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Latin America Equity Research

17 February 2010

Mexico 101
The 2010 Country Handbook

Mexico Equity Strategy


AC
Ben Laidler
(1-212) 622-5252
ben.m.laidler@jpmchase.com
J.P. Morgan Securities Inc.

Mexico Economics
Gabriel CasillasAC
(52-55) 5540-9558
gabriel.casillas@jpmorgan.com

Banco J.P. Morgan S.A. Institucion de Banca


Multiple, J.P. Morgan Grupo Financiero

See page 71 for analyst certification and important disclosures,


disclosures. including non-US analyst disclosures.
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Ben Laidler Latin America Equity Research
(1-212) 622-5252 17 February 2010
ben.m.laidler@jpmchase.com

Gabriel Casillas
(52-55) 5540-9558
gabriel.casillas@jpmorgan.com
Table of Contents
Mexico 101 ................................................................................4
Key Macro Forecasts ...................................................................................................4
Key Fixed Income Trades............................................................................................4
Equity Strategy View...................................................................................................4
Things to Know.........................................................................5
Overview ...................................................................................6
Area..............................................................................................................................6
Population ....................................................................................................................6
Politics .........................................................................................................................7
Health.........................................................................................................................10
Education ...................................................................................................................11
Migration & Remittances...........................................................................................11
Labor..........................................................................................................................13
Wealth Distribution....................................................................................................15
Competitiveness.........................................................................................................16
Security ......................................................................................................................17
Economy .................................................................................19
Financial System........................................................................................................20
Pension Funds ............................................................................................................21
Mutual Funds .............................................................................................................23
Capital Markets..........................................................................................................23
Fiscal Policy...............................................................................................................25
Sovereign Credit Ratings ...........................................................................................26
Currency & Monetary Policy.....................................................................................27
Monetary Policy.........................................................................................................28
Prices & Wages..........................................................................................................29
Fixed Income Market.................................................................................................30
External Accounts......................................................................................................30
Demand ...................................................................................31
Consumption..............................................................................................................31
Investment..................................................................................................................33
Exports.......................................................................................................................34
Imports.......................................................................................................................35
Sectors ....................................................................................36
Telecom .....................................................................................................................36
Housing......................................................................................................................38
Energy........................................................................................................................40
Electricity...................................................................................................................41
Tourism......................................................................................................................42
Beverages...................................................................................................................44
Retail..........................................................................................................................45
Manufacturing............................................................................................................46

2
Ben Laidler Latin America Equity Research
(1-212) 622-5252 17 February 2010
ben.m.laidler@jpmchase.com

Gabriel Casillas
(52-55) 5540-9558
gabriel.casillas@jpmorgan.com Infrastructure ..........................................................................47
Roads .........................................................................................................................47
Airports ......................................................................................................................49
Railroads ....................................................................................................................50
Ports ...........................................................................................................................50
Annex 1 ...................................................................................52
Mexico Pension Funds’ Investment Regime Summary .............................................52
Annex 2 ...................................................................................53
Mexico Data ............................................................................54

Special thanks to Pablo Monsivais and Iker Cabiedes of Banco J.P. Morgan
S.A. for their contribution to this report

Cover photo: morgueFile.

3
Ben Laidler Latin America Equity Research
(1-212) 622-5252 17 February 2010
ben.m.laidler@jpmchase.com

Gabriel Casillas
(52-55) 5540-9558
gabriel.casillas@jpmorgan.com

Entered (Sep 18, 2009) at 125bp. Target 20bp.


Mexico 101 – Receive 20-year vs. 10-year in TIIE IRS swaps.
Entered (Aug 3, 2009) at 60bp. Target: 40bp.
We hope that this 70-page handbook on Mexico serves Inflation Linkers:
as a useful primer and reference guide for all those Buy 3Y breakeven inflation (UDI-TIIE Swaps). Entered
looking to better understand and invest in this country. in Nov24 at 4.62%. Target 5.5%.
– Mexico: Buy 3Y Udibono. Entered in Jan22 at 1.36%.
CDS & External Debt
Ben Laidler Gabriel Casillas
– Mexico/Colombia: Sell Mex 5Y CDS vs. Buy
Colombia 5Y CDS. Entered in Nov20 at -7bp.
Key Macro Forecasts – Mexico: Favor UMS’19N.
GDP forecast to grow 4.5% in 2010, driven by externally
driven manufacturing rebound. This over-11-point swing Equity Strategy View
is the second largest of any country we cover globally. Mexico is our top country pick in LatAm equities given:
Central Bank to raise rates only 75 basis points this year, 1. Our above-consensus outlook for US economic
as output gap remains large and medium-term inflation growth, and Mexico’s significant macro leverage to this.
expectations well anchored. Expect 5.4% CPI in 2010. J.P. Morgan and consensus expectations are moving up,
and risks are to the upside looking at prior crises.
We forecast continued MXN/USD appreciation into
midyear (12.50 target), before weakening into year-end, 2. The undervalued Mexican Peso should benefit from a
along with our global call for a stronger USD. cyclical rebound and attractive relative valuations.
Reserve accumulation program may slow gains.
Table 1: Macro Summary
2009E 2010E 2011E 3. The ‘underownership’ of Mexican equity markets by
GDP Growth ( %oya) -6.7 4.5 3.5 global and local investors is significant, leaving the
Consumer Inflation (% oya) 5.3 4.7 4.0 market with leverage to upside surprises.
Current Account Balance (% GDP) -0.7 -0.8 -2.2
Fiscal Balance (% GDP) -2.3 -2.8 -2.2 We focus our strategy model portfolio on cyclical sectors
Source: J.P. Morgan Economics. and stocks, with the greatest earnings leverage to the
macro recovery. Cyclicals only represent around 1/3 of
Key Fixed Income Trades the index however, complicating stock picking.
(F. Pianetti/C. Carranza, JPM’s Mexico Color, 2/16/10) Our top picks are Ternium (steel), Banorte (financials),
Grupo Mexico (copper), ICA (heavy construction), Urbi
Stay overweight external debt: Mexico has modestly
(homebuilder). We also own index blue-chip AMX but
outperformed the index YTD despite digesting US$2
are underweight the shares in the portfolio.
billion of issuance from Pemex and the sovereign. After a
year when everything that could go wrong for Mexico
did, we still think Mexico is well positioned to benefit Our 33-company Mexico sample is trading on 12.7x
from the global cyclical recovery. We continue to think 2011e P/E, and 4.9x EV/EBITDA, with forecast earnings
the cash curve is too steep up to the 10-year area growth of 20% in 2010 and 14% in 2011.
following the new issuance and favor ’19Ns.
Table 2: Mexico Constituents of LatAm Model Portfolio
Price* JPM Portfolio MSCI Deviation
FX:
Local Rating Weight Weight (%)
– Sell USD/MXN. Entered in Nov24 at 12.89. Target Currency (%) (%)
12.25. Stop 13.50. Mexico 28,742 OW 21.5 19.0 2.5
– Buy MXN/CLP. Entered in Jan22 at 39.0. AMX 45.9 OW 4.0 5.8 (1.8)
Banorte 46.2 N 3.0 0.7 2.3
Rates: Grupo Mexico 30.5 OW 4.0 1.3 2.7
– Favor 5Y Mbono (Jun’14) vs. 5Y TIIE IRS. Entered ICA 31.1 OW 3.5 0.0 3.5
(Oct 23, 2009) at 11bp. Ternium 31.3 OW 4.0 0.0 4.0
Urbi 30.0 OW 3.0 0.2 2.8
– Receive 5-year vs. Pay 2-year in TIIE IRS swaps.
Source: MSCI; J.P. Morgan estimates.

4
Ben Laidler Latin America Equity Research
(1-212) 622-5252 17 February 2010
ben.m.laidler@jpmchase.com

Gabriel Casillas
(52-55) 5540-9558
gabriel.casillas@jpmorgan.com

Remittances are the second-largest source of FX, after


Things to Know exports. 51% goes to food and rent.

Mexico’s total area is nearly 2 million square kilometers


(772 thousand miles), making it the 14th-largest country In terms of wealth distribution, Mexico has a Gini
in the world. coefficient of 0.48. This is the 32nd-highest in the world
and one of the better numbers in the region.

Mexico has around 111 million people, making it the


country with the 12th-largest population in the world. The informal sector is estimated at 28% of the
economically active population.

Mexico is the second-largest economy in Latin America


and 13th in the world, with a nominal GDP of nearly a Credit penetration is only around 25% of GDP, low by
trillion US dollars. regional standards. Only 37% of Mexicans ‘trust’ the
banking system.

50% of the population is under 25, with an old-age


dependency ratio around 1/3 that of developed The financial system is dominated by foreign-controlled
economies. banks (70% of system assets). BBVA (Bancomer) and
Citibank (Banamex) are Mexico’s two largest banks.

60% of population and GDP are in and around Mexico


City. Mexico has a mandatory-contribution private pension
fund system, with individual capitalization accounts,
established in 1997, and now with assets of US$90bn.
In the 70 years from 1929 to 2000 the country was
governed by the centrist PRI party.
The Central Bank became independent in 1994 and
officially set a 3% inflation targeting regime in 2001.
Services accounts for 65% of the GDP, while industrial
production represents 30%.
México is the 10th most popular international tourist
destination, by arrivals.
Mexico is an open economy, with an openness coefficient
of 55% and free-trade agreements with more than 53
countries. Mexico’s housing deficit is estimated at 8.9 million
homes. Additionally, household formation drives demand
for an additional 530,000 homes a year.
80% of exports go to the US. Major exports are electrical
goods (39%), cars/auto parts (14%), and oil (11%).
Despite seeing a 7% GDP contraction in 2009, the MSCI
Mexico posted the third-highest earnings growth of any
Crude oil accounts for about 5-6% of GDP, 10-15% of major emerging market.
exports and 30-40% of fiscal revenues.

63% of MSCI Mexico is Staples and Telecoms. 41% is


Pemex is the world’s third-largest oil company, by crude two stocks: America Movil and Walmex.
production.

5
Ben Laidler Latin America Equity Research
(1-212) 622-5252 17 February 2010
ben.m.laidler@jpmchase.com

Gabriel Casillas
(52-55) 5540-9558
gabriel.casillas@jpmorgan.com

population is currently 26. Despite further shrinkage of


Overview this age group, the young-age dependency ratio will still
be one of the highest in the world. In contrast, the old-
Area age dependency ratio, despite rising, will be only around
Mexico’s total area is nearly 2 million square one-third of the projected average in developed markets.
kilometers (772 thousand miles), making it the 14th-
Figure 2: Population Pyramid. (LHS: Male. RHS: Female)
largest country in the world. Mexico is the fifth-largest
% of total population
country in the Americas, after Canada, the US, Brazil and
Argentina. Mexico’s area is about 1.2 times that of the 85+ 0.2 0.3
state of Alaska, nearly 3 times that of the state of Texas. 80-84 0.3 0.4
75-79 0.5 0.5
70-74 0.7 0.8
0.9 1.0
Table 3: Top 5 countries in the Americas by total area 65-69
60-64 1.2 1.4
55-59 1.5 1.6
km2 mn mi2 mn 50-54 2.0 2.1
Canada 9.98 3.85 45-49 2.4 2.6
40-44 2.9 3.1
United States 9.63 3.72 35-39 3.4 3.7
Brazil 8.51 3.28 30-34 3.7 4.2
Argentina 2.77 1.06 25-29 3.8 4.3
20-24 4.2 4.7
Mexico 1.97 0.76 5.0
15-19 5.1
Source: INEGI (National Institute of Statistics, Geography, and Information Technology) 10-14 5.5 5.4
5-9 5.3 5.1
and CIA world factbook.
0-4 5.2 5.0

Population
Source: INEGI, 2005.
Mexico has 111 million people approximately, making
it the country with the 12th-largest population in the Life expectancy is 75 years, ranking Mexico 71st in
world (Brazil is 6th with 199 million). The yearly the world. Japan is first, with 82 years, among the major
population growth rate is currently at 1.1%, 120th place countries, while Chile is the highest of the major LatAm
in the world (Brazil is 110th at 1.2%), having slowed countries at 77 years.
from more than 3% per year in the early 1970s to 1.2% in
2004-08, and is marginally below the Latin American Figure 3: Life Expectancy
average of 1.3%. Years

Figure 1: Population and Birth Rate 78 77


140 3.5% 76 75
120 3.0%
74
72
100 2.5%
72
80 2.0%
70
60 1.5%
68
40 1.0% Total Males Females

20 0.5%
Source: CONAPO (National Population Council), 2005.
- 0.0%
1951

1957

1963

1969

1975

1981

1987

1993

1999

2005

2011E

2017E

Population is concentrated in central Mexico, in and


Pop in mn Mex Pop Growth Rate
around Mexico City. Northern Mexico is the most
Source: INEGI. sparsely populated area, where one-quarter of the
population lives and which generates around 30% of
Over 50% of Mexico’s population is under 25, with GDP. Mid-Mexico, including the capital, Mexico City,
the largest age group between 10 and 14 years old has about 60% of the population and is responsible for
(10.9% of population). According to the US Census 60% of GDP. Finally, the southeast, with just over 15%
Bureau’s projections, by 2025 the largest population of the population, generates 10% of the country’s GDP.
segment will be 25 to 29 years old and account for 7.8% Around 10% of the total population is of indigenous
of the total population. Around 30% of the population is origin.
14 years old or under, and the average age of the
6
Ben Laidler Latin America Equity Research
(1-212) 622-5252 17 February 2010
ben.m.laidler@jpmchase.com

Gabriel Casillas
(52-55) 5540-9558
gabriel.casillas@jpmorgan.com

Figure 4: Population Density, by Region Mexico has 7 recognized political parties, though three
Population per km are the most important: the current ruling party, the
rightist PAN; the centrist PRI; and the left-wing PRD.
The other political parties are the PT (Labor Party),
PVEM (Green Party), Convergencia (Left), and Nueva
Alianza (Centrist).

There are 31 state governors and 1 government head of


the Federal District (Mexico City). Currently 19
governors (60%) are from the PRI, 7 are from the PAN
(21%) and 6 are from the PRD (19%). As the chart below
shows, the PRI has an important presence in the north
and southeastern parts of Mexico while the PAN is
focused on the central region. The PRD is more popular
in poorer states, such as Guerrero and Chiapas.
Source: INEGI.

Figure 6: Governors by political party


Mexico’s urbanized area has increased significantly
since 1940, with the urbanization rate rising from 35% to
over 77% in 2008. Urbanization is already high by
developing country standards. Increased urbanization has
been spurred by migration to the northern border states,
attracted by the rapid growth of the ‘maquila’ (offshore
assembly for re-export) industry, and to tourist centers on
the Caribbean and Atlantic coasts.

Figure 5: Urban Population as % of Total


90%
80% 76% 77%
71% 74%
70%
59%
60%
51%
50% 43% Source: CONAGO (National State Governors Commission), 2010.
40% 34% 35%

30% Calderón’s administration faced challenges at the


20% beginning of his term, when PRD presidential candidate
10% Andres Manuel López Obrador (AMLO) disputed the
0%
2006 election result, which showed he lost by 0.58%
1930 1940 1950 1960 1970 1990 2000 2005 2008
only. Calderón’s administration has attempted to pursue a
Source: INEGI.
reformist agenda on fiscal, pension, political, education
and energy issues. However, as the charts below show,
Politics the general public’s appetite for reform may be
Felipe Calderón, of the right-wing party PAN, is the diminishing.
current president of Mexico, serving a six-year term
that began on December 1st, 2006, and will end on
November 30th, 2012. Presidential re-election is
explicitly forbidden in Mexico. It is worth noting that
presidents have served six-year terms since 1940. Before
that, the president’s term in office lasted 4 years (from
1917 to 1940). In the 70 years from 1929 to 2000 the
country was governed by the centrist PRI party.

7
Ben Laidler Latin America Equity Research
(1-212) 622-5252 17 February 2010
ben.m.laidler@jpmchase.com

Gabriel Casillas
(52-55) 5540-9558
gabriel.casillas@jpmorgan.com

Figure 7: Reforms have to be made in order to grow. Do you Table 4: Election schedule, 2010
agree?
Election schedule 2010
100 Date: State: Elections for:
90 Sun 16-May Yucatan Local Representatives and Municipalities
80
* Sun 4-Jul Veracruz Governor (Currently PRI)
* Sun 4-Jul Oaxaca Governor (Currently PRI)
70
* Sun 4-Jul Durango Governor (Currently PRI)
60 Do not know * Sun 4-Jul Aguascalientes Governor (Currently PAN)
50 Do not agree * Sun 4-Jul Zacatecas Governor (Currently PRD)
40 Agree * Sun 4-Jul Chihuahua Governor (Currently PRI)
30 Sun 4-Jul Hidalgo Governor (Currently PRI)
20 Sun 4-Jul Quintana Roo Governor (Currently PRI)
* Sun 4-Jul Tlaxcala Governor (Currently PAN)
10
Sun 4-Jul Baja California Local Representatives and Municipalities
0
* Sun 4-Jul Puebla Governor (Currently PRI)
Mar 2007 Nov 2009
* Sun 10-Oct Sinaloa Governor (Currently PRI)
* Sun 14-Nov Tamaulipas Governor (Currently PRI)
Source: J.P. Morgan.
Source: ISA.

Presidential elections are set for 2012. According to


Although the next general elections will not take place
recent polls from Consulta Mitofsky – using the most
until 2012, there will be 17 scheduled governorship
likely current candidates – the PRI leads with 44%, the
elections in 2010-11 that will keep electoral activity
PAN has 14% and the PRD 12%.
heightened in much of the country. In our view, the
election in the state of Estado de Mexico in 2011 will Figure 9: Which candidate will you vote for?
provide a useful barometer of political sentiment, given
that it has the largest number of voters in the country. Enrique Peña
Nieto, PRI
Undefined
44%
Calderón enjoys an approval rate of around 55%. As 25%

shown in the chart below, this is behind the very high


ratings – especially after so long in office (two terms) –
of Lula in Brazil and Alvaro Uribe in Colombia, though
well ahead of Alan Garcia in Peru and Cristina
Fernandez in Argentina.
Santiago Creel,
Figure 8: LatAm Presidents’ Approval Ratings PAN Marcelo Ebrard, AMLO, PRD/PT
% Approval Rating 14% PRD 5%
12%
100% 83% 81%
Source: Consulta Mitofsky.
80% 64%
55%
60%
Mexico’s government is divided into three branches: (1)
40% 29%
19% the executive branch, formed by the president, state
20%
governors and municipal heads; (2) the legislative
0%
branch, consisting of local and federal congresspersons
Lula (Brazil) Bachelet Uribe Calderon Garcia (Peru) Fernandez
(Chile) (Colombia) (Mex ico) (Argentina)
and senators; and (3) the judicial power, consisting of the
judiciary and the Supreme Court.
Source: Consulta Mitofsky. January 2010.
The legislature consists of a bicameral Congress
14 state elections will take place in 2010. During the formed by senators and representatives. The senators are
second half of the year, 14 states will vote for local elected for a six-year term and there are 128 seats. Each
representatives and heads of municipalities, and voters in state has one senator, and the Federal District (Mexico
12 of those 14 states will have to choose their governor. City) has 2. These 64 senators are elected under the
The centrist PRI party currently rules nine of the 12 principle of relative majority. Moreover, there is one
states in dispute, while the ruling party PAN governs senator for each state including the Federal District
two. assigned under the principle of first minority, adding 32
senators. Finally, 32 senators divided among the parties

8
Ben Laidler Latin America Equity Research
(1-212) 622-5252 17 February 2010
ben.m.laidler@jpmchase.com

Gabriel Casillas
(52-55) 5540-9558
gabriel.casillas@jpmorgan.com

based on the proportion of the national vote, for a total of # Allow independent candidacies
128 senators.
# Reduce the number of legislators (representatives to
Figure 10: Upper Chamber composition 400 from current 500, and senators to 96 from current
PAN 51
128).
PRI 32
# Increase the minimum share of votes for a political
PRD 26 party to be registered in an election (to 4% from 2%).
PVEM 6

PT 5
The Upper Chamber has not started to discuss these
reforms. Mexico hasn’t had a significant political reform
CONVERGENCIA 5
since the 1970s.
Without group 3

0 10 20 30 40 50 60 The legislature holds two ordinary sessions per year.


The first is from September 1st until December 15th; the
Source: Cámara de Senadores’ website (The Mexican Senate).
second is from February 1st to April 30th. A Permanent
Commission – formed by 18 senators and 19 deputies –
The lower chamber has 500 representatives. Two holds legislative responsibilities between the two
hundred are elected by proportional representation from ordinary sessions.
among large ‘plurinominal districts’, and the remaining
300 from single-member districts on a first-past-the-post The judicial branch is composed of the Supreme Court
basis. Lower chamber elections take place every three and the Electoral Tribunal, as well as several collegiate
years. and unitary circuit tribunals, district tribunals, the
Citizenship Council of the Federal Judiciary and the
It is worth noting that the PRI is the largest political force Federal Judiciary Council.
in the Chamber of Representatives, with 37% of the 500
seats (21% previously) versus the PAN with 28% (41% The Supreme Court is the head of judicial power. It is
prior) and the PRD at 12% of the total number of seats formed by 11 ministers, each elected by the Senate from
(from 25% before). a three-candidate pool suggested by the president. They
are elected for 15-year terms. The Supreme Court’s
Figure 11: Lower Chamber composition
duties are to defend the Constitution, maintain the
PRI 237
equilibrium between the executive and the legislature or
PAN 143 any other entities at the state level and to solve any major
PRD 71
relevant judicial affairs. Its decisions are final.
PVEM 21
The Electoral Tribunal of the Judiciary is the institution
PT 13 in charge of all electoral affairs. This Tribunal has one
NUEVA ALIANZA 9
supreme group (7 magistrados) and 5 regional groups (3
magistrados each group), the magistrados that compose
CONVERGENCIA 6
the supreme group are elected by the Senate, taking into
0 50 100 150 200 250 account the Supreme Court’s suggestions. The supreme
Source: Cámara de Diputados’ website (Lower House). group magistrados are elected for 10-year terms while
the regional magistrados are elected for 8-year terms.
We highlight that back on November 30th 2009,
President Calderón proposed a political reform aiming to The collegiate and unitary circuit judicial tribunals are
change the structure of the Mexican political system. The divided geographically across the country. It is worth
main proposals were: noting that there are 31 tribunals. The unitary circuit
tribunals have 1 magistrado. They resolve juicios de
# Consecutive re-election of congresspersons and mayors amparo promoted against other unitary circuit tribunals
and resolve the appeals process, among other
# Second-round presidential elections responsibilities.

9
Ben Laidler Latin America Equity Research
(1-212) 622-5252 17 February 2010
ben.m.laidler@jpmchase.com

Gabriel Casillas
(52-55) 5540-9558
gabriel.casillas@jpmorgan.com

The collegiate circuit tribunals have 3 magistrados and Health


are entitled to resolve the juicios de amparo that end a
Public spending per capita on health has more than
legal suit and to extradite a person by request of the
doubled in real terms since the 1995 ‘tequila’ crisis but
president or foreign government, to give a few examples. remains low by international standards. At the same time,
These tribunals are specialized in different legal affairs Mexico’s health indicators lag those of most OECD
such as corporative, administrative and labor, among countries. Although population health indicators have
others. improved over the past two decades, life expectancy at
birth remains lower, child mortality higher and outcomes
The district tribunals are composed of one judge. This is are highly uneven across socioeconomic groups.
the first legal phase and might be specialized by different
affairs, while the Citizenship Council of the Federal The Mexican health system is fragmented into several
Judiciary is formed by 7 regular citizens to resolve any vertically integrated units that integrate financing,
issue that a district tribunal judge may impose. insurance and provision. The state-owned social security
institutes cover salaried workers in the formal sector,
The Federal Judiciary Council is the institution in charge while the ‘popular health insurance’ scheme (Seguro
of the administration, control and development of the Popular) covers part of the population working in the
judicial career, with the exemption of the Supreme Court informal sector as well as the population in general.
and the Electoral Tribunal. This institution is obliged to According to the OECD, one-third of the population,
protect the independence and good functioning of all the mostly in lower-income groups, has no health insurance.
judicial institutions.
Table 5: Mexican healthcare system
Overall respect for political institutions seems
reasonably low. Of the major institutions in the country,
the most trusted are Universities and the Church, whilst
political parties, Deputies and Unions are the least trusted
(according to a Consulta Mitofsky poll).

Figure 12: Confidence level in Institutions (1=Lowest. 10=Highest) Source: OECD.

Political Parties
The government is aiming for Seguro Popular to
Deputies achieve universal coverage by year 2011. Seguro
Popular has increased its coverage by about 25% of the
Unions population since 2004.
Police
Table 6: Healthcare Outlook
Senators

2000 2001 2002 2003 2004 2005 2006


Presidency
Total expenditure on
Businessmen health (%GDP) 5.6 6.0 6.2 6.3 6.5 6.4 6.2
Per capita total
Electoral Institute expenditure on health
(US$) 327 371 394 395 429 474 500
Supreme Court
Per capita government
expenditure on health
Media
(US$) 152 167 173 174 199 215 217
Army General government
expenditure on health
Church (% of total government
expenditure) 11.4 11.9 11.6 11.7 12.9 12.5 11
Univ ersity 's Private expenditure on
health (% of total
0 2 4 6 8 10 expenditure on health) 53.4 55.1 56.1 55.9 53.6 54.5 56.7
Source: WHO (World Health Organization).
Source: Consulta Mitfosky.

10
Ben Laidler Latin America Equity Research
(1-212) 622-5252 17 February 2010
ben.m.laidler@jpmchase.com

Gabriel Casillas
(52-55) 5540-9558
gabriel.casillas@jpmorgan.com

Education This has been particularly dramatic in Belgium, Greece,


Ireland, Italy, Korea, Portugal, Spain and Chile.
The Mexican education system is structured into basic
education, upper secondary education and higher Figure 14: Population Attained at Least Upper Secondary
education. Children attend preschool between 3 and 5 Education (2007)
years old, primary school between 6 and 11, and lower Percentage, by age group
secondary education between 12 and 14. School
attendance is mandatory until the completion of lower
secondary. Upper secondary education lasts, in general,
three years and includes a general or technical
baccalaureate or vocational training. After upper
secondary, students can move on to undergraduate (3-6
years) and postgraduate (1-4 years) university studies.
Around 25 million students are enrolled in basic
education, 4 million in upper secondary and 3 million in
higher education. Public spending shares were,
respectively, 66%, 14% and 20%. Around 90% of
students in primary and lower secondary education go to
public schools.

Mexico spent 5.75% of GDP on education


Source: OECD. Using Data from 2004
expenditure in 2006 versus an OECD average of
6.1%. This compared to Brazil at 4.9% and Chile at
5.6%. This equated to around US$2,500 per student, less Around 20% of Mexicans have a tertiary education
than in Chile though more than in Brazil, and compares versus an OECD average of 28%, for 25- to 64-year-
to an OECD average of US$9,000. olds. Growth in tertiary attainment levels between the
youngest and oldest levels has been robust (5pp or more)
Figure 13: Education Expenditure per Student in all countries except Austria, the Czech Republic, the
In Equivalent US$ converted using PPPs
US, Brazil and Germany.
S
Figure 15: Population Attained at Least Tertiary Education (2007)
Percentage, by age group

Source: OECD. (1) Public Institutions Only.

More than two-thirds of the population has not


completed upper secondary education. In Mexico,
Portugal, Turkey and Brazil, more than two-thirds of the Source: OECD. Using Data from 2004.

population aged 25 to 64 has not completed upper


secondary education. On average across OECD Migration & Remittances
countries, the proportion of 25- to 34-year-olds having Remittances are the second-largest source of FX for
attained at least upper secondary education is 22
Mexico, after exports. These grew dramatically, from
percentage points higher than that of 55- to 64-year-olds.

11
Ben Laidler Latin America Equity Research
(1-212) 622-5252 17 February 2010
ben.m.laidler@jpmchase.com

Gabriel Casillas
(52-55) 5540-9558
gabriel.casillas@jpmorgan.com

under US$2bn/qtr in 2000 to near US$6bn/qtr in 2008, Figure 17: Workers’ Remittances
but have been under pressure from rising unemployment MXN per transaction, and number of transactions
in the US. In 2008 Mexico remittances totaled US$25.1
7500 450
billion, equivalent to around 2.5% of GDP. By contrast,
remittances to El Salvador, Honduras, Guyana, Haiti and 7000
400
Jamaica made up over 15% of GDP for those countries. 6500

Remittances are especially important for certain 6000 350


regions of Mexico with high rates of emigration and for 5500
many lower-income households where they may 300
5000
constitute a sizable share of total income. Moreover,
because there is likely to be a high propensity to consume 4500 250
out of income from remittances, a decline in such income 2006 2007 2008 2009
is likely to have a relevant impact on domestic demand Number of transactions Av erage remittances per transaccion
and economic activity.
Source: Banxico.

Studies have shown some evidence that remittances to


Mexico respond positively to deteriorating economic Remittances are especially important for the poorest.
conditions back home in Mexico, providing some buffer According to polling company Consulta Mitofsky, 51.2%
to the shock coming from the US. Also, there is some of remittances go to food and rent, 10.9% to paying debts
sign that remittances respond positively to a depreciation and 5.3% to other items related to consumption. Just
of the peso and so could help to cushion or mitigate 32.6% is allocated in investing; and from that, 20% to
adverse external shocks. buying land or agricultural tools, 5.3% to buying houses,
4.6% to starting businesses and 2.7% to financing
Figure 16: Remittance Inflows to Mexico education.
US$ billions/quarter
The US is the major source of remittances. Mexicans
are the largest minority in the most US states. The US is
host to a 12m-strong population of Mexican origin
(around an estimated one-half of which work in the US
illegally).

Figure 18: US states where Mexicans are among top 5 minorities

Source: IMF.

On average US$325 is sent in each remittance. This


has remained broadly stable over time, though impacted
by issues such as the MXN/USD exchange rate, the US
housing sector and employment conditions on both sides
of the border.

Source: CONAPO.

In 2008 an estimated 11 US states each sent over US$1


billion in remittances to Latin America, including
California, Texas, Florida, Illinois and New York.

12
Ben Laidler Latin America Equity Research
(1-212) 622-5252 17 February 2010
ben.m.laidler@jpmchase.com

Gabriel Casillas
(52-55) 5540-9558
gabriel.casillas@jpmorgan.com

Figure 19: Remittances from the US to Latin America Figure 20: Opinions on the USA
% Respondents with a Good/Very Good opinion of the USA

Source: IADB.

The IADB estimates that Latin America and the


Caribbean will receive about $62 billion in remittances
from expatriates in 2009, a decline of about 11% from
the previous year. Remittances from the US – where
unemployment among Latin Americans is higher than Source: Latinobarometro 2000-2008.

among the general population – were expected to decline


by 11% to about $42.3 billion in 2009. European Labor
remittances were expected to fall 9% to US$9 billion. Employment is a major challenge. The total
economically active population (EAP) employed in
Mexico is mid-table in a comparative study of Latin Mexico is around 44 million. This compares, in contrast,
American views of the US, with 57% having a positive to 91 million in Brazil. However, the growth rate of those
opinion of the US in the most recent Latinobarometro entering the formal labor market is falling, reflecting the
survey. This is simlar to Brazil, significantly ahead of current recession; from +5% yoy in 4Q06 to -2% in
countries such as Argentina and Venezuela but behind 2Q09; however, in 3Q09 we saw a slight recovery, with
many Central American countries. The regional average the growth rate dropping only 0.7%. The fall in formal
is 58%, down from a high of 73% in 2001. labor has the effect of narrowing the tax base as well as
making social security access more difficult.

Figure 21: Employment in the formal sector


33 6%

32 5%

31 4%
3%
30
2%
29
1%
28
0%
27 -1%
26 -2%
25 -3%
2Q00
4Q00
2Q01
4Q01
2Q02
4Q02
2Q03
4Q03
2Q04
4Q04
2Q05
4Q05
2Q06
4Q06
2Q07
4Q07
2Q08
4Q08
2Q09

EAP employed in the formal sector


Employment in the formal sector growth rate yoy

Source: INEGI.

13
Ben Laidler Latin America Equity Research
(1-212) 622-5252 17 February 2010
ben.m.laidler@jpmchase.com

Gabriel Casillas
(52-55) 5540-9558
gabriel.casillas@jpmorgan.com

According to the INEGI, 28% of the employed EAP Figure 24: IMSS formal employment
work in the informal sector; this share has been In thousands
growing in the last 2 years. For example, in 4Q06 this 16,000
share was at the lowest level of 26% while in 3Q09 the 14,000
share reached 28.17%. 12,000

10,000
Figure 22: Informal Sector
8,000
% Share of Total Employment
6,000

30% 4,000

29% 2,000

-
29%

Jan-00

Jan-01

Jan-02

Jan-03

Jan-04

Jan-05

Jan-06

Jan-07

Jan-08

Jan-09
28%
28% Permanent Temporary

27% Source: IMSS.

27%
26%
As of December formal employment in Mexico
accounted for 14 million (12 permanent, 2 temporary).
26%
Nevertheless, even though we believe this is a good labor
25% market indicator, there is a relevant drawback. Because
2Q00
4Q00
2Q01
4Q01
2Q02
4Q02
2Q03
4Q03
2Q04
4Q04
2Q05
4Q05
2Q06
4Q06
2Q07
4Q07
2Q08
4Q08
2Q09

of the not-so-flexible structure of the labor market in


Source: INEGI.
Mexico, firms started about 15 years ago to hire more
workers under the ‘honorarios’ scheme, in which usually
Figure 23: Composition of labor by type of job (2008) there is no contract and companies pay the workers on a
per-hour or per-day basis, rather than on the weekly,
60 biweekly or monthly basis usual with signed contracts.
50.4
50
Under the ‘honorarios’ companies do not have to register
40 their personnel at the IMSS. Firms tend to choose the
‘honorarios’ regime because it adds flexibility to their
30 27.5
labor needs as it is easier for them to discharge workers
than under the ‘formal’ hiring procedure. Nevertheless,
20
11.9 the number of IMSS affiliates is a relevant indicator of
10
employment conditions in Mexico and serves as a
4.2 3.2 2.0 0.8 complement to the unemployment rate to assess the labor
0 market situation across the nation. In fact, the federal
and business

Informal

Institutions

remunerated

Agriculture

institutions

Others

government uses the number of IMSS affiliates to set


Companies

sector

Private
Public

Domestic
work

employment goals for the administration.

Source: INEGI.

Another relevant indicator to assess the situation of the


labor market in Mexico is the number of workers
registered at the IMSS (Instituto Mexicano del Seguro
Social – Mexican Social Security Institute). This is also
known as the ‘formal employment indicator’ since hiring
companies – by law – have to register their workers at
the IMSS.

14
Ben Laidler Latin America Equity Research
(1-212) 622-5252 17 February 2010
ben.m.laidler@jpmchase.com

Gabriel Casillas
(52-55) 5540-9558
gabriel.casillas@jpmorgan.com

Figure 25: Formal employment impact of the current economic crisis on the poorest
% yoy segments of the population. The government is also
controlling prices of selected foodstuffs consumed by the
6
poor.
4
Figure 27: Social spending and poverty levels
2

-2

-4

-6
Jan-06 Sep-06 May -07 Jan-08 Sep-08 May -09
IMSS Workers INEGI's Employ ed Population

Source: IMSS and INEGI.

Wealth Distribution
Mexico has a Gini coefficient of 0.48. This is the 32nd
highest in the world and one of the better numbers in
the region. This compares to a highest/worst of 0.71
(Namibia) and a lowest/best of 0.23 (Sweden). Mexico’s
Gini level has been improving, from 0.53, for example,
in 1998. This index measures the degree of inequality of
family income. Perfectly distributed income would
gather a score of 0.

Figure 26: Gini Coefficient Comparison in EU, US, and LatAm Source: ECLAC, OECD, Anexo Estadistico del Segundo Informe del Gobierno.
0.65
0.59 The main poverty reduction programs are:
0.60 0.57 0.57 0.56
0.55 0.55
0.54 0.54
0.55 0.52
0.50 0.49
0.48 0.48 0.48
The Oportunidades program provides means-tested cash
0.50
0.46 0.45 transfers to lower-income families conditional on
0.45
children’s regular school attendance and comes with a
0.40 basic health coverage package. It covered about 5 million
0.35 families in 2008, with positive effects on school
0.30
attendance and health, in particular that of girls.
0.25
The Seguro Popular provides a voluntary health
Bolivia

Paraguay

Brazil

Panama

Guatemala

Chile

Colombia

Honduras

El Saldavor

Peru

Argentina

Mexico

Venezuela

Costa Rica

Ecuador

Uruguay

insurance for people without access to social security. It


LatAm average US EU
covered about 8 million mainly lower-income families in
2008 and has been shown to have reduced the incidence
Source: INEGI, CIA World Factbook.
of high health spending among the poor.
Protection of the poorest has improved substantially
The Procampo program, a part of the Programa Especial
since the 1995 crisis, but safety nets for the moderately
poor remain small. Government spending on social Concurrente of over 100 rural support programs, was
programs (Desarrollo Social budget category) is introduced in 1993 to compensate farmers with cash
currently more than double in real terms than in 1995 at subsidies for the elimination of input subsidies, price
the onset of the ‘tequila’ crisis. The targeting of poverty support and import protection as a result of Mexico’s
reduction programs has also improved, which has entry into NAFTA. In 2007 it covered 2.4 million
contributed to a decline in poverty, and should ease the

15
Ben Laidler Latin America Equity Research
(1-212) 622-5252 17 February 2010
ben.m.laidler@jpmchase.com

Gabriel Casillas
(52-55) 5540-9558
gabriel.casillas@jpmorgan.com

beneficiary farmers, mainly at the lower end of the A comparison of sources of growth among emerging
income distribution. markets shows that weaker labor productivity is the
principal reason accounting for Mexico’s relatively poor
Competitiveness performance. Labor productivity growth was slightly
negative over the past 20 years in Mexico, while it was
Mexico ranks 60th in the most recent World
the main driver of growth in the better-performing
Economic forum (WEF) Global Competitiveness
Index, out of 133 countries, down 8 places versus the economies.
prior-year rank. This is lower than Brazil (ranked 56th,
Figure 29: Sources of Growth
up 8 places from prior year). Other LatAm country
Average Growth, 1987 - 2007
rankings were Argentina (85th), Venezuela (113th). Only
Chile (30th) appears among the top 30 performers
globally.

Mexico scores better than average on macro stability,


trade agreements, a large domestic market, a diversified
and fairly sophisticated business sector and
comprehensive value chain breadth.

The most problematic factors highlighted by survey


Source: OECD, National Accounts, World Bank.
respondents that were constraining business: inefficient
government bureaucracy, corruption, and crime and theft.
An important factor explaining slow convergence in
Aspects where Mexico ranks poorly (below its overall
Mexico is restrictive product market regulations (PMR)
60th place are the inefficiency of public institutions
that tend to capture many structural weaknesses.
(101st), together with high insecurity (125th) due to
Mexico’s PMR level is one of the most restrictive in the
widespread violence and crime. Also poorly ranked are
OECD (Figure 29). PMRs reduce competition that would
Mexico’s rigid labor market (115th) – characterized by
motivate firms to enhance productivity by adopting new
burdensome labor regulations, high payroll taxes and
technologies and processes.
high social contributions – and its inefficient goods
market (90th), with widespread red tape and insufficient
Regulation can also have ‘knock-on’ effects on
competition. Last but not least, the higher education and
training system (74th) does not seem to provide the nonregulated sectors of the economy that use the output
economy with the necessary pool of skilled labor, of the regulated sectors as intermediate inputs. The
notably scientists and engineers (94th), and is not regulatory impact of PMR in Mexico is above the OECD
creating an environment conducive to adopting new median for all industries, except in real estate and
technologies (71st in the technological readiness pillar) business services. The largest negative impact is in the
and generating new ones (78th in the innovation pillar). network industries (electricity, gas and water) where the
regulatory impact of PMR in Mexico is fourfold
Figure 28: Quality of overall infrastructure compared to the OECD median.
Index
Figure 30: Product Market Regulation (1)
6.5
5.9 5.8 5.8 5.9
5.4 5.6
4.8
4.1 4.3 4.2
4.0 3.8 4.0
3.2 3.4 3.2
Germany (6)

Panama (67)
US (14)

Japan (17)

Canada (13)

Malaysia (27)

Ireland (65)

Chile (23)

China (66)

India (89)

Mexico (71)

El Salvador (40)

Uruguay (61)
Korea (20)

Brasil (81)

Argentina (94)
Shouth Africa (47)

Source: OECD. (1) Overall indicator, the scale of the indicator is 0-6 from least to most
restrictive of competition.

Source: World Economic Forum.

16
Ben Laidler Latin America Equity Research
(1-212) 622-5252 17 February 2010
ben.m.laidler@jpmchase.com

Gabriel Casillas
(52-55) 5540-9558
gabriel.casillas@jpmorgan.com

Figure 31: Cost of enforcing contracts Figure 33: Kidnapping in Mexico (cases)
as % of total debt values 1,200 100%
1,045
1,000 80%
825
60%
800 734
590 601 601 40%
600 521
433 436 436 20%
400 334 325
0%
200 -20%

0 -40%
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

% Change yoy

Source: ICESI.

The economic cost could be relevant. According to the


IADB, the cost of security in Mexico could reach 15% of
GDP, the second highest in Latin America, behind
Colombia (25% of the GDP).
Source: World Bank.

In the 2008 Latinobarometro regional survey, 42% of


Security Mexican respondents said they had been victims of a
The Calderon Administration has made combating crime in the last 12 months, the second-highest level in
the illegal drug trade a priority. Murders related to the region (after Venezuela at 53%) and well above the
narcotics rose from 2,477 in 2007 to 7,724 in 2009, regional average of 33%. However, this was down from a
according to local press. recent high in Mexico of 79% in 2001. In the same
survey, crime was seen as the most important problem
Figure 32: Murders related to narcotics facing the country.
9,000
7,724 Figure 34: Crime in Mexico
8,000
Victim of Crime in last 12 months (Blue) vs Crime as biggest issue for
7,000 country (Red)
6,000 5,600

5,000

4,000

3,000 2,477
2,100
1,776
2,000 1,290 1,304
1,080 1,230
1,000

-
2001 2002 2003 2004 2005 2006 2007 2008 2009

Source: ICESI, local press, J.P. Morgan.

Kidnapping is also a major concern. Last year the


Instituto Ciudadano de Estudios Sobre la Inseguridad
(ICESI) reported that 825 kidnappings took place in
Source: Latinobarometro 1995-2008.
2008, the highest level since 1997. Whilst likely under-
reported, the trend is a concern.
There is a sharp divergence in reported levels of
violence between states, with Chihuahua, Sinaloa and
Guerrero seeing the highest murder rates, over double the
national average of 10.6 murders per 100,000. This 10.6

17
Ben Laidler Latin America Equity Research
(1-212) 622-5252 17 February 2010
ben.m.laidler@jpmchase.com

Gabriel Casillas
(52-55) 5540-9558
gabriel.casillas@jpmorgan.com

rate compares to reported higher rates in South Africa


(49), Colombia (37) and Brazil (25) and is approximately
twice the level of the US (5.6). Chile is reported at 1.9.

Figure 35: Murders per 100,000 inhabitants

Source: CIDAC. August 2009.

18
Ben Laidler Latin America Equity Research
(1-212) 622-5252 17 February 2010
ben.m.laidler@jpmchase.com

Gabriel Casillas
(52-55) 5540-9558
gabriel.casillas@jpmorgan.com

Table 8: Services sector breakdown (Q309)


Economy % of service
sector % of GDP
Commerce/Trade 22.6% 14.4%
Mexico is the second-largest economy in Latin Real Estate 17.1% 10.8%
America and the 13th in the world. It has been a very Transport, mail and storage 10.8% 6.9%
open economy since 1996, when NAFTA really kicked Educational services 7.2% 4.6%
Media 6.4% 4.0%
in. This, combined with Mexico’s strategic geographical Government 6.0% 3.8%
location, has made the economy strongly dependent on Financial Services and Insurance 5.8% 3.7%
US business cycles. Particularly, manufacturing activity Professional, scientific & tech 5.4% 3.4%
Health & social services 4.6% 2.9%
in Mexico is tightly linked to the US. Other services ex government 4.4% 2.8%
Managing & remediation of tailing services 4.2% 2.7%
Table 7: Top 15 Countries by GDP* Accommodation & food services 4.0% 2.5%
Recreation & cultural services 0.9% 0.6%
GDP, US$ Population, Per Capita Corporate services 0.7% 0.5%
bn. mn. GDP, US$
Source: INEGI
1 U.S. 14,441.40 304.23 47,469.00
2 Japan 4,909.27 127.29 38,568.22
3 China 4,326.19 1,330.05 3,252.66 Mexico is a consumption-driven economy, with private
4 Germany 3,652.82 82.37 44,346.53
and government consumption making up 82% of GDP as
5 France 2,853.06 64.06 44,538.73
6 U.K. 2,645.59 60.94 43,410.23 of 3Q09 – private 71% and government 11%. Real gross
7 Italy 2,293.01 58.15 39,436.03 fixed capital formation make up 22% of the GDP, and
8 Brazil 1,612.54 196.34 8,212.87 this share has been increasing since 1995, when it made
9 Russia 1,607.82 140.70 11,427.10
10 Spain 1,604.17 40.49 39,618.04 up around 14%.
11 Canada 1,400.09 33.21 42,154.91
12 India 1,217.49 1,148.00 1,060.54 Mexico’s external sector is especially linked to the
13 Mexico 1,085.95 109.96 9,876.32
14 Australia 1,015.22 21.01 48,327.56 economy of the US, which is the destination for around
15 South Korea 929.12 48.38 19,205.05 80% of total exports. The largest export items to the US
*Data for Dec. 2008 are electric machinery and transport vehicles. Mexico is
Source: Bloomberg. one of the countries that has the most free trade
agreements worldwide. Mexico enjoys an enviable
The Mexican economy is focused on the service geography, making this one of the advantages against
sector, which in 3Q09 made up 64% of GDP. The other trade-oriented economies; the closeness to the US
service sector employs around 26.9 million people; this is is a key driver for Mexican exports.
61% of the total Mexican workforce.
Mexican imports are more diverse (on a geographical
The industrial sector represents 30% of Mexican GDP, as basis) than its exports; US imports to Mexico make up
of 3Q09. This proportion has been relatively stable since around 50% of total imports, and this share has been
the 1980s. Manufacturing is the most important industry decreasing since 2000. Currently, imports from China are
in this sector, making up around 17% of total GDP, gaining importance. In 2000, less than 2% were imports
followed by construction (6%), mining (5%) and from China; nowadays they make up around 15%. On a
electricity, gas and water at 2%, as of 3Q09. This sector product basis Mexican imports are focused on electric
employs around 11.3 million; this is 26% of the total machinery mainly, making up 39% of total imports for
workforce. the period of January-November 2009.

The primary sector is a small part of Mexican economy,


representing less than 5% historically, and employs
around 5.8 million people; this is 13% of the workforce.

19
Ben Laidler Latin America Equity Research
(1-212) 622-5252 17 February 2010
ben.m.laidler@jpmchase.com

Gabriel Casillas
(52-55) 5540-9558
gabriel.casillas@jpmorgan.com

Table 9: Economic Summary Figure 36: 2009 financial system assets breakdown
Average
2003-
2007 2009 2010F 2011F Brookerage
Real GDP, US$ Bn 745.1 617.04 681.53 667.30 Insurance Non banks, 4% House, 2%
Nominal GDP, US$ BN 857.2 872.1 1018.1 1036.8 companies, 7%
GDP per capita - US$ 8,123 7,954 9,194 9,270
Real GDP, % change 3.4 -6.7 4.5 3.5 Development
Contribution to growth of GDP. Banks, 7%
Consumption 3.1 -4.2 3.4 4.0
Investment 0.6 -4.4 1.9 1.6
Net trade -0.3 1.8 -0.8 -2.1
Banks, 47%
Consumer prices, %oya 4.2 5.4 4.7 4.0
Mutual Funds,
% Dec/Dec 4.1 4.0 5.4 4.0
15%
Producer prices, %oya 5.2 4.2 5.6 4.3
Government balance, % of
GDP -1.4 -2.3 -2.75 -2.2
Industrial production index,
1993=100, average 1,460 .. .. ..
Unemployment rate, percent of Pension Funds,
labor force 3.3 .. .. .. 18%
Exchange rate, units/$, eop 10.9 13.1 13.0 13.5
Merchandise trade balance
($bn) -7.7 -4.7 -10.0 -27.0 Source: Lower Chamber seminar on Mexican Financial System Structure.
Exports 217.8 229.7 258.4 281.7
Imports 225.4 234.4 268.4 308.6
Current account balance -5.9 -5.9 -8.3 -22.8 The Mexican banking system is well capitalized (3Q09
% of GDP -0.7 -0.7 -0.8 -2.2 capital/risk-weighted assets ratio of 11%), with past-due
Note: Debt with original maturity of less than one year loans at 3.31% of total loans (3Q09) and provisioning
International reserves, (US$
bn) 66.7 86.0 95.0 100.0
levels of over 165.5%. Profitability levels are reasonably
Total external debt, (US$ bn) 175.6 187.7 182.7 .. poor, with a 1.7% ROA and 15.1% ROE.
Short term 35.7 37.4 37.4 ..
Total external debt, % of GDP 20.0 21.6 18.2 .. Figure 37: Loans growth rate by type
Total external debt, % of
exports 67.0 70.1 60.6 .. 120%
Interest payments, % of 100%
exports 5.0 5.9 5.4 4.7
Note: Exports of goods, services, and net transfers. 80%
Source: J.P. Morgan 60%

40%
Financial System
20%
Mexico’s financial system is made up of regulatory and 0%
supervisory institutions – SHCP, the Central Bank,
-20%
CNBV, CNSF, Consar, Condusef and IPAB; and by
operating institutions – credit institutions, auxiliary credit -40%
organizations, insurance organizations, securities -60%
Dec-94

Dec-95

Dec-96

Dec-97

Dec-98

Dec-99

Dec-00

Dec-01

Dec-02

Dec-03

Dec-04

Dec-05

Dec-06

Dec-07

organizations, SAR institutions and others. The SHCP


(Finance Minister) is the highest authority in the financial
system. Consumption Housing Corporate Total loans

The CNBV regulates credit institutions, auxiliary credit Source: Banxico.

organizations and securities organizations; the CNSF


regulates insurance company and the CONSAR regulates
Afores and Siefores. It is worth noting that the Afores are
the pension fund administrators and the Siefores are the
pension fund portfolios.

20
Ben Laidler Latin America Equity Research
(1-212) 622-5252 17 February 2010
ben.m.laidler@jpmchase.com

Gabriel Casillas
(52-55) 5540-9558
gabriel.casillas@jpmorgan.com

Figure 38: Delinquency rates by type of loan Figure 40: Bank Credit to Private Sector
Percentage of GDP, 2008

Source: Banxico; ABM.

Table 10: Comparative LatAm Bank Metrics


Capital / Capital / NPL / Provision /
RWA Assets Loans NPL ROA ROE Source: IMF.

Argentina 16.8% 12.9% 2.7% 131.0% 1.6% 13.4%


Brazil 18.4% 9.1% 3.1% 190.0% 1.5% 15.6% Public confidence in the banks is reasonably low,
Chile 12.5% 6.9% 1.0% 180.0% 1.2% 15.2% likely a reaction to the 1994-1995 ‘tequila’ crisis. The
Colombia 13.4% 12.2% 4.0% 120.0% 2.4% 20.0%
2008 Latinobarometro survey showed that only 37% of
Mexico 15.3% 9.6% 3.2% 161.0% 1.2% 12.5%
Peru 11.9% 8.3% 2.2% 151.0% 2.6% 31.1% Mexican respondents trusted the banks, below the LatAm
Source: IMF Global Financial Stability Report.
average of 44% (up from a low of 29% in 2003). Chile
has the highest banking sector confidence, at 55%, in line
The Mexican financial system is dominated by with its greater banking penetration. By contrast – for
foreign-controlled banks, which make up over 70% of example – overall confidence in the private sector in
system assets. BBVA (Bancomer) and Citibank Mexico was lower (35%) as well as below the LatAm
(Banamex) are the two largest banks in the country. average (41%). Oddly enough, confidence in the private
sector was highest in Venezuela (58%).
Figure 39: Share of Assets Held in Subsidiaries of Foreign Banks
(% of total banking system assets, 2008) Figure 41: Banking-Sector Confidence
How much confidence do you have in the banking sector?

Source: IMF, National Authorities, Bankscope.


Source: Latinbarometro 2003-2008.
Credit penetration in Mexico is low by both global
and regional standards, at around 25% of GDP versus
over 55% in Brazil and over 70% in Chile. This low Pension Funds
penetration level is partly explained by the Mexican Mexico has a mandatory-contribution private pension
devaluation and subsequent banking crisis of 1995. fund system, with individual capitalization accounts.

21
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Gabriel Casillas
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gabriel.casillas@jpmorgan.com

This was introduced in 1997, to replace the previous weighted average of 8.3%), an equity limit of 30%, and
‘pay-as-you-go’ system, and is based on the Chilean is held by those less than 26 years old.
model introduced in 1980 and widely adopted across the
region. Workers and employers contribute 8.5% of Table 13: Pension Fund Equity Holdings by Type of Fund
monthly wages. The private pension managers running Billion Pesos as of end November, 2009
these funds are known as ‘Afores’. There are currently 16
Afores in existence, with the top 5 being Banamex, ING,
Bancomer, Banorte Generali and Inbursa.

Table 11: Mandatory Contribution Private Pension Funds System


Assets Under Management US$m
Country 2004 2005 2006 2007 2008
Argentina 18,306 22,565 29,371 30,105
Bolivia 1,716 2,060 2,299 2,910 3,885
Chile 60,799 74,756 88,632 111,037 74,313
Colombia 11,067 16,015 19,284 24,643 26,021
Costa Rica 476 711 1,020 1,396 1,513
El Salvador 2,148 2,896 3,352 3,958 4,471
Source: Consar, J.P. Morgan.
Mexico 42,524 55,205 66,613 75,995 67,771
Peru 7,820 9,397 14,260 20,155 16,682
Dominican Rep 194 381 639 955 1,356 In terms of daily risk tolerance, measured by VaR (value
Uruguay 1,678 2,153 2,586 3,392 2,872 as risk), the most conservative fund, Fund 1, can only
Total 146,729 186,139 228,056 274,547 198,884
have up to 0.6% daily VaR (95% confidence level),
Source: J.P. Morgan, AIOS. while the most aggressive, Fund 5, can post a 2% daily
VaR on its portfolio. This new breakdown into five
With around US$88.1 billion in assets under different funds has given more room for diversification
management (December 2009), private pension funds and risk taking.
(Afores) have played a major role in the development
of the local market over the past 10 years. The Mexican However, after the high volatility experienced over the
system has in excess of 39.3 million affiliates (by far the last year on the back of the global financial turmoil, the
greatest in the region, with Colombia the next nearest at pension fund regulator (CONSAR) granted forbearance to
8.6 million), of which 14 million are regular contributors. pension funds, which allows them flexibility to adjust
The average monthly contribution is around US$490, and their equity and fixed income portfolios and meet
the net total bimonthly system inflow has been averaging redemptions. Against this backdrop, pension funds were
around US$1.5 billion. granted a temporary waiver on the VaR limits.
Table 12: Pension Fund Holdings
This provided some financial flexibility to pension funds
Billion Pesos as of end November 2009
and prevented them from selling their assets at fire-sale
prices. In addition, pension funds’ limits on A and AA
commercial paper were increased and exposure to
principal protector private equity investments issued by
Mexican nationals was revised for all funds but Fund 1
(see Annex 1).

On the other hand, pension funds can only buy


Source: Consar, J.P. Morgan. equities through indices or trackers approved by the
regulator CONSAR. While this has not changed, the
The system was reformed in March 2008, from a two- positioning of pension funds in individual stocks can now
fund asset allocation model to one offering five funds deviate by +/-4% from the weights indicated by the
(‘multifunds’), with distinct risk/return asset allocations. approved indices, instead of the previous +/1%.
Fund 1 is the most conservative – cannot hold equity
positions – and is held by those age 56 or over. Fund 5, The objective of this measure is to improve the flexibility
by contrast, is the most aggressive, and has the highest and efficiency of equity investments, which should
equity positions (13.8% in local equities versus a system eventually lead to higher equity exposure. As of

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ben.m.laidler@jpmchase.com

Gabriel Casillas
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gabriel.casillas@jpmorgan.com

December 2009, total equity exposure of the combined Figure 42: Mutual Funds AUM growth rate yoy
portfolio of pension funds stood at 13.0%, with 9.0% in 25%
local stocks and 4.0% in international equities. This 20%
equity exposure is higher than the 9.8% average in 1H09 15%
but lower than the 15.5% reached a year ago. 10%
5%
0%
However, it is worth noting that pension funds signed an -5%
agreement among their portfolio managers in March -10%
2009 that requires all new investments for the rest of the -15%
year to be invested in local assets. In addition, this

Apr-08

Jun-08

Aug-08

Oct-08

Dec-08

Feb-09

Apr-09

Jun-09

Aug-09

Oct-09

Dec-09
agreement urged the pension funds to invest in
infrastructure and housing projects in order to help create Source: AMIB.
jobs and offset the economic slowdown. This was an
agreement without legal obligations. Furthermore, The mutual funds industry had invested in equities in a
pension fund managers decided to extend the conservative manner. For the period 1996 to 2006, the
agreement for another five months, until May 31, share of total AUM invested in equities was 15%, and
2010 (for further details please see Mexico Economic currently this share is 15.9%, slightly more than seen in
Comment, ‘Pension funds agreement on foreign assets – the Afore system. However, between 2Q07 and 4Q07
A gradual exit strategy rather than an actual extension of this weight was close to 20%, but in 2008 it started to
the agreement’, December 21, 2009). decrease, as risk aversion increased and equities
performed poorly.
Finally, in addition to the Afores, which only manage
private-sector employee funds, the reform of the Figure 43: Mutual fund investment in equity as a % of total AUM
pension system for public-sector employees (ISSSTE 19%
reform) incorporated US$3.2 billion into the system in 18%
December 2008. The so-called PensionISSSTE started 17%
16%
fully invested in government securities but has been 15%
slowly diversifying its portfolio over the last year. 14%
However, PensionISSSTE will manage civil servants’ 13%
12%
accounts for the next three years, which suggests all their
11%
incoming new accounts will start building positions in 10%
the most aggressive funds, while their accounts in the
Apr-08

Jun-08

Aug-08

Oct-08

Dec-08

Feb-09

Apr-09

Jun-09

Aug-09

Oct-09

Dec-09
least aggressive funds should remain relatively
unchanged over the next three years. Source: AMIB.

After a three-year period, the PensionISSSTE will be able Capital Markets


to receive contributions from private-sector employees,
and all workers, public or private, will choose among all Mexican Bolsa has 120 listed companies, and around
existing pension funds (including PensionISSSTE). 370 listed share series and other instruments. This
compares to 392 listed in Brazil and 238 listed in
Mutual Funds Santiago. The number of overall instrument listings has
actually been rising strongly in Mexico – from only 177
The mutual fund industry has US$73 billion of AUM, in 2000 – whilst it has been falling in Brazil – from 467
as of December 2009, making it not dissimilar in size to in 2000.
the better-known Afore pension fund system. As of 3Q09
the mutual fund industry represented 8% of GDP.

Total AUM had been increasing steadily until the 1998


economic crisis, which hurt AUM growth rates. Since
mid-2009, however, growth rates have been recovering.
As of December 2009, there were 477 mutual funds
registered in Mexico.

23
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ben.m.laidler@jpmchase.com

Gabriel Casillas
(52-55) 5540-9558
gabriel.casillas@jpmorgan.com

Figure 44: Number of listed entities The Mexican stock market has 120 listed companies, and
600 the market cap/GDP is around 30% of GDP. The Indice
de Precios y Cotizaciones (IPC), the benchmark index of
400
the Mexbol, is composed of 35 stocks, and it’s a market
200 capitalization-weighted index, rebalanced quarterly. The
index is gradually moving toward a free float-adjusted
0 methodology.
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008

Brazil Argentina Colombia Lima Mex ico Santiago There are a few indices that measure the performance of
Source: WFE.
the Mexbol. Some investors use the Mexico MSCI index,
which is composed of 23 companies, free float market
Daily exchange traded volume is not well reflected in capitalization weighted.
the high number of listed companies, with Brazil’s
Table 14: IPC and MSCI top 10 constituents
daily volume dramatically higher. Daily traded volume
reported to the World Federation of Exchanges averaged Companies MSCI share % IPC share %
only US$110 million in 2008, compared to US$724 AMX 30.8 19.8
Walmex 10.0 14.3
million in Brazil. Grupo Mexico 6.5 7.0
Carso Global 2.4 5.4
Figure 45: Average Daily Value of Shares Traded Elektra 2.8 4.7
Grupo Televisa 6.8 4.5
US$ Millions
Cemex 6.5 4.4
800,000 Femsa 6.7 4.0
Inbursa 1.7 4.0
600,000 Banorte 3.7 3.1
TOTAL 77.8 71.2
400,000
Source: J.P. Morgan estimates.
200,000

0
Table 15: MSCI Mexico Sector Weights
1990 1993 1996 1999 2002 2005 2008 Sector Weights (%)
Discretionary 11.5
Brazil Argentina Colombia Lima Mex ico Chile
Staples 23.4
Source: WFE.
Financials 5.2
Industrials 4.1
Materials 15.8
The lack of new equity issuance has combined with only Telecoms 39.9
a gradual pick up in average daily trading volume to see Total 100.0
a significant decrease in Mexico’s weight in global Source: MSCI.
emerging market indices. This reflects the greater
issuance, market performance, and liquidity increase in The Global BMV Market is a mechanism designed to
other emerging markets. list and trade, on the Mexbol, securities that were:

Figure 46: Mexico weight in MSCI EM Index, vs Brazil # Not subject to a public offering in Mexico.

17.0%
# Not listed in the Securities Section of the National
14.0% Brazil Weight in EM Securities Registry.
11.0%
# Listed on foreign securities markets that have been
8.0% recognized by the National Banking and Securities
Commission (CNBV) (Recognized Foreign Markets) or
5.0%
Mexico Weight in EM whose issuers have received the relevant recognition of
2.0% said Commission (Recognized Foreign Issuers).
95 96 97 98 99 00 01 02 03 04 05 06 07 08 09
There are 436 securities trading in this market. 86%
Source: J.P. Morgan, MSCI are US securities, 10% are European securities, 2% Asian

24
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ben.m.laidler@jpmchase.com

Gabriel Casillas
(52-55) 5540-9558
gabriel.casillas@jpmorgan.com

and the rest Australian and Canadian securities. Volume Table 16: LatAm Fiscal Deficits
in this market accounts for around 17% of total BMV Budget balances (% of GDP)
turnover.

ETFs in Mexico are growing in importance, as many


investors prefer to invest in ETFs rather than stock
picking. This is particularly true for the Afores. The ETF
industry in Mexico is composed mainly of three highly
traded vehicles, EWW (average daily trading volume –
ADTV – of US$129mn), NAFTRAC (ADTV of Source: J.P. Morgan.
US$96mn) and ILCTRAC (ADTV of US$14mn).
Breakdown of Mexico fiscal income and expenditures:
There are another four ETFs that seek to replicate a Oil revenue represented 37% of total government income
Mexican Index – like IMCTRAC, IHBTRAC and in 2008 (see Table 11), whilst tax revenue represented
ICMTRAC – but none of these is very liquid. EWW is 42%. Income from other state-owned enterprises
the oldest ETF and is composed of a broader range of (electricity, water) represented the remaining 21% of
securities, 48; while NAFTRAC just has 35 stocks, but is fiscal revenue. The IETU and cash deposit taxes brought
in 5% of tax revenue in 2008. On the expenditure side,
the most demanded by local investors.
discretionary (‘programmable’) spending represents 77%
Figure 47: Invested amount in domestic equities by the Afores vs.
of total. Three-quarters of this is to current spending, as
Naftrac 6M moving average ADTV opposed to investment.
60 100
90 Table 17: Fiscal Revenues and Expenses
50
80 In Ps billions
Share Volume in mn

70
40 Fiscal Revenue 2005 2006 2007 2008
60
Total Income 1,948 2,264 2,486 2,861
Ps bn

30 50
40 Oil Revenues 727 861 881 1,055
20
30 Non - Oil Revenues 1,221 1,402 1,605 1,806
10
20 Non oil public companies and others 428 472 558 599
10 Tax Income 793 931 1,047 1,208
0 0 ISR (Corporate Income Tax) 385 448 527 608
IETU (Alternative Min Corp Tax) 47
Oct-02

Oct-03

Oct-04

Oct-05

Oct-06

Oct-07

Oct-08

Oct-09
Apr-03

Apr-04

Apr-05

Apr-06

Apr-07

Apr-08

Apr-09

IVA (VAT) 318 381 409 458


Import Duties 27 32 32 36
Inv ested amount in domestic equities by the Afores Naftrac 6M ADTV
IDE (Cash Deposits Tax) 18
Other taxes 61 68 75 37
Source: J.P. Morgan estimates, company data. Oil Revenues % Total Income 37.% 38% 35% 36%
Tax Revenue % of Total Income 40% 41% 42% 42%
Fiscal Policy Tax revenues as a % of GDP 8.5% 8.9% 9.3% 9.9%
Oil revenues as a % of GDP 7.8% 8.2% 7.8% 8.7%
Mexico’s fiscal deficit is expected to increase to 2.8%
of GDP this year vs 2009. Latin America fiscal deficit to Fiscal Expenditure 2005 2006 2007 2008
Total Net Expenses 1,958 2,255 2,483 2,873
GDP will be also 2.8%, while Brazil’s fiscal deficit Programmable expenses 1,459 1,657 1,895 2,210
might reach 3.4% and Chile 1.6% of GDP. Mexico fiscal Investment 273 319 405 532
gap will be below an EM average of 3.2% of GDP. This Current 1,186 1,338 1,490 1,678
Mexico and EM deterioration pales in comparison with Wages and personnel services 557 611 654 710
the fiscal deficit of 8.6% of GDP that developed markets Other operating expenses 422 496 576 638
Subsidies and transfers 203 224 260 330
are expected to register this year. Non programmable expenses 499 598 588 662
Financing 210 250 239 227
Participations 279 329 333 423
Programmable Expenses % Total Expenses 74% 73% 76% 76%
Source: SHCP and J.P. Morgan.

Comparative tax rates: This low Mexican public-sector


revenue/GDP and low tax/GDP come despite

25
Ben Laidler Latin America Equity Research
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ben.m.laidler@jpmchase.com

Gabriel Casillas
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comparatively similar tax rates versus emerging market Figure 50: Amounts involved in the fiscal reform process
peers. Ps bn

Figure 48: Comparative Tax Rates: VAT + Corporate Tax


Proposed (with oil price at US$54)
500
419 409 Approved (with oil price at US$ 59)
400

300 74 74
95
200 95
136
189 103
100 60

0
Budget Less New Non-recurrent Projected
gap spending taxes revenues deficit

Source: J.P. Morgan and Deloitte.


Source: J.P. Morgan with data from the Ministry of Finance, the Senate, and the Lower
House.
Figure 49: Tax structure trend in LatAm

In our view, the approved fiscal reform does not reduce


significantly the government’s dependence on oil
revenues. In this context, we note that about 40% of the
projected additional tax collection will come from
recurrent sources. So, even though the temporary
increase in the income tax rate will account for nearly
50% of the marginal revenues, the rest will come from
recurrent sources – the 1%-pt increase in the VAT as
well as from excise taxes and new measures to improve
tax collection efficiencies.

Table 18: Estimated revenue by type of proposed fiscal measure


Source: CEPAL.
Proposed Approved
Ps , mn % Ps , mn %
President Calderón’s fiscal package for year 2010 and the Total 189,441 100 136,411 100
passed 2009 fiscal reform aimed to finance Ps419 billion Income tax (ISR) 72,988 38.5 67,061 49.2
via: less public spending (Ps74 billion); new taxes (Ps189 New 2% sales tax 71,775 37.9 0 0.0
billion); use of nonrecurrent revenues (Ps95 billion from Food and medicine 20,000 10.6 0 0.0
Other 51,775 27.3 0 0.0
savings primarily generated by past oil windfall); and a 1%-pt increase in the VAT 0 0.0 29,796 21.8
projected deficit of Ps60 billion (0.5% of GDP, first Modification to excise taxes 21,677 11.4 16,554 12.1
chart). The Senate and the Lower House needed to New 3% tax on telecom services1 13,990 7.4 10,000 7.3
finance a smaller lower amount (Ps409 billion) as a result Other 7,687 4.1 6,554 4.8
Modification to cash deposits tax 2,565 1.4 2,565 1.9
of the higher crude oil assumption. Other2 20,436 10.8 20,436 15.0
1. Improvements in tax collection efficiencies
2. The original proposal was 4%
Source: Ministry of Finance and J.P. Morgan.

Sovereign Credit Ratings


Last year, Standard and Poor’s and Fitch Ratings
downgraded Mexico’s sovereign debt rating by one
notch to BBB, from BBB+. However, it lifted its outlook
to ‘stable’ from ‘negative’. We continue to believe that
Moody’s will not follow the Fitch and S&P downgrades,
as it has observed a more optimistic appraisal of
Mexico’s fiscal pressures. In fact, it has not even
changed its outlook from ‘stable’. Moreover, even

26
Ben Laidler Latin America Equity Research
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ben.m.laidler@jpmchase.com

Gabriel Casillas
(52-55) 5540-9558
gabriel.casillas@jpmorgan.com

though Moody’s started with a lower rating compared to Figure 51: Policy Responses to contain FX appreciation in EM
S&P (by 1 notch), Moody’s has never downgraded
México’s sovereign debt, not even in 1995 when the
‘tequila crisis’ emerged, while S&P did.

Table 19: Mexico Historical Long-Term Sovereign Debt Credit


Ratings1 &
Rate Chg. Rate Chg. Rate Chg.
S&P Date Moody’s Date Fitch Date
BBB Baa1 BBB
(Stable) 14-Dec-09 (Stable)3 5-Aug-09 (Stable) 23-Nov-09
BBB+ Baa1 BBB+
(Neg) 11-May-09 (Stable) 6-Jan-05 (Neg) 11-Nov-08
BBB+ 8-Oct-07 Baa2 6-Feb-02 BBB+ 19-Sep-07
BBB 31-Jan-05 Baa3 7-Mar-00 BBB 7-Dec-05
BBB- 7-Feb-02 Ba1 10-Aug-99 BBB- 15-Jan-02
BB+ 13-Mar-00 Ba2 20-Feb-91 BB+ 3-May-00
BB 10-Feb-95 BB 30-Aug-95
BB+ 29-Jul-92
1. Outlook between parentheses
2. 'Investment Grade' is considered to be achieved at a rating of BBB- (Baa3
for Moody's) or above.
3. Moody's Investors Service ratified México's sovereign rating at Baa1 on
August 5, 2009
Source: S&P, Moody’s and Fitch Ratings.

At BBB by S+P, Mexico is rated two notches above


investment grade. This is in line with Russia, Bulgaria, Source: J.P. Morgan. 1. Swaps, forwards, credit lines. 2. The Treasury set up an offshore
fiscal stabilization fund in 2006 to accumulate the windfall gains from high copper prices. 3.
Croatia and Lithuania. It is a notch above Brazil, Intervened once but with euros. 4. Capital controls are indirect. 5. URR lifted on February
Colombia and Peru (BBB-). Chile is the highest-rated 29, 2008. 6. Sale of USD assets to manage spread between official and parallel FX rates.
major economy in LatAm (A+).
With an estimated daily turnover of more than US$20
Currency & Monetary Policy billion (US$20 billion in the spot market) the peso is
the most liquid currency in Latin America and one of the
Since the adoption of the free-floating exchange rate
most liquid globally, just after HKD, NOK and NZD.
regime in December 1994, there have been no
restrictions on buying/selling the peso freely. Until Table 20: Mexico’s Exchange Rate Regimes (1932-2010)
October 2008, Banxico’s only mechanism of intervention
was through daily dollar sales by predetermined amounts 1932-1944 Free Floating
1944-1948 Fixed Exchange Rate1
announced every three months in the event of FX 1948 Free Floating
reserves accumulation (from Pemex, mostly). This 1949-1976 Fixed Exchange Rate
mechanism was suspended by the Exchange Commission 1976-1977 Free Floating
at the end of July 2008 as a means to compensate for the 1977-1982 Fixed Exchange Rate
1982-1991 'Dual' Exchange Rate
drop in reserves caused by an US$8 billion sale to the 1991-1994 Crawling Peg with the US Dollar
Finance Ministry (Hacienda). Since October 2008 1994-2008 Free Floating with Some FX Interventions
Banxico has intervened in the spot market through 1998-2008 Free Floating
discretionary and rule-based USD sales aimed at 2008-2010 Free Floating with Some FX Interventions2
1. Mexico was part of the Bretton-Woods agreement.
providing liquidity and smoothing volatility. 2. The Foreign Exchange Commission (FEC) decided to intervene in the FX
market to stabilize the exchange rate amidst the Global Crisis that started in the
US subprime housing market.
Source: Banco de México, Ortiz, Guillermo, and Leopoldo Solís ‘Estructura Financiera y
Experiencia Cambiaria: México 1954-1977’, Documento de Investigación, 1978-01, Banco
de México, 1978.

Fixed rate: Banxico sets the exchange rate daily by


conducting three surveys during the day among at least
four local banks and calculating the average of their

27
Ben Laidler Latin America Equity Research
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ben.m.laidler@jpmchase.com

Gabriel Casillas
(52-55) 5540-9558
gabriel.casillas@jpmorgan.com

quotes. The fixed rate serves as the official reference rate Table 21: Banco de México’s Historical Highlights1
for US dollar-denominated contracts domiciled in Sep 1, 1925 Banco de México opens its doors
Mexico. Jun 22, 1992 The New Monetary Law (released on June 22, 1992)
in which the government decided to eliminate three
zeroes from the peso, yielding to the creation of the
FX forward and futures market: In addition to the 'New Pesos' (1,000 Pesos = 1 'Nuevo' Peso)
OTC market, the market for listed future peso contracts Apr 1, 1994 Banco de México becomes an Independent Central
has grown rapidly over the past few years, through the Bank
Mexican Market of Derivatives (MexDer), as Siefores Sep 13, 1995 Banco de México changed its operational instrument
to a monetary target signal, also known as ‘el corto’,
(Sociedades de Inversion Especializadas en Fondos para in which commercial banks should hold a zero
el Retiro, that is, retirement funds) have turned more monthly cumulative balance with the Central Bank
active. 1999 'Unofficial' adoption of an inflation target of 3%
2001 Official adoption of an inflation target regime
2002 Official adoption of a long-term inflation target of 3%
Jul 28, 2002 'Official' adoption of a long-term inflation target of 3%
Monetary Policy +/- 1%
Mexico’s Central Bank opened its doors back in 1925. Jan 2003 The Central Bank's board started to meet on a
biweekly basis to announce changes in monetary
However, Banco de Mexico did not become an policy (before the board could make announcements
independent institution until 1994. In sync with every other day). It is worth noting that a statement
Banxico’s autonomy, the monetary authority adopted ‘el was released only after the second meeting of the
corto’ (used to implement monetary policy through a month
Apr 10, 2003 Banco de México modified its operational instrument
signal based on monetary targeting to short or absorb ‘el corto’ to a daily balance, from a monthly
liquidity in the interbank money market) as its monetary cumulative balance
instrument. Apr 2004-May 2005 The board mentioned in their communiqués that
short-term interest rates in Mexico 'should reflect' the
US Fed's monetary policy actions
Later on, in 2001, Banxico officially implemented its Aug 26, 2005 'Unofficial' adoption of the overnight rate as the
inflation target level of 3%. Finally, in early 2005, monetary policy instrument of choice, instead of ‘el
Banxico adopted the policy rate target (the O/N rate, or corto’
tasa de fondeo) as its main monetary policy instrument; Jan 2006 The Central Bank's board started to meet in a monthly
basis to announce changes in monetary policy
el corto was officially discontinued on January 21, 2008. Jan 20, 2008 'Official' adoption of the overnight rate as the
monetary policy instrument of choice
Central Bank governors are appointed for six-year
terms, by the president, and are subject to Senate Source: Banxico.
approval. The current governor, Agustin Carstens, took
office in December 2009 and was previously Mexico’s The beginning of a new era. With the new leadership in
finance minister for three years and had been the Central Banxico we believe that the new Governor Carstens and
Bank’s chief economist in 1994-1999. As Central Bank the other members of the board could be inclined to be
governor, Carstens replaced two-term governor, more transparent, particularly by releasing minutes from
Guillermo Ortiz. the monetary policy meeting as well as by giving the vice
governors more active roles.

28
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ben.m.laidler@jpmchase.com

Gabriel Casillas
(52-55) 5540-9558
gabriel.casillas@jpmorgan.com

Table 22: Heads of Banco de México1 trend on the back of new taxes and higher energy tariffs
Period President implemented at the beginning of the year. In addition, the
Alberto Sep 1925 - May Ministry of Finance has confirmed that fuel prices will
Mascareño 1932 Plutarco Elias Calles increase at a gradual pace until domestic prices reach
Emilio Portes Gil
Pascual Ortiz Rubio international standards (US gasoline prices are still
May 1932 - Apr around 10% above Mexican prices).
Agustín Rodríguez 1935 Pascual Ortiz Rubio
Abelardo L. Rodríguez
Lázaro Cárdenas We believe the recently approved fiscal reform will
Gonzalo Robles Apr 1935 - Dec 1935 Lázaro Cárdenas add 129bp to 12-month headline inflation in 2010. We
Luis Montes de Dec 1935 - Sep estimate a year-over-year 43-bp contribution from the
Oca 1940 Lázaro Cárdenas
Eduardo Sep 1940 - Dec
1%-pt increase in the VAT, 10bp from higher excise
Villaseñor 1946 Manuel Ávila Camacho taxes and 36bp from the 10% annual rate gasoline price
Dec 1946 - Nov hike. In this context, we note that these price increases
Carlos Novoa 1952 Miguel Alemán Valdés are in line with our inflation baseline scenario. Our
Dec 1952 - Aug
Rodrigo Gómez 1970 Adolfo Ruiz Cortines forecast calls for inflation to trend upward to 5.1% by
Adolfo López Mateos year-end 2010.
Ernesto
Fernández Dec 1970 - Dec
Table 24: Estimations of the tax modifications as well as the
Hurtado 1976 Gustavo Díaz Ordáz
Luis Echeverría Álvarez administered prices to headline CPI inflation
Gustavo Romero Dec 1976 - Mar Banxico J.P. Morgan
Kolbeck 1982 José López Portillo Total contribution (bp) 169 129
Miguel Mancera Mar 1982 - Sep 1. Tax modifications 50 53
Aguayo 1982 José López Portillo a. 1% VAT increase 35 43
Carlos Tello b. Excise taxes 10 10
Macías Sep 1982 - Dec1982 José López Portillo Beer 2 --
Miguel Mancera Dec 1982 - Dec Alcoholic beverages (above 20° GL) 1 --
Aguayo 1998 Miguel de la Madrid Hurtado Tobacco products 3 --
Carlos alinas de Gortari Telecom 5 --
Ernesto Zedillo Ponce de León c. Corporate income tax increase 5 --
Guillermo Ortiz 2. Administered prices 76 56
Martinez Jan 1998 - Dec 2009 Ernesto Zedillo Ponce de León a. Direct effects 62 46
Vicente Fox Quesada Gasoline 32 36
Felipe Calderón Hinojosa Heating Gas 12 5
Agustín Guillermo Electricity Tariffs 18 5
Carstens Jan 2010 - Felipe Calderón Hinojosa b. Second-round effects 14 10
1. From 1925 to 1993 the head of Banxico was named Director General. 3. Administered prices and taxes at the state
However, the Central Bank's head has been called Governor since 1994 when level 44 20
Banco de México achieved its autonomy
Source: Banxico and J.P. Morgan.
Source: Banxico.

On the other hand, the average minimum wage in Mexico


Table 23: Banco de Mexico (Banxico) Summary
for the three different labor areas was settled at 55.9
(US$4.27) pesos per day for 2010, up 4.8% from the
prior level. Moreover, public and private workers
negotiate wage adjustments on a yearly basis. This
information is published by the Ministry of Labor on a
monthly basis. In our view, wage settlements are an
important indicator as Banxico usually uses wage
negotiations to gauge demand-side inflationary pressures
that could trigger monetary policy actions.
Source: J.P. Morgan.

Prices & Wages


Last year Mexico experienced a sharp disinflation trend
due to the strong economic downturn and President
Calderon’s commitment to freeze administered prices.
However, inflation in 2010 is expected to start an upward

29
Ben Laidler Latin America Equity Research
(1-212) 622-5252 17 February 2010
ben.m.laidler@jpmchase.com

Gabriel Casillas
(52-55) 5540-9558
gabriel.casillas@jpmorgan.com

Table 25: Minimum wage settlements Figure 53: Bonos outstanding and holdings by type of investor
MXN per day % of holdings
2010 2009 Chg %Chg
Area A 57.46 54.8 2.66 4.85
Area B 55.84 53.26 2.58 4.85
Area C 54.47 51.95 2.52 4.85
Average 55.92 53.34 2.59 4.85
Source: National Minimum Wage Committee (CONASAMI).

Figure 52: Inflation forecast and wages in Mexico


% yoy

7
Minimum wage
6 Inflation
Wages negotiations

5 Source: Banxico.

4 Recently the Mexican government has been able to


increase debt duration. Moreover, the local debt yield
3
curve has expanded from 1-year maturity in 1995 to a 30-
2 year tenor in March 2006.
02 04 06 08 10
Figure 54: Extension of the yield curve
%
Source: Banxico, CONASAM and J.P. Morgan.

35
Fixed Income Market 30
Federal government securities (FGS): Federal 25
government securities make up about 60% of the local 20
fixed income market, followed by IPAB, the Institute for 15
the Protection of Banking Savings (20%), corporates and 10
public companies (15%) and MBS and other securities 5
(5%). 0
0 0 1 1 3 5 7 10 20 30
Bonos: Bonos are Euroclearable, and most foreigners are Jan 1999 Jan 2000 May 2000
exempted from withholding taxes by the Mexican Jul 2001 Mar 2006 Dec 2009
Finance Ministry. Average daily turnover reaches over Source: Banxico.
US$1.5 billion.
External Accounts
BondesD: These bonds were issued in August 2006 to
cancel out the Central Bank’s BREMS and acquire USD Mexico’s current account deficit is forecast to narrow
used to prepay external debt. this year and next and remains well covered by FDI
flows. Whilst these flows have fallen, they are expected
to rebound to US$22bn in 2010, more than double the
estimated current account deficit.

Table 26: External Accounts (US$ bn)

Source: 1. Forecast is based on the series reported by the CB of Venezuela which we


believe overstates Venezuela’s oil exports due to PDVSA data distortions.

30
Ben Laidler Latin America Equity Research
(1-212) 622-5252 17 February 2010
ben.m.laidler@jpmchase.com

Gabriel Casillas
(52-55) 5540-9558
gabriel.casillas@jpmorgan.com

Mexico’s stock of private-sector external debt is


around US$93 billion, equivalent to 10.7% of GDP, The Demand
fourth highest of the major LatAm countries. Higher
commodity prices and higher public bank lending have Consumption
eased concerns about private debt rollovers in recent The Mexican consumer has been affected by the
months. current recession, with the double-digit fall in real
private consumption only comparable to the aftermath of
Table 27: Private External Debt Stock (US$ bn)
the 1994-1995 ‘tequila crisis’. In 3Q09 we started to see
a steady recovery in real private consumption growth
rates. Interesting to note that when the real private
consumption growth rate bottomed in a crisis historically,
it took around 2-3 years to retrace historical high levels
and 1 year or less to post precrisis growth rates.

Figure 55: Real private consumption, % change yoy


12%
10%
8%
6%
4%
2%
0%
Feb-81
Feb-82
Feb-83
Feb-84
Feb-85
Feb-86
Feb-87
Feb-88
Feb-89
Feb-90
Feb-91
Feb-92
Feb-93
Feb-94
Feb-95
Feb-96
Feb-97
Feb-98
Feb-99
Feb-00
Feb-01
Feb-02
Feb-03
Feb-04
Feb-05
Feb-06
Feb-07
Feb-08
Feb-09
-2%
Source: J.P. Morgan. *Includes private corporate and banks, latest available. **Includes
-4%
trade financing lines.
-6%
-8%
Since the implementation of NAFTA in 1994, Mexico -10%
has significantly expanded its free trade agreements with -12%

the rest of the world, including the EU in 2000 and Japan -14%

in 2005. Real private consumption growth yoy, saar


Mean
+ 1 Stdev
- 1 Stdev
Table 28: Mexico's Signed Free-Trade Agreements
Source: INEGI and J.P. Morgan.
Agreement Partners: Official Start
Date:
1 NAFTA US and Canada 1-Jan-94 Real private consumption as a percentage of total
2 TLC - G3 Colombia* 1-Jan-95 consumption, for 3Q09, was 86.4%. Real private
3 TLC - Mexico-Costa Rica Costa Rica 1-Jan-95 consumption as a percentage of GDP, in 3Q09, reached
4 TLC - Mexico-Bolivia Bolivia 1-Jan-95 70%, coming from a recent low of near 62% during the
5 TLC - Mexico-Nicaragua Nicaragua 1-Jul-98
6 TLC - Mexico-Chile Chile 1-Aug-99 1994-1995 ‘tequila crisis’. Real government consumption
7 EUFTA European Union 1-Jul-00 is around 12% of Mexican GDP.
8 FTA - Mexico - Israel Israel 1-Jul-00
9 TLC - Triángulo del Norte El Salvador, Guatemala, 15-Mar-01
Honduras**
10 FTA - European Free Iceland, Norway, 1-Jul-01
Trade Association Liechtenstein, and
Switzerland
11 TLC - Mexico-Uruguay Uruguay 15-Jul-04
12 FTA - Mexico-Japan Japan 1-Apr-05
*Venezuela was part of the agreement from January 2005 to November 2006
**Free trade agreement with Honduras started on June 1st, 2001
Source: Ministry of Economics.

31
Ben Laidler Latin America Equity Research
(1-212) 622-5252 17 February 2010
ben.m.laidler@jpmchase.com

Gabriel Casillas
(52-55) 5540-9558
gabriel.casillas@jpmorgan.com

Figure 56: Real private consumption share as a % of GDP, sa Figure 58: Consumer confidence index
40%
72%
35%
70%
30%
68% 25%

66% 20%
15%
64%
10%
62% 5%
60% 0%

Dec-94
Dec-95
Dec-96
Dec-97
Dec-98
Dec-99
Dec-00
Dec-01
Dec-02
Dec-03
Dec-04
Dec-05
Dec-06
Dec-07
Dec-08
58%
Feb-80

Feb-82

Feb-84

Feb-86

Feb-88

Feb-90

Feb-92

Feb-94

Feb-96

Feb-98

Feb-00

Feb-02

Feb-04

Feb-06

Feb-08
Source: INEGI.

Source: INEGI. Two other variables play a key role in consumption:


credit and remittances. Consumer credit saw
Average income per employed person has been very remarkable double-digit growth from 2002 until the
stable for the past decade, after recovering from the beginning of the economic crisis in 3Q08. However, as
‘tequila crisis’. of 3Q09 consumption loan growth was -17% yoy.
Between 1994 and 2000 the share of consumer credit as a
Figure 57: Real average income index per EMPLOYED person, sa percentage of total private credit averaged around 7%.
120 This grew significantly from then on, peaking at 33.9%
as of November 2006; however, in November 2009 this
110
share reached 24% (includes total credit outstanding). At
100 the same time, asset quality (NPLs) deteriorated to near
10% of consumer loans in the recent economic crisis,
90
from a cyclical low of under 5% in 2003 and 2004.
80
Figure 59: Consumer NPLs
70
40%
60 35%
Jan-93

Jan-94

Jan-95

Jan-96

Jan-97

Jan-98

Jan-99

Jan-00

Jan-01

Jan-02

Jan-03

Jan-04

Jan-05

Jan-06

Jan-07

Jan-08

30%
25%
Source: INEGI. 20%
15%
Consumer confidence has been gloomy since April 10%
2008, and not hitting its lowest level until October 2009 5%
(index level 77.0), a 27% decline since the end of 2007. 0%
Since October, confidence levels have gradually
Dec-94

Dec-96

Dec-98

Dec-00

Dec-02

Dec-04

Dec-06

Dec-08

improved (+6.6% as of January 2010).


Source: Banco de México.

Remittances are especially important for the poorest.


According to Consulta Mitofsky, 51.2% of remittances
goes to basic needs such as food and rent, 10.9% to
paying debts and 5.3% to other items related to
consumption. Just 32.6% is allocated to investing; and
from that, 20% to buying land or agricultural tools, 5.3%

32
Ben Laidler Latin America Equity Research
(1-212) 622-5252 17 February 2010
ben.m.laidler@jpmchase.com

Gabriel Casillas
(52-55) 5540-9558
gabriel.casillas@jpmorgan.com

to buying houses, 4.6% to starting businesses and 2.7% Mexico is one of the largest consumer markets in the
to financing education. world, ranked 11th out of 133 by the World Economic
Forum. The top 5 markets by size are the US, China,
Figure 60: Consumer loans in Ps bn Japan, India and Germany. Brazil is number 9.
600 60% Penetration of consumer goods is mixed – strong relative
50%
500 40%
to the region in items such as cars, but low in other areas,
400 30% such as computers, TVs, and telephones.
20%
In Ps bn

300 10%
0% Table 30: Consumer Good Penetration
200 -10% Per 1,000 population, 2008
100 -20%
-30% Consumer Goods Mexico LatAm
0 -40% Passenger Cars 162 116
Dec-94

Dec-96

Dec-98

Dec-00

Dec-02

Dec-04

Dec-06

Dec-08
Fixed Line Telephone 172 183
Total loans for consumption Consumption loans growth rate yoy Mobile Subscribers 709 804
Television Sets 396 468
Source: Banxico and J.P. Morgan.
Personal Computer 182 215

Figure 61: Average Total Annual Cost of Credit Source: UN Statistical Office, World Bank, FAO.

18 8%
6% Consumption is very concentrated. If we analyze the
17
4% spending allocation in Mexico among quintiles, we see
16
2% that 43% is consumed by the top 20% and 65% by the
15 0% top 40%. The bottom 40% only accounts for 19% of total
14 -2% consumption.
13 -4%
-6% Figure 62: Total spending by quintile
12
-8% 50% 43%
11 -10%
40%
10 -12%
30%
Dec-04

Apr-05

Aug-05

Dec-05

Apr-06

Aug-06

Dec-06

Apr-07

Aug-07

Dec-07

Apr-08

Aug-08

Dec-08

Apr-09

Aug-09

22%
20% 16%
12%
Average Total Annual Cost of Credit growth rate yoy 7%
Average Total Annual Cost of Credit 10%
0%
Source: Banco de México.
I II III IV V
Table 29: Consumer spending breakdown as a % of total Source: INEGI.
consumption
Items % Investment
Food, Beverages and Tobacco 22.2%
Housing 14.1% Mexico gross fixed investment/GDP is around 22%, in
Transportation expenses 12.2% line with the global average (21.8%), and above
Education and entertainment 8.9%
Transfer and others 8.7% developed markets (EU average 21.1%, US 14.3%).
Electricity and gas, housing expenses 6.6% However, it is only midtable amongst other major EM
Personal care and education items 4.6% economies.
Cleaning products and furniture 4.0%
Clothes 3.5%
Credit card payments 2.8%
Others 2.4%
Savings 2.6%
Losses incurred in business activities 2.3%
Health care 2.1%
Transfers 2.0%
Auto consumption 0.9%
Loans to others 0.1%
Source: INEGI and J.P. Morgan estimates.

33
Ben Laidler Latin America Equity Research
(1-212) 622-5252 17 February 2010
ben.m.laidler@jpmchase.com

Gabriel Casillas
(52-55) 5540-9558
gabriel.casillas@jpmorgan.com

Figure 63: Comparative Investment Spending Figure 65: Real gross fixed capital formation, % change yoy
Gross Fixed Investment/GDP 2008 40%
Brazil 30%
Turkey
Taiwan 20%
Russia 10%
Mexico
Argentin 0%
S. Africa

Feb-81
Feb-82
Feb-83
Feb-84
Feb-85
Feb-86
Feb-87
Feb-88
Feb-89
Feb-90
Feb-91
Feb-92
Feb-93
Feb-94
Feb-95
Feb-96
Feb-97
Feb-98
Feb-99
Feb-00
Feb-01
Feb-02
Feb-03
Feb-04
Feb-05
Feb-06
Feb-07
Feb-08
Feb-09
-10%
Chile
Colombia -20%
Peru
-30%
Korea
India -40%
China
-50%
0% 5% 10% 15% 20% 25% 30% 35% 40% 45% Real gross fixed capital formation, sa, change yoy
Mean
Source: CIA World Factbook + Std Dev
- Std Dev

Investment fell to a ‘tequila crisis’ low of ~14%/GDP


Source: INEGI and J.P. Morgan.
but has steadily recovered since then to the current 22%
levels and has not seen anything like the collapse during
this recession that it did during the ‘tequila crisis’ or at
Exports
the beginning of this decade. As a percentage of GDP, exports have risen from 15%
in 1993, just before the implementation of NAFTA, to an
Figure 64: Real gross fixed capital formation as a % of GDP average of 27% of GDP in the past five years. As a share
26% of total exports, manufactured goods exports have risen
24% from an average of 37% of total in the 1980s to over 85%
22% in the past five years. However, despite Mexico’s
20% extensive network of free-trade agreements (FTAs;
18%
covering 80% of the world economy), over 80% of
export sales are still made in the US.
16%
14%
Mexico’s economy is reasonably ‘open’, with
12%
exports/GDP of near 27% second only to Chile (39%)
10%
amongst the major LatAm economies and well above the
Feb-80
Feb-82
Feb-84
Feb-86
Feb-88
Feb-90
Feb-92
Feb-94
Feb-96
Feb-98
Feb-00
Feb-02
Feb-04
Feb-06
Feb-08

region’s most closed major economy, Brazil (13%).

Source: INEGI. Table 31: External Indicators


As % of GDP
In 3Q09 fixed investment fell 12.3% yoy. This compares Total Commodity Exports External
to the 19% and 38% falls seen in the 1982 and 1994/5 Exports Exports to US Debt FDI
crises, respectively. We can see that in 2008/09 gross Argentina 21.4 12.8 1.7 47.1 2.4
Brazil 12.6 6.7 2 17.9 2.3
fixed capital formation didn’t decrease as much as real Chile 39.3 30.3 4.8 35.9 9.9
private consumption. Colombia 15.8 8.8 5.5 18.7 4.4
Ecuador 35.6 27.4 15.5 31.1 1.8
Mexico 26.8 5.6 21.6 17.2 2.1
Peru 24.7 19 4.7 26.5 3.2
Venezuela 31.3 30.3 18.1 18.8 0.1
Source: J.P. Morgan.

Commodities are not a significant net export, at 5.6%


of GDP – the lowest in the region – or 21% of exports.
Most of this is oil, making Mexico the fourth most
dependent country in the region on oil exports, after
Venezuela (93% exports), Ecuador (66%) and Colombia
(28%).

34
Ben Laidler Latin America Equity Research
(1-212) 622-5252 17 February 2010
ben.m.laidler@jpmchase.com

Gabriel Casillas
(52-55) 5540-9558
gabriel.casillas@jpmorgan.com

Table 32: Commodities share as % of GDP, by Country Figure 66: Mexico Exports to the US as % of Total
12 month rolling average
Commodities as % of each Exports to US
country exports as % of total 90%
Total Oil Metals Agriculture 89%
Argentina 59.9 12.1 2.7 45.2 7.8 88%
87%
Brazil (1) 53.5 8.3 17.7 27.5 15.8
86%
Chile 77.3 0.0 54.4 22.9 12.3 85%
Colombia 55.7 28.4 17.3 14.0 34.6 84%
Ecuador 77.0 66.8 0.0 17.2 43.5 83%
Mexico 21.0 13.5 0.8 3.7 80.5 82%
81%
Peru 76.9 8.0 62.0 6.9 19.0
80%
Venezuela 96.8 93.7 3.7 0.0 57.7 79%
Source: Official Sources and J.P. Morgan. (1) 1 Brazil imports more oil than it sells abroad 78%
77%

Sep-93
Jun-94
Mar-95
Dec-95
Sep-96
Jun-97
Mar-98
Dec-98
Sep-99
Jun-00
Mar-01
Dec-01
Sep-02
Jun-03
Mar-04
Dec-04
Sep-05
Jun-06
Mar-07
Dec-07
Sep-08
Jun-09
Mexico’s major exports are electrical goods (39%),
cars/auto parts (14%) and oil (11%). Together they Mex exports to US share Mean + Std Dev - Std Dev

account for 64% of total exports. Source: INEGI

Table 33: Main Mexican Exports The remaining 20% of Mexico’s exports are well
January-Nov 2009, US$ millions diversified between South and Central America (6%),
Category US$ mn % Total Europe (5%) and Asia (3%).
Electric machinery and other industries machinery 81,384 39.4%
Transport equipments, road vehicles 30,831 14.9% Figure 67: Mexican Exports by Region
Auto/Autoparts 29,804 14.4%
January-November 2009, US$ millions
Mining 28,499 13.8%
Crude Oil 22,879 11.1%
Iron, steel and manufactures of those metals 9,502 4.6% South America, Central America,
Medical machinery 7,961 3.9% Canada, 3.6% 4.3% Asia, 3.3% 1.7%
Chemicals and related products 7,114 3.4%
Vegetables, fruits, cereals, coffee and others 6,353 3.1%
Miscellaneous manufactured articles 5,857 2.8% Europe, 5.3%
Beverages, alcohol and tobacco 5,625 2.7%
Pearls, precious and semiprecious stones 5,571 2.7%
Textiles, footwear, umbrellas and others 5,565 2.7%
Plastics 5,295 2.6%
Stones and related manufactures 2,151 1.0%
Live animals and related products 1,567 0.8% US, 80.6%
Paper, paper pulp and others 1,511 0.7%
Non-classified articles 1,176 0.6%
Leather manufactures 375 0.2% Source: INEGI.
Cork and wood manufactures 283 0.1%
Animal and vegetable oil and fats 119 0.1%
Arms and ammunition 21 0.0% Imports
Works of art, collectors' pieces and antiques 7 0.0%
Total exports 206,769 100.0% Mexican imports have risen dramatically since 1994
Source: INEGI when the NAFTA was implemented. Mexico is one of
the countries in the world with the most free trade
These exports are predominantly focused on the US, agreements signed (14) with more than 45 countries;
the destination for approximately 80% of exports. although it’s undeniable that commercial activity has
However, this percentage has been declining from a been most active with the US, for obvious reasons.
recent 2001 peak of 89%, as Mexico has gradually
diversified its export destinations – particularly to Europe From January to November 2009 Mexico imported
and Latin America. As seen in the figure below, this mostly electrical machinery, 39.2% of total imports,
means that exports to the US account for around 22% of followed by chemicals, 8.6%, and iron and steel
Mexican GDP. manufactures, 7.8%.

35
Ben Laidler Latin America Equity Research
(1-212) 622-5252 17 February 2010
ben.m.laidler@jpmchase.com

Gabriel Casillas
(52-55) 5540-9558
gabriel.casillas@jpmorgan.com

Table 34: Mexican imports breakdown, Jan-November 2009 Figure 69: Mexican imports by region, Jan-November 2009
Category US$ mn % Total
Others, 3.5%
Electric machinery and other industries machinery 82,841 39.2%
Chemicals and related products 18,119 8.6% Central America, 0.8%
, Africa, 0.4%
South America, 3.5%
Transport equipments, road vehicles 16,676 7.9% Europe, 12.7%
Iron, steel and manufactures of those metals 16,526 7.8%
Mining 14,597 6.9%
China, 13.9% US, 47.9%
Plastics 14,360 6.8%
Medical machinery 8,024 3.8%
Vegetables, fruits, cereals, coffee and others 6,779 3.2%
Textiles, footwear, umbrellas and others 6,688 3.2%
Paper, paper pulp and others 4,986 2.4%
Beverages, alcohol and tobacco 4,530 2.1%
Asia, 30.8%
Miscellaneous manufactured articles 4,140 2.0%
Non-classified articles 4,018 1.9%
Live animals and related products 3,898 1.8% Source: INEGI and J.P. Morgan.
Stones and related manufactures 1,449 0.7%
Animal and vegetable oil and fats 976 0.5%
Cork and wood manufactures 939 0.4%
Pearls, precious and semiprecious stones
Leather manufactures
809
777
0.4%
0.4%
Sectors
Arms and ammunition 56 0.0%
Works of art, collectors' pieces and antiques 11 0.0% Telecom
Total exports 211,200 106.9%
Source: INEGI and J.P. Morgan. The first Mexican telephone ‘call’ was made in March
1878, and private companies such as Bell (La Mexicana)
Figure 68: US and China imports share as a % of total imports and Ericsson (Mexeric) operated fixed-line telephony
concessions. These two companies merged in 1948 to
90%
form Telmex. The government bought 51% of Telmex in
80%
1972 and privatized the company in 1995.
70%
60%
Currently Mexico is midtable in Latin America fixed-line
50%
40%
telephony penetration, behind Chile, Argentina and
30%
Brazil but ahead of Colombia and Peru.
20%
Figure 70: Main telephone lines per 100 hab
10%
35
0% 31.7
28.6
Jan-93
Jan-94
Jan-95
Jan-96
Jan-97
Jan-98
Jan-99
Jan-00
Jan-01
Jan-02
Jan-03
Jan-04
Jan-05
Jan-06
Jan-07
Jan-08
Jan-09

30
24.1
25 23.0 22.4
21.2 21.0
China US 19.1
20
Source: J.P. Morgan. 15.5 14.6 14.6
14.2
15
11.4 10.6
10.2 10.0
Mexican imports come mainly from the US, 10 7.1
5.8
4.4
representing 48% of total imports, reflecting that imports 5

are not as concentrated with US as exports. Europe made 0


up 13% of total imports for the same period, as opposed
Costa Rica

Uruguay

Argentina

Trinidad and Tobago

Venezuela

Brazil

Chile

Mexico

El Salvador

Colombia

Panama

Ecuador

Honduras

Guatemala

Peru

Dominican Republic

Bolivia

Paraguay

Nicaragua

to only 5% of exports. Imports from China are increasing


at a fast pace; between 1993 and 2000, Chinese import
share was less than 2%. However, Chinese imports
represented 14% of total imports in November 2009, and Source: World Economic Forum and J.P. Morgan.
in 2009 averaged 13.8%.
Mexico has 20.5 million fixed lines (15.4m residential
and 5m nonresidential), of which Telmex has 85%
(17.3m as of 3Q09). The remaining 15% of the market
includes Axtel, Maxcom, Televisa and Megacable.

36
Ben Laidler Latin America Equity Research
(1-212) 622-5252 17 February 2010
ben.m.laidler@jpmchase.com

Gabriel Casillas
(52-55) 5540-9558
gabriel.casillas@jpmorgan.com

Figure 71: Residential and Nonresidential lines growth rate major players in this industry, though new entrant Dish,
from MVS, is gaining importance and aiming to finish
25%
2009 with 900 thousands clients, or around 25% market
20% share.
15%
Figure 73: Cable and Satellite TV Subscriber growth rate
10%
55%

5% 50%
45%
0% 40%
35%
Dec-95

Sep-96

Jun-97

Mar-98

Dec-98

Sep-99

Jun-00

Mar-01

Dec-01

Sep-02

Jun-03

Mar-04

Dec-04

Sep-05

Jun-06

Mar-07

Dec-07

Sep-08

Jun-09
-5% 30%
25%
-10% 20%
15%
-15%
10%
5%

Residential fix ed lines % Change YoY Non-Residential fix ed lines % Change YoY 0%

Mar-00

Sep-00

Mar-01

Sep-01

Mar-02

Sep-02

Mar-03

Sep-03

Mar-04

Sep-04

Sep-05

Mar-06

Sep-06

Mar-07

Sep-07

Mar-08

Sep-08

Mar-09

Sep-09
-5%

Mar-05
-10%
Source: COFETEL and J.P. Morgan. -15%
-20%
-25%
In mobile telephony, America Movil (Ticker: AMX) -30%
was created in September 2000 as the result of a spin-
off from Telmex. At that time AMX only had operations Cable TV % change YoY Satelite TV % change YoY

in Mexico, Guatemala, Ecuador and the US, and only had Source: COFETEL.
10.1m subscribers compared to 201 million (Q409)
today. Figure 74: Cable and Satellite TV Subscribers, in thousands
6,000
Total Mexican mobile subscribers reached 78.4 million 5,500
5,000
(September 2009), of which AMX had 58.3 million 4,500
(74%). This is followed by Telefonica with 16.8 million 4,000
3,500
(20%) and Iusacell with 3.5m (4.5%). Mexico is ranked 3,000
89th out of 132 countries globally by mobile penetration, 2,500
2,000
behind Argentina (31st), Spain (38th), Colombia (66th), 1,500
1,000
Chile (6th) and Brazil (81st). 500
0
Figure 72: Minutes per Subscriber
Mar-00

Dec-00

Sep-01

Jun-02

Mar-03

Dec-03

Sep-04

Jun-05

Mar-06

Dec-06

Sep-07

Jun-08

Mar-09
200 50%
Cable TV Satelite TV
180 40%
160 30% Source: COFETEL.
140 20%
120 10% Mexico is ranked 73 out of 133 countries on internet
100 0%
users per 100 of population, with 21.6 users, behind
80 -10%
Brazil with 35.2 users (ranked 47), Chile with 32.5 users
60 -20%
40 -30%
(ranked 53) and Peru with 25.3 (ranked 65). Mexico has
20 -40% around 28 million internet users but just 13 million have
0 -50% internet access in the house. The CAGR of total users
since 2000 is 21%. Currently, 92% of all internet
J an-95
J an-96
J an-97
J an-98
J an-99
J an-00
J an-01
J an-02
J an-03
J an-04
J an-05
J an-06
J an-07
J an-08
J an-09

accounts are with broadband technology, whilst three


years ago this share was only 64%.
Minutes per user Grow th rate y oy

Source: COFETEL and J.P. Morgan.

Pay TV has also been growing fast. Since 2000, the


subscriber CAGRs for satellite and cable have been 10%
and 14% respectively. Televisa and Megacable are the

37
Ben Laidler Latin America Equity Research
(1-212) 622-5252 17 February 2010
ben.m.laidler@jpmchase.com

Gabriel Casillas
(52-55) 5540-9558
gabriel.casillas@jpmorgan.com

Figure 75: Internet users in millions Table 35: Housing Outlook


30 28

27 1970 1990 1995 2000 2005 2010 2015


23
24 22
21 Number of houses 8.3 16.2 19.4 21.9 24.3 24.3 30.2
21 Average number of
18
18 occupants per
14 house 5.8 5.0 4.7 4.4 4.3 4.0 3.7
15 13
12
12 11
9 Source: INEGI and CONAPO
8
9 7 7
6
6 5 5 5
3 4 Mexico City and the State of Mexico make up the
3
3 majority of the households. As of 2009 these two entities
0 were estimated to account for 22.5% of total. The
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
second-highest region, on the same basis, is northern
Total Users Users with internet access in his house Mexico, with 19.3% of total houses. This region includes
Source: COFETEL. Aguascalientes, Coahuila, Chihuahua, Durango, Nuevo
Leon, San Luis Potosi, Tamaulipas and Zacatecas.
Figure 76: Number and type of internet accounts per 100 hab
10 Figure 77: Household geographic distribution as of 2009
South East
8 and
6 Caribbean,
4 7.09 13%
0.41 1.84 2.93 4.30 Center,
0.11 0.23 1.00
2 0.11 South 38%
1.03 1.76 1.83 1.95 2.01 1.88 1.63 1.21 0.63
0 Pacific, 14%
2000 2001 2002 2003 2004 2005 2006 2007 2008
Dial Up Broad band

Source: COFETEL.
North
Pacific, 16%
Housing North, 19%
As of the 2005 census there were an estimated 24.3
Source: CONAPO and J.P. Morgan.
million houses in Mexico. 2025 estimates are that this
needs to grow to 35.7 million. This growth is driven by
In the past 10 years many changes were made in order to
demographics and lower average occupancy. In 2005
develop financing channels for the housing sector.
there were 4.0 occupants per household, down from 5.0
Government participation via institutions such as
in 1990. For 2025 it is estimated to decline to 3.3 Infonavit played a key roll in developing this market.
occupants per house. Mexican Government Housing
authorities estimate a housing deficit today of around 8.9
Infonavit is an autonomous institution that provides
million homes – people that want a house but do not have entry-level mortgages to lower-income families; this is
one; or do not have an adequate house (very poor among the biggest mortgage institutions in the Americas
condition). Additionally, it is estimated that 530,000 (in terms of loans originated). As of August 2009
households are formed every year – of which 60% are Infonavit had 13.8 million affiliates out of the 30 million
estimated able to demand a mortgage loan. people who work in the formal sector. 90% of Infonavit
resources come from mandatory employer contributions
73% of households have three or more rooms (a kitchen (40%). These amount to 5% of the monthly salary of
is considered a room), with 18% having two rooms and private workers and are contributed to the workers’
8% one room. Approximately 90% have cement or wood Infonavit accounts. The remaining financing largely
floors, whilst 10% have only a dirt floor. comes from mortgage repayments (50%).

38
Ben Laidler Latin America Equity Research
(1-212) 622-5252 17 February 2010
ben.m.laidler@jpmchase.com

Gabriel Casillas
(52-55) 5540-9558
gabriel.casillas@jpmorgan.com

Figure 78: Mortgage market share by institution Figure 80: Credit to housing sector by banks (MXN bn)
Others 350 120%
2% 100%
Financial 300
80%
Institutions 250
60%
22% 200 40%

150 20%
0%
100
Fonhapo -20%
50
-40%
5%
Infonavit - -60%

Dec-94

Dec-95

Dec-96

Dec-97

Dec-98

Dec-99

Dec-00

Dec-01

Dec-02

Dec-03

Dec-04

Dec-05

Dec-06

Dec-07

Dec-08
Fovissste 62%
9% Housing Housing loans growth rate, yoy

Source: Banxico.
Source: INFONAVIT.

Figure 79: Infonavit mortgages granted by year, in ’000 As of September 2009 Infonavit registered 821 housing
constructors, only 47% of the 2007 level given the
600 525
510 499 impact of the economic crisis. The concentration of this
500 447
401 sector among the big housing companies (constructing
400 more than 3,000 houses each year) increased from 67%
301
300 251 257 253 in 2007 to 68% in 2008, before falling somewhat in 2009
199 219
200 to 49%.
100
Figure 81: Number of housing companies
-
2000 1762
2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010E

1364
1500
1156
Source: INFONAVIT. 1049
934
1000 821

The strategy of the federal government and Infonavit is


500
to focus on covering the workers that earn less than 4x
the minimum wage. For 2012 the goal is to reach 0
600,000 annual mortgages, 65% of them focused on 2004 2005 2006 2007 2008 Sep-09
workers who earned less than 4x the minimum wage.
However, currently workers who earn from 2x minimum Source: INFONAVIT.
wages to 4x make up 34.6% of the affiliates. For 2013
the goal is to increase this share to 39%. The second The biggest public listed homebuilders in Mexico are
major source of mortgage provisions is banks. Bank Homex, which produced 63,241 units in 2008, followed
credit to the housing sector tripled from 2001 to 2005. closely by Geo at 51,879, Urbi at 42,844 and Ara at
20,972.

Finally, it is worth noting that, in contrast to many


other countries’, the Mexican housing market has not
experienced an asset price bubble. All housing
segments – from social housing to ‘residential plus’
premium housing – have seen fairly moderate price
cycles.

39
Ben Laidler Latin America Equity Research
(1-212) 622-5252 17 February 2010
ben.m.laidler@jpmchase.com

Gabriel Casillas
(52-55) 5540-9558
gabriel.casillas@jpmorgan.com

Figure 82: Price per Sq. Mt. by Segment Table 36: Pemex Operating Summary
Exploration and Production 2004 2005 2006 2007 2008
Production and international trade
Oil and gas production (MMboed) 4.40 4.40 4.43 4.39 3.96
Crude oil production (MMbd) 3.38 3.33 3.26 3.08 2.79
Change -1.5% -2.3% -5.5% -9.2%
Natural gas production (MMMcfd) 4.57 4.82 5.36 6.06 6.92
Change 5.4% 11.2% 13.1% 14.2%
Crude oil exports (MMbd) 1.87 1.82 1.79 1.69 1.40
Change -2.8% -1.3% -5.9% -16.8%
Reserves
Liquids and gas 1P reserves (MMMboe) 17.65 16.47 15.51 14.72 14.31
Change -6.7% -5.8% -5.1% -2.8%
Source: Real Estate Watch. * June 2009 Pesos. 1P developed reserves (MMMb) 11.35 11.33 10.65 10.01 10.20
Crude oil 1P reserves (MMMb) 12.88 11.81 11.05 10.50 10.40
Liquids and gas 2P reserves (MMMboe) 33.49 32.29 30.77 29.86 28.83
Energy Liquids and gas 3P reserves (MMMboe) 46.91 46.42 45.38 44.48 43.56
Average 1P reserve life (years) 11.0 10.3 9.6 9.2 9.9
Oil accounts for about 5-6% of GDP, 10-15% of Average 2P reserve life (years) 20.8 20.1 19.0 18.7 19.9
Exploration
exports and 30-40% of fiscal revenues. The sector is (2)
Reserve replacement rate 1P 23.0% 26.0% 41.0% 50.3% 71.8%
dominated by state-owned Pemex, which is responsible Discoveries 3P (MMboe) 916 950 966 1,053 1,482
for production, distribution and imports of oil and gas Reserve replacement rate 3P (3) 57.0% 59.2% 59.7% 65.8% 102.4%
products. The central bank buys all foreign exchange Refining 2004 2005 2006 2007 2008
Capacity (Mbd) 1,540 1,540 1,540 1,540 1,540
from Pemex and limits the currency inflow to the Throughput (Mbd) 1,303 1,284 1,284 1,270 1,261
economy to reduce pressures on the exchange rate from Production of petroleum products (Mbd) 1,587 1,554 1,546 1,511 1,490
oil revenues. Change -2.1% -0.5% -2.3% -1.4%
Domestic sales of petroleum products (Mbd) 1,391 1,458 1,457 1,516 1,536
Domestic sales of gasoline (Mbd) 636 671 718 760 792
Pemex is the world’s third-largest oil company, by Imports / Domestic sales of gasoline 14.4% 24.4% 28.0% 39.0% 41.8%
crude production, and the sole producer of oil, gas and Gas and Basic Petrochemicals 2004 2005 2006 2007 2008
Dry gas production (MMcfd) 3,144 3,147 3,445 3,546 3,461
petroleum products in Mexico. In 2008 the company Natural gas domestic sales (MMcfd) 2,756 2,632 2,955 3,076 3,074
produced 2.8mmbd (Petrobras 1.8mm) of oil and had Net imports of natural gas (MMcfd)
(4)
766 480 451 386 450
total production of 4.0mmboed (Petrobras 2.0mm). Liquids of gas production (Mbd) 451 436 436 405 376
Petrochemicals domestic sales (Mt) (5) 3,531 3,750 3,826 3,992 4,134
Petrochemicals imports (Mt) 277 397 436 425 440
Figure 83: Pemex Production Highlights, Nine-months 2009
Source: Pemex.

Production declines have been focused on the


Cantarell field, whilst the short-term development focus
is on the Chicontepec field, where current production is
only around 30 Mbd, but an 2009-2017 average of 200-
400 Mbd is forecast. Longer term, deepwater offshore
fields are being explored, such as Tamil-1, an extra-
heavy oil reservoir, and Lakach, a large gas field with an
estimated total reserve of 1.4 Tcf.

Figure 84: Pemex Upstream Production

Source: Pemex.

Source: Pemex.

40
Ben Laidler Latin America Equity Research
(1-212) 622-5252 17 February 2010
ben.m.laidler@jpmchase.com

Gabriel Casillas
(52-55) 5540-9558
gabriel.casillas@jpmorgan.com

Mexico has three oil stabilization funds – for the Figure 85: Energy Subsidies in Mexico
federal government, for Pemex and for the states. 40% of % of GDP
‘excess revenues’ are allocated to the federal fund, and
25% each to the Pemex and state funds. There is a target
level of savings (relatively low at around 1.2% of GDP),
and amounts above these levels are allocated to
investment (75%) and to supporting pension fund
restructuring (25%). Source: SHCP.

Table 37: Oil-Related Fiscal Indicators


% of GDP
Electricity
The energy sector, both oil and electricity, is considered
strategic. Transmission and distribution of electricity is
state controlled – as defined by the constitution – through
the Comisión Federal de Electricidad (CFE), which has
177 plants, as of 2010.

Table 38: Generation capacity by type of fuel input


Nov
2004 2005 2006 2007 2008
09
Fossil Fuels 55% 54% 54% 53% 53% 52%
Alternative resource 45% 46% 46% 47% 47% 48%
Source: CFE.

Figure 86: Generation by type of source


Source: IMF. Geothermic,
2.90%
Mexico also has energy subsidies and a mechanism to Coal , 7.25%
smooth gasoline price volatility. The government has
been attempting to moderately increase gasoline prices in Nuclear, 4.49%
Aeolian, 0.10%
order to reduce this subsidy. Gasoline prices are an Hy drocarbon,
implicit subsidy when international prices are above 40.76%
around US$45 per barrel. At the same time there is a
straight subsidy on household-used LP gas and
electricity. These three subsidies cost the budget around Independent
2.7% of GDP in 2008. Producers,
33.05%
The 2008 energy reform allowed for improved decision
making, with a stronger CEO and a board of directors Water, 11.44%

with clear roles and responsibilities. An executive Source: CFE.


committee was created and four new professional board
members incorporated. The company’s execution and Mexico produced in October 2009 13,003 GW/hour, the
financial capability were also strengthened with a new 12M average for the same period rose to 12,406
contracting regime (contracts with performance GW/hour. However, this level of production has been
incentives, prices can be negotiated and participants decreasing since 2000. The 12M rolling average growth
prequalified), flexibility to invest excess income, a
rate of electricity production has been negative since
differentiated fiscal regime and the ability to issue
2000, posting positive growth rate only from 2Q05 until
citizens’ bonds.
3Q06 and in 2001.

Power generation has seen some private-sector


involvement under different plans, such as independent
power producers. Independent producers represented
33% of total electric production in 2009. Foreign

41
Ben Laidler Latin America Equity Research
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ben.m.laidler@jpmchase.com

Gabriel Casillas
(52-55) 5540-9558
gabriel.casillas@jpmorgan.com

companies such as AES, Union Fenosa, Gas Natural, Residential customers make up 88.1% of total clients,
InterGen, Mitsubishi. Iberdrola, TransAlta and Mitsui while industrial clients are less than 0.81%. By revenue,
operate in Mexico. households represent 29%, while industrial clients make
up 57%.
Figure 87: Power generation by independent producers
50% Table 40: Clients and sales by sector, as of November 2009
No. Of Clients Sales
40% Household 88.14% 29.18%
32% 33%
31%
Agriculture 0.43% 4.05%
27%
30% Industrial 0.81% 57.02%
22% 21% Commercial 9.99% 6.18%
20% 16% Services 0.63% 3.58%
11%
Source: CFE.
10%
1% 2%
Figure 89: Domestic and industrial energy consumption index
0%
350
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
300

Source: CFE. 250

200
Figure 88: Electricity production (12M rolling average) and growth
150
rates
18,000 13% 100

16,000 10% 50
14,000 8% -
12,000 5%
Jan-83

Jan-85

Jan-87

Jan-89

Jan-91

Jan-93

Jan-95

Jan-97

Jan-99

Jan-01

Jan-03

Jan-05

Jan-07

Jan-09
bn of watts / hour

10,000 3%
Domestic energy consumption index
8,000 0%
Industrial energy consumption index
6,000 -3%
Source: INEGI.
4,000 -5%
2,000 -8%
Figure 90: Average electricity prices by type of costumers
0 -10%
2007 real Ps/kWh
Dec-82

Dec-84

Dec-86

Dec-88

Dec-90

Dec-92

Dec-94

Dec-96

Dec-98

Dec-00

Dec-02

Dec-04

Dec-06

Dec-08

Growth yoy Total energy generated

Source: INEGI.

On October 11, 2009, the Mexican government closed


state-owned electricity provider Luz y Fuerza del
Centro (LyFC). The company had been chronically loss
making for many years. The operations were absorbed
into the CFE. The company employed nearly 40,000
workers, who were in charge of providing electricity to
20 million people (19% of the total population) across
five states (Distrito Federal, Estado de México, Morelos,
Hidalgo and Puebla).

Table 39: Electricity sales by region, as of August 2009


Region Share Source: SENER.
Central 31%
Northeast 28%
West
North
21%
11%
Tourism
Southeast 10% Tourism is a key industry for Mexico. It is one of the
Source: INEGI. most important sources of foreign exchange, generating
US$13.2bn of inflows in 2008. This has suffered with the

42
Ben Laidler Latin America Equity Research
(1-212) 622-5252 17 February 2010
ben.m.laidler@jpmchase.com

Gabriel Casillas
(52-55) 5540-9558
gabriel.casillas@jpmorgan.com

economic crisis, ‘swine flu’, and weaker Peso, and Jan- and the Caribbean, 1.3% from Asia, and 5.4% other. This
Nov 2009 tourism inflows were only US$10.1 bn, the sector employs directly an estimated 2.1 million people.
lowest level since 2004. Hotel and food services oriented to tourism make up
3.8% of the total service sector.
Figure 91: 12M moving average spending per international tourist
USD According to the World Tourist Organization, in 2008,
160
México was the 10th most popular international
destination, by arrivals. The top three spots were France,
140 the US and Spain. Among emerging economies, China
120 (4th), Turkey (8th) and Ukraine (7th) joined Mexico in
100
the top 10.
80 Table 41: Top 10 countries by international arrivals
60 Rank Country Millions of Passengers Growth rate yoy, in (%)
40 2007 2008 2007 2008
1 France 81.9 79.3 3.9 -3.2
20 2 US 56.0 58.0 9.8 3.6
3 Spain 58.7 57.3 1.1 -2.3
0
4 China 54.7 53.0 9.6 -3.1
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008

5 Italy 43.7 42.7 6.3 -2.1


6 UK 30.9 30.2 0.7 -2.2
Source: Banxico. 7 Ukraine 23.1 25.4 22.1 9.8
8 Turkey 22.2 25.0 17.6 12.3
Figure 92: US$ inflows from international tourist 9 Germany 24.4 24.9 3.6 1.9
10 Mexico 21.4 22.6 0.1 5.9
USD bn
Source: WTO.
14

12 Over the last ten years, the country has averaged around
10
20 million international tourists per year. In 2008, 22.6
million international tourists visited Mexico, a 6%
8
growth rate yoy vs. the flat growth rate seen in 2007.
6 Mexico attracted 15.4% of all the visitors to the
4 Americas, just behind the US with 39.5% and well above
Brazil (3.4%).
2

0
The economic crisis has impacted tourism. Aeronautical
1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

passengers, both domestic and international, suffered


Source: Banxico. from two different negative shocks – namely the
economic crisis (preceded by high oil prices) which
Mexico tourism is mainly domestic. For 2007, 140.6 pushed several airlines into bankruptcy, and then the
million tourists were domestic; this represented 86% of 2009 influenza outbreak. At the peak of the outbreak, in
the total, while 21.3 million were international. The May 2009, aggregate passenger traffic fell 42% (-35%
target of the government is to reach 166 million domestic domestic and -53.7% international).
tourists (85% of total) and 29 million international (15%
of total) by 2012.

In 2009 Mexico suffered from the flu AH1N1 outbreak,


which affected negatively the international image of
Mexico as a safe tourist destination, so for the period of
January to October 2009 international tourists decreased
to 17.2 million, -5.5% yoy

From January to October 2009, 77% of international


tourists were from North America (67.4% US and 9.8%
Canada), 10.4% from Europe, 5.9% from South America

43
Ben Laidler Latin America Equity Research
(1-212) 622-5252 17 February 2010
ben.m.laidler@jpmchase.com

Gabriel Casillas
(52-55) 5540-9558
gabriel.casillas@jpmorgan.com

Figure 93: Passenger growth rate (public companies) has a stronger presence in the northern and southern
60% regions of the country, while Grupo Modelo has stronger
presence in the central belt. Combined they have 13
40% plants in Mexico. Grupo Modelo has 7 plants, with an
installed capacity of 60m hl, and sold in Mexico 36.2m hl
20% in 2008. Meanwhile FEMSA sold 27.39m hl in Mexico,
has 6 plants, with an installed capacity of 37m hl.
0%
On a pro forma 2008 basis, Modelo is the world’s 6th-
-20% largest beer producer (by hectoliters sold globally), and
Femsa is the 8th. This is behind Anheuser Inbev, SAB,
-40% Heineken, Carlsberg, Molson, Tsingtao and Beijing
Yanjing., whilst ahead of Kirin and Asahi. In January
-60% 2010, FEMSA announced an agreement to swap its beer
assets for a 20% stake in Heineken.
Jan-06
Mar-06
May-06
Jul-06
Sep-06
Nov-06
Jan-07
Mar-07
May-07
Jul-07
Sep-07
Nov-07
Jan-08
Mar-08
May-08
Jul-08
Sep-08
Nov-08
Jan-09
Mar-09
May-09
Jul-09
Sep-09
Nov-09

Domestic Pass Change YoY International Pass Change YoY FEMSA estimates that annual per capita beer
consumption reached approximately 60 liters, or 0.6
Source: J.P. Morgan estimates, company data.
hectoliters, in 2008, compared to approximately 82 liters,
or 0.8 hectoliters, in the US. It estimates that men
Efforts to promote tourism are focused on Cancun and between 18 and 45 years of age are the primary market
the Riviera Maya, followed by Los Cabos and by Loreto for its beer operations. We estimate that in 2025 18% of
in the northwest. That said, Caribbean beaches are by far the population will fall into this category.
the most popular, as they also enjoy the benefit of being
close to the Mayan heartland and archaeological Mexico is estimated to be the third most attractive market
attractions such as Tulum and Chichen Itza. globally on the basis of future volume growth (2008-
2015) – by consultant Plato Logic – behind China and
Figure 94: International tourist arrival growth rate, yoy
Brazil and ahead of Vietnam and India.
20%
Figure 95: Beer sales (12M moving average) and sales growth
rate
10%
In Ps bn

0% 6.0 18%
16%
5.0
-10% 14%
4.0 12%
-20% 10%
3.0
8%
-30% 2.0 6%
4%
Jan-07

Apr-07

Jul-07

Oct-07

Jan-08

Apr-08

Jul-08

Oct-08

Jan-09

Apr-09

Jul-09

Oct-09

1.0
2%
0.0 0%
Source: Banxico.
Dec-05
Mar-06
Jun-06
Sep-06
Dec-06
Mar-07
Jun-07
Sep-07
Dec-07
Mar-08
Jun-08
Sep-08
Dec-08
Mar-09
Jun-09
Sep-09

Beverages
Beer sales 12M moving average Growth rate
Latin America is an attractive region for the beverage
industry, given demographics and growing purchasing Source: INEGI.
power. The Mexican beer industry has been growing at
an average rate of 9% of volumes, while sparkling drinks The beverage sector is defensive during economic
posted an average growth rate of 4%, both for the periods downturns. The correlation of industry sales (in Ps)
of Jan 2006-October 2009. growth to GDP growth is low, whilst the correlation of
volume and real GDP growth is high (+78%) as of 1Q09.
There are two major beer producers in Mexico, Grupo Mexican bottlers have pricing power and are able to pass
Modelo (63% share) and FEMSA (37% share). FEMSA on price increases to the consumer.

44
Ben Laidler Latin America Equity Research
(1-212) 622-5252 17 February 2010
ben.m.laidler@jpmchase.com

Gabriel Casillas
(52-55) 5540-9558
gabriel.casillas@jpmorgan.com

Mexico has the second-highest per capita cola Retail


consumption worldwide. According to the AMEE
(Asociación Mexicana de Envase y Embalaje) the per Commerce and trade is the largest subsector of the
capita consumption of sparkling drinks was around 140- services industry in Mexico, accounting for 22.6% of
150 liters per year in 2008. GDP as of 3Q09. According to the Asociacion Nacional
de Tiendas de Autoservicio y Departamentales (ANTAD)
The bottler industry is quite fragmented, with 13 regional the average growth rate of same store sales since 2006
players. There were 131 bottling plants, employing has been 5.7%. This saw a major decrease starting 1Q08,
127,609 people as of 2007. More than a million small when the economic crisis started.
family companies are dedicated to selling sparkling
beverages Figure 98: 3M rolling average Same Stores Sales growth
%
Figure 96: Sparkling beverages sales (12M moving average) and 25%
sales growth rate
In Ps bn 20%

10.0 9% 15%
8% 10%
9.5 7%
6% 5%
9.0
5%
0%
8.5 4%
3% -5%
8.0 2%
1% -10%
7.5
0% -15%
7.0 -1%
Mar-06

Jul-06

Nov-06

Mar-07

Jul-07

Nov-07

Mar-08

Jul-08

Nov-08

Mar-09

Jul-09

Nov-09
Dec-05
Mar-06
Jun-06
Sep-06
Dec-06
Mar-07
Jun-07
Sep-07
Dec-07
Mar-08
Jun-08
Sep-08
Dec-08
Mar-09
Jun-09
Sep-09

Sparkling beverages sales 12M moving average Growth rate Source: ANTAD.

Source: INEGI. Figure 99: Self service store sales growth


20.0%
Table 42: Sparkling beverages consumption 17.0%
Liters 14.0%

2001 2002 2003 2004 2005 2006 2007 11.0%

Per Capita 148.4 147.2 147.3 148.1 155.8 157.9 160.1 8.0%
% Growth -1.70 -0.80 0.10 0.50 5.20 1.30 1.40 5.0%

Source: ANPRAC. 2.0%

-1.0%
Figure 97: Coke bottlers’ areas of operation in Mexico -4.0%

-7.0%
J a n -0 5

A p r-0 5

J u l-0 5

O c t-0 5

J a n -0 6

A p r-0 6

J u l-0 6

O c t-0 6

J a n -0 7

A p r-0 7

J u l-0 7

O c t-0 7

J a n -0 8

A p r-0 8

J u l-0 8

O c t-0 8

ANTAD Supermarkets SSS, Change YoY INEGI Supermarket SSS, Change YoY

Source: INEGI and ANTAD.

Walmex (the Mexican listed subsidiary of Walmart


USA) is the leading retailer in Mexico. As of October
2008 Walmex had a market share in super centers of
33%. Nevertheless, supermarket competition is in the
informal sector, which according to Nielsen represents
50% of the total retail market.

Source: Company reports and J.P. Morgan estimates. On the back of this, many retail companies have
developed low-cost formats targeting lower-income

45
Ben Laidler Latin America Equity Research
(1-212) 622-5252 17 February 2010
ben.m.laidler@jpmchase.com

Gabriel Casillas
(52-55) 5540-9558
gabriel.casillas@jpmorgan.com

customers – for example Walmex opened 246 Bodegas Figure 102: Retail sector breakdown
Aurrera in 2009 (29 Bodegas, 37 Mi Bodega and 180
Departamental
Bodegas Express) compared to just 16 Walmart, 7 Sam’s
and Retail ,
and 1 Superama formats.
29.60%
Others,
Figure 100: Supermarkets Market Share, as of Oct 2008 38.70%
% of Sales from ANTAD members

Auto/Autoparts
Healthcare, and Gas,
15.80% 15.90%

Source: INEGI.

Manufacturing
The Mexican manufacturing sector has passed through a
Source: ANTAD. significant transformation since the Mexican government
initiated the Border Industrialization Program in 1965, as
Commerce and trade make up around 22.3% of the a response to the demise of the US government’s
tertiary sector, which makes up around 63% of GDP. As ‘Bracero Program’ in 1964. Since then, the free trade
of 2008, 80.1% of the economic units in the commercial agreements implemented in 1980s and 1990s have been
sector were developing some sort of activity that the cornerstone for Mexico’s manufacturing-sector
composes the retail commerce sector, while 19.9% is
boom.
composed by the wholesale sector.

Table 43: Workforce allocation breakdown by size of company


The industrial sector in Mexico has been around 29-33%
of the GDP since the 1980s. Industrial production is
Wholesale Retail
divided into three sectors: Manufacturing; construction;
Micro (=<10) 5.2% 13.1%
Small (11-30) 13.0% 15.1% mining, electricity, gas and water. The manufacturing
Medium (31-100) 28.3% 22.1% sector is the biggest constituent of the Mexican industrial
Big (>101) 53.4% 49.7% production – representing 16.7% of GDP as of 3Q09.
Source: INEGI.

This sector is inherently related to exports. For example,


Figure 101: Wholesale sector breakdown
Others, for the period January to November 2009, electric
14.40% machinery and auto/auto parts manufactures made up
54.3% of total exports, producing US$111 billion.
Machinery Food and Manufacturing employs around 26% of the total
and Beverages economically active population, i.e., 11.2 million people
Industrial , 38.80% (73% male).
Equipment,
14.10%

Raw
Materials,
32.30%
Source: INEGI.

46
Ben Laidler Latin America Equity Research
(1-212) 622-5252 17 February 2010
ben.m.laidler@jpmchase.com

Gabriel Casillas
(52-55) 5540-9558
gabriel.casillas@jpmorgan.com

Figure 103: Industrial production share of the GDP electricity supply are the worst ranked. At the beginning
35% of the Calderon Administration, the National
34% Infrastructure Plan was announced, planning to inject
33% US$233bn in different infrastructure projects, to raise the
32% coverage, quality and competitiveness of infrastructure.
31%
Table 44: Overall Mexico infrastructures ranking, out of 133
30%
Rank
29%
Quality of overall infrastructure 71
28% Quality of roads 57
27% Quality of railroad infrastructure 66
Quality of port infrastructure 82
1Q80
3Q82
1Q85
3Q87
1Q90
3Q92
1Q95
3Q97
1Q00
3Q02
1Q05
3Q07
Quality of air transport infrastructure 56
Available seat kilometers 20
Source: INEGI and J.P. Morgan. Quality of electricity supply 88
Telephone lines 65
US industrial production is heavily correlated to Mexican Source: World Economic Forum.
manufacturing production, posting a correlation of 97%
during the period of January 1980 to August 2009, Figure 105: Quality of Overall Infrastructure in Lat Am
6.0
almost a perfect correlation. Many factors explain this
correlation, including low labor costs in Mexico, 5.0

geographical advantages and a well-exploited free trade


4.0
agreement. However, Mexican manufactures are not only
about low-cost labor and a depreciated currency. Factors 3.0
5.6
5.1
like cluster creation, government support and a highly 4.8
4.4 4.3 4.2 4.0
2.0 3.8 3.7
skilled labor force enhance the advantages that have 3.4 3.4 3.4 3.4 3.2 3.1 3.0 3.0 2.7 2.5 2.2
positioned Mexico as a leading manufacturing country. 1.0

0.0
Figure 104: Industrial Production share of the GDP, breakdown
Chile

Puerto Rico

El Salvador

Trinidad and Tobago

Guatemala

Uruguay

Panama

Mexico

Honduras

Dominican Republic

Brazil

Colombia

Costa Rica

Argentina

Ecuador

Peru

Venezuela

Nicaragua

Bolivia

Paraguay
by sector
35%

30%
Score Global Mean

25%
Source: World Economic Forum.
20%

15% Unfortunately a number of the most emblematic of these


projects have been delayed by the credit crisis and
10%
recession, including Punta Colonet (new multimodal
5%
port), FARAC II (toll roads), and the Riviera Maya
0% airport.
1Q05

3Q05

1Q06

3Q06

1Q07

3Q07

1Q08

3Q08

1Q09

3Q09

Manufacturing, nsa , % share Construction, nsa, % share


Roads
Mining, nsa , % share Electricity, gas, and water, nsa
Roads have been one of the main beneficiaries of
Source: INEGI and J.P. Morgan. recent infrastructure spending, with the country having
one of the lowest road densities among major economies,
significantly smaller than other LatAm countries’. The
Infrastructure national vehicular park reaches 22 million cars for 167
cars per 1,000 population.
Mexico is ranked 71st globally on the overall quality
of its infrastructure (out of 133 countries), according to
the World Economic Forum (WEF), somewhat below its
overall country ranking of 60. Mexico is better ranked for
roads and airports infrastructure, whilst the port and

47
Ben Laidler Latin America Equity Research
(1-212) 622-5252 17 February 2010
ben.m.laidler@jpmchase.com

Gabriel Casillas
(52-55) 5540-9558
gabriel.casillas@jpmorgan.com

Table 45: Transport Usage – By Weight and No. of Passengers Figure 107: Investments in roads
60
Type % of Weight % Passengers
Road 53.0% 98.00% 49.7
Maritime 30.4% 0.69% 50
Rail 16.5% 0.00%
39.3
Air 0.1% 1.30% 40
Source: SCT.
30 26
25.3 24.3
Spending policy is aimed to increase cross-country roads.
20
In order to build and maintain the National Highway 13.9 14.7
Network, the SCT calculates that US$6.0bn is needed.
10
The federal government had structured three ways to
encourage private investment in highways: Concessions, 0
Highway Assets Utilization, and Service Provision 2003 2004 2005 2006 2007 2008 2009
(PPS). Source: SCT.

Table 46: Investment in roads by financing plan Figure 108: Mexican roads as of 2005
Ps bn
Package
In Under Bid in under
operations construction process preparation Total
Concession 16 14 1 26 57
Highway
Assets
Utilization 47 2 6 33 88
PPS 2 27 8 0 37
Total 65.6 42.4 14.7 59.2 181.9
Source: SCT.

The Concession model partnership is set to build, operate


and maintain toll roads. The Highway Assets Utilization
is an integrated package of high-specification existing
freeways and highways to build and share. PPS is the
third model, a public-private partnership to upgrade Source: Plan Nacional de Infraestructura.
existing roads to be toll free.
Figure 109: Mexican road estimates for 2012
Figure 106: Mexico national highway network

Source: SCT.

Source: Plan Nacional de Infraestructura.

48
Ben Laidler Latin America Equity Research
(1-212) 622-5252 17 February 2010
ben.m.laidler@jpmchase.com

Gabriel Casillas
(52-55) 5540-9558
gabriel.casillas@jpmorgan.com

Figure 110: Network Density The state-owned ASA now operates 19 airports, which
Km per 1,000 square kilometers includes Mexico City airport (AICM); the largest in
terms of passengers. In 2008 the AICM reported 26.2
million passengers; this is 1.3% more than in previous
years. The AICM handles more passengers than all other
Mexican airports combined.

Figure 111: Mexican public airport companies’ traffic


performance
7,000

6,000

5,000

4,000

3,000

2,000
Source: World Bank. Data as of end-2005.
1,000

Airports -
1Q06
2Q06
3Q06
4Q06
1Q07
2Q07
3Q07
4Q07
1Q08
2Q08
3Q08
4Q08
1Q09
2Q09
3Q09
4Q09
Mexico has 61 significant airports, divided among 4
large operators, and individual private ASUR GAP OMA
concessionaries. In the 1990s Aeropuertos y Servicios Source: J.P. Morgan estimates, company data.
Auxiliares (ASA) was a state-owned independent
company that administered, operated and maintained the Figure 112: Mexican public airport companies’ traffic growth rate
airports. In 1997 the federal government began to 40%
privatize the airports, dividing them into four main 30%
packages.
20%

Grupo Aeroportuario del Sureste (Ticker: ASUR) was 10%

the first company to acquire a package concession, 0%


obtaining the southeast group that contained 9 airports, -10%
including Cancun – Mexico’s most popular tourist
-20%
destination. In September 2000 ASUR went public, and
-30%
today it trades on the Mexbol and NYSE.
1Q07

2Q07

3Q07

4Q07

1Q08

2Q08

3Q08

4Q08

1Q09

2Q09

3Q09

4Q09

Grupo Aeroportuario de Pacífico (Ticker: GAP) obtained ASUR GAP OMA


the second package granted by the government; this was
Source: J.P. Morgan estimates, company data.
the Northeast Pacific package and consisted of 12
airports, including high-traffic destinations such as
Guadalajara, Tijuana, PuertoVallarta and Los Cabos.
GAP went public in 2006, and trades on the Mexbol and
NYSE. GAP is the biggest public airport company.

Grupo Aeroportuario del Centro Norte (Ticker: OMA)


obtained in 2000 the concession to operate the
Central/North package, which includes Monterrey
airport, the country’s major business destination after
Mexico City. It went public in 2006 and today trades on
the Mexbol and NASDAQ.

49
Ben Laidler Latin America Equity Research
(1-212) 622-5252 17 February 2010
ben.m.laidler@jpmchase.com

Gabriel Casillas
(52-55) 5540-9558
gabriel.casillas@jpmorgan.com

Figure 113: Mexican airports liquidated. Three major private companies emerged from
the privatization process.

# Ferromex, which is owned mainly by Grupo Mexico, is


the biggest railroad company, with 8,500 km of railroad
network, which is around 32% of the national railroad
network. It covers the Northwest, West and Central parts
of Mexico.

# Kansas City Southern de Mexico covers 4,200 km,


representing around 16% of the national railroad
network, covering the Center and Northeast part of
Mexico.

# Ferrosur, covers 1,500km, mainly in the Southeast part


of Mexico.
Source: Plan Nacional de Infraestructura.

Railroads
Figure 115: Railroads as of 2006
Mexican railroad development is badly ranked,
according to the World Economic Forum. No country in
the region is above the global mean score.

Figure 114: Quality of railroads


3.5

3.0

2.5

2.0

1.5
2.5 2.3
1.0 2.1 2.1 2.0
1.8 1.8 1.7 1.6 1.6
1.5 1.5 1.5 1.4 1.3
0.5 1.2 1.1 1.0 1.0

0.0 Source: Plan Nacional de Infraestructura.


Panama

Mexico

Puerto Rico

Chile

Argentina

Brazil

Peru

Bolivia

Nicaragua

Venezuela

Dominican Republic

Colombia

Honduras

Uruguay

Costa Rica

El Salvador

Guatemala

Ecuador

Paraguay

Ports
Score Global Mean Mexico is badly positioned in a LatAm context, behind
Panama, Chile and Puerto Rico in the development of its
Source: WEF. port system but ahead of Brazil and Argentina. Punta
Colonet was supposed to me the main project for this
The Mexican railroad network hasn’t been growing. In administration. This port was designed to compete with
1990 it had 26.4 thousand km of track, and by 2006 this Long Beach in California in trans-Pacific trade flows
figure was almost flat at 26.7 thousand. Over the same from Asia but has been delayed by the financial crisis.
period, freight transportation volume grew 104%, from
46.4mn tons to 94.7mn tons. By 2012 the federal Mexico had 114 ports as of 2007. 56 are located on the
government is planning to build an additional 1,418km of Pacific Coast, while 58 are in the Gulf of Mexico and
rail roads and to increase the average speed from 24 km Caribbean Sea. Manzanillo is the country’s largest
per hour to 40 km per hour. container port, followed by Veracruz and Altamira.

Former President Zedillo privatized the Mexican railroad Private-sector investment in port infrastructure has been
network. Ferrocarriles Nacionales de Mexico was the growing, and currently makes up around two-thirds of
state-owned railroad company, and currently it is being total investment.

50
Ben Laidler Latin America Equity Research
(1-212) 622-5252 17 February 2010
ben.m.laidler@jpmchase.com

Gabriel Casillas
(52-55) 5540-9558
gabriel.casillas@jpmorgan.com

Table 47: Investment in ports by type of source


Ps bn
2001 2002 2003 2004 2005 2006 2007
Public 1.3 1.1 1.4 1.6 2.6 2.9 2.5
Private 6.9 4.0 1.9 6.7 5.6 4.4 4.1
Total 8.2 5.1 3.3 8.3 8.2 7.3 6.6
Total growth rate -38% -36% 154% 0% -12% -10%
Source: SCT.

Figure 116: Mexican Port Container Traffic – Growth rate yoy


30%
25%
25%

20%
15% 14%
15% 13% 12%

10% 8% 8%

5%

0%
2001 2002 2003 2004 2005 2006 2007

Source: SCT.

51
Ben Laidler Latin America Equity Research
(1-212) 622-5252 17 February 2010
ben.m.laidler@jpmchase.com

Gabriel Casillas
(52-55) 5540-9558
gabriel.casillas@jpmorgan.com

Annex 1
Mexico Pension Funds’ Investment Regime Summary
Limits by Type of Pension fund0
5 4 3 2 1
Age= < 26 27 to 36 37 to 45 46 to 55 56 +
Value at Risk [VaR historical(1-α=95%, 1day)] 2.0% 1.6% 1.3% 1.0% 0.6%
Equity (only through indices) 30% 25% 20% 15% 0%
Market

Risk

Derivatives:
Interest rates, Fx and equity (credit derivatives not allowed) yes yes yes yes yes

Government securities1 100% 100% 100% 100% 100%


mx AAA-rated securities2 100% 100% 100% 100% 100%
Credit

Corporate
Risk

35% 35% 35% 35% 35%


mx AA-rated securities
50% 50% 50% 50% 50%
mx A-rated securities 5% 20% 5% 20% 5% 20% 5% 20% 5% 20%

mxAAA-rated securities from one issuer3 or counterpart 5% 5% 5% 5% 5%


Local

mxAA-rated securities from one issuer or counterpart 3% 3% 3% 3% 3%


mxA-rated securities from one issuer or counterpart 1% 1% 1% 1% 1%
Concentration

A-rated foreign securities from one issuer or counterpart 4 5% 5% 5% 5% 5%


Risk

Foreign

Maximum ownership of one issue (local and foreign) 5 20% 20% 20% 20% 20%
Maximum ownership of securities endorsed by related parties 15% 15% 15% 15% 15%

Maximum ownership of securities endorsed by parties related


5% 5% 5% 5% 5%
to the Afore

Inflation protected bonds (minimum limit) 6 no limit no limit no limit no limit min 51%
Currency denomin.

Government external bonds (UMS) 30% 30% 30% 30% 30%


Investments

USD-EUR-JPY

Corporate securities (min rate allowed is A-) 30% 30% 30% 30% 30%
Foreign securities 20% 20% 20% 20% 20%

Maximum ownership of equity, Fx derivatives, corp & foreign


30% 30% 30% 30% 30%
securities

Securitizations (must be an independent issuer)7 40% 30% 20% 15% 10%


10% 7.5%
Limits
Other

PP Private equity investments (issued by Mexican nationals)8 5% 10% 1% 5% 0%


20% 15%
REITs (Real estate must be in Mexican territory) 10% 10% 5% 5% 0%
0 Alllimits expressed as percentages of assets under management, except the maximum ownership of one issue. All limits are maximums except the inflation protected bonds
1 There is no limit for government, states and municipalities, state-owned corporate. Development banks are not included

2 These are local rates for securities issued by Mexican nationals in Mexico. In case of violation of this restriction, Afores are no longer forced to immediately sell and can hold the

securities until maturity


3 Issuer or endorser in the percentage it guarantees. Counterparty exposure in repos and derivatives must be added to exposure acquired through securities

4 Global ratings that apply to foreign securities


5 Percentage of the total amount stated in the prospectus, adjusted by later amortizations and repurchases
6 Minimum limit on securities that guarantee a return equal or in excess of Mexico's inflation rate. Includes any derivatives contracts open with an underlying value in UDIs
7 Securitizations must comply with Circular 15-20's appendix K
8 Must comply with Circular 15-20's appendix L, which states the issue should be capital protected, the underlying cannot a derivative or related, price vendor M2M valuation,
registered at the SIC, etc
Note: This regimen started in March 2008. Source: CONSAR

52
Ben Laidler Latin America Equity Research
(1-212) 622-5252 17 February 2010
ben.m.laidler@jpmchase.com

Gabriel Casillas
(52-55) 5540-9558
gabriel.casillas@jpmorgan.com

Annex 2
Figure 117: Debt instruments
Instrument Type Coupon Index Day-count Maturities Size* Total
CETES Fixed rate Zero-coupon - Linear, Act/360 28, 91, 182, and 364-day 491,749.2 19%
BONOS Fixed rate Semiannual - Bond, Act/360 3, 5, 10, 20, and 30-year 1,251,642.9 47%
BONDES D Floater 28-day 28-day TIIE Linear, Act/360 3 and 5-year 481,026.8 18%
UDIBONOS Linker Semiannual UDIS Bond, Act/360 3, 10, 20, and 30-year 418,460.0 16%
* MXN2,642,878.9 million as of August 2009.
Source: J.P. Morgan.

53
Ben Laidler Latin America Equity Research
(1-212) 622-5252 17 February 2010
ben.m.laidler@jpmchase.com

Gabriel Casillas
(52-55) 5540-9558
gabriel.casillas@jpmorgan.com

Mexico Data

54
Ben Laidler Latin America Equity Research
(1-212) 622-5252 17 February 2010
ben.m.laidler@jpmchase.com

Gabriel Casillas
(52-55) 5540-9558
gabriel.casillas@jpmorgan.com

MSCI Mexico: Market Performance and Valuation by Sectors and Stock


Sector/Stock Weigthings% Total market cap ADTV* Trailing Consensus Estimates LC Performance US$ Performance
US$ Mn US$ Mn PE PB DY 1M 3M 6M YTD 12M 1M 3M 6M YTD 12M
Consumer Discretionary 11.3 25,429 30 18.9 3.7 1.1 -3.1 6.4 3.8 -3.3 82.5 -4.9 7.8 3.4 -2.5 103.4
Televisa 6.8 9,162 16 18.8 3.0 2.6 -6.3 -11.5 2.8 -10.3 27.2 -8.1 -10.3 2.4 -9.5 41.8
Elektra 2.8 12,295 6 20.4 4.8 0.2 -0.2 20.4 3.8 1.9 124.5 -2.1 22.0 3.4 2.8 150.1
Homex 0.8 1,739 5 14.2 1.8 0.0 -13.2 -11.7 -10.8 -8.9 39.7 -14.8 -10.5 -11.1 -8.0 55.7
Urbi 0.8 2,233 3 14.8 1.6 0.0 1.9 17.1 19.1 0.7 111.7 0.0 18.6 18.7 1.6 135.9
Consumer Staples 23.4 62,541 67 27.3 5.0 1.2 -3.3 9.5 22.5 -2.3 79.4 -5.1 11.0 22.1 -1.5 99.9
Walmex 10.0 38,103 31 30.6 6.3 1.1 -4.7 13.9 26.7 0.0 92.5 -6.5 15.4 26.2 0.9 114.5
Femsa 6.7 8,969 18 26.7 2.3 0.4 -3.9 -5.5 9.6 -14.3 39.8 -5.7 -4.2 9.2 -13.5 55.8
Kimber 1.9 2,702 5 18.3 8.6 4.9 7.5 12.6 5.4 5.9 30.9 5.4 14.1 5.0 6.8 45.9
Bimbo 1.8 8,173 4 17.5 2.5 0.6 2.4 8.3 23.0 3.9 95.0 0.4 9.7 22.6 4.9 117.3
Grupo Modelo 1.8 2,972 9 25.5 2.9 3.2 -9.7 0.1 19.9 -16.6 48.2 -11.5 1.4 19.5 -15.9 65.1
Coca Cola Femsa 1.2 1,623 1 22.9 2.3 0.9 -1.1 9.8 28.1 -10.0 49.0 -2.9 11.3 27.7 -9.2 66.0
Financials 5.4 18,145 20 17.9 2.2 0.9 -2.1 2.4 11.4 5.8 79.9 -4.0 3.7 11.0 6.7 100.5
Banorte 3.7 7,060 15 16.3 2.2 0.4 -3.3 -5.6 23.4 -5.4 134.8 -5.1 -4.4 22.9 -4.6 161.6
Inbursa 1.7 11,085 5 18.9 2.2 1.2 -1.3 7.4 3.8 12.9 45.0 -3.2 8.9 3.5 13.9 61.6
Industrials 4.1 12,789 12 14.0 1.6 2.1 -0.9 6.8 17.3 4.1 110.7 -2.8 8.2 16.9 5.0 134.8
Alfa 1.5 3,669 6 NM 1.4 0.5 -0.9 13.8 56.3 1.7 277.7 -2.8 15.3 55.7 2.6 320.8
Gcarso 1.4 7,555 3 13.1 1.9 3.0 -0.6 1.4 -1.7 5.2 41.0 -2.5 2.7 -2.1 6.1 57.2
GAP 1.2 1,565 2 18.2 0.9 1.4 -2.7 16.7 17.9 4.4 55.5 -4.5 18.3 17.5 5.3 73.3
Materials 16.0 38,973 73 40.0 2.6 3.1 -7.5 -5.0 32.6 -5.2 144.8 -9.3 -3.7 32.1 -4.3 172.7
Cemex 6.5 9,168 26 NM 0.5 8.9 -17.6 -18.4 -11.2 -21.0 9.1 -19.2 -17.3 -11.5 -20.3 21.6
Grupo Mexico 6.5 17,738 36 22.7 3.0 1.7 -3.9 -0.8 51.6 -1.8 235.9 -5.7 0.5 51.0 -0.9 274.3
Mexchem 1.6 4,175 6 68.1 3.7 0.2 2.8 24.2 73.6 20.1 179.3 0.9 25.9 72.9 21.2 211.2
Penoles 1.5 7,893 5 64.0 3.5 1.0 -9.3 -14.3 19.1 -7.9 79.3 -11.0 -13.1 18.6 -7.0 99.8
Telecoms 39.8 77,874 126 14.9 4.5 2.7 -2.5 -3.3 4.4 -4.0 34.5 -4.3 -2.0 4.0 -3.1 49.9
AMX 30.8 45,753 99 13.5 5.4 3.7 -2.3 -7.8 -1.3 -5.8 35.3 -4.1 -6.6 -1.7 -5.0 50.8
TII International 3.5 8,599 12 25.2 2.2 0.7 -1.1 16.0 40.2 -0.7 77.2 -3.0 17.5 39.7 0.2 97.4
Telmex 3.1 7,548 8 10.6 4.5 4.3 -6.8 -15.0 -11.0 -9.1 -13.2 -8.6 -13.9 -11.3 -8.3 -3.2
Carso Global Telecom 2.4 15,975 6 15.6 3.1 0.0 -1.8 4.7 8.8 1.9 31.6 -3.7 6.1 8.4 2.9 46.7
MSCI Mexico 100.0 235,751 327 23.0 3.9 2.0 -3.5 1.9 15.1 -2.5 77.4 -5.3 3.2 14.6 -1.6 97.7
Source: MSCI, Datastream, J.P. Morgan. Note:* ADTV is the 6 month average daily traded volume Updated as on Feb 2010

55
Ben Laidler Latin America Equity Research
(1-212) 622-5252 17 February 2010
ben.m.laidler@jpmchase.com

Gabriel Casillas
(52-55) 5540-9558
gabriel.casillas@jpmorgan.com

IPC Bolsa: Market Performance and Valuation by Sectors and Stock


Sector/Stock Weigthings% Total market cap ADTV* Trailing Consensus Estimates LC Performance US$ Performance
US$ Mn US$ Mn PE PB DY 1M 3M 6M YTD 12M 1M 3M 6M YTD 12M
Consumer Discretionary 12.7 29,810 43 19.7 3.4 1.0 -3.1 5.9 7.5 -2.8 95.4 -5.0 7.3 7.1 -2.0 117.8
Elektra 4.7 12,353 6 20.4 4.8 0.2 -0.2 20.4 3.8 1.9 124.5 -2.1 22.0 3.4 2.8 150.1
Televisa 4.5 9,113 16 18.8 3.0 2.6 -6.3 -11.5 2.8 -10.3 27.2 -8.1 -10.3 2.4 -9.5 41.8
Urbi 0.9 2,233 3 14.8 1.6 0.0 1.9 17.1 19.1 0.7 111.7 0.0 18.6 18.7 1.6 135.9
Homex 0.8 1,739 5 14.2 1.8 0.0 -13.2 -11.7 -10.8 -8.9 39.7 -14.8 -10.5 -11.1 -8.0 55.7
Geo 0.7 1,439 7 6.3 1.1 0.0 -1.4 -0.5 22.2 -1.6 103.9 -3.3 0.9 21.8 -0.7 127.2
TV Azetca 0.4 1,116 1 62.2 4.0 1.2 -2.7 -3.1 23.5 -3.1 56.0 -4.5 -1.8 23.1 -2.2 73.8
Ara 0.4 875 2 8.1 1.2 1.9 -4.9 -3.1 19.5 -4.6 124.6 -6.7 -1.8 19.1 -3.8 150.2
Gfamsa 0.4 942 3 21.4 1.5 0.0 -6.0 17.6 56.6 9.9 444.9 -7.8 19.2 56.0 10.9 507.2
Consumer Staples 26.4 67,044 74 27.0 4.8 1.2 -2.8 9.3 21.5 -1.2 83.0 -4.6 10.8 21.1 -0.3 103.9
Walmex 14.3 37,917 31 30.6 6.3 1.1 -4.7 13.9 26.7 0.0 92.5 -6.5 15.4 26.2 0.9 114.5
Femsa 4.0 8,969 18 26.7 2.3 0.4 -3.9 -5.5 9.6 -14.3 39.8 -5.7 -4.2 9.2 -13.5 55.8
Bimbo 3.1 8,173 4 17.5 2.5 0.6 2.4 8.3 23.0 3.9 95.0 0.4 9.7 22.6 4.9 117.3
Soriana 1.6 4,844 3 27.9 2.8 0.5 4.3 7.3 7.1 6.2 44.7 2.3 8.7 6.7 7.2 61.2
Grupo Modelo 1.5 2,972 9 25.5 2.9 3.2 -9.7 0.1 19.9 -16.6 48.2 -11.5 1.4 19.5 -15.9 65.1
Kimber 1.3 2,680 5 18.3 8.6 4.9 7.5 12.6 5.4 5.9 30.9 5.4 14.1 5.0 6.8 45.9
Gruma 0.5 1,171 4 6.9 0.8 3.0 -5.8 11.2 34.5 16.6 343.7 -7.6 12.6 34.0 17.6 394.5
Commerci 0.2 318 1 1.6 0.2 4.4 -2.6 -5.0 30.2 -2.8 244.5 -4.5 -3.7 29.8 -2.0 283.9
Financials 8.3 21,016 24 16.8 2.4 1.0 -2.2 2.5 14.7 4.7 85.3 -4.1 3.9 14.3 5.6 106.5
Inbursa 4.0 11,085 5 18.9 2.2 1.2 -1.3 7.4 3.8 12.9 45.0 -3.2 8.9 3.5 13.9 61.6
Banorte 3.1 7,060 15 16.3 2.2 0.4 -3.3 -5.6 23.4 -5.4 134.8 -5.1 -4.4 22.9 -4.6 161.6
Comparto 0.9 2,129 3 13.7 5.0 1.8 -2.5 5.5 41.0 -4.7 137.0 -4.4 6.9 40.5 -3.8 164.1
Bolsa 0.3 742 1 NA NA NA -3.6 -1.3 19.2 4.7 69.1 -5.4 0.0 18.8 5.7 88.4
Industrials 6.7 15,581 26 16.4 1.5 2.0 -1.7 6.2 16.9 2.9 94.5 -3.6 7.6 16.4 3.8 116.7
Gcarsa 2.7 7,547 3 13.1 1.9 3.0 -0.6 1.4 -1.7 5.2 41.0 -2.5 2.7 -2.1 6.1 57.2
Alfa 1.8 3,575 6 NM 1.4 0.5 -0.9 13.8 56.3 1.7 277.7 -2.8 15.3 55.7 2.6 320.8
GAP 0.8 1,565 2 18.2 0.9 1.4 -2.7 16.7 17.9 4.4 55.5 -4.5 18.3 17.5 5.3 73.3
ICA 0.7 1,487 11 23.9 0.9 0.0 -5.8 -1.9 17.4 -1.8 18.2 -7.6 -0.6 16.9 -1.0 31.7
Asur 0.7 1,407 2 23.8 1.0 3.9 -4.6 9.8 14.9 -3.3 39.8 -6.4 11.3 14.5 -2.4 55.8
Materials 16.1 39,309 73 39.8 2.7 3.2 -7.5 -5.0 32.4 -5.2 143.6 -9.3 -3.7 31.9 -4.3 171.4
Grupo Mexico 7.0 17,730 36 22.7 3.0 1.7 -3.9 -0.8 51.6 -1.8 235.9 -5.7 0.5 51.0 -0.9 274.3
Cemex 4.4 8,931 26 NM 0.5 8.9 -17.6 -18.4 -11.2 -21.0 9.1 -19.2 -17.3 -11.5 -20.3 21.6
Penoles 2.8 7,893 5 64.0 3.5 1.0 -9.3 -14.3 19.1 -7.9 79.3 -11.0 -13.1 18.6 -7.0 99.8
ICH 1.6 4,175 6 68.1 3.7 0.2 2.8 24.2 73.6 20.1 179.3 0.9 25.9 72.9 21.2 211.2
Autlan 0.2 581 1 25.8 7.6 11.8 -12.6 -7.7 0.3 -10.5 10.3 -14.3 -6.5 -0.1 -9.6 22.9
Telecoms 29.8 77,980 130 14.9 4.4 2.6 -2.6 -3.0 4.9 -3.9 35.4 -4.4 -1.7 4.5 -3.0 50.9
AMX 19.8 44,951 99 13.5 5.4 3.7 -2.3 -7.8 -1.3 -5.8 35.3 -4.1 -6.6 -1.7 -5.0 50.8
Carso Global Telecom 5.4 15,951 6 15.6 3.1 0.0 -1.8 4.7 8.8 1.9 31.6 -3.7 6.1 8.4 2.9 46.7
TII International 2.1 8,483 12 25.2 2.2 0.7 -1.1 16.0 40.2 -0.7 77.2 -3.0 17.5 39.7 0.2 97.4
Telmex 2.0 7,452 8 10.6 4.5 4.3 -6.8 -15.0 -11.0 -9.1 -13.2 -8.6 -13.9 -11.3 -8.3 -3.2
Axtel 0.6 1,143 5 11.8 0.9 0.0 -10.2 18.7 35.7 0.7 96.4 -11.9 20.3 35.2 1.6 118.8
IPC Bolsa 100.0 250,741 370 22.9 3.8 2.0 -3.4 2.1 15.5 -2.1 80.1 -5.2 3.4 15.1 -1.2 100.6
Source: MSCI, Datastream, J.P. Morgan.* ADTV is the 6 month average daily traded volume Updated as on Feb 2010

56
Ben Laidler Latin America Equity Research
(1-212) 622-5252 17 February 2010
ben.m.laidler@jpmchase.com

Gabriel Casillas
(52-55) 5540-9558
gabriel.casillas@jpmorgan.com

Value: Mexico Sectors Valuation


P/E (x) Div. Yield (%) P/BV (x) ROE (%)
15-Feb-10 Avg. Current 12m Prospective Avg. Current Prospective Avg. Current Prospective
MSCI Index 02-07 Trailing Fwd 2009E 2010E 2011E 02-07 Trailing 2009E 2010E 2011E 02-07 Trailing 2009E 2010E 2011E 2008 2009E 2010E 2011E
Consumer Discretionary 565.4 20.6 15.6 13.9 15.9 14.1 12.7 1.5 2.8 2.9 2.5 2.6 3.1 2.6 2.6 2.4 2.1 20.0 16.5 16.7 16.5
Consumer Staples 414.6 19.7 14.3 15.6 14.1 15.9 13.5 1.8 1.8 1.8 2.1 2.8 3.0 3.0 3.0 2.4 2.1 12.8 21.6 15.1 15.5
Financials 2147.1 14.1 16.4 13.8 16.7 14.2 11.0 0.8 1.1 1.1 1.2 1.9 2.5 2.3 2.3 2.1 1.7 18.7 13.8 14.5 15.2
Industrials 316.9 15.5 19.4 16.5 19.8 16.6 16.4 1.8 2.8 2.8 2.7 4.8 1.2 1.3 1.3 1.1 0.9 2.6 6.8 6.4 5.4
Materials 273.5 13.4 23.4 12.1 25.0 12.5 9.2 2.8 2.1 2.1 2.3 2.3 1.7 1.1 1.1 1.1 0.8 1.0 4.4 8.7 9.0
Telecommunication services 1032.4 16.0 11.7 11.2 11.8 11.3 10.6 1.6 2.9 2.7 3.8 4.1 4.4 5.1 5.2 4.9 4.6 36.7 44.0 43.2 43.6
Market Aggregate 28244 15.6 14.3 12.5 14.6 12.7 11.1 1.8 2.5 2.4 2.9 3.3 2.8 2.5 2.5 2.3 2.0 18.2 17.2 18.1 17.8

Value: PE Matrix for Countries and Sectors

South Africa
EMF Latam
EMF EMEA

Argentina

Colombia
EMF Asia

Malaysia
Europe

Taiwan
Mexico

Russia

Turkey
Global

Korea
China
Brazil

Chile

India
Peru
USA

12-month forward PE EM

Consumer Discretionary 15.8 14.8 14.8 12.2 11.7 11.6 13.8 13.2 13.9 26.8 NA NA NA 16.4 14.6 NA 11.6 8.1 23.2 15.7 10.6
Consumer Staples 14.5 13.6 14.7 16.9 14.5 17.5 17.3 17.6 15.6 20.5 23.5 NA NA 16.4 20.8 20.1 13.4 13.2 16.4 15.6 16.6
Energy 11.2 12.7 9.7 9.3 7.1 11.4 11.7 11.6 NA NA NA NA 16.5 11.0 12.3 6.6 9.3 7.5 21.0 11.3 9.2
Financials 12.1 12.6 10.6 11.8 10.8 11.7 12.0 12.0 13.8 12.3 9.5 10.8 NA 10.7 17.2 13.1 10.1 9.0 12.4 13.3 9.0
Industrials 15.3 15.2 14.8 13.5 10.1 14.1 20.6 22.0 16.5 21.4 NA NA NA 14.9 21.1 NA 8.8 10.3 24.8 15.3 9.3
Materials 13.9 15.7 13.0 12.7 13.6 11.6 13.2 12.8 12.1 23.5 NA 18.7 45.6 13.5 11.3 12.8 15.0 8.6 15.0 12.8 16.0
Telecommunication Services 11.4 13.3 9.9 11.6 10.0 13.1 11.3 11.6 11.2 12.8 7.2 NA NA 12.6 11.7 9.3 9.9 8.3 14.5 15.1 10.6
Market Aggregate 13.1 13.3 11.7 12.0 10.1 12.3 12.8 12.5 12.5 17.1 9.1 10.8 16.6 12.7 16.1 8.1 11.3 10.0 13.7 14.5 9.8
Sector Neutral* 13.0 13.6 12.1 12.0 11.4 12.8 12.9 12.9 12.7 15.6 11.6 13.3 19.5 14.7 15.7 12.1 11.4 9.5 16.0 13.4 11.5

Regional and Countries Valuations


P/E (x) Div. Yield (%) P/BV (x) ROE (%)
15-Feb-10 Avg. Current 12m Prospective Avg. Current Prospective Avg. Current Prospective
MSCI Index 02-07 Trailing Fwd 2009E 2010E 2011E 02-07 Trailing 2009E 2010E 2011E 02-07 Trailing 2009E 2010E 2011E 2008 2009E 2010E 2011E
Mexico 28244 15.6 14.3 12.5 14.6 12.7 11.1 1.8 2.5 2.4 2.9 3.3 2.8 2.5 2.5 2.3 2.0 18.2 17.2 18.1 17.8
Brazil 232341 11.4 15.5 12.5 16.0 12.8 10.6 3.8 2.9 2.9 3.1 3.3 2.0 2.2 2.2 2.0 1.7 15.9 13.8 15.8 16.2
Chile 4674 25.2 18.9 17.1 19.2 17.3 15.9 2.3 2.1 2.0 2.7 NA 1.9 1.9 2.0 1.8 2.0 11.4 10.2 10.5 12.5
Argentina 14582200 29.0 8.7 8.2 8.7 8.4 6.9 1.3 NA NA NA NA 2.5 1.2 1.2 NA NA 17.1 NA NA NA
Colombia 2145 17.4 21.1 16.6 21.8 17.5 10.2 3.0 5.5 5.8 2.8 4.7 1.9 2.2 2.2 2.0 1.9 15.7 NA NA NA
Peru 2204 15.2 16.4 12.2 17.2 12.4 10.6 3.8 1.6 1.5 2.5 NA 3.2 4.3 4.3 3.5 2.1 27.8 24.7 28.0 20.1
EMF Latam 7113740 13.7 15.6 12.8 16.0 13.1 11.0 2.9 2.8 2.7 3.0 3.3 2.2 2.3 2.3 2.1 1.8 14.5 14.2 16.0 16.4
EMF Asia 570 14.6 15.3 12.2 15.8 12.4 10.8 2.3 2.2 2.1 2.6 2.6 2.0 2.0 2.0 1.8 1.8 12.2 13.2 15.3 16.7
EMF EMEA 371 14.6 13.0 10.1 13.5 10.4 8.1 2.4 2.3 2.2 2.8 3.6 2.3 1.7 1.7 1.5 1.4 15.7 13.0 15.5 17.7
Emerging Markets 40835 14.3 15.1 12.1 15.5 12.3 10.5 2.4 2.2 2.2 2.6 3.1 2.1 2.0 2.0 1.8 1.6 12.6 13.1 15.6 16.5
China 60 16.1 15.4 12.7 15.8 13.0 11.2 2.3 2.5 2.4 2.9 2.9 2.4 2.2 2.3 2.0 2.0 14.9 15.2 16.5 18.1
Russia 761 12.7 11.9 8.5 12.5 8.9 6.4 1.8 1.3 1.2 1.7 2.4 1.8 1.3 1.3 1.2 1.0 15.5 10.5 13.9 17.2
Korea 452 11.5 12.3 9.9 12.7 10.2 8.5 2.0 1.0 1.0 1.3 1.3 1.6 1.5 1.6 1.3 1.3 8.4 13.0 14.1 15.2
Taiwan 269 24.7 23.3 13.6 25.8 13.9 11.8 3.0 2.9 2.8 3.7 3.7 2.0 1.8 1.9 1.8 1.8 5.3 7.3 13.1 15.1
South Africa 685 14.3 14.7 11.3 15.2 11.7 9.4 3.0 2.8 2.7 3.3 4.2 2.6 2.2 2.2 1.9 1.7 17.2 14.6 17.5 19.3
Global* 283 18.4 14.4 11.9 14.8 12.2 10.2 2.1 2.8 2.8 3.0 3.3 2.5 1.6 1.6 1.5 1.4 13.1 10.9 12.7 14.4
USA* 1025 19.0 16.9 13.4 17.5 13.8 11.5 1.8 2.0 2.0 2.1 2.3 2.9 1.9 1.9 1.9 1.7 11.7 11.5 14.0 15.8
Europe* 1059 16.4 11.4 9.0 11.8 9.2 7.6 2.9 3.8 3.7 4.0 4.5 2.3 1.5 1.5 1.5 1.4 16.7 12.8 16.2 18.5
Japan* 553 19.4 NM 30.3 NM 32.2 17.6 1.1 1.9 1.9 2.0 2.2 1.8 1.2 1.2 1.1 1.1 8.2 NM 3.5 6.0

Source: I/B/E/S, MSCI, JPMorgan. Updated as of Feb 2010


Market forecast numbers are derived from bottom-up calculations of each individual MSCI constituents using I/B/E/S estimates.
Companies with different yearends are calendarised to December yearends and are free float adjusted for aggregation. Historical numbers are from MSCI.

57
Ben Laidler Latin America Equity Research
(1-212) 622-5252 17 February 2010
ben.m.laidler@jpmchase.com

Gabriel Casillas
(52-55) 5540-9558
gabriel.casillas@jpmorgan.com

J.P. Morgan Stock Coverage

Name Ticker JPM Price Mkt Cap ADTV % Price Change P/E EV/EBITDA P/BV Dividend Yield EPS Growth (%) ROE (%) Coverging
Rating 15 Feb 10 $mn $mn 1d 1w 1m 3m YTD 09E 10E 09E 10E 09E 10E 09E 10E 09E 10E 09E 10E Analyst
America Movil SA AMX US OW 44.6 71,884 212 -0.2 0.6 -4.2 -7.9 -5.0 11.3 10.2 nm nm nm nm 18.6 19.7 8.1 10.2 44.7 46.0 Baggio, Andre
ASUR ASURB MM OW 65.7 1,526 2 0.3 4.6 -4.6 9.8 -3.3 19.0 17.3 8.8 8.0 1.4 1.4 3.7 4.2 26.4 10.1 16.6 17.4 Huerta, Adrian E
Axtel SA de CV AXTELCPO MM N 11.9 1,145 5 2.2 1.5 -10.2 18.7 0.7 nm 19.0 5.5 4.4 1.8 1.7 0.0 0.0 -220.0 250.0 2.7 8.7 Jhawar, Rajneesh
Carso Global Telecom SA TELECOA1 MM UW 59.3 15,982 6 0.5 1.6 -1.8 4.7 1.9 na na na na na na na na na na 10.7 10.8 Baggio, Andre
Cemex CX US OW 9.5 9,138 100 -0.5 1.8 -19.0 -20.6 -19.5 30.7 13.8 6.2 5.0 0.6 0.6 0.0 2.1 138.5 122.6 1.9 4.1 Betts, Mike F
Coca-Cola Femsa SA KOF US N 59.4 10,968 8 -0.8 0.3 -3.7 7.5 -9.6 10.0 9.5 6.6 5.8 1.9 1.7 1.7 1.9 2.9 4.5 13.6 13.4 Alanis, Alan
Comerci COMERUBC MM UW 10.7 898 1 0.1 -0.2 -2.6 -5.0 -2.8 6.4 5.2 4.3 4.0 0.5 0.5 na na 28.7 24.1 8.5 9.7 Teixeira, Andrea
Compartamos Banco COMPARTO MM OW 64.4 2,133 3 0.5 0.5 -2.5 5.5 -4.7 15.2 na - - 5.0 na 1.2 na 28.1 na 37.6 na de Mariz, Frederic Rozeira
Consorcio Ara ARA* MM UW 8.7 877 2 0.2 0.0 -4.9 -3.1 -4.6 12.6 11.1 8.0 7.1 1.2 1.1 2.0 2.0 3.0 13.0 9.3 9.8 Huerta, Adrian E
Contal CONTAL* MM N 33.7 1,957 0 0.0 1.3 -0.9 8.7 1.8 13.6 13.0 7.1 6.7 2.7 2.7 6.6 6.8 5.1 5.3 21.3 22.0 Alanis, Alan
Corporacion Geo GEOB MM N 34.2 1,442 7 0.2 -1.6 -1.4 -0.5 -1.6 8.8 7.6 5.0 4.5 1.4 1.2 0.0 0.0 20.8 15.2 14.2 13.9 Huerta, Adrian E
Embotelladoras Arca ARCA* MM OW 40.6 2,536 2 0.0 -0.9 -3.3 9.0 -6.3 11.3 10.5 6.1 5.6 1.9 1.8 4.8 5.0 6.8 7.5 17.0 16.8 Alanis, Alan
FEMSA FMX US OW 41.3 14,789 66 -0.9 0.8 -5.8 -6.3 -13.7 10.2 9.0 7.4 7.1 1.3 1.2 1.4 2.2 53.4 13.8 10.7 9.7 Alanis, Alan
First Cash Financial FCFS US OW 21.3 634 4 -1.4 1.7 -7.6 17.5 -4.2 13.0 10.9 7.2 6.3 2.4 2.0 na na 15.5 18.9 19.3 18.1 Laidler, Ben
GAP GAPB MM N 42.5 1,845 2 0.6 1.4 -2.7 16.7 4.4 21.4 19.5 9.5 8.6 0.9 0.9 4.2 4.2 0.5 10.1 35.9 36.7 Huerta, Adrian E
Grupo Bimbo BIMBOA MM OW 89.9 8,189 4 2.4 3.3 2.4 8.3 3.9 15.0 13.4 7.8 7.0 2.3 2.0 0.8 1.1 17.4 12.2 15.3 15.0 Alanis, Alan
Grupo Financiero Banorte GFNORTEO MM N 45.3 7,073 15 0.1 -0.2 -3.3 -5.6 -5.4 12.9 na - - 2.0 na 1.7 na 20.6 na 15.2 na Martinez, Saul
Grupo Financiero Inbursa GFINBURO MM UW 43.0 11,107 5 0.0 3.3 -1.3 7.4 12.9 16.8 15.1 - - 2.1 1.9 1.7 2.1 5.3 11.3 13.2 13.4 Martinez, Saul
Grupo Mexico GMEXICOB MM OW 29.5 17,765 36 -0.3 7.5 -3.9 -0.8 -1.8 12.0 12.7 5.4 5.6 2.9 2.6 2.6 3.9 58.3 -5.3 24.9 21.0 Angele, Rodolfo R
Grupo Modelo GMODELOC MM N 60.9 15,237 9 -1.4 -2.8 -9.7 0.0 -16.6 16.8 15.5 7.1 6.5 2.5 2.3 2.5 3.0 34.6 8.3 14.7 14.8 Alanis, Alan
Grupo Televisa SA TV US OW 18.6 10,489 43 -0.7 -0.7 -8.7 -15.8 -10.2 16.2 14.1 6.3 5.6 0.2 0.2 22.8 29.5 15.1 15.1 16.3 16.5 Jhawar, Rajneesh
HOMEX HOMEX* MM N 67.0 1,742 5 0.5 5.4 -13.2 -11.7 -8.9 7.7 6.7 5.0 4.2 1.4 1.1 0.0 0.0 18.9 15.7 17.1 16.4 Huerta, Adrian E
ICA ICA* MM OW 29.9 1,490 11 -5.5 -3.1 -5.8 -1.9 -1.8 28.0 20.2 10.0 9.0 0.8 0.7 0.0 0.0 -8.5 38.3 3.6 4.8 Huerta, Adrian E
ICA ADR ICA US OW 9.8 1,572 3 0.5 4.0 -2.1 0.2 4.6 27.2 19.6 10.5 9.3 0.8 0.8 0.0 0.0 9.1 38.9 15.7 20.7 Huerta, Adrian E
Megacable MEGACPO MM OW 26.9 1,792 1 0.0 4.3 -9.1 -8.9 -3.2 13.6 10.9 6.3 5.1 2.0 1.7 0.0 0.0 -1.0 24.2 14.6 15.3 Jhawar, Rajneesh
NII Holdings Inc. NIHD US N 36.1 5,995 69 2.8 14.8 -2.4 23.7 7.4 16.1 13.0 5.9 6.4 1.8 1.9 0.0 0.0 -13.2 23.7 10.9 14.0 Baggio, Andre
OMA OMAB MM UW 21.1 651 1 0.3 4.1 3.5 10.2 -4.5 18.2 17.2 7.8 7.1 1.1 1.1 3.9 4.6 20.8 6.0 16.2 16.6 Huerta, Adrian E
Organizacion Soriana SORIANAB MM UW 34.8 4,853 3 -0.4 7.3 4.3 7.3 6.2 20.2 17.7 9.7 8.7 1.8 1.6 0.3 0.4 11.7 14.5 9.3 9.7 Teixeira, Andrea
Silver Wheaton SLW US OW 15.1 5,181 124 0.7 6.0 -11.7 -4.4 0.8 15.9 13.4 11.0 10.2 2.3 1.9 0.0 0.0 143.6 18.9 16.3 14.5 Bridges, John D
Telmex Internacional TII US UW 17.9 16,056 33 0.2 2.7 -3.3 17.2 0.6 22.1 19.5 7.9 7.2 2.0 2.0 10.5 30.3 3.1 13.3 9.3 10.1 Baggio, Andre
Telmex SA TMX US UW 15.4 14,005 18 -0.7 -1.9 -8.2 -11.9 -7.1 9.9 10.0 5.1 5.2 5.0 5.0 nm nm -10.7 -0.8 50.6 49.4 Baggio, Andre
TV Azteca TVAZTCPO MM N 6.9 1,569 1 0.3 2.4 -2.7 -2.1 -3.1 12.3 10.0 5.5 5.1 2.6 2.3 0.1 0.1 43.6 23.2 21.3 22.0 Jhawar, Rajneesh
Urbi URBI* MM OW 29.6 2,237 3 -0.1 9.3 1.9 17.0 0.7 11.4 9.4 6.2 5.2 1.5 1.3 0.0 0.0 32.0 21.2 12.9 13.5 Huerta, Adrian E
Wal-Mart de Mexico WALMEXV MM N 58.7 38,011 31 -0.8 2.2 -4.7 13.8 0.0 26.0 22.8 15.0 13.1 5.3 4.7 0.0 0.0 13.6 14.2 21.5 21.8 Teixeira, Andrea
Mexico 14.9 12.7 5.4 4.9 1.9 1.7 6.5 8.2 19.9 14.0 24.1 23.7
Source: J.P. Morgan Estimates, Bloomberg and Company Reports Updated as of Feb 2010

58
Ben Laidler Latin America Equity Research
(1-212) 622-5252 17 February 2010
ben.m.laidler@jpmchase.com

Gabriel Casillas
(52-55) 5540-9558
gabriel.casillas@jpmorgan.com

Mexico Market: Technical Indicators


Mexico Performance Mexico fair value range* Mexico Fwd PE

FWD PER (22873) (30316) 17


650 300
Absolute relative to EM
550 250 PER (16832) (23925) 15 +1SD
450 200 PBR (19793) (32796)
13
350 150 DY (32844) (54481)
11 Avg
250 100 (14142)
BY/EY
(34433) 9
150 50 -1SD
BY/DY
50 0 7
94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 0 20000 40000 60000 80000 100000 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09

Mexico Trailing PE Mexico ROE vs Price to Book Value Mexico Earnings Growth
24 25 4.5
108
4.0 2010
+1SD 20 100
21 3.5
15 3.0 92
18
Avg 10 2.5 84
15 2.0 2009
5 76
1.5
12 -1SD 68
0 1.0
9 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 60
93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 ROE Price to Book Feb-08 Jun-08 Oct-08 Feb-09 Jun-09

Mexico Embig Spread vs Earnings Yield Moving Averages Mexico Yield Gap Model
#

1500 0.14 7000 -10.0 Equities Cheap


0.12 -5.0 De-Rating
1200 6000 0.0
0.1 5.0
900 5000
0.08 10.0
0.06 4000 15.0
600
20.0 Equities Expensive
0.04 3000
300 25.0
0.02 Re-Rating
30.0
2000 35.0
0 0
Jan 07 Jun 07 Nov 07 Apr 08 Sep 08 Feb 09 Jul 09 Dec 09 40.0 Mexico Yield Gap TREND in YG
93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09
Embig Spread Earnings Yield 200 day 50 day Mexico 30 day 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10

Updated as of February 15
Source: MSCI, IBES, Datastream, CEIC, Bloomberg, EPFR Global
Note: Mexbol absolute and relative to MSCI EM is rebased to 100 since Jan 03.
# Our Earnings Yield Gap model is defined as BY/EY. For Bond yield we take mexico 1 year cetes rates.

59
Ben Laidler Latin America Equity Research
(1-212) 622-5252 17 February 2010
ben.m.laidler@jpmchase.com

Gabriel Casillas
(52-55) 5540-9558
gabriel.casillas@jpmorgan.com

Consensus EPS Revisions: Changes in 2009 and 2010 Forecasts


AMX Banorte Cemex Coca Cola Femsa
135 170 120 145
130 2010
2010 105 2010 135
125 150
2010 90
120 125
130 75
115 60 115
110 110 45
2009 105 2009
105 30
2009 90 2009 95
100 15
95 70 0 85
Feb 08 Jul 08 Dec 08 May 09 Oct 09 Feb 08 Jul 08 Dec 08 May 09 Oct 09 Feb 08 Jul 08 Dec 08 May 09 Oct 09 Feb 08 Jul 08 Dec 08 May 09 Oct 09

Femsa Grupo Mexico Homex NIHD


155 120 170 170
145 2010 100 150
2010 150
135 130
80 130 2010 2010
125 2009 110
60 2009 110
115 90
105 40 90 2009 2009
70
95 20 70 50
Feb 08 Jul 08 Dec 08 May 09 Oct 09 Feb 08 Jul 08 Dec 08 May 09 Oct 09 Feb 08 Jul 08 Dec 08 May 09 Oct 09 Feb 08 Jul 08 Dec 08 May 09 Oct 09

Telmex Televisa Walmex Urbi


150 150 150 140
2010 140 130
130 2010 140 2010
130 120
130 110
110 120 2010
120 100
90 110
2009 90
110
100 80
2009
70 2009 2009
90 100 70
50 80 90 60
Feb 08 Jul 08 Dec 08 May 09 Oct 09 Feb 08 Jul 08 Dec 08 May 09 Oct 09 Feb 08 Jul 08 Dec 08 May 09 Oct 09 May 08 Oct 08 Mar 09 Aug 09 Jan 10

Updated as of February 15
Source: I/B/E/S
Notes: The dashboard aims to show changes in earnings expectations. All year ends are for December .Charts have been rebased to 100 in Feb 2008

60
Ben Laidler Latin America Equity Research
(1-212) 622-5252 17 February 2010
ben.m.laidler@jpmchase.com

Gabriel Casillas
(52-55) 5540-9558
gabriel.casillas@jpmorgan.com

Value: Forward PE for Stocks


AMX Banorte Cemex Coca Cola Femsa

50 18 21 40
15 +1SD 18 +1SD 35
40
+1SD 30 +1SD
12 15
30 12 25
9
20 9 20
6 15
6
10 -1SD
3 -1SD 10
-1SD -1SD 3
0 0 0 5
01 02 02 03 04 05 06 07 08 09 96 97 98 00 01 02 04 05 06 08 09 99 00 02 03 04 05 07 08 09 96 97 98 99 01 02 03 04 06 07 08 09

Femsa Grupo Mexico Homex NIHD


21 32 21 32
+1SD +1SD +1SD
28 28
18 18
24 24
15
15 20
20
16 +1SD 12
12 16
12
9 12
8 -1SD
9 -1SD
-1SD 6 8
4
-1SD
6 0 3 4
98 99 01 02 03 05 06 07 09 96 97 98 99 01 02 03 04 06 07 08 09 05 06 07 07 08 03 04 05 06 07 08 09 10

Telmex Televisa Walmex Urbi


18 50 33 21
+1SD
45 30 +1SD 18
15 +1SD +1SD
40
27 15
35
12 24 12
30
21 9
9 25
20 18 6 -1SD
-1SD
6 -1SD 15 15 3
-1SD
10 12 0
3
96 97 98 99 00 01 03 04 05 06 07 08 10 96 97 98 99 00 01 03 04 05 06 07 08 10 04 05 06 07 07 08 09
96 97 98 99 00 01 03 04 05 06 07 08 10

Updated as of February 15
Source: I/B/E/S, Datastream
Note: This Dashboard aims to show historic consensus forward PE with +/- 1 SD bands

61
Ben Laidler Latin America Equity Research
(1-212) 622-5252 17 February 2010
ben.m.laidler@jpmchase.com

Gabriel Casillas
(52-55) 5540-9558
gabriel.casillas@jpmorgan.com

Value: Price to book value versus Return on equity


AMX Banorte Cemex Coca Cola Femsa
60 12.0 4.5 24 3.0 40 5.0
31 4.0
50 10.0 2.5 35 4.5
28 3.5 18
30 4.0
40 8.0 25 3.0 2.0
12 3.5
P/BV 2.5 25

P/BV
22
ROE

ROE

P/BV
ROE
P/BV
ROE
30 6.0 1.5 3.0
2.0 20
19 6 2.5
20 4.0 1.5 1.0
16 15 2.0
1.0 0
10 2.0 13 0.5 10 1.5
0.5
0 0.0 10 0.0 -6 0.0 5 1.0
01 02 03 04 05 06 07 08 09 02 03 04 05 06 07 08 09 10 01 02 03 04 05 06 07 08 09 01 02 03 04 05 06 07 08 09

Femsa Grupo Mexico Homex NIHD


18 3.0 35 4.5 24 7.0 30 15.0
2.7 30 3.8 6.0 27
16 21 12.0
2.4 25 5.0 24
3.0
14 18 9.0
20 4.0 21
P/BV
ROE

P/BV
ROE

2.1

P/BV

P/BV
ROE

ROE
2.3
12 15 3.0 18
15 6.0
1.8 1.5
10 2.0 15
10 1.5 12 3.0
5 0.8 12
1.0
8 1.2 0 0.0 9 0.0 9 0.0
01 02 03 04 05 06 07 08 09 01 02 03 04 05 06 07 08 09 06 06 07 07 08 08 09 09 05 05 06 06 07 07 08 08 09 09

Telmex Televisa Walmex Urbi


90 30 5.5 27 8.0 20 6.0
10.0 27 5.0 19
80 7.0
24 18 5.0
24 4.5
70 8.0
21 4.0 6.0 17 4.0
60 21 16
6.0 18 3.5
P/BV

P/BV
ROE

ROE

P/BV
ROE
P/BV
ROE

5.0 15 3.0
50 15 3.0 18 14
4.0 4.0 2.0
12 2.5 13
40
2.0 9 2.0 15 12
30 3.0 1.0
6 1.5 11
20 0.0 3 1.0 12 2.0 10 0.0
01 02 03 04 05 06 07 08 09 01 02 03 04 05 06 07 08 09 01 02 03 04 05 06 07 08 09 05 05 06 06 07 07 08 08 09 09

Updated as of February 15
Source: MSCI, Datastream
Note: This Dashboard aims to show historic trailing PB versus ROE. Blue Line shows ROE and Red Line shows Price to book Value

62
Ben Laidler Latin America Equity Research
(1-212) 622-5252 17 February 2010
ben.m.laidler@jpmchase.com

Gabriel Casillas
(52-55) 5540-9558
gabriel.casillas@jpmorgan.com

Dividend Yield

DY DPS Time of the year when the


2009 2010E 2009 2010E dividend is paid Dividend Yield : 2010E
Alfa* 2.0% 1.67 NA Biannual 4.00
Alsea NA NA Annual
AMX 2.0% 2.1% 0.57 0.62 Biannual
3.50
Ara 1.9% 1.9% 0.17 0.17 Annual
Arca 4.8% 5.0% 1.95 2.03 Annual
3.00
ASUR 3.7% 4.2% 2.46 2.79 Annual
Autlan NA NA Annual
Axtel 0.0% 0.0% 0.00 2.50
0.00 Never pay dividends
Banorte 1.8% 0.80 NA Annual
Bimbo 0.8% 1.1% 0.69 1.03 Annual 2.00
Bolsa 0.0% 0.0% 0.00 0.00 NA
Cemex 0.0% 1.6% 0.00 0.20 Annual 1.50
CICSA 0.0% 0.0% 0.00 0.00 Never pay dividends
Cmoctez NA NA Annual 1.00
Comerci NA NA Annual
Comparto 1.2% 0.77 NA Annual 0.50
Contal 6.6% 6.8% 2.24 2.30 Annual
Elektra NA NA Annual 0.00
FEMSA 1.3% 1.7% 0.71

GFamsa

KIMBER
0.89 Annual

GCarso

SIMEC
CICSA

GFInbursa

Megacable
Bimbo

Comparto

Mexchem

TVAZTCA
Cmoctez

GMexico
GModelo

Telecom
Banorte

Cemex

Comerci

Elektra
FEMSA

HOMEX

Peñoles

Soriana

Televisa
TELINT
Telmex

Walmex
Alsea

ASUR
Autlan
Axtel

Bolsa

Contal

IDEAL
Alfa*

AMX

Arca

GAP

GCC

KOF

OMA

Sare
Geo

ICA
ICH

Urbi
Ara
GAP 4.2% 4.2% 1.78 1.78 Biannual
GCarso 0.0% 0.0% 0.00 0.00 Annual
GCC NA NA Biannual
Geo 0.0% 0.0% 0.00 0.00 Never pay dividends Market Dividend Yield
GFamsa 0.0% 0.0% 0.00 0.00 Never pay dividends
GFInbursa 1.7% 2.1% 0.73 0.90 Annual 3.6
GMexico 0.2% 0.3% 0.06 0.09 Annual
GModelo 2.2% 3.0% 1.36 1.83 NA 3.2
HOMEX 0.0% 0.0% 0.00 0.00 Never pay dividends
ICA 0.0% 0.0% 0.00 0.00 Never pay dividends 2.8
ICH 0.0% 0.0% 0.00 0.00 Never pay dividends +1SD
IDEAL 0.0% 0.0% 0.00 0.00 Never pay dividends 2.4
KIMBER NA NA Quarterly
KOF 1.7% 1.9% 1.29 1.49 Annual 2 Avg
Megacable 0.0% 0.0% 0.00 0.00 Never pay dividends
Mexchem 0.7% 0.0% 0.22 0.00 Quarterly 1.6
OMA 3.9% 4.6% 0.82 0.98 Quarterly
Peñoles NA NA Annual 1.2 -1SD
Sare 0.0% 0.0% 0.00 0.00 Never pay dividends
SIMEC 0.0% 0.0% 0.00 0.00 Never pay dividends 0.8
Soriana 0.3% 0.4% 0.12 0.14 Annual 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09
Telecom NA NA NA
Televisa 6.1% 7.0% 2.97 3.41 Annual
TELINT 4.6% 5.1% 0.53 0.59 Annual Source: Datastream, MSCI
Telmex 8.7% 8.5% 0.87 0.85 Quarterly
TVAZTCA 0.1% 0.1% 0.01 0.01 Annual
Urbi 0.0% 0.0% 0.00 0.00 Never pay dividends
Walmex 0.0% 0.0% 0.01 0.02 Annual
Simple average 1.6% 1.8% 0.60 0.63
Source: Bolsa Mexicana de Valores, J.P. Morgan estimates and Company Reports

63
Ben Laidler Latin America Equity Research
(1-212) 622-5252 17 February 2010
ben.m.laidler@jpmchase.com

Gabriel Casillas
(52-55) 5540-9558
gabriel.casillas@jpmorgan.com

Key Economic Data


Real GDP (%oya) IP (%oya) PMI (%oya) Imports Breakdown
9% 15% 30% 120% Capital Intermediate
Consumer
6% 10% 90%
20%
3% 60%
5% 10%
0%
0% 0% 30%
-3%
-5% -10% 0%
-6%
-10% -20% -30%
-9%
-12% -15% -30% -60%
90 91 93 94 96 97 99 00 02 03 05 06 08 09 11 90 91 93 94 96 97 99 00 02 03 05 06 08 09 11 Jan 05 Oct 05 Jul 06 Apr 07 Jan 08 Oct 08 Jul 09 90 91 92 93 95 96 97 98 00 01 02 03 05 06 07 08

Exports Breakdown Unemployment Rate Consumer Confidence (%oya) Real Wage Growth (%oya)
200% Oil Non Oil Agriculture 9% 15% 0.15
160% 8% 10% 0.1
7% 5% 0.05
120%
6% 0% 0
80% 5%
-5% -0.05
40% 4%
3% -10% -0.1
0%
2% -15% -0.15
-40% 1% -20% -0.2
-80% 0% -25% -0.25
90 91 92 93 94 95 97 98 99 00 01 02 04 05 06 07 08 09 90 91 92 93 94 95 97 98 99 00 01 02 04 05 06 07 08 09 02 03 04 05 06 08 09 90 91 92 93 94 95 97 98 99 00 01 02 04 05 06 07 08 09

Producer Confidence (%oya) CPI (%oya) PPI (%oya) Mexican Peso (MXN)
20% 55% 60% 16.0 J.P. Morgan forecast:
50% end Mar 10: 12.80
10% 50% 15.0
45% end Jun 10: 12.50
40% 14.0 Consensus
0% 40% end Sep 10: 12.80
35%
30% 13.0
-10% 30%
25% 12.0 J.P. Morgan
-20% 20% 20%
15% 11.0
-30% 10% 10% 10.0
5%
-40% 0% 0% 9.0
Jan 05 Oct 05 Jul 06 Apr 07 Jan 08 Oct 08 Jul 09 90 91 92 93 95 96 97 98 00 01 02 03 05 06 07 08 10 11 90 91 92 93 94 95 97 98 99 00 01 02 04 05 06 07 08 09 04 06 07 08 09 10

Updated as of February 15
Source: J.P. Morgan Economics, Bloomberg, Datastream, INEGI, Banxico. Red line Refers to forecasted numbers

64
Ben Laidler Latin America Equity Research
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ben.m.laidler@jpmchase.com

Gabriel Casillas
(52-55) 5540-9558
gabriel.casillas@jpmorgan.com

Economic Forecasts Table

Mexico Avg* 2008 2009F 2010F 2011F US 2007 2008 2009F 2010F 2011F
Real GDP, US$ Bn 745 800 613 673 653 Gross domestic product
Nominal GDP, US$ BN 857 1,085 857 988 995 Real GDP (%ch saar) 2.0 1.3 -2.4 3.5 3.1
GDP per capita - US$ 8,123 9,999 7,819 8,920 8,892 Final sales 2.4 1.6 -1.7 2.3 3.0
Real GDP, % change 3.4 1.3 -7.0 3.5 2.5 Domestic 1.8 0.1 -2.7 2.1 3.0
Contribution to growth of GDP. Consumer spending 2.8 0.3 -0.6 2.3 2.6
Consumption 3.1 1.1 -4.6 2.4 2.1 Business investment 4.9 2.4 -18.2 -0.4 6.7
Investment 0.6 1.2 -3.8 1.3 0.9 Equipment 1.7 -1.5 -17.3 4.9 8.8
Net trade -0.3 -1.0 1.5 -0.1 -0.5 Structures 12.7 10.8 -19.9 -12.0 1.5
Consumer prices, %oya 4.2 5.1 5.4 4.7 4.0 Residential investment -17.9 -21.3 -20.2 9.2 19.4
% Dec/Dec 4.1 6.5 4.0 5.1 4.0 Government 2.1 2.9 2.1 2.0 0.0
Producer prices, %oya 5.2 6.3 4.2 5.4 4.3 Exports (%ch saar) 8.4 8.5 -9.5 14.5 9.0
Government balance, % of GDP -1.4 -2.0 -2.1 -2.8 -2.2 Imports (%ch saar) 2.2 -2.3 -13.7 10.7 7.4
Industrial production index, 1993=100, average 1,460 1,567 1,443 1,508 1,567 Contribution to real GDP growth (% pts):
Unemployment rate, percent of labor force 3.3 4.3 6.0 4.8 4.1 Domestic final sales 1.8 0.1 -2.7 2.1 3.0
Exchange rate, units/$, eop 10.9 13.8 13.0 13.0 13.5 Net exports 0.7 1.5 0.9 0.2 0.1
Merchandise trade balance (US$ bn) -7.7 -17.3 -12.0 -13.2 -14.9 Inventories -0.4 -0.3 -0.6 1.2 0.1
Exports 217.8 291.3 228.1 250.7 277.0 Consumer Price Index 2.9 4.1 -0.3 2.3 1.0
Imports 225.4 308.6 240.1 264.0 291.9 Core 2.3 2.4 1.7 1.0 0.6
Current account balance -5.9 -15.8 -13.2 -12.0 -11.2 Producer Price Index 3.9 7.4 -2.7 1.7 0.6
% of GDP -0.7 -1.5 -1.5 -1.2 -1.1 Core 1.9 3.3 2.7 0.7 0.2
Note: Debt with original maturity of less than one year Productivity 1.4 2.5 -12.6 -4.2 1.3
International reserves, (US$ bn) 66.7 85.4 85.9 94.5 102.0 Housing starts (mn units, saar)1 1.3 0.9 0.6 0.7 0.9
Total external debt, (US$ bn) 175.6 189.6 185.7 188.3 187.0 Industrial production, mfg. 1.7 -1.5 -11.2 4.6 3.9
Short term 35.7 37.6 39.6 39.3 40.0 Capacity utilization, mfg. (%)1 79.4 76.7 66.9 70.5 72.4
Total external debt, % of GDP 20.0 17.0 22.0 19.0 19.0 Light vehicle sales (mn units, saar)1 16.1 13.3 10.3 11.5 12.5
Total external debt, % of exports 67.0 55.0 70.0 63.0 57.0 Unemployment rate1 4.6 5.7 9.3 9.9 9.3
Interest payments, % of exports 5.0 4.0 6.0 6.0 5.0 Nominal GDP 4.8 3.6 -1.2 4.1 3.7
Current account balance ($bn)1 -731 -643 -424 -477 -542
% of GDP -5.3 -4.5 -3.0 -3.2 -3.5
Federal budget balance ($bn) 1 -162 -455 -1,417 -1,400 -1,000
% of GDP -1.2 -3.2 -9.9 -9.4 -6.5
Note: Exports of goods, services, and net transfers.
* avg is for 2003-2007
Source: J.P. Morgan Economics

65
Ben Laidler Latin America Equity Research
(1-212) 622-5252 17 February 2010
ben.m.laidler@jpmchase.com

Gabriel Casillas
(52-55) 5540-9558
gabriel.casillas@jpmorgan.com

Financial Sector
Cetes Rates Change in Monetary Base (%oya) M1 Money Supply (%oya) M3 Money Supply (%oya)
80 91 Days Cetes Rates 60% 160% 60%
70 140%
28 days cetes Rates 50% 50%
60 120%
40% 100% 40%
50 80%
40 30% 60% 30%
30 40%
20% 20% 20%
20
10% 0%
10 10%
-20%
0 0% -40% 0%
93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 90 91 92 93 94 95 97 98 99 00 01 02 04 05 06 07 08 09 90 91 92 93 94 95 97 98 99 00 01 02 04 05 06 07 08 09 90 91 92 93 94 95 97 98 99 00 01 02 04 05 06 07 08 09

Real Credit Growth (%oya) Deposit Growth (%oya) Total Deposits of Comercial Banking, Mxp bn Delinquency Rates (%oya)
45% 35% 0.2 50%
Short term Long Term Consumer
35% 25% Total
0.19 40% Housing
25%
15% Corporate
15% 0.18 30%
5%
5% 0.17 20%
-5% -5%
0.16 10%
-15% -15%
-25% -25% 0.15 0%
98 99 01 03 05 07 09

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009
01 03 04 05 06 07 08 09 94 96 97 98 99 00 01 02 03 04 05 06 07 09

Cost of Deposit (%oya) CD Rates Total Loan Growth (%oya) Loan Growth Composition (%oya)
80 60 60% 120% Consumer Housing
70 100% Corporate
50 40%
60 80%
40 60%
50 20%
40%
40 30
0% 20%
30
20 0%
20 -20%
-20%
10 10
-40%
0 0 -40% -60%
90 91 92 93 94 95 97 98 99 00 01 02 04 05 06 07 08 90 91 92 93 94 95 97 98 99 00 01 02 04 05 06 07 08 09 96 96 97 98 99 00 01 01 02 03 04 05 06 06 07 08 09 96 96 97 98 99 00 01 01 02 03 04 05 06 06 07 08 09

Updated as of February 15
Source: J.P. Morgan, Bloomberg, Datastream, Banxico, INEGI

66
Ben Laidler Latin America Equity Research
(1-212) 622-5252 17 February 2010
ben.m.laidler@jpmchase.com

Gabriel Casillas
(52-55) 5540-9558
gabriel.casillas@jpmorgan.com

Consumer and Telecom Sector


Retail Sales Index (%oya) Antad Sales (%oya) Car Sales (%oya) Motor Vehicle Production (%oya)
18% 24% All Stores Supermarkets 125% 75%
21% 100%
15%
18% 50%
75%
12% 15%
50% 25%
9% 12%
25%
9% 0%
6% 6% 0%
-25% -25%
3% 3%
0% -50% -50%
0%
-3% -75%
-3% -6% -100% -75%
02 03 04 05 06 07 08 09 Jan 06 Nov 06 Sep 07 Jul 08 May 09 91 92 93 94 95 96 98 99 00 01 02 03 05 06 07 08 09 94 94 95 96 97 98 99 00 01 02 03 04 05 05 06 07 08

General Economic Activity Index (%oya) Workers Remittances (%oya) Productivity Index (%oya)
Low Income Housing Units Constructed ('000s)
15.0% Tertiary Secondary IGAE 80% 15%
12% 70
10.0% 60%
9% 60
5.0% 40% 6% 50
3% 40
0.0% 20%
0% 30
-5.0% 0% -3%
20
-10.0% -20% -6%
10
-9%
-15.0% -40% 0
-12%

2001

2002

2003

2004

2005

2006

2007

2008

2009
04 04 05 06 07 08 09 96 97 98 99 00 01 02 03 04 05 06 07 09 94 94 95 96 97 98 99 00 01 02 03 04 05 05 06 07 08 09

Credit to Mortgages (USD MN) Mobile Subscriber Growth (%oya) Fixed Lines Growth (%oya)
Cable TV and Satellite TV Growth (%oya)
24 160%
Minutes Users 15%
21 140% 55%
Satellite Cable TV
12%
18 120% 45%
15 100% 9%
35%
12 80% 6%
25%
9 60%
3% 15%
6 40%
3 0% 5%
20%
0 0% -3% -5%
2001

2002

2003

2004

2005

2006

2007

2008

2009

96 97 98 99 00 01 03 04 05 06 07 08 95 96 97 98 99 00 01 02 03 04 05 06 07 08 Mar-00 Sep-01 Mar-03 Sep-04 Mar-06 Sep-07 Mar-09

Updated as of February 15
Source: J.P. Morgan,Bloomberg, Antad, INEGI, COFETEL,Sociedad Hipotecaria Federal

67
Ben Laidler Latin America Equity Research
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ben.m.laidler@jpmchase.com

Gabriel Casillas
(52-55) 5540-9558
gabriel.casillas@jpmorgan.com

Others
Crude Production Natural Gas Production Cement Production Index Steel Production Index
3,800 50% 500 40% 150 40% 330 150%
3,500 40% 30% 300

P roduction (000 bbl's)


130
P roduction (000 bbl's)

30% 450 20% 20% 270


3,200 100%

G row th (% oya)

P roduction Index
P roduction Index
G row th (% oya)

G row th (% oya)
G row th (% oya)
20% 10% 240
2,900 110
10% 400 0% 210
0% 50%
2,600 180
0% 90 -10%
2,300 150
-10% 350 -20% 0%
-20% 120
2,000 70
-20% -30% 90
1,700 -30% 300 -40% 60 -50%
50 -40%
85 87 89 91 93 95 97 99 01 03 05 07 09 96 97 98 99 00 01 02 03 04 05 06 07 08 09 95 96 97 98 99 00 01 02 03 04 05 06 07 08
95 96 97 98 99 00 01 02 03 04 05 06 07 08

Gasoline Price (MXP/LTS) Cement Price Index Steel Price Index Passenger Travel Growth (%oya)
8 125 50% 180 110% 0.6 International Domestic
120 40% 90%
7 160 0.4
115
6 30% 140 70%
110

G row th (% oya)

G row th (% oya)
20% 50% 0.2
P rice Index

P rice Index
5 105 120
100 10% 30% 0
4 95 100
0% 10%
3 90 80 -0.2
-10% -10%
85
2 -20% 60 -30% -0.4
80
1 75 -30% 40 -50% -0.6
97 98 99 00 01 02 04 05 06 07 08 09 95 96 97 98 99 00 01 02 03 04 05 06 07 08 95 96 97 98 99 00 01 02 03 04 05 06 07 08 06 06 06 06 07 07 07 07 08 08 08 08 09 09 09 09

Source: J.P. Morgan, PEMEX, INEGI. The Blue line shows the Production numbers and Brown Line Growth (%oya)

Updated as of February 15

68
Ben Laidler Latin America Equity Research
(1-212) 622-5252 17 February 2010
ben.m.laidler@jpmchase.com

Gabriel Casillas
(52-55) 5540-9558
gabriel.casillas@jpmorgan.com

Fund Flows

Pension Fund Flows Holdings- December 2009 Survey of key EM managers positioning relative to MSCI EM – For major EMs
MXN (bn) Exposure1 chg m/m Country > 2% OW < 2% UW OW-UW < 0.1% EM % JPM reco
% bn
Total investments 1151 100.0 22.7 212.8 Russia 20 (21) 7 (8) 13 (13) 4 (4) 6.3 N

Government Securities 764 66.3 19.2 123.1 Mexico 14 (13) 4 (3) 10 (10) 2 (2) 4.3 OW
Bonds (Government bonos) 262 22.8 0.9 2.2 Brazil 10 (10) 10 (10) 0 (0) 0 (0) 16.9 N
Cetes (Treasury bills) 96 8.3 29.4 21.7 India 11 (12) 12 (13) -1 (-1) 1 (1) 7.5 OW
Inflation-indexed bonds 241 20.9 46.4 76.2 China+HK 11 (12) 12 (14) -1 (-2) 0 (1) 17.9 UW
Non-government securities 238 20.7 20.1 39.8 South Africa 5 (6) 12 (12) -7 (-6) 2 (1) 6.9 N
Total equities 150 13.0 50.0 49.9 China 6 (9) 19 (19) -13 (-10) 0 (1) 17.9 UW
Mexico equities 103 9.0 85.9 47.8 Korea 5 (6) 19 (21) -14 (-15) 2 (2) 12.7 N
Malaysia 2 (2) 18 (19) -16 (-17) 11 (10) 2.7
International equities 46 4.0 4.9 2.1 UW
Taiwan 3 (3) 20 (20) -17 (-17) 0 (0) 11.4 OW
1.Percentage of total net assets under management plus accountable commissions; used to se the investment regime limits Israel 0 (2) 21 (18) -21 (-16) 16 (16) 2.8 UW
Source: CONSAR
Source: EPFR Global, MSCI, J.P. Morgan calculations

Mexico Monthly Net Foreign Investment into Mexican Stock Market Monthly Cumulative Net Foreign Investment into the Mexican Stock Market

700 35,000 3

350 30,000 1

0 25,000 (1)

(350) 20,000 (3)


(5)
(700) 15,000
(7)
(1,050) 10,000
(9)
(1,400) 5,000
00 01 02 03 04 05 06 06 07 08 09 (11)
Foreigners' Net Buy (L) MSCI Mexico (R) 95 96 97 98 00 01 02 03 05 06 07 08 09

Source: MSCI, Datastream, EPFR Global Source: EPFR Global

69
Ben Laidler Latin America Equity Research
(1-212) 622-5252 17 February 2010
ben.m.laidler@jpmchase.com

Gabriel Casillas
(52-55) 5540-9558
gabriel.casillas@jpmorgan.com

70
Ben Laidler Latin America Equity Research
(1-212) 622-5252 17 February 2010
ben.m.laidler@jpmchase.com

Gabriel Casillas
(52-55) 5540-9558
gabriel.casillas@jpmorgan.com

Companies Recommended in This Report (all prices in this report as of market close on 17 February 2010)
America Movil SA (AMX/$45.88/Overweight), Grupo Financiero Banorte (GFNORTEO.MX/Ps45.55/Neutral), Grupo
Mexico (GMEXICOB.MX/Ps30.21/Overweight), ICA (ICA.MX/Ps30.57/Overweight), Ternium (TX/$31.41/Overweight),
Urbi (URBI.MX/Ps30.34/Overweight)
Analyst Certification:
The research analyst(s) denoted by an “AC” on the cover of this report certifies (or, where multiple research analysts are primarily
responsible for this report, the research analyst denoted by an “AC” on the cover or within the document individually certifies, with
respect to each security or issuer that the research analyst covers in this research) that: (1) all of the views expressed in this report
accurately reflect his or her personal views about any and all of the subject securities or issuers; and (2) no part of any of the research
analyst’s compensation was, is, or will be directly or indirectly related to the specific recommendations or views expressed by the
research analyst(s) in this report.
Important Disclosures

• Market Maker/ Liquidity Provider: JPMSL and/or an affiliate is a market maker and/or liquidity provider in Ternium.
• Client of the Firm: America Movil SA is or was in the past 12 months a client of JPMSI; during the past 12 months, JPMSI
provided to the company non-investment banking securities-related services and non-securities-related services. Grupo Financiero
Banorte is or was in the past 12 months a client of JPMSI. Grupo Mexico is or was in the past 12 months a client of JPMSI. ICA is or
was in the past 12 months a client of JPMSI; during the past 12 months, JPMSI provided to the company non-investment banking
securities-related services. Ternium is or was in the past 12 months a client of JPMSI; during the past 12 months, JPMSI provided to
the company non-securities-related services. Urbi is or was in the past 12 months a client of JPMSI.
• Investment Banking (next 3 months): JPMSI or its affiliates expect to receive, or intend to seek, compensation for investment
banking services in the next three months from America Movil SA.
• Non-Investment Banking Compensation: JPMSI has received compensation in the past 12 months for products or services other
than investment banking from America Movil SA, ICA. An affiliate of JPMSI has received compensation in the past 12 months for
products or services other than investment banking from America Movil SA, Ternium.
• MSCI: The MSCI sourced information is the exclusive property of Morgan Stanley Capital International Inc. (MSCI). Without prior
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used to create any financial products, including any indices. This information is provided on an 'as is' basis. The user assumes the
entire risk of any use made of this information. MSCI, its affiliates and any third party involved in, or related to, computing or
compiling the information hereby expressly disclaim all warranties of originality, accuracy, completeness, merchantability or fitness
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its affiliates or any third party involved in, or related to, computing or compiling the information have any liability for any damages
of any kind. MSCI, Morgan Stanley Capital International and the MSCI indexes are services marks of MSCI and its affiliates.

America Movil SA (AMX) Price Chart

Date Rating Share Price Price Target


114 OW $36 N $32 OW $58 ($) ($)
27-Nov-06 OW 42.97 55.00
95 OW $76 OW $58 N $34 OW $47 04-Apr-07 OW 50.21 59.00
27-Jun-07 OW 60.20 76.00
76 OW $55 OW $59 OW $88 OW $70 OW $41 OW $37 OW $61
10-Dec-07 OW 64.85 88.00
Price($) 14-May-08 OW 56.90 70.00
57
25-Jul-08 OW 47.16 58.00
30-Oct-08 OW 28.23 36.00
38
10-Dec-08 OW 31.23 41.00
18-Feb-09 N 28.31 34.00
19
01-Apr-09 N 27.08 32.00
29-Apr-09 OW 30.39 37.00
0
Oct Jan Apr Jul Oct Jan Apr Jul Oct Jan Apr Jul Oct Jan
20-May-09 OW 38.30 47.00
06 07 07 07 07 08 08 08 08 09 09 09 09 10 24-Aug-09 OW 46.90 58.00
14-Jan-10 OW 50.01 61.00
Source: Bloomberg and J.P. Morgan; price data adjusted for stock splits and dividends.
This chart shows J.P. Morgan's continuing coverage of this stock; the current analyst may or may not have covered it
over the entire period.
J.P. Morgan ratings: OW = Overweight, N = Neutral, UW = Underweight.

71
Ben Laidler Latin America Equity Research
(1-212) 622-5252 17 February 2010
ben.m.laidler@jpmchase.com

Gabriel Casillas
(52-55) 5540-9558
gabriel.casillas@jpmorgan.com

Grupo Financiero Banorte (GFNORTEO.MX) Price Chart

Date Rating Share Price Price Target


85 OW Ps61 OW Ps28 (Ps) (Ps)
25-Oct-06 OW 37.97 43.00
OW Ps47 OW Ps33 N Ps24 N Ps49 23-Jan-07 OW 43.70 47.00
68
03-Apr-07 OW 52.49 61.00
OW Ps43 OW Ps67 OW Ps65 OW Ps25 UW Ps38 19-Nov-07 OW 48.66 67.00
51
Price(Ps) 23-Jul-08 OW 42.55 65.00
23-Oct-08 OW 21.64 33.00
34 27-Jan-09 OW 18.67 28.00
18-Mar-09 OW 18.45 25.00
17 06-Apr-09 N 21.06 24.00
21-Jul-09 UW 38.56 38.00
27-Oct-09 N 45.34 49.00
0
Oct Jan Apr Jul Oct Jan Apr Jul Oct Jan Apr Jul Oct Jan
06 07 07 07 07 08 08 08 08 09 09 09 09 10

Source: Bloomberg and J.P. Morgan; price data adjusted for stock splits and dividends.
Break in coverage May 31, 2008 - Jul 23, 2008. This chart shows J.P. Morgan's continuing coverage of this stock; the
current analyst may or may not have covered it over the entire period.
J.P. Morgan ratings: OW = Overweight, N = Neutral, UW = Underweight.

Grupo Mexico (GMEXICOB.MX) Price Chart

Date Rating Share Price Price Target


OW Ps31.5 (Ps) (Ps)
48 18-Nov-08 N 8.37 14.50
OW Ps26.5 28-Jul-09 N 16.77 26.50
19-Aug-09 OW 20.17 26.50
36 N Ps14.5 N Ps26.5 OW Ps39 09-Oct-09 OW 26.67 31.50
Price(Ps) 10-Dec-09 OW 30.01 39.00
24

12

0
Oct Jan Apr Jul Oct Jan Apr Jul Oct Jan Apr Jul Oct Jan
06 07 07 07 07 08 08 08 08 09 09 09 09 10

Source: Bloomberg and J.P. Morgan; price data adjusted for stock splits and dividends.
Break in coverage Aug 25, 2005 - Nov 18, 2008. This chart shows J.P. Morgan's continuing coverage of this stock; the
current analyst may or may not have covered it over the entire period.
J.P. Morgan ratings: OW = Overweight, N = Neutral, UW = Underweight.

72
Ben Laidler Latin America Equity Research
(1-212) 622-5252 17 February 2010
ben.m.laidler@jpmchase.com

Gabriel Casillas
(52-55) 5540-9558
gabriel.casillas@jpmorgan.com

ICA (ICA.MX) Price Chart

Date Rating Share Price Price Target


(Ps) (Ps)
115 19-Jan-10 OW 31.85 43.00

92
OW Ps43

Price(Ps) 69

46

23

0
Oct Jan Apr Jul Oct Jan Apr Jul Oct Jan Apr Jul Oct Jan
06 07 07 07 07 08 08 08 08 09 09 09 09 10

Source: Bloomberg and J.P. Morgan; price data adjusted for stock splits and dividends.
Initiated coverage Jan 19, 2010. This chart shows J.P. Morgan's continuing coverage of this stock; the current analyst
may or may not have covered it over the entire period.
J.P. Morgan ratings: OW = Overweight, N = Neutral, UW = Underweight.

Ternium (TX) Price Chart

80 Date Rating Share Price Price Target


OW $31 ($) ($)
04-Jun-07 OW 27.03 36.70
64 OW $29 OW $45.5 22-Oct-07 OW 35.20 45.50
13-Mar-08 OW 37.58 50.20
48 OW $36.7 OW $45.5 OW $50.2OW $50.4 OW $16.5OW $25.5 OW $40.5 07-Jul-08 OW 37.63 50.40
Price($) 23-Jan-09 OW 9.31 16.50
08-May-09 OW 15.67 25.50
32
20-Jul-09 OW 20.58 29.00
03-Sep-09 OW 24.30 31.00
16 10-Dec-09 OW 32.15 40.50
02-Feb-10 OW 31.90 45.50

0
Oct Jan Apr Jul Oct Jan Apr Jul Oct Jan Apr Jul Oct Jan
06 07 07 07 07 08 08 08 08 09 09 09 09 10

Source: Bloomberg and J.P. Morgan; price data adjusted for stock splits and dividends.
This chart shows J.P. Morgan's continuing coverage of this stock; the current analyst may or may not have covered it
over the entire period.
J.P. Morgan ratings: OW = Overweight, N = Neutral, UW = Underweight.

73
Ben Laidler Latin America Equity Research
(1-212) 622-5252 17 February 2010
ben.m.laidler@jpmchase.com

Gabriel Casillas
(52-55) 5540-9558
gabriel.casillas@jpmorgan.com

Urbi (URBI.MX) Price Chart

Date Rating Share Price Price Target


85 (Ps) (Ps)
19-Mar-07 OW 41.77 50.00
OW Ps34 16-Jul-08 OW 33.58 45.00
68
31-Oct-08 OW 18.76 31.00
OW Ps50 OW Ps45OW Ps31 N Ps25 14-Jul-09 N 20.28 25.00
51
Price(Ps) 14-Sep-09 OW 27.08 34.00

34

17

0
Oct Jan Apr Jul Oct Jan Apr Jul Oct Jan Apr Jul Oct Jan
06 07 07 07 07 08 08 08 08 09 09 09 09 10

Source: Bloomberg and J.P. Morgan; price data adjusted for stock splits and dividends.
This chart shows J.P. Morgan's continuing coverage of this stock; the current analyst may or may not have covered it
over the entire period.
J.P. Morgan ratings: OW = Overweight, N = Neutral, UW = Underweight.

Explanation of Equity Research Ratings and Analyst(s) Coverage Universe:


J.P. Morgan uses the following rating system: Overweight [Over the next six to twelve months, we expect this stock will outperform the
average total return of the stocks in the analyst’s (or the analyst’s team’s) coverage universe.] Neutral [Over the next six to twelve
months, we expect this stock will perform in line with the average total return of the stocks in the analyst’s (or the analyst’s team’s)
coverage universe.] Underweight [Over the next six to twelve months, we expect this stock will underperform the average total return of
the stocks in the analyst’s (or the analyst’s team’s) coverage universe.] The analyst or analyst’s team’s coverage universe is the sector
and/or country shown on the cover of each publication. See below for the specific stocks in the certifying analyst(s) coverage universe.

Coverage Universe: Ben Laidler: First Cash Financial (FCFS)

J.P. Morgan Equity Research Ratings Distribution, as of December 31, 2009


Overweight Neutral Underweight
(buy) (hold) (sell)
JPM Global Equity Research Coverage 42% 44% 14%
IB clients* 58% 57% 42%
JPMSI Equity Research Coverage 41% 49% 10%
IB clients* 78% 73% 57%
*Percentage of investment banking clients in each rating category.
For purposes only of NASD/NYSE ratings distribution rules, our Overweight rating falls into a buy rating category; our Neutral rating falls into a hold
rating category; and our Underweight rating falls into a sell rating category.

Valuation and Risks: Please see the most recent company-specific research report for an analysis of valuation methodology and risks on
any securities recommended herein. Research is available at http://www.morganmarkets.com , or you can contact the analyst named on
the front of this note or your J.P. Morgan representative.

Analysts’ Compensation: The equity research analysts responsible for the preparation of this report receive compensation based upon
various factors, including the quality and accuracy of research, client feedback, competitive factors, and overall firm revenues, which
include revenues from, among other business units, Institutional Equities and Investment Banking.

Registration of non-US Analysts: Unless otherwise noted, the non-US analysts listed on the front of this report are employees of non-US
affiliates of JPMSI, are not registered/qualified as research analysts under NASD/NYSE rules, may not be associated persons of JPMSI,
and may not be subject to NASD Rule 2711 and NYSE Rule 472 restrictions on communications with covered companies, public
appearances, and trading securities held by a research analyst account.

74
Ben Laidler Latin America Equity Research
(1-212) 622-5252 17 February 2010
ben.m.laidler@jpmchase.com

Gabriel Casillas
(52-55) 5540-9558
gabriel.casillas@jpmorgan.com

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75
Ben Laidler Latin America Equity Research
(1-212) 622-5252 17 February 2010
ben.m.laidler@jpmchase.com

Gabriel Casillas
(52-55) 5540-9558
gabriel.casillas@jpmorgan.com

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redistributed without the written consent of J.P. Morgan.

76