tenaris
TS www.ir.tenaris.com
TS is one of the best early-cycle plays. We believe oil prices will lead a reactivation of exploration and development drilling globally. Tenaris is the most profitable manufacturers of steel tubular goods for the oil and gas industry. The company has a leading footprint in the niche of premium (oil country tubular goods (OCTG). We believe that Tenaris (TS) is likely to keep its dominance position on global OCTG market and gain market share in other key growing markets such as the US, Saudi Arabia, Iraq and, yes, Brazil. We project an annualized earnings expansion of 12.9% between 2009 and 2012, mostly driven by cost reduction and volume growth. Reduction in structural costs is a major differentiating factor because the industry is suffering from sluggish pricing and cost pressures. Equipment producers with global footprints, such as TS, offer investors a broadly diversified play on oil, gas, onshore and offshore projects, with ROCEs that are bouncing from the cycle trough. Benefits from expansion to be visible as early as 2011. TS is adding capacity in its Mexico plant in late 2010. Ramp-up of capacity would allow TS to export low-diameter OCTG out of Mexico to the US shale gas market, among other destinations. New facilities could also allow TS to reallocate output from higher-cost sites, such as Europe. We don’t see risk of overcapacity in seamless OCTG. For now we believe the NA market appears in check. With the countervailing duties on China there is a shortfall of about 1.5 mn tons of seamless pipe in the US alone. Planned expansions are targeting such shortfall. We have a YE11 target of $52/ADR, derived from a combination of SOTP model and target multiples. On an EV/EBITDA basis, TS is trading at 7.9x, similar to peer Vallourec. We believe TS deserves a premium because it generates ~22% higher EBITDA per ton than VK (rated OW by JPM European machinery analyst Alessandro Abate).
Tenaris SA (TS;TS US) Company Data Price ($) Date Of Price 52-week Range ($) Mkt Cap ($ mn) Fiscal Year End Shares O/S (mn) Price Target ($) Price Target End Date 41.33 28 Oct 10 47.79 32.91 24,395.80 Dec 590 52.00 31 Dec 11 EPS FY ($) Bloomberg EPS FY ($) Revenues FY ($ mn) EBITDA FY ($ mn) EV/EBITDA FY P/E FY 2009A 2.05 2.02 8,183 2,114 9.5 20.2

Overweight
$41.33 (28 Oct 10)

Price Target: $52
End Date: Dec 2011

Global Oil Services & Equipment
Sergio Torres AC
(1-212) 622-3378 [email protected] J.P. Morgan Securities LLC Bloomberg JPMA TORRES <GO>

Price Performance
48 44 $ 40 36 32
Nov-09 Feb-10 May-10 Aug-10 Nov-10

Source: Bloomberg, J.P.Morgan.

Performance
1M Absolute (%) 7.8
Source: Bloomberg, J.P. Morgan.

3M 3.3

12M 12.3

2010E 2.06 2.00 7,869 2,192 9.6 20.0

2011E 2.59 2.97 9,434 2,940 6.9 15.9

2012E 2.95 3.58 10,474 3,282 6.0 14.0

Source: Company data, Bloomberg, J.P. Morgan estimates. 'Bloomberg' above denotes Bloomberg consensus estimates.

90

Ben Laidler (1-212) 622-5252 [email protected]

Latin America Equity Research November 2010

Tenaris SA: Summary of Financials
Income Statement - Annual
Revenues Cost of products sold Gross profit SG&A DD&A Other operating expenses Operating Income EBIT EBITDA Net interest income / (expense) Income applicable to minority interests Pretax income Taxes Tax rate (%) Reported net income Non-recurring items, disc ops Adjusted net income Average diluted shares outstanding EPS EPS growth rate (%) Dividend per share WTI crude price ($/bbl) Henry Hub natural gas price ($/mcf)

FY09A FY10E FY11E FY12E
8,183 (4,598) 3,318 (1,235) (266) (4,865) 1,847 1,847 2,114 (89) (46) 1,785 (511) 1,208 2.05 (43.2%) 0.86 61.66 7,869 (4,133) 3,330 (1,547) (405) (4,539) 1,787 1,787 2,192 (59) (36) 1,771 (517) 1,219 2.06 0.9% 0.38 79.94 9,434 (4,671) 4,218 (1,824) (546) (5,217) 2,394 2,394 2,940 (57) (40) 2,337 (767) 1,530 2.59 25.5% 0.38 86.00 10,474 (5,202) 4,692 (1,990) (579) (5,781) 2,702 2,702 3,282 (30) (50) 2,672 (882) 1,740 2.95 13.8% 0.52 83.00 -

Income Statement - Quarterly
Revenues Cost of products sold Gross profit SG&A DD&A Other operating expenses Operating Income EBIT EBITDA Net interest income / (expense) Income applicable to minority interests Pretax income Taxes Tax rate (%) Reported net income Non-recurring items, disc ops Adjusted net income Average diluted shares outstanding EPS EPS growth rate (%) Dividend per share WTI crude price ($/bbl) Henry Hub natural gas price ($/mcf)

1Q10A 2Q10A 3Q10E 4Q10E
1,639 (916) 652 (292) (71) (987) 309 309 380 (13) (3) 328 (105) 220 0.37 (1.3%) 0.00 78.76 1,982 (1,112) 798 (337) (71) (1,183) 405 405 531 (18) (13) 400 (105) 282 0.48 28.5% 0.42 76.00 1,900 (942) 828 (415) (130) (1,072) 413 413 543 (14) (10) 399 (131) 258 0.44 (8.4%) 0.00 80.00 2,349 (1,163) 1,052 (503) (133) (1,296) 550 550 683 (15) (10) 535 (176) 350 0.59 35.3% 0.19 85.00 -

Balance Sheet and Cash Flow Data
Cash and cash equivalents Other current assets Total current assets Net PP&E Other assets Total assets Total debt Total liabilities Minority interests Preferred stock Shareholders' equity Net Income DD&A Deferred taxes Other Cash earnings Change in working capital Cash flow from operations Capex Dividends Share buybacks (net) Change in debt Change in preferred stock Other uses of cash Change in cash Free cash flow

FY09A FY10E FY11E FY12E
2,123 502 5,622 3,255 502 13,483 1,447 4,391 629 9,092 1,208 (266) 861 1,132 1,737 3,064 461 508 (1,465) 4 (1,176) 980 481 5,623 3,711 481 13,796 1,213 4,111 619 9,685 1,219 (405) 0 1,122 (1,077) 372 881 226 (239) (1,032) 1,962 1,691 481 7,066 3,868 481 15,182 1,213 4,217 619 10,965 1,530 (546) 0 1,526 (625) 1,491 490 224 0 776 2,308 2,468 481 7,446 3,522 481 15,440 1,292 4,263 619 11,177 1,740 (579) 0 1,740 362 2,732 511 305 79 1,996 1,526

Ratio Analysis
Valuation P/E (adjusted) P/CF Enterprise value/EBITDA EV/DACF Ratios Net debt/equity Net debt/capital Net coverage ratio ROE ROCE Yield and cash returns CFPS CF yield FCF yield Dividend yield Dividend payout ratio Buyback yield Total cash returns (%)

FY09A FY10E FY11E FY12E

20.2 21.6 9.5 -

20.0 21.7 9.6 -

15.9 16.0 6.9 -

14.0 14.0 6.0 -

13.7% 17.6 14.0% 21.6%

11.1% 26.3 13.0% 19.1%

10.0% 36.5 14.8% 24.2%

10.4% 41.4 15.7% 26.8%

1.92 2.0% 28.5% -

1.90 0.9% 20.0% -

2.58 0.9% 20.0% -

2.95 1.2% 20.0% -

Mkt Cap (current) ($bn) Enterprise Value (current)

25.15

Source: Company reports and J.P. Morgan estimates. Note: $ in millions (except per-share data). Fiscal year ends Dec

91

Ben Laidler (1-212) 622-5252 [email protected]

Latin America Equity Research November 2010

Retail & Healthcare
Key country dynamics Solid growth in both the retail and healthcare sectors in Brazil has been led by strong consumer demand driven by: (1) Income mobility to middle-income segment. (2) Strong job creation, which is driving unemployment rates to record lows. (3) Inflation under control. These factors are leading to record-high consumer confidence. As a result we believe the country is the best positioned in terms of growth within Latin America for retailers and healthcare names, while we are still cautious with retail in Mexico. While there is some evidence of economic recovery, correlation with the US economy is still high. Growth characteristics and how they are changing In Brazil, both sectors are growing fast, on the back of the solid growth of the Brazilian economy. We expect solid growth to continue but to slightly decelerate in 2011 given tougher comparisons. Drivers of returns – Multiples and growth Main drivers of growth for the retail sector are (1) consumer confidence, (2) unemployment rate and wage mass increase, (3) inflation, and (4) credit supply. For the healthcare sector, the main drivers are: (1) wage mass increase; (2) formal job creation; and (3) increased penetration of private healthcare spending within the population, which is currently very low. Nevertheless, we don’t expect further reratings for the sectors given recent outperformance. Any potential appreciation is likelier to come from earnings surprises. Recommendations OW: Hypermarcas (HYPE3) is a core holding in Brazil consumer, given its focus on high-growth lowerincome segments such as pharma and HPC. Its accelerated M&A allows for more synergies in 20112013e. It trades at a relatively cheap P/E 11e of 20.7x, a 25% discount to Brazilian peers that we view as unwarranted given high EPS CAGR 10-13e of 20%. OW: DASA (DASA3): We expect revenue growth to pick up in 2011 as the company has resumed M&A. DASA will likely start capturing revenue synergies as a result of its integration with MD1. UW: SORIANA (SORIANAB): Lack of catalysts in the short/mid term and rich valuation, trading at 12-M forward P/E of 18.5x, a 20% premium to historical, and 12-M fwd EV/EBITDA of 9.7x, 23% above historical, which in our view does not reflect the risks.

Andrea Teixeira AC
(1-212) 622-6735 [email protected] J.P. Morgan Securities LLC Bloomberg JPMA TEIXEIRA <GO>

Middle-income expansion is a positive driver for retailers and healthcare companies in Bz
100% 80% 60% 40% 20% 0% 13,0% 2002 11,6% 2003 11,6% 2004 A&B 12,6% 2005 C D 13,3% 2006 E 14,4% 2007 15,5% 2008 28,6% 14,2% 44,2% 30,4% 15,5% 42,5% 30,4% 15,7% 42,3% 25,4% 15,3% 46,7% 24,8% 13,3% 48,6% 21,7% 15,0% 48,9% 18,4% 14,2% 51,9%

Source: FGV.

Recent consumer deleverage in BZ supports Bz Retailers
25% 20% 15% 10% 5% Jan-05 Mar-05 May-05 Jul-05 Sep-05 Nov-05 Jan-06 Mar-06 May-06 Jul-06 Sep-06 Nov-06 Jan-07 Mar-07 May-07 Jul-07 Sep-07 Nov-07 Jan-08 Mar-08 May-08 Jul-08 Sep-08 Nov-08 Jan-09 Mar-09 May-09 Jul-09 Sep-09 Nov-09 Jan-10 Mar-10 May-10 Jul-10 Brazil

16.5%

Source: BACEN, J.P. Morgan estimates.

Wage mass growing steadily in Brazil
20% 15% 10% 5% 0% -5% -10% -15% -20% Jan-03 Apr-03 Jul-03 Oct-03 Jan-04 Apr-04 Jul-04 Oct-04 Jan-05 Apr-05 Jul-05 Oct-05 Jan-06 Apr-06 Jul-06 Oct-06 Jan-07 Apr-07 Jul-07 Oct-07 Jan-08 Apr-08 Jul-08 Oct-08 Jan-09 Apr-09 Jul-09 Oct-09 Jan-10 Apr-10 Jul-10

Source: IBGE.

Unemployment rates at lowest levels
11.0% 10.0% 9.0% 8.0% 7.0% 6.0% Sep-06 Sep-07 Sep-08 Sep-09 Jan-06 Jan-07 Jan-08 Jan-09 May-06 May-07 May-08 May-09 Jan-10 May-10

Unemploy ment Rate

Source: IBGE.

92

Ben Laidler (1-212) 622-5252 [email protected]

Latin America Equity Research November 2010

Top picks and stocks to avoid
Price Top picks Hypermarcas DASA Stocks to avoid Soriana R27.99 R$21.07 Ps37.40 Code HYPE3 BZ DASA3 BZ Rating OW OW Mkt cap (MM) R$14,941 R$6,555 Ps67,320 P/E (x) 10E 28.3 30.9 21.6 11E 20.7 17.8 18.2 EPS 10E 0.99 0.68 1.73 11E 1.35 1.18 2.06 Div. yield 11E (%) 300.7 0.4 ROE 11E (%) 31.9 10.2

SORIANAB MM UW

Source: Bloomberg, J.P. Morgan estimates. Note: DASA3 and SORIANAB share prices and valuations are as of November 9, 2010; HYPE3 valuations share prices and valuations are as of October 28, 2010.

Retail absolute and relative to MSCI LatAm
1400 1200 1000 800 600 400 200 0 Dec-02 Mar-04 May -05 Aug-06 Oct-07 Jan-09 Mar-10 Absolute Relativ e to MSCI EMF Index

Retail EPS integer
170 2011 150 130 110 90 70 50 Feb-09 Jul-09 Dec-09 May -10 Oct-10 2010

Source: MSCI, Bloomberg, IBES, Datastream, J.P. Morgan.

Source: MSCI, Bloomberg, IBES, Datastream, J.P. Morgan.

Retail 12 mth fwd PE
40 35 30 25 20 15 10 5 95 97 98 99 00 PE 01 02 03 Av g 04 05 06 07 08 10

Retail trailing PB
14 12 10 8 6 4 2 0 95 97 98 99 00 PB 01 02 03 Av g 04 05 06 07 08 -1SD 10

+1SD

-1SD

+1SD

Source: MSCI, Bloomberg, IBES, Datastream, J.P. Morgan.

Source: MSCI, Bloomberg, IBES, Datastream, J.P. Morgan.

93

Ben Laidler (1-212) 622-5252 [email protected]

Latin America Equity Research November 2010

Diagnosticos da America (DASA)
DASA3.SA www.dasa.com.br
Company description Dasa is the largest diagnostic laboratory in Brazil. Its business model is divided into three segments: (1) private clinical and image analysis, (2) public services provider and (3) lab-to-lab operations. Its growth is based on a mix of organic growth and acquisitions. Currently, Dasa is established in 12 states and holds 21 different brands (after acquisition of MD1 and Cerpe). Investment case Our positive view on the company is due to its leading position in the most important markets in Brazil (SP and RJ after the acquisition of MD1) and its exposure to less affluent demographic sectors. Potential for earnings upgrades Dasa announced in the beginning of October the acquisition of MD1, the fourth-largest laboratory in Brazil. The integration process has the potential to create both revenue and cost synergies. DASA should also still benefit from margin expansion as new management is focused on increasing profitability. Prospects for re-/derating Although the stock has been performing strongly lately (more than +40% YTD), we think there is more upside to come. After its weak period of top-line expansion, we expect revenue growth to pick up in 2011 since the company will likely capture revenue synergies as a result of operating leverage from growth and the integration of recent acquisitions MD1 and Cerpe. Dasa trades at a 15% premium to Fleury on a P/E 11e basis, which we believe is warranted given (1) its position in less affluent segments, (2) higher diversification of payers and (3) higher stock liquidity. Price target and risks Our R$26 price target (end date Dec-11) is based on a 9-year discounted free cash flow to firm (no acquisitions) at a 10.3% nominal reais discount rate and 5.0% perpetuity growth. Main risks to our thesis are (1) if management does not deliver its guidance of 27.5% EBITDA margin, (2) pricing pressure and/or increased competition for acquisitions, and (3) economic slowdown.

Overweight
R$21.07 (9 Nov 10)

Price Target: $26
End Date: Dec 2011

Brazil Retail & Healthcare
Andrea Teixeira, CFA AC
(1-212) 622-6735 [email protected] J.P. Morgan Securities LLC Bloomberg JPMA TEIXEIRA <GO>

Price Performance
20 R$ 16 12
Nov-09 Feb-10 May-10 Aug-10 Nov-10

Source: Bloomberg.

Performance
1M Absolute (%)
Source: Bloomberg.

3M 27.5

12M 73.1

3.0

Priced as of the close on November 9, 2010; see our note out November 10 for further details.

Company Data Price (R$) Date Of Price 52-week Range (R$) Mkt Cap (R$ mn) Fiscal Year End Shares O/S (mn) Price Target (R$) Price Target End Date

21.10 09 Nov 10 22.00 12.14 6,565.03 Dec 311 26.00 31 Dec 11

Diagnosticos da America (DASA) (DASA3.SA;DASA3 BZ) 2009A 2010E EPS Reported FY (R$) 0.66 0.68 EV/EBITDA FY 21.9 17.3 P/E FY 31.7 30.9 EBITDA FY (R$ mn) 319 401

2011E 1.18 11.7 17.9 580

2012E 1.33 15.8 655

Source: Company data, Bloomberg, J.P. Morgan estimates. Adj. EPS=EPS (reported)+Goodwill Tax Shield.

94

Ben Laidler (1-212) 622-5252 [email protected]

Latin America Equity Research November 2010

Diagnosticos da America (DASA): Summary of Financials
Income Statement FY09A FY10E FY11E FY12E FY13E Balance Sheet FY09A FY10E FY11E FY12E FY13E

Revenues Cost of Services SG&A Operating Profit (EBIT) EBIT Margin Depreciation EBITDA EBITDA margin Financial income Financial expense FX & Monetary gains (losses) Other Nonoperarting income Equity income EBT Taxes Minority interest Extraordinary Net income Net income margin Technical Reserve Provisions Goodwill Amortisation Adjusted Net Incoome EPS

1,388 (943) (256) 189 13.6% 105 319 23.0% 12 (41) 4 152 2 (1) 0 153 6.0% 84 0.66

1,505 (947) (260) 298 19.8% 103 401 26.6% 98 (164) 8 240 (83) 0 0 157 10.4% 157 0.68

2,158 2,385 2,626 (1,346) (1,488) (1,627) (371) (399) (428) 441 497 572 20.4% 20.9% 21.8% 139 158 161 580 655 732 26.9% 27.5% 27.9% 28 47 90 (96) (102) (102) 11 12 13 384 454 572 (131) (154) (194) 0 0 0 0 0 0 367 415 492 11.7% 12.6% 14.4% 253 300 377 1.18 1.33 1.58

Cash Accounts receivable Inventories

287 269 47

268 283 47

396 393 67

780 475 72

1,044 522 79

Other current assets Net PP&E Other assets Total assets Technical Reserves Short-term debt Accounts payable Other current liabilities Long-term debt Deferred taxes Other liabilities Total liabilities Minority Interests Shareholders' equity Liabilities + Equity

110 425 159 1,619 152 50 156 545 8 168 1,080 0 539 1,619

106 575 163 1,794 113 67 224 494 18 179 1,095 0 699 1,793

152 586 233 2,177 113 94 315 494 16 256 1,288 0 889 2,177

170 591 91 2,529 113 102 343 494 76 287 1,415 0 1,113 2,529

187 606 101 2,890 113 111 374 494 84 317 1,493 0 1,397 2,890

Revenue growth EBITDA growth Net income growth FCF growth
Operating Data, Ratios

22.0% 14.0% (418.8%) 19.2%
FY09A

8.4% 25.6% 87.1% (74.9%)
FY10E

43.4% 44.6% 61.6% (348.9%)
FY11E

10.5% 13.1% 18.3% 72.3%
FY12E

10.1% 11.7% 25.9% 25.4%
FY13E

Net debt Net Debt/Capital Debt/Capital Net Debt/EBITDA Valuation, Macro EV/EBITDA P/E P/BV P/S FCF yield Dividend yield ROE Net income margin Net revenue/Assets Assets/Equity ROIC Shares ADRs DCF WACC Perpetual Growth Cost of equity Cost of debt

410 33.2% 56.4% 1.3

339 25.9% 46.5% 0.8

211 14.1% 40.6% 0.4 FY11E

(173) (10.0%) 35.3% (0.3) FY12E 15.8 5.9 2.8 355.8% 30.0% 12.6% 94.3% 2.3 311 -

(437) (21.8%) 30.3% (0.6) FY13E 13.3 4.7 2.5 447.9% 30.1% 14.4% 90.9% 2.1 311 -

FY09A FY10E 21.9 31.7 12.2 4.7 1.7% 0.0% 16.5% 6.0% 85.8% 3.0 15.7% 230 -

Capex Change in working capital Free cash flow Dividends Dividend % of net income Capex/depreciation CAPEX/sales Working capital Working capital/sales
Adjusted MLR HC Members ('000) Dental Plan Members ('000) Total Membership ('000) % of Individual Plans/Total Market Share Average Ticket (R$/month) # of PSCs Revenue/Requisition Capex Maintenance

93 4 (273) 0 0.0% 0.9 6.7% 272 19.6%
321 58 93 -

96 73 (69) 9 5.6% 0.9 6.4% 296 19.7%
337 58 96 -

150 (56) 171 63 25.0% 1.1 7.0% 402 18.6%
466 68 150 -

162 (70) 294 75 25.0% 1.0 6.8% 444 18.6%
475 68 162 -

162 (70) 369 94 25.0% 1.0 6.2% 490 18.6%
482 69 162 -

17.3 11.7 30.9 17.8 9.4 7.4 4.4 3.1 1.8% 3.0% 41.6% 300.7% 25.3% 31.9% 10.4% 11.7% 83.9% 99.1% 2.6 2.5 230 311 -

10.3% 5.0% 10.4% 15.0%

Expansion

-

-

-

-

-

Source: Company reports and J.P. Morgan estimates. Note: R$ in millions (except per-share data). Fiscal year ends Dec

95

Ben Laidler (1-212) 622-5252 [email protected]

Latin America Equity Research November 2010

Hypermarcas
HYPE3.SA www.hypermarcas.com.br
Company description Hypermarcas, one of the leading consumer products company in Brazil, is established in 3 segments: pharmaceutical, household/personal care and food. Investment case Hypermarcas is a combination of fast-growing consumer exposure in Brazil with a defensive profile as its portfolio is mostly composed of staple goods. Still, the HPC and pharma industries are very fragmented, meaning that there is enough room for additional M&A. Still, even if acquisitions stop, we estimate an improvement in EBITDA margin of at least 200bps. Potential for earnings upgrades The company is targeting 15% same brand sales (SBS) growth for the next few years, which we view as conservative. We believe that the market might incorporate higher estimates as the company delivers stronger results. Also, Hypermarcas has the potential to unlock value by delivering more than official guidance of R$2.5bn in acquisitions for 2010-2011 (it has already delivered R$1.3bn). Recent debenture issue of R$1bn may indicate a continued interest in shopping. Prospects for re-/derating Our Dec 11 price target is R$30, derived from a 50/50 mix of organic model (R$29 per share) and acquisitions-plus-growth DCF (R$32/share) and considering company official M&A guidance. Also, we ran a sensitivity analysis incorporating an additional R$1bn in M&A, which added R$1 to our PT. Hypermarcas currently trades at P/E 11e of 21x, a 16% discount to Brazil peers, which we view as unwarranted given high EPS CAGR 10-13e of 20%. Price target and risks Our price target is based on a 9-year DCF analysis at 11.3% WACC and perpetuity growth of 6%. We blend the organic and the organic-plusacquisitions scenarios 50/50 in our price target valuation. Main risks to our thesis are (1) increasing competition for acquisitions, (2) potential overhang from private equity fund which owns 17.3% of the company and (3) Hypermarcas is reliant on founder “Junior” to prospect for and negotiate deals.
Hypermarcas S.A. (HYPE3.SA;HYPE3 BZ) 2009A Adj. EPS FY (R$) 1.21 P/E FY 23.1

Overweight
R$27.99 (28 Oct 10)

Price Target: $30
End Date: Dec 2011

Brazil Retail & Healthcare
Andrea Teixeira, CFA AC
(1-212) 622-6735 [email protected] J.P. Morgan Securities LLC Bloomberg JPMA TEIXEIRA <GO>

Price Performance
28 R$ 24 20
Mar-10 Jun-10 Sep-10 Dec-10

Source: Bloomberg.

Performance
1M Absolute (%)
Source: Bloomberg.

3M 21.6

12M 27.8

-2.8

Company Data Price (R$) Date Of Price 52-week Range (R$) Mkt Cap (R$ mn) Fiscal Year End Shares O/S (mn) Price Target (R$) Price Target End Date

27.99 28 Oct 10 30.25 15.95 14,936.24 Dec 534 30.00 31 Dec 11

2010E 0.99 28.2

2011E 1.35 20.7

2012E 1.55 18.1

2013E 1.73 16.2

Source: Company data, Bloomberg, J.P. Morgan estimates. *Adj. EPS = EPS (reported) + Goodwill Tax Shield.

96

Ben Laidler (1-212) 622-5252 [email protected]

Latin America Equity Research November 2010

Hypermarcas: Summary of Financials
Income Statement - Annual Revenues COGS Gross profit FY09A FY10E FY11E Income Statement - Quarterly Revenues COGS Gross profit 1Q10A 2Q10A 3Q10E 4Q10E

2,025 (843) 1,182 (718) 464 503 15
0

3,262 (1,416) 1,847 (1,138) 708 784 (166)
0

4,111 (1,781) 2,330 (1,415) 915 1,044 (157)
0

657 (274) 383 (222) 161 175 (60)
0

758 (327) 431 (299) 132 150 (44)
0

855 (359) 496 (285) 211 234 (57)
0

993 (455) 538 (333) 205 226 (5)
0

SG&A Operating income EBITDA Interest, net Other Income Pretax income Income taxes Tax rate
Net income - reported (GAAP)

SG&A Operating income EBITDA Interest, net Other Income Pretax income Income taxes Tax rate
Net income - reported (GAAP)

479 (166) (34.6%) 517 421 0.74 1.21
FY09A

542 (194) (35.7%) 529 534 0.65 0.99
FY10E

758 (258) (34.0%) 758 548 0.91 1.35
FY11E

101 (39) (38.4%) 93 481 0.13 0.19
FY09A

88 (35) (39.5%) 91 541 0.10 0.17
FY10E

153 (52) (34.0%) 153 548 0.18 0.28
FY11E

200 (68) (34.0%) 191 548 0.24 0.35

Diluted shares outstanding
EPS- Reported Adj. EPS Balance Sheet and Cash Flow Data

Diluted shares outstanding
EPS- Reported Adj. EPS Ratio Analysis

Cash and cash equivalents Accounts receivable Current assets PP&E
Total assets

499 725 1,836 296 6,278 889 1,292 1,322 6,278 3,437 39 (319) 207 (1,961) (1,342) (3.19) 0.00

1,753 1,000 3,612 868 9,466 900 1,487 2,214 9,466 5,341 76 (338) 173 (1,488) (962) (1.80) 0.00

1,550 1,161 3,677 846

Sales growth Same store sales growth EBITDA growth EBIT growth EPS growth - operating

51.9% 60.8% 67.0% 753.3% 58.4% 22.9% 24.8%

61.1% 56.0% 52.6% (18.3%) 56.6% 21.7% 24.0%

26.0% 33.1% 29.1% 36.6% 56.7% 22.2% 25.4%

9,504 649 1,334 1,796 9,504 5,655 130 (171) 514 (103) 1,182 2.16 185.40 Enterprise value / Revenues Enterprise value / EBITDA P/E 29.1 23.1 18.2 28.3 13.2 20.7 Debt / EBITDA 4.4 4.0 2.3 Gross margin EBIT margin EBITDA margin

Short-term Debt Current liabilities Long-term Debt Total liabilities Shareholders' equity D&A Change in working capital Cash flow from operations Capex Free cash flow Free cash flow / share Dividends

Source: Company reports and J.P. Morgan estimates. *Adj. EPS = EPS (reported) + Goodwill Tax Shield. Note: R$ in millions (except per-share data). Fiscal year ends Dec.

97

Ben Laidler (1-212) 622-5252 [email protected]

Latin America Equity Research November 2010

Soriana
SORIANAB.MX www.soriana.com
Company description Organizacion Soriana is a food retailer operating 500 stores (as of 3Q10) across Mexico. The store formats are mostly hypermarkets, clubs and convenience stores. Investment case Our negative view on Soriana is due to a lack of catalysts in the short/middle term. Soriana has been experiencing weak sales growth despite easy comparisons. Last year, the company was hard hit by the economic downturn. We still see competition and cautious consumer purchase of discretionary categories in Mexico as dragging Soriana’s growth. Also, the stock is trading at rich valuations, at P/E 11e of 22.1x and EV/EBITDA 11e of 10.8x. Potential for earnings upgrades We see limited room for positive earnings surprises as the improvement in SSS performance expected for the 4Q10 and 2011 seems already priced into consensus. We expect Soriana to continue to face headwinds from heavy competition as (1) Walmex is aggressively lowering prices and has greater bargaining power with suppliers; (2) Fourth-largest competitor Chedraui is now well capitalized and is gaining share (SSS at 3Q10 stood at 4.4% vs. 2.9% for Soriana and 2.8% for Walmex). Prospects for re-/derating We believe further recovery is priced in, as Soriana is trading at significant premiums to its historical averages. At a 12-month forward P/E, the stock trades at 23.3x, a 44% premium, and 12-month fwd EV/EBITDA of 11.1x, 47% above historical, which in our view do not reflect the risks. Price target and risks Our Ps38 December 2011 price target is based on a 50/50 blend of a 9-year DCF at 7.4% nominal WACC, 4% growth and 16.8x P/E 12E (30% discount to peers). Upside risks to our cautious view include: (1) faster-than-anticipated recovery in the economy; and (2) better-than-anticipated execution, i.e., no market share losses.

Underweight
Ps37.40 (9 Nov 10)

Price Target: Ps38
End Date: Dec 2011

Mexico Retail & Healthcare
Andrea Teixeira, CFA AC
(1-212) 622-6735 [email protected] J.P. Morgan Securities LLC Bloomberg JPMA TEIXEIRA <GO>

Price Performance
38 Ps 34 30
Nov-09 Feb-10 May-10 Aug-10 Nov-10

Source: Bloomberg.

Performance
1M Absolute (%)
Source: Bloomberg.

3M 9.1

12M 17.5

4.4

Priced as of the close on November 9, 2010; see our note out November 10 for further details.

Company Data Price (Ps) Date Of Price 52-week Range (Ps) Mkt Cap (Ps mn) Fiscal Year End Shares O/S (mn) Price Target (Ps) Price Target End Date

37.40 09 Nov 10 40.10 29.58 67,320.00 Dec 1,800 38.00 31 Dec 11

Organizacion Soriana (SORIANAB.MX;SORIANAB MM) 2009A 2010E EPS FY (Ps) 1.59 1.73 EV/EBITDA FY 11.3 10.5 P/E FY 23.5 21.6 EBITDA FY (Ps mn) 6,568 7,107
Source: Company data, Bloomberg, J.P. Morgan estimates.

2011E 2.06 9.3 18.2 7,837

2012E 2.21 8.5 17.0 8,418

98

Ben Laidler (1-212) 622-5252 [email protected]

Latin America Equity Research November 2010

Organizacion Soriana: Summary of Financials
Income Statement FY09A FY10E FY11E FY12E FY13E Balance Sheet FY09A FY10E FY11E FY12E FY13E

Revenues Cost of goods sold SG&A Operating Profit (EBIT) EBIT Margin Depreciation EBITDA EBITDA Margin Financial income Financial expense FX & Monetary gains (losses) Other Nonoperating income Equity income EBT Taxes Minority interest Extraordinary Net Income Net income margin EPS Revenue growth EBITDA growth Net income growth FCF growth
Operating Data, Ratios

88,637 (70,344) (13,710) 4,584 5.2% 1,984 6,568 7.4% 148 885 79 0 3,842 (974) 2,868 3.2% 1.59

93,853 (74,573) (14,225) 5,055 5.4% 2,052 7,107 7.6% 166 601 66 (4) 4,558 (1,423) 3,110 3.3% 1.73

100,365 (79,746) (14,909) 5,710 5.7% 2,127 7,837 7.8% 38 459 0 0 5,151 (1,442) 3,708 3.7% 2.06

107,127 (85,065) (16,040) 6,022 5.6% 2,396 8,418 7.9% 59 459 0 0 5,514 (1,544) 3,970 3.7% 2.21 6.7% 7.4% 7.1% (47.5%)
FY12E

115,242 (91,452) (17,303) 6,488 5.6% 2,626 9,114 7.9% 95 459 0 0 6,008 (1,682) 4,326 3.8% 2.40 7.6% 8.3% 9.0% 170.4%

Cash Accounts receivable Inventories

2,139 1,119 1,301 2,114 2,263 3,305 4,384 4,667 4,981 5,359 11,084 13,207 13,817 14,505 15,344

Other current assets Net PP&E Other Assets Total assets Short-term debt Accounts payable Other current liabilities Long-term debt Deferred taxes Other liabilities Total liabilities Minority interest Shareholders' equity Liabilities + Equity

89 37,610 11,367 65,594 3,529 15,976 0 5,500 7,532 1,127 33,664 0 31,930 65,594

95 38,615 12,135 69,555 4,039 17,057 0 4,592 8,041 1,203 34,932 0 34,623 69,555

102 40,142 12,920 72,948 2,039 18,403 0 4,592 8,561 1,281 34,876 0 38,072 72,948

108 43,036 13,790 78,535 2,039 19,864 0 4,592 8,909 1,367 36,771 0 41,764 78,535

117 47,162 14,835 85,079 2,039 21,605 0 4,592 9,584 1,470 39,291 0 45,788 85,079

(7.3%) 5.9% 6.9% 8.0% 8.2% 10.3% 66.4% 8.4% 19.3% (133.8%) (101.0%) (6104.7%)
FY09A FY10E FY11E

Net Debt Net Debt/Capital Debt/Capital Net Debt/EBITDA

6,889 7,512 5,331 4,517 4,368 16.8% 17.4% 11.9% 9.3% 8.3% 22.0% 20.0% 14.8% 13.7% 12.7% 1.0 1.1 0.7 0.5 0.5 FY09A FY10E FY11E FY12E FY13E 11.3 10.5 9.3 8.5 7.9 23.5 21.6 18.2 17.0 15.6 2.1 1.9 1.8 1.6 1.5 0.8 0.7 0.7 0.6 0.6 5.6% (0.1%) 3.4% 1.8% 4.9% 0.0% 0.1% 0.4% 0.4% 0.4% 9.3% 9.5% 10.2% 9.9% 9.9% 3.2% 3.3% 3.7% 3.7% 3.8% 1.4 1.3 1.4 1.4 2.1 2.0 1.9 1.9 5.7% 7.3% 8.2% 1,800 1,800 1,800 1,800 1,800 -

FY13E Valuation, Macro

Capex Change in working capital Free Cash Flow Dividends Dividend % of net income Capex/Depreciation Capex/Sales Working capital Working capital/sales Sales Area (Sq,m) Floor Space Growth No. of Stores SSS growth (nominal terms) # of PL cards issued % of sales in 0+5x (no interest) % of sales on interest plans Bad Debt Provisions Personal Loans Portfolio
Capex Maintenance Expansion

1,164 (479) 4,141 0 0.0% 0.6 1.3% (1,498) (1.7%)

3,100 2,127 (41) 70 2.3% 1.5 3.3% 629 0.7%

3,655 (447) 2,459 260 7.0% 1.7 3.6% 182 0.2%

2,824,481 2,923,125 3,058,125 1.5% 2.5% 5.5% 471 511 566 (10.3%) (0.7%) 0.8% 1,164 3,100 3,655 -

EV/EBITDA P/E P/BV P/S FCF yield Dividend yield ROE Net income margin Net revenue/Assets Assets/Equity 3,253,981 3,515,043 ROIC 4.0% 7.2% Shares 634 718 ADRs 0.7% 0.7% - DCF - WACC - Perpetual Growth - Cost of equity - Cost of debt 5,290 6,752 -

5,290 (451) 1,291 278 7.0% 2.2 4.9% (268) (0.3%)

6,752 (518) 3,490 303 7.0% 2.6 5.9% (786) (0.7%)

7.4% 4.0% 7.7% 4.1%

Source: Company reports and J.P. Morgan estimates. Note: Ps in millions (except per-share data). Fiscal year ends Dec

99

Ben Laidler (1-212) 622-5252 [email protected]

Latin America Equity Research November 2010

Telecom, Media & Technology
Key country dynamics We believe investors should only have a selective exposure to the sector, either through highgrowth/underpenetrated market stories or through stocks offering a mix of growth and cash flow (like TSU/AMX). Generally, telecom stocks tend to be defensive, while media stocks are more cyclically exposed, as are tech stocks. We believe the telecom sector could offer attractive cash flow and dividend yields, compensating for slower growth. Media stocks fared better in earnings than developed peers as most of the media expenditure is still staple variety rather than discretionary. Tech stocks offer highest growth among TMT sector, as LatAm is still underpenetrated, with high demand. Growth characteristics and how they are changing Among telecom companies, growth is mainly driven by the increasing contribution from data revenues: companies are investing a large amount in data networks, and there will be a 3G license auction in Brasil (NIHD likely to be the only bidder) as there was in Mexico. Looking at media companies, we could see them grow, on increasing pay-TV penetration and also from the offer of combined services. Tech companies could benefit from good economic momentum, given higher demand. Drivers of returns – Multiples and growth TMT investors benefit from attractive cash flow yields as well as good dividend distribution, as the sector usually provides low growth for reasonable cash generation, and thus is considered defensive. We believe exposure should be taken in stocks with cheap FCF yield relative to EBITDA growth. Recommendations OW: TIM Participações (TSU): only pure mobile player in Brazil, with the highest growth among Brazilian telcos; lower exposure to MTR changes; valuation of 9.3% FCF yield and 2.9 x EV/EBITDA 2011E. UW: Telmex (TMX): weak trends, demonstrated by double-digit EBITDA decline over the last six quarters; rich valuation relative to higher-growth LatAm peers; tough outlook, given rising competition in Mexico.

Andre Baggio AC
(55-11) 3048-3427 [email protected] Banco J.P. Morgan S.A. Bloomberg JPMA BAGGIO <GO>

EV/EBITDA is a key metric for the sector . . . .
8 7 6 5 4 3 2 1 0 VIV TSU AMX ENTEL NIHD TEO PT TI VOD TEF 3.4 2.9 6.4 5.5 4.4 4.2 4.6 7.2 5.1 5.5

Source: J.P. Morgan estimates.

. . . and we should also look at FCF yields
20% 15% 10% 5% 0% -5% VIV -1.2% TSU AMX ENTEL NIHD TEO PT TI VOD TEF 10.8% 15.1% 9.4% 11.4% 8.0% 7.0% 4.4% 7.8% 10.3%

Source: J.P. Morgan estimates.

Best combination: cheap FCF yield relative to EBITDA growth
EBITDA CAGR 2011-2013E
15% 10% 5% 0% -5% 4% TEO 6% 8% 10% 12% 14% 16% ENTEL TSU AMX TEF PT VIV VOD TI

2011 FCF yield Source: J.P. Morgan estimates.

EBITDA CAGR, 2011-2013e, for covered telecom stocks
15% 10% 5% 0% -5% VIV TSU AMX ENTEL NIHD -3% TEO 9% 6% 5% 5% 14%

Source: J.P. Morgan estimates.

100

Ben Laidler (1-212) 622-5252 [email protected]

Latin America Equity Research November 2010

Top pick and stock to avoid
Price (US$) Top pick TIM Participacoes Stock to avoid Telmex 31.85 15.02 Code TSU TMX Rating OW UW Mkt cap (US$MM) 7,900 13,586 P/E (x) 10E 29.4 12.2 11E 14.3 13.0 EPS 10E 0.19 0.8 11E 0.4 0.7 Div. yield 11E (%) 1.7% 5% ROE 11E (%) 10% 37%

Source: Bloomberg, J.P. Morgan estimates. Note: Share prices and valuations are as of October 28, 2010.

Telecom absolute and relative to MSCI LatAm
600 500 400 300 200 100 0 Dec-02 Mar-04 May -05 Aug-06 Oct-07 Jan-09 Mar-10 Absolute Relativ e to MSCI EMF Index

Telecom EPS integer
150 140 130 120 110 100 90 Feb-09 Jul-09 Dec-09 May -10 Oct-10 2010 2011

Source: MSCI, Bloomberg, IBES, Datastream, J.P. Morgan.

Source: MSCI, Bloomberg, IBES, Datastream, J.P. Morgan.

Telecom 12 mth fwd PE
24 21

Telecom trailing PB
5 4

18 15 12 9 6 95 97 98 99 00 PE 01 02 03 Av g 04 05 06 07 08 10
3 2 1 0 95 97 98 99 00 PB 01 02 03 Av g 04 05 06 07 08 10

+1SD

-1SD

+1SD

-1SD

Source: MSCI, Bloomberg, IBES, Datastream, J.P. Morgan.

Source: MSCI, Bloomberg, IBES, Datastream, J.P. Morgan.

101

Ben Laidler (1-212) 622-5252 [email protected]

Latin America Equity Research November 2010

TIM Participacoes
TSU www.tim.com.br
Company description TIM Participações S.A. (NYSE: TSU) provides telecommunication services all across Brazil. Most of its revenues come from mobile, and it also has long distance and data transmission services. TSU is controlled by the Telecom Italia group. Investment case TSU is our top pick: (i) turnaround to go on, demonstrated by better FCF; (ii) higher growth among Brazilian telcos; (iii) increasing presence as data service provider; (iv) lower MTR exposure, even when compared to VIV/TSP combined; (v) cheap valuation of 9.8% FCF yield 2011e and 2.8x EV/EBITDA (still cheap on ON+PNs, at 8.1%/3.4x). Potential for earnings upgrades We believe TSU could upgrade earnings if: (1) it maintains a high number of subscriber additions without substantial dilution in ARPU, (2) it is able to increase levels of data as % of service revenues toward the ones reported by Vivo and Claro, as well as improve its offer of data services; (3) it reduces advertisement expenses. Prospects for re-/derating The market could derate TSU, if: 1) results from the free on-net minutes strategy disappoint in ARPU; 2) competition increases with the entry of new players (5th license); and 3) capex rises as result of more voice or data traffic, depressing FCF. Price target and risks We rate TSU OW and our Dec 11 price target is $40 based on the average of our DCF and multiples valuation. Our DCF valuation is based on 9.4% WACC, 1.5% LT growth and yields, a $43.3 fair value. Our multiples-based valuation derives from a 10% target FCF yield, resulting in a fair value of $36.7. The downside risks are mentioned above.
TIM Participacoes (TSU;TSU US) Company Data Price ($) Date Of Price 52-week Range ($) Mkt Cap ($ mn) Fiscal Year End Shares O/S (mn) Price Target ($) Price Target End Date Div. Yield Debt/Total Capital 32.21 28 Oct 10 34.13 22.49 7,974.34 Dec 248 40.00 31 Dec 11 1.5% 17.9% Revenues FY (R$ mn) EBITDA FY (R$ mn) EBITDA Margin FY (R$) EPS FY (R$) Bloomberg EPS FY (R$) P/BV FY 2009A 13,907 3,571 26% 3.20 0.03 1.8

Overweight
$32.21 (28 Oct 10)

Price Target: $40
End Date: Dec 2011

Brazil Telecom, Media & Technology
Andre Baggio AC
(55-11) 3048-3427 [email protected] Banco J.P. Morgan S.A. Bloomberg JPMA BAGGIO <GO>

Price Performance
34 30 $ 26 22
Oct-09 Jan-10 Apr-10 Jul-10 Oct-10

Source: Bloomberg.

Performance
1M Absolute (%)
Source: Bloomberg.

3M 27%

12M 29%

14%

2010E 14,406 4,195 29% 1.86 1.95 1.5

2011E 15,862 4,704 30% 3.84 4.07 1.5

2012E 17,220 5,111 30% 6.14 5.47 1.5

Source: Company data, Bloomberg, J.P. Morgan estimates.

102

Ben Laidler (1-212) 622-5252 [email protected]

Latin America Equity Research November 2010

TIM Participacoes: Summary of Financials
Income Statement Net Revenue Cash Costs EBITDA EBITDA margin Depreciation and Amortisation EBIT Net interest expense Other nonoperating income EBT Taxes Minority interest Extraordinary Net Income Adj. Net Income Shares Outstanding EPS Adj. EPS Revenue growth EBITDA growth Net income growth FCF growth FY09A FY10E FY11E FY12E FY13E Balance Sheet 13,907 14,406 15,862 17,220 18,348 Cash -10,336 -10,211 -11,158 -12,110 -12,879 Accounts receivable 3,571 4,195 4,704 5,111 5,469 Inventories 26% 29% 30% 30% 30% Other current assets -3,141 -3,198 -3,149 -2,989 -2,883 Net PP&E 444 997 1,555 2,121 2,586 Other Assets 253 -278 -187 -32 -32 Total assets 0 0 0 0 0 Short-term debt 697 719 1,368 2,089 2,554 Accounts payable -6 -259 -419 -568 -608 Other current liabilities 0 0 0 0 0 Long-term debt - Deferred taxes 691 460 949 1,521 1,946 Other liabilities 691 460 949 1,521 1,946 Total liabilities 2,476 2,476 2,476 2,476 2,476 Minority interest 3.20 1.86 3.84 6.14 7.87 Shareholders' equity 2.79 1.86 3.84 6.14 7.87 Liabilities + Equity 5.8% 3.6% 10.1% 23.2% 17.5% 12.1% 249.8% -33.4% 106.3% -72.1% -605.5% 125.7% 8.6% 8.7% 60.2% 32.3% 6.5% 7.0% 28.0% 14.6% Net Debt Adj. Net Debt Net Debt/Capital Debt/Capital Net Debt/EBITDA FY09A FY10E FY11E FY12E 2,559 1,852 2,040 2,214 2,480 2,881 3,172 3,444 406 248 273 296 1,321 1,662 1,824 1,975 5,323 5,333 4,984 4,795 5,360 5,341 5,341 5,341 17,450 17,317 17,634 18,066 1,417 1,597 1,597 1,597 0 0 0 0 4,320 4,607 5,066 5,493 2,743 1,502 642 816 1,013 709 698 715 -365 118 129 112 9,127 8,533 8,131 8,732 0 0 0 0 8,323 8,785 9,504 9,333 17,450 17,317 17,634 18,066 FY13E 2,359 3,670 316 2,101 4,788 5,341 18,574 1,597 0 5,848 961 715 111 9,232 0 9,342 18,574

1,684 1,317 269 269 269 1,684 1,317 39 -1,652 -3,590 9.6% 7.6% 1.5% 1.5% 1.4% 23.8% 17.9% 12.7% 13.4% 13.8% 0.5 0.3 0.1 0.1 0.0 FY09A FY10E FY11E FY12E FY13E 4.7 3.5 3.0 2.5 2.0 19.7 29.5 14.3 8.9 7.0 1.8 1.5 1.5 1.5 1.6 -0.7% 1.2% 8.3% 0.8 2.1 3.5% 2,476 248 9.6% 1.5% 10.8% 5.2% 0.0% 4.2% 9.2% 11.9% 13.3% 1.5% 1.7% 12.4% 14.3% 5.2% 10.0% 16.3% 20.8% 0.8 0.9 1.0 1.0 2.0 1.9 1.9 2.0 6.2% 2,476 248 9.7% 13.2% 16.6% 2,476 2,476 2,476 248 248 248

Operating Data, Ratios Capex Change in working capital Free Cash Flow Equity Dividends/Share Dividend % of net income Consolidated Dividends Sharebuybacks Capex/Depreciation Capex/Sales Working capital Working capital/sales Net income margin Lines in Service Broadband Subs Broadband Net Adds Mobile Subs Mobile Net Adds Mobile ARPU Mobile MOU PayTV subs Fx, Avg Quarterly Data Revenue Net Income EPS

FY09A -2,671 -243 -112 0.68 24.3% 168 0 0.9 19.2% 111 0.8% 5.0% 0 0 0 41,115 4,713 26.54 83 0 1.99 1Q10A 3,296 30 0.13

FY10E FY11E FY12E FY13E Valuation, Macro -3,000 -2,800 -2,800 -2,876 EV/EBITDA -90 -20 -19 -16 Adj. P/E 566 1,278 1,691 1,938 P/BV 0.82 0.93 6.83 7.83 44.3% 24.3% 111.2% 99.6% FCF yield 204 230 1,691 1,938 Dividend yield 0 0 0 0 ROE 0.9 0.9 0.9 1.0 Net revenue/Assets 20.8% 17.7% 16.3% 15.7% Assets/Equity 201 221 240 256 1.4% 1.4% 1.4% 1.4% ROIC 3.2% 6.0% 8.8% 10.6% Shares ADRs 0 0 0 0 0 0 0 0 0 0 0 0 WACC 48,052 52,857 57,085 60,510 Perpetual Growth 6,937 4,805 4,229 3,425 Cost of equity 24.58 23.65 23.42 23.42 Cost of debt 0 0 0 0 Subsidiary Share 0 0 0 0 1.79 1.83 1.88 1.92 Quarterly Data Revenue Net Income EPS

2Q10A 3Q10E 4Q10E 3,559 3,680 3,870 101 121 208 0.41 0.48 0.84

1Q11E 2Q11E 3Q11E 4Q11E -

Source: Company reports and J.P. Morgan estimates. Note: R$ in millions (except per-share data). Fiscal year ends Dec.

103

Ben Laidler (1-212) 622-5252 [email protected]

Latin America Equity Research November 2010

Telmex
TMX www.telmex.com
Company description Telmex provides fixed-line telecommunications services in Mexico. The company’s service coverage comprises the operation of the nation’s most complete local and long distance networks. Additionally, Telmex offers services such as connectivity, internet access, co-location, web hosting and interconnection services to other telecommunications operators. Investment case The key reasons for our UW rating are: (1) Continuing weak core trends at TMX as demonstrated by double-digit EBITDA decline over the last six quarters; (2) Likelihood of adverse regulation hurting trends further; (3) Less alignment with Carlos Slim, given recent AMX-CGT-TII transaction, which lowered his effective stake in TMX significantly; (4) Rising competition in Mexico, especially from cable operators. Potential for earnings upgrades We believe TMX could upgrade earnings if it is able to control costs, which have increased in line with inflation although revenues have been declining. Moreover, TMX could get a pay-TV license, which would help trends. Prospects for re-/derating The market could rerate TMX, if trends improved or if there is an expectation of a tender offer for minorities from its controlling shareholder AMX at a premium to market price. No such offer has been announced. Price target and risks Our PT of US$12 is based on a combination of DCF ($14.1 value), growth model ($10.1) and multiples ($11.5). Our DCF methodology and uses a WACC of 10.4%, LT growth of -1% and LT margin of 39%. We rate TMX UW in light of weak trends, rich valuation relative to higher-growth LatAm peers, and a tough outlook. Upside risks to our rating are the same as the ones mentioned in the above paragraph (better trends, a tender from AMX).

Underweight
$15.15 (28 Oct 10)

Price Target: $12
End Date: Dec 2011

Mexico Telecom, Media & Technology
Andre Baggio AC
(55-11) 3048-3427 [email protected] Banco J.P. Morgan S.A. Bloomberg JPMA BAGGIO <GO>

Price Performance
19 17 $ 15 13
Oct-09 Jan-10 Apr-10 Jul-10 Oct-10

Source: Bloomberg.

Performance
1M Absolute (%)
Source: Bloomberg.

3M -1%

12M -18%

2%

Telmex SA (TMX;TMX US) Company Data Price ($) Date Of Price 52-week Range ($) Mkt Cap ($ mn) Fiscal Year End Shares O/S (mn) Price Target ($) Price Target End Date Div. Yield Debt/Total Capital 15.15 28 Oct 10 18.48 13.00 13,779.68 Dec 910 12.00 31 Dec 11 5.4% 60.2% Revenues FY (Ps mn) EBITDA FY (Ps mn) EBITDA Margin FY (Ps) EPS FY (Ps) P/BV FY P/E FY 2009A 119,100 52,315 44% 22.28 4.7 8.4 2010E 112,804 45,385 40% 18.51 4.7 10.1 2011E 108,244 42,811 40% 17.30 4.8 10.8 2012E 103,133 40,308 39% 15.23 7.6 12.3

Source: Company data, Bloomberg, J.P. Morgan estimates.

104

Ben Laidler (1-212) 622-5252 [email protected]

Latin America Equity Research November 2010

Telmex SA: Summary of Financials
Income Statement Net Revenue Cash Costs EBITDA EBITDA margin Depreciation and Amortisation EBIT Net interest expense Other nonoperating income EBT Taxes Minority interest Extraordinary Net Income Adj. Net Income Shares Outstanding EPS Adj. EPS Revenue growth EBITDA growth Net income growth FCF growth FY09A FY10E FY11E FY12E FY13E Balance Sheet 119,100 -66,785 52,315 44% -17,943 34,372 -5,411 0 28,963 -8,486 0 0 20,477 16,506 18,383 22.28 18.50 112,804 -67,419 45,385 40% -17,357 28,028 -5,546 0 23,858 -7,157 0 0 16,700 13,403 17,564 18.51 14.70 108,244 -65,433 42,811 40% -16,424 26,388 -5,789 0 21,209 -6,151 0 0 15,058 12,435 17,296 17.30 14.21 103,133 -62,825 40,308 39% -14,836 25,473 -5,871 0 18,733 -5,620 0 0 13,113 11,164 17,170 15.23 13.00 99,549 -60,853 38,696 39% -12,511 26,186 -5,498 0 19,794 -5,938 0 0 13,856 12,580 17,115 16.19 14.67 -3.5% -4.0% 5.7% -7.7% Cash Accounts receivable Inventories Other current assets Net PP&E Other Assets Total assets Short-term debt Accounts payable Other current liabilities Long-term debt Deferred taxes Other liabilities Total liabilities Minority interest Shareholders' equity Liabilities + Equity Net Debt Adj. Net Debt Net Debt/Capital Debt/Capital Net Debt/EBITDA FY09A FY10E FY11E FY12E FY13E 14,380 0 0 37,456 104,305 22,214 178,355 19,769 0 17,519 83,105 0 19,641 140,034 0 38,321 178,355 10,958 0 0 38,503 97,170 20,103 166,735 3,790 0 23,012 96,547 0 8,326 131,676 0 35,059 166,735 10,958 0 0 37,113 90,343 20,103 158,516 3,790 0 22,181 91,039 0 8,326 125,337 0 33,180 158,516 10,958 0 0 35,361 84,650 20,103 151,071 3,790 0 21,134 85,709 0 19,174 129,807 0 21,264 151,071 10,958 0 0 34,132 80,964 20,103 146,157 3,790 0 20,400 80,000 0 19,174 123,364 0 22,793 146,157

-4.0% -5.3% -9.3% -13.2% 1.5% -18.4% -4.0% -33.5%

-4.0% -4.7% -5.7% -5.8% -9.8% -12.9% 13.4% -8.2%

88,494 89,379 83,871 78,541 72,832 121,494 110,716 97,055 84,803 72,846 49.6% 53.6% 52.9% 52.0% 49.8% 57.7% 60.2% 59.8% 59.2% 57.3% 1.7 2.0 2.0 1.9 1.9 FY09A FY10E FY11E FY12E FY13E 5.8 10.1 4.7 13.1% 8.8% 53.4% 0.7 4.7 6.1 12.7 4.7 9.0% 5.4% 47.6% 0.7 4.8 6.0 13.2 4.8 11.5% 5.3% 45.4% 0.7 4.8 6.1 14.4 7.6 10.8% 5.1% 61.7% 0.7 7.1 6.2 12.8 7.3 10.3% 4.3% 60.8% 0.7 6.4

Operating Data, Ratios Capex Change in working capital Free Cash Flow Equity Dividends/Share Dividend % of net income Consolidated Dividends Sharebuybacks Capex/Depreciation Capex/Sales Working capital Working capital/sales Net income margin Lines in Service Broadband Subs Broadband Net Adds Mobile Subs Mobile Net Adds Mobile ARPU Mobile MOU PayTV subs Fx, Avg

FY09A FY10E FY11E FY12E FY13E Valuation, Macro -9,001 -10,000 -9,596 -9,143 -8,825 EV/EBITDA 963 -5,493 831 1,047 734 Adj. P/E 29,480 19,592 22,209 20,388 18,822 P/BV 16.42 10.02 9.88 9.48 8.02 73.7% 52.7% 56.8% 62.0% 49.5% FCF yield 15,093 8,803 8,547 8,136 6,865 Dividend yield 4,095 6,074 2,553 1,322 648 ROE 0.5 0.6 0.6 0.6 0.7 Net revenue/Assets 7.6% 8.9% 8.9% 8.9% 8.9% Assets/Equity 19,937 15,491 14,932 14,227 13,732 16.7% 13.7% 13.8% 13.8% 13.8% ROIC 17.2% 14.8% 13.9% 12.7% 13.9% Shares ADRs 15,882 15,509 15,124 14,671 14,231 6,524 7,349 8,112 8,598 8,770 1,514 825 763 487 172 WACC 0 0 0 0 0 Perpetual Growth 0 0 0 0 0 Cost of equity 0.00 0.00 0.00 0.00 0.00 Cost of debt 0 0 0 0 0 Subsidiary Share 0 0 0 0 0 13.50 12.68 12.35 12.38 12.65

18.3% 15.4% 15.8% 17.9% 19.0% 18,383 17,564 17,296 17,170 17,115 919 878 865 858 856 10.4% -1.0% 11.1% 4.2%

Source: Company reports and J.P. Morgan estimates. Note: Ps in millions (except per-share data). Fiscal year ends Dec.

105

Ben Laidler (1-212) 622-5252 [email protected]

Latin America Equity Research November 2010

Utilities
Key sector dynamics In Brazil, the main sector drivers for 2011 should be: (1) inflation. If inflation expectations increase in 2011, most companies in the sector provide a hedge due to indexed tariffs; (2) energy prices. With long-term electricity supply-vs.-demand balance still comfortable, free market prices seem capped for the near term, limiting upside to generators. Outcome of new capacity auctions will give the market more visibility on balance and price trend; (3) regulation. The pending issue of concession renewals might be tackled in 2011; additionally, while water companies are expected to benefit from new regulation, uncertainty should be high for power discos as they start their 3rd cycle of tariff resets. Overall, we remain lukewarm on the sector outlook for 2011 and recommend investors to selectively focus on individual cases of potential regulatory upside and stocks that provide inflation hedges. In Chile, expectation of tight reserve margin in 2011 means thinner margins for generators (especially heavily hydro-based) and overall growth outlook remains uncertain for major players. Growth characteristics and how they are changing Despite the high demand growth and increased need for new capacity, auction for greenfield projects should remain competitive, thereby limiting the upside for generators. Discos should also benefit less from demand growth in the future due to recent changes in tariff regulation. Drivers of returns – Multiples and growth Valuation discount of Brazilian to global utilities is sustained by high local interest rates, and we do not expect this to change in 2011. Major potential for rederatings will come from regulatory changes. Although cost cutting and M&A are potential drivers for power discos, we are skeptical on execution during 2011. Recommendations Our top picks among Latin American utilities are: Brazilian water utility Copasa (CSMG3) due to expected rerating coming from a new tariff framework, and Brazilian power utility AES Tiete (GETI4) due to earnings stability, high dividend yield and inflation hedge on revenues. We recommend that investors avoid Brazilian power utility Eletropaulo (ELPL6), due to the risk related to the tariff reset process in July 2011 and potential nonrecurring R$1bn liability, and vertical Brazilian utility CPFL Energia (CPFE3), due to relatively expensive valuation.

Anderson Frey AC
(1-212) 622-6615 [email protected] J.P. Morgan Securities LLC Bloomberg JPMA FREY <GO>

Inflation expectations in Brazil for 12M forward In %
6.5 6.0 5.5 5.0 4.5 4.0 3.5 Jan-09 Apr-09 Jul-09 Oct-09 Jan-10 Apr-10 Jul-10 Oct-10 IPCA IGPM

Source: Brazilian Central Bank consensus.

Forecast of reserve margin in Brazil for electricity In % of total sector assured generation capacity
15 gov ernment 10 5 0 -5 -10 2010e 2011e 2012e 2013e 2014e 2015e 2016e 2017e 2018e 2019e alternativ e w ith some project delay s alternativ e w ith some project cancellations

Source: EPE and J.P. Morgan estimates.

Global utilities valuation 2011E P/E and EV/EBITDA, see our weekly report for list of companies
16 14 12 10 8 6 4 Brazil Chile Asia Pacific Europe USA 2011e P/E 2011e EV/EBITDA

Source: J.P. Morgan estimates. Priced as of 28-Oct.-2010.

Declining regulatory returns for power utilities After-tax, real, regulated WACC for Brazilian utilities
12% 10% 8% 6% 4% 2% 0% Discos 2003-05 Transcos 2005-09 Discos 2007-10 Transcos 2009-13 Discos 2011-14 11.26% 9.18% 9.95% 7.24% 7.15%

Source: ANEEL.

106

Ben Laidler (1-212) 622-5252 [email protected]

Latin America Equity Research November 2010

Top picks and stocks to avoid
Price Top picks Copasa AES Tiete Stocks to avoid Eletropaulo CPFL Energia 26.4 23.5 29.9 40.4 Code CSMG3 GETI4 ELPL6 CPFE3 Rating OW OW UW UW Mkt cap (US$MM) 1,783 5,246 2,936 11,368 P/E (x) 10E 6.4 10.7 4.8 13.7 11E 6.0 9.8 8.5 13.9 10E 4.13 2.19 6.29 2.94 EPS 11E 4.39 2.38 3.54 2.90 Div. yield 11E (%) 8.3 10.7 12.3 5.4 ROE 11E (%) 12.0 181.4 18.0 25.3

Source: Bloomberg, J.P. Morgan estimates. Note: Share prices and valuations are as of October 28, 2010.

Utilities absolute and relative to MSCI LatAm
800 700 600 500 400 300 200 100 0 Dec-02 Mar-04 May -05 Aug-06 Oct-07 Jan-09 Mar-10 Absolute Relativ e to MSCI EMF Index

Utilities EPS integer
180 170 160 150 140 130 120 110 100 90 Feb-09 Jul-09 Dec-09 May -10 Oct-10 2010 2011

Source: MSCI, Bloomberg, IBES, Datastream, J.P. Morgan.

Source: MSCI, Bloomberg, IBES, Datastream, J.P. Morgan.

Utilities 12 mth fwd PE
30 25 20 15 10 5 95 97 98 99 00 PE 01 02 03 Av g 04 05 06 07 08 10

Utilities trailing PB
1.4 1.2 1 0.8 0.6 0.4 0.2 0 95 97 98 99 00 PB 01 02 03 Av g 04 05 06 07 08 10

+1SD

-1SD

+1SD

-1SD

Source: MSCI, Bloomberg, IBES, Datastream, J.P. Morgan.

Source: MSCI, Bloomberg, IBES, Datastream, J.P. Morgan.

107

Ben Laidler (1-212) 622-5252 [email protected]

Latin America Equity Research November 2010

COPASA
CSMG3.SA www.copasa.com.br
Company description Controlled by the state government of Minas Gerais in Brazil, COPASA (CSMG3) is a water utility providing water distribution for 603 municipalities (population of 13.8mn) and sewage collection for 156 municipalities (population of 7.8mn) in the state. Investment case CSMG3 trades at a valuation discount to peer SABESP, global water utilities and Brazilian electric utilities, mainly due to the lack of a regulatory framework in which the company’s capex is properly remunerated by marketbased return rates. Nevertheless, a regulatory agency was created in the state and is expected to develop a new and market-friendly tariff framework during 2011, to be implemented by Mar 2012. Additionally, COPASA benefits from high cost efficiency relative to peers, high corporate governance, high volume growth prospects and a high dividend yield (2010e at 7.8%). Potential for earnings upgrades For 2011, positive surprises on earnings could come from: (1) sales volume growth above our 9.5% estimate; and (2) tariff adjustment above inflation in March. For the long term, since there is still uncertainty regarding the final design of the new tariff framework, we chose to be more conservative and assume a mild tariff reset of +2.3% in March 2012 (i.e., below inflation). Earnings upside could come from a better outcome. Prospects for re-/derating While globally water utilities trade at a valuation premium to electric utilities, in Brazil CSMG3 currently trades at a significant discount to electricity peers. We expect valuation convergence under a new tariff framework. Price target and risks We have a DCF-based 2011YE price target of R$34, with 9.1% real cost of equity and 0% perpetuity growth. The main risks are: (1) worse-than-expected tariff reset; (2) sales volume growth for 2011 below our expectation; (3) belowinflation tariff adjustment in Mar 2011; (4) lower-than-50% earnings payout; and (5) high increases in operating costs.

Overweight
R$26.35 (28 Oct 10)

Price Target: R$34
End Date: Dec 2011

Brazil Utilities
Anderson Frey AC
(1-212) 622-6615 [email protected] J.P. Morgan Securities LLC Bloomberg JPMA FREY <GO>

Price Performance
36 32 R$ 28 24 20
Nov-09 Feb-10 May-10 Aug-10 Nov-10

Source: Bloomberg.

Performance
1M Absolute (%) Relative (%) 3.2 -1.5 3M 5.5 -2.9 12M -15.9 -25.6

Source: Bloomberg and J.P. Morgan.

Company Data Price (R$) Date Of Price 52-week Range (R$) Mkt Cap (R$ mn) Fiscal Year End Shares O/S (mn) Price Target (R$) Price Target End Date Div. Yield Debt/Total Capital

26.35 28 Oct 10 34.25 20.95 3,038.16 Dec 115 34.00 31 Dec 11 7.8% 45.4%

Cia Saneamento Minas Gerais (CSMG3.SA;CSMG3 BZ) 2010E 2009A Revenues FY (R$ mn) 2,229 2,332 EBITDA FY (R$ mn) 939 951 EBITDA Margin FY (R$) 42.1% 40.8% EPS Reported FY (R$) 4.73 4.13 Bloomberg EPS FY (R$) 4.18 4.11 P/E FY 5.6 6.4 P/BV FY 0.8 0.8

2011E 2,589 1,074 41.5% 4.39 4.00 6.0 0.7

2012E 2,874 1,152 40.1% 3.80 4.00 6.9 0.7

2013E 3,188 1,267 39.7% 4.13 6.4 0.6

Source: Company data, Bloomberg, J.P. Morgan estimates. 'Bloomberg' above denotes Bloomberg consensus estimates.

108

Ben Laidler (1-212) 622-5252 [email protected]

Latin America Equity Research November 2010

COPASA: Summary of Financials
Income Statement Net Revenues Cost and Expenses EBITDA EBITDA margin (%) Depreciation EBIT Net Financial Result FX & Monetary gains (losses) Non-operating income EBT Taxes Minority interest Net income Net Margin (%) Shares EPS Operating Data, Ratios Change in working capital Capex FCFF FCFE Dividends Dividend % of net income Net debt to EBITDA Net Debt to Equity Current ratio Interest Coverage Capex/depreciation Net Margin (%) Revenues/Assets Assets/Equity ROE (%) FY09A FY10E FY11E FY12E FY13E Balance Sheet 2,229 (1,546) 939 42.1% (256) 683 13 (2) 0 522 (148) 0 546 24.5% 115 4.73 2,332 (1,648) 951 40.8% (267) 684 (42) (8) 0 425 (157) 0 476 20.4% 115 4.13 2,589 2,874 3,188 Cash (1,787) (1,991) (2,213) Accounts receivable 1,074 1,152 1,267 Other current assets 41.5% 40.1% 39.7% Long Term assets (272) (268) (293) Net fixed assets 802 883 975 Total assets (112) (252) (290) Short-term debt (4) (25) (25) Accounts payable 0 0 1 Other current liabilities 460 406 442 Long-term debt (181) (168) (183) Other long-term liabilities 0 1 2 Total liabilities 506 438 476 Minority interest 19.5% 15.2% 14.9% Shareholders' equity 115 115 115 Liabilities + Equity 4.39 3.80 4.13 Net debt FY09A FY10E FY11E FY12E FY13E 415 404 112 967 5,025 6,923 201 97 327 1,709 858 3,191 0 3,731 6,923 2,035 48 423 112 977 5,708 7,267 201 103 273 1,861 858 3,297 0 3,970 7,267 2,501 73 469 112 999 6,236 7,889 201 112 273 2,222 858 3,666 0 4,223 7,889 2,837 41 521 112 1,025 6,804 8,502 201 124 273 2,583 879 4,061 0 4,442 8,502 3,250 39 578 112 1,053 7,385 9,166 201 138 273 2,973 901 4,487 0 4,680 9,166 3,664

FY09A FY10E FY11E FY12E FY13E Valuation, Macro (54) (1,045) (309) (52) 158 29.0% 2.2 54.5% 1.5 (69.6) 4.1 24.5% 0.3 1.9 14.6% (21) (950) (178) (76) 238 50.0% 2.6 63.0% 1.0 22.4 3.6 20.4% 0.3 1.8 12.0% (61) (64) (71) Sales (million m3) (800) (836) (874) Connections 58 84 140 Avg.Tariff ($/m3) 303 189 236 # employees 253 219 238 50.0% 50.0% 50.0% FX rate (eop) 2.6 2.8 2.9 Inflation (%) 67.2% 73.2% 78.3% GDP growth (%) 1.1 1.1 1.2 Interest Rates (%,eop) 9.6 4.6 4.4 2.9 3.1 3.0 EV/EBITDA 19.5% 15.2% 14.9% P/E 0.3 0.3 0.3 P/BV 1.9 1.9 2.0 FCFE yield (%) 12.0% 9.9% 10.2% Dividend yield

FY09A FY10E FY11E FY12E FY13E 960.7 1009.6 1105.6 1192.3 1264.5 5,242 5,549 6,512 6,946 7,595 2.6 2.6 2.6 2.7 2.8 11,540 11,655 11,655 11,655 11,655 1.74 1.75 1.85 1.93 (1.7%) 9.2% 5.2% 4.5% (0.2%) 7.5% 4.5% 4.0% 8.8% 10.8% 12.5% 10.5% 5.7 5.6 5.0 5.5 6.3 5.9 0.8 0.8 0.7 (1.7%) (2.5%) 10.0% 5.3% 7.9% 8.4% 4.6 6.9 0.7 6.2% 7.3% 2.00 4.5% 4.0% 9.5% 4.2 6.3 0.7 7.8% 7.9%

Source: Company reports and J.P. Morgan estimates. Note: R$ in millions (except per-share data). Fiscal year ends Dec.

109

Ben Laidler (1-212) 622-5252 [email protected]

Latin America Equity Research November 2010

ELETROPAULO
ELPL6.SA www.eletropaulo.com.br
Company description Controlled by the US utility AES and BNDES (Brazilian Development Bank), Eletropaulo (ELPL6 BZ) is a pure power distribution company that owns the concession for the metropolitan area of Sao Paulo city and serves 6.0 million customers (9% market share in Brazil). Investment case We believe that the stock’s performance in 2011 should be capped by the following potential negative drivers: (1) increased likelihood of a cash disbursement of ~ R$1.1bn in the judicial dispute with Brazilian utility Eletrobras; and (2) uncertainty regarding the outcome of the July 2011 tariff reset. Moreover, we expect sustainable dividend yields to decrease post 2011 to levels below of those of more predictable utilities in Brazil, which is a major negative since a high dividend yield has been for years one of the highlights of ELPL6’s investment case. Potential for earnings upgrades Since the potential cash disbursement of R$1.1bn in the judicial dispute with Eletrobras is not yet included in our estimates, this represents the single highest downside risk for 2011 earnings. The second major source of downside (or upside) is the outcome of the July 2011 tariff reset. We assumed a 1.6% tariff increase allowed by the regulator. Prospects for re-/derating ELPL6 currently trades at similar valuation levels to other power utilities in Brazil. Although we do not expect this to change in the near future, we do expect a relevant reduction in profitability after the July 2011 tariff reset. Price target and risks We have a DCF-based 2011YE price target of R$30, with 10.0% real cost of equity and 0% perpetuity growth. The main risks: (1) a better-than-expected outcome from the July 2011 tariff reset; (2) lower-than-expected expense with pension liability; (3) a favorable resolution to the ~R$1.1bn debt dispute with Eletrobras; (4) steep reduction in controllable costs; and (5) a sooner-thanexpected restart of the sale process of a controlling stake by BNDES.
ELETROPAULO (ELPL6.SA;ELPL6 BZ) 2009A Revenues FY (R$ mn) 8,050 EBITDA FY (R$ mn) 1,573 EBITDA Margin FY (R$) 19.5% EPS Reported FY (R$) 6.35 Bloomberg EPS FY (R$) 5.45 P/E FY 4.7 P/BV FY 1.5

Underweight
R$29.90 (28 Oct 10)

Price Target: R$30
End Date: Dec 2011

Brazil Utilities
Anderson Frey AC
(1-212) 622-6615 [email protected] J.P. Morgan Securities LLC Bloomberg JPMA FREY <GO>

Price Performance
40 36 R$ 32 28
Nov-09 Feb-10 May-10 Aug-10 Nov-10

Source: Bloomberg.

Performance
1M Absolute (%) Relative (%) -1.0 -5.7 3M -10.3 -18.6 12M 8.0 -1.8

Source: Bloomberg and J.P. Morgan.

Company Data Price (R$) Date Of Price 52-week Range (R$) Mkt Cap (R$ mn) Fiscal Year End Shares O/S (mn) Price Target (R$) Price Target End Date Div. Yield Debt/Total Capital

29.90 28 Oct 10 39.98 28.76 5,003.59 Dec 167 30.00 31 Dec 11 21.8% 71.7%

2010E 8,758 1,983 22.6% 6.29 6.16 4.8 1.5

2011E 8,931 1,353 15.2% 3.54 4.02 8.5 1.5

2012E 9,439 1,340 14.2% 3.11 3.36 9.6 1.5

2013E 10,118 1,459 14.4% 3.18 9.4 1.5

Source: Company data, Bloomberg, J.P. Morgan estimates. 'Bloomberg' above denotes Bloomberg consensus estimates.

110

Ben Laidler (1-212) 622-5252 [email protected]

Latin America Equity Research November 2010

ELETROPAULO: Summary of Financials
Income Statement Net Revenues Cost and Expenses EBITDA EBITDA margin (%) Depreciation EBIT Net Financial Result FX & Monetary gains (losses) Non-operating income EBT Taxes Minority interest Net income Shares EPS Change in working capital Capex FCFF FCFE Dividends Dividend payout (%) Operating Data, Ratios Nominal Capacity (avg MW) Distribution Customers ('000) Distribution Demand (GWh) Avg.GenerationTariff ($/MWh) Avg.Regulated Disco Tariff ($/MWh) # employees Net RAB Capex/depreciation Revenue/Employee ('000) Net Margin (%) Revenues/Assets (%) Assets/Equity ROE (%) FY09A FY10E FY11E FY12E FY13E Balance Sheet FY09A FY10E FY11E FY12E FY13E 8,050 8,758 8,931 9,439 10,118 Cash 1,249 931 669 419 213 (6,477) (6,776) (7,578) (8,100) (8,660) Accounts receivable 1,434 1,363 1,396 1,475 1,581 1,573 1,983 1,353 1,340 1,459 Other current assets 959 999 899 799 799 19.5% 22.6% 15.2% 14.2% 14.4% Long Term assets 1,505 1,360 1,331 1,331 1,331 (382) (398) (400) (414) (427) Net PP&E 6,699 6,916 7,136 7,355 7,574 1,192 1,585 953 926 1,032 Other fixed assets 10 10 10 10 10 5 (112) (158) (251) (262) Total assets 11,855 11,578 11,439 11,388 11,507 224 9 (11) 0 0 Short-term debt 624 115 300 300 300 0 75 75 75 0 Accounts payable 830 836 868 918 984 1,421 1,557 859 750 770 Other current liabilities 2,225 1,791 1,679 1,579 1,579 (357) (505) (267) (230) (237) Long-term debt 1,505 1,360 1,331 1,331 1,331 - Other long-term liabilities 3,391 4,196 3,980 3,978 3,978 1,063 1,053 592 520 533 Total liabilities 8,574 8,297 8,158 8,106 8,172 167 167 167 167 167 Minority interest 0 0 0 0 0 6.35 6.29 3.54 3.11 3.18 Shareholders' equity 3,281 3,281 3,281 3,281 3,335 Liabilities + Equity 11,855 11,578 11,439 11,388 11,507 160 510 (47) (30) (40) (516) (615) (620) (633) (646) Net debt 3,999 3,742 3,999 4,248 4,454 861 1,448 532 519 523 Net debt to EBITDA 2.5 1.9 3.0 3.2 3.1 1,406 1,533 256 274 299 Net Debt to Equity 121.9% 114.1% 121.9% 129.5% 133.6% 1,080 1,053 592 520 480 Current ratio 1.0 1.2 1.0 1.0 0.9 101.6% 100.0% 100.0% 100.0% 90.0% Interest Coverage (318.9) 17.8 8.6 5.3 5.6 FY09A FY10E FY11E FY12E FY13E Valuation, Macro - FX rate (eop) 6,036 6,279 6,524 6,774 7,029 Inflation (%) 34,436 35,965 37,156 38,456 39,802 GDP growth (%) - Interest Rates (%,eop) 437.4 454.4 461.4 470.9 486.8 4,360 4,360 4,360 4,360 4,360 EV/EBITDA 5,522 5,892 6,283 6,554 6,816 P/E P/BV 1.4 1.5 1.5 1.5 1.5 FCFE yield (%) 1,846 2,009 2,048 2,165 2,321 Dividend yield 13.2% 12.0% 6.6% 5.5% 5.3% 67.9% 75.6% 78.1% 82.9% 87.9% genco EV/kW capacity 3.6 3.5 3.5 3.5 3.5 disco EV/customer 32.4% 32.1% 18.0% 15.8% 16.0% discoEV/Net RAB FY09A FY10E FY11E FY12E FY13E 1.74 1.75 1.85 1.93 2.00 (1.7%) 9.2% 5.2% 4.5% 4.5% (0.2%) 7.5% 4.5% 4.0% 4.0% 10.1% 10.0% 12.1% 11.1% 10.0% 5.2 4.1 6.1 6.1 5.6 4.7 4.7 8.4 9.6 9.3 1.5 1.5 1.5 1.5 1.5 28.1% 30.6% 5.1% 5.5% 6.0% 22.5% 22.0% 12.4% 10.8% 10.0% 1.4 1.5 1.3 1.4 1.3 1.3 1.2 1.2 0.7 0.7

Source: Company reports and J.P. Morgan estimates. Note: R$ in millions (except per-share data). Fiscal year ends Dec.

111

Ben Laidler (1-212) 622-5252 [email protected]

Latin America Equity Research November 2010

112

Ben Laidler (1-212) 622-5252 [email protected]

Latin America Equity Research November 2010

Economics and Commodities

Ben Laidler (1-212) 622-5252 [email protected]

Latin America Equity Research November 2010

114

Ben Laidler (1-212) 622-5252 [email protected]

Latin America Equity Research November 2010

Global Economic Outlook
• • • • • Global GDP growth slowdown may have already bottomed. Data flow has been generally positive, with our global PMIs signaling a slight pickup in growth this quarter. Global GDP growth in 2011 revised up a touch, the first upward revision since April. Inflation pressures muted well past 2011 in the major developed economies; return to target unlikely. Fed and BoJ open quantitative easing spigot, BoE likely to follow by early next year.

Bruce Kasman
(1-212) 834-5515 [email protected] JPMorgan Chase Bank NA

David Hensley
(1-212) 834-5516 [email protected] JPMorgan Chase Bank NA

Joseph Lupton
(1-212) 834-5735 [email protected] JPMorgan Chase Bank NA

Carlton Strong
(1-212) 834-5612 [email protected] JPMorgan Chase Bank NA

Michael Mulhall
(1-212) 834-9123 [email protected] JPMorgan Chase Bank NA

Laying the seeds for 1H11 acceleration
We are becoming more confident that the seeds are being sowed for a lift to above-trend growth starting in 1H11. The latest developments in the US, Europe and Asia all suggest that earlier drags are fading. And while midyear shocks will reverberate through production plans as firms slow the pace of inventory accumulation, evidence suggests this adjustment is moving forward constructively. Largely in response to the stronger-thanexpected Chinese data out last month, we have marked up our global GDP outlook for 2011(%oya) to a modestly above-trend pace of 3% from 2.9% as of the last GMOS. Although the change is small, it is the first upward revision since late April and the momentum in positive data surprises has turned positive in the last four weeks after a midyear run of negative outturns. Consequently, along with our tiny upward revision to the growth outlook, the risk bias has shifted to the upside. The deceleration in global economic activity looks to have continued in the current quarter. After jumping 3.9% annualized in 2Q10, global GDP growth downshifted to a 2.7%pace last quarter and is projected to step further down to a2.3% pace this quarter. Some deceleration should not have been a surprise as the record surge in global manufacturing in the first year of the recovery came off the boil. However, the downshift was amplified by an unexpected slowing in consumer and business spending, coupled with deterioration in sentiment and risk appetites. Given the global nature of the step down in manufacturing output growth, the deceleration has been broad-based, with growth slowing across the developed and emerging markets.

Nikolaos Panigirtzoglou
(44-20) 7777-0386 [email protected] J.P. Morgan Securities Ltd.

Grace Koo
(44-20) 7325-1362 [email protected] J.P. Morgan Securities Ltd.

John Normand
(44-20) 7325-5222 [email protected] J.P. Morgan Securities Ltd.

Paul Meggyesi
(44-20) 7859-6714 [email protected] J.P. Morgan Securities Ltd.

The forces behind the midyear slowdown—a policyinduced downshift in China, a sovereign debt crisis in Europe and a slide in consumer confidence and spending in the US—were broad-based and together posed a legitimate risk to an expansion still in its early stages. Also of concern was that these drags would be magnified by a sharper retrenchment in business spending. Another worry was of a negative feedback loop where slower growth fed weakness through a deterioration in financial conditions. In the event, firms appear to be bending modestly in the face of slower growth but continue to increase capital spending and hiring. Moreover, financial conditions remain a positive for growth, helped in part by the easing signals sent by central banks.

115

Ben Laidler (1-212) 622-5252 [email protected]

Latin America Equity Research November 2010

Economic Activity Surprise Index (EASI)
Index 30 15 0 -15 -30 -45 -60 2007 2008 2009 US -5 -10 0 E u r o ar ea 5

Inflation probability distribution for 2011 (developed)
% , p ro b a b ility (b a s e d o n 1 9 2 p o s s ib le o u tc o m e s ) 30 25 20 15 10 5 0 -0 . 5 -0 . 0 0 . 0 -0 . 5 0 . 5 -1 . 0 1 . 0 -1 . 5 1 . 5 -2 . 0 M ean P ro b (< ta rg e t) = 1.1% = 64%

J . P . M o rg a n fc s t = 1 . 0 %

2 . 0 -2 . 5

2 . 5 -3 . 0

> 3.0

2010

H e a d lin e in fla tio n (% 4 Q / 4 Q )

Source: J.P. Morgan.

Source: J.P. Morgan.

China provides the most concrete signs that drags are abating. The latest figures confirm that the most intense phase of the midyear inventory correction has passed and that growth bottomed in 2Q. A steady rebound is now under way, with domestic demand rising at a robust pace despite softness in the export sector. We expect economic activity in China to accelerate further in the coming quarters, fueled by ongoing strengthening in domestic demand. With monetary conditions still very easy and government infrastructure projects for next year to begin ramping up, the risk of overheating is now increasing. We have thus raised our estimate for China’s real GDP growth in coming quarters. Recent developments suggest the risks to our Euro area growth forecast are to the upside, with a shallower and shorter soft patch than the one currently in our projections. While the downward pressure on growth in the periphery remains intense, the extent of the spillover to the area wide economy looks to be more moderate than we have been anticipating. Indeed, German business surveys continue to impress. In the US, developments are less clear-cut, with consumer confidence still depressed and the impact of an imminent fiscal tightening uncertain. However, goods consumption rebounded smartly in the three months ending in September and the latest reading on October auto sales points to a further acceleration into the current quarter. In addition, an upturn in investment and hours worked remains intact. A key issue relates to the impact of the Fed’s recently announced quantitative easing package. While we are not building in significant growth benefits from these actions in our forecast, the Fed’s success in promoting more stimulative financial conditions helps limit downside risks as the economy continues to move forward at a modest pace. Perhaps the most important effect of the Fed’s actions will be its impact on confidence and asset prices.

The most recent readings from our J.P. Morgan global PMIs are adding some upside risk to the projected further slowing in growth in the current quarter. Based on the data in hand, the J.P. Morgan all-industry PMI (out tomorrow) appears to have jumped from 52.6 to just under 55, a large move that would be the first increase since peaking back in April and erase all of the decline since July. If the current level of the index holds through the end of the year, global GDP could expand at an annualized pace of 2.9%, over 1/2%-point stronger than our current forecast. More importantly, it is signalling that the midyear slowdown may have already bottomed as of the third quarter.

Deflation odds low, inflation odds also low
Although economic activity appears set to accelerate into 2011, we are still only looking for trend-like growth in 1H11 and a move to above trend by 2H11. Consequently, the elevated levels of economic slack— primarily in the US, Euro area, Japan and UK—will remain in place well past 2011 and so too will the downward pressure on inflation. Despite a year of abovetrend growth in the first year of the recovery and a jump in commodity prices from their recession lows, core inflation rates in the developed markets (DM) have slid to the lowest level in over 50 years. In this regard, the historical record is clear: the level of economic slack matters more than its change. Since 1970, negative output gaps in every OECD country have been associated with declines in core inflation even in periods of above-trend growth. Phillips-curve-based model estimates suggest headline inflation will fall further next year in the developed markets, reaching just 0.1%oya by the end of 2011. By contrast, the J.P. Morgan forecast looks for headline inflation to remain near 1%oya.

116

Ben Laidler (1-212) 622-5252 [email protected]

Latin America Equity Research November 2010

The J.P. Morgan forecast rests on two key factors that should stabilize inflation next year. The first is that inflation expectations remain anchored near central bank targets. Improved monetary policy over the past two decades supports the view that expectations will remain anchored. With that said, the greater risk is that expectations will move down in line with the recent decline in core inflation. The second factor underlying the J.P. Morgan forecast is the considerable evidence that the transmission of slack to inflation is diminished at lower levels of inflation. Institutional as well as behavioral impediments create significant downward nominal rigidities in the price-setting process, thereby putting a floor under inflation. In a recent report, we estimate that DM inflation will average 1.1%oya in 2011 across a wide range of possible behavioral and economic scenarios (“Stuck in a low inflation rut,” Global Issues, October 27, 2010). This result is in line with the J.P. Morgan forecast. Deflation for the DM as a whole is unlikely, with a probability of just 2%, but is somewhat more likely in the US. Although deflation risks appear low, our analysis shows that it will be difficult for central banks to raise inflation to a level with which they are comfortable. We estimate a two-thirds probability that inflation in the developed markets remains below central bank targets by the end of next year. Although the risk of a deflationary spiral appears low, this will be of limited comfort to central banks, who face a formidable challenge in returning inflation to a level with which they are comfortable. Large negative output gaps continue to exert a powerful downward pull on inflation. As an illustration, we estimate that GDP growth would need to reach about 5.5% in the US, 3.3% in the Euro area and 5.8% in Japan in 2011 to return inflation to target in the coming year. Moreover, these calculations assume stable inflation expectations, anchored at central bank targets. If inflation expectations move down in coming quarters, in line with past experience, growth will need to be even stronger. It is against this backdrop that the Fed has reopened the quantitative easing spigot today, roughly in line with market expectations. While the recent FOMC statement indicated inflation is only somewhat low, recognizing that the unemployment rate will remain elevated for some time suggests an admission of failure on both legs of its dual mandate. The BoJ has also already acted with the announcement of a wide-ranging new asset-purchase program.

The initial installment was modest in size, although officials have said they will expand it if necessary. We also look for the Bank of England to renew its bondbuying program by early next year, although, with inflation proving stickier at an elevated level, this is a much closer call. In sharp contrast to each of these central banks, the ECB has indicated it sees the potential costs of quantitative easing as outweighing any potential benefits. That said, none of these central banks is expected to begin raising rates until mid-2012 at the earliest. Note: This piece is excerpted from the issue of Global Markets Outlook and Strategy dated November 3, 2010.

117

Ben Laidler (1-212) 622-5252 [email protected]

Latin America Equity Research November 2010

Global Economic Outlook

Note: For some emerging economies, 2010-2011 quarterly forecasts are not available and/or seasonally adjusted GDP data are estimated by J.P. Morgan. Bold denotes changes from last edition of Global Markets Outlook and Strategy published November 3, 2010, with arrows showing the direction of changes. Underline indicates beginning of J.P. Morgan forecasts. Source: J.P. Morgan estimates.

118

Ben Laidler (1-212) 622-5252 [email protected]

Latin America Equity Research November 2010

Central Bank Watch
Change from Official interest rate Global Developed Emerging CEEMEA EM Asia The Americas United States Canada Brazil Mexico Chile Colombia Peru Europe/Africa Euro area Sweden Norway Switzerland Hungary Israel Poland Romania Russia South Africa Turkey Asia/Pacific Australia New Zealand Japan Hong Kong China Korea Indonesia India Malaysia Philippines Thailand Taiwan GDP-weighted average GDP-weighted average GDP-weighted average GDP-weighted average GDP-weighted average GDP-weighted average Federal funds rate Overnight funding rate SELIC overnight rate Repo rate Discount rate Repo rate Reference rate GDP-weighted average Refi rate Repo rate Deposit rate 3-month Swiss Libor 2-week deposit rate Base rate 7-day intervention rate Base rate 1-week deposit rate Repo rate 1-week repo rate GDP-weighted average Cash rate Cash rate Overnight call rate Discount window base 1-year working capital Base rate BI rate Repo rate Overnight policy rate Reverse repo rate 1-day repo rate Official discount rate Current Aug '07 (bp) 1.79 2.44 0.61 5.09 7.24 4.08 4.71 1.28 0.125 1.00 10.75 4.50 2.75 3.00 3.00 1.45 1.00 0.50 1.00 2.00 0.25 0.75 5.25 2.00 3.50 6.25 2.75 6.00 7.00 3.01 4.75 3.00 0.05 0.50 5.56 2.25 6.50 6.25 2.75 4.00 1.75 1.500 -316 -237 -358 -201 -217 -294 -154 -453 -512.5 -325 -125 -270 -225 -600 -150 -322 -300 -500 -250 -250 -225 -200 -250 -200 -100 -75 -25 -350 -1050 -119 -150 -500 -48 -625 -101 -225 -200 -150 -75 -350 -150 -163 2 Nov 10 (+25bp) 29 Jul 10 (+25bp) 5 Oct 10 (-5bp) 17 Dec 08 (-100bp) 19 Oct 10 (+25bp) 9 Jul 10 (+25bp) 5 Aug 09 (-25bp) 2 Nov 10 (+25bp) 8 Jul 10 (+25bp) 9 Jul 09 (-25bp) 26 Aug 10 (+25bp) 6 Dec 10 8 Dec 10 5 Nov 10 4 Nov 10 1Q 11 15 Nov 10 4 Nov 10 16 Dec 10 12 Nov 10 18 Nov 10 1 Dec 10 1Q 11 (+25bp) 10 Mar 11 (+25bp) On hold On hold 2Q 11 (+25bp) 4Q 10 (+25bp) 2Q 11 (+25bp) 1Q 11 (+25bp) On hold 2Q 11 (+25bp) 1 Dec 10 (+25bp) 3Q 11 (+12.5bp) 7 May 09 (-25bp) 5 Mar 09 (-50bp) 26 Oct 10 (+25bp) 5 May 10 (+25bp) 12 Mar 09 (-25bp) 6 May 10 (-25bp) 26 Apr 10 (-25bp) 27 Sep 10 (+25bp) 24 Jun 09 (-25bp) 4 May 10 (-25bp) 31 May 10 (-50bp) 9 Sep 10 (-50bp) 4 Nov 10 4 Nov 10 15 Dec 10 15 Dec 10 4Q 10 4 Nov 10 29 Nov 10 22 Nov 10 23 Nov 10 5 Jan 11 Nov 10 18 Nov 10 11 Nov 10 On hold On hold 15 Dec 10 (+25bp) 3Q 11 (+25bp) Jun 11 (+25bp) 2Q 11 (+25bp) 3Q 11 (+25bp) 22 Nov 10 (+25bp) 2Q 11 (+25bp) 3Q 11 (+25bp) 3Q 11 (+25bp) 18 Nov 10 (-50bp) 4Q 11 (+50bp) 16 Dec 08 (-87.5bp) 8 Sep 10 (+25bp) 21 Jul 10 (+50bp) 17 Jul 09 (-25bp) 16 Sep 10 (+50bp) 30 Apr 10 (-50bp) 9 Sep 10 (+50bp) 14 Dec 10 7 Dec 10 8 Dec 10 26 Nov 10 16 Nov 10 19 Nov 10 11 Nov 10 On hold 1 Mar 11 (+25bp) Mar 11 (+25bp) On hold 16 Nov 10 (+25bp) 1Q 11 (+50bp) May 11 (+25bp) Last change Next meeting Forecast next change Dec 10 Mar 11 Jun 11 Sep 11 Dec 11 1.80 2.45 0.62 5.11 7.27 4.05 4.75 1.29 0.125 1.00 10.75 4.50 3.25 3.00 3.00 1.45 1.00 0.50 1.25 2.00 0.25 0.75 5.25 2.25 3.50 6.25 2.75 5.50 7.00 3.03 4.75 3.00 0.05 0.50 5.56 2.50 6.50 6.25 2.75 4.00 2.00 1.50 1.85 2.52 0.63 5.26 7.74 4.07 4.82 1.38 0.125 1.25 11.50 4.50 4.00 4.00 3.00 1.45 1.00 0.50 1.25 2.00 0.25 0.75 5.25 2.50 3.50 6.25 2.75 5.50 7.00 3.09 5.00 3.25 0.05 0.50 5.56 2.75 6.50 6.50 2.75 4.00 2.00 1.50 1.92 2.61 0.65 5.47 8.33 4.13 4.97 1.49 0.125 1.50 12.50 4.50 4.25 5.00 3.50 1.46 1.00 0.50 1.25 2.00 0.50 1.00 5.25 2.75 3.75 6.25 2.75 5.50 7.00 3.19 5.25 3.50 0.05 0.50 5.81 2.75 6.75 6.50 2.75 4.25 2.00 1.50 1.96 2.67 0.68 5.56 8.39 4.32 5.02 1.51 0.125 1.75 12.50 4.50 4.25 5.50 4.25 1.51 1.00 0.50 1.50 2.25 0.75 1.25 5.50 3.25 4.00 6.50 3.00 5.50 7.00 3.24 5.50 3.75 0.05 0.50 5.81 2.75 6.75 6.75 2.75 4.50 2.00 1.625 2.05 2.80 0.72 5.79 8.40 4.80 5.22 1.55 0.125 2.25 12.50 4.50 4.25 5.50 4.50 1.62 1.00 0.50 2.00 2.75 1.00 1.75 5.75 3.50 4.25 6.75 3.50 5.50 8.00 3.37 5.75 4.00 0.05 0.50 6.06 3.00 6.75 7.00 2.75 4.50 2.00 1.75

excluding US GDP-weighted average

Latin America GDP-weighted average

United Kingdom Repo rate

Czech Republic 2-week repo rate

30 Sep 10 (+12.5bp) 23 Dec 10

Bold denotes move since last GMOS and forecast changes.
Source: J.P. Morgan.

119

Ben Laidler (1-212) 622-5252 [email protected]

Latin America Equity Research November 2010

Capital Controls and FX Intervention
State of current FX regime, capital controls and possible future Intervention measures in Emerging Markets
FX regime China India Closed Capital Account. Bond Investment only possible through QFI, but discouraged by authorities Strict Limits on size of foreign bond investment. Limit of $5bn on government bonds and $15 bn on corporates Recent measures None Possible future measures None

Indonesia Korea Malaysia Philippines Singapore Sri Lanka Taiwan

Thailand

Argentina Brazil Chile Colombia Mexico Peru Czech Hungary Israel Poland Russia South Africa Turkey

In September, SEBI announced the Potential for currency intervention, but we expect no action against bonds. increases in the FII Limits to $10bn for government bonds and $20bn for corporates Interest and an income tax at 20%, but majority of investors use tax 1-month minimum holding period for Further restrictions on SBIs; Tax treaties to reduce these taxes between 0-10% foreigners investing in SBIs increases are unlikely as it needs parliamentary approval Withholding tax was made exempt on MSB and KTB since May In June, caps on foreign banks FX forward Possibly reimposing WHT on MSBs and 2009 positions were announced leading to less KTBs. Further lowering of cap on foreign banks FX fwd positions. MSB holdings. No taxes None None Income tax of 20% on interest income and capital gains. None None Open capital account. No taxes. None None None Easing of capital controls. Strict Limits on size of foreign investment in T-bonds and T-bills at 10% of total outstanding. Investment in corporate bonds is not permitted. None Time deposits are not allowed for foreigners. FINI account required Verbally discourage fixed income for foreign investment, frequest inspections of custodian banks investment by FINI accounts, propose mandatory use of USD for foreigners equity margin accounts. Foreigners exempt from WH tax for government bonds 15% WHT was reintroduced to equalize Potential introduction of across the board tax on all fixed income inflows with with current tax regime for domestic potential restrictions on minimum holding holders. period. Non Convertible and capital outflow controls remain in place with a None None minimum holding period of 1year and US$2mm outflow per month Risks remain high for further Non Convertible. Tax of 6% on foreign fixed income investment and Increase IOF Tax on fixed income interventions. 2% on equity investment. Increase margin for derivative transactions investment to 4% on Oct 4th and to 6% on Oct 18 Non Convertible. No capital controls None Near-term risks are limited although an increase in FX intervention is possible if CLP rallies further USD purchases of $20mm day Risks remain high for further interventions Non Convertible. 33% tax on income and capital gains and 6% WHT both in spot FX and potentially increases on coupon payments for bonds with maturities up to 5 years and 4% in Reserve for longer bonds. Free floating and deliverable. No FX controls. Banxico sells $600mm None None of USDMXN puts per month. Reinstated 4% fee on Bank CDs Unlikely to initiate new tax measures but Non Convertible. Reserve Requirements on foreign deposits purchases of USD have been high this (120%), 30% tax on interest paid to non-residents. Limits on pension year at $8bn YTD. fund short USD positions Free floating and convertible None None Free floating and convertible. It is important to note the heavy None None indebtedness of the private sector in foreign currency debt. None None Free floating and convertible. Interventions in the fx market have been substantial and we estimate have been running at a $700mm per month pace. Free floating and convertible. None None Managed float vs a basket of EUR and USD (45%/55%). Current Recently widened the band Moving toward more currency flexibility band of the basket is between 32.90 and 36.90 Freely convertible. SARB does intervene on occasion. No capital None Risk of more aggressive intervention controls Risk of aggressive and unorthodox Freely floating and convertible. CBRT engages in daily FX auctions Lowered the interest rate on foreign intervention is low, but policy of building of $40mm USD and sets a weekly guidance of an extra amount. currency deposit rates to 0.25% from reserves remains in place. 2.50%. Increased weekly auction amounts to $500mm most recently.

Source: J.P. Morgan, “Get over It: EM FX Appreciation and Interventions Are Here to Stay,” Sclater -Booth et al, 21 Oct 10.

120

Ben Laidler (1-212) 622-5252 [email protected]

Latin America Equity Research November 2010

Foreign exchange reserve appreciation (YTD)
70 60 50 40 30 20 10 0 -10 23.6 17.7 16.9 USD Bn 15.5 15.3 15.0 12.2 12.2 9.4 8.5 6.8 6.4 6.1 5.3 5.2 4.1 3.7 0.1 -1.7 % change 25 20 15 10 5 0 South Africa -5 Malaysia Argentina Indonesia Brazil Thailand Korea Philippines Colombia Russia Poland Mexico Taiwan Turkey Czech China Chile India Peru

Source: Bloomberg.

FX appreciation vs. US$ (YTD %)
15 10 5 0 South Africa -5 Thailand Colombia Philippines Malaysia Indonesia Argentina
Taiwan
121

12.1

11.0

10.9 8.6 7.0 6.5 6.3 5.6 5.4 5.2 4.9 4.8 3.9

3.4

2.8

2.2

2.1

-2.5

-4.0

India

Czech

Korea

Brazil

Chile

Peru

China

Poland
3.5 2.2 Czech

Source: Bloomberg.

10-year government bond yields (%)
14 12 10 8 6 4 2 0 India Indonesia Peru Colombia Poland Korea Philippines Russia Malaysia Mexico Turkey China Brazil SA 11.9 8.0 5.2 7.8 5.2 8.3 5.1 7.1 4.1 Pre-tax After-tax

6.5

7.0 4.0

5.6 3.7

6.0 3.7

5.4 3.5

Taiwan

Mexico

Turkey

5.4 3.1

4.5 2.9

5.3 2.7

3.9 2.4

3.6 2.4

3.1 1.4 1.3 0.9 Thailand

Source: Bloomberg, J.P. Morgan calculations. Note: After-tax assumes US institutional investor tax treatment.

Russia

Ben Laidler (1-212) 622-5252 [email protected]

Latin America Equity Research November 2010

Brazil Economics
Inflation risks on the rise Despite the slowdown observed in the central quarters of the year, the economic activity scenario remains very robust, especially due to the domestic demand drivers. The labor market is extremely tight, with the unemployment rate at a historical low and real wage gains accelerating at a worrisome pace. On top of that, credit conditions continued to improve despite the 200bp monetary tightening implemented between April and September. Against this backdrop of strong domestic demand expansion, we believe Brazil’s growth rate will reaccelerate by the end of this year and will begin 2011 on a strong footing. The resumption of growth in an environment of already tight utilization rates will put even more pressure on headline and core inflation, which are already running above the BCB target of 4.5%. Will Rousseff rebalance Brazil’s policy mix? The economic policy mix in the last year of the Lula Administration has been clearly unbalanced, with the expansionary fiscal policy putting upward pressure on interest rates, and the high yields of local rates market attracting short-term capital inflows. The problem is that the government has responded to the resulting fx appreciation pressures with the imposition of new taxation on foreign capital inflows instead of promoting a fiscal adjustment aimed at reducing aggregate demand. We expect that the next administration will promote some fiscal correction, but the resumption of a monetary tightening is inevitable, in our view. Our forecast is that the Selic rate will be increased by 175bp next year, to 12.50%. Assuming some policy action will be taken by the next administration, we anticipate growth will moderate to 4.5% next year (from 7.5% in 2010), which will help to reduce inflation from 5.6% this year to a still-above-target 5.1% in 2011. All eyes on cabinet formation The market expects a market-friendly cabinet, with exFinance Minister Palocci likely setting the agenda from the Chief of Staff’s chair. BCB Governor Meirelles is seen as an invaluable asset and should be retained, either remaining at the BCB or being appointed to a more political position. If Meirelles leaves the BCB, an appointment from within is likely. For the finance portfolio, Guido Mantega and Luciano Coutinho are the leading contenders, in our view.

Fabio Akira

AC

(55-11) 3048-3634 [email protected] Banco J.P. Morgan S.A.

High utilization of labor and capital resources
% of full capacity, sa 88 86 84 82 80 78 76 03 05 07 09 Unemployment rates FGV operating rates 8 10 12 14 % of labor force, sa, inverted 6

IPCA headline and core inflation
%oya, nsa 7 6 5 4 3 Core Headline

2006

2007

2008

2009

2010

Brazil: economic indicators
Average 2003-07 Real GDP, % change Consumption* Investment* Net trade* Consumer prices, %oya % Dec/Dec Producer prices, %oya Government balance, % of GDP Exchange rate, units/$, eop Merchandise trade balance ($ bil.) Exports Imports Current account balance % of GDP International reserves, ($ bil.) Total external debt, ($ bil.) Short term† Total external debt, % of GDP Total external debt, % of exports‡ Interest payments, % of exports‡ * Contribution to growth of GDP. † Debt with original maturity of less than one year. ‡ Exports of goods, services, and net transfers. 4.0 2.7 1.2 0.0 7.1 6.0 9.6 -3.3 2.36 37.9 117.3 79.3 9.4 1.0 83.8 229.9 32.7 25 157 11

2008 5.1 4.5 2.7 -2.0 5.7 5.9 13.7 -1.9 2.31 24.9 198.7 173.8 -29.2 -1.8 192.8 306.4 38.8 18 124 7

2009 -0.2 3.1 -3.4 0.1 4.9 4.3 -0.2 -3.3 1.74 25.0 153.5 128.5 -25.2 -1.6 236.8 301.2 30.8 19 160 9

2010f 7.5 6.1 4.5 -3.1 5.0 5.6 4.5 -3.4 1.70 13.7 196.7 183.0 -49.3 -2.4 292.3 335.2 29.8 16 137 7

2011f 4.5 4.3 1.7 -1.6 5.6 5.1 3.1 -2.5 1.85 -0.6 221.0 221.6 -68.3 -3.1 300.3 352.2 29.8 16 131 6

Source: BCB and J.P. Morgan.

122

Ben Laidler (1-212) 622-5252 [email protected]

Latin America Equity Research November 2010

Mexico Economics
External demand might curb growth, but auto sector and credit could boost domestic demand Unfortunately, gubernatorial elections will likely create a political impasse for structural reforms Sluggish growth and well-behaved inflation will keep Banxico on hold all year long Favor long MXN over front-end receivers in TIIE swaps

Gabriel CasillasAC
(52-55) 5540-9558, [email protected] Banco J.P. Morgan S.A., Institución de Banca Múltiple J.P.Morgan Grupo Financiero

Fundamentals and politics in 2011
Structural change in the auto sector and credit growth could overcompensate sluggish US growth The externally driven manufacturing production has led Mexico’s economic recovery throughout the year. Nevertheless, growing concerns about longer-term sluggish growth in the US is posing risks ahead. In this context, we believe Mexico’s GDP will grow 3.5% in 2011 (consensus: 3.5%). We could even see lower growth rates in Mexico. Nevertheless, it is our take that the structural change that the auto sector has experienced in the Mexican economy and credit growth in Mexico will help to overcompensate US growth’s sluggishness. On the one hand, several automakers across the world have reallocated part of their production to Mexico to benefit from a weaker peso, skilled Mexican labor, stillhigh transport costs, and the country’s strategic geographic location. On the other hand, commercial banks’ credit might post significantly high growth rates in 2011. The Mexican banking system is composed of 41 well-capitalized commercial banks. The average capitalization index stands at 17.7, with a range of 12.3 to early 240. Unfortunately, total commercial bank credit to the private sector represents less than 15% of GDP. After the credit boom in Mexico in 2004-2006, nonperforming loans increased significantly, making banks rethink their credit-giving policies. Nevertheless, commercial banks have now “cleaned up” their credit balances and employment conditions have improved significantly in the past 12 months. As a result, we believe that it is highly likely that all these factors will probably lead to an ascending trend in the country’s domestic credit cycle.

Gubernatorial elections will likely create a political impasse for structural reforms There is no doubt that Mexico needs several structural reforms, particularly meaningful fiscal and labor-market reforms as well as new guidelines to empower antitrust officials to dilute monopolies and foster competitiveness. We strongly believe that the lack of these structural reforms is restraining domestic demand and Mexico’s potential GDP. Furthermore, the prevailing legal uncertainty with regard to enforcing contracts is shortcircuiting the credit intermediation function of commercial banks. Unfortunately, the seemingly large GDP growth rates that the country has observed in 2010 appear to be providing a “false sense of security” to government officials, particularly legislators, who have now downplayed the need for reforms in Mexico. Furthermore, with gubernatorial elections in six states next year, particularly in the highly populated State of Mexico, it is going to be difficult to secure congressional approval for the key reforms that the country needs. Not all long-term plans are negative. We believe infrastructure projects, including construction of roads, water treatment plants, and massive transportation systems, will play an important role in the next two years. This is mainly because several projects that had been in a feasibility study phase over the past two years are now ready to start construction. Furthermore, several projects suffered important delays because of the global financial crisis. However, state-owned development bank BANOBRAS has modified its lending framework to provide guarantees in addition to funding and is now working with the National Infrastructure Fund to also provide direct, nonrefundable funds to projects with a high social return. Banxico to keep rates on hold throughout the year The growth backdrop we have sketched above, in addition to well-anchored medium-term inflation expectations and moderate wage increases, clearly support our “low-for-long” monetary policy call, in which we anticipate that the first hike will not take place until 2Q12 (consensus: 1Q12).

Market strategy
We favor long MXN over receivers in the front end of the TIIE swap curve.
123

Ben Laidler (1-212) 622-5252 [email protected]

Latin America Equity Research November 2010

China Economics
Growth momentum in China’s economy improved moderately in 3Q10, with real GDP rising 8.1%q/q saar by our calculation, exceeding our forecast of 7.5% and following a 7.2%q/q saar expansion in 2Q. The latest macro figures confirm our view that growth bottomed in 2Q and has been on a steady rebound since, with domestic demand rising at a solid pace despite softness in the export sector and with the most intense phase of inventory correction gradually fading. We expect growth in China to pick up steadily in coming quarters, with further solid expansion in domestic demand in particular. Local governments are anticipated to gear up for the start of new projects going into 2011. This, along with the central government’s efforts to meet the 5.8-million-unit housing target, solid private consumption and investment demand, the gradual fading of the inventory drag, and largely accommodative monetary conditions, could increase the risk of overheating by early next year. We have moderately increased our estimate for China’s real GDP growth in coming quarters. Our forecast for 2010 full-year GDP growth has been fine-tuned to 10.0%oya (previously: 9.8%), while our estimate for 2011 GDP growth is now 9.0%oya (previously: 8.6%). We have also revised the forecast for 2010 average CPI inflation rate to 2.9%oya (previous forecast: 2.8%). The forecast for 2011 average CPI inflation now stands at 3.2%oya, taking into account the impact of potential further resource and energy price liberalization. Indeed, we believe the PBoC’s 25bp rate hike effective on October 20th is intended to signal that the central bank is keen to contain inflation expectations. As such, we expect headline CPI inflation to peak in coming months, with the inflation rate gradually stabilizing at around 3.2% by early next year. Our US team is looking for the Fed to maintain its fed funds target rate through to 2Q12, and to begin QE2 in early November. So these factors imply the PBoC would be somewhat constrained should it want to undertake further rate hikes. We now expect the PBoC to be on hold in coming months as it monitors the impact of tightening measures on the property sector. We expect the next rate hike to come in 2Q11, and we look for a total of two rate hikes next year. For the property sector, we believe the authorities will continue to focus on sector-specific measures, targeting both the demand and the supply sides, in an effort to contain further rises in property prices.

Qian Wang
(852) 2800 7009, [email protected]

Grace Ng
(852) 2800 7002, [email protected]

Lu Jiang
(852) 2800 7053, [email protected] JP Morgan Chase Bank, N.A., Hong Kong

China: real GDP growth
%oya 16 14 12 10 10 8 6 00 02 04 06 08 10 5 0 %oya %q/q, saar %q/q, saar 20 15

Source: CEIC and J.P. Morgan estimates.

China: headline CPI, food prices, and nonfood CPI inflation
%oya, both scales 10 8 6 4 2 0 -2 -4 2002 CPI Nonfood CPI CPI: food prices 25 20 15 10 5 0 -5 2003 2004 2005 2006 2007 2008 2009 2010

Source: CEIC and J.P. Morgan estimates.

124

Ben Laidler (1-212) 622-5252 [email protected]

Latin America Equity Research November 2010

Meanwhile, CNY/USD appreciation has accelerated in recent weeks, and the trend could continue post the US midterm elections and G-20 summit in November. The probability of more significant near-term CNY/USD appreciation could yet be capped by Chinese policymakers’ fears over ongoing uncertain external demand and its impact on exports, and if the spot rate begins to show more two-way volatility when political pressure starts to ease later this year. Our forecast is for the CNY/USD rate to be unchanged at 6.6 at year-end, with the bilateral rate expected to appreciate steadily toward 6.3 by end-2011. On the fiscal front, we expect the focus to shift from infrastructure investment toward consumption and achieving more balanced growth. In addition to structural reforms and the gradual buildup of social security, urbanization and infrastructure spending will likely remain a key focus in the 12th five-year plan. Therefore, solid public investment and steadily strengthening private consumption should ensure that the economy expands at a solid 8% pace over the next five years, despite soft global demand. This, together with the government’s commitment to increase the supply of housing, suggests that commodity demand from China will remain solid in coming years. However, the government’s firm resolve to conserve energy and slower the pace of private investment growth, given the softer global demand and abundant capacity in many manufacturing sectors, suggests that the booming pace of China’s commodity demand growth during the past decade is unlikely to be repeated.

China: benchmark lending and deposit rates
% per annum 8 7 6 5 4 3 2 1 04 05 06 07 08 09 10 11 1-year deposit rate 1-year lending rate J.P. Morgan forecasts

Source: CEIC and J.P. Morgan estimates.

125

Ben Laidler (1-212) 622-5252 [email protected]

Latin America Equity Research November 2010

China Infrastructure
Target railway capex for 2010 and 2011 As per the Ministry of Railway’s (MOR) plan announced in July 2009, the total railway spending target for 2010 and 2011 is Rmb825 billion and Rmb900 billion respectively. The target capex on civil works, which accounts for c.85% of the total railway capex, is Rmb700 billion for 2010 and Rmb750 billion for 2011. This implies that spending on civil works is estimated to increase by 17% in 2010 and 7% in 2011. This is significantly lower than the average growth rate of 64% in the last four years. Strong railway spend so far Railway capex is up 27% yoy in 9M2010. The MOR’s railway spending amounted to Rmb491 billion in the first nine months, achieving 60% of the full-year target of Rmb825 billion, ahead of last year’s ratio of 55% over the same nine-month period. Within this, a total of Rmb430 billion was spent on civil works, forming 88% of the railway spending and achieving 61% of the fullyear target, ahead of last year’s 57%. For the final quarter of the year, the pace of increase is expected to soften markedly to a meager 3% yoy, assuming the MOR’s target is kept unchanged. It is likely that the current target may be exceeded if the current momentum is maintained.

Qian Wang
(852) 2800 7009, [email protected]

Grace Ng
(852) 2800 7002, [email protected]

Lu Jiang
(852) 2800 7053, [email protected] JP Morgan Chase Bank, N.A., Hong Kong

Target railway length Based on the latest version of the MOR’s medium- to long-term railway development plan (announced in 2008), China plans to achieve a total ending length of 120,000km by 2020. During late 2008 and early 2009, in response to the financial crisis outside China, the MOR fast-tracked a number of projects on back of the government’s aggressive fiscal stimulus. With this year’s ending length at approximately 90,000km, our regional infrastructure team expects China to achieve a total railway length of 110,000km by 2012. The MOR’s existing medium-term target of 120,000km of railway network by 2020 can be achieved as early as 2015. Expectations from the 12th Five-Year Plan While the 12th Five-Year plan has not yet been officially announced, our regional infrastructure team believes that there is a high likelihood of upward revisions to railway infrastructure spending and increases in the MOR’s medium-term railway operating length target. The government has emphasized on several occasions that improving transportation links, particularly the railway network, is vital to rebalancing economic growth across regions.

China infrastructure spending outlook
Spending (Rmb B) Capex on total railway spending Capex on civil works Capex on locomotives and others % capex on civil works % capex on locomotives and others Y/Y growth (capex on civil works) Y/Y growth (capex on locomotives) Ending railway length (km) MOR’s railway spending during the year Highway/Tollroads (Rmb B)
Source: MOR, J.P. Morgan estimates.

2005 120 89 31 74 26

2006 208 155 52 75 25 75 68 76,919 155

2007 255 177 78 69 31 14 49 77,904 177 649

2008 414 337 77 81 19 90 (1) 79,625 337 688

2009 701 600 101 86 14 78 31 86,500 600 967

2010E 825 700 125 85 15 17 23 90,000 700 1160

2011E 900 750 150 83 17 7 20 93,500 750 1276

2012E 880 700 180 80 20 (7) 20 108,000 700 na

75,438 89

126

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Latin America Equity Research November 2010

Western-China-driven growth
Western China Western China includes six provinces (Gansu, Guizhou, Qinghai, Shaanxi, Sichuan, and Yunnan), five autonomous regions (Guangxi, Inner Mongolia, Ningxia, Tibet, and Xinjiang), and one municipality (Chongqing). The major cities (with a population over 5 million) are Chengdu, Chongqing, Xi'an, Kunming, Wulumuqi. Land area and population Western China accounts for 71% of mainland China’s area. Its population as of 2009 was 370 million, or 27.5% of China’s total population. GDP growth From 2000 to 2008, Western China’s GDP growth consistently lagged that of the non-western regions (see table top right). As a result, Western China’s share of China’s real GDP experienced a steady decline during the period (see figure top right). In 2007, Western China accounted for 15.9% of China’s real GDP growth, lower than its share in 2000 (16.3%). However, in 2009 the trend reversed, with Western China’s GDP growing at 12.4%, higher than the non-western region’s at 11.5%. The two main reasons for this were: a) With its greater reliance on China’s exports, the impact of the global recession in 2008 was more severe on Eastern China; and b) Western China benefited from China’s massive infrastructure spending in 2009, as significant resources were allocated to the western region, which has poor infrastructure facilities. Per-capita GDP There is significant scope for economic development in Western China compared to the more developed coastal regions. 2009 average per capita GDP in the 12 western provinces was Rmb17,595. This is less than half of the per capita GDP of Rmb42,469 in the coastal provinces. The average per capita urban income for the 12 western provinces was Rmb13,896. This is only 70% of the average in coastal provinces (Rmb19,766).

Real GDP growth – Western China lagged until 2008
15 14 13 12 11 10 9 8 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
Source: CEIC, J. P. Morgan Economics.

Non-w estern region Western region

Western China’s real GDP as % of national real GDP
16.4

16.2

16.0

15.8 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
Source: CEIC, J. P. Morgan Economics.

GDP per capita – Western vs. coastal provinces (Rmb/yr)
45,000 40,000 35,000 30,000 25,000 20,000 15,000 10,000 5,000 99 00 01 02 Coastal Western

03

04

05

06

07

08

09

Source: CEIC, J. P. Morgan Economics.

127

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Latin America Equity Research November 2010

Policy initiatives and projects announced in 2010 In 2000, Beijing adopted the ‘Go West’ policy to develop its relatively isolated and underdeveloped Western China region. The main components of the policy included infrastructure development, attracting foreign investment, improving ecological protection, promoting education, and retaining high-skilled labor from moving to richer provinces. From 2000 to 2009, China launched 120 projects with a total cost of Rmb2.2 trillion (source: Reuters). In 2010, the following projects and preferential policies were announced to further improve the development of the western region: 1. The National Development Reform and Commission (NDRC) announced on 6 July that China will embark on 23 new projects in the west region this year totaling Rmb682 billion (US$100 billion). These projects range from railway, airports, power grids, power stations, wind powers to coal mines.

2. China’s State Council announced on 7 July that the new resource tax, which was levied in Xinjiang as of 1 June 2010, and is charged at 5% of the revenue of coal, oil and gas companies, should be extended to all 12 provinces in Western China. The resource tax reform will help the local governments in Western China to collect taxation revenue to develop the local economy and gradually bridge the gap between developed coastal regions and the less developed western regions. 3. The state council confirmed that the encouraged industries in Western China will be entitled to 15% preferential income tax rate for another 10 years. In comparison, the income tax rate of Chinese enterprises in other regions will be unified to 25%. This measure should help boost Western China’s medium-term growth by attracting more factories/companies and creating more job opportunities.

128

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Latin America Equity Research November 2010

Chinese retail sales (%yoy)
25 20 15 10 5 0 Jan-99 Jul-00 Jan-02 Jul-03 Jan-05 Jul-06 Jan-08 Jul-09
Source: J.P. Morgan Economics.

Chinese car sales (%yoy)
120 100 80 60 40 20 0 -20 -40 01 02 03 04 05 06 07 08 09 10

Source: J.P. Morgan Economics, September 2010.

Wage growth (%yoy)
22 20 18 16 14 12 10

Consumer loan increase as a % of total loan increase
15% 12% 9% 6% 3% 0% Jan-09 Feb-09 Mar-09 Apr-09 May-09 Jun-09 Jul-09 Aug-09 Sep-09 Oct-09 Nov-09 Dec-09 Jan-10 Feb-10 Mar-10 Apr-10 May-10 Jun-10 Jul-10 Aug-10

8 1Q01 1Q02 1Q03 1Q04 1Q05 1Q06 1Q07 1Q08 1Q09 1Q10
Source: J.P. Morgan Economics.

Source: CEIC, J. P. Morgan.

Minimum wage increases in several provinces and municipalities in 2010
Provinces/ Municipals Shanghai Zhejiang Guangdong Beijing Jiangsu Tianjin Shandong Fujian Hubei Shanxi Jilin Ningxia Minimum monthly wage (RMB) Before After 960 1,120 960 1,100 860 1,030 800 960 850 960 820 920 760 920 720 900 700 900 736 850 650 820 560 710 Recent minimum wage increase (%) 17% 15% 20% 20% 13% 12% 21% 25% 29% 16% 26% 27% Adjustment effective date 1-Apr-10 1-Apr-10 1-May-10 1-Jul-10 1-Feb-10 1-Apr-10 1-May-10 1-Mar-10 1-May-10 1-Apr-10 1-May-10 1-May-10

% of households grouped by annual income as of 2008
Annual income <RMB10000 RMB10000-20000 RMB20000-30000 RMB30000-40000 RMB40000-50000 RMB50000-60000 RMB60000-70000 RMB70000-80000 RMB80000-90000 RMB90000-100000 >RMB100000
Source: CEIC.

% of households 1.5 9.9 17.7 18.3 15.0 10.8 7.8 5.3 3.7 2.6 7.5

Source: finance.sina, Bloomberg news. Note: Except Shanghai and Beijing, all districts in the table have multiple tiers of minimum wages. The minimum wages and increase % shown for those districts are of the highest tier.

129

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Latin America Equity Research November 2010

China FAI: Do not extrapolate
Can housing starts continue to grow in 2011 or will there be an inventory correction? Residential construction (advanced 12 months) versus sales (millions of square meters GFA per month)

160 140 120 100 80 60 40 20 0 Jan-06

Note: Increases in affordable housing construction starts 167M sq m of GFA in 2011 – just six weeks of private construction starts (J.P. Morgan estimates, see China affordable housing, Kwong et al, 27 October 2010).

Jul-06

Jan-07

Jul-07

Jan-08

Jul-08

Jan-09

Jul-09

Jan-10

Jul-10

Jan-11

Jul-11

Estimated total monthly residential construction starts

Monthly residential sales

Source: CEIC, J.P. Morgan calculations. Notes: Monthly total construction data is available in China. The ratio from 2005 to 2010 of residential construction to total construction is 80%. This ratio is used to estimate the residential starts from the monthly total construction starts. The monthly total constructions starts and monthly residential sales data are seasonally adjusted.

Per capita consumption of cement (tonnes) vs. adjusted per capita nominal GDP
Cement consumption per capita (tonnes) 1.4 China 2010 E 1993: per capita cement consumption peaked in Taiwan 1.2 China 2009
Russia (1991-2009E)

1997: per capita cement consumption peaked in Korea

Brazil (1985-2009E) India (1985-2009E) China (1985-2010E) US (1930-2008) UK (1985-2009E) Germany (1985-2009E) Japan (1985-2009E) Taiwan (1985-2009)

1.0 S. Korea 2009E 0.8

South Korea (1985-2009E) Mexico (1985-2009E)

Japan 2009E

0.6 Russia 2009E 0.4 Mexico 2009E Taiwan 2009 Germany 2009E

0.2 Brazil 2009E India 2009E 0.0 0 6000 12000 18000 24000 30000 GDP per capita (USD) 36000 42000 48000 UK 2009E US 2008

Source: US Geological Survey and J.P. Morgan estimates. Note: The GDP per capita is restated for today's dollars by adjusting the deflator series.

130

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Latin America Equity Research November 2010

Market Forecasts

Source: Bloomberg, Datastream, IBES, Standard & Poor’s Services, J.P. Morgan estimates.

131

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Latin America Equity Research November 2010

J.P. Morgan FX Forecasts vs. Forwards & Consensus
Exchange rates vs. U.S dollar Current Majors EUR JPY GBP AUD CAD NZD JPM USD index DXY Oct 1 1.37 83.3 1.58 0.97 1.03 0.74 82.2 78.7 Dec 10 1.30 79 1.49 0.93 1.03 0.71 82.8 81.4 Mar 11 1.30 81 1.48 0.95 1.02 0.72 82.9 81.7 Jun 11 1.30 83 1.48 0.99 0.99 0.76 82.7 81.7 Sep 11 1.30 85 1.49 1.01 0.97 0.77 82.3 81.7 Dec 11 1.25 88 1.47 0.98 0.99 0.74 83.9 84.5 JPM forecast gain/loss vs Dec-11* forward rate -8.5% -6.1% -6.7% 6.9% 4.8% 3.7% Consensus** -0.7% 3.8% -5.5% 12.1% 5.1% 7.1% Actual change in local FX vs USD Past 1mo 7.3% 1.4% 2.4% 7.1% 2.5% 4.3% -3.1% -4.6% YTD -4.2% 11.9% -2.0% 8.3% 2.0% 2.1% -2.0% 1.1% Past 12mos -5.8% 7.9% -0.8% 12.4% 5.3% 3.6% -2.4% 2.2%

Europe, Middle East & Africa CHF ILS SEK NOK CZK PLN HUF RUB TRY ZAR Americas ARS BRL CLP COP MXN PEN VEF LACI Asia CNY HKD IDR INR KRW MYR PHP SGD TWD THB ADXY Exchange rates vs Euro JPY GBP CHF SEK NOK CZK PLN HUF RON TRY RUB 114 0.87 1.34 9.21 8.03 24.4 3.94 274 4.27 1.98 41.86 103 0.87 1.29 9.00 7.80 24.50 3.90 275 4.15 1.95 38.56 105 0.88 1.27 9.00 7.70 24.25 3.85 275 4.10 1.95 37.98 108 0.88 1.25 8.95 7.70 25.00 3.80 270 4.05 1.94 37.69 111 0.87 1.25 8.95 7.60 24.50 3.75 268 4.00 1.92 38.17 110 0.85 1.25 9.00 7.60 24.00 3.70 265 3.90 1.76 37.18 2.6% 2.0% 6.3% 3.6% 7.8% 2.0% 9.8% 8.1% 16.7% 21.6% 17.7% 4.5% -4.8% 7.5% 1.0% 0.9% 1.6% 1.6% 1.2% 6.3% 9.0% 2.6% 0.98 3.63 6.71 5.85 17.79 2.87 200 30.49 1.45 6.92 3.96 1.67 481.8 1795 13.08 2.80 4.29 114.37 6.69 7.76 8920 44.5 1130 3.09 43.72 1.31 31.30 30.18 115.0 0.99 3.75 6.92 6.00 18.85 3.00 212 29.66 1.50 7.00 4.05 1.75 480 1800 12.50 2.78 4.30 112.71 6.60 7.78 8700 45.5 1150 3.10 43.25 1.32 31.20 30.25 115.1 0.98 3.75 6.92 5.92 18.65 2.96 212 29.21 1.50 7.15 4.15 1.80 505 1830 12.50 2.84 5.50 110.48 6.50 7.78 8600 44.5 1180 3.07 42.75 1.30 31.00 30.10 115.9 0.96 3.75 6.88 5.92 19.23 2.92 208 28.99 1.49 7.30 4.15 1.82 500 1850 12.25 2.82 5.50 110.90 6.40 7.79 8550 44.0 1140 3.04 42.25 1.29 30.75 30.00 117.4 0.96 3.75 6.88 5.85 18.85 2.88 206 29.36 1.48 7.70 4.25 1.83 500 1880 12.25 2.79 5.50 110.37 6.30 7.80 8500 43.5 1100 3.02 42.00 1.28 30.50 29.70 119.0 1.00 3.75 7.20 6.08 19.20 2.96 212 29.74 1.41 8.10 4.25 1.85 500 1900 12.25 2.78 5.50 109.91 6.20 7.80 9200 42.0 1100 3.02 42.25 1.33 30.50 30.80 119.0 4.6% -0.7% 2.2% 12.1% 4.1% 3.8% 7.7% -1.3% -1.4% -1.1% 4.1% -0.4% -3.4% 6.6% -1.6% 2.0% 4.0% -0.9% 0.4% 0.6% -2.8% -2.2% -5.2% -1.4% -6.7% 0.5% -1.1% 7.7% 11.2% -8.2% 6.7% 0.2% 0.0% -2.5% 7.5% 1.4% -21.9% 6.8% 1.8% 0.3% 0.2% 0.9% 0.9% 0.5% 1.8% 8.2% -1.8% 3.7% 1.0% 2.6% 3.1% 4.9% 2.5% -12.0% 4.0% 4.2% 8.6% 5.9% 8.5% 8.0% 11.3% 0.7% 4.9% 5.4% -0.3% 4.3% 3.1% 0.9% 4.3% -0.1% 0.1% 3.1% 1.8% 0.2% 1.0% 5.3% 4.8% 1.5% 3.1% 2.7% 2.4% 3.2% 2.6% 5.9% 4.4% 6.7% -0.9% 3.3% -0.3% -5.6% -1.5% 3.7% 6.7% -4.1% 4.2% 5.3% 13.9% 4.3% 3.3% -49.9% 4.0% 2.1% -0.1% 5.4% 4.7% 3.0% 11.1% 5.6% 7.1% 2.2% 10.6% 3.9% 6.0% 3.7% 4.9% -0.8% -1.9% 1.0% -8.0% -1.1% 3.3% 10.4% -3.0% 6.4% 15.0% 7.0% 9.1% 2.9% -49.9% 6.9% 2.0% -0.1% 8.1% 7.4% 3.9% 12.8% 7.7% 7.9% 3.2% 11.0% 4.5%

Actual change in local FX vs EUR -5.5% -4.5% -3.0% 1.2% -1.3% 1.1% 0.7% 3.7% -0.2% -1.9% -6.1% 16.8% 2.3% 10.6% 11.4% 3.4% 7.8% 4.1% -1.5% -0.8% 8.4% 3.3% 14.5% 5.4% 12.5% 11.3% 5.3% 4.2% 7.2% -2.3% 0.2% 9.9% 5.2%

↑ indicates revision resulting in stronger local FX , ↓ indicates revision resulting in weaker local FX * Negative indicates JPM more bullish on USD than consensus,** Consensus Economics Publication: Foreign Exchange Consensus Forecasts September 2010 Source: J.P.Morgan

132

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Latin America Equity Research November 2010

Commodities Forecasts
• J.P. Morgan are above consensus with oil and copper forecasts. • J.P. Morgan are below consensus with nickel forecasts. • China’s share of 2010 global demand is 8% (oil), 41% (iron ore), 41% (aluminum), 39% (copper) and 31% (nickel).
Energy Forecasts: Oil, thermal and coking coal
WTI Crude J.P. Morgan forecasts Forward price Consensus Price WTI (billions bbls) Total Oil Supply Total Oil Demand Surplus (Deficit) China Demand WTI (change) Price Global Supply Global Demand Chinese Demand China's share of demand Coal (USD/tonne) Hard coking coal Thermal coal Coal (change) Hard coking coal Thermal coal Q3'10 225 100 Q3'10 (US$/bbl) Q4 10 86 85.6 80 2002 77.5 78.3 -0.8 5.0 2002 1% 0% 8% 6% Q4'10 205 100 Q4'10 -9% 0% Q1 11 88 88.8 81.4 2003 80.3 79.2 1.1 5.6 2003 1% 4% 10% 7% CY2010E 190 95 CY2010E -7% -5% Q2 11 88 89.8 82.75 2004 83.6 83.1 0.5 6.4 2004 5% 4% 16% 8% Q1'11 205 95 Q1'11 8% 0% Q3 11 90 90.4 85 2005 84.8 84.4 0.4 6.7 2005 2% 1% 4% 8% Q2'11 220 100 Q2'11 7% 5% Q4 11 89.75 90.0 85 2006 85.6 85.4 0.2 7.2 2006 1% 1% 8% 8% Q3'11 210 105 Q3'11 -5% 5% 2012 105 92 93 2007 85.6 86.8 -1.2 7.6 2007 2% 0% 4% 9% Q4'11 210 105 Q4'11 0% 0% 2013 120 92 106 2008 86.6 86.2 0.5 7.7 2008 -1% 1% 2% 9% CY2011E 211 101 CY2011E 0% -4% 2014 92 95 2009 85.2 84.9 0.2 8.3 2009 -1% -2% 7% 10% 2012E 210 105 2012E 0% 4% 2010 86.9 87.3 -0.4 9.2 2010 3% 2% 10% 10% 2013E 210 105 2013E 0% 0% 2011 88.3 88.9 -0.6 9.6 2011 2% 2% 5% 11%

2001 77.6 77.5 0.1 4.7

Source: J.P. Morgan estimates, Bloomberg.

Iron Ore Forecasts
Iron Ore (US$/tonnes) J.P. Morgan forecasts Forward Price Iron ore (000s tonnes) World Supply World Demand Balance: Surplus (Deficit) China Demand Price Global Supply Global Demand Chinese Demand China's share of demand 4Q10E 145 158 2005 1313 1299 14 471 1Q11E 140 156 2006 1491 1482 9 597 14% 14% 27% 26% 2Q11E 150 153 2007 1634 1619 15 709 10% 9% 19% 32% 3Q11E 150 149 2008 1758 1725 33 823 8% 7% 16% 33% 4Q11E 140 144 2009e 1651 1631 20 894 -6% -5% 9% 39% 2010E 145.1 145 2010e 1806 1806 0 979 9% 11% 10% 41% 2011E 145 145 2011e 1933 1937 -4 1067 0% 7% 7% 9% 43% 2012E 145 132 2012e 2059 2052 8 1147 0% 7% 6% 8% 45% 2013E 116 2013e 2206 2154 52 1214 -20% 7% 5% 6% 47% 2014E 98.6 2014e 2339 2261 78 1286 -15% 6% 5% 6% 49%

36%

Source: J.P. Morgan estimates, Bloomberg.

133

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Latin America Equity Research November 2010

134

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Latin America Equity Research November 2010

LatAm Data

Ben Laidler (1-212) 622-5252 [email protected]

Latin America Equity Research November 2010

136

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Latin America Equity Research November 2010

LatAm Dashboards
Profit Outlook: Earnings Forecasts Matrix for Countries and Sectors
EM Total Market Consumer Discretionary Consumer Staples Energy Financials Health Care Industrials Information Technology Materials Telecommunication Services Utilities Mexico Total Market Consumer Discretionary Consumer Staples Energy Financials Health Care Industrials Information Technology Materials Telecommunication Services Utilities Peru Total Market Consumer Discretionary Consumer Staples Energy Financials Health Care Industrials Information Technology Materials Telecommunication Services Utilities MSCI Mexico AMX Walmex Grupo Mexico Femsa Grupo Televisa Cemex Banorte Telmex Inbursa Grupo Modelo Grupo Carso Weight (%) 100.0 6.8 6.8 14.0 26.4 0.8 7.2 12.0 14.5 8.0 3.5 Weight (%) 100.0 9.7 25.4 0.0 6.0 0.0 4.7 0.0 16.2 38.0 0.0 Weight (%) 100.0 0.0 0.0 0.0 30.8 0.0 0.0 0.0 69.2 0.0 0.0 Weight (%) 35.5 10.6 7.8 7.3 6.6 5.0 3.8 2.6 2.2 2.2 2.1 2010 28.1 29.0 19.5 17.9 24.7 24.0 30.7 57.3 52.7 8.0 9.3 Consensus 2011 16.4 14.1 11.6 15.7 21.8 17.2 13.8 4.7 27.4 10.9 16.9 Consensus 2011 20.4 14.0 20.4 NA 27.2 NA -3.7 NA 50.4 15.3 NA Consensus 2011 31.1 NA NA NA 18.2 NA NA NA 38.2 NA NA Consensus 2011 15.9 19.5 49.3 18.6 13.2 -228.2 28.8 4.1 12.7 9.8 -11.5 2012 13.9 14.4 11.2 12.0 17.2 16.1 15.7 11.0 13.0 10.9 14.7 LATAM Total Market Consumer Discretionary Consumer Staples Energy Financials Health Care Industrials Information Technology Materials Telecommunication Services Utilities Chile Total Market Consumer Discretionary Consumer Staples Energy Financials Health Care Industrials Information Technology Materials Telecommunication Services Utilities Colombia Total Market Consumer Discretionary Consumer Staples Energy Financials Health Care Industrials Information Technology Materials Telecommunication Services Utilities MSCI Chile Copec Cencosud Enersis CMPC Endesa SQM Lan Airlines Santander Chile CAP Falabella Colbun Weight (%) 100.0 5.3 11.9 16.3 22.2 0.0 4.5 1.1 24.4 8.8 5.5 Weight (%) 100.0 4.6 15.2 0.0 9.7 0.0 20.5 0.0 23.1 2.7 24.1 Weight (%) 100.0 0.0 5.9 29.0 39.5 0.0 0.0 0.0 16.3 0.0 9.2 Weight (%) 13.7 11.3 9.5 9.5 9.4 7.5 6.8 6.7 6.1 4.6 3.1 2010 15.8 45.1 11.5 -14.8 18.4 NA -18.1 12.1 84.5 3.1 5.6 Consensus 2011 21.4 27.9 21.5 7.1 19.6 NA 24.6 1.6 40.1 15.4 8.8 Consensus 2011 11.2 18.7 12.7 NA 9.4 NA 27.5 NA 4.1 15.4 8.0 Consensus 2011 47.1 NA 38.8 42.3 67.0 NA NA NA 45.7 NA 16.7 Consensus 2011 25.0 21.7 3.7 17.4 1.5 20.1 15.0 11.0 19.6 22.8 -14.3 2012 16.1 17.6 13.3 8.8 16.6 NA 26.7 2.2 19.7 6.9 19.4 Brazil Total Market Consumer Discretionary Consumer Staples Energy Financials Health Care Industrials Information Technology Materials Telecommunication Services Utilities Argentina Total Market Consumer Discretionary Consumer Staples Energy Financials Health Care Industrials Information Technology Materials Telecommunication Services Utilities MSCI Brazil Petrobras Vale Itauunibanco Bradesco Ambev Itausa OGX BM&F Bovespa CSN Banco do Brasil BRF Foods MSCI Latam (others) Buenaventura Ecopetrol Southern Copper Credicorp Bancolombia Suramericana Bancolombia SA Inveragos ISA Cementos Argos Exito Weight (%) 100.0 4.8 8.8 22.5 26.5 0.0 3.3 1.6 25.1 2.4 5.0 Weight (%) 100.0 0.0 0.0 10.0 44.5 0.0 0.0 0.0 NA 39.4 0.0 Weight (%) 19.0 16.4 9.4 6.6 3.4 3.0 2.9 2.7 2.1 1.9 1.6 Weight (%) 1.2 1.1 1.0 1.0 0.5 0.5 0.4 0.4 0.3 0.2 0.2 2010 16.3 46.7 21.3 -15.5 16.9 NA -47.7 12.1 105.0 -17.5 18.8 Consensus 2011 21.6 34.5 23.6 6.1 18.7 NA 39.7 1.6 41.2 15.7 8.8 Consensus 2011 4.8 NA NA -41.8 3.6 NA NA NA NA 27.7 NA Consensus 2011 -4.1 47.8 20.1 16.4 12.5 16.6 75.7 19.2 62.2 12.9 66.7 Consensus 2011 36.0 31.4 50.1 18.1 24.1 2.0 24.1 NA -3.3 -7.1 24.9 2012 16.1 21.2 18.7 5.2 15.7 NA 31.6 2.2 11.1 9.0 12.1

2010 9.0 39.9 -4.9 NA 39.4 NA 23.8 NA -10.2 13.4 NA

2012 16.3 9.4 4.5 NA 15.7 NA NA NA 25.8 8.1 NA

2010 23.0 65.0 84.1 NA 26.7 NA 51.3 NA 177.0 -2.3 -19.6

2012 7.1 19.6 8.3 NA 23.1 NA NA NA 14.6 7.4 27.8

2010 17.1 NA NA NM 7.0 NA NA NA NA 21.4 NA

2012 6.7 NA NA 9.6 11.8 NA NA NA NA 3.3 NA

2010 27.7 NA NA NA 21.4 NA NA NA 31.5 NA NA

2012 22.5 NA NA NA NA NA NA NA 24.3 NA NA

2010 26.9 NA 20.1 26.3 36.7 NA NA NA -0.2 NA 21.1

2012 -34.8 NA 24.6 NA NA NA NA NA NA NA 10.6

2010 -0.9 97.4 32.1 13.9 13.9 29.9 89.7 37.9 -33.0 19.9 5.3

2012 0.9 12.4 15.4 12.3 6.5 42.9 172.3 19.5 5.8 18.4 32.9

2010 -1.6 -42.9 81.6 28.9 -3.5 -141.4 23.6 -12.0 17.2 20.4 4.9

2012 36.7 22.0 18.1 25.3 10.1 171.9 24.5 3.7 -3.0 7.9 -18.0

2010 70.8 112.8 -11.0 157.4 -2.6 -2.4 125.8 21.4 -1501.5 79.1 16.7

2012 27.9 16.2 -1.4 20.6 4.9 41.5 17.0 7.6 7.8 20.1 91.7

2010 13.6 31.4 77.0 26.3 11.0 2.0 11.0 NA 30.3 1.7 17.5

2012 -4.4 52.2 22.7 18.0 20.5 NA 20.5 NA NA 22.6 57.8

Source: I/B/E/S, Bloomberg, MSCI, J.P. Morgan Note: Average earnings growth calculated based on earnings aggregate of MSCI contituents from IBES.

Updated as October, 2010

137

Ben Laidler (1-212) 622-5252 [email protected]

Latin America Equity Research November 2010

Profit Growth Outlook: Changes in 2010 and 2011 EPS Forecasts
World 135 125 115 105 95 85 Feb-09 2010 2011 155 145 135 125 115 105 95 Jul-09 Dec-09 May-10 Oct-10 85 Feb-09 Jul-09 Dec-09 Brazil 130 2011 120 110 2010 100 90 80 70 Feb-09 2010 2011 105 100 95 90 85 80 75 Jul-09 Dec-09 May-10 Oct-10 70 Feb-09 Jul-09 Dec-09 May-10 Oct-10 2010 May-10 Oct-10 2010 2011 Emerging Markets (EM) 165 155 145 135 125 115 105 95 85 Feb-09 Jul-09 Dec-09 May-10 Oct-10 2010 2011 EM Asia 160 150 140 130 120 110 100 90 80 Feb-09 Jul-09 Dec-09 May-10 Oct-10 2010 2011 EM Europe

EM Latin America 150 140 130 120 110 100 90 80 Feb-09 Jul-09 Dec-09 May-10 Oct-10

Mexico 2011 135 125 115 105 95 85 75 Feb-09 Jul-09

Chile

2011

2010

Dec-09

May-10

Oct-10

Argentina 110 100 90 80 70 60 50 Feb-09 2010 Jul-09 Dec-09 May-10 Oct-10 110 90 70 Feb-09 2011 170 150 130

Peru 200 2011 170 140 110 2010 80 50 Feb-09

Colombia

2011

2010 Jul-09 Dec-09 May-10 Oct-10

Jul-09

Dec-09

May-10

Oct-10

Source: I/B/E/S Notes: The dashboard aims to show changes in earnings expectations. All year ends are for December. EPS figures are normalized, starting at 100 on base date Feb 2009 for ease of comparison. These numbers are directly from IBES aggregate and may differ from those in the growth expectations pages where adjustments are made for exceptional items.

Updated as of October 2010

138

Ben Laidler (1-212) 622-5252 [email protected]

Latin America Equity Research November 2010

Profit Growth Outlook: Changes in 2010 and 2011 EPS Forecasts
Consumer Discretionary 190 170 150 130 110 90 Feb-09 2010 2011 125 115 105 95 85 75 65 Feb-09 100 2010 85 70 Feb-09 2010 2011 130 115 Consumer Staples 145 2011 Energy 155 145 135 125 115 105 95 85 Feb-09 Jul-09 Dec-09 May-10 Oct-10 2010 2011 Financials

Jul-09

Dec-09

May-10

Oct-10

Jul-09

Dec-09

May-10

Oct-10

Jul-09

Dec-09 Materials

May-10

Oct-10

Industrials 140 130 120 110 100 90 80 70 60 Feb-09 Jul-09 Dec-09 May-10 Oct-10 2010 2011 155 145 135 125 115 105 95 Feb-09

Information Technology 2011 160 140 120 2010 100 80 60 Feb-09

Telecom 145 135 2011

2011

125 115 105 2010 95 85 Feb-09 2010 Jul-09 Dec-09 May-10 Oct-10

Jul-09

Dec-09

May-10

Oct-10

Jul-09

Dec-09

May-10

Oct-10

Utilities 190 170 150 130 110 90 Feb-09 2010 2011

Jul-09

Dec-09

May-10

Oct-10

Source: I/B/E/S Notes: The dashboard aims to show changes in earnings expectations. All year ends are for December. EPS figures are normalized, starting at 100 on base date Feb 2009 for ease of comparison. These numbers are directly from IBES aggregate and may differ from those in the growth expectations pages where adjustments are made for exceptional items.

Updated as of October 2010

139

Ben Laidler (1-212) 622-5252 [email protected]

Latin America Equity Research November 2010

Value: Regional and Countries Valuations
P/E (x) 28-Oct-10 MSCI Index 240,463 33,007 5,857 239,902 3,031 3,371 77,963 316 1,129 1,151 511 667 418 46,685 531 296 69 836 778 798 553 1,836 1,007,187 395 4,675 1,322 1,379 333 763
Avg. 02-07 Current Trailing 12m Fwd 2009 Prospective 2010E 2011E Avg. 02-07

Div. Yield (%)
Current Trailing 2009 Prospective 2010E 2011E Avg. 02-07 Current Trailing

P/BV (x)
Prospective 2009 2010E 2011E 2008

ROE (%)
2009 2010E 2011E

Brazil Mexico Chile Argentina Colombia* Peru* EMF LATAM* Global* USA* Europe* Japan* EMF Asia EMF EMEA* Emerging Markets Korea Taiwan China Russia* South Africa* India Malaysia Poland* Turkey* Thailand Indonesia Hungary* Egypt Czech Republic Philippines

11.4 15.6 25.2 29.0 17.4 15.2 13.7 18.4 19.0 16.4 19.4 14.6 14.6 14.3 11.5 24.7 16.1 12.7 14.3 18.9 16.3 6.5 7.1 11.8 13.0 12.1 17.8 19.4 16.9

13.1 17.8 19.9 13.9 26.7 40.3 14.6 13.5 15.5 10.7 NM 14.3 11.3 13.6 11.3 15.1 15.1 8.2 14.9 21.4 18.2 13.9 12.1 15.8 17.6 13.1 13.0 10.4 19.1

10.9 15.1 17.7 13.0 18.3 16.6 11.9 11.6 13.2 9.0 12.8 12.4 9.1 11.6 10.2 12.7 12.7 6.4 11.8 17.6 15.1 11.9 11.0 13.7 14.9 10.5 10.7 9.9 16.7

14.9 19.2 23.8 14.4 33.1 26.5 16.3 16.4 20.1 13.9 NM 18.3 14.2 16.8 15.7 26.0 18.5 11.2 18.4 25.0 22.0 16.6 14.0 18.0 20.5 12.8 16.4 10.2 22.0

12.8 17.6 19.3 13.8 25.7 20.7 14.0 13.0 14.8 10.3 14.5 13.7 10.8 13.1 10.7 13.9 14.6 7.8 14.3 20.8 17.6 13.5 11.8 15.4 17.1 13.1 12.5 10.4 18.7

10.6 14.6 17.4 12.9 16.8 15.8 11.5 11.3 12.9 8.8 12.4 12.2 8.9 11.3 10.2 12.5 12.4 6.2 11.5 17.0 14.6 11.6 10.8 13.4 14.6 10.1 10.4 9.8 16.3

3.8 1.8 2.3 1.3 3.0 3.8 2.9 2.1 1.8 2.9 1.1 2.3 2.4 2.4 2.0 3.0 2.3 1.8 3.0 1.5 2.4 2.5 2.2 3.3 3.2 1.9 3.0 3.7 1.9

3.1 3.4 2.5 NA 2.1 2.5 3.1 2.7 2.0 3.5 2.2 2.3 2.6 2.4 1.0 3.4 2.4 1.6 2.9 1.2 3.1 3.1 2.5 2.9 2.3 2.8 3.2 6.4 3.3

2.4 2.4 1.3 NA 1.0 0.9 2.3 2.5 1.9 3.3 2.1 2.0 2.3 2.1 0.8 2.8 2.1 0.3 2.4 1.0 2.4 2.3 3.4 2.6 2.0 1.9 2.5 5.4 3.1

2.6 2.4 1.7 NA 1.9 2.1 2.5 2.7 2.0 3.5 2.2 2.3 2.7 2.5 1.0 3.5 2.5 1.8 2.9 1.2 3.2 3.3 2.4 3.0 2.4 3.0 3.3 6.6 3.4

3.3 3.6 2.6 NA 2.2 2.6 3.3 3.0 2.1 4.0 2.4 2.7 3.3 2.9 1.2 4.2 2.9 2.3 3.6 1.3 3.4 4.0 2.9 3.2 2.8 3.8 4.1 6.7 3.1

2.0 2.8 1.9 2.5 1.9 3.2 2.2 2.5 2.9 2.3 1.8 2.0 2.3 2.1 1.6 2.0 2.4 1.8 2.6 3.9 2.0 2.2 1.9 2.2 3.1 2.6 4.1 1.9 1.9

1.7 2.8 2.2 1.8 2.4 5.7 1.9 1.7 2.0 1.6 1.0 2.1 1.6 2.0 1.5 1.9 2.4 1.1 2.3 3.4 2.2 1.6 2.1 2.5 4.3 1.4 1.4 1.8 3.0

2.3 2.6 2.5 NA 1.5 6.9 2.4 1.8 2.2 1.6 1.1 2.3 1.7 2.2 1.7 2.0 2.7 1.2 2.6 3.7 2.4 1.9 2.4 2.7 5.0 1.6 1.5 1.9 3.2

1.8 2.9 2.4 NA 3.0 5.4 2.0 1.6 2.0 1.6 1.0 2.1 1.5 2.0 1.5 1.9 2.4 1.1 2.2 3.4 2.2 1.6 2.1 2.4 4.2 1.4 1.4 1.8 3.0

1.7 2.7 2.2 NA 3.0 4.5 1.9 1.5 1.8 1.5 1.0 1.8 1.4 1.8 1.3 1.7 2.1 0.9 2.0 2.9 2.1 1.5 1.9 2.2 3.6 1.3 1.3 1.7 2.8

18.7 19.3 13.3 22.8 11.4 30.6 18.5 11.0 11.3 15.0 7.8 10.6 17.2 12.3 7.7 5.4 14.2 17.3 19.1 12.9 14.2 15.4 17.8 12.1 28.4 22.0 12.7 19.7 13.2

15.3 13.7 10.5 NA 4.5 13.9 14.5 11.1 11.2 11.7 NM 13.2 14.0 13.6 11.4 8.0 15.2 12.7 14.4 14.3 11.2 11.6 18.8 14.9 26.7 12.9 12.0 20.1 14.9

13.7 16.5 12.2 NA 11.8 13.8 13.9 13.1 14.1 15.7 7.0 15.9 15.0 15.8 15.0 13.9 17.2 14.4 16.6 17.0 13.1 12.7 19.1 16.6 26.5 11.2 11.8 18.0 16.5

16.2 18.6 12.7 NA 17.6 15.1 16.3 14.0 14.8 17.4 7.7 16.0 16.4 16.4 13.9 14.4 17.9 15.9 18.2 18.3 14.6 12.9 18.2 17.2 26.4 13.2 13.0 18.1 17.6

Source: I/B/E/S, MSCI, J.P. Morgan * Market forecast numbers are derived from bottom-up calculations of each individual MSCI constituents using I/B/E/S estimates For all other markets, forecast numbers are derived from bottom-up calculations of each individual MSCI constituents using JPM estimates for covered stocks and I/B/E/S estimates for the rest. USA, Europe and Japan PE are I/B/E/S aggregate estimates. Japan Valuation estimates are for the financial year ending March

Updated as of October 28

140

Ben Laidler (1-212) 622-5252 [email protected]

Latin America Equity Research November 2010

Value: PE Matrix for Countries and Sectors
EMF LATAM EMF EMEA Argentina Emerging Markets 12-month forward PE Colombia NA 34.5 20.7 11.3 NA NA NA 51.5 NA 37.3 18.3 21.2 Updated as of October 28 EMF Asia Europe Mexico Global Brazil Chile Peru NA NA NA 15.3 NA NA NA 16.6 NA NA 16.6 13.5 USA 12.8 12.7 10.3 9.3 10.5 12.1 12.2 13.6 13.2 12.8 13.2 11.5

Consumer Discretionary Consumer Staples Energy Financials Health Care Industrials Information Technology Materials Telecommunication Services Utilities Market Aggregate Sector Neutral*

13.9 14.5 10.4 10.9 11.4 13.4 12.8 11.8 12.0 12.3 11.6 12.0

12.8 14.2 8.7 9.2 10.8 13.2 13.6 10.5 10.4 10.7 9.0 10.9

12.8 18.4 8.2 12.3 18.8 13.4 11.2 11.2 11.6 11.8 11.6 11.6

14.4 18.4 5.6 10.8 14.1 10.7 9.9 12.2 10.9 10.8 9.1 10.9

12.0 17.3 12.0 12.4 22.0 14.4 12.3 12.3 12.3 13.7 12.4 12.9

14.4 20.4 10.3 12.6 NA 22.9 10.4 10.1 11.0 10.9 11.9 12.9

13.3 19.9 10.0 12.4 NA 24.3 10.4 8.6 8.0 9.4 10.9 12.3

15.4 20.1 NA 15.2 NA 20.9 NA 16.8 12.0 NA 15.1 14.4

31.0 24.0 NA 14.1 NA 22.3 NA 19.5 11.7 13.1 17.7 15.9

NA 24.6 10.8 12.5 NA NA NA NA 9.1 NA 13.0 12.6

Value: P/BV Matrix for Countries and Sectors
EMF LATAM EMF EMEA Argentina Emerging Markets Trailing P/B Colombia NA NA 5.1 2.1 NA NA NA 1.4 NA 2.7 2.3 EMF Asia Europe Mexico Global Brazil Chile Peru NA NA NA 3.8 NA NA NA 7.1 NA NA 5.6 USA 2.8 3.5 1.9 1.1 2.5 2.7 3.7 2.8 2.0 1.5 2.0

Consumer Discretionary Consumer Staples Energy Financials Health Care Industrials Information Technology Materials Telecommunication Services Utilities Market Aggregate

2.1 3.0 1.7 1.2 2.6 2.1 2.9 2.1 1.9 1.4 1.7

2.0 3.1 1.6 1.0 3.1 2.4 2.5 1.9 1.6 1.4 1.6

2.7 3.5 1.4 2.1 4.3 2.1 2.3 2.2 2.5 1.3 2.0

3.2 4.0 1.0 2.0 3.2 2.1 1.1 2.7 2.8 1.1 1.6

2.5 3.7 2.4 2.1 5.2 2.0 2.3 2.0 2.1 1.5 2.1

3.0 3.1 1.4 2.6 NA 2.8 18.8 2.2 3.3 1.2 1.9

2.8 3.0 1.4 2.5 NA 3.3 18.8 2.3 1.3 0.9 1.7

3.2 3.5 NA 2.6 NA 1.8 NA 1.3 5.3 NA 2.8

4.9 3.0 NA 4.2 NA 3.2 NA 2.6 2.8 2.1 2.2

NA 1.9 0.7 2.7 NA NA NA NA 1.5 NA 1.7

Source: IBES, MSCI, J.P. Morgan. Note: PEs are derived from bottom-up calculations of each individual MSCI constituents using JPM estimates for covered stocks and IBES estimates for the rest. *Sector neutral PE are calcuated by using sector weights of MSCI EM and sector PE of respective markets (MSCI EM sector PE used where country sector does not exist)

141

Ben Laidler (1-212) 622-5252 [email protected]

Latin America Equity Research November 2010

Value: Trailing P/BV for Regions/Countries
World
4.5 4.0 3.5 3.0 2.1 2.5 2.0 1.5 1.0 95 97 98 99 00 01 02 03 04 05 06 07 08 10 1.8 3.3 3.0

Emerging Markets (EM)
3.3

EM Asia
3.5

EMEA

+1SD

2.7 2.4

+1SD

3.0 2.7 2.4 2.1 1.8 1.5

+1SD
3.0

+1SD

2.5

2.0

-1SD

1.5 1.2 0.9 95 97 98 99 00 01 02 03 04 05 06 07 08 10

-1SD

1.2 0.9 95 97 98 99 00 01 02 03 04

-1SD
05 06 07 08 10

1.5

-1SD
99 00 01 02 03 04 05 06 07 08 09

1.0

EM Latin America
4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0 95 97 98 99 00 01 02 03 04 05 06 07 08 10 4.0

Brazil
4.0 3.7

Mexico
3.2

Chile

+1SD

3.5 3.0 2.5 2.0 1.5 1.0

+1SD

3.4 3.1 2.8 2.5 2.2 1.9

+1SD

2.9 2.6 2.3 2.0 1.7 1.4

+1SD

-1SD

0.5 0.0 95 97 98 99 00

-1SD
01 02 03 04 05 06 07 08 10

1.6 1.3 95 97 98 99 00 01 02

-1SD
03 04 05 06 07 08 10

1.1 0.8 95 97 98

-1SD
99 00 01 02 03 04 05 06 07 08 10

Argentina
5.0 7.0 6.0 5.0 3.0 4.0 2.0 3.0

Peru
4.0 3.5

Colombia
6.0

USA

4.0

+1SD

+1SD

3.0 2.5 2.0 1.5 1.0

5.0

+1SD

+1SD
4.0

3.0

1.0

-1SD

-1SD
95 97 98 99 00 01 02 03 04 05 06 07 08 10

2.0 1.0 95 97 98 99 00 01 02 03 04

-1SD
05 06 07 08 10

2.0

-1SD

0.5 0.0 95 97 98 99 00 01 02 03 04 05 06 07 08 10 1.0 95 97 98 99 00 01 02 03 04 05 06 07 08 10

0.0

Source: I/B/E/S Notes: The dashboard aims to show historical consensus trailing P/BV with +/-1 SD bands since Dec 1995 . For EMEA Trailing P/BV since Feb 1999.

Updated as of October 2010

142

Ben Laidler (1-212) 622-5252 [email protected]

Latin America Equity Research November 2010

Value: Forward PE for Regions/Countries
World
25.0 22.0 19.0 16.0 11.0 13.0 15.0 9.0 20.0

Emerging Markets (EM)
30.0

EM Asia
18.0

EMEA

+1SD

+1SD
17.0 25.0 15.0

+1SD

+1SD
14.0 20.0 12.0

-1SD
10.0 7.0 95 97 98 99 00 01 02 03 04 05 06 07 08 10

8.0

-1SD

10.0

6.0

-1SD

-1SD
5.0 3.0 95 97 98 99 00 01 02 03 04 05 06 07 08 10 95 97 98 99 00 01 02 03 04 05 06 07 08 10 04 05 06 07 08 10

5.0 95 97 98 99 00 01 02 03

EM Latin America
16.0 14.0 12.0 10 10.0 8.0 6.0 4.0 95 97 98 99 00 01 02 03 04 05 06 07 08 10 8 14

Brazil
17.0

Mexico
23.0

Chile

+1SD

+1SD
12 15.0

+1SD

+1SD
20.0

13.0

17.0

11.0

14.0

-1SD

6

-1SD
98 99 00 01 02 03 05 06 07 08 09 10

9.0

-1SD
95 97 98 99 00 01 02 03 04 05 06 07 08 10

11.0

-1SD

4

7.0

8.0 95 97 98 99 00 01 02 03 04 05 06 07 08 10

Argentina
30 25 32

Peru
24 21

Colombia

USA

24 21 18 15

+1SD

+1SD
20 15 10 5 0 95 97 98 99 00 01 02 03 04 05 06 07 08 10

24

+1SD

18 15

+1SD

16

12 9

-1SD

8

-1SD

6 3

-1SD
12 9 95 97 98 99 00 01 02 03 04 05 06 07 08 10 95 97 98 99 00 01 02 03 04 05 06 07 08 10

-1SD

0 95 97 98 99 00 01 02 03 04 05 06 07 08 10

0

Source: I/B/E/S

Updated as of October 2010

143

Ben Laidler (1-212) 622-5252 [email protected]

Latin America Equity Research November 2010

Fair Value P/E*: Gordon Growth P/E
MSCI LatAm
17 12 Mth Fwd PE 15 13 11 9 6 7 5 Jan 03 Feb 04 Mar 05 Apr 06 May 07 Jun 08 3 Jan 03 9 7 Jan 03 9 11 Gordon Growth P/E 12 15

MSCI Brazil
12 Mth Fwd PE Gordon Growth P/E 17 15 13

MSCI Mexico
12 Mth Fwd PE Gordon Growth P/E 22 20 18 16 14 12 10 8

MSCI Chile
12 Mth Fwd PE Gordon Growth P/E

Jul 09

Aug 10

Feb 04

Mar 05

Apr 06

May 07

Jun 08

Jul 09

Aug 10

Feb 04

Mar 05

Apr 06

May 07

Jun 08

Jul 09

Aug 10

6 Jan 03

Feb 04

Mar 05

Apr 06

May 07

Jun 08

Jul 09

Aug 10

Source: MSCI, J.P. Morgan. *We use a re-organized Gordon growth model to derive a ‘fair value’ P/E = (ROE-g)/ROEx(COE-g). 1) COE made up of the US 10-year treasury yield as the risk-free rate, the respective country EMBIG spreads, and a fixed equity market risk premium of 5% (30-year average) 2) We take the potential GDP growth as the growth rate; 3)the 12m-forward I/B/E/S consensus ROE

Value: Forward PE for Sector
Consumer Discretionary
30 20

Consumer Staples
20

Energy
18

Financials

+1SD
25 17

+1SD

15 15

+1SD
12

+1SD

20 14 15 11 5 10

9

10

-1SD

-1SD

-1SD
0 10 95 97 98 99 00 01 02 03 04 05 06 07 08 10

6

-1SD

5 95 97 98 99 00 01 02 03 04 05 06 07 08 10

8 95 97 98 99 00 01 02 03 04 05 06 07 08

3 95 97 98 99 00 01 02 03 04 05 06 07 08 10

Industrials
21 18 15 12 8 9 6 6 3 98 99 00 01 02 03 05 06 07 08 09 10 16

Materials
24

Telecom
32

Utilities

+1SD

14

+1SD
12 10

21 18 15 12 8

+1SD

24

+1SD

16

-1SD

4 2 95 97 98 99 00 01 02

-1SD
03 04 05 06 07 08 10

9 6 95 97 98 99 00 01

-1SD
95 97 98 99 00 01 02 03 04 05 06 07 08 10

-1SD
0 02 03 04 05 06 07 08 10

Source: I/B/E/S Notes: The dashboard aims to show historical consensus forward PE with +/-1 SD bands since Dec 1995 . No Heathcare sector

Updated as of October 2010

144

Ben Laidler (1-212) 622-5252 [email protected]

Latin America Equity Research November 2010

Economic Forecasts: Changes in Real GDP Forecasts
Real GDP Growth (% Y/Y) JPM Consensus 2010E 2011E 2010E 2011E LATAM Argentina Brazil Colombia Mexico Peru EMEA Russia South Africa Poland Turkey Hungary Egypt Czech Republic Morocco Jordan Asia S Korea Taiwan China India Thailand Indonesia Philippines Malaysia 8.5 7.5 4.5 4.5 8.2 4.3 2.9 3.5 7.1 1.0 na 2.0 na na 6.1 9.9 10.0 8.3 8.5 6.0 7.0 6.8 5.5 4.5 4.1 3.5 6.0 4.7 3.1 3.8 4.3 2.8 na 3.2 na na 4.0 4.1 9.0 8.5 4.0 5.4 4.5 4.6 8.3 7.1 4.6 4.7 7.0 4.2 3.1 3.2 7.1 0.9 na 2.0 na na 6.0 4.6 10.0 8.4 7.5 6.0 5.9 6.8 4.8 4.5 4.7 3.5 6.0 4.3 3.6 3.5 4.5 2.6 na 2.0 na na 4.6 4.0 9.0 8.4 4.5 6.3 5.0 5.2 Change in Forecasts Past 3 months (%) JPM Consensus 2010E 2011E 2010E 2011E 0.0 0.0 0.0 0.0 0.9 -0.7 -0.2 -0.1 1.2 0.0 na 0.0 na na 0.0 1.1 0.0 0.0 0.0 0.0 0.2 -0.4 1.0 0.5 0.0 0.0 0.0 -0.3 -0.4 0.0 -0.7 -0.3 na 0.0 na na 0.0 -0.1 0.2 0.0 -1.0 0.0 0.2 0.0 2.0 0.6 1.2 0.3 1.0 0.2 0.0 0.2 0.8 0.4 na 0.3 na na 0.0 0.0 0.0 0.2 1.9 0.0 1.8 1.9 0.3 0.0 0.7 -0.1 0.7 -0.2 -0.1 0.0 0.2 -0.2 na -0.2 na na 0.0 0.0 0.1 na 0.1 0.0 0.7 0.8 2Q10E 12.6 5.1 3.9 13.5 12.7 4.3 3.2 4.1 11.7 0.0 na 3.8 na na 5.8 7.2 7.2 8.5 0.6 7.5 7.7 7.2 Economic Momentum GDP SAAR 3Q 10E 4Q 10E 0.0 2.3 3.7 -3.6 4.8 2.5 3.1 3.5 -3.0 2.0 na 2.5 na na 2.5 1.5 8.1 8.0 2.8 4.5 0.8 0.0 2.0 3.2 4.0 3.1 3.5 5.0 3.2 3.5 -8.5 2.0 na 2.3 na na 3.8 2.3 8.7 8.9 2.8 5.0 1.6 2.0 1Q11E 6.0 5.7 4.0 2.9 5.8 5.0 3.1 3.0 6.1 2.0 na 2.5 na na 4.0 4.2 9.5 8.0 4.9 5.3 5.7 4.9 Inflation (% Y/Y) 2010E 2011E 8.2 5.0 2.2 4.2 1.7 6.8 4.4 2.5 8.6 4.9 na na na na 2.7 1.0 2.8 11.6 3.1 5.1 3.7 1.5 10.0 5.4 3.4 3.9 2.3 7.8 4.4 2.8 6.5 3.6 na na na na 3.3 1.8 2.7 10.2 1.9 5.3 2.3 1.7

2010E GDP Growth: JPM Minus Consensus
1.5 0.8 0.0 (0.8) (1.5) Brazil Philippines Hungary Turkey Indonesia Malaysia Argentina Colombia Czech Republic S Korea Thailand South Africa Poland Chile Mexico Taiwan Russia China Peru 1.2 0.6 0.0 (0.6)

Change in Consensus Forecasts for 2010E GDP over last 3 months (%)

Brazil

Czech Republic

Hungary

Turkey

Philippines

Taiwan

S Korea

Poland

Indonesia

China

India

Argentina

Thailand

Russia

Mexico

Colombia

South Africa

Source: J.P. Morgan estimates, Bloomberg Note: Consensus estimates for Jordan, Egypt and Israel sourced from WES and Morocco from EIU

Updated as of October 28

145

Malaysia

Chile

Peru

Ben Laidler (1-212) 622-5252 [email protected]

Latin America Equity Research November 2010

Economic Forecasts: Policy Rate Trend and Forecasts
Country
Latin America Brazil Mexico Chile Colombia Peru Developed Markets United States Euro Area Japan Europe, Middle East and Africa Czech Republic Hungary Poland Russia South Africa Turkey EM Asia China Korea India Thailand Taiwan 1-year working capital Overnight call rate Repo rate 1-day repo rate Official discount rate 5.31 2.00 5.00 1.25 1.38 5.31 2.00 5.00 1.25 1.38 5.31 2.25 6.00 1.75 1.50 5.56 2.25 6.00 1.75 1.50 5.56 2.50 6.25 2.00 1.50 5.56 2.75 6.50 2.00 1.50 5.81 2.75 6.50 2.00 1.50 5.81 2.75 6.75 2.00 1.63 19 Oct 10 (+25bp) 9 Jul 10 (+25bp) 16 Sep 10 (+25bp) 26 Aug 10 (+25bp) 30 Sep 10 (+12.5bp) 2Q 11 (+25bp) 4Q 10 (+25bp) 2 Nov 10 (+25bp) 1 Dec 10 (+25bp) 3Q 11 (+12.5bp) 2-week repo rate 2-week deposit rate 7-day intervention rate 1-week deposit rate Repo rate O/n borrowing rate 1.00 5.50 3.50 2.75 6.50 6.50 0.75 5.25 3.50 3.50 6.50 6.50 0.75 5.25 3.50 2.75 6.00 7.00 0.75 5.25 3.50 2.75 6.00 7.00 0.75 5.25 3.50 2.75 5.50 7.00 0.75 5.25 3.50 2.75 5.50 7.00 1.00 5.25 3.75 2.75 5.50 7.00 1.25 5.50 4.00 3.00 5.50 7.00 6 May 10 (-25bp) 26 Apr 10 (-25bp) 24 Jun 09 (-25bp) 31 May 10 (-50bp) 9 Sep 10 (-50bp) 2Q 11 (+25bp) 3Q 11 (+25bp) 2Q 11 (+25bp) 3Q 11 (+25bp) 18 Nov 10 (-50bp) 4Q 11 (+50bp) Federal funds rate Refi Rate Overnight Call Rate 0.125 1.00 0.10 0.125 1.00 0.10 0.125 1.00 0.10 0.125 1.00 0.05 0.125 1.00 0.05 0.125 1.00 0.05 0.125 1.00 0.05 0.125 1.00 0.05 16 Dec 08 (-87.5bp) 7 May 09 (-25bp) 5 Oct 10 (-5bp) On hold On hold On hold SELIC overnight rate Repo rate Discount rate Repo rate Reference Rate 8.75 4.50 0.50 3.50 1.25 10.25 4.50 0.50 3.00 1.75 10.75 4.50 2.50 3.00 3.00 10.75 4.50 2.75 3.00 3.00 10.75 4.50 3.25 3.00 3.00 11.50 4.50 4.00 4.00 3.00 12.50 4.75 4.25 5.00 3.50 12.50 5.25 4.25 5.50 4.25 21 Jul 10 (+50bp) 17 Jul 09 (-25bp) 16 Sep 10 (+50bp) 30 Apr 10 (-50bp) 9 Sep 10 (+50bp) Mar 11 (+25bp) Jun 10 (+25bps) 16 Nov 10 (+25bp) 1Q 11 (+50bp) May 11 (+25bp)

Official interest rate

Q1'10

Q2'10

Q3'10

Current

Q4'10F

Q1'11F

Q2'11F

Q3'11F

Last Change

Next Change

Change in policy rates

Emerging Markets policy rate 22

Colombia Brazil India Peru Thailand Czech Poland Korea China Hungary Russia Japan Mexico EU USA Turkey Taiwan SAfrica -1100

Change from Aug 07
18

Forecast change to Jun 11
14

Nominal Policy Rate

10

6

Real Rate

2

-900

-700

-500

-300

-100

100

300

-2 1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

Source: J.P. Morgan Economics, Bloomberg.

Updated as of October 28

146

Ben Laidler (1-212) 622-5252 [email protected]

Latin America Equity Research November 2010

Commodity Prices: Movement and Forecasts
Gold
1,400.0 1,200.0 1,000.0 800.0 600.0 400.0 Dec 04 J.P. Morgan 24.0 21.0 18.0 15.0 12.0 9.0 6.0 3.0 Dec 04 Apr 06 Jul 07 Nov 08 Feb 10 Jun 11 J.P. Morgan

Silver
2300 2000 1700 1400 1100 800 500 Dec 04 Apr 06

Platinum
J.P. Morgan 725.0 625.0 525.0 425.0 325.0 225.0 125.0 Dec 04 Apr 06

Palladium
J.P. Morgan

Apr 06

Jul 07

Nov 08

Feb 10

Jun 11

Jul 07

Nov 08

Feb 10

Jun 11

Jul 07

Nov 08

Feb 10

Jun 11

Copper
10,000.0 8,000.0 6,000.0 4,000.0 2,000.0 0.0 Dec 04 J.P. Morgan 3,000.0 2,700.0 2,400.0 2,100.0 1,800.0 1,500.0 1,200.0 Apr 06 Jul 07 Nov 08 Feb 10 Jun 11 900.0 Dec 04 Apr 06

Aluminum
5,000.0 J.P. Morgan 4,000.0 3,000.0 2,000.0 1,000.0 0.0 Dec 04

Zinc
60,000.0 J.P. Morgan 50,000.0 40,000.0 30,000.0 20,000.0 10,000.0 Apr 06 Jul 07 Nov 08 Feb 10 Jun 11 0.0 Dec 04

Nickel

J.P. Morgan

Jul 07

Nov 08

Feb 10

Jun 11

Apr 06

Jul 07

Nov 08

Feb 10

Jun 11

Crude
140.0 110.0 80.0 300 50.0 20.0 Dec 04 200 100 Jan 02 J.P. Morgan 600 500 400

S&P GSCI Industrial Metals Index
600 550 500 450 400 350 300 250 200 150 100 Jan-02

S&P GSCI Agricultural Index

S&P Goldman Sachs Commodity Index
950 850 750 650 550 450 350 250 150 Jan-02

Apr 06

Jul 07

Nov 08

Feb 10

Jun 11

Apr 03

Jul 04

Oct 05

Jan 07

Apr 08

Aug 09

Apr-03

Jul-04

Oct-05

Jan-07

Apr-08

Aug-09

Apr-03

Jul-04

Oct-05

Jan-07

Apr-08

Aug-09

Commodity Price Forecasts Spot Price WTI oil $/bbl Brent oil $/bbl Natural gas $/mmbtu Gold ($/oz) Silver ($/oz) Platinum ($/oz) Palladium ($/oz) Copper ($/metric ton) Aluminium ($/metric ton) Zinc ($/metric ton) Nickel ($/metric ton) Corn ($/bushel) Wheat ($/bushel) Soybeans ($/bushel) 82.2 82.8 3.4 1,335 23.7 1,685 626 8,330 2,229 2,467 23,029 5.6 7.1 12.0 10Q4 81.0 83.0 4.5 1,275 19.6 1,700 600 6,750 2,100 2,350 21,000 5.3 6.6 10.5 11Q1 78.0 80.0 4.8 1,250 19.2 1,750 650 6,750 2,100 2,200 20,000 5.3 7.2 10.6 11Q2 81.0 83.0 5.0 1,250 19.2 1,800 675 7,000 2,150 2,100 20,000 5.2 7.1 10.4 11Q3 83.0 85.0 5.3 1,250 19.2 1,800 675 6,800 2,175 2,100 20,000 5.1 6.5 10.2 2009 61.9 62.5 4.7 976 14.7 1,205 262 5,157 1,696 1,669 15,363 3.8 5.3 10.2 2010E 78.5 79.2 5.1 1,221 18.7 1,598 495 7,294 2,175 2,143 22,170 4.2 5.9 10.0 2011E 82.5 84.5 5.4 1,438 22.1 1,600 613 8,713 2,338 2,275 22,000 5.2 6.6 10.4 Updated as of October 28

Source: Datastream, J.P. Morgan Estimates

147

Ben Laidler (1-212) 622-5252 [email protected]

Latin America Equity Research November 2010

Economic Forecasts: Currency Movements and Forecasts
Brazilian Real (BRL)
3.0 2.8 2.6 2.4 2.2 2.0 1.8 1.6 1.4 Dec 04 Apr 06 Jul 07 Nov 08 Consensus Feb 10 Jun 11 J.P. Morgan J.P. Morgan forecast: end Dec 10: 1.70 end Mar 11 : 1.80 end Jun 11: 1.82 16.0 15.0 14.0 13.0 12.0 11.0 10.0 9.0 Dec 04 Apr 06 Jul 07 Nov 08 Feb 10 Jun 11 Consensus

Mexican Peso (MXN)
J.P. Morgan forecast: end Dec 10: 12.50 end Mar 11: 12.50 end Jun 11: 12.25 800 J.P. Morgan 750 700 650 600 550 500 450 400 Dec 04 Apr 06

Chilean Peso (CLP)
J.P. Morgan forecast: end Dec 10: 480 end Mar 11: 505 end Jun 11: 500 Consensus 4.6 4.4 4.2 4.0 3.8 3.6 3.4 3.2 3.0 2.8 Dec 04

Argentinian Peso (ARS)
J.P. Morgan forecast: end Dec 10: 4.05 end Mar 11: 4.15 end Jun 11: 4.15 J.P Morgan

Consensus

Jul 07

Nov 08

Feb 10

Jun 11

Apr 06

Jul 07

Nov 08

Feb 10

Jun 11

Peruvian Nuevo Sol (PEN)
3.5 3.3 3.1 2.9 2.7 J.P. Morgan forecast: end Dec 10: 2.78 end Mar 11: 2.84 end Jun 11: 2.82 Apr 06 Jul 07 Nov 08 Feb 10 J.P. Morgan 3,000 2,800 2,600 2,400 2,200 2,000 Consensus Jun 11 1,800 1,600 Dec 04

Colombian Peso(COP)
J.P. Morgan forecast: end Dec 10: 1800 end Mar 11: 1830 end Jun 11: 1850 1.80 1.70 1.60 1.50 J.P. Morgan 1.40 1.30 1.20 Consensus Apr 06 Jul 07 Nov 08 Feb 10 Jun 11 1.10 Dec 04 Apr 06

Euro (EUR)
J.P. Morgan forecast: end Dec 10: 1.30 end Mar 11: 1.30 end Jun 11: 1.30 125 115 Consensus 105 95 J.P. Morgan Jul 07 Nov 08 Feb 10 Jun 11 85

Japansese Yen (JPY)

J.P. Morgan forecast: end Dec 10: 79 end Mar 11: 81 end Jun 11: 83

Consensus

2.5 Dec 04

J.P. Morgan Nov 08 Feb 10 Jun 11

75 Dec 04

Apr 06

Jul 07

Taiwan Dollar (TWD)
40 38 36 34 32 30 28 Dec 04 Apr 06 Jul 07 Nov 08 Consensus J.P. Morgan forecast: end Dec 10: 31.20 end Mar 11: 31.00 end Jun 11: 30.75 J.P. Morgan 8.5 8.0 7.5 7.0 6.5 6.0 Dec 04

Chinese Yuan Renminbi (CNY)
J.P. Morgan forecast: end Dec 10: 6.60 end Mar 11: 6.50 end Jun 11: 6.40 J.P. Morgan 45 42 39 36 33 30 27 Consensus 24 21 Apr 06 Jul 07 Nov 08 Feb 10 Jun 11 Dec 04

Russian Rouble (RUB)
J.P. Morgan forecast: end Dec 10: 29.66 end Mar 11: 29.21 end Jun 11: 28.99

South African Rand (ZAR)
J.P. Morgan forecast: 14.0 end Dec 10: 7.00 13.0 end Mar 11: 7.15 12.0 end Jun 11: 7.30 11.0 10.0 9.0 8.0 7.0 6.0 5.0 Dec 04 Apr 06 Jul 07

Consensus

Consensus

J.P.Morgan

J.P. Morgan Nov 08 Feb 10 Jun 11

Feb 10

Jun 11

Apr 06

Jul 07

Nov 08

Feb 10

Jun 11

Expected % Gain vs USD till December 2010 (J.P. Morgan)
8.0 7.0 6.0 5.0 4.0 3.0 2.0 1.0 0.0 KRW TWD MXN PLN INR ARS HUF PHP CZK THB TRL (5.5) (7.0) 0.5 (1.0) (2.5) (4.0)

Expected % Loss vs USD till December 2010 (J.P. Morgan)

JPY

IDR

MYR

Source: Datastream, J.P. Morgan estimates, Bloomberg.

Updated as of October 28

148

EUR

CNY

CLP

RUB

BRL

Ben Laidler (1-212) 622-5252 [email protected]

Latin America Equity Research November 2010

Flows and Positioning
EM Managers’ Positioning Relative to MSCI EM: Major EM Markets Regional and US Mutual Fund Flows Weekly Index Country
Russia Indonesia Mexico India Brazil China+HK South Africa Malaysia China Korea Taiwan

Net Weekly Flows US$M
2,691 1,646 239 320 458 28 (108) 838 490 5,269 4,202 17,329

2010 YTD Agg. US$M
66,401 44,218 1,390 4,695 15,131 966 (1,461) (10,765) 1,824 9,727 140,307 (399,002)

2009 Agg. US$M
64,373 29,058 8,786 2,017 19,108 5,404 (5,461) 2,506 18,727 (8,290) 180,622 (466,143)

12M Avg. (x).
1.4 1.3 1.1 1.8 0.7 0.3 (0.5) 1.0 0.6 1.3 1.2 1.8

> 2% OW
16 (17) 11 (9) 10 (8) 12 (10) 11 (10) 11 (10) 6 (6) 2 (2) 4 (5) 5 (3) 1 (1)

< 2% UW
8 (11) 4 (4) 5 (5) 10 (7) 10 (12) 14 (15) 19 (20) 18 (19) 20 (24) 23 (23) 28 (25)

OW-UW
8 (6) 7 (5) 5 (3) 2 (3) 1 (-2) -3 (-5) -13 (-14) -16 (-17) -16 (-19) -18 (-20) -27 (-24)

< 0.1%
3 (3) 4 (4) 3 (3) 1 (1) 0 (0) 0 (0) 2 (2) 12 (13) 0 (0) 1 (2) 1 (1)

EM %
6.0 2.4 4.2 8.4 16.6 17.8 7.5 2.9 17.8 13.4 10.5

JPM reco
N N N OW UW N N OW N N N Total EM Equity**** Global EM Equity* LatAm Equity* EMEA Equity* Asia ex-Japan Equity* BRIC Equity* Japan Equity Funds Developed Europe* International Equity* US Equity*** US Bond*** US Money Market***

chg (%)
(0.2) (0.2) (1.3) (1.3) 0.2 (1.1) (1.6) (1.7) (1.4) 0.5 2.7 0.1

Source: EPFR Global, MSCI, J.P. Morgan calculations. The survey covers 45 fund managers. The calculation of OW is greater than 2% overweight versus the MSCI benchmark. UW is less than -2% of benchmark weighting. Fund weightings are as of 30 September 2010 and MSCI weightings as of 1 October 2010. Numbers in brackets are the previous month values. Potentially China stocks have been misclassified as Hong Kong, hence the combined weight for Hong Kong and China. Hong Kong investment may be providing non-China exposure

Source: Bloomberg, J.P. Morgan, I:Net, MKK, Lipper FMI, MSCI, Datastream. *EPFR Global data. ***Data from Lipper FMI. BRIC Funds separated from EM Funds from 11 May 07. 12 month average column shows ratio of current flows to past 12 months rolling average. ****Total EM Equity includes Global EM, LatAm, EMEA, Asia ex Japan and BRIC funds.

Cumulative EM Fund Flows (US$ BN), by Year 120 2006 90 60 30 0 (30) (60) Jan Feb Mar Apr May Jun Jul Aug Sep Oct
Source: J.P. Morgan estimates, Bloomberg and EPFR

2010 LatAm Funds Cumulative Total and ETF Flows (US$ MN) 1,500

2007

2008

2009

2010 66.4 64.4 40.8 22.4

1,000 500 0 (500) (1,000) (1,500) (2,000) (2,500) (39.4) Nov Dec ETF Flows

Total Flows

(3,000) Jan 10 Feb 10 Mar 10 Apr 10 May 10 Jun 10

Jul 10

Aug 10 Sep 10 Oct 10

149

Ben Laidler (1-212) 622-5252 [email protected]

Latin America Equity Research November 2010

Economic Forecasts: Credit Risk
Foreign Reserves (US$bil) LATAM Argentina Brazil Colombia Mexico Peru EMEA Russia South Africa Poland Turkey Hungary Czech Republic Morocco* Jordan* Asia Korea Taiwan China India Malaysia Thailand Indonesia Philippines 51.2 262.8 26.5 111.8 32.5 472.9 41.7 81.6 78.0 37.1 44.0 13.6 5.3 290.1 387.7 2766.0 273.6 100.2 155.5 83.6 41.4 External (2010E) Current External Debt Account 2010F** 2010F** (US$bil) %GDP %GDP 0.0 -2.4 -2.0 -0.8 -0.7 4.5 -5.0 -2.5 -4.8 0.5 -1.8 -0.9 -14.4 2.7 7.4 4.8 -3.3 15.6 3.7 0.6 4.8 118.0 221.0 54.3 178.0 33.2 502.8 82.6 261.3 273.5 181.4 84.0 na na 402.9 na 443.6 277.9 70.0 72.3 183.0 56.5 32.9 10.9 19.4 16.8 22.3 33.5 24.0 51.0 37.4 141.6 44.5 na na 42.3 na 7.5 16.0 33.7 22.6 26.2 27.8 Fiscal Position Fiscal Deficit Public Sector Debt 2010F** 2011F** 2009 2010F** % GDP % GDP % GDP % GDP -1.5 -3.3 -2.7 -0.5 -1.9 -5.9 -6.7 -7.1 -5.5 -4.0 -5.9 na na -1.7 -3.6 -3.3 -6.8 -7.1 -3.9 -1.6 -3.9 -1.0 -3.4 -4.2 -2.5 -2.5 -4.2 -5.0 -7.0 -3.4 -4.2 -5.0 na na -0.5 -1.5 -2.1 -5.1 -5.2 -2.5 -2.0 -4.0 51.2 64.1 48.8 37.4 24.7 8.0 32.9 51.0 55.4 78.3 35.3 na na 44.4 na 19.3 42.3 53.3 34.2 35.8 52.6 46.4 61.7 47.9 34.1 22.1 7.9 38.2 53.2 49.0 79.3 38.5 na na 42.8 na 19.0 41.1 46.9 34.4 32.5 49.3 Sovereign Ratings (Long Term Foreign Debt) Rating Moody's Action Date Aug-14-08 Sep-22-09 Jun-19-08 Jan-06-05 Dec-16-09 Dec-12-08 Jul-16-09 Jan-05-10 Jan-08-10 Mar-31-09 Dec-08-08 Jun-18-03 Jan-08-07 Apr-14-10 Jan-24-02 Nov-09-09 Jan-22-04 Dec-16-04 Apr-13-10 Jan-21-10 Mar-29-10 Rating BBBBBBBBBB BBBBBB BBB+ ABB BBBA BB+ BB A AAA+ BBBABBB+ BB+ BBS&P Action Downgrade, O/L stable Upgrade, stable Upgrade, stable Downgrade, O/L changed to stable Upgrade, stable O/L changed to stable, Affirmed O/L changed to (-), Affirmed O/L changed to stable, Affirmed Upgrade, O/L (+) O/L changed to stable, Affirmed Affirmed, O/L stable Upgrade, O/L stable Affirmed, O/L stable Affirmed, O/L stable O/L changed to (-), Affirmed Affirmed, O/L stable O/L changed to stable, Affirmed O/L changed to stable, Affirmed Affirmed, O/L (-) Upgrade, O/L (+) Affirmed, O/L stable Date Aug-11-08 30-Apr-08 30-Apr-08 Dec-14-09 30-Apr-08 Dec-21-09 Nov-11-08 Oct-27-08 Feb-19-10 Oct-2-09 Dec-21-09 Mar-23-10 Mar-12-10 Jan-12-10 Apr-14-09 Jan-12-10 Mar-18-10 May-15-08 Apr-13-10 Mar-12-10 Apr-18-08

B3 O/L changed to stable Baa3 (+) Upgrade, O/L (+) Ba1 Upgrade, O/L stable Baa1 Upgrade, O/L stable Baa3 Upgrade, O/L changed stable Baa1 A3 A2 Ba2 Baa1 A1 Ba1 Ba2 A1 Aa3 A1 Baa3 A3 Baa1 Ba2 Ba3 O/L changed to stable, Affirmed Upgrade, O/L changed to stable Affirmed, O/L stable Upgrade, O/L stable Downgrade, O/L (-) O/L changed to stable, Affirmed O/L changed to stable O/L changed to stable Upgrade, O/L stable Affirmed, O/L stable Jan-24-02 O/L changed to (+), Affirmed Upgrade, O/L stable Upgrade, O/L stable Affirmed, O/L (-) Affirmed, O/L stable Affirmed, O/L stable

EMBI Global Spreads and Yields
1000 900 800 700 600 500 400 300 200 100 Oct-08 Jul-09 Spread (L) Mar-10 Yield 17.0 15.0 13.0 11.0 9.0 7.0 5.0 800 700 600 500 400 300 200 100 Oct-08

EMBI Asia Spreads and Yields
11 10 9 8 7 6 5 4 Jul-09 Spread (L) Mar-10 Yield 1300 1100 900 700 500 300 100 Oct-08

EMBI Europe Spreads and Yields
1000 12.5 10.5 8.5 6.5 4.5 Jul-09 Spread (L) Mar-10 Yield 900 800 700 600 500 400 300 200

EMBI Latin America Spreads and Yields
18.0 15.0 12.0 9.0 6.0 Jul-09 Spread (L) Mar-10 Yield

100 Oct-08

Source: Bloomberg, J.P. Morgan Source: Bloomberg, J.P. Morgan Source: Bloomberg, J.P. Morgan Source: CEIC, J.P. Morgan estimates, Moody's, Standard & Poor's, Bloomberg * Data from World Economic Outlook for October 2009, ** F denotes forecast.

Source: Bloomberg, J.P. Morgan
Updated as of October 28

150

Ben Laidler (1-212) 622-5252 [email protected]

Latin America Equity Research November 2010

Perspective: Demographic and Key Economic Statistics
Population## 2010E Growth million %YoY USA LATAM Brazil# Chile Colombia Mexico Peru EMEA Russia# South Africa Israel Poland Turkey Hungary Egypt Czech Rep. Morocco Jordan Asia Korea Taiwan China India Thailand Indonesia Philippines 48 23 1354 1184 68 233 94 0.1 0.3 0.6 1.3 0.7 1.2 1.8 0.3 0.3 0.3 0.5 0.3 0.4 0.6 0.1 0.1 0.1 0.1 0.1 0.1 0.1 91 na 73 54 77 64 86 1013 430 6016 1682 325 729 196 20981 18531 4441 1415 4709 3129 2081 6.6 2.8 17.6 13.8 10.2 16.0 9.9 6.2 2.4 16.8 12.1 9.2 14.5 7.9 6.0 3.3 10.4 10.0 4.4 5.2 4.6 5.6 2.9 9.7 8.4 3.5 3.9 2.7 141 49 7 38 76 10 78 10 32 6 -0.1 0.7 2.2 -0.1 1.2 -0.1 2.0 0.2 1.4 2.3 0.2 0.5 0.4 0.2 0.4 0.2 0.5 0.2 0.5 0.5 0.2 0.1 0.2 0.2 0.1 0.2 0.1 0.2 0.1 0.1 93 90 93 97 79 97 87 96 48 87 1598 371 199 473 714 130 216 199 94 25 11316 7581 26845 12450 9426 13008 2759 19198 2909 4062 19.9 10.8 5.1 10.7 13.7 10.5 8.1 13.4 9.8 11.4 20.4 9.8 3.1 10.8 12.1 10.7 5.9 13.2 8.4 8.8 5.9 3.2 2.8 3.6 3.2 1.9 4.9 3.1 4.9 6.3 6.4 2.2 0.5 3.8 1.9 2.1 2.8 3.0 3.8 3.9 194 17 46 111 30 1.2 1.0 1.5 1.0 1.2 0.4 0.4 0.5 0.5 0.5 0.1 0.1 0.1 0.1 0.1 102 89 75 80 92 2095 199 298 1046 150 10822 11632 6418 9450 5085 12.5 10.2 13.5 6.1 10.9 11.1 8.9 12.5 4.8 9.2 3.1 3.6 3.9 1.5 5.4 1.7 2.3 2.2 0.4 3.8 310 1.0 Population and Demographics Age Dependency Ratio* Young Old na na Nominal GDP Gross Enrollment Ratio Secondary** 98 2010E US$ billion 14,646 Per capita (US$) 47,213 10 year CAGR*** Total Per capita (%) (%) 4.1 3.1 Real GDP 10 year CAGR*** Total Per capita (%) (%) 3.0 2.0

Source: CEIC, Datastream, Bloomberg, US Consensus Bureau, World Bank, IMF, UNESCO, J.P. Morgan estimates * Age dependency ratio defined as dependents to working-age population. ** Gross Enrollment Ratio is defined as pupils enrolled in a secondary level, regardless of age expressed as a percentage of the population in the relevant official age group *** 10-year CAGR for period 1999-2009, in local currency. # CAGR for period 1999-2009 ## Population data based on IMF estimate as on July 2007 Data for Gross enrollment data for 2004 except for Malaysia, Brazil and Argentina which is for 2003

Updated as of October 28

151

Ben Laidler (1-212) 622-5252 [email protected]

Latin America Equity Research November 2010

Perspective: Global Emerging Capital Markets
MSCI EMF Index Total Market Cap US$ Bn LATAM Brazil Chile Colombia Mexico Peru EMEA Russia South Africa Poland Turkey Hungary Egypt Czech Republic Morocco ASIA Korea Taiwan China India Malaysia Thailand Indonesia Philippines Total 640 383 129 215 27 36 41 29 779 554 1363 847 256 172 214 57 7407 35 70 45 32 60 47 34 21 63 70 49 35 41 36 41 33 49 28 45 22 20 4 10 4 3 99 118 125 60 39 20 22 12 754 1426 1019 214 641 81 53 55 6 3766 2207 4088 336 292 494 252 44 18629 8 5 1 3 0 0 0 0 20 12 22 2 2 3 1 0 100 6 7 2 2 0 0 0 0 13 11 18 8 3 2 2 1 100 5 17 7 11 2 7 3 4 28 31 9 22 20 14 10 7 25 40 23 60 75 30 50 100 18 25 15 33 62 70 41 67 33 4 3 22 1 1 na 1 na na 7 na 9 na 6 19 232 4 4 3 14 1 1 na 1 na na 8 na 7 na 5 14 141 1007 171 147 283 60 58 36 22 56 46 75 16 8 21 3 2980 146 49 337 145 16 1 0 2 1 16 2 1 4 1 16 9 4 7 2 17 69 50 29 67 50 5 7 50 8 23 8 7 29 8 Estimated Free Float (%) Companies Number Average Daily Turnover US $ Mn % of Emerging Market Trading Volume % Weighting in MSCI EMF (%) Markets Concentration Stocks constituting 75% of Country Market Cap Number Stocks constituting 75% of Country Market Cap (%) JPM EMBI Global Market Capitalisation US$ Bn Issues Number

AC World Index Market Capitalisation
Emerging Markets 11% Japan 8% Developed Asia 5% Developed Europe 26%

MSCI Regional Market Capitalisation
EM Latin America 24%

Top 8 versus Rest of Emerging Markets
India Russia 8% 6% Mexico 4% Rest of EM 16% Korea 13% Taiwan 11% Brazil 16% South Africa 7%

North America 47%

EM Asia 58%

EM Europe and Middle East 18%

China 19%

Source: MSCI, J.P. Morgan

Updated as of October 28

152

Ben Laidler (1-212) 622-5252 [email protected]

Latin America Equity Research November 2010

Perspective: MSCI Emerging Market Index Composition by Countries and Sectors
Number of Companies: 754 Consum er Staples Total Market Capitalization (in billion US$): Telecom Services 7407 Consum er Discretionary Inform ation Technology Health care Industrials

Financials

M aterials

MSCI Emerging Markets Free Index

Utilities

Energy

Brazil Mexico Chile Peru Colombia LatAm Russia South Africa Poland Turkey Hungary Egypt Czech Republic Morocco Jordan EMEA Korea China Taiwan India Malaysia Indonesia Thailand Philippines Asia Total Source: MSCI, J. P. Morgan

0.8 0.4 0.1

1.4 1.1 0.3 0.1 2.8 0.2 0.4 0.0 0.2

3.7

1.3 1.0 0.0 0.0

0.3 3.9 3.3 0.7 0.2 0.1 0.1

0.0

4.2 0.3 0.2 0.2 0.3 5.3 1.0 1.9 0.8 1.1 0.2 0.2 0.1 0.1 5.4 2.1 7.1 1.6 2.2 0.9 0.7 0.6 0.2 15.5 26.1

0.5 0.2 0.3

0.3

1.1 0.2 0.3 0.0 0.2 0.1

0.3

0.0

4.1 0.7 0.4 0.5 0.1 5.8 0.9 1.9 0.2 0.0 0.0

0.4 1.7 0.0

0.8 0.4 0.1 1.3 0.3 0.1

0.1

2.1 0.4 0.9 0.1 0.2 0.0 0.1 0.1 0.1 2.0 0.4 2.1 0.5 0.1 0.3 0.3 0.1 0.1 3.8 7.9

0.2

16.1 4.4 1.7 0.8 0.9 23.8 6.1 7.3 1.6 1.9 0.4 0.5 0.4 0.2 18.3 13.4 18.3 10.6 8.1 2.9 2.4 1.7 0.5 57.9 100.0

1.1 2.0 1.0 0.3 0.4 0.4 0.4 0.0 0.0 4.5 6.8

0.8 0.6 1.1 0.2 0.5 0.4 0.3 0.2 3.2 6.8

4.5 0.4 3.1 0.1 1.1 0.0 0.3 0.7 5.7 14.1

0.2 0.1 0.1 0.3

0.7 2.2 1.4 0.4 0.9 0.5 0.1 0.1 5.6 7.3

0.0 3.6 1.0 6.1 1.3

3.0 1.9 1.0 1.4 0.9 0.0 0.2 0.1 5.6 14.4

0.7 0.2 0.3 0.4 0.3 0.1 0.0 0.1 1.5 3.5

0.5 0.8

12.0 12.3

Updated as of October 28

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Other companies recommended in this report (and priced as of October 28, 2010): Bladex (BLX/US$15.29/OW) Cielo (CIEL3.SA/R$14.60/Neutral) Coca-Cola FEMSA (KOF/US$78.40/Neutral) Compania Cervecerias Unidas (CCU/US$56.05/Overweight) Fleury (FLRY3.SA/R$21.85/Neutral) Grupo Modelo (GMODELOC.MX/Ps68.67/Overweight) Heineken (HEIN.AS/€36.34/Neutral) Itau Unibanco Holding SA (ITUB4.SA/R$41.14/Overweight) Redecard (RDCD3.SA/R$22.50/Neutral) SABESP (SBSP3.SA/R$39.79/Neutral) Southern Copper Corporation (SCCO/US$43.08/Neutral) Souza Cruz SA (CRUZ3.SA/R$86.60/Neutral) Telesp (TSP/US$24.24/Overweight) Vallourec (VLLP.PA/€74.75/Overweight) Vivo Participacoes (VIV/US$28.18/Overweight)

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LatAm Equity Research
Ben Laidler, Director of Research Equity Strategy / Special Situations Ben Laidler (LatAm & Mexico) Emy Shayo (Brazil) Brian Chase (Chile/Argentina/Andes) Vinay Joseph (LatAm) Pablo Monsivais (Mexico) Economics / Fixed Income Strategy Joyce Chang (Head of GEM Strategy) Luis Oganes (Head of LatAm Economics) Fabio Akira Hashizume (Brazil) Gabriel Casillas (Mexico) Julio Callegari (Brazil, Colombia & Peru) Franco Uccelli (Central America & Caribbean) Neeraj Arora (Central America & Caribbean) Ben Ramsey (Andes) Vladimir Werning (Argentina & Chile) Agribusiness / Pulp & Paper Debbie Bobovnikova Lucas Ferreira Basic Materials Rodolfo Angele (Steel & Mining) Rodrigo Fernandes Mandeep Singh Manihani John Bridges (Precious Metals) Cement / Construction / Homebuilders Adrian Huerta Marcelo Motta Varun Ginodia Financials / Exchanges / Merchant Acquirers Saul Martinez Frederic de Mariz (SMid Cap Financials) Mariana Barros Marina Mansur Ken Worthington (Exchanges) Retail / Healthcare / Cosmetics Andrea Teixeira Joao Mamede Felipe Oliveira Beverages / Food / Tobacco Alan Alanis Sambuddha Ray Pedro Leduc Telecoms / Media / Technology Andre Baggio Rajneesh Jhawar Anna Daher Transport / Aerospace / Industrials Fernando Abdalla Adrian Huerta (Airports) Jamie Baker (Airlines) Joe Nadol (Aerospace) Utilities & Concessions Anderson Frey Pedro Manfredini Energy / Petrochemicals Sergio Torres Felipe Dos Santos [email protected] [email protected] [email protected] [email protected] [email protected] [email protected] [email protected] [email protected] [email protected] [email protected] [email protected] [email protected] [email protected] [email protected] [email protected] [email protected] [email protected] [email protected] [email protected] [email protected] [email protected] [email protected] [email protected] [email protected] [email protected] [email protected] [email protected] [email protected] [email protected] [email protected] [email protected] [email protected] [email protected] [email protected] [email protected] [email protected] [email protected] [email protected] [email protected] [email protected] [email protected] [email protected] [email protected] [email protected] [email protected] [email protected] +1 212 622 5252 +1 212 622 5252 +55 11 3048 6684 +56 2 425 5245 +91 22 6157 3323 +52 55 5540 9374 +1 212 834 4203 +1 212 834 4326 +55 11 3048 3634 +52 55 5540 9558 +55 11 3048 3369 +1 305 579 9415 +1 212 834 4321 +1 212 834 4308 +1 212 834 4144 +1 212 622 3489 +55 11 3048 3629 +55 11 3048 3888 +55 11 3048 3983 +1 212 622 6433 +1 212 622 6430 +52 81 8152 8720 +55 11 3048 6712 +91 22 6157 3321 +1 212 622 3602 +55 11 3048 3398 +55 11 3048 3480 +55 11 3048 3893 +1 212 622 6613 +1 212 622 6735 +55 11 3048 3711 +55 11 3048 3892 +1 212 622 3697 +91 22 6157 3310 +55 11 3048 3824 +55 11 3048 3427 +1 212 622 6480 +55 11 3048 3756 +55 11 3048 3463 +52 81 8152 8720 +1 212 622 6713 +1 212 622 6548 +1 212 622 6615 +55 11 3048 3896 +1 212 622 3378 +55 11 3048 3796
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Disclosures
Analyst Certification: The research analyst(s) denoted by an “AC” on the cover of this report certifies (or, where multiple research analysts are primarily responsible for this report, the research analyst denoted by an “AC” on the cover or within the document individually certifies, with respect to each security or issuer that the research analyst covers in this research) that: (1) all of the views expressed in this report accurately reflect his or her personal views about any and all of the subject securities or issuers; and (2) no part of any of the research analyst’s compensation was, is, or will be directly or indirectly related to the specific recommendations or views expressed by the research analyst(s) in this report. In compliance with Instruction 483, issued by Comissão de Valores Mobiliários (the Brazilian securities commission) on July 6, 2010, the Brazilian primary analyst signing this report declares: (1) that all the views expressed herein accurately reflect his or her personal views about the securities and issuers; (2) that all recommendations issued by him or her were independently produced, including from the entity in which he or she is an employee; and (3) that he or she will set forth any situation or conflict of interest believed to impact the impartiality of the recommendations herein, as per article 17, II of Instruction 483.

Important Disclosures
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J.P. Morgan Equity Research Ratings Distribution, as of September 30, 2010 Overweight Neutral Underweight (buy) (hold) (sell) J.P. Morgan Global Equity Research Coverage 46% 43% 12% IB clients* 49% 45% 33% JPMS Equity Research Coverage 43% 48% 8% IB clients* 69% 60% 50% *Percentage of investment banking clients in each rating category. For purposes only of FINRA/NYSE ratings distribution rules, our Overweight rating falls into a buy rating category; our Neutral rating falls into a hold rating category; and our Underweight rating falls into a sell rating category.

Valuation and Risks: Please see the most recent company-specific research report for an analysis of valuation methodology and risks on any securities recommended herein. Research is available at http://www.morganmarkets.com, or you can contact the analyst named on the front of this note or your J.P. Morgan representative. Analysts’ Compensation: The equity research analysts responsible for the preparation of this report receive compensation based upon various factors, including the quality and accuracy of research, client feedback, competitive factors, and overall firm revenues, which include revenues from, among other business units, Institutional Equities and Investment Banking.
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