Riding+out+the+storm+-+LatAm+2012 HSBC Dec2012
Riding+out+the+storm+-+LatAm+2012 HSBC Dec2012
Riding+out+the+storm+-+LatAm+2012 HSBC Dec2012
Latin America
December 2011
Our base case for 2012 is that growth will slow, but that global political uncertainty means both
upside and downside risks are great. HSBC’s strategy team and industry analysts have
developed four themes that we anticipate will drive relative stock performance: (1) earnings
resilience, (2) structural growth, (3) balance-sheet strength, and (4) pricing anomalies. We
identify companies that stand to benefit, as well as those at risk.
Disclosures and Disclaimer This report must be read with the disclosures and analyst
certifications in the Disclosure appendix, and with the Disclaimer, which forms part of it
Equities
Latin America abc
December 2011
Sector Comment
Winners
Earnings resilience
AES Tietê Utilities (Brazil) Fully contracted until 2015; high margins; high dividend yield
Multiplan Shopping malls (Brazil) Diversified retail exposure; c80% of revenues from rents
Walmex Retail (Mexico) Regaining price leadership in large stores and better traction at Express stores
FEMSA Food & beverage (Mexico) Good cost management in an expanding business
Structural growth
Brasil Foods Food & beverage (Brazil) Global competitive cost advantage; acquiring distribution assets and brands in other emerging markets
Cielo, Redecard Financials (Brazil) Secular changes in consumer behavior – card penetration and paper-for-plastic substitution
OdontoPrev Healthcare (Brazil) Unique access to distribution channel for SMEs and individuals. Product innovation and proven execution track record
Mexichem Chemicals (Mexico) Hard-to-replicate competitive advantages, good M&A track record
Alsea Retail (Mexico) Improved execution; positive consumer trend; strong brands
FEMSA Food & beverage (Mexico) Continued store expansion efforts and acquisitions on the soft drinks side
Walmex Retail (Mexico) Strong selling space growth in Mexico
Pricing anomalies
Itau Unibanco, Bradesco Financials (Brazil) Valuations have suffered the most during the 2011 turmoil. On a PBV basis, the banks are not too far from the
2008/09 lows
Copel Utilities (Brazil) Trading below book value and quite close to its five-year lows
Gruma Food & beverage (Mexico) Trading at 1.1x PBV for 2012e against 2.7x for the IPC index
At risk
Earnings resilience
Lojas Marisa, B2W, Magazine Retail (Brazil) If consumption does not bounce back quickly in Brazil, retail companies (especially those more exposed to
Luiza credit-sensitive products) could have to deal with higher inventories and revise down their growth plans
Simec, Industrias ICH Steel (Mexico) Significant exposure to the external cycle
Structural growth
Soriana, Comerci Retail (Mexico) Limited expansion and strong dependence on the growth of the market
1
Equities
Latin America abc
December 2011
2
Equities
Latin America abc
December 2011
Contents
Diversified financials 54
Brazil equity strategy 12
Real estate 56
Mexico equity strategy 15
Healthcare 62
Latin America economics 17
Industrials 65
Key forecasts 23 Cement, construction, & infrastructure 66
Beverages 38
Disclosure appendix 92
Education 40 Disclaimer 95
Food products 42
We would like to thank Nicholas Swanson for his contribution
Food retailing 44 to this report.
3
Equities
Latin America abc
December 2011
The macro fog is as thick as we can remember come about from a fall in the savings ratio, and is
Alexandre Gartner*
with equity markets hostage to political decisions. therefore likely to be unsustainable. Brazil Equity Strategist and
Head of Research, Brazil
Here, we include a brief summary of our global HSBC Bank Brasil S.A.
Meanwhile, in the Eurozone, growth even in core
macro outlook (see Riding out the storm: Global +55 11 3371 8181
economies such as Germany and France has [email protected]
Equities in 2012, 5 December 2011) and
started to surprise on the downside after a strong Juan Carlos Mateos,* CFA
summarise four themes we believe will help Head of Equity Research,
run and, in our economists’ view, more peripheral
Mexico
investors to navigate through this uncertainty.
economies such as Italy and Spain are already in HSBC México, S.A.
+52 55 5721 3607
The themes are: earnings resilience, structural recession. [email protected]
growth, balance-sheet strength, and pricing Garry Evans*
At the same time, there are signs that China’s Global Head of Equity Strategy
anomalies.
growth is starting to slow a little, too. In recent The Hongkong and Shanghai
Banking Corporation Ltd
Economics weeks, monthly sales numbers from companies +852 2996 6916
such as department stores and automakers have [email protected]
The global economy will be a hostage to *Employed by a non-US affiliate
noticeably worsened. of HSBC Securities (USA) Inc,
politicians’ actions as well as facing its own
and is not registered/qualified
structural headwinds from deleveraging. HSBC’s Positive economic surprises in the US, negative in Europe pursuant to FINRA regulations
economists do not see a recession in 2012 – their 60
current forecasts are 1.8% real GDP growth in the 40
20
US and 0.6% in the Eurozone – but the risks are
HSBC surprise index
0
on the downside if political chaos spooks
-20
consumers and corporate decision-makers, -40
4
Equities
Latin America abc
December 2011
in October, down from a peak of 6.5% in July) since the revision ratio bottoms, it is often a positive
it means that the authorities can start to ease policy lead indicator for markets.
further, following on from the 50bp cut in the
What concerns us, though, is that the degree of
required reserve ratio (RRR) at the end of
downward revision has not been that great – and
November.
that analysts still forecast healthy growth for all
Politics regions in 2012.
The problem is that, as economist Paul Krugman Valuations
has noted, in a Venn diagram the category of
Valuations in global markets are cheap by historical
“Things that are considered politically feasible” in
standards. While this might not help much in the
Europe does not overlap with “Things that might
short run if the most disastrous scenario plays out, it
actually work.”
should mean that for long-term-minded investors,
In the end, we believe Germany will have to drop equities offer a reasonable return, and almost
its objections – or be prepared to abandon the euro certainly more than zero return from cash.
project. But it will probably take a crisis before
We have argued previously that, in a recession,
Germany buckles. With EUR1.2trn of Eurozone
price/book is a more reliable indicator. Not that we
government debt due to be refinanced in 2012,
are looking for a recession yet, but it is worth
further rises in market interest rates for these
checking the message given by this indicator (see the
bonds could easily trigger such a crisis.
table below). Japan is close to a record low on PB of
Earnings 0.9x (with data going back to 1974); Europe ex-UK
Analysts have started to reflect the concerns over is only 16% above the low from March 2009 – 22%
global economic growth in their earnings above it, excluding financials – although it still a
forecasts, but we would question whether they long way above where it got to in 1982, when it
have done so sufficiently yet. bottomed at 0.74x. But US PB is still 28% ahead of
where it was in March 2009 and emerging markets
Earnings revision ratios, MSCI EM and DM
are 41% higher.
80
70 PB ratio, MSCI indexes
60 2008-9 All-time Data
50 PB now low Diff low Diff from
40 Japan 0.92 0.90 -3% 0.90 -3% Dec-74
30 Europe ex UK 1.28 1.07 -16% 0.74 -42% Dec-74
20 Europe 1.37 1.11 -19% 0.77 -44% Dec-74
DM 1.60 1.24 -23% 1.01 -37% Dec-74
10 US 2.03 1.46 -28% 0.98 -52% Dec-74
0 Asia ex Japan 1.58 1.12 -29% 1.12 -29% Nov-95
EM 1.58 0.93 -41% 0.93 -41% Sep-95
89 91 93 95 97 99 01 03 05 07 09 11
Source: HSBC, Thomson Reuters Datastream
EMW Dev W
Source: HSBC, Thomson Reuters Datastream In this environment, we see stock markets remaining
volatile and stuck within a trading range. They are
Certainly, the revision ratio has fallen well below
likely to drop each time European sovereign funding
50% over the past six months (see chart above)
issues resurface and each time there are questions
and even showed signs of rebounding in
over the sustainability of economic growth. But they
November. It is true that, as in early 2009, when
will be cushioned by their low valuations and by
5
Equities
Latin America abc
December 2011
hopes of a policy response to the Eurozone debt AES Tietê, which is fully contracted until
problem and of central bank easing – the Fed, at 2015 for volumes and selling prices. The
least, has clearly signalled that it will reopen company also very high margins, which helps
quantitative easing if growth slows. to minimize cost pressures.
6
Equities
Latin America abc
December 2011
would be companies that are highly dependent on Alsea has improved execution at all of its
the growth of the market to expand their business units and positive regional consumer
businesses. So we would prefer companies that spending trends should translate into
are growing through geographic expansion rather sustained growth for Alsea over the next three
than those adding capacity to the same markets. to five years, in our view. Agreements with
Starbucks and P.F. Chang’s provide the right
Another important growth angle during turbulent
footprint to grow in Mexico and Latin
times is M&A. Companies with sound balance
America over the long term.
sheets will likely find bargain acquisition targets
or will have the chance to cut a deal with a target FEMSA, whose y-o-y growth rates for 2012
that would be unlikely during growth times. should slow; however, it should benefit from
its continued store expansion efforts and
In Brazil, we would highlight the following
acquisitions at its soft drink business.
examples:
Walmex maintains its leadership position in
Brasil Foods is likely to take advantage of its
the country’s retailing through an ambitious
strong post-merger balance sheet (we expect
store opening program. Management is
the company to be net cash positive in 2012)
accelerating selling space growth in 2011 to
to acquire brands and distribution assets in
13% from the 12.2% announced previously.
emerging markets, boosting its international
In Central America, Walmex is making
presence.
bigger investments than we believed are
Cielo and Redecard, both of which benefit required to lift its operations to company
from structural secular changes in consumer standards. However, we expect the outcome
behavior such as the increased credit card will be a very competitive operation.
penetration and the substitution of paper
Companies at risk in this theme include those
payment with electronic payment.
in the Mexican retail sector, such as Soriana
OdontoPrev, which has a multi-year growth and Comerci, given their strong dependence
opportunity driven by its unique access to on the growth of the market.
SMEs and individuals via Bradesco’s and
3. Balance-sheet strength
Banco do Brasil’s branches. Product
innovation and superior execution capacity Companies that stand on their own two feet
should help the company execute its strategy. The possibility of a credit crunch is unfortunately a
real one in 2012, more pronouncedly so in Europe.
In Mexico, we highlight the following examples, But if that happens, it is likely that aftershocks will
which include FEMSA and Walmex mentioned be felt in other regions and Latin America would not
above. be immune. As a reference, during the 2008/09
Mexichem is an acquisition machine and an credit crunch, there were several contagion channels
effective integrator of acquired companies. Its to Latin America, such as a shutdown of the offshore
growth prospects are backed by hard-to- corporate bond market and the disappearance of
replicate competitive advantages and its trade finance lines.
leading position in PVC in Mexico. Companies that have a solid cash position and are
on track to comfortably face debt maturities in
2012 would tend to better stand adversity, should
7
Equities
Latin America abc
December 2011
FEMSA had at the end of 3Q11 a net cash balance Copel is another company we highlight, as it is
of MXN7.1bn (cash of MXN35.4bn and debt of still trading below book value and relatively
MXN28.3bn). Walmex had a net debt of only closer to the lowest five-year multiples than the
MXN206m (cash of MXN15.1bn and debt of vast majority of other Brazilian stocks.
MXN15.3bn). In Mexico, Gruma is a name we would highlight.
In contrast, we recommend being cautious on The company is trading just above book value
highly leveraged companies such as Cemex and (1.1x PBV) for 2012. However, we recommend
Axtel. disregarding low PBV in companies such as Sare
and Cemex given their operating and financial
problems.
8
Equities
Latin America abc
December 2011
Alexandre Gartner*
Latam equities in 2012 themes that will be important for stock selection
Brazil Equity Strategist and
in 2012. The winners will be those companies that Head of Research, Brazil
The year 2011 has been a challenging one for HSBC Bank Brasil S.A.
have some or all of the following characteristics: +55 11 3371 8181
Latin American equity markets: The Brazilian [email protected]
earnings resilience, structural growth potential,
index is down c23% y-t-d while the Mexican Juan Carlos Mateos,* CFA
balance-sheet strength, and attractive valuations.
index is off by c14%. This compares to a flat S&P Head of Equity Research,
We identify Brazilian and Mexican companies Mexico
and declines in the mid-teens for most European HSBC México, S.A.
that we expect to benefit from these trends in +52 55 5721 3607
markets. [email protected]
2012 (see pages 33-84).
*Employed by a non-US
Despite the many questions that continue to hang
Brazil call in a nutshell affiliate of HSBC Securities
over the outlook for 2012, we do see opportunities (USA) Inc, and is not
In Brazil, the consumer pulled back in 2011 and registered/qualified pursuant
in Latin America’s biggest equity markets. to FINRA regulations
the pace of economic growth declined. The policy
Brazil seems better positioned for a rebound response to shore up spending has been swift.
should global growth prospects improve, in our Announced measures increase the risk of being
view. Key drivers for a recovery would be underweight in the consumer-driven sectors, and
improvement in Europe, resilience in China, and we have become slightly more positive on
the stimulus measures taken by the government. companies exposed to Brazilian consumers.
HSBC’s expectation of a soft landing in China is
Mexico is better positioned should the volatile
supportive of commodity exporters, a sector
scenario persist, in our opinion, as long as the US
which we continue to favor (see the “Brazil equity
economy does not falter.
strategy” section of this report, page 12).
Winning stocks
In the “A fat tail at both ends” section of this
report (page 4), we have identified four global
9
Equities
Latin America abc
December 2011
growth estimate, revising it to 3.7% from 4%; for MSCI Brazil MSCI Mexico
15
Mexico, our forecast is now 3.4% from 3.9%
13
before.
11
10
Equities
Latin America abc
December 2011
50
MSCI Mexico MSCI Brazil
40
30
20
10
(10)
(20)
(30)
Nov- Nov- Nov- Nov- Nov- Nov- Nov- Nov- Nov- Nov- Nov-
01 02 03 04 05 06 07 08 09 10 11
11
Equities
Latin America abc
December 2011
Global growth and domestic in the second half. We expect the pickup in Alexandre Gartner*
spending key in 2012 second-half growth to be driven by recent interest Brazil Equity Strategist and Head
of Research, Brazil
rate cuts (we expect the Selic rate to reach 9.0% HSBC Bank Brasil S.A.
We expect 2012 to be a challenging year for +55 11 3371 8181
by the middle of 2012), the reversal of some [email protected]
Brazil. The weak global economic backdrop and
macro-prudential measures that restricted lending, Francisco Machado*
risk aversion among international investors Strategist
and additional governmental spending (mostly in
contributed to the declines in Brazilian equities in HSBC Bank Brasil S.A.
infrastructure projects). + 55 11 3371 8191
2011. However, there have been some domestic [email protected]
factors impacting the market, mostly the rise in Domestic cyclicals in the spotlight *Employed by a non-US affiliate of
HSBC Securities (USA) Inc, and
inflation and the fall in consumer spending. For companies operating in domestic cyclical is not registered/qualified
pursuant to FINRA regulations
sectors – consumer, retail, homebuilders,
The Brazilian government has reacted strongly to
financials, healthcare, and education – the first
the possibility of 2012’s GDP staying around 3%
months of the year will require adjustments to a
by cutting rates and announcing credit and tax
lower growth environment that started to
easing measures (see our 2 December report, A
materialize in 3Q11. This means managing
strong policy response to weaker growth). This
excessive inventory levels and possibly revising
should help consumption in the short run.
growth plans downwards, as expected cash flow
Whether this will be sustainable depends on how
generation declines, and the payback time for
much appetite banks have to boost lending, as
expansion projects increases.
consumers have shown signs of being more
leveraged than a year ago, and disposable income The government has made clear it will use all
has been eroded by inflation. Leverage has policy tools it has to reverse the consumption
increased to 42.2% of household income, from slowdown that started in recent months. Until
32.2% since the 2008 crisis (see below). now, the measures taken have impacted only a
small portion of the consumer-related sectors
HSBC economists expect a rebound in Brazilian
(mainly white goods). It is likely, however, that
GDP growth (to 3.7% in 2012 from 3% in 2011),
more extensive measures will follow. As a result
with a weak first half of the year and acceleration
12
Equities
Latin America abc
December 2011
of this aggressive policy action, we adopt a more As seen in the table below, there is less room to
positive stance towards these sectors. If maneuver this time, and we expect a new round of
government policies are effective, these sectors stimulus to result in less bang for the buck.
could rebound strongly. Relative to the end of 2008, there is now less
slack in the labor markets, higher inflation
Earnings resilience still key
(especially ex-food), and higher household debt
Our preferred plays continue to be companies levels and burden. Ex-food CPI was running at
with strong earnings resilience backed up by clear 4.4% in September 2008 compared to 6.5% at the
cost-cutting opportunities, as well as those with a last reading. Real wage gains in 2012 may prove
strong franchise supported by competitive more difficult to come by given what has been
advantages. As mentioned in the earlier sections already achieved in prior years.
of this report, we highlight AES Tietê, Multiplan,
Brasil Foods, OdontoPrev, and Cielo. Worse initial macro conditions give less room to maneuver
Macro variables Sep/08 Last 2011
Value in commodity producers CPI (%) 6.3 7.0
Commodity producers have looked attractive CPI (ex-food, %) 4.4 6.5
Unemployment 7.7 5.8
compared to domestic cyclicals in recent months. Debt (% of income) 32.2 42.2
Debt burden (% of income) 18.3 22.2
However, the aggressive consumption stimulus
Source: HSBC, IBGE, BCB
measures adopted by Brazil’s government shifts
this perspective somewhat. Moreover, it is unclear how much lending appetite
We still favor positions in commodities as we the banks will have at a time when consumers are
expect these to benefit from an improved outlook tightening their belts. That said, like in 2009,
for China (HSBC’s out-of-consensus view is for a government-owned banks may take the lead in
soft landing in China; see HSBC’s 1 December accelerating credit.
report, China in 2012). In addition, earnings Middle-class consumers,
growth expectations for commodity producers are
inflation, and leverage
quite low, and several investors are underweight
the sector, we believe. Commodity producers that Probably the biggest surprise to investors recently
focus on exporting to emerging markets should was the sudden slowdown in consumer appetite
benefit from exposure to this region and a weaker seen in 3Q11. Even with the government adopting
BRL. Brasil Foods and Vale are good examples of aggressive stimulus measures to counteract this
companies benefiting from these trends. slowdown, understanding why consumers slowed
down in the first place is critical to assessing what
2012 vs 2009 rebound: kind of rebound we may see ahead.
Tougher this time around
We attribute the 2011 slowdown to higher
Brazil’s central bank (BCB) has been taking inflation eating into real wage gains and the
measures to accelerate growth, namely, cutting impact of additional leverage.
rates and easing credit conditions. We believe,
however, that the impact of such measures will be Inflation and wages
more limited this time around, compared to the At times when inflation was running at around the
rapid response of the domestic economy center of the target range (4.5%), a real wage gain
following the 2008 crisis. of 1% was relatively large. But once inflation
accelerated to above 7% as it did in 2011, real
13
Equities
Latin America abc
December 2011
wage gains of the same magnitude were quickly Brazilian households have leveraged up
Debt (% of income)
Add this to the fact that wage adjustments in 2011 40 23
Debt burden (% of income) -RHS
have lost momentum vs 2010 (even under tighter
35 21
labor market conditions; see table below). This
combination is strong enough, in our view, to 30 19
14
Equities
Latin America abc
December 2011
Fundamentals offer resilience USD for foreign investors and could represent an Juan Carlos Mateos,* CFA
Mexico Equity Strategist and
to global turbulence attractive entry level. Head of Equity Research, Mexico
HSBC México, S.A.
Stronger macro profile High earnings growth but rich +52 55 5721 3607
[email protected]
Mexico is less vulnerable than it was in the past to valuation
Jaime Aguilera*
external events. This is the result of prudent fiscal As of 28 November, the benchmark Mexican Equity Strategist
HSBC México, S.A.
and monetary policies adopted since the 2008 stock index, the IPC, was down 19% y-t-d in USD +52 55 5721 2379
crisis. Mexican authorities have implemented [email protected]
terms, better than -22% posted by a broader
*Employed by a non-US affiliate
policies of low external debt, prudent fiscal emerging markets index such as the MSCI EM. of HSBC Securities (USA) Inc,
accounts, and a flexible exchange rate. In 2012, and is not registered/qualified
Looking ahead to 2012, expected earnings growth pursuant to FINRA regulations
HSBC expects GDP to grow 3.4% and for Mexican companies in the IPC index is 130bp
consumption at 5.1%. higher than that forecast for the EM index (see
Good growth/inflation balance table below).
In contrast to some other emerging market International stock market valuation, 2012e EPS growth
economies, Mexico faces no threat from inflation 2012e EPS
Country/index PE 2011e PE 2012e growth (%)
or a sharp slowing of growth or a recession. Our
MSCI World 11.0 9.9 11.1
fixed income strategists expect monetary policy to MSCI developed countries 11.3 10.1 11.3
remain on hold in 2012, and do not expect a hike MSCI EM 9.7 8.8 9.8
Mexico (IPC index) 15.3 13.8 11.1
until the third quarter of 2013.
Source: Bloomberg
15
Equities
Latin America abc
December 2011
We conclude, therefore, that the overall Mexican As shown in the chart that follows, while cyclicals
stock market has a high valuation and does not posted 12-month EBITDA declines in several
offer value. quarters during these two economic downturns,
domestic-oriented companies posted low, but
Forward PE: S&P 500, Euro Stoxx 50, and IPC indexes
positive,12-month EBITDA growth during the
16
15
same periods.
14
13 12m EBITDA y-o-y change: Cyclical vs domestic-oriented
12 companies
11
10 50%
9 40%
8 30%
7
20%
6
10%
2007 2008 2009 2010 2011
0%
IPC S&P500 Euro Stoxx 50 -10%
-30%
16
Equities
Latin America abc
December 2011
Latin America
economics
17
Equities
Latin America abc
December 2011
Global pain felt in Latam The key variables that will determine the path of André Loes
Latin America economies in 2012 will be: Chief Economist, Latin America
Latin America faces a challenging year in 2012. HSBC Bank Brasil S.A.
+55 11 3371 8184
The overhang of debt – both sovereign and Plenty of policy ammunition: We expect [email protected]
consumer debts – in Europe and the US has policymakers to respond to further declines in
already hurt growth prospects in developed growth with monetary and fiscal policy.
economies. The impact of this cooling (see
Eurozone exposure: manageable so far.
Stephen King et al., The New Global Cooling, 6
Eurozone banks are an important source of
September 2011) is now also being felt in
funding and Europe is a big destination for
emerging markets, and the knock-on effects of the
Latin American exports.
Eurozone debt crisis and a weak US recovery will
continue to be a factor for Latin American Commodity prices and Chinese demand:
economies into 2012. key risks.
18
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December 2011
The overall state of government finances in the 2012 growth at a level which is still higher than
six Latin American countries in this report, potential GDP growth.
despite being worse than the pre-2009 period, is
Last but not least, international reserves are at
good enough to allow the region the necessary
robust levels across the region. In some countries,
firepower in case the crisis deepens, in our view.
reserves are far above their levels of September
But the capacity for policy response for the region 2008, at the outbreak of the global financial crisis.
is more significant at the monetary, rather than We expect the majority of Latin American central
fiscal, level. While policy interest rates are lower banks to let currencies float in the event of a more
than in 2008 – when the region started its last pronounced global risk aversion, but also
monetary easing cycle – inflation is also lower in anticipate intervention in case of disorderly,
most parts of the region. illiquid depreciations. Having high levels of
international reserves is a positive, in our view.
Brazil, Chile, Colombia, Mexico, and Peru follow
When markets seize up, overshooting may occur,
an inflation targeting regime (Argentina does not).
increasing the risks of financial instability and
Most of these currently have inflation either close
leading to an amplified credit contraction. The
or converging to the mid-point target, and
ability to intervene in the currency markets may
HSBC’s 2012 inflation forecasts project the
alleviate the potential for an economic slowdown
continuation of this trend. Peru is an exception,
beyond the intensity explained by the initial
but even here the trend is not concerning, as it is
external shock.
mainly explained by non-core, food inflation. The
chart below shows the gap between inflation and Eurozone exposure: source of
the mid-point of the national targets. credit lines for Latam
Inflation looks manageable relative to targets European banks represent the most important
8.00 source of international credit lines for the region.
6.00
4.00
2.00
Exposure to European banks is manageable
% Y-o-Y
0.00
-2.00 100.0%
7
Ja 7
Ja 8
Ja 9
Ja 0
1
07
08
09
10
11
1
t-0
r-0
t-1
t-1
r-0
r-0
t-0
t-0
r-1
r-1
l-0
l-0
l-1
l-1
l-0
n-
n-
n-
n-
n-
80.0%
Ju
Ju
Oc
Oc
Oc
Oc
Oc
Ju
Ju
Ju
Ap
Ap
Ap
Ap
Ap
Ja
-4.00
-6.00
-8.00
60.0%
Brazil Chile Colombia Mex ico Peru 40.0%
20.0%
Source: Central Banks and HSBC 0.0%
ARG BRA CHI COL MEX PER
Brazil has already started to ease monetary policy,
and we expect Chile and Peru to follow suit in Ex ternal funding from European banks/ex ports
2012. Colombia, on the other hand, is still Ex ternal funding from European banks/Reserv es
19
Equities
Latin America abc
December 2011
In 2008, external funding (from Europe and Looking into 2012, the risk of a more severe
elsewhere) for the countries of the region fell by deceleration of exports – and consequently
between 10% and 20%, from peak to trough. In reduction in commodity prices – would be
the moments when the contraction of lines is more negative for the small, commodity exporting,
pronounced, the majority of lines coming due is open economies. For countries like Chile and
not renewed, implying an important rise in the Peru, the commodities segment is particularly
cost of trade finance. Market participants suggest important.
the cost of lines already went up 50-60bp over the
Risks: commodity prices and
last couple of months.
Chinese demand
Some alternative sources of USD denominated
When looking at our 2012 forecasts it becomes
funding may come into play, such as an expanded
clear that the smaller and more commodity driven
supply of lines from banks of other regions, as
economies of the region are expected to suffer
well as regional development banks. Yet, chances
more from the global slowdown. The chart below
are that the cost of USD external funding may
shows 2011 and 2012 HSBC growth forecasts for
remain higher than normal for some quarters.
the six countries covered in this report.
Eurozone exposure: exports Growth hit more in commodity exporters
Europe is an important export destination for most 10.0 1.0
which remains more tied to the US. The table below 6.0 -1.0
0.0 -4.0
In 2009, Latin American exports to Europe fell by
Argentina Brazil Chile Colombia Mex ico Peru
almost 19% from 2008. This was a sharper fall
2011(LHS) 2012 (LHS) fall/increase (RHS)
than the decline in total exports, which fell by
Source: HSBC
13% over the same period. It is reasonable to
expect that in a year of global economic declines
We expect Argentina to post a sharp slowdown. It
– which tend to negatively affect commodity
reflects the headwinds from increasing capital
prices – Latin American exports to Europe may
outflows, as well as the stabilization of Brazilian
suffer more than its exports to other regions, just
growth at levels lower than the average in recent
as they did in 2009.
years – 23% of 2010 total Argentine exports went
20
Equities
Latin America abc
December 2011
to Brazil. The big challenge for Argentina is how commodity prices would affect growth, it would
to manage the increased dollarization pressure, be more diluted by the diversified base of
finding the right time to allow for quicker production. Another risk for the Brazil scenario in
depreciation. Dealing with the timing and the case of a reduction of commodity prices is a
implementation of this change will be key. second order one. For a country where residual
inflation concerns are still relevant, the currency
The Andean countries have their growth dynamics
depreciation which one could expect on a scenario
more correlated to commodities markets,
of permanently lower commodity prices could
especially Chile and Peru, which are more open
mean additional pressure on prices and some
than Colombia – in 2010, exports plus imports as
limits to monetary policy action.
a percentage of GDP on the three countries
reached 62.0%, 41.8%, and 27.4%, respectively. Economic risks associated with our Mexican
forecasts are linked to developments in the US
A global slowdown implies a more modest growth
and Europe. However, the Mexican economy has
of commodities output, and can also translate into
been showing resilience to the slowdown in the
lower prices. When it does, it also affects the
US, and we expect this to continue (see our 1
business activity in the services sector, through
December report, GDP expectations rebound).
wealth effect and confidence. Accordingly, risks
for our scenario in Chile and Peru are for a more This is related to a more resilient domestic
significant growth deceleration than we currently demand, but also regaining competitiveness by
forecast, should global activity suffer more than Mexican exports to the US over their Chinese
expected. This would be especially true should rivals in the last couple of years – captured by the
China expand substantially below what is the reducing gap between their unit labor costs in
current forecast – China is the main market for USD terms – shown in the chart below. This is
Andean copper exports. leading to a higher participation of Mexican
exports on the American market.
In this case, policy easing would also go beyond
what is currently forecast, with more rate cuts in Unit labor costs in Mexico and China (USD/hour)
3,5
2
policy, providing increased support the 1,5
to reflate). 2002 2003 2004 2005 2006 2007 2008 2009 2010
21
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December 2011
Conclusion
Our assumption is that growth in Latin America
will remain positive in 2012.
22
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December 2011
Key forecasts
CPI (year-end)
2010 24.8 5.9 3.0 3.2 4.4 2.1 6.9 27.4
2011(f) 24.0 6.5 3.6 3.3 3.5 4.2 7.4 29.2
2012(f) 20.8 5.4 3.0 3.1 3.9 2.7 7.1 26.3
Industrial production
2010 10.3 10.4 0.5 5.0 6.0 14.1 3.5 (2.5)
2011(f) 9.0 0.0 6.2 4.5 3.3 8.3 5.1 4.8
2012(f) 5.4 3.6 5.0 5.5 4.2 6.7 4.5 4.6
Private consumption
2010 9.0 7.0 10.4 5.0 5.0 6.0 11.5 (1.9)
2011(f) 10.5 4.4 10.2 5.3 5.0 6.1 8.9 2.6
2012(f) 6.3 4.4 6.0 4.6 5.1 4.7 6.4 7.0
23
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December 2011
24
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December 2011
Country profiles
25
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December 2011
Argentina
The country is dealing with high inflation, which Another key policy challenge is to keep wage
we expect will fall in 2012, as well as continued rises below the 20% inflation rate during the
pressure on the Argentine peso. Argentine savers bargaining process.
and investors have increased purchases of dollars
Finally, the government appears committed to
since April 2011, putting pressure on central bank
reduce the cost of energy and transportation
reserves, which are used to repay debt, and also
subsidies that are approaching 4% of GDP in
increasing the pressure on the peso. President
2011. It is a significant political challenge as some
Christina Fernandez’s government has continued
residential consumers will be affected. It is not
to fight depreciation, however, and has responded
clear if the money “saved” by eliminating
to the pressure from “dollarization” by imposing
subsidies will be spent elsewhere.
currency controls. The policy of devaluing at a
rate well below inflation results in the currency Key events for 2012
strengthening in real terms. Argentina does not have monetary policy
The thirst for dollars has pushed funding costs and committee meetings. There are no elections in
rates upwards. The policy of minimizing 2012.
exchange rate volatility by imposing limits on the
ability to acquire US dollars is expected to hit
economic growth. Lower growth will also help
lower inflation, we believe.
26
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December 2011
Brazil
Economic outlook for 2012 government measures and increased spending. We Constantin Jancsó
forecast GDP growth will reach 3.7% in 2012. Economist
The Brazilian economy lost momentum in the HSBC Bank Brasil S.A.
+55 11 3371 8183
second half of 2011, reflecting the impact of Policy challenges [email protected]
slower growth in the US and Europe, and fiscal
Inflation will remain the key challenge for
and monetary tightening in Brazil undertaken to
policymakers. The 12-month CPI rate will likely
curb inflation. The impact of inflation on Brazil’s
fall to about 5.5% by the second quarter (within
household budgets, especially in the “new middle
the target range), but resist further declines,
class,” which has fueled domestic consumption
ending 2012 at 5.4%. We expect the central bank
growth, has already resulted in slower demand.
to respond to sluggish growth early in 2012 and
Brazil’s authorities have already responded to the modest improvement in inflation expectations
weaker growth. Taking a page out of their 2008 by cutting the Selic rate to 9% by May 2012.
playbook, interest rates started to be cut in August
The central bank has continued to take measures
2011, the government reversed course on
to contain BRL volatility, and this will remain a
measures aimed at curbing credit growth and,
focus. Shortages in USD funding caused by the
more recently, reintroduced tax exemptions on
European crisis will likely lead the central bank to
white-line goods, and cut the IOF tax on foreign
provide funding from international reserves.
equity investments and on consumer loans.
Key events for 2012
Economic activity will likely begin 2012 on a
slow note. We expect growth to slow to just 3% in We expect the government to reveal a cabinet
2011, with slower consumption and investment. reshuffle and budget cuts early in 2012.
However, assuming no disaster in Europe, we Nationwide mayoral elections in October will
expect growth to gain momentum, especially in likely be market-neutral. The central bank holds
the second half of 2012, in response to eight policy-setting meetings per year.
27
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December 2011
Chile
Economic outlook for 2012 than usual, and lower ore grades in mature copper Jorge Morgenstern
mines. A return to more typical strike activity in Economist
The Chilean economy is expected to keep HSBC Bank Argentina S.A.
2012 and the impact of new operations set to +54 11 4130 9229
growing in 2012, but at a slower pace than in [email protected]
begin next year should result in a positive
2011. We forecast GDP growth of 4.5% in 2012,
contribution from mining to GDP growth. In our
versus growth of 6.4% expected in 2011. The
view, mining production will be even more
mining sector will be a key driver of exports and
relevant for GDP growth going forward, as the
of GDP growth, and the demand for Chile’s
update of national accounts unveiled by the
commodities will be closely tied to global
central bank raised the estimated weight of the
economic conditions. A more pronounced global
sector in the economy.
slowdown than is currently forecast could have a
significant negative impact on Chile’s economy. Policy challenges
Inflation should converge to the middle of the The government is facing calls for reforms of the
central bank target of 2-4%, with risks to the educational system. If those reforms are made, the
downside. We forecast that the central bank of Chile result could be higher public funding of
will start a gradual easing of monetary conditions, education, putting pressure on government
cutting the official interest rate (TPM) by 25bp in finances. This could, in turn, result in pressure for
each of its three meetings in the first quarter. The higher taxes.
rate is currently at 5.25%. A deteriorating global
Key events for 2012
economic picture, driven by problems in the
Eurozone and a slowdown in China, could result in Local elections are slated for 28 October. The
more aggressive monetary easing. central bank meets monthly, around the 14th of
each month.
Mining production in 2011 was held back by
strikes, which were more disruptive to production
28
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December 2011
Colombia
Economic outlook for 2012 Investment is heavily concentrated in the oil Ramiro Blazquez
sector, which has become a major growth driver Economist
Colombia’s growth prospects are closely tied to HSBC Bank Argentina S.A.
alongside mining. Given our expectations of +54 11 4348 5759
demand for commodities and global economic [email protected]
resilient oil prices, we expect FDI to reach 3% of
growth. Colombia’s oil industry is a buffer to
GDP in 2012, after reaching 3.6% of GDP in
global growth declines, however, especially if oil
2011. We expect the central bank will continue to
prices remain resilient. We expect GDP growth to
intervene to maintain currency stability.
reach 4.2% in 2012, from around 5% in 2011. The
2012 forecast is only slightly below our estimate Policy challenges
of Colombia’s potential growth rate of 4.5%.
The free trade agreement agreed with the US in
Contagion from slower growth in the US and 2011 will require Colombia to enhance the
Europe should spread mostly through trade, as competitiveness of its exports going forward.
55% of total exports are sold to these regions. Maintaining progress made on the fiscal front is
However, as long as oil prices hold up above another challenge, which could be hampered by
USD95/bbl WTI (oil accounts for 34% of healthcare reform and the payment of reparations
exports), Colombia should not experience a to the victims of terrorism. We expect the central
significant negative shock. We also forecast a bank to refrain from easing monetary conditions,
decline in inflation to 3.1% in 2012 from 3.3% in given the stimulative levels of interest rates and
2011, about the midpoint of the central bank concerns about the emergence of a housing
target range of 2-4%. This forecast assumes no bubble.
further floods, which disrupt food supply and
Key events for 2012
contributed c50bp to annual inflation.
Central bank monetary policy meetings are held in
Foreign direct investment (FDI) inflows have the second fortnight of each month.
been key to Colombia’s recent economic success.
29
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Mexico
30
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Peru
31
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32
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33
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Agribusiness
Commodities should trade range-bound in 2012 as global supplies
improve; corn remains an exception due to low inventory levels
Investors should focus on growth and earnings stability; we remain
bullish on value appreciation of farmland, particularly in Brazil
Our highest conviction stocks are Cosan, a diversified sugar and
ethanol player, and BrasilAgro, a longer-term bet on farmland prices
Brazil
AGRO3
MT
SLC
34
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December 2011
35
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December 2011
retailers. We believe the close of 2011 should be The following chart shows a relative index of Stewart H Ragar, CFA
Analyst
positive for consumption while Q1 2012 could be a pharma and personal care spend in Brazil compared HSBC Securities (USA) Inc
+1 212 525 3460
challenge, improving as the year progresses. to Mexico, using January 2003 as a base. The chart [email protected]
suggests that since 2008, growth in Brazil’s index
We are bullish on Mexico consumer spending trends
has outpaced Mexico’s, growing 45% faster in
heading into the presidential election year. The 2012
January 2011, shown by the column reading for Jan-
presidential election should help consumption and
11 at 145. We expect this differential to narrow as
should be supportive of personal and health care
consumption trends improve in Mexico. Mexico’s
spending. HSBC economists believe Mexico is more
healthcare spending per capita is expected to grow
resilient now to global economic downturns than
6% annually to 2014, with a goal to reach 100% of
during the 2008 crisis. Secular trends are generic and
the population from the 85% covered presently.
OTC drug and personal care consumption are
Recent studies forecast 14% pharmaceutical industry
positive for Genomma.
CAGR for the largest emerging markets, including
Investment themes Brazil and Mexico.
Brazil apparel: Closer to consumers Pharma and personal care products index: Brazil vs Mexico
Companies in the apparel segment have been
200
investing in new stores that should lead to stronger
total and same-store sales going forward. In 3Q11, 160
retailers in our universe grew selling space at
120
double-digit rates, led by Hering and Marisa with
24% and 20% growth, respectively. We also expect 80
margin expansion driven by improved expense Jan-03 Jan-05 Jan-07 Jan-09 Jan-11
absorption and higher earnings through lower
Relativ e Brazil Mex ico
interest expense. Source: HSBC, IBGE, INEGI
36
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December 2011
Trends in prescription medication behavior have better terms from suppliers than its peers at 157 days
been favorable for generic and OTC growth in against 42. Genomma does not own manufacturing
Mexico. A 2011 survey of prescription drug users in facilities, which is a lower capital-intensive model
Mexico showed that consumers are switching to that generates high returns.
generics and OTC as a lower cost alternative to
Cia Hering, TP BRL46, OW(V)
prescription drugs. In 2011, 40% of prescription
drug users purchased generic instead of prescription Hering makes a strong case for having the best
drugs, and 30% of consumers surveyed have asked a apparel business model in Brazil, combining the
doctor to prescribe a generic drug. manufacturing of a strong brand with a network of
owned, franchise, and third-party stores. The
Industry valuation metrics pressures faced by its competitors that have to build
We value apparel and consumer retailers using PE their own store network, even if they just lease the
multiples. We select our target multiples based on space, depressed their earnings in the third quarter.
their historical average. From that average we Hering’s focus is on retailing, leaving the financing
determine whether growth prospects justify a target to financial institutions. This way, Hering avoids the
above or below that historical average. We use a 22x pitfalls of delinquencies and other credit headaches.
target multiple to both Hering and Genomma, which We expect a strong holiday season for Hering and
is above the historical average for both stocks. estimate December sales to represent almost 20% of
Highest conviction stocks its full-year sales, and 4Q sales to represent around
33% of 2011 sales. For 2012, we expect further
Genomma, TP MXN39, OW(V) EBITDA margin expansion to 28.7% from 2011e of
Genomma has an attractive new product pipeline 28.3%, with the normalization of expenses and
and new markets that should drive strong sales continued 30%+ top line growth. Third-quarter
growth in 2012. This should translate into 41% and EBITDA margin expansion indicates potential
22% EPS growth for 2011e and 2012e. Our 22% additional expense dilution as the company gains
2012 EPS growth estimate reflects our expectation scale. In addition, lower capital expenditures in
for sustained long-term earnings expansion for manufacturing should result in a lower depreciation
Genomma. However, Mexico consumption trends charge. We estimate 2012 capex of BRL60m
could lead to better performance in 2012. compared to 2011e capex of BRL70m. Finally,
Genomma, like Brazil’s Hypermarcas, has high lower cotton prices should be reflected in higher
working capital requirements to provide customer 2012 gross margins, which have dropped to
funding. However, balance sheet data show that USDc90/lb as of 25 November from USDc215/lb in
Genomma has a shorter cash conversion cycle than March 2011.
Hypermarcas even though it keeps more days of For valuation and risks, please see page 46.
inventory and receivables. Genomma benefits from
37
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December 2011
Beverages
Industry leaders have combated challenging market conditions
with brand strength, as well as pricing and cost savings initiatives
For 2012, we favor beverage companies with a more diversified
portfolio mix and opportunities to expand
Highest conviction stocks are AmBev and FEMSA due to their
leading domestic presence and expansionary efforts
US
W orld
Mexico
Brazil
Lat am
avg.
Pricing actions
GDP CPI
Despite the weak global macroeconomic
environment, beverage companies have raised Source: HSBC estimates
38
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December 2011
39
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December 2011
Education
Industry seems oversold and could rebound in 2012
Key themes for 2012 include increasing scrutiny from regulators to
ensure quality of education, and more M&A activity and its impact
Our highest conviction stock in the industry is Anhanguera due to
highest potential returns under our most stringent stress test
Even with positive prospects for 2012, the three Education industry looks oversold relative to its past
performance and Ibovespa
education stocks in our coverage have
underperformed the Bovespa on average by c15.7% 115 AEDU3 ESTC3
KROT11 IBOV
105
y-t-d. The industry appears oversold, trading at 7.4x
95
EV/EBITDA for 2012e, after trading at a one-year 85
forward multiple of 16.2x in January 2011. 75
65
We believe the 16.2x multiple at the start of the 55
year was too optimistic but also believe that the 45
35
current 7.4x is too pessimistic. Moreover, we do
Jan-11
Mar-11
Jul-11
Sep-11
May-11
Nov-11
40
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December 2011
41
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December 2011
Food products
We expect domestic consumption across Latin America to be
resilient to slower GDP growth expectations in the region
We prefer companies with a well-diversified product mix and those
with dominant domestic market share and solid pricing power
Our highest conviction stocks are Alicorp, a diversified Peruvian
consumer goods company, and Brasil Foods, the dominant Latin
American food company
Pedro Herrera
2012 outlook Investment themes Analyst
HSBC Securities (USA) Inc.
Solid domestic consumption Market share and pricing power +1 212 525 5126
[email protected]
We expect strong consumption driven by resilient We believe that companies with dominant
Diego Maia*
domestic economies, rising personal income domestic market shares and solid pricing power Analyst
HSBC Bank Brasil S.A.
levels and high consumer confidence. Domestic will outperform. These companies have been able +5511 3371 8192
to pass on most of the 2011 input cost pressures [email protected]
consumption should outperform 2012 GDP
growth in most Latin American countries. via price increases and thus will benefit the most Ravi Jain
Analyst
Outperformers include Mexico (5.1% in 2012 as costs soften and prices remain in place. HSBC Securities (USA) Inc.
+1 212 525 3442
consumption vs 3.4% GDP growth), Brazil (4.3% [email protected]
Geographic and product diversification
vs 3.7% GDP growth), Argentina (6.3% vs 5% *Employed by a non-US
We like companies with a higher exposure to affiliate of HSBC Securities
GDP growth), and Colombia (4.6% vs 4.2% GDP (USA) Inc, and is not
processed products as they produce stronger registered/qualified pursuant
growth). Consumption trends in Peru should also
margins. Product and geographic diversification to FINRA regulations
be solid 4.7%).
helps reduce operating risks. We prefer companies
Alleviation of input cost pressures with solid exposure to emerging markets as
We see some of the challenges faced by our food
Latam food industry: 2012e EBITDA margin vs EV/EBITDA
companies in 2011 softening in 2012. While we
11
might see softer demand from developed Nutresa
10
countries due to the lingering effects of the
9
financial crisis (in the US and Europe), we expect JBS
BRF
EV/EBITDA
8
emerging market economies to provide ample Marfrig Bimbo
7
opportunities for companies to grow. Input costs
6 Alicorp
(grains and other soft commodities) are mostly on Gruma
5 Minerv a
a downward trend, as global supplies improve
4
(except corn, where the stock-to-use ratio remains
5% 8% 11% 14% 17%
low at 14% vs the 18% historical average). EBITDA margin
Source: HSBC estimates
42
Equities
Latin America abc
December 2011
demand in these regions remain robust. Note that The company enjoys a dominant market share
about c70-75% of BRF exports are directed to position in Peru, with over c50% share in many of
emerging markets. its product segments (mayonnaise 95%, soaps
81%, animal nutrition 70%). The company
Industry valuation metrics
produces solid EBITDA margins (13-16% range)
In addition to metrics such as EV/EBITDA and and ROIC (18% in 2012) and expects to reach
PE, we also suggest investors focus on company USD2.5bn in revenues by 2015 (from USD1.3bn
free cash flows and net debt to EBITDA. Many in 2010). The stock is relatively inexpensive at
companies, especially in the proteins industry, are 6.6x 2012e EV/EBITDA.
highly leveraged (except BRF). As a result, it is
important to focus on net debt to EBITDA, debt
Brasil Foods, TP BRL42, OW
equity, and current ratios. In addition, we suggest Brasil Foods is our preferred play in the Brazilian
investors focus on free cash flow generation, net proteins industry. Domestically we see the
margins, and, ultimately, dividend yields. We company benefiting from strong pricing power
expect companies such as Alicorp and Brasil and robust demand for processed products while
Foods to continue generating solid free cash internationally we expect the company to continue
flows, paying strong dividends (relative to peers) its aggressive expansion strategy. BRF recently
and generally outperforming the industry. doubled its synergy guidance from the merger
with Sadia to BRL1bn by the end of 2013.
Highest conviction stocks
The company’s long-term plan contemplates
Alicorp, TP PEN8, OW achieving BRL50bn in net sales by 2015 (double
We view Alicorp as an attractive vehicle for 2011e). International expansion will be focused
investors to participate in Peru’s strong economic on processed products and primarily in emerging
fundamentals and consumption growth, as well as markets such as the Middle East, Latin America,
that of the Latin American region in general as the China, and Japan. We believe the company is
company expands internationally. The company successfully transforming itself into a dominant
has and will continue to benefit from the global food company and become more
increasing purchasing power and economic well- comparable to the Nestles, Kelloggs, and Krafts of
being of the lower segments of Peru’s population. the world versus smaller regional protein players.
43
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December 2011
Food retailing
Ample growth opportunity for food retailers in Brazil and Mexico
Rising income drives higher-margin product demand
Walmex’s high returns and GPA’s leading market position make
them our highest conviction stocks
and 2012. 3
2
The chart at right ranks the food retailers in our SSS
1
Sales Growth
44
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December 2011
45
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December 2011
Consumer & retail: Valuations and risks for our highest conviction stocks
Name/ticker Rating Valuation Risks
We use a DCF methodology to value Cosan SA including a terminal growth rate of 3% Risks include minority dilution as part of a share structure
and a WACC of 9.5%. Based on these metrics, we arrive at our 12-month target price simplification process, a fall in sugar prices from strong
for CSAN3 shares of BRL34. Using the HSBC currency team’s end-fiscal 1H13 production in countries such as India, lower demand for
(September 2012) FX forecast of BRL1.65/USD and CZZ’s 62.3% stake in Cosan SA, hydrous ethanol from a potential cut in gasoline prices in
Cosan,
OW we arrive at a value of USD19.20 per CZZ share. To that we apply a 10% holding Brazil, and integration risks associated with the Shell.
CSAN3, CZZ company discount and assign a USD17 target price to the CZZ shares. Under our
research model, for stocks without a volatility indicator, the Neutral band is 5ppts above
and below the hurdle rate for Brazilian stocks of 11.5%. Our target price of BRL34 on
the CSAN3 shares implies a potential return of 29.1%, above the Neutral band.
We value BrasilAgro using a sum-of-the-parts methodology: cash flows from agricultural Downside risks include potential extreme climatic variations
operations and appraisal of the farmland portfolio. We value grain operations using a affecting grain production, volatility of grain prices and the
DCF analysis (10.9% WACC). To value the farms, we use a combination of farm sales in BRL, international trade issues, potential disruptions in land
BrasilAgro, the region, Informa Economics FNP data, and an independent valuation by Deloitte. We acquisition processes, and potential restrictions on
OW
AGRO3 then apply a 15% liquidity discount factor to arrive at our 12-month target price for farmland ownership by foreign investors.
AGRO3 shares of BRL16. Under our research model, for stocks with a volatility indicator,
the Neutral band is 5ppts above and below the hurdle rate for Brazilian stocks of 11.5%.
Our target price of BRL16 implies a potential return of 79.8%, above the Neutral band.
We derive our BRL46 target prince on Hering shares by applying a 22x PE multiple on Downside risks include a sharp increase in Brazilian
our 2012e EPS of BRL2.29. We derive our target PE multiple from our ROE-to-PE interest rates, problems with execution and brand-name
model. We apply the PE formula, PE = (ROE – g)/ROE*(kg), where g = the long-term expansion, and increasing competition.
growth rate of earnings, and k = the cost of equity. We estimate Hering’s cost of equity
at 12.5%, and we forecast 2011 ROE of 46%. Our 22x target PE multiple implies an
Cia Hering, 8.9% long-term earnings growth rate for Hering and represents a 15% discount to the
OW(V)
HGTX3 target multiple we apply on Renner shares. It represents a 5% premium to the multiple
we apply on Marisa shares, given that HGTX3 is in the MSCI Brazil index. Under our
research model, for stocks with a volatility indicator, the Neutral band is 10ppts above
and below our hurdle rate for Brazilian stocks of 11.5%. Our target price currently
implies a potential return of c20%, including a dividend yield of 1.2%. At the time we set
our target price, the potential return was above the Neutral band.
We derive our MXN39 target price on Genomma shares by applying a 22x multiple on our Risks to the downside include slower-than-expected
2012e EPS of MXN1.77. We derive our target multiple of 22x by applying the following branded generics growth in Mexico, and risks associated
formula: PE = (ROE – g)/ROE*(k-g) where g = long-term earnings growth rate, k = the with regulatory issues in new markets, specifically Brazil
cost of equity and ROE = return on equity capital. We estimate Genomma’s cost of equity and Colombia.
Genomma at 11.1%, and we apply our projected 2012 ROE of 33.0%. Given these two inputs, we
OW(V)
Lab, LABB calculate different growth assumptions to arrive at a “fair” multiple. Our target multiple of
22x assumes a long-term earnings growth rate of 7.6%. Under our research model, for
stocks with a volatility indicator, the Neutral band is 10ppts above and below the hurdle
rate for Mexican stocks of 9.5%. Our target price of MXN39 implies a potential return of
38%, including a dividend yield of 1.5%, which is above the Neutral band.
For AmBev ADRs, our 12-month target price of USD40 represents a relative (to an Downside risks, we believe, include weakening consumer
aggregate Brazilian market index, compiled by FactSet) F/PE multiple of 1.8x, and 13.5x sentiment, increased competition and loss of share in the
AmBev, 2012e EV/EBITDA multiple. Under our research model, for stocks without a volatility Brazilian beer market, steeper price discounting in Canada,
OW
ABV indicator, the Neutral band is 5ppts above and below our hurdle rate for Brazilian stocks and increasing raw material costs.
of 11.5%. Our target price implies a potential return, including a 2.9% dividend yield, of
23.5%, which is above the Neutral band.
Our USD78 target price on FEMSA shares represents an F/PE multiple, relative to an Downside risks that we see include weakening
aggregate Mexican market index compiled by FactSet, of 1.3x for 2012e, and a 9.5x consumption trends, particularly in Mexico, increased
FEMSA, 2012e EV/EBITDA multiple. Under our research model, for stocks without a volatility competition, rising input costs, and the inability to open
OW
FMX indicator, the Neutral band is 5ppt around our hurdle rate for Mexican stocks of 9.5%. Oxxo stores at the anticipated rate.
Our target price implies a potential return, including a 1.8% dividend yield, of 21.6%,
which is above the Neutral band.
We use a USD-based WACC of 11.5% and a perpetuity growth rate of 4.5%. Under our Downside risks include lower-than-expected admissions and
Anhanguera, research model, for stocks without a volatility indicator, the Neutral band is 5ppt above higher-than-expected outflow of students, leading campuses
OW
AEDU3 and below the hurdle rate for Brazilian stocks of 11.5%. Our target price of BRL35 to mature with lower-than-expected average enrollments and
implies a potential return of 117.4%, above the Neutral band. higher-than-expected short-term margin deterioration.
OW = Overweight, N = Neutral, UW = Underweight; V = Volatile. Potential return equals the percentage difference between the current share price and the target price, including the forecast dividend yield when indicated.
Source: HSBC estimates, Bloomberg, Reuters Thompson
46
Equities
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December 2011
We value Alicorp using a DCF methodology. We assume 11% for Peru cost of equity, Downside risks are higher commodity prices, deterioration
10% cost of debt, 15:85 debt-to-equity ratio, and 4% terminal growth rate, leading to a of the Peruvian economy, political risks from the new
Alicorp, 9.5% WACC. Based on these metrics, we have a 12-month target price of PEN8 on the administration, and FX volatility.
OW
ALICORC1 ALICORC1 shares. Under our research model, for stocks with a volatility indicator, the
Neutral band is 5ppts above and below the hurdle rate for Peruvian stocks of 11%. Our
target price of PEN8 implies a potential return of 40.4%, above the Neutral band.
We value Brasil Foods using a 50-50 weighted average DCF valuation (9.9% WACC) Downside risks are slower-than-expected Sadia integration,
Brasil and target EV/EBITDA multiple (10x) to arrive at our BRL42 target price. Using the slower market-share recovery from suspended brands, and
HSBC FX team’s forecast of BRL1.65/USD for end-2012, our BRFS ADR target price is lower-than-expected sale price for the assets/brands to be
Foods, OW
USD25. Under our research model, for stocks with a volatility indicator, the Neutral band divested, higher grain prices, FX volatility, and sanitary
BRFS3 is 5ppts above and below the hurdle rate for Brazilian stocks of 11.5%. Our target price issues.
of BRL42 implies a potential return of 22.1%, above the Neutral band.
We derive our PCAR4 local and CBD ADR target prices by applying a target multiple of Risks include pressure on operating expenses from higher
22x to our consolidated 2012e EPS of BRL4.08 and EPADR of USD2.47. We derive our wages and delays in the store expansion program.
target PE multiple from our ROE-to-PE model. We apply the PE formula, PE = (ROE –
g)/ROE*(kg), where g = the long-term growth rate of earnings, and k = the cost of equity.
Grupo Pão Assuming a 10% growth rate, we arrive at our 22x multiple. Our ADR target price is
based on a local share-to-ADR ratio of 1:1 and an end-2011 BRL/USD exchange rate of
de Açúcar, OW 1.65. Note that GPA’s ROE has been below its cost of equity. Thus, we have to assume
PCAR4/CBD that over time, the company’s ROE will return to more positive levels (we assume 30%) to
have a solution to the model. Under our research model, for stocks without a volatility
indicator, the Neutral band is 5ppts above and below the hurdle rate for Brazilian stocks
of 11.5%. Our target price of BRL90 for PCAR4 (USD54 for CBD) implies a potential
return of 45.7%, including a dividend yield of 0.9%, above the Neutral band.
We derive our MXN41 target price for Walmex shares by applying a target multiple of Risks include expense growth outpacing sales growth and
26.5x to our 2012e EPS of MXN1.54. We derive our target PE multiple from our ROE-to- slower-than-expected turnaround in Central America.
PE model. We apply the PE formula, PE = (ROE – g)/ROE*(kg), where g = the long-term
Wal-Mart de growth rate of earnings, and k = the cost of equity. Our target multiple is based on a
Mexico, OW historical average PE and is supported by our PE to ROE model implying a 9.1% long-
WALMEXV term earnings growth rate and a 19.8% ROE that we forecast for 2012. Under our
research model, for stocks without a volatility indicator, the Neutral band is 5ppts above
and below the hurdle rate for Mexican stocks of 9.5%. Our target price of MXN41 implies
a potential return of 17.8%, including a dividend yield of 1.2%, above the Neutral band.
OW = Overweight, N = Neutral, UW = Underweight; V = Volatile. Potential return equals the percentage difference between the current share price and the target price, including the forecast dividend yield when indicated.
Source: HSBC estimates, Bloomberg, Reuters Thompson
47
Equities
Latin America abc
December 2011
48
Equities
Latin America abc
December 2011
Financials
49
Equities
Latin America abc
December 2011
Banks, Brazil
GDP growth slowdown to impact revenues and credit quality
Winners to show single-digit opex growth and minimal margin
erosion
Highest conviction stocks are deep value Banco do Brasil and
premium ROE Itaú Unibanco
2012 outlook Banco do Brasil is executing well on cost control, Victor Galliano
Analyst
and management aims to keep opex growth at 9- HSBC Securities (USA), Inc.
A tougher growth outlook +1 212 525 5253
10% for 2012; Itaú Unibanco, after some headwinds [email protected]
Our HSBC economists forecast Brazil GDP growth
in 1H 2011, delivered q-o-q opex growth in 3Q 2011
Mariel Santiago
of 3% for 2011 and 3.7% for 2012. The soft GDP
of 3% and management expects 2012 opex growth Analyst
growth implies slower loan growth forecasts. HSBC Securities (USA), Inc.
to be c9%. In contrast, we forecast Bradesco 2012 +1 212 525 5418
Nonetheless, we believe that the bigger risks lie with [email protected]
opex growth at 11%+; it continues to invest,
margin and spread pressure, given the high
especially in the case of mini-branches, in an effort
likelihood of further monetary easing, as well as the
to compensate for the loss of the 6,000+ Banco
changing loan mix. Our HSBC economists forecast
Postal franchise outlets, and also in the IT program.
the Selic rate at 11% by 2011-end and 9.5% by
Santander Brasil has now accrued much of the
2012-end. We see more corporate-driven loan
merger-related saving costs, so opex growth is likely
growth, as infrastructure credit picks up consumer
to accelerate into 2012.
slack due to the economic slowdown. Slower growth
could result in worsening credit quality, but we Margin erosion is likely to be a challenge for the
believe that there are also mitigating factors at work, banks, given lower benchmark rates and the
in the form of lower lending rates and better quality changing loan mix. Nonetheless, we should see
data from the credit bureau. some near-term offset in the form of lower domestic
funding costs, as individual credit is fixed-rate with
Investment themes 45% of individual system loans maturing in less than
Opex control and margin erosion one year. A significant worsening of credit quality
According to Febraban, the private banks would be a risk to our scenario, potentially due to
association, consensus estimates for system loan Banco do Brasil PBV ratio discount*: As wide as it has been
growth are 17.1% for 2011, slowing to 15.5% for 50%
2-Jan-07
2-Jan-08
2-Jan-09
2-Jan-10
2-Jan-11
- 10%
will have lesser ROE pressures in 2012.
Source: Datastream, HSBC. *Relative to Bradesco and Itaú Unibanco
50
Equities
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December 2011
weaker GDP growth, as this would imply higher Unibanco (21.1%) from 2011-2013e, and yet it
provisions and hurt the earnings outlook. trades at a c40% discount to the big two private
banks in PBV ratio terms, and at a 30% discount to
Industry valuation metrics
their average 2012e PE multiple. We believe there
We value Latam banks based on an implied PE is excessive political risk premium baked into
valuation metric. We estimate that the big cap Brazil Banco do Brasil’s valuations.
banks have traded in forward PE terms that range
from 5x to 15x over the last four years.
Banco Itaú Unibanco, TP BRL41, OW
Banco Itaú Unibanco is set to remain the top Brazil
Highest conviction stocks bank ROE generator, in our view, estimated at
Banco do Brasil, TP BRL34, OW 21.3% for 2012. We believe that Itaú Unibanco can,
We see Banco do Brasil as our top story in big-cap thanks to its opex control, deal with a potential
banks with its solid cost and premium credit quality softening of revenue growth. Also, we see Itaú
as key supports in a tougher margin and softer loan Unibanco as the big cap Brazil bank that is most
growth climate. On the revenue side, Banco do likely to see the credit quality cycle turn first; its
Brasil should see less attrition in terms of margin as lower NPL coverage of 135% compared to Bradesco
it has a more defensive credit mix, and we believe (160%) and Banco do Brasil (183%) is less of a risk.
that the Banco Postal franchise acquisition will help Itaú Unibanco trades in line with Bradesco in terms
with cost control, by substituting for organic growth. of its 2012e PBV ratio of 1.7x and at a 10% discount
Banco do Brasil’s 3Q 2011 NPL ratio is a low 2.5% based on its 2012e PE multiple of 8.5x, yet we
as it benefits from the positive agribusiness cycle expect Itaú Unibanco’s ROE to better Bradesco’s in
that should counter worsening consumer credit 2012 by 130bp, due to Itaú’s better prospects for cost
quality, and its 183% NPL coverage. control, which should drive its re-rating. Versus its
We see Banco do Brasil as the Brazil banks’ deep own history, Itaú Unibanco is attractive value; only
value play on a 2012e PBV ratio of 1x. We estimate since July 2011 has it traded below its forward PE of
that Banco do Brasil should deliver ROE, on 10x. Prior to this, it last traded on a single-digit-
average, that is only 10% lower than that of the forward PE multiple in March 2009.
average ROE for Bradesco (20.2%) and Itaú For valuation and risks, please see page 58.
Price (BRL) Market cap Target ______ PE ______ ______ PBV _____ ______ ROE _____ PEG
Brazilian banks 11/29/11 BRLm Ticker Rating price (BRL) 2011e 2012e 2011e 2012e 2011e 2012e 2010-13e
Bradesco 28.3 109,038 BBDC4 N 36.0 9.7 9.1 1.9 1.7 21.6% 20.0% 1.11
Itaú Unibanco 30.1 136,901 ITUB4 OW 41.0 9.7 8.5 2.0 1.7 21.8% 21.3% 0.77
Banco do Brasil 23.2 67,513 BBAS3 OW 34.0 6.0 5.9 1.1 1.0 20.3% 18.2% 1.80
Santander Brasil 13.2 50,166 SANB11 N 18.0 6.6 6.5 0.6 0.6 10.1% 9.7% 2.00
Weighted average large caps 8.6 7.9 1.6 1.4 19.7% 18.6% 1.21
Mexican banks 11/29/11 MXNm Ticker Rating MXN 2011e 2012e 2011e 2012e 2011e 2012e PEG
Grupo Financiero Banorte 43.9 101,546 GFNORTE OW 60.0 11.4 9.0 1.5 1.3 15.4% 15.2% 0.40
Financiera Independencia 6.8 4,932 FINDEP N 7.0 33.9 10.9 1.7 1.5 7.0% 14.3% 2.20
Compartamos 17.9 28,910 COMPARC OW 25.0 14.6 11.2 4.6 3.7 32.3% 33.5% 0.82
WA Mexican banks 12.9 9.6 2.1 1.8 18.8% 19.1% 0.23
Other LatAm 11/29/11 USDm Ticker Rating USD 2011e 2012e 2011e 2012e 2011e 2012e PEG
Bancolombia (Colombia) 56.1 7,188 CIB N 65.0 13.2 10.7 2.3 2.0 17.8% 19.9% 0.94
Credicorp (Peru) 104.5 8,226 BAP UW 106.0 12.6 11.2 2.6 2.2 21.9% 21.7% 1.58
WA Other LatAm 12.9 11.0 2.5 2.1 19.5% 20.6% 0.46
HSBC ratings: OW = Overweight, N = Neutral, UW = Underweight. V = Volatile (see Disclosure appendix definitions). Source: HSBC estimates, Bloomberg, Reuters Thompson, FactSet (prices as of close of 11/29/2011)
51
Equities
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December 2011
Banks, ex-Brazil
Solid GDP growth a boost to loan growth
Stable near-term benchmark rates supportive for bank margins
Highest conviction stocks are high-growth, OW-rated GF Banorte
in Mexico, and lower-growth, UW-rated Credicorp in Peru
Victor Galliano
2012 outlook Investment themes Analyst
HSBC Securities (USA), Inc.
More robust growth scenario Less dovish on rates, credit quality +1 212 525 5253
[email protected]
Mexico Mexico
Mariel Santiago
HSBC economists forecast GDP growth of 3.7% Our less-dovish view on Mexican benchmark Analyst
HSBC Securities (USA), Inc.
for 2011 and 3.4% for 2012. Our better-than- rates vs consensus impacts banks, and especially +1 212 525 5418
GFNorte, due to the asset sensitivity of banks’ [email protected]
consensus Mexico GDP growth forecasts,
combined with the weaker MXN/USD rate, which balance sheets; in essence, higher benchmark rates
is potentially inflationary, adds weight to HSBC result in margin expansion.
economists’ view that Banxico should keep the
GDP growth – and by extension loan growth –
Fondeo rate at 4.5% until tightening in 1Q 2013.
should benefit from 2012’s being an election year in
We expect stable Mexican asset quality going Mexico. Our Mexico economics and strategy team
forward due to improvement in the corporate and estimates that the election effect could add150bp to
consumer segments seen in September, despite a GDP growth in 2012. Total system loan growth was
slight deterioration in system NPL ratio, largely 12.5% y-o-y to August 2011, and we expect this to
attributable to state and municipal debt exposures. accelerate to 15-16% by 2011-end.
At August-end, the system NPL ratio was 2.7%.
Peru
We do not see systemic risk in these government
Like Mexico, Peruvian banks are asset-sensitive
– state and municipal – debt exposures.
and our expectations for a loosening of monetary
Peru policy in 1Q 2012 is likely to put pressure on
HSBC economists forecast GDP growth of 6.4%
Banorte currently trading at 33% PTBV discount to
in 2011 for Peru, slowing to 5.3% in 2012, and Bancolombia and Credicorp
that benchmark rates should be cut by 50bp in 1Q 5.00
2.00
further details on Peru’s economic outlook.
1.00
-
Jul-08
Jul-09
Jul-05
Jul-06
Jul-07
Jul-10
Jan-11
Jul-11
Jan-06
Jan-07
Jan-08
Jan-09
Jan-10
52
Equities
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December 2011
margins. Nonetheless, there should be some offset On estimated PE multiples of 11.4x for 2011 and
from system loan growth, which should continue 9x for 2012, we view GFNorte as a “growth at
to be in the high teens for 2011 and 2012. reasonable price” (GARP) share – as reflected in
the attractive PEG ratio of 0.42x – with expanding
Industry valuation metrics
returns in terms of ROTE. We believe that market
We value Latam banks based on an implied PE concerns on government debt exposure should
valuation metric. We estimate that the big cap ex- fade, along with those of further Fondeo rate cuts,
Brazil banks have traded in forward PE terms that and confidence in the bull story should build as
range from 5x to 18x over the last four years. the synergy gains accrue.
Price (MXN) Market cap Target _____ PE _______ ______ PBV_______ _____ ROE_______ PEG
Mexican banks 11/29/11 MXNm Ticker Rating price (MXN) 2011e 2012e 2011e 2012e 2011e 2012e 2010-13e
Grupo Financiero Banorte 43.9 101,546 GFNORTE OW 60.0 11.4 9.0 1.5 1.3 15.4% 15.2% 0.40
Financiera Independencia 6.8 4,932 FINDEP N 7.0 33.9 10.9 1.7 1.5 7.0% 14.3% 2.20
Compartamos 17.9 28,910 COMPARC OW 25.0 14.6 11.2 4.6 3.7 32.3% 33.5% 0.82
WA Mexican banks 12.9 9.6 2.1 1.8 18.7% 19.0% 0.24
Other LatAm 11/29/11 USDm Ticker Rating USD 2011e 2012e 2011e 2012e 2011e 2012e PEG
Bancolombia (Colombia) 56.1 7,188 CIB N 65.0 13.2 10.7 2.3 2.0 17.8% 19.9% 0.94
Credicorp (Peru) 104.5 8,226 BAP UW 106.0 12.6 11.2 2.6 2.2 21.9% 21.7% 1.58
WA Other LatAm 12.9 11.0 2.5 2.1 19.5% 20.6% 0.46
HSBC ratings: OW = Overweight, N = Neutral, UW = Underweight. V = Volatile (see Disclosure appendix definitions)
Source: HSBC estimates, Bloomberg, Reuters Thompson, FactSet (prices as of close of 11/29/2011)
53
Equities
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December 2011
Diversified financials
Overblown fears of competition are re-emerging for acquirers and
BVMF; BRIN continues to consolidate industry
Key themes for 2012 are competition and technology upgrades
with a pinch of economic deceleration thrown in
Highest conviction stocks are Redecard due to improved margins
and resilient growth and Cetip due to investment needs in Brazil
2012 outlook trading module for equities and integration of Paulo Ribeiro
Analyst
clearing systems with an estimated capex of HSBC Securities (USA) Inc.
One overarching theme for diversified financial +1 212 525 4430
BRL240m. The acquirers are focusing on [email protected]
names in Brazil in 2012 is new entrants and
lowering cost per transaction and expanding
competition. This is reminiscent of early 2011/late
product offering (such as for small transactions
2010, when the announcement by BATS that it
and contactless payments). Cetip continues to
would offer an alternative exchange drove BVMF
strengthen its collateral management business and
shares down, and concerns over price erosion for
to develop a mortgage-registration product. Brasil
Redecard and Cielo weighed on those stocks. Just
Insurance is improving monitoring and integration
as the market seems to have come to terms with
of its increasing broker base and developing better
the idea that the Brazilian market for card
quote screens for insurance products.
acquirers and exchanges would not become nearly
as fragmented and prices as compressed as in the Investment themes
US, a recent flow of negative news flow rekindles
We factored in increasing competition in our
old fears. For Brasil Insurance, with a full-year
valuation for the acquirers and BVMF and still we
track record under its belt since its IPO, the focus
see plenty of potential for those names. We see
will continue to be on the company’s ability to
the acquirers losing 5% market share to
deliver on accretive acquisitions. For Cetip,
Santander-GetNet in 2012 and new entrants. For
competition is limited to OTC derivatives (4.9%
BVMF, we expect a new exchange could be fully
of revenues), where its dominant 75% market
operational in Brazil by 2014. We believe the
share could face a fiercer challenge from an
upgraded platform at BVMF (25% share). Card transaction is consistent regardless of changes in retail
sales – card growth has small correlation with retail growth
Technology upgrades are another central theme 30%
0%
0% 4% 8% 12% 16%
Retail Sales growth YoY
54
Source: Bloomberg, Company data, HSBC Quarterly data used from 4Q07 to 3Q11
Equities
Latin America abc
December 2011
market is repeating the pattern we saw earlier this 2012 – 95% for RDCD, 70% for Cielo and BRIN,
year – castigate the stocks first and ask questions and 50% for Cetip (as allowed by debt covenants).
afterwards. In both cases, the shares took a
Industry valuation metrics
beating as the news flow about competition
emerged only to recover later as things were not We use an eight-year discounted cash flow, with a
as bad as they first appeared. terminal growth rate of 4% and a cost of equity
appropriate for each stock. Multiple comparisons
We recognize that the threat to BVMF from
are, at best, an imperfect exercise as there are only
Direct Edge is now more serious than from
one or two companies in each subsector.
BATS. But we also think that structural
differences in Brazil and the US where Direct Highest conviction stocks
Edge operates could significantly delay its launch Redecard, TP BRL39, OW
(announced for 4Q12) and limit its ability to gain
Share price appreciation should come from higher
market share. For the acquirers, the potential
EPS and PE expansion. In turn, EPS expansion is
negative impact of new entrants is significantly
based on continued volume growth (albeit lower
less, in our opinion, than when Redecard and
in 2012 than in 2011) and stronger pricing power,
Cielo started to compete directly in mid-2010.
and, most important, on improved operating
The central investment case for the diversified efficiency. Our 2012e EPS of BRL2.46 is 18%
financials – acquirers, exchanges, or insurance above consensus. We expect new competitors to
brokerage – is growth. Card transactions’ be niche players and price-takers in terms of
performance has been resilient (but not immune) to merchant discount rates. For more details, please
fluctuations to GDP, credit growth interest rate, refer to our note published on 14 November 2011.
nonperforming loans, retail sales, or even private
Cetip, TP BRL30.85, OW
consumption patterns over the last 10 years. Equity
and derivatives trading volumes at BVMF are more Given the substantial financing needs for investment
susceptible to a deceleration in the Brazilian and infrastructure in Brazil, we expect Cetip to
economy and concerns over the global scenario. For benefit from private companies’ raising capital and
Cetip, growth in the securities segment has been the use of more structured financial products. For
fairly steady over the years but the GRV acquisition 2012, the deepening of the financial markets and
in December 2010 added exposure to the more substantial investment needs in Brazil are the main
cyclical auto financing business. growth drivers. The company’s future strategy is to
migrate from a registration center to a liquidity pool
Another investment positive is the relatively high of assets held in custody.
dividend payout. These diversified financials are
strong cash generators with low capex For valuation and risks, please see page 58.
requirements allowing for high payout ratios in
55
Equities
Latin America abc
December 2011
Real estate
Homebuilders seek cash generation while brokers and mall
operators continue to consolidate
Key themes for 2012 are mortgage availability, acquisition prices
for malls, and broker expansion into secondary market
Highest conviction stocks: PDG due to cheap valuation and
expected margin recovery; BR Brokers due to large PE discount
enough to support the industry by 2014. We expect On the Brazilian malls front, we expect new
operational funding costs to increase by around greenfield and expansion project announcements
250bp by 2014 as banks will have to dig into their and strong same-store rent performance to
free resources to continue sector lending. continue driving share performance. Cap rates for
acquisitions should be monitored closely, as we
Investment themes
saw a significant compression last year. As for the
Shifting from growth to value brokers, we expect BR Brokers to lead the
Homebuilders under our coverage are all focused consolidation trend in 2012, and to explore
on generating free cash flow. The fastest way to numerous opportunities in the still-fragmented
generate cash in this business is to decrease Brazilian secondary market.
growth levels, completing the long real estate
PDG margin recovery and cash flow boosting 2012e ROE
cycle without re-investing profits. We expect
17.9%
2012 to be key for Brazilian homebuilders if they 14.7%
16.3%
56
Equities
Latin America abc
December 2011
57
Equities
Latin America abc
December 2011
We value Itaú Unibanco based on implied PE as our core valuation methodology, as we Risks to the downside include poorer-than-expected GDP
believe this best captures both growth potential and return on capital (ROE). The growth, resulting in slower-than-expected asset quality
implied – or target – PE multiple is defined as ROE less long-term growth (ROE-g) deterioration and thus greater charges for loan losses
Itaú divided by ROE times cost of capital less long-term growth (k-g). We assume ROE of against earnings; synergy gains and economic of scale,
21.3% for 2012e and cost of capital of 12.11%, with an assumed stock beta of 1.04, both in terms of banking and insurance businesses, falling
Unibanco, OW
medium-term (2010-2013e) EPS growth of 12.5%pa, and long-term (2014-2017e) EPS short of expectations; and the bank’s net interest margins
ITUB4 growth of 5.75%. Based on an implied PE of 11.5x for 2012, we arrived at our 12-month and spreads coming under greater pressure than expected.
target price of BRL41. Under our research model, for stocks without a volatility indicator,
the Neutral band is 5ppts above and below the hurdle rate for Brazilian stocks of 11.5%.
Our target price of BRL41 implies a potential return of 36.2%, above the Neutral band.
We value Banco do Brasil based on implied PE as our core valuation methodology, as Risks to the downside include worse-than-expected asset
we believe this best captures both growth potential and return on capital (ROE). The quality leading to higher provisioning and lower earnings;
implied – or target – PE multiple is defined as ROE less long-term growth (ROE-g) greater-than-expected margin pressure from a poorer loan
Banco do divided by ROE times cost of capital less long-term growth (k-g). We assume ROE of mix and political pressures; and weaker loan growth than
18.2% for 2012e and cost of capital of 12.4%, with an assumed stock beta of 1.12, our expectations.
Brasil, OW
medium term (2010-2013e) EPS growth of 3.3%pa, and long-term (2013e-2017e) EPS
BBAS3 growth of 2.25%. Based on an implied PE of 8.7x for 2012, we arrived at a target price
of BRL34. Under our research model, for stocks without a volatility indicator, the Neutral
band is 5ppts above and below the hurdle rate for Brazilian stocks of 11.5%. Our target
price of BRL34 implies a potential return of 46.6%, above the Neutral band.
We apply our core valuation methodology of implied PE, as we believe this best Risks to the downside include worse-than-expected asset
captures both growth potential and return on capital (ROE). The implied – or target – PE quality, especially in the SME portfolio, requiring greater
multiple is defined as ROE less long-term growth (ROE-g) divided by ROE times cost of loan-loss charges against the income statement; flat or
Grupo capital less long-term growth (k-g). We assume ROE of 15.24% for 2012e and cost of weaker net interest margins; higher-than-anticipated
Financiero OW
capital of 11.14%, with an assumed stock beta of 1.03, medium-term (2010-2013e) EPS operating costs and funding expenses, due to greater
Banorte, growth of 28.6%, and long-term (2013e-2017e) EPS growth of 6.5%. Based on an competition for funding, and lower than-expected synergies
GFNORTEO implied PE of 12.3x for 2012, we arrive at a target price of MXN60. Under our research from the Ixe merger.
model, for stocks without a volatility indicator, the Neutral band is 5ppts above and
below the hurdle rate for Mexican stocks of 9.5%. Our target price of BRL60 implies a
potential return of 36.7%, above the Neutral band.
We use implied PE as our core valuation methodology, as we believe this best captures Upside risks are faster-than-expected loan growth, higher-
both growth potential and return on capital (ROE). The implied – or target – PE multiple than-expected interest margins, and a lower-than-expected
is defined as ROE less long-term growth (ROE-g) divided by ROE times cost of capital NPL ratio.
less long-term growth (k-g). We assume ROE of 21.7% for 2012e and cost of capital of
Credicorp; 11.4%, with an assumed stock beta of 0.98, medium-term (2010-2013e) EPS growth of
UW
BAP 8%pa, and long-term (2013e-2017e) EPS growth of 4.5%pa. Based on an implied PE of
11.3x for 2012, we arrive at a target price of USD106. Under our research model, for
stocks without a volatility indicator, the Neutral band is 5ppts above and below the
hurdle rate for Peruvian stocks of 11%. Our target price of USD106 implies a potential
return of 1.9%, below the Neutral band.
OW = Overweight, N = Neutral, UW = Underweight; V = Volatile. Potential return equals the percentage difference between the current share price and the target price, including the forecast dividend yield when indicated.
Source: HSBC estimates, Bloomberg, Reuters Thompson
58
Equities
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December 2011
We calculate an end-2012 target price for RDCD3 of BRL39.0, primarily through an Risks include possible regulatory actions that are
eight-year discounted cash flow model with cost of equity of 12.6% and long-term detrimental to one or more of Redecard’s business lines,
growth rate of 4.0%. Under our research model, for stocks without a volatility indicator, CEF moves more to Cielo as it starts to issue Elo cards,
the Neutral band is 5ppts above and below the hurdle rate for Brazilian stocks of 11.5%. stronger-than-expected competition (including lower MDR
Redecard, Our target price of BRL39 implies a potential return of 32.9%, above the Neutral band. and less market share gain of Visa transactions), a faster
OW
RDCD3 decline in the contribution of “discount receivables” than we
expect, a steeper decline in average number of POS per
merchant than we forecast, economic turmoil in Brazil,
which could impact consumption patterns materially, and
the development of alternative payment networks.
We calculate our mid-2012 target price of BRL31 for CTIP3 shares, primarily through a Downside risks include possible regulatory action that is
discounted cash flow model, with cost equity of 12.1%. A PE multiples comparison detrimental to Cetip, in particular any that affects growth of
between Cetip and BM&F Bovespa and other foreign exchanges, as well as Brazilian auto financing; less efficient integration of GRV; economic
CETIP,
OW merchant acquirers and some global credit services companies, serves as a validation to turmoil in Brazil, which could impact consumption and
CTIP3 our DCF calculations. Under our research model, for stocks without a volatility indicator, investment patterns materially, thus hampering growth in
the Neutral band is 5ppts above and below the hurdle rate for Brazilian stocks of 11.5%. private fixed income and OTC derivatives; and development of
Our target price of BRL30.85 implies a potential return of c23%, above the Neutral band. alternative distribution channels for the company’s products.
Brasil Our BRL12.00 target price is based on a 10-year DCF model with an 11% WACC and Downside risks include higher prices for acquisitions,
4% growth in perpetuity. Under our research model, for stocks with a volatility indicator, slower-than-expected integration of subsidiaries, slowdown
Brokers, OW(V)
the Neutral band is 10ppts above and below the hurdle rate for Brazilian stocks of in homebuilder launches, potential overhang on stocks, and
BBRK3 11.5%. Our target price implies a potential return of 97%, above the Neutral band. fiercer competition.
Our BRL14.00 target price is based on a 10-year DCF model with a 13.6% WACC and Downside risks include slower integration of AGRE, margin
PDG Realty, 4% growth in perpetuity. Under our research model, for stocks with a volatility indicator, compression, higher inflation, lack of demand, reduction in
OW(V)
PDG3 the Neutral band is 10ppts above and below the hurdle rate for Brazilian stocks of 11.5%. sales speed, and project delays.
Our target price of BRL14.00 implies a potential return of 117%, above the Neutral band.
OW = Overweight, N = Neutral, UW = Underweight; V = Volatile. Potential return equals the percentage difference between the current share price and the target price, including the forecast dividend yield when indicated.
Source: HSBC estimates, Bloomberg, Reuters Thompson
59
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60
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Healthcare
61
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Healthcare
The increasing penetration of private health and dental insurance
is likely to drive EPS growth in the range of 13-50% y-o-y in 2012
The key themes for 2012 are distribution and pricing power, but
there are also specific issues to monitor
Our highest conviction stock in the industry is OdontoPrev due to
unparalleled distribution and pricing power
2012 outlook We forecast the coverage ratio of dental insurance Luciano Campos*
Analyst
over the population with private health insurance HSBC Bank Brasil S.A.
Increasing demand driven by private + 55 11 3371 8194
to reach 36.0% in 2012. This is equivalent to the [email protected]
health and dental insurance coverage
number of people with dental insurance increasing Caio S. Moscardini*
As we mentioned in our 21 September healthcare Analyst
12% y-o-y to reach 18.2m individuals in 2012.
HSBC Bank Brasil S.A.
report, Beyond the very favorable Brazilian +55 11 3847 5635
demographics, we expect the positive Brazilian We expect the strong industry demand to translate [email protected]
demographics to keep driving growth in 2012. into even stronger earnings growth, in the range of *Employed by a non-US affiliate
of HSBC Securities (USA) Inc,
But, some companies will be better prepared to 13.6-50.5%, as we show in the chart below.
and is not registered/qualified
benefit from market dynamics. Of the companies pursuant to FINRA regulations
Investment themes
we cover, we believe OdontoPrev is best
positioned to benefit from the expected growth The increasing penetration of private insurance is
due to its solid presence in all major regions of the positive for all market players; however,
country. We also like Amil, although it is still performance may differ significantly from one
under-represented in some important regions. On company to another. We believe the following
the other hand, DASA and Fleury will need to themes are likely to drive performance in 2012:
invest in patient service centers openings to OdontoPrev offers the best combination of EPS growth and
dividend payout of the sector
benefit from market demographics. Also, in
regions like Rio de Janeiro, they may close down 1.4 EPS 11 EPS 12 DPS 11 DPS 12
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We use a USD-based WACC of 10.7% and a perpetuity growth rate of 4.5%. Under our Downside risks include lower-than-expected performance
research model, for stocks without a volatility indicator, the Neutral band is 5ppt above from Bradesco channels; higher-than-expected cost of
Odontoprev,
OW and below the hurdle rate for Brazilian stocks of 11.5%. Our target price of BRL33.5 service or inability to increase prices to compensate for
ODPV3 implies a potential return of 40.2%, above the Neutral band. those costs; and a final court decision obligating ODPV to
collect INSS social contribution taxes.
OW = Overweight, N = Neutral, UW = Underweight; V = Volatile. Potential return equals the percentage difference between the current share price and the target price, including the forecast dividend yield when indicated.
Source: HSBC estimates
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Industrials
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GAP
Ara
Geo
U rbi
OMA
Homex
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We are bullish on construction. Yet, negative FCF operators, we use a discounted cash flow
and rich valuation multiples relative to the IPC methodology due to stability and visibility in the
Index are likely to weigh on stock prices. Balance cash flows.
sheet risk is not as important as execution risk.
Highest conviction stocks
Investment themes Cemex, TP USD3.40, UW(V)
Homebuilders should outperform if Cemex shares are expensive on every metric, and
growth prospects improve we think the company is in the hands of its
Homebuilders should be the names that benefit creditors. Stretched financial covenants will be
the most if fears of a credit crunch recede. more difficult to meet as they become stringent
Mortgage eligibility and incentives for banks to every six months. Since banks need bondholders
grow their mortgage portfolio could result in a to cash out, we think that stockholders will carry
richer sales mix. the burden in any debt restructuring scenario.
Expect dilution in the form of more stock being
Two sides of credit exposure
issued and/or higher financial expenses that limit
Except for the Mexican airport operators, the Cemex’s operating gearing.
group has some degree of direct or indirect
exposure to a potential credit crunch scenario. Homex, TP MXN56, OW(V)
Particularly vulnerable is Cemex, the most highly Homex has one of the highest shares of vertical
indebted company (8.4x gross debt to EBITDA at projects in its mix; thus, we see reduced pressure
3Q11). Homex is a special case: renegotiation of on cash flow at its Mexican operations. Contracts
covenants could be a major catalyst. to build and operate jails are accretive – up to
13% of revenues in 2013e. A potential
Industry valuation metrics
renegotiation of covenants could be a major
Because of lower ROE, we think it best to capture catalyst for the stock.
fair value for the homebuilders and Cemex
For valuation and risks, please see page 72.
through target PE multiples. For the airport
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Industrials, Mexico
Mexican industrials have strengthened their market leadership
and expanded product portfolio and geographies
Petrochemicals and chemicals prices near record-high levels;
Mexico’s auto industry is booming; the political cycle in Mexico
should support the continued recovery in domestic consumption
Our highest conviction stocks are Mexichem, an effective
integrator of acquired companies, and Grupo Carso, a retail play
that should benefit from an expected consumption recovery
2012 outlook Mexican auto production and exports at record- Juan Carlos Mateos,* CFA
Mexico Equity Strategist and
high levels should maintain their trend, and Head of Equity Research, Mexico
Industry in good shape HSBC Mexico, S.A.
domestic sales should continue its smooth but
As we highlighted in our 4 November 2011 +52 55 5721 3607
trend upward. [email protected]
report, Mexican Industrials: Full-speed ahead.
Ivan Enriquez*
Ready to continue growing across multiple Attractive revenue and EBITDA growth rates in 2012e and 2013e Analyst
for Mexichem and Carso HSBC Mexico, S.A.
industries, in the aftermath of the 2008-2009 +52 55 5721 2397
____ Revenues______ _____ EBITDA ______
crisis, Mexican industrials under our coverage 2012e 2013e 2012e 2013e [email protected]
*Employed by a non-US affiliate of
achieved stronger operations and larger Alfa 3.6% 9.6% 2.7% 7.7% HSBC Securities (USA) Inc, and
Carso 11.6% 10.0% 13.9% 14.3%
geographic footprints. In our view, they are well Mexichem 15.7% 14.0% 14.8% 12.7%
is not registered/qualified
pursuant to FINRA regulations
equipped to continue delivering positive results in KUO 9.7% 8.0% 2.7% 6.5%
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Transportation, Brazil
Toll road traffic should increase 1.5-1.9x GDP in 2012 and benefit
from higher GDP growth; air travel should be constrained by
better yields and rise 2.9x GDP, lower than the 6.3x in 9M11
Key themes for 2012 include the potential privatization of three
major airports, which will demand BRL19.7bn investments and will
be important for the success of upcoming sports events
Our highest conviction stock is CCR; it is trading at 25.1%
discount to NPV and because of the upside risk from new projects
2012 outlook yields will increase 3% in 2012, leading to a 10% Luciano Campos*
Analyst
increase in RPKs, or 2.9x GDP, a lower elasticity HSBC Bank Brasil S.A.
HSBC’s economics team projects GDP growth of + 55 11 3371 8194
than observed in 9M11. [email protected]
3.7% in 2012, better than the 3.0% for 2011,
which is positive for toll road and air traffic; Investment themes Marcello Günther*
Analyst
however, a potential increase in yields in 4Q11 HSBC Bank Brasil S.A.
New infrastructure projects +55 11 3371 8190
and 2012 should reduce air traffic elasticity to [email protected]
As depicted in the chart below, we have identified
GDP.
*Employed by a non-US affiliate
BRL64.7bn of potential projects in Brazil for the
of HSBC Securities (USA) Inc,
Toll road traffic growth, measured by the next few years. Upcoming sports events, 2014 and is not registered/qualified
pursuant to FINRA regulations
Brazilian Road Concessionaries Association FIFA World Cup and 2016 Olympics, increase the
(ABCR), peaked at 10.4% y-o-y in April 2011 probability that those projects will materialize.
and decelerated to 4.1% in October. In 9M11, the
Growth opportunities: Transport infrastructure investments
ABCR index rose 7.6%, or 2.5x the HSBCe FY11 (BRLbn)
GDP growth, while CCR’s and OHL’s volumes 27.9
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likely to participate in this process. CCR is On the positive side, interest rates are declining
currently evaluating the possibility to enter the and companies are indicating improving yields
airport infrastructure business, by expanding its and further cost-cutting efforts in 4Q11 and 2012.
bylaws and acquiring assets from controlling As a result, we project GOL and TAM’s EBITs to
shareholders, as formally announced by the increase from BRL76m and BRL416m, to
company in late August. In late October, OHL BRL611m and BRL911m in 2012.
announced that its controlling shareholder, OHL
Industry valuation metrics
Concessiones, and AENA International engaged
in a MOU to form a consortium to participate in The toll road industry’s EV/EBITDA is currently
the auctions. at 6.8x and PE is at 12.4x for 2012. The
predictability of earnings in this industry typically
Contradicting moving parts for airlines translates into stable multiples.
Operating performance for airlines is hard to
estimate given the influence of externalities (e.g., TAM and GOL’s 2012e average adjusted
oil prices, FX and competition), which are likely EV/EBITDAR is 6.9x. An inability to deliver
to move in opposite directions in 2012, reducing earnings growth proportional to the strong
the confidence on the accuracy of earnings domestic and international demand for air travel
forecasts. in Brazil has been preventing further multiple
expansion.
On the negative front, we have still-high oil prices
and a weaker BRL. WTI interrupted a declining CCR, TP BRL14, OW
trend on October 4 2011, when it reached CCR is our preferred name among the
USD76.1/barrel, and started to rise, reaching transportation companies we cover due to its cash
USD96.8/barrel on November 25 2011. The flow predictability and low risk of potential
exchange rate was down 4.3% y-t-d until 31 negative contract rebalancing arising from capex
August 2011, when it reached BRL1.59/USD and delays. We highlight that our valuation for the
then suddenly spiked, reaching BRL1.91/USD on company does not consider: (1) potential
22 September 2011 and, after a period of high reinvestments in its current portfolio; or (2) new
volatility, BRL1.89/USD on 25 November. As a projects from the potential pipeline of BRL64.7bn
reminder, 40-50% of GOL and TAM’s costs are illustrated in the chart on the previous page. Thus,
exposed to the USD. any accretive development on those fronts would
represent a stock performance catalyst.
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We derive our 12-month target price from our target PE multiple of 6.7x and 2015e EPS Upside risks on the back of short interest near all-time
of USD0.73. The key assumptions in our derived fair value PE are a ROE of 6.5%, cost highs according to NYSE include a waiver of financial
Cemex, of equity of 11.7%, and perpetuity EPS growth of 2.5%. Under our research model, for covenants under financing agreement without major costs
UW(V)
CX stocks with a volatility indicator, the Neutral band is 10ppts above and below the hurdle to stockholders, a material transportation bill in the US, and
rate for Mexican stocks of 9.5%. Our target price of USD3.4 implies a potential return of full payment of assets seized in Venezuela.
-21.3%, which is below the Neutral band.
Our target price is the result of our five-year EPS growth projection of 16.1%, which Downside risks include a prolonged economic slowdown;
results in a 2016e EPS of MXN9.68, by applying a target PE multiple of 9.7x, and depreciation of the MXN against the USD; changes in the
discounted at Homex’s cost of equity of 10.8%. Under our research model, for stocks payment methods used by lenders, which could entail
Homex,
OW(V) with a volatility indicator, the Neutral band is 10ppts above and below the hurdle rate for higher working capital requirements; and higher materials
HOMEX Mexican stocks of 9.5%. Our target price of MXN56 implies a potential return of 112.7%, costs. Also, if Homex does not renegotiate successfully its
which is above the Neutral band. financial covenants, the company could experience lower
growth prospects due to weaker financial flexibility.
Our 12-month target price is derived from our DCF valuation methodology using a Downside risks include a stronger peso (MXN), which could
discount rate of 8.5% and a terminal growth rate of 2.0%. Under our research model, for hurt profitability, given that approximately 75% of
stocks without a volatility indicator, the Neutral band is 5ppts above and below the Mexichem’s revenues are USD-denominated. Mexichem’s
hurdle rate for Mexican stocks of 9.5%. Our MXN60 target price implies a potential exposure to cyclical businesses such as construction,
return of 32.5%, above the Neutral band. infrastructure, and agriculture remains at c70% so economic
MEXICHEM,
OW slowdowns or downturns could negatively impact its growth
MEXCHEM* prospects. Leverage could increase substantially in the short
to medium term given that the company has stated it is
considering building a VCM production facility. Accidents at
mining sites could result in production stoppages, thus
hurting the company’s revenues and profits.
We arrive at our 12-month target price of MXN42 for Carso shares through a two-step Downside risks include a delay in the recovery of domestic
process. First, we utilize our DCF valuation methodology, with a WACC of 7.9% and a consumption and consumer credit, which would likely force
terminal growth rate of 2.5%, which results in a preliminary target price of MXN49 per consumers to postpone purchases of durable goods or to
share. Second, we apply a 15% discount to our DCF valuation to reflect what we view trade down in restaurants. This could hurt profitability at
as low earnings visibility and, potentially, lower investor interest as a result of the stock’s Sanborns and Sears retail stores. The economic recovery in
removal from the IPC index of the Mexican Stock Exchange. Under our research model, the NAFTA region could lose momentum or the region could
for stocks without a volatility indicator, the Neutral band is 5ppts above and below the face a new downturn. Sales in the NAFTA market
Grupo Carso hurdle rate for Mexican stocks of 9.5%. Our target price implies a potential return of accounted for approximately c91% of Carso’s total revenues
OW
GCARSOA1 32.1%, above the Neutral band. in 2010. At CICSA, risks include a decline in public spending
as a result of a deterioration of the Mexican economy;
changes in government policies and delays in tendering for
projects, which would have a negative impact on CICSA’s
financial condition and operations; and competition from
foreign and domestic construction companies could
adversely affect the company’s operations, mostly in the
bidding of industrial and infrastructure projects.
We use a USD-based WACC of 8.6% and a target debt to equity ratio of 50%. Under Downside risks include regulatory issues and lower-than-
CCR, our research model, for stocks without a volatility indicator, the Neutral band is 5ppt expected traffic and toll fares.
OW
CCRO3 above and below the hurdle rate for Brazilian stocks of 11.5%. Our target price of
BRL14 implies a potential return of 25.1%, above the Neutral band.
OW = Overweight, N = Neutral, UW = Underweight; V = Volatile. Potential return equals the percentage difference between the current share price and the target price, including the forecast dividend yield when indicated.
Source: HSBC estimates, Bloomberg, Reuters Thompson
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Natural resources
& energy
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Electric utilities
Growing electricity demand and inflation-indexed contracts should
continue to support revenue flow and margins in 2012
Key themes for next year are a decision on the concessions
renewal and distributors’ reactions to the start-off of tariff reviews
Highest conviction stocks are Cemig due to earnings growth
potential and Eletropaulo on the back of tariff review concerns
2012 outlook 7.5% for the generation companies in 2012, Reginaldo Pereira*
healthy but below the annual CAGR of 10.5% Analyst
Defensive profile maintained but with HSBC Bank Brasil S.A.
from 2007-2010. The fact that most of them are +55 11 3371 8203
lower dividends from distribution [email protected]
already highly contracted should limit the effect
We believe the utilities companies should deliver Eduardo Gomide*
of lower free market prices on profits.
Analyst
relatively healthier results in 2012 than several HSBC Bank Brasil S.A.
other industrial sectors. The cash generation will Investment themes +55 11 3847 9502
[email protected]
likely continue to be sustained by stable revenues Concessions renewal, inflation trends, *Employed by a non-US affiliate of
and costs, and controlled leverage with low and the inevitable tariff review HSBC Securities (USA) Inc, and
exposure to foreign debt. Access to cheap funding is not registered/qualified
The federal government is likely to announce a pursuant to FINRA regulations
from BNDES is supportive for growth.
decision on concessions renewal in 2012, with
Despite fundamentals pointing to Brazil utilities impacts on generation prices. We think the market
as a defensive alternative, it is worth highlighting would react negatively to tariffs below
the earnings decline expected for distributors BRL70/MWh, assuming renewal with capped
undergoing the tariff review process from 1H prices. Signs of higher inflation could be a
2012. The new methodology imposes a decrease catalyst for utilities, supporting revenue growth.
in the regulatory WACC to 7.50% from 9.95%,
which could translate into a cut of up to 20% in Brazil’s generation power: Supply vs demand (avg MW)
EBITDA.
80,000 8%
7%
70,000 7% 7%
On the generation front, unenthusiastic prices
60,000 6%
in the free market should persist in 2012. We
50,000 4% 5%
expect a 4% oversupply for the system. On the 4%
40,000 4%
one hand, this should curb the earnings growth of 30,000 2% 3%
generators exposed to free market clients; on the 20,000 2%
other hand, inflation pass-through assured by 10,000 1%
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Oct-11
Oct-10
Jan-11
Feb-11
Mar-11
Apr-11
Jun-11
Aug-11
Sep-11
Apr-10
Jun-10
Jul-10
Aug-10
Sep-10
Jul-11
Nov-11
May-11
May-10
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Our view is that the global steel industry will price estimate of USD140/t. We estimate that the
remain in oversupply in 2012, which is positive market is currently valuing Vale shares on an iron
for iron ore prices, but that steel prices should ore price of USD81/t in 2012, well below current
remain under pressure. In our opinion, the spot iron ore price of cUSD120/t. We continue to see
industry is extremely reliant on world growth such a tight iron ore market through at least 2013 and thus
that, if global GDP were to rebound materially, even if Chinese demand cools a bit, we do not see
we would likely see a strong upward pressure on sharp decline in iron ore prices.
stock prices across our industry.
Vale has committed to returning excess capital to
Industry valuation metrics shareholders. It has returned USD12bn in 2011 and
we expect it to return a minimum of USD5bn in
We value mining and steel stocks on a 50:50 blend
2012 (based on our net income estimates and a
of DCF and EV/EBITDA multiple. DCF valuation
minimum 25% dividend payout), implying a 10.2%
reflects the value of the producing assets and new
dividend yield in 2011 and 4.4% in 2012.
projects over the longer term whereas EV/EBITDA
valuation captures shorter-term cash flow. Usiminas ONs, TP BRL15, UW
Highest conviction stocks Usiminas ON shares are our least preferred name
given their high cost structure, lack of backwards
Vale, TP USD33, OW(V) integration, low profitability, and high valuation.
Vale is our preferred name in the Latam metals and Usiminas ON shares are trading on 2012e PE and
mining space and our only OW-rated stock. Vale has EV/EBITDA of 42.3x and 12.1x, respectively. In
a solid growth pipeline in both iron ore and base addition, the ON shares currently trade at a massive
metals. We forecast Vale’s iron ore production to 75% premium to the PN shares on the expectation of
grow to 409mt in 2015, an increase of 37% from a mandatory tender offer, which is unlikely.
2010 levels but below company guidance of 469mt.
For valuation and risks, please see page 80.
From a valuation perspective, Vale trades on a 2012e
EV/EBITDA of 3.6x and PE of 5.7x, both well
below historical averages, and on our falling iron ore
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2012 outlook partners is commendable. Not only have resource Anisa Redman
Analyst
volumes been impressive, but the economics also
Region growing in global importance HSBC Securities (USA) Inc.
continue improving. A 15% ROI at USD35/bbl is +1 212 525 4917
Brazil has evolved from a pure importer, refiner, [email protected]
highly attractive in global terms, and this mark
and consumer of oil, to become a potential major David Phillips*
could be cut further on rising flow rate estimates. Analyst
exporter. Petrobras has achieved impressive HSBC Bank Plc
growth (4.6% annually) in the past decade versus Access to deepwater equipment and +44 20 7991 2344
[email protected]
the global average of just 1.0%. Brazil’s services are the biggest challenge
*Employed by a non-US affiliate
prominence in the global oil industry should rise Although Petrobras’ pre-salt output targets seem of HSBC Securities (USA) Inc,
and is not registered/qualified
thanks to its vast oil resources. If Petrobras justified by the ever-rising resource estimates, actual pursuant to FINRA regulations
delivers on its domestic oil production target performance will depend on factors such as:
(4.9MMbpd by 2020), then this alone would utilization of large quantities of gas contained in oil
increase Brazil’s share of global output to 6.0%. reservoirs, sufficient financial resources, and the
terms of new production-sharing contracts due to be
Industry valuations catching up with
introduced for new “strategic” resources.
oil price and international peers
Various regional (macro) and certain company- Petrobras targets steep domestic oil production growth
1,000
Upstream growth
Given its vast scale, pre-salt remains the key focus 0
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011e
2012e
2013e
2014e
2015e
2016e
2017e
2018e
2019e
2020e
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We determine our 12-month BRL37 target price through a methodology of DCF to Downside risks include regulatory decisions, low electricity
equity holders at a rate of 11.8%, with a nominal perpetuity growth rate of 3%. Under prices in the free market, and expensive acquisitions.
Cemig,
OW our research model, for stocks without a volatility indicator, the Neutral band is 5ppts
CMIG4 above and below the hurdle rate for Brazil stocks of 11.5%. Our target price of BRL37
implies a potential return of 29%, above the Neutral band.
We determine our 12-month BRL31 target price through a methodology of DCF to Upside risks include a higher dividend payout, regulatory
equity holders at a rate of 9.5%, with a nominal perpetuity growth rate of 3%. Under our decisions, and a change in control of Eletropaulo, which
Eletropaulo,
UW research model, for stocks without a volatility indicator, the Neutral band is 5ppts above could trigger 100% tag-along rights.
ELPL4 and below the hurdle rate for Brazil stocks of 11.5%. Our target price of BRL31 implies a
potential return of 1%, below the Neutral band.
We have a net present value (NPV) of USD29.50 per share and an EV/EBITDA Downside risks include demand for iron ore products,
valuation of USD36.50. The 50:50 blend leads us to our target price of USD33.00 per increased taxes and royalties, fluctuations in the BRL/USD
Vale,
OW(V) common ADR (VALE.N). Under our research model, for stocks with a volatility indicator, FX rate, and continued global economic concerns.
VALE BZ* the Neutral band is 10ppts above and below the hurdle rate for Brazil stocks of 11.5%.
Our USD33 target price implies a potential return of 48.8%, above the Neutral band.
We have a net present value (NPV) of BRL22.00 per share and an EV/EBITDA valuation We see increases in raw material prices in the short term,
of BRL6.50. We apply a 15% premium to these values to capture voting rights assigned lower domestic steel prices, missed iron ore volume
Usiminas, to the ON shares. The 50:50 blend leads us to our target price of BRL15.00 per share guidance, missed cost reduction guidance, and pressure
UW
USIM3 (USIM3 BZ). Under our research model, for stocks without a volatility indicator, the on the BRL as the key downside risks.
Neutral band is 5ppt above and below our hurdle rate for Brazilian stocks of 11.5%. Our
BRL15 target price implies a potential return of -16.7%, below the Neutral band.
Our 12-month target prices of USD51 for PBR US, USD46 for PBR/A US, BRL41 for Key risks include a deterioration in the global macro
PETR3, and BRL37 for PETR4 are based on a DCF analysis using Brent price environment; inability to contract enough rigs and other
assumptions of USD90/bbl in 2012-2015e, 5% cuts to Petrobras’ production volume targets E&P equipment resulting in project delays; and unattractive
Petrobras,
OW (to reflect target misses in the past), capex in line with the 2011-2015e business plan, and PSC terms for future pre-salt projects.
PETR3 a WACC of 9% in 2012e. Under our research model, for stocks without a volatility indicator,
the Neutral band is 5ppts above and below the hurdle rate for Brazil stocks of 11.5%. Our
target price of BRL41 implies a potential return of 76%, above the Neutral band.
Our 12-month TPs (BRL19.5/local and USD11.0/ADR) are based partly on an NAV Key downside risks include: negative publicity around core
analysis of each of OGX’s 30 projects, using volume and cost assumptions in line with shareholders or management; delays in production
OGX,
OW(V) management guidance. Under our research model, for stocks with a volatility indicator, launches and failure to meet production targets; and
OGXP3 the Neutral band is 10ppts above and below the hurdle rate for Brazil stocks of 11.5%. possible announcements of dry or uncommercial wells.
Our target price of BRL19.5 implies a potential return of 43%, above the Neutral band.
OW = Overweight, N = Neutral, UW = Underweight; V = Volatile. Potential return equals the percentage difference between the current share price and the target price, including the forecast dividend yield when indicated.
Source: HSBC estimates, Bloomberg, Reuters Thompson
80
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Telecoms, media
& technology
81
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2012 outlook Azteca), and general efforts to curb America Richard Dineen
Analyst
Movil’s power in the mobile market. HSBC Securities (USA) Inc
Worsening macro sentiment in 2011 has reignited
+1 212 525 6707
fears of challenging times persisting through 2012 Investment themes [email protected]
at least. With this in mind, we highlight the Sean Glickenhaus
We expect strong mobile revenue growth in Latin Analyst
defensive qualities of telecoms firms (as well as HSBC Securities (USA) Inc
America to continue through 2012 (HSBCe
similar cable/satellite names) for the year ahead. +1 212 525 4131
average 10.6% for companies covered in their key [email protected]
Mobile, fixed telephony, and broadband are
markets in reporting currency). Although mobile Enrique Gomez-Tagle,* CFA
clearly critical means of communication for Analyst
penetration in several countries in the region is HSBC Mexico, S.A.
seeking work, while even pay-TV remains a +52 55 5721 2167
already 100%+, inflated by users with multiple
cheaper way of entertaining a family than [email protected]
prepaid accounts, we believe underlying levels of *Employed by a non-US affiliate of
restaurants, vacations, and the like. Cash flow and
ownership are materially lower – ranging between HSBC Securities (USA) Inc, and
returns in the form of dividends and buybacks are is not registered/qualified
55-70% of the population. We see rising income pursuant to FINRA regulations
further insulated from economic stress by the
levels (in most Latam countries) over the next
operators’ ability to temporarily cut capex. Such
several years lifting these underlying penetration
qualities were evident in the downturn of 2008-09
and we would expect them to prove so again in Brazil: Growing delta between SIM (account) penetration and
underlying levels of mobile device ownership as % of population
future.
140%
A major event on 1 July 2012 will be the Mexican 120%
presidential election, raising the question whether a 100%
new administration from 2013 will seek to continue 80%
60%
with or break from current policies in the telecoms
40%
and media industries. Particularly at issue is
20%
Telmex’s longstanding petition to enter the pay-TV 0%
market, the potential licensing of new terrestrial 2006 2007 2008 2009 2010 Sep-11
broadcasters (which would impact Televisa and TV
Account penetration Mobile ow nership
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levels to a saturation point at around 80% of regional telecoms and media industries. Incumbents’
population – an important but, we think, often legacy fixed telephony revenues, however, should
overlooked component of industry revenue growth. remain under pressure, challenged by triple-play
We expect mobile voice prices to remain under cable competitors like NET Servicos (America
pressure in 2012, however. As a narrowband service Movil), and Televisa (which controls around c50%
(10-15kbps), voice telephony takes up few network of the Mexican cable industry). Also, we expect
resources and consequently there is little fixed-mobile substitution to generally trend worse
opportunity cost to operators’ pricing voice minutes over time as mobile coverage improves and voice
at ever-cheaper rates. While voice is a mature prices fall, as well as through the natural cycling out
service which conspicuously lacks pricing power, of older users loyal to fixed lines.
we are more hopeful for mobile data.
Industry valuation metrics
Rapid adoption of smartphones and tablets and the
Investors preferring to normalize for varying levels
growing sophistication of application are
of capital intensity may prefer to use EV/EBITDA-
compounding to drive global mobile traffic growth
based multiples to compare valuations in the
at roughly exponential rates. We see data penetration
industry. On this basis, the Latam telecoms peer
growth in Latin America surprising as smartphone
group trades on a forward 2012 mean multiple of
prices continue to tumble. (The lowest touchscreen
4.1x; media names trade at a c10% premium of 4.6x.
Android phones are now wholesaling for cUSD100.)
However, while mobile data demand growth is Highest conviction stocks
roughly exponential, capacity supply is much more TIM, TP BRL10.50, OW
linear due to a dearth of suitable spectrum, as well as
TIM 2012 service revenue growth should exceed
plateauing network efficiency gains. We expect this
market expectations (HSBCe +14%) on 13%
fundamental supply/demand imbalance in Latin
subscriber growth and 30%+ data revenue growth.
America (as we do globally) to usher in more orderly
competition between operators and introduce pricing Entel, TP CLP12,500, OW
power hitherto unseen in the industry. High exposure to mobile with 15% 2012e service
In fixed line, we see continued strong demand for revenue growth should drive 11% group revenue
broadband services in the region in 2012, as well as growth. We view concerns over VTR as overdone.
continued steady migration from free-to-air to For valuation and risks, please see page 84.
satellite and cable pay-TV as highlights of the
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Our 12-month DCF based target price of BRL10.50 is based on a WACC of 9.5%, Downside risks include stronger-than-expected competition
consisting of a 7% cost of debt in USD terms, a risk-free rate of 3.5%, a market risk in the Brazilian mobile market.
TIM, OW
premium of 8%, and a beta of 0.9, leading to a cost of equity of 10.7% in USD terms.
TIMP3/TSU.N Under our research model, for stocks without a volatility indicator, the Neutral band is
5ppts above and below the hurdle rate for Brazil stocks of 11.5%. Our target price
implies a potential return of 25.9%, which is above the Neutral band.
Our 12-month DCF based target price of CLP12,500 is based on a WACC of 7.6%, Downside risks include new entrant competition from VTR
comprised of a 7.0% cost of debt and an 8.0% cost of equity. We derive our cost of equity and Nextel. Longer term, we see a risk from Entel’s lack of
ENTEL, by using a 3.5% risk free rate, a 5.0% market risk premium for Chile, and a 0.9 beta which wireline local access infrastructure, as fixed mobile
OW
ENTEL.SN is the five-year average. Under our research model, for stocks without a volatility indicator, convergence grows in importance.
the Neutral band is 5ppts above and below the hurdle rate for Chile stocks of 8.5%. Our
target price implies a potential return of 26.3%, which is above the Neutral band.
OW = Overweight, N = Neutral, UW = Underweight; V = Volatile. Potential return equals the percentage difference between the current share price and the target price, including the forecast dividend yield when indicated.
Source: HSBC estimates, Bloomberg, Reuters Thompson
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Latam coverage
universe
85
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Latin America
Equities
Coverage universe by sector and analyst name
HSBC Current HSBC Mkt cap* ___ PE or P/FFO ____ ____EV/EBITDA _____
Sector/industry Analyst Company Ticker Currency target price price* rating (USDm) 2011e 2012e 2011e 2012e
abc
Beverages Torres AmBev ABV.N USD 40.00 33.15 OW 103,323 19.5 17.7 12.8 12.0
Beverages Torres Coca-Cola FEMSA KOF.N USD 108.00 87.39 OW 16,137 19.1 16.2 9.2 8.2
Beverages Torres FEMSA FMX.N USD 78.00 65.08 OW 23,287 18.8 15.1 8.7 7.9
Beverages Torres Grupo Modelo GMODELO.C.MX MXN 82.00 83.80 N 19,681 25.4 23.4 9.2 8.4
Beverages Torres Heineken HEIA.AE EUR 36.00 33.48 N 26,382 13.1 11.6 7.5 6.8
OW = Overweight; N = Neutral; UW = Underweight; V = Volatile; NM = Not meaningful; NA = Not available
*Priced as at 29 November 2011
Source: HSBC estimates, Bloomberg, Reuters Thompson
December 2011
Latin America
Equities
Coverage universe by sector and analyst name
HSBC Current HSBC Mkt cap* ___ PE or P/FFO____ ____EV/EBITDA _____
Sector/ndustry Analyst Company Ticker Currency target price price* rating (USDm) 2011e 2012e 2011e 2012e
Financials
Banks, Brazil Galliano Banco ABC ABCB4.SA BRL 15.50 10.89 OW (V) 900 6.0 5.0
Banks, Brazil Galliano Banco Cruzeiro do Sul CZRS4.SA BRL 10.00 13.58 UW 900 13.7 12.1
Banks, Brazi Galliano Banco Daycoval DAYC4.SA BRL 10.00 9.05 N 1,100 8.2 6.4
Banks, Brazil Galliano Banco do Brasil BBAS3 BRL 34.00 23.20 OW 67,513 6.0 5.9
Banks, Ex-Brazil Galliano Bancolombia CIB USD 65.00 56.10 N 7,188 13.2 10.7
Banks, Brazil Galliano Banco Pine Pine4.SA BRL 15.50 12.10 OW 500 7.2 5.6
Banks, Brazil Galliano Banco Sofisa SFSA4.SA BRL 3.80 3.50 UW 400 16.0 7.5
Banks, Brazil Galliano BIC Banco BICB4.SA BRL 11.50 7.15 OW 1,200 6.4 4.9
Banks, Brazil Galliano Bradesco BBDC4 BRL 36.00 28.30 N 59,086 9.7 9.1
Banks, Ex-Brazil Galliano Compartamos COMPARC MXN 25.00 17.90 OW 2,091 14.6 11.2
Banks, Ex-Brazil Galliano Credicorp BAP USD 106.00 104.50 UW 8,226 12.6 11.2
Banks, Ex-Brazil Galliano Financiera Independencia FINDEP MXN 7.00 6.80 N 357 33.9 10.9
Banks, Ex-Brazil Galliano Grupo Financiero Banorte GFNORTE MXN 60.00 43.90 OW 7,346 11.4 9.0
Banks, Brazil Galliano Itaú Unibanco ITUB4 BRL 41.00 30.10 OW 74,185 9.7 8.5
Banks, Brazil Galliano Parana Banco PRBC4.SA BRL 12.50 9.89
Banks, Brazil Galliano Santander Brasil SANB11 BRL 18.00 13.20 N 27,184 6.6 6.5
Diversified Financials Ribeiro BM&F Bovespa BVMF3.Sa BRL 11.60 9.50 OW 10,436 12.2 11.3 11.5 9.0
Diversified Financials Ribeiro Brasil Insurance BRIN3.SA BRL 26.30 16.69 OW(V) 847 10.7 7.5 8.2 5.2
Diversified Financials Ribeiro Cetip CTIP3.SA BRL 30.85 25.10 OW 3,426 31.8 19.6 15.0 11.4
Diversified Financials Ribeiro Cielo CIEL3.SA BRL 61.00 46.81 OW 13,734 14.3 11.6 8.6 7.0
Diversified Financials Ribeiro Redecard RDCD3.SA BRL 39.00 29.35 OW 10,615 14.5 11.9 9.1 7.6
Real Estate Rodrigues Aliansce ALSC3 BRL 17.00 13.75 OW(V) 1,031 20.8 15.4
Real Estate Rodrigues BR Malls BRML3 BRL 24.00 17.75 OW(V) 4,289 18.5 15.9
Real Estate Rodrigues Brasil Brokers BBRK3 BRL 12.00 6.10 OW(V) 632 9.2 5.8
Real Estate Rodrigues Cyrela CYRE3 BRL 20.00 15.00 N(V) 3,411 10.9 8.1
Real Estate Rodrigues Gafisa GFSA3 BRL 10.00 5.25 N(V) 1,218 5.8 3.7
Real Estate Rodrigues Iguatemi IGTA3 BRL 37.00 33.04 N(V) 1,408 15.5 12.2
Real Estate Rodrigues Lopes LPSB3 BRL 47.00 26.60 N(V) 789 11.4 9.9
Real Estate Rodrigues MRV MRVE3 BRL 16.00 11.49 N(V) 2,980 6.8 5.7
Real Estate Rodrigues Multiplan MULT3 BRL 48.00 35.02 OW(V) 3,374 17.0 17.2
Real Estate Rodrigues PDG PDGR3 BRL 14.00 6.44 OW(V) 3,830 6.2 5.3
Real Estate Rodrigues Rossi RSID3 BRL 17.00 9.63 N(V) 1,379 5.3 3.7
Healthcare
Healthcare Campos Amil AMIL3 BRL 25.50 16.15 OW 3,158 20.9 17.8 11.7 9.4
Healthcare Campos DASA DASA3 BRL 15.00 13.15 N 2,223 21.8 14.5 8.7 7.6
abc
Healthcare Campos Fleury FLRY3 BRL 23.50 20.55 N 1,740 19.9 16.4 13.5 8.2
Healthcare Campos OdontoPrev ODPV3 BRL 33.50 23.90 OW 2,295 27.5 24.2 21.3 16.5
OW = Overweight; N = Neutral; UW = Underweight; V = Volatile; NM = Not meaningful; NA = Not available
*Priced as at 29 November 2011
Source: HSBC estimates, Bloomberg, Reuters Thompson
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Equities
Coverage universe by sector and analyst name
HSBC Current HSBC Mkt cap* ___ PE or P/FFO____ ____EV/EBITDA _____
Sector/industry Analyst Company Ticker Currency target price price* rating (USDm) 2011e 2012e 2011e 2012e
Industrials
Transportation, Brazil Campos ALL ALLL3 BRL 19.00 8.08 OW(V) 5,568 15.3 11.6 6.5 5.8
Transportation, Brazil Campos CCR CCRO3 BRL 14.00 11.19 OW 10,711 19.0 14.4 8.6 7.3
Transportation, Brazil Campos Gol GOLL4 BRL 20.00 12.61 OW(V) 1,871 NA 28.6 8.9 4.4
Transportation, Brazil Campos Multiplus MPLU3 BRL 31.50 31.50 N(V) 2,756 20.1 20.7 14.3 14.2
Transportation, Brazil Campos OHL OHLB3 BRL 65.50 56.50 N(V) 2,110 9.4 7.3 5.7 5.5
Transportation, Brazil Campos TAM TAMM4 BRL 39.00 34.43 OW(V) 2,916 10.2 70.7 9.4 7.2
Industrials, Mexico Mateos Alfa ALFAA.MX MXN 180.00 156.74 N 6,064 10.4 5.8
Industrials, Mexico Mateos Grupo Carso GCARSOA1.MX MXN 42.00 31.79 OW 5,284 18.3 8.8
Industrials, Mexico Mateos Grupo KUO KUOB.MX MXN 22.00 18.60 OW(V) 610 5.1 4.2
Industrials, Mexico Mateos Kimberly-Clark de Mexico KIMBERA.MX MXN 81.00 71.23 N 5,539 20.8 19.9 11.4 11.2
Industrials, Mexico Mateos Mexichem MEXCHEM*.MX MXN 60.00 45.28 OW 5,909 17.8 9.0
Cement, Constr & Infra Suarez Aeroportuario Del Centro OMAB.OQ USD 16.40 13.97 OW(V) 594 19.5 19.4 8.5 7.9
Cement, Constr & Infra Suarez Aeroportuario Del Pacific PAC.N USD 41.00 33.51 N(V) 1,598 19.1 16.9 8.7 8.5
Cement, Constr & Infra Suarez Aeroportuario Del Sureste ASR.N USD 66.00 54.55 OW 1,637 16.0 14.8 9.7 9.2
Cement, Constr & Infra Suarez Carso Infraestructura CICSAB1.MX MXN 9.10 8.08 OW(V) 1,462 20.4 16.3 11.4 9.5
Cement, Constr & Infra Suarez Cemex CX.N USD 3.40 4.32 UW(V) 4,402 NA NA 9.1 9.5
Cement, Constr & Infra Suarez Consorcio Ara ARA.MX MXN 3.50 3.77 UW 352 8.0 7.9 4.5 5.7
Cement, Constr & Infra Suarez Corporacion Geo GEOB.MX MXN 33.00 15.12 OW 595 4.8 4.4 3.4 3.1
Cement, Constr & Infra Suarez Desarrolladora Homex HOMEX.MX MXN 56.00 26.33 OW(V) 633 4.8 4.0 3.7 3.5
Cement, Constr & Infra Suarez Empresas ICA ICA.MX MXN 38.00 17.38 OW(V) 1,601 4.4 7.7 9.9 8.5
Cement, Constr & Infra Suarez Sare Holding SAB de CV SAREB.MX MXN 3.30 1.21 N(V) 60 5.7 3.8 4.4 4.1
Cement, Constr & Infra Suarez URBI Desarrollos Urbanos URBI.MX MXN 32.00 15.81 OW 1,107 7.1 5.4 4.0 3.4
Natural Resources & Energy
Metals & Mining Brandt CSN* CSNA3 BZ BRL 17.50 14.17 N 11,200 6.0 8.1 3.9 4.2
Metals & Mining Brandt Gerdau PN* GGBR4 BZ BRL 15.00 12.95 N 11,501 11.4 11.5 5.9 5.4
Metals & Mining Brandt Metalurgica Gerdau GOAU4 BRL 19.00 16.35 N 3,864 14.4 14.5 5.6 5.1
Metals & Mining Brandt Usiminas PN* USIM5 BZ BRL 13.00 10.21 N 7,745 34.1 24.0 12.4 10.2
Metals & Mining Brandt Vale ON ADR* VALE US USD 33.00 22.18 OW (V) 116,261 4.8 5.7 3.6 3.8
Chemicals Haire Braskem BRKM5.SA BRL 17.00 13.72 N 5,371 9.4 9.0 4.7 6.0
OW = Overweight; N = Neutral; UW = Underweight; V = Volatile; NM = Not meaningful; NA = Not available
*Priced as at 29 November 2011
abc
Source: HSBC estimates, Bloomberg, Reuters Thompson
December 2011
Latin America
Equities
Coverage universe by sector and analyst name
HSBC Current HSBC Mkt cap* ___ PE or P/FFO ____ ____ EV/EBITDA _____
Sector/industry Analyst Company Ticker Currency target price price* rating (USDm) 2011e 2012e 2011e 2012e
abc
OW = Overweight; N = Neutral; UW = Underweight; V = Volatile; NM = Not meaningful; NA = Not available
*Priced as at 29 November 2011
Source: HSBC estimates, Bloomberg, Reuters Thompson
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Notes
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Notes
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Disclosure appendix
Analyst Certification
Each analyst whose name appears as author of an individual section or individual sections of this report certifies that the views
about the subject security(ies) or issuer(s) or any other views or forecasts expressed in the section(s) of which (s)he is author
accurately reflect his/her personal views and that no part of his/her compensation was, is or will be directly or indirectly related
to the specific recommendation(s) or view(s) contained therein: Alexandre Gartner, Juan Carlos Mateos-duran De Huerta,
Garry Evans, Andre Loes, Jaime Aguilera, Ramiro Blazquez, Luciano Campos, Francisco Chevez, Lorena Dominguez, Ivan
Enriquez, Marcos Fernandes, Javier Finkman, Victor Galliano, Sean Glickenhaus, Enrique Gomez Tagle, Eduardo Gomide,
Pedro Herrera, Ravi Jain, Constantin Jancso, Francisco V Machado, Diego Maia, Sergio Martin, Leonardo Martins, Jorge
Morgenstern, Claudia Navarrete, Ramon Obeso, Reginaldo Pereira, Anisa Redman, Felipe Rodrigues, Francisco Suarez, James
Watson, Jonathan Brandt, Stewart Ragar, Paulo Ribeiro, Lauren Torres, Richard Dineen, Caio Moscardini, Manisha Chaudhry,
David Phillips and Marcello Gunther
The analyst(s) furthermore certifies(y) that the recommendations contained in this report have been prepared independently,
even in relation to HSBC.
Important disclosures
Stock ratings and basis for financial analysis
HSBC believes that investors utilise various disciplines and investment horizons when making investment decisions, which
depend largely on individual circumstances such as the investor's existing holdings, risk tolerance and other considerations.
Given these differences, HSBC has two principal aims in its equity research: 1) to identify long-term investment opportunities
based on particular themes or ideas that may affect the future earnings or cash flows of companies on a 12 month time horizon;
and 2) from time to time to identify short-term investment opportunities that are derived from fundamental, quantitative,
technical or event-driven techniques on a 0-3 month time horizon and which may differ from our long-term investment rating.
HSBC has assigned ratings for its long-term investment opportunities as described below.
This report addresses only the long-term investment opportunities of the companies referred to in the report. As and when
HSBC publishes a short-term trading idea the stocks to which these relate are identified on the website at
www.hsbcnet.com/research. Details of these short-term investment opportunities can be found under the Reports section of this
website.
HSBC believes an investor's decision to buy or sell a stock should depend on individual circumstances such as the investor's
existing holdings and other considerations. Different securities firms use a variety of ratings terms as well as different rating
systems to describe their recommendations. Investors should carefully read the definitions of the ratings used in each research
report. In addition, because research reports contain more complete information concerning the analysts' views, investors
should carefully read the entire research report and should not infer its contents from the rating. In any case, ratings should not
be used or relied on in isolation as investment advice.
For each stock we set a required rate of return calculated from the cost of equity for that stock’s domestic or, as appropriate,
regional market established by our strategy team. The price target for a stock represents the value the analyst expects the stock
to reach over our performance horizon. The performance horizon is 12 months. For a stock to be classified as Overweight, the
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potential return, which equals the percentage difference between the current share price and the target price, including the
forecast dividend yield when indicated, must exceed the required return by at least 5 percentage points over the next 12 months
(or 10 percentage points for a stock classified as Volatile*). For a stock to be classified as Underweight, the stock must be
expected to underperform its required return by at least 5 percentage points over the next 12 months (or 10 percentage points
for a stock classified as Volatile*). Stocks between these bands are classified as Neutral.
Our ratings are re-calibrated against these bands at the time of any 'material change' (initiation of coverage, change of volatility
status or change in price target). Notwithstanding this, and although ratings are subject to ongoing management review,
expected returns will be permitted to move outside the bands as a result of normal share price fluctuations without necessarily
triggering a rating change.
*A stock will be classified as volatile if its historical volatility has exceeded 40%, if the stock has been listed for less than 12
months (unless it is in an industry or sector where volatility is low) or if the analyst expects significant volatility. However,
stocks which we do not consider volatile may in fact also behave in such a way. Historical volatility is defined as the past
month's average of the daily 365-day moving average volatilities. In order to avoid misleadingly frequent changes in rating,
however, volatility has to move 2.5 percentage points past the 40% benchmark in either direction for a stock's status to change.
Information regarding company share price performance and history of HSBC ratings and price targets in respect of its long-
term investment opportunities for the companies the subject of this report,is available from www.hsbcnet.com/research.
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1 HSBC* has managed or co-managed a public offering of securities for this company within the past 12 months.
2 HSBC expects to receive or intends to seek compensation for investment banking services from this company in the next
3 months.
3 At the time of publication of this report, HSBC Securities (USA) Inc. is a Market Maker in securities issued by this
company.
4 As of 31 October 2011 HSBC beneficially owned 1% or more of a class of common equity securities of this company.
5 As of 31 October 2011, this company was a client of HSBC or had during the preceding 12 month period been a client of
and/or paid compensation to HSBC in respect of investment banking services.
6 As of 31 October 2011, this company was a client of HSBC or had during the preceding 12 month period been a client of
and/or paid compensation to HSBC in respect of non-investment banking-securities related services.
7 As of 31 October 2011, this company was a client of HSBC or had during the preceding 12 month period been a client of
and/or paid compensation to HSBC in respect of non-securities services.
8 A covering analyst/s has received compensation from this company in the past 12 months.
9 A covering analyst/s or a member of his/her household has a financial interest in the securities of this company, as
detailed below.
10 A covering analyst/s or a member of his/her household is an officer, director or supervisory board member of this
company, as detailed below.
11 At the time of publication of this report, HSBC is a non-US Market Maker in securities issued by this company and/or in
securities in respect of this company
Alexandre Gartner has a long position in the shares of Banco Itau Unibanco, Vale, SLC Agricola, Gerdau, CSN.
Analysts, economists, and strategists are paid in part by reference to the profitability of HSBC which includes investment
banking revenues.
For disclosures in respect of any company mentioned in this report, please see the most recently published report on that
company available at www.hsbcnet.com/research.
Additional disclosures
1 This report is dated as at 04 December 2011.
2 All market data included in this report are dated as at close 29 November 2011, unless otherwise indicated in the report.
3 HSBC has procedures in place to identify and manage any potential conflicts of interest that arise in connection with its
Research business. HSBC's analysts and its other staff who are involved in the preparation and dissemination of Research
operate and have a management reporting line independent of HSBC's Investment Banking business. Information Barrier
procedures are in place between the Investment Banking and Research businesses to ensure that any confidential and/or
price sensitive information is handled in an appropriate manner.
4 As of 31 October 2011, HSBC and/or its affiliates (including the funds, portfolios and investment clubs in securities
managed by such entities) either, directly or indirectly, own or are involved in the acquisition, sale or intermediation of,
1% or more of the total capital of the subject companies securities in the market for the following Company(ies): BRASIL
FOODS SA, ANHANGUERA EDUCACIONAL PA, PDG REALTY, BANCO ITAU UNIBANCO, VALE SA, CIA
HERING, CCR-CIA CONCESSOES ROD.
5 As of 18 November 2011, HSBC owned a significant interest in the debt securities of the following company(ies):
BANCO ITAU UNIBANCO, CEMEX
6 In October 2010, Brasil Brokers Participações S.A. and HSBC Bank Brasil S.A. – Banco Múltiplo signed a five-year
partnership to promote and offer real-estate loans in Brazil. Brasil Brokers will receive commission from HSBC for each
loan made during the partnership and HSBC will pay commission in advanced instalments to Brasil Brokers.
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Disclaimer
* Legal entities as at 04 March 2011 Issuer of report
‘UAE’ HSBC Bank Middle East Limited, Dubai; ‘HK’ The Hongkong and Shanghai Banking Corporation
Limited, Hong Kong; ‘TW’ HSBC Securities (Taiwan) Corporation Limited; ‘CA’ HSBC Securities (Canada) HSBC Bank Brasil S.A. – Banco
Inc, Toronto; HSBC Bank, Paris Branch; HSBC France; ‘DE’ HSBC Trinkaus & Burkhardt AG, Düsseldorf; Múltiplo
000 HSBC Bank (RR), Moscow; ‘IN’ HSBC Securities and Capital Markets (India) Private Limited, Mumbai; Av. Faria Lima, 3.064 - 4° andar
‘JP’ HSBC Securities (Japan) Limited, Tokyo; ‘EG’ HSBC Securities Egypt SAE, Cairo; ‘CN’ HSBC
Itaim Bibi – São Paulo – SP – Brasil
Investment Bank Asia Limited, Beijing Representative Office; The Hongkong and Shanghai Banking
Corporation Limited, Singapore Branch; The Hongkong and Shanghai Banking Corporation Limited, Seoul CEP 01451-000
Securities Branch; The Hongkong and Shanghai Banking Corporation Limited, Seoul Branch; HSBC Telephone: 55 11 3371 8184
Securities (South Africa) (Pty) Ltd, Johannesburg; ‘GR’ HSBC Securities SA, Athens; HSBC Bank plc,
Fax: 55 11 3847 5669
London, Madrid, Milan, Stockholm, Tel Aviv; ‘US’ HSBC Securities (USA) Inc, New York; HSBC Yatirim
Menkul Degerler AS, Istanbul; HSBC México, SA, Institución de Banca Múltiple, Grupo Financiero HSBC; Website: www.hsbc.com.br
HSBC Bank Brasil SA – Banco Múltiplo; HSBC Bank Australia Limited; HSBC Bank Argentina SA; HSBC
Saudi Arabia Limited; The Hongkong and Shanghai Banking Corporation Limited, New Zealand Branch
This document has been elaborated, produced and approved by HSBC Bank Brasil S.A. – Banco Múltiplo. If this research is received by a customer of an
affiliate of HSBC, its provision to the recipient is subject to the terms of business in place between the recipient and such affiliate.
HSBC Securities (USA) Inc. accepts responsibility for the content of this research report prepared by its non-US foreign affiliate. All U.S. persons receiving
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In the UK this report may only be distributed to persons of a kind described in Article 19(5) of the Financial Services and Markets Act 2000 (Financial
Promotion) Order 2001. The protections afforded by the UK regulatory regime are available only to those dealing with a representative of HSBC Bank plc in
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Otras Instituciones Financieras (SIBOIF).
This document is not and should not be construed as an offer to sell or the solicitation of an offer to purchase or subscribe for any investment. HSBC has based
this document on information obtained from sources it believes to be reliable but which it has not independently verified; HSBC makes no guarantee,
representation or warranty and accepts no responsibility or liability as to its accuracy or completeness. The opinions contained within the report are based upon
publicly available information at the time of publication and are subject to change without notice.
Nothing herein excludes or restricts any duty or liability to a customer which HSBC has under the Financial Services and Markets Act 2000 or under the Rules
of FSA. A recipient who chooses to deal with any person who is not a representative of HSBC in the UK will not enjoy the protections afforded by the UK
regulatory regime. Past performance is not necessarily a guide to future performance. The value of any investment or income may go down as well as up and
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report, changes in the exchange rates may have an adverse effect on the value, price or income of that investment. In case of investments for which there is no
recognised market it may be difficult for investors to sell their investments or to obtain reliable information about its value or the extent of the risk to which it is
exposed.
© Copyright 2011, HSBC Bank Brasil S.A. - Banco Múltiplo. ALL RIGHTS RESERVED. No part of this publication may be reproduced, stored in a retrieval
system, or transmitted, on any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of
HSBC Bank Brasil S.A. - Banco Múltiplo. MICA (P) 208/04/2011 and MICA (P) 040/04/2011
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Latin America Equities & Economics
Research Team
Patrick Boucher - Head of Research, Americas Telecoms, Media & Technology
+1 212 525 7632 [email protected] Richard Dineen - Telecoms
+1 212 525 6707 [email protected]
Shora Haydari - Director of Research Marketing, Americas
+1 212 525 3335 [email protected] Sean Glickenhaus - Telecoms
+1 212 525 4131 [email protected]
Equities
Luigi Minerva - Telecoms
Alexandre Gartner - Head of Equity Research, Brazil +44 20 7991 6928 [email protected]
+55 11 3371 8181 [email protected]
Enrique Gomez-Tagle - Media
Juan Carlos Mateos - Head of Equity Research, Mexico +52 55 5721 2167 [email protected]
+52 55 5721 3607 [email protected]
Equity Strategy
Consumer Brands & Retail
Francisco J Chevez - Retail & Consumer John Lomax - Head of Equity Strategy, GEMs
+1 212 525 5350 [email protected] +44 20 7992 3712 [email protected]
Manisha A Chaudhry - Retail & Consumer Alexandre Gartner - Head of Equity Research, Brazil
+1 212 525 3035 [email protected] +55 11 3371 8181 [email protected]
Pedro Herrera - Food & Agricultural Products, Alt. Fuels Juan Carlos Mateos - Head of Equity Research, Mexico
+1 212 525 5126 [email protected] +52 55 5721 3607 [email protected]
Ravi Jain - Food & Agricultural Products, Alt. Fuels Jaime Aguilera - Strategist
+1 212 525 3442 [email protected] +52 55 5721 2379 [email protected]
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Alexandre Gartner*
Brazil Equity Strategist and Head of Equity Research, Brazil
HSBC Bank Brasil S.A. – Banco Múltiplo
+55 11 3371 8181
[email protected]
Alexandre joined HSBC in 2007 as the Head of Equity Research for Brazil. He has been in the sell-side industry since 1995, during which
time he has been the Head of Research at two international investment banks and a research analyst. Alexandre has won multiple
awards from the Institutional Investor and LatinFinance surveys, including being part of the top Latin America research team, and
being recognized as a top analyst eight times.
Juan Carlos Mateos joined HSBC in June 2008 as Head of Mexico Equity Research. He has more than 20 years’ experience in the
Mexican corporate and financial sectors, including stints with Procter & Gamble and Grupo Gigante, and experience from both
the buy and sell sides of the finance industry. Juan Carlos is a CFA charter holder and has an MBA from Harvard. Juan Carlos has won
several awards from the Institutional Investor and LatinFinance surveys, including being part of the top Mexico and Latin America
research teams, and being individually ranked second as a top analyst.
André Loes
Chief Economist, Latin America
HSBC Bank Brasil S.A. – Banco Múltiplo
+55 11 3371 8184
[email protected]
André Loes is HSBC’s chief economist for Latin America, having joined HSBC in August 2008 as chief economist for Brazil. Previously,
he was a partner at an asset management concern and chief economist, head of equity research and head of equity at a major Spanish
bank based in Brazil. Earlier, he served as aide to Brazil’s foreign trade secretary in the Ministry of Industry and Foreign Trade, and he
led the economic department of the Brazilian National Association of Investment Banks (ANBID). Andre holds a bachelor’s degree
and a master’s degree in economics, both from the Federal University of Rio de Janeiro, and a doctorate in economics from Université
de Paris, France.
Garry Evans*
Global Head of Equity Strategy
The Hongkong and Shanghai Banking Corporation Limited
+852 2996 6916
[email protected]
Garry heads HSBC’s equity strategy team worldwide. His previous roles at HSBC include Asia Pacific Equity Strategist, Head of
Pan-Asian Equity Research, and Japan Strategist. Garry began his career as a financial journalist and was editor of Euromoney
magazine for eight years before joining HSBC in Tokyo in 1998. Garry is based in Hong Kong.
*Employed by a non-US affiliate of HSBC Securities (USA) Inc, and is not registered/qualified pursuant to FINRA regulations.