LATIN AMERICAN

EQUITY RESEARCH
25 SEPTEMBER 2019 Strategy Report | Brazil
BRAZIL STRATEGY
EPS IS BETTER THAN GDP: UPDATING TOP PICKS IN A NEW LOW-SELIC-RATE ENVIRONMENT
Daniel Gewehr* Ricardo Peretti*
Brazil: Banco Santander S.A. Brazil: Banco Santander S.A.
+5511-3012-5787 | dhgewehr@santander.com.br +5511-3553-2197 | rperetti@santander.com.br

Net/Net: We reiterate our Overweight on Brazil with an Ibovespa target price of 115,000 points for 2019YE, offering 13% return potential, based on: (i) EPS is better than GDP
growth (EPS 2019-21E CAGR of 12.5%, better than EM’s 5%) given operating leverage and lower financial expenses (our Selic rate estimates are 4.50% for both 2019 and
2020, lower than consensus); (ii) supportive valuation (12.2x P/E, slightly above historical, and attractive 0.9x PEG); (iii) domestic asset reallocation (equities AUM at 7.6% of
total) on lower MT/LT rates (potential R$120 billion of inflows); and (iv) pension reform approval expected soon (already discussed in Lower House and pending Senate
2018 OUTLOOK
ratification). Six Top Picks: Three are new: (i) CPFL Energia (9% Real IRR, replaces Energisa), (ii) SulAmerica (attractive way to play healthcare at 15x, replaces Bradesco),
and (iii) Rumo (8% Real IRR, replaces Suzano). Three remain: (iv) Localiza, (v) Lojas Renner and (iv) Banco do Brasil. Risks: Reforms Delivery and EM Vulnerability.
 Five Themes We Like: (i) Bond-proxy with attractive growth: OW Utilities (~7% real IRR); (ii) Reinvestment opportunity leaders: Quality companies with positive ROIC
spread over WACC that present sector market share gain prospects. (i.e., Car Rental, Tech, Consumer); (iii) Cyclical value from operating efficiency (not only top line
but also cost-cutting); (iv) Secular calls: companies benefiting from secular growth trends or GDP per capita improvement (Healthcare, Education and Tech); and (v)
State-owned entities (SOE) improvement (Brazilian state and federal stocks in Utilities (both Electric and Water), Oil, Banks. With disappointing Brazil 2019E GDP
(revised to 0.8% from 1.3%) and our below consensus 2020E GDP of 1.6%, we focus on micro stories: Three of the five themes are less dependent on GDP growth.
 Sector Allocation. Our Overweight sectors are: Utilities (+400 bps), Transportation (+300 bps), Healthcare (+250 bps), Basket of Protein stocks (+190 bps), Retail
(+100 bps), and Income Properties (+100 bps). Most of our Top Picks are in sectors where the country’s long-term bottlenecks offer opportunities (Logistics, Energy,
Healthcare). Main Changes: focusing on quality and domestic companies (increased OW in Transportation, Healthcare, Income Properties & Homebuilding), while
adjusting exposure to commodities and financials (Banks and Pulp & Paper to Neutral). Portfolio Profile: 1.1x beta, with a 71% value weight and 44% in moat stocks.
 Stocks Added: CPFL Energia, Hapvida, Kroton and MercadoLibre. Stocks Removed: Iochpe-Maxion, Equatorial, Linx (coverage withdrawn) and OdontoPrev.
 Three New Studies: (i) EPS is better than GDP (page 5); (ii) The Myth of Foreign Investor Outflow (Page 6); (iii) Econometric Models: Ibovespa as Leading GDP (Page 9).
EPS Is Better than GDP - Ibovespa EPS CAGR 12.5% The Myth of Foreign Investor Outflow - Annual Financial Operating Leverage: Consolidated Net Revenue,
2019-2021E; 19E Brazil 20pp spread over EM Movement of Foreign Investors (BRL billion) EBIT Growth and Real GDP YoY

Sources all charts: Santander estimates and Bloomberg.

IMPORTANT DISCLOSURES/CERTIFICATIONS ARE IN THE “IMPORTANT DISCLOSURES” SECTION OF THIS REPORT.
U.S. investors’ inquiries should be directed to Santander Investment Securities Inc. at (212) 583-4629 / (212) 350-3918.
* Employed by a non-US affiliate of Santander Investment Securities, Inc. and is not registered/qualified as a research analyst under FINRA rules.
Summary
Updating Top Picks In a New Low Selic Rate Environment ‒ Key Insights:
Brazil Key Conclusions (Page 3)
Brazil Four Pillars (Page 4)
Five Studies Highlights
EPS Is Better than GDP (Page 5)
The Myth of Foreign Investor Outflow (Page 6)
Operating Leverage; What May Not Be Priced In? (Page 7)
Macroeconomic Data Is Positive for Equities (Page 8)
Econometric Models: Ibovespa as Leading Indicator for GDP (Page 9)
Top Five Themes/Theses in Our Portfolio (Page 10)
Reinvestment Opportunity Leaders (Page 11)
Bond Proxy with Attractive Valuation (Page 12)
Secular Calls (Page 12)
State-Owned Entities (SOEs) Improvement (Page 13)
Cyclical Value from Operating Efficiency (Page 13)
Recommended Brazil Portfolio
Allocation by Sector & Overview (Page 14)
Main Changes (Page 15)
Valuation Metrics (Page 16)
Profile by Stock (Page 17)
Top 6 Picks and Additions – Investment Thesis + Catalysts (Page 18-20)
Other Interesting Analyses
Earnings Revision Trend Slightly Negative, Driven by Both Global
Cyclicals and Domestic Companies (Page 21-22)
Our Sector Quadrant Scorecard (SQS): Stock Selection for Bull and Bear
Macro Domestic & Global Scenarios (Page 23-25)
Domestic Asset Reallocation into Equities: Quantifying Potential (Page 26-
27)
Our Valuation of Style Investing (Quality Companies, Domestic Cyclicals,
SOEs & Commodities) (Page 28-29)
Could Brazil Cyclical Companies Detach from Global Market? (Page 30)
Brazil Five Key Corners
1) Valuation
The Investor Mood: How Much Is Priced In in Brazil? (Page 32)
Multiple Sensitivity (Page 33)
Valuation Diffusion (Page 34)
Ibovespa Performance Mainly Led by Multiple Re-Rating (Page 35-36)
2) Earnings Trend
Tracking Earnings Revisions and Consensus GDP Forecasts – We Expect Slight
Negative EPS Trend (Page 37-38)
Playing the Hurdle Race: Looking at Earnings Trend by Sector (Page 39)
Mismatch Between Valuation and Expectations Surprise + Operating Leverage (Page 40)
3) Macroeconomic Corner
Key Economic Indicators to Track: Confidence, Cycle of Credit, Formal Job Creation
and Long-Term Interest Rates (Page 41)
Fiscal Policy Challenges Remain (Page 42)
4) Style & Thematic Investing
The Local Flavor – 2019 Value Investing Conference in São Paulo (Page 43)
Style Investing Overview: Selection of Best Ranked Companies in Our Studied Styles
Provide Good Performance (Page 44-46)
Applicability in Brazil Studies Key Points (Earnings Momentum, Value and Quality)
5) Performance, Flows & Technicals (Page 48-52)
Risks to Monitor In Brazil
Potential Trade War: Impact on Brazil – Direct and Indirect Risks (Page 53)
Macro – Brazil Positioning in Global Risk Context (Page 54)
LatAm Market and Commodities: Decoupling? Lower but Still High Correlation (0.62)
with Commodities (Mainly Metals) + EPS Relationship (Page 55-56)
Other Themes to Be Monitored (BNDES Stake, Dividends and Tariffs) (Page 58)
LatAm Corner
Our Thesis and Key Conclusions (Page 68)
Equity Strategy Snapshot: Top Picks by Region (Page 69)
Secular Drivers (Page 71)
2
Brazil Key Conclusions
 We reiterate our Overweight on Brazil (upgraded to Buy in early October 2018):
(1) Consolidated valuation is supportive (12.2x P/E, slightly above historical, and attractive 0.9x PEG); 15% and 37% of companies are trading at a discount to their historical P/E
and FV/EBITDA multiples, respectively;
(2) attractive EPS growth (2019-21E CAGR of 12.5%), with slight negative EPS revisions;
(3) potential return of domestic asset reallocation (equities AUM at 7.6% of total) on lower MT/LT rates (fixed income short-term P/E at 26x); and
(4) reform pillar: pension reform approved in second round of Lower House. Tax reform could increase long-term growth potential, in our view.
 Brazil Portfolio Profile: We slightly increased our portfolio beta to 1.1x (vs. 1.0x previously), with a value tilt (71% weight) focus on risk-adjusted returns. Our portfolio currently has
45% “competitive advantage” stocks (stocks with ROIC above WACC and market share stability). Momentum: portfolio EPS revision -1.5% in last three months (vs. -6% for Ibovespa).
 Five Themes We Like: (i) bond proxy with attractive growth: OW Utilities (~7% real IRR); (ii) Reinvestment opportunity leaders: Quality companies with positive ROIC spread
over WACC that present prospects for sector market share gains. With disappointing Brazil 2019E GDP (revised to 0.8% from 1.3%), we focus on micro stories (i.e., Car
Rental, Tech, Consumer); (iii) cyclical value from operating efficiency (not only top line but also cost-cutting); (iv) secular calls: companies benefiting from secular growth
trends or GDP per capita improvement (Healthcare, Education); (v) state-owned entities (SOE) improvement (Brazilian state and federal stocks in Utilities (both Electric and
Water), Oil, Banks. Three of the five themes are less dependent on short-term GDP growth.
 Six Main Overweight Sectors: Utilities (+400 bps), Transportation (+300 bps), Healthcare (+250 bps), Food: basket of Protein stocks (+190 bps), Retail (+100 bps), and
Income Properties (+100 bps). Most of our Top Picks are in sectors where the country’s long-term bottlenecks offer opportunities (Logistics, Energy, Financials, Healthcare)
and present important bottom-up components.
 Six Top Picks: CPFL Energia (replaces Energisa), Localiza, Lojas Renner, SulAmerica (replaces Bradesco), Rumo (replaces Suzano) and Banco do Brasil; we have a
YE2019 Ibovespa target price of 115,000 points, offering ~13% return potential (including dividends). This is slightly below the 116,000 points consensus forecast.
 What do our Top Picks have in Common? CPFL Energia, Banco do Brasil, Rumo and SulAmerica had positive revisions in earnings in past three months.
 What’s the market pricing in? We believe the market is pricing in almost a divided ~65%/35% bull/bear case when looking at P/E ranges. Bottom-up valuation P/E sensitivity: (Max =
149,000 points, Average: 88,000 points, Min: 46,000 points).
 Risks to monitor: Government’s ability to approve structural reforms; CDS spike; commodities’ high correlation; trade war potential; EM vulnerability.
Ibovespa (In Points, R$) vs. Brazil 10Y Real Interest Brazilian Funds Inflows by Type—Equities vs.
Rates Fixed Income—R$ Billions Ibovespa EPS Revisions

Sources for all charts: Bloomberg, Anbima and Santander estimates.

Between the Hope and the Reality: Four Pillars Expected to Remain in Place
Earnings Trend Pillar: Sideways; EPS CAGR 12.5% 2019- Flow Pillar: Reallocation to Equities Is Happening; Equity Funds
2021E; Brazil with 20pp spread over EM in 2019E (1) AUM as % of Total Funds Industry AUM (2)

Value Pillar: Neutral; Brazil at 12.2x 12-Month Forward P/E Reform Pillar: Expect for YE2019; Debt/GDP Sustainability?
Investor Mood: Historical P/E Ranges (3) Public Spending on Pensions and Demographic Profile (4)

4
Sources: (1) Bloomberg consensus; (2) Anbima; (3) Bloomberg; (4) OECD. Note: 2017 data accumulated until the end of June.
EPS Is Better than GDP Growth
 Medium-term view: Decent EPS growth (2019-21E CAGR of EPS Growth YoY Ibovespa vs. GDP Estimates (1)
12.5%, better than EM’s 5%).
 Earnings Diffusion: We see 75% of companies growing
revenue above LTM inflation. We forecast 70% of our coverage
with increasing EBITDA margins and 69% with higher net
margins YoY in 2019.
 Why? Lower financial expenses, lower corporate leverage, and
better operating leverage (DOL).
 Bittersweet: EPS for 2019E has been revised downward 9.3%
YTD and down 3.7% over the past month.
 Decent 2Q19 Season: 11% EBITDA growth, more balanced
between categories (domestic/global). Consolidated revenues
increased 7.7% and net income grew 9.5% YoY (we note that
net income mass sum grew 31% YoY).
Ibovespa Consensus EPS Revisions (2)

Operating Statistics 2019E (2)

Revenues EBITDA EPS EBITDA Margin Net Margin

Growth Growth Growth Expansion Expansion
Expansion 41 43 45 38 37
Neutral 7 3 1 3 2
Contraction 7 8 12 13 15
Expansion (%) 74.5% 79.6% 77.6% 70.4% 68.5%
Neutral (%) 12.7% 5.6% 1.7% 5.6% 3.7%
Contraction (%) 12.7% 14.8% 20.7% 24.1% 27.8%

5
Source: (1) Santander Estimates. (2) Bloomberg Consensus.
The Myth of Foreign Investor Outflow  A lot has been talked about B3 flows data that shows foreign investors
accumulated redemptions of R$20.1 billion YTD (in August alone,
Annual Financial Movement of Foreign Investors (BRL billion) investors withdrew R$10 billion). The amount represents the largest
outflow since 2008 (R$8.6 billion). However, this B3 flows data does
not consider IPOs and follow-ons, which ends up distorting the
definition of foreign investors in Brazil.
 Inflows of IPOs and follow-ons this year reached R$25 billion
up until August; therefore, when we sum it to outflows we see a
positive flow of R$4.9 billion from foreign investors. We note that
number could be higher, as IPO and follow-on stats are not yet
available for the months of August and September.
 Foreign investors remain a major player in the market: they
hold 44% of deposited securities in Bovespa. The peak of 50%
was reached in October 2017. Foreign investors increase in
importance when we add ADRs, which represent 15% of deposited
securities. Institutional investors hold 19%; Individuals hold 12%.
Bovespa Segment ‒ Breakdown of the Balance of Deposited
Monthly Financial Movement of Foreign Investors (BRL million) Securities by Type of Participant (R$ Billion)
A+C-B
Month Bids (A) Offers (B) Follow On (C)
(Balance)
Jan 155,785.9 154,266.9 0.0 1,518.9
Feb 154,529.7 157,143.5 2,587.2 (26.6)
Mar 142,579.7 140,232.7 592.3 2,939.3
Apr 143,550.6 144,296.1 608.9 (136.6)
May 153,699.9 157,861.3 2,072.1 (2,089.2)
Jun 135,868.8 136,114.9 6,445.2 6,199.1
Jul 157,383.3 163,916.0 12,714.2 6,181.5
Aug(**) 190,077.6 200,873.4 0.0 (10,795.7)
Sep(**) 102,687.4 101,562.7 1,124.7
2019 (*) 1,336,163.0 1,356,267.6 25,020.0 4,915.4

6
(*) Until Sep 19 (**)Data from IPOs and follow-ons not available yet. Data from IPOs and follow-ons comply with the Public Offering archive. Sources: B3 and Santander
Operating Leverage: What May Not Be Priced In?
Stocks with Operating Leverage: 2018-21E EBIT CAGR
(X Axis) vs. PEG 2020-21E (Y Axis)  We believe that stories with a good degree of operating leverage (DOL) (above 1.2x),
trading at reasonable normalized levels, are a favorable combination to play the
approaching economic recovery in Brazil (1.6% 2020E GDP YoY, a delta of +0.8 p.p. vs.
0.8% 2019E GDP YoY). We expect some inflection for Brazil earnings revisions in the
coming quarters, after negative 9% revisions YTD. We expect Brazil’s consolidated
revenue to grow 7.6% in 2020, translating into 18% consolidated EBIT growth, with
potential upside risks as a result of operating leverage.
 Degree of operating leverage (DOL). Operating leverage measures the change in
operating profit (usually EBIT) for every unit of change in sales. The higher the number,
the higher the degree of operating leverage.
 We also looked at companies’ cost composition in order to assess the proportion of fixed
costs and variable costs relative to net revenue. This analysis also looks at the degree of
potential costs dilution for companies. For instance, for a company that has a high
proportion of fixed costs, each incremental unit of revenue should dilute more costs and
generate higher earnings than for a company that has a lower proportion of fixed costs.
 Companies that stand out in this theme and we hold in out recommended portfolio are
Azul, CVC, Kroton and Lojas Renner.

Sectors’ Fixed and Variable Costs as % of Net Revenue—

Consolidated Net Revenue, EBIT Growth and Real GDP YoY Market Cap Weighted

7
(1) Note: Companies and weightings used in the analysis refer to current Ibovespa composition and weightings fixed and retroactive to the past. Sources for all charts: Santander and Bloomberg estimates.
Macroeconomic Data Is Positive for Equities. New YE2019 Selic Estimate of 4.5%
Leads to “Fixed Income” P/E of 26x; GDP Improvement Expected for 2020E YoY
Macroeconomic Forecasts Snapshot (1)
2015 2016 2017 2018 2019E 2020E  According to our macroeconomics team, the combination of slowly
Real GDP (%) (3.5) (3.3) 1.1 1.1 0.8 1.6 recovering economic activity, substantial idleness, declining current
Consumer Spending (%) (3.2) (4.3) 1.0 1.9 1.5 1.6 inflation, anchored inflationary expectations, and advancing
Capital Spending (%) (13.9) (10.3) (1.8) 4.1 4.0 5.8 congressional reforms opens room for further cuts in the Selic rate.
Government Spending (%) (1.4) (0.1) (0.6) 0.0 (0.2) 0.2
Assuming that the international scenario does not show further
Exports (%) 6.8 1.9 5.2 4.1 1.7 3.3
(14.2) (10.2) 5.0 8.5 2.3 4.9
deterioration in the short term, we expect Brazil’s basic interest rate
Imports (%)
GDP - Agriculture (%) 3.3 (4.3) 13.0 0.1 0.6 1.8 to reach 4.50% p.a. by the end of this year.
GDP - Industrial (%) (5.8) (4.0) 0.0 0.6 (0.1) 2.3  The evolution of the global scenario present the main risk factor for this
GDP - Services (%) (2.7) (2.6) 0.3 1.3 1.1 1.5 forecast, especially via exchange rate impact and despite the almost
Industrial Production (YoY) (8.2) (6.4) 2.5 1.1 (1.0) 2.0 absent pass-through. The sources of uncertainty are already known:
Retail Sales (YoY) (4.3) (6.3) 2.0 2.3 3.8 3.0
trade war, Brexit, and elections in Argentina. Increased exchange rate
GDP per capita (US$) 8,803 8,714 9,888 8,933 8,604 8,831
volatility inhibits investments. However, the message conveyed by the
Unemployment rate (%) 8.5 11.5 12.8 12.3 11.8 10.9
Inflation – IPCA (%) 10.7 6.3 2.9 3.7 3.3 3.5 Brazilian Central Bank confirms our expectation of further monetary
Inflation – IGPM (%) 10.5 7.2 (0.5) 7.5 5.2 4.0 easing, as the authority recognizes that recent stimuli granted by the
R$/US$ Exchange Rate (Year-End) 3.90 3.26 3.31 3.87 4.00 4.00 central banks of advanced economies may be taken as relatively
R$/US$ Exchange Rate (Average) 3.33 3.49 3.19 3.65 3.93 4.00 favorable for emerging markets. Therefore, we think it is likely that the
Interest Rate – Selic rate (%, Year-End) 14.25 13.75 7.00 6.50 4.50 4.50 external environment will need to worsen substantially from the current
Foreign Direct Investment (US$ billion) 75.1 78.9 70.3 88.3 90.0 85.5
situation in order to prevent additional cuts by the BCB.
Current Account Balance (US$ Billion) (58.9) (23.5) (7.2) (14.5) (19.1) (26.2)
Current Account Balance (% of GDP) (3.3) (1.3) (0.4) (0.8) (1.1) (1.4)
 Thereby, considering the Selic rate at 4.50% p.a. by YE2019, we can
Primary Surplus (% of GDP) (1.9) (2.5) (1.7) (1.6) (1.6) (0.8) measure the valuation of fixed income in Brazil by inverting the yield. As
International Reserves (US$ Billion) 369 372 382 387 390 392 a result, interest rates would be trading at 22x P/E by the end of
Nominal Fiscal Balance (% of GDP) (10.2) (9.0) (7.8) (7.1) (6.5) (5.7) 2019, excluding any fees and taxes (or 26x P/E if we count a 15%
World GDP growth 3.1 3.4 3.5 3.6 3.5 3.6 income tax). Consequently, the current monetary easing cycle being
US GDP growth 2.4 1.6 2.3 2.9 2.3 1.6
carried out by BCB only widens the gap in favor of Brazilian equities,
Eurozone GDP growth 2.0 1.8 2.4 1.8 1.9 1.8
which are trading at 12.2x P/E when examining Ibovespa.
Latin America GDP growth (0.5) (1.6) 1.5 2.3 2.1 2.2

8
(1) Sources: IBGE, Brazil Central Bank and Brazilian Government Official data for 2015 to 2017 reported data. Santander estimates for forecasts.
Econometric Models: Ibovespa as Leading Indicator for GDP Suggests 1.5%
Growth in 1Q20
 Our Macro Team has built two interesting models, using the stock market as a relevant input to estimate recurring GDP growth six
months ahead.
 The Conclusions:
 1) Using an Ibovespa weighting, the 15-year model has an R-squared of 0.77 and projects GDP growth to reach 1.5% during 1Q20.
 2) Using a GDP weighting model from Brazil stocks coverage, the model has an R-squared of 0.83, and suggested Brazilian GDP
growth will be running at 2.5% during 1Q20.
 Current market estimates point to 2.0% GDP growth for YE2020, while Santander’s Macro Team estimates 1.6% GDP growth for
2020E.

GDP Model Tracking: Ibovespa and GDP Weighting Financials Condition Model: R-Squared
Financials Conditions Models
Bolsa:Ibovespa x Ibovespa
Ibovespa X ÍndiceGDP WeightedPIB
Ponderado 10
PIB: Modelos de(%
Condições
YoY) Financeiras
60 (%YoY)
(% YoY) (% YoY)
50 46 8
GDP Weighting
Ponderação PIB Ibov Weighting
Ponderação Ibov
40 6 2Q20
30
4
30
20 2.5
2
10
1.5
0
0
-2
-10 Premises:
Model 1 1– -IBOV
Modelo c/IBOV R2=0.77
R2=0.77
-20 -4 Historical
- CDS: 125
Observado
Model 2 2– c/
modelo Ibov GDP PIB
bolsa R2=0.83
R2 = 0.83 - CRB: 180
-30 -6
mar/15

mar/16

mar/17

mar/18

mar/19
mar/11

mar/12

mar/13

mar/14
jul/11

jul/12

jul/13

jul/14

jul/15

jul/16

jul/17

jul/18

jul/19
nov/11

nov/12

nov/13

nov/14

nov/15

nov/16

nov/17

nov/18

jan/05

jan/07

jan/09

jan/11

jan/13

jan/15

jan/17

jan/19
set/03

set/05

set/07

set/09

set/11

set/19
set/13

set/15

set/17
mai/04

mai/06

mai/08

mai/10

mai/12

mai/14

mai/16

mai/18
9
Note: Source: Santander Macro Team.
Top Five Themes/Theses in Our Portfolio Top Pick: CPFL Energia
(disciplined capital
allocation with 9% real
BOND
BOND PROXY WITH
PROXY WITH IRR)
Top Pick: Banco do Brasil Top Picks: Localiza (+13%
ATTRACTIVE
ATTRACTIVE VALUATION
VALUATION
(faster EPS growth than peers: ROIC 2020E & +33% EPS
Additional Theme Stocks:
2019E recurring net income CAGR 2018-20E) and Lojas
We are Overweight in Utilities, the Energisa, CESP,
growth of 24% YoY; potential re- Multiplan. Renner (+24% ROIC & +21%
rating on ROE improvement) sector with highest average IRR
EPS CAGR 2018-20E)
(~7% real vs. NTN-B ~3.3%)

Additional Theme Stocks: Cemig, Sectors Represented: Utilities, Additional Theme Stocks: CVC
Sabesp, Petrobras. Malls, Transportation (Consumer), IRB (Financials).

STATE-OWNED ENTITIES REINVESTMENT

(SOE) IMPROVEMENT PORTFOLIO BACKGROUND OPPORTUNITY LEADERS

 71% portfolio weight in value stocks. Quality companies with positive

Stocks with expected improvement
in operating execution
Sectors Represented: Utilities (both
Electric and Water, Oil & Gas, Banks
 45% weight in “competitive advantage”
stocks (stocks with ROIC above
WACC and market share stability).
 Portfolio EPS CAGR (2018-20E): 28%.
ROIC spread over WACC (value
creation) that present sector market
share gain prospects
Sectors Represented: Consumer,
Healthcare, Transportation, Tech.

SECULAR CALLS
US$-LINKED WITH REASONABLE
Top Pick: SulAmerica
VALUATION
(Attractive way to play
Healthcare at 15x)
We always like to carry some FX hedge, 33%
Other Healthcare names (Hapvida
weight in FX-related stocks.
and Hypera), Agribusiness-related
Sectors Represented: Sectors represented: stocks (Rumo), Education (Kroton)
Protein, Pulp & Paper (Suzano) and Mining and Tech (MercadoLibre)
(Vale). We like low-cash-cost producers.
CYCLICAL VALUE
BOND PROXY FROM
WITH Top Pick: Rumo (solid operating
OPERATING EFFICIENCY
ATTRACTIVE VALUATION momentum [2018-21E EBIT
CAGR of 23%] while
Cyclical stocks with lower/mid-teens deleveraging [~1.4x net
margins level that can benefit from debt/EBITDA in 2023E vs. ~2.3x
operating efficiency
in 2018])
Sectors Represented: Banks,
Protein sector, Transportation, Additional Theme Stocks: Protein
Homebuilders basket (BRF & JBS), Azul, Even

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Reinvestment Opportunity Leaders
MARKET SHARE SIZE VS. MARKET CONCENTRATION  We believe market share leader companies offer a good combination
Axis X: Company Market Share Current; Axis Y: Market Share of (i) protection (“barrier to entry”) from potential competition, (ii)
Top 5 Player Current (%) (1) ability to generate returns (and sustainable) growth above cost of
capital, and (iii) higher than average/market growth.
 Considering an environment of softer-than-expected economic
activity, we believe that market leaders with reinvestment
opportunities may outpace their industries/peers and economic
growth.
 We prefer companies that are dominant in their markets but that
have somewhere below 35% concentration (market share of top five
players), with opportunity for growth (and/or market consolidation).
 Our top picks in this theme are: Localiza (+13% ROIC 2020E vs.
9% WACC & +33% EPS CAGR 2018-20E) and Lojas Renner
(+24% ROIC vs. 10% WACC & +21% EPS CAGR 2018-20E).

Axis X: EPS CAGR 2009-2018; Axis Y: Net Revenues CAGR  Additional stocks in our portfolio that fit the aforementioned profile
2009-2018 (1) and that we like: CVC and IRB.
Companies We Hold in Our Companies We Do Not Hold/
Portfolio: (1) We Are Underweight: (1)

EPS CAGR ROIC EPS 2019E 6-m EPS 2019E 6-m

Company EPS CAGR 2018- ROIC 2020E Revision
2018-20E 2020E (*) Revision
Company 20E (*)
CCR Rodovias 27% 14% -14%
Localiza 33% 13% -0%
Natura 27% 13% -9%
IRB 27% 37% 4%
Arezzo 22% 35% -8%
CVC 25% 23% -6%
Engie Brasil 20% 28% -6%
Lojas Renner 21% 24% 1% Ultrapar 20% 8% -28%
Bradesco 14% 19% 8% RD 16% 18% 0%
Itaú Unibanco 10% 19% -0% WEG 12% 19% 1%
BB Seguridade 8% 39% 0%
Ambev 6% 31% -2%
Smiles 5% 48% -6%
Cielo -31% 8% -27%

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(*) ROE for IRB, Itau Unibanco, Bradesco, BB Seguridade and Cielo. (1) Sources: Company data and Santander.
Top Themes in Our Portfolio Explained
 The Regulatory Alpha: Remain OW Utilities, Our Preferred Bond
Proxy. The Utilities sector is our largest Overweight in our Brazil
BOND PROXY WITH ATTRACTIVE VALUATION portfolio, given its attractive risk-return, in our view, offering an
Bond Proxy Companies: Real IRR Comparison (1)
average of 6.5% IRR. We believe the sector should trade at ~5%
IRR, given its lower beta. Also, Utilities present medium-term above-
average growth opportunities, given electric utilities are one of the
country’s main bottlenecks.
 We believe that the bulk of long-term curve compression is done,
with real rates below 3.4% and nominal at ~7.3%. Nevertheless,
the interest rates bias is still to the downside, given our base case
that pension reform will be approved.
 Sectors Represented: Utilities (OW in both Water and Electric
Utilities), Malls (OW), Transportation (OW).
 Expected deceleration in global GDP in 2019 historically bodes
well for staples. We see our Utilities call as in sync with both
domestic and international cycles. (Same for Healthcare OW.)

SECULAR CALLS: Population of Senior Citizens in Brazil: The  Brazil’s healthcare sector offers an attractive medium- to long-term
China Like Growth (3.6% CAGR through 2030) scenario, in our view, based on: (i) an aging population (the 60-plus
population is forecast to grow at a 3.6% CAGR through 2030); (ii)
the inherent higher spending on healthcare by seniors; and (iii)
Brazil’s still-underpenetrated healthcare market: at YE2018, only
22.6% of the population had health plans.
 LatAm e-commerce penetration (~2.7% of total sales) remains low
compared to global average (~12%), and we estimate e-commerce
reaching 3.5% by 2022E. We expect MELI’s +17.9% GMV CAGR,
leading MELI’s LatAm marketshare from 24% in 2018 to 30% in
2022E.
 Sectors Represented: Healtchare, Education and Tech

12

Sources: (1) Santander and Bloomberg. (2) Santander estimates, Bloomberg and Suzano data (period between December 2011 to January 2019).
Top Five Themes in Our Portfolio Explained
STATE-OWNED ENTITIES (SOE) IMPROVEMENT  Brazil’s new finance minister, privatization, and improving operating
FV/EBITDA Valuation Breakdown by Type of Company (1) results for SOE companies.
 SOEs are trading at attractive absolute valuation multiples (i.e.,
SOE (Ex Petro
SOE Private-Co' FV/EBITDA of 4.5x), presenting 92% upside to historical
& Vale)
maximum multiples and limited downside of -7% to minimum
Current 4.5 7.5 11.3 historical multiples.
Avg. 5.8 6.7 9.6  When looking at P/E, SOEs are trading at 8.3x P/E (16% above
Max 8.7 11.1 11.9 historical and with 36% upside to maximum multiples).
Min 4.2 4.6 5.9  Sectors Represented: Utilities (both Electric and Water), Oil,
Premium/Disc. To Avg. -22% 12% 17%
Banks.
Upside to Avg. 28% -10% -15%
Upside to Max. 92% 48% 6%
Upside to Min -7% -38% -47%
1 Stdev 1.0 1.4 0.9
Z-Score -1.3 0.6 1.7
CYCLICAL VALUE FROM OPERATING EFFICIENCY
Domestic Cyclical Companies Category – Quarterly Results  Given efficiency and micro measures that company managements
YoY Growth (2) took in 2015-18 (some sectors laid off more than 20% of
employees), we see the companies poised to grow earnings at a
higher pace than the overall economy.
 Operating leverage measures the change in operating profit
(usually EBIT) for every unit of change in sales. The higher the
number, the higher the degree of operating leverage.
 As we learned in the “Pat Dorsey: The Little Book that Builds
Wealth" talks at Google, analysts tend to show mean
convergence bias (they tend to underestimate both recoveries
and recessions).
 Sectors Represented: Banks, Protein sector, Transportation,
Homebuilders.

13

Sources: (1) Santander and Bloomberg; (2) Company data and Santander.
Recommended Brazil Portfolio: Our Allocation by Sector
Sector Allocation over Benchmark
 Main Overweight Sectors: Utilities (+400 bps), Transportation
(+300 bps), Healthcare (+250 bps), Retail (+100 bps), Income
Properties (+100 bps), Homebuilders (+100 bps), Education (+50
bps).

 Key Sector Movements: Utilities (Largest OW maintained in

Water and Electric), Transportation (OW increased), Education
(Moved to OW), Food & Beverages (UW reduced, added OW
protein stocks), Financial Institutions (increased UW). See next
page for complete list of changes we made in our portfolio.

Sectors OW / UW Portfolio Benchmark Comments

Utilities 4.0% 9.4% 5.4% ~6.5% Real IRR

Transp. 3.0% 8.9% 5.9% Brazil Bottleneck
Portfolio Distribution by Theme
Healthcare 2.5% 4.4% 1.9% Secular Call
Retail 1.0% 9.7% 8.7% Bottom Up Recovery
Inc. Properties 1.0% 2.3% 1.3% Quality Bond Proxy
Homebuilders 1.0% 1.6% 0.6% Bottom Up Recovery
Education 0.5% 2.0% 1.5% Secular Call
Agribusiness 0.0% 0.5% 0.5% Operating Improvement
TMT 0.0% 1.8% 1.8% Secular Call
Banks 0.0% 26.8% 26.8% Operating Efficiency
Mining 0.0% 8.7% 8.7% Attractive FX Hedge
Pulp & Paper -0.1% 1.8% 1.9% Attractive FX Hedge
Steel -0.6% 1.1% 1.7% Value at Poor Macro
Cap. Goods -1.0% 0.0% 1.0% Uninspiring ST Intake
Oil & Gas -1.9% 12.5% 14.4% SOE W/ 6% Prod CAGR
F&B -3.0% 6.2% 9.2% (+) Proteins | (-) Beverage
Fin. Institutions -6.6% 2.3% 8.9% OW Insurance

14

Source: Santander estimates.

Recommended Brazil Portfolio: Main Changes
Previous Current Company Company
Sector Sector Action Chg (p.p.) Company Weightings Changes
OW/UW OW/UW Additions Exclusions
Agribusiness Reduced to Neutral 0.4% 0.0% -0.4% - - Decrease OW in Cosan
1) Banco do Brasil mantained as Top Pick (Slighty Increased
Banks Reduced to Neutral 1.0% 0.0% -1.0% - -
OW), 2) Reduction of Bradesco to Neutral
Capital Goods Reduced to UW 0.0% -1.0% -1.0% - Iochpe Sector weight decreased due to removal of Iochpe

Education Moving to slight OW -1.4% 0.5% 1.9% Kroton - Included Kroton

Food & Beverage Remained UW -3.0% -3.0% 0.0% - - Increased OW in BRF and JBS
Sector weight decreased due to reclassification of Sulamerica
Financial Inst. - Others Remained UW -3.4% -6.6% -3.2% - -
into Healthcare
1) Sulamerica New Top Pick (Slighty Increased OW); 2) removal
Healthcare Remained OW 1.0% 2.5% 1.5% Hapvida OdontoPrev
of OdontoPrev; 3) Included Hapvida
Homebuilding Moving to OW 0.0% 1.0% 1.0% - - Increased OW in Even

Income Properties Moving to OW 0.0% 1.0% 1.0% - - Increased OW in Multiplan

Mining Remained Neutral 0.0% 0.0% 0.0% - -

Oil & Gas Moved to UW -1.7% -1.9% -0.2% - - Decreased OW in Petrobras

Pulp & Paper Reduced to Neutral 2.0% -0.1% -2.1% - - Decrease OW in Suzano

Retail Maintained OW 1.0% 1.0% 0.1% - - 1) Renner mantained as Top Pick (OW mantained)

Steels Maintained slightly UW -0.9% -0.6% 0.3% - -

TMT Maintained neutral 0.0% 0.0% 0.0% Totvs

MELI Linx Removed Linx to add Totvs
MercadoLibre

1) Rumo new Top Pick (OW increased), 2) Localiza mantained as

Transportation Slight increase in OW 1.0% 3.0% 2.0% - -
Top Pick (OW mantained), 3) Increased OW in Azul
Utilities Maintained as largest OW 4.0% 4.0% 0.0% CPFL Energia Equatorial 1) CPFL new Top Pick (OW increased); 2) Removal of Equatorial

15

Source: Santander estimates.

Recommended Brazil Portfolio: Valuation

16
(1) Last 30 days ADTV, R$ millions. (2) 2020 target price. (3) MercadoLibre numbers in dollar. NM: Not meaningful. NA: Not available. Sources: Bloomberg, Santander estimates.
Recommended Brazil Portfolio: Profile by Stock
 Balanced Portfolio: With a tilt to value (71% weight), focus on risk-adjusted returns; market beta at 1.1x.

 Our portfolio currently has 44% “competitive advantage” stocks (stocks with ROIC above WACC and with
stable market share) with a high ROIC profile. We hold 24% of our portfolio based on SOE improvement.
Momentum: weighted EPS revisions +1% in the last three months.

Low Beta Competitive

Low
Dollar Asset Inflation Secular Attractive With Advantage ROIC/ROE Positive Ibovespa
Company Ticker Sector Correlation Deleverage Weight OW/UW
Linked Light Linked Themes Valuation Attractive Companies / Improvement Asymmetry Weight
to GDP
Growth High ROIC
Itausa ITSA4 Financial Institutions - Banks     3.3% 3.3% 0.0%
Itaú Unibanco ITUB4 Financial Institutions - Banks    7.8% 9.2% -1.4%
Bradesco BBDC4 Financial Institutions - Banks    9.2% 9.2% 0.0%
Banco do Brasil BBAS3 Financial Institutions - Banks   6.5% 3.5% 3.0%
Energisa ENGI11 Utilities        1.5% NA 1.5%
Cemig CMIG4 Utilities        1.5% 0.8% 0.7%
Azul AZUL4 Transportation      2.5% 0.9% 1.6%
CPFL Energia CPFE3 Utilities        3.0% NA 3.0%
Kroton KROT3 Education     2.0% 0.9% 1.1%
IRB IRBR3 Financial Institutions - Others        2.3% 1.9% 0.4%
Sul America SULA11 Healthcare    2.0% NA 2.0%
Petrobras PETR3 Oil, Gas & Petrochemicals      12.5% 11.8% 0.7%
Cosan Energia CSAN3 Agribusiness   0.5% 0.5% 0.0%
Suzano SUZB3 Pulp & Forest Products      1.8% 1.3% 0.5%
Vale VALE3 Mining      8.7% 8.7% 0.0%
MercadoLibre MELI US Telecom, Media & Technology   1.8% NA 1.8%
Localiza RENT3 Transportation     3.4% 1.4% 2.0%
Rumo Logistica RAIL3 Transportation    3.0% 1.4% 1.6%
Multiplan MULT3 Income Properties    2.3% 0.4% 1.9%
Gerdau GGBR4 Steel    1.1% 1.0% 0.1%
CVC Corp. CVCB3 Retail    3.2% 0.4% 2.8%
Lojas Renner LREN3 Retail    6.5% 2.2% 4.3%
Even EVEN3 Homebuilding    1.6% NA 1.6%
Sabesp SBSP3 Utilities        2.0% 1.0% 1.0%
Cesp CESP6 Utilities      1.4% NA 1.4%
Hapvida HAPV3 Healthcare      1.5% NA 1.5%
Hypera HYPE3 Healthcare      0.9% 0.7% 0.2%
BRF BRFS3 Food & Beverage      2.4% 1.7% 0.7%
JBS JBSS3 Food & Beverage      3.8% 2.6% 1.2%
Total 29 10 7 4 8 15 19 8 11 24 9 10 100.0% 64.9%
% Total Companies 34% 24% 14% 28% 52% 66% 28% 38% 83% 31% 34%
% Total Weight 25% 33% 9% 17% 37% 72% 16% 44% 90% 32% 38%

17

NA: Not present in index. Sources: B3, Santander estimates.

Recommended Brazil Portfolio: Top 6 Picks

Company Our Rationale Catalysts Risks

 Our top pick in Brazil’s retail space is Renner, as we believe the company's high-
quality image is likely to draw investor interest as one of the most resilient vehicles
to tap the consumer rebound in Brazil.
 Renner’s proven track record of stability, particularly during industry turmoil, is
what sets the company apart from its apparel peers, in our view. We anticipate  New CEO in office should keep the market
SSS growth (average of 7.2% over the next three years) to outpace the market  Acceleration of SSS growth to a double-digit pace watching closely for execution risks.
and key competitors, while our anticipated gross margin expansion supports our throughout 2019 could lead to upward earnings revisions.  Stiffer competition from smaller players seeking
Lojas Renner
15% adjusted EBITDA CAGR for 2018E-2021E.  Operating leverage supporting EBITDA margin expansion to participate in Brazil's consumer rebound.
 We expect Renner to continue to command a premium multiple compared to the expectations.  FX volatility could negatively affect gross
rest of the retail sector given its high-quality image. Our model embeds margins.
reasonably constructive estimates from a profitability perspective (a 240-bps
adjusted retail EBITDA margin gain by 2021), but this is a risk we believe is worth
taking given the company's recent track record and potential value to be unlocked
by new digital capabilities that are not reflected in our forecasts.
 Tech threats - traditional banks avoidance due
to digital banks’ risk. Although we particularly
 Very cheap valuation: At 1.1x P/BV 2020, we see BBAS3 close to its bottom (in
do not buy this idea, the ramp-up of digital
what we call “the bargain zone”), with asymmetric valuation risk: our target P/BV
stories in the country has been impacting large
2020 is 1.5x, among the strongest upside potential among companies we cover.
banks’ stocks in the last months,
 We believe the stock has underperformed the IBOV YTD due to a series of
 Higher-than-expected NPLs, if the Brazilian
events, most of them already priced in: (i) exposure to a specific corporate name  The conclusion of the offering (mostly from CEF divesting
economy does not follow the recovery trend
Banco do (construction sector), impact already noted on the 2Q19; (ii) weak loan growth in its stake in BB).
that we expect.
Brasil corporate segment during 2H19, leading to loan growth guidance being revised  3Q19 will continue to be supportive to our “strong EPS
 Governance risk associated with its public
downward for 2Q19 (a large corporate name from the oil&gas segment pre-paid growth” call.
sector ownership and control.
a large sum – impact already noted on the 2Q19); (iii) potential follow-on ahead
of ~R$3.5 billion (already known by the market)  High exposure to volatile weather (e.g., El
Niño events) and commodity prices affecting
 We expect BB to have the strongest EPS growth for 2019 among large Brazilian
its agricultural loan book along with its
banks.
insurance operations through its subsidiary
(BB Seguridade).
 Around 70% of health insurance plans are revised during
 Sul America is an attractive play on the healthcare industry. After the sale process
the second half, increasing premiums and consequently the
of its Auto insurance portfolio to Allianz is completed, Sul America will earn 98%
loss ratio. Therefore the 3Q normally is the second best of
of its premiums from the health insurance segment (from 70% currently). The
the year.  Regulatory risk from both the insurance and
company is among the top five players in this sector. In Brazil, healthcare is a
 The impact of declining unemployment rates on the health the health watchdogs (SUSEP and ANS).
growing industry that is currently in a consolidation phase; we believe this could
SulAmerica
open up opportunities for well-capitalized players such as Sul America.
insurance market is noteworthy. We could see in the next  The definitive sale of its vehicle insurance is
5 years (from 2019 to 2023) a positive impact of around 5.2 still pending regulatory approval, although we
 The company trades at a deep discount to healthcare stocks. Sul America is an
million new individuals to be enrolled in a healthcare plan. do not count on some bumps on the road.
alternative way to gain exposure to the Brazilian healthcare industry, albeit at
This represents an increase of around 11% in the
more attractive valuation multiples: on a P/E multiple basis, the discount on
healthcare plans’ membership, and 13% in the corporate
healthcare companies is ~50% for YE2019
healthcare plans.

18

Source: Santander
Recommended Brazil Portfolio: Top 6 Picks (…continued)

Company Our Rationale Catalysts Risks

 Defensive characteristics, with a diversified portfolio, high exposure to the disco
segment, long-term contracts, and low exposure to hydro deficit and long-term
prices.
 Overpayment in potential M&A opportunities.
 Good margins and excellent operating performance in regulatory parameters.
 Corporate governance.
 Attractive valuation versus its peers: trading at 2020E EV/RAB of 1.49x and real  M&A activity;
 Lower GDP driving energy consumption
CPFL IRR of 8.9%  Faster-than-expected economic recovery;
down.
 Growth optionality (organic and inorganic), with a proven track record in terms of  Potential inclusion in equity indexes
 Change in regulatory parameters.
capital discipline. CPFL should deliver EBITDA CAGR (2019-2024E) of 7.3% and
an average dividend yield of 4.7% (2019-2024E).
 Potential value creation from the resolution of a variety of corporate and tax
issues.
 Localiza is our Top Pick among the car rental companies, as after its successful
capital increase of ~R$1.8 billion in February 2019, we estimate a strong
sustainable growth profile and continuing high value creation (ROIC minus cost
of debt post-tax spread increasing to 7.7 p.p. versus 6.8 p.p. in 2018) for 2019E
and 2020E.
 Localiza raised its depreciation rates to
 We expect Localiza to deploy its follow-on proceeds gradually in 2019, mostly
account for lower-than-expected used car
toward its already strong RAC operation. The main increases in our estimates
 Strong and sustainable growth throughout 2019E and prices, signaling the company’s concern given
are: (i) stronger-than-expected RAC EBITDA (more than offsetting slightly lower
2020E, mainly in the RAC division. its need to increase its selling volumes to
Localiza Seminovos results); and (ii) continuously low interest rates expected by
 Continuing volume growth should support the company’s support strong RAC growth.
Santander (6.5% Selic through YE2020), resulting in net profit for 2019E and
operational leverage and margin expansion.  Strong competition as fiercer competition
2020E up by 12% (+4% EPS) and 39% (+28% EPS), to R$925 million and R$1.3
could imply lower prices in both the RAC and
billion, respectively.
fleet rental businesses.
 Localiza trades at a P/E of ~27x and ~19x for 2019E and 2020E, respectively.
Although a comparison to the historical level of ~18x may seem to indicate that
the company is overvalued based on 2019 estimates, we see the comparison as
unfair given that Localiza currently enjoys stronger growth prospects than in the
past, with a continuously high return spread to the cost of capital.
 Rumo is our Top Pick among our LatAm coverage and despite Rumo’s larger
capex plan (~R$14 bn in 2019-2023E), we expect the company to generate
increasingly positive FCF in the five-year period (~R$5.5 bn in total). We believe
 Strong volumes in, mostly impacted by an all-time-high
this allows implementation of a dividend policy in the coming years. We expect  Concession renewal, as our estimates rely on
corn crop.
Rumo to share profits with shareholders starting in 2020 (~4% dividend yield), the renewal of Rumos’s current concessions.
 Positive yield performance for 3Q19 ahead, while investors
Rumo while deleveraging through its investment plan (~1.4x net debt/EBITDA in 2023E,  Volume vrowth, unfavorable climate and
vs. ~2.3x in 2018). are still concerned about soft pricing growth during 2Q19 –
structural conditions could negatively affect
which we see as an one-off event that should not continue
 Rumo trades at an implied equity nominal IRR of 11.5% (7.7% in real terms), Rumo’s transported volume.
in 2H19.
presenting an appealing spread of 430 bps vs 10-year NTN-B, aligned to a high
cash flow duration profile. We discount Rumo’s estimated cash flows by a nominal
WACC of 11.8%, in local currency, with an implied cost of equity of 14%.

19
Source: Santander
Additional Portfolio Stocks Added – Investment Thesis

Company Our Rationale Catalysts Risks

 We see Kroton as having the best-in-class execution in the higher education
segment; Following a few years of results compression, we expect 2019 to mark
the bottom for the sector (as the negative trend from FIES and overall graduations  Continued price competition in higher
 K12 segment restructuring delivery resulting in operational
should reduce their impact on on-site student bases). education business (on-site and DL).
results growth.
Kroton  K12 business exposure to begin to generate positive news. We see the recent  Continued lack of financial resources among
 Learning system segment - which has a high operating
peer valuation of learning systems, a specific segment where Kroton’s K12 potential students, resulting in high drop-outs
leverage potential - showing strong growth.
operates, trading at attractive valuations. If the company reverses mild pre- and weak intakes.
acquisition results and shows similar growth rate to peers, we see upside risk to
our estimates based on a sum-of-the-parts analysis.
 Integration of acquisitions taking too long or
 Largest healthcare operator in Brazil (considering the acquisitions of São being unsuccessful, consequently eroding
Francisco and Grupo América) with leadership position in the Northern and  Successful Integration of the acquired companies with value.
Northeastern regions. increase in verticalization, bringing margins close to  Margin compression upon entry into new
Hapvida  High growth potential, having posted 5%+ member base CAGR in a period when Hapvida's current one. regions with different customer profiles and
the total private healthcare base was decreasing.  Ramp-up of the operation in Joinville and expansion of the markets.
 Lowest MLR (~60% vs. 83% market average) in the market, showing the footprint in the South.  Slowdown in member base growth caused by
company's operating excellence flat penetration and change in competitive
landscape.
 LatAm e-commerce penetration (~2.7% of total sales) remains low compared to
global average (~12%), and we estimate e-commerce reaching 3.5% by 2022E.
 Faster-than-expected acceleration of e-commerce vs.
We expect MELI’s +17.9% GMV CAGR, leading MELI’s LatAm market share from  Further deterioration of macroeconomic
physical retail. We see our estimates of 3.5% penetration in
24% in 2018 to 30% in 2022E. indicators in the main countries it operates,
LatAm by 2022E as conservative.
 We believe that Mercado Libre’s (MELI) ongoing investment cycle both on and off particularly Argentina.
 Acceleration in off-platform TPV above our forecasted 2019-
Mercado marketplace, with its financial division’s solid performance, should help it deliver  Increased competition from new players, such
22E 38% CAGR.
Libre one of the highest growth rates among the Brazilian retailers (2019-22E CAGR of as Amazon in Brazil.
 Roll-out of new services faster than expected, generating
22.7%).  Higher-than-expected margin compression
new sources of revenue not incorporated in our numbers
 Its Fintech division (MercadoPago) had TPV of US$18.4 billion (~2.9% market related to the free shipping strategy and
(i.e., new partnerships such as Linx QR and credit cards
share in LatAm payments in 2018). The recent US$2 billion capital increase in competition in the payments industry.
with Itau).
1Q19 should allow the company to invest in strategic discounts/cashbacks to
attract app users (already ~290 million registered users in its marketplaces).

20
Source: Santander
Earnings Revision Trend Slightly Negative, Driven by Both Global Cyclicals and
Domestic Companies – Categories Breakdown
Ibovespa Earnings Revisions Trend by Strategy  We built a bottom-up monitor of Ibovespa earnings revision trends
Categories—EPS 2020E (100 Basis) (1) divided by categories and sectors in order to have better granularity
regarding the main drivers for the evolution of earnings expectations.
 We found that global cyclical sectors and commodities companies
have been a negative contribution vector for Ibovespa’s negative
earnings revisions in the past months (i.e., global cyclicals 2020E
EPS revised -8.6% and -9% in the past three months and six months,
respectively).
 Domestic cyclicals have seen slightly negative revisions to earnings
(i.e., the category had 2020E EPS revised -0.2% and
-0.2% in the past three months and six months, respectively), and
domestic defensive companies had mixed revisions (-2.3% in past
three months and +0.8% in past six months).

Ibovespa Earnings Revisions by Sectors During Last Three

Ibovespa Earnings Revisions by Strategy Categories— Months—EPS 2020E (% Change) (1)
2020E (% Change) (1)

21
(1) Note: Companies and weightings used in the analysis refer to current Ibovespa composition and weightings fixed and retroactive to the past. Sources: Santander and Bloomberg estimates.
Earnings Revision Trend Slightly Negative, Driven by Both Global Cyclicals and
Domestic Companies – Sectors Breakdown
Ibovespa EPS 2020E Estimates Trend (100 Basis)—Domestic  We built a breakdown of earnings trends for EPS 2020E by sector.
Cyclical Sectors (1) (2) The negative highlights are the Global Cyclical/Commodities sectors
(mainly Pulp & Paper and Oil & Gas). See below detailed sector
highlights:
 Pulp & Paper EPS for 2020E revised downward -42% in the past
three months and -53% in the past six months.
 Oil & Gas saw -15% and -21% revisions in EPS in the same
periods, respectively.
 Also as a negative highlight, Homebuilding, in Domestic Cyclicals,
had -9% and -12% earnings revisions in the past 3-m and 6-m,
while Education in the Domestic Defensive sector saw -9% and -
17% revisions in the same periods, respectively.
 On the positive side, Food & Beverage, TMT and Transportation
had positive revisions recently.

Ibovespa EPS 2020E Estimates Trend (100 Basis)—Global Ibovespa EPS 2020E Estimates Trend (100 Basis)—Domestic
Cyclical Sectors (1) Defensive Sectors (1)

22
(1) Note: Companies and weightings used in the analysis refer to current Ibovespa composition and weightings fixed and retroactive to the past. Sources: Santander and Bloomberg estimates.
Our Sector Quadrant Scorecard (SQS): Stock Selection for Bull and Bear
Domestic & Global Macro Scenarios
We discuss stocks to play under four different scenarios (four-quadrant stock selection). We rank sectors and stocks in terms of attractiveness (both quant and qualitative)
regarding Global Risk-On/Off and Reform-Oriented/Non-Reform-Oriented scenarios. We take into consideration: FX Exposure, Operating Profile, Beta, Liquidity, and Style
Investing. We show our base case portfolio for comparison and note that some stocks can appear in more than one combination/scenario:
 1) Bull Squared (global risk-on & structural fiscal reform): focus on SOEs, Cyclicals, Rates Sensitive, High Beta, Small Caps, Deleveraging
 2) Better Domestic (global risk-off & structural fiscal reform): Quality, Lower Leverage, Domestic Cyclicals, Long Rates Sensitive, Financial Deleveraging
 3) Bear Squared (global risk-off without structural fiscal reform): FX Exposure, Large Caps, Quality, Secular Growth, Net Cash/Float, Asset Light, Low Beta
 4) Better Global (global risk-on, w/o structural reform): FX Exposure (Excluding High-Volatility Commodities), Large Caps, Quality, Secular Growth, Net Cash/Float

Bear Case – No Reforms Bull Case – With Structural Reforms

FX Exposure, Large Caps, Quality, Secular Growth, Net SOEs, Domestic Cyclicals, Long Rates Sensitive, High Beta,
Cash/Float, Asset Light, Low Beta Small Caps, Value, Capital Intensive, Financial Deleveraging
Global Risk-On

1) Vale 1) Petrobras
2) Suzano 2) Banco do Brasil
3) Gerdau 3) Azul
4) Tupy 4) Randon
5) IRB 5) Even

FX Exposure (Lower-Volatility Commodities), Large Caps, Quality, Lower Leverage, Domestic Cyclicals, Long Rates
Quality, Secular Growth, Net Cash/Float, Asset Light, Low Beta Sensitive, Financial Deleveraging
Global Risk-Off

6) JBS 6) CPFL Energia

7) IRB 7) Localiza
8) OdontoPrev 8) Multiplan
9) SulAmerica 9) Bradesco
10) Hapvida 10) Lojas Renner

23

Source: Santander.
Sector Quadrant Scorecard (SQS): Sector Selection for Bull and Bear Domestic
& Global Macro Scenarios
 1) Bull Squared (global risk-on & structural fiscal reform): focus on Oil & Gas, Banks, Homebuilding, Transportation (Agro-linked), Retail, and Properties
 2) Better Domestic (global risk-off & structural fiscal reform): focus on Healthcare, Private Banks
 3) Bear Squared (global risk-off without structural fiscal reform): focus on Pulp & Paper, Healthcare
 4) Better Global (global risk-on without structural reform): focus on Pulp & Paper, Mining

24

Source: Santander.
Sector Quadrant Scorecard (SQS): Stock Selection for Bull and Bear Macro
Domestic & Global Scenarios
 1) Bull Squared (global risk-on & structural fiscal reform): we believe companies like Gol, Randon, Azul, Banco do Brasil, and Petrobras can outperform in this
scenario.
 2) Better Domestic (global risk-off & structural fiscal reform): we believe companies like BB Seguridade, CPFL Energia, Bradesco, Itau, Multiplan, and Lojas
Renner can outperform in this scenario.
 3) Bear Squared (global risk-off without structural fiscal reform): we believe companies like JBS, IRB, SulAmerica, OdontoPrev, and Klabin can outperform in this
scenario.
 4) Better Global (global risk-on without structural reform): we believe stocks such as Vale, Suzano, Gerdau, Tupy, and IRB can outperform in this scenario.

25

Source: Santander.
Domestic Asset Reallocation into Equities: Quantifying Potential
Sensitivity of Equity Brazilian Funds’ Industry AUM Relative to  Considering the period between 2002 and 2014, years with a
Total Funds Industry AUM (1) favorable domestic economic environment (or without serious
Implied Total Equities economic weaknesses until the 2015-16 recession), equity funds
Equities as Total Equities
Inflows/Outflows AUM Implied
% of AUM AUM (R$ Million) represented an average of ~10% of the Brazilian funds industry.
to Equities Change (%)
Bull Case 20.0%
18.0%
1,017,325
915,593
629,547
527,814
162.3%
136.1%
 Assuming that equity funds could return to the level of 10% of the
16.0% 813,860 426,082 109.9% total Brazilian funds industry, that could imply inflows of R$120
14.0% 712,128 324,349 83.6% billion into equities, reaching R$508 billion of AUM (compared to the
12.0% 610,395 222,616 57.4%
Base Case 10.0% 508,663 120,884 31.2% current R$388 billion of AUM in equities—or +31% higher AUM),
9.0% 457,796 70,018 18.1% according to our estimates.
Current
8.0%
7.6%
406,930
387,779
19,151
0
4.9%
0.0%
 In a more positive scenario, considering that equities could reach
7.0% 356,064 (31,715) -8.2% 18% of Brazilian total funds’ industry AUM (equities reached 14.6%,
6.0% 305,198 (82,581) -21.3%
Bear Case 5.0% 254,331 (133,447) -34.4%
an all-time high, in 2007), that could imply R$527 billion inflows into
Equity Funds AUM as a % of Total Funds Industry AUM equities, representing total R$915 billion AUM for the category,
(R$ Billions) (1) according to our estimates.
 In a more negative scenario, to which we currently attribute a lower
probability, if we consider that equities could reach 5% of total
funds’ industry AUM (all-time low of 4.3% reached in 2016), that
could imply R$133 billion outflows from equities (accumulating
R$254 billion total AUM, or a 34% decrease), according to our
estimates.
 The hedge funds (multimercados) category is a highlight, with R$49
billion of inflows in the past 12 months, amounting to R$1,084 billion
of AUM, or 21% of total industry AUM.
 Equity funds had R$43 billion of inflows in the same period, totaling
R$388 billion AUM (7.6% of AUM).

26
(1) Note: 2019 data accumulated until the end of July. Sources: Anbima and Bloomberg.
Domestic Asset Reallocation into Equities: Already Happening (and Speeding Up)
Brazilian Fund Inflows by Type—Equities vs. Fixed Income and
Hedge Funds (Multimercados)—LTM Accumulated 2017, 2018
and 2019 (R$ Billions) (1)
Equity Funds AUM as a % and Fixed Income Funds’ AUM
as a % of Brazilian Domestic Funds Total Industry AUM (1)
(1) Note: 2019 data accumulated until the end of July. Sources: Anbima, Bloomberg and ABRAPP.
Brazil is known as a “fixed income market” (indeed, the Ibovespa historical
average earnings yield gap is -2.6%). That said, the Selic rate reached
single digits in July 2017, and Santander’s Macroeconomics Team
expects the Selic to be cut to a low level of 4.50% by YE2019. In our view,
this should continue to be a lever for further inflows into equity funds
throughout the next few years. Below we show some numbers that
indicate the reallocation toward equities is already happening:
 In 2018, there were inflows of ~R$30 billion into equities, while fixed
income funds had redemptions of R$11.6 billion.
 In 2019, YTD inflows to equities have accumulated R$32 billion.
 During the cycle 2009-2013 (when the average Selic rate was 9.6%),
equity funds had a total intake of R$21 billion (~R$4 billion/year).
 During the 2014-16 recession period, Brazil’s equity fund industry
suffered R$37 billion in outflows.
Brazil’s fund industry totals R$5 trillion, with R$2.2 trillion in fixed income
and R$1.1 trillion in multimarket funds.
 We estimate there is R$106 billion of Brazilian bonds (LTN) to expire
by the end of 2019, which could be reallocated into more risky assets
such as equities, given current lower interest rates.
 Pension funds’ equity allocation was 17.9% of their AUM as of the
latest available data from April, still low after reaching 37.7% in 2008.
27
Our Valuation of Style Investing: Categories’ Valuations Show Domestic Stories as Less Attractive, but
Still with Room for Estimate Revisions
 The current Ibovespa P/E 12-month forward multiple at 12.2x (16%
Ibovespa P/E 12-Month Forward by Strategy Categories (1) above the historical average) seems to show reasonable valuation levels,
in our view, considering the current optimism about Brazilian equities,
which are up 38% since the lows of September 14, 2018, when investors
anticipated the election results.

 Breaking down the Ibovespa into categories shows that the

commodities category’s P/E at 9.4x (slightly above the category’s
historical average) contributes to a lower consolidated multiple. On
the flip side, non-commodity companies at 15.5x P/E (38% above the
historical average) show that the category’s valuation still reflects
some degree of optimism in the market.

 Using another framework, global cyclicals are trading at 9.4x P/E (6%
above historical), domestic defensives’ P/E is at 17x (30% above
historical), and domestic cyclicals’ P/E is at 15.1x (41% above the
historical average).

Ibovespa P/E 12-Month Forward by Commodities Companies

Ibovespa P/E 12-Month Forward by Domestic Cyclicals (1) and Non-Commodities (1)

28
(1) Sources: Santander and Bloomberg. Calculation considered current weightings of companies in Ibovespa and fixed current weightings retroactive to past.
Our Valuation of Style Investing: Attractiveness Is Less Asymmetrical When Comparing Historical
Bottom-Up Maximum/Average/Minimum Multiples – P/E 12-m Fwd
 In order to provide more a specific view on valuation of different theme-related stocks, we also segregated Ibovespa’s P/E 12-month
forward in other categories:
 Growth stocks’ P/E 12-m fwd is at 25x (43% above historical and with 3% upside if it converges to maximum historical multiples),
while value stocks are trading at 10x P/E (22% above historical and also with 11% upside to maximum multiples).
 Quality companies are trading at 16.8x P/E (41% above historical and with 5% upside to maximum multiples).
 SOEs are trading at 8.3x P/E (16% above historical and with 36% upside to maximum multiples).
 On sector highlights, Transportation trades at 22.9x (56% above historical), Financial Non-Banks +69% above historical, and Retail 36%
above historical. On the other hand, Education (-1%) is trading at a discount to historical.
P/E 12-m Fwd Multiples and Upside on Convergence to Historical Maximum, Average and Minimum – by Categories and Sectors (1)

Market (Ex SOEs (Ex

Petro & Global Domestic Domestic Non- Non- Non- Bond Petro & Private- BRL- US$-
Market Vale) Cyclical Cyclical Defensive Commodity commodity Quality quality Value Growth Bond Proxy Proxy SOE Vale) Co' Linked Linked
Current 12.2 13.8 9.4 15.1 17.0 9.4 15.5 16.8 9.7 10.0 25.0 15.4 13.2 8.3 9.5 15.9 15.3 9.5
Avg. 10.5 11.4 8.8 10.7 13.0 9.2 11.1 11.9 9.0 8.2 17.5 10.6 10.5 7.2 6.1 12.1 11.2 9.1
Max 14.3 15.7 12.9 15.8 18.3 13.1 16.3 17.6 12.9 11.1 25.7 15.9 14.5 11.3 10.0 16.6 16.0 12.8
Min 6.0 6.3 5.3 5.9 7.2 5.5 6.2 6.4 5.6 5.0 9.0 5.4 6.1 4.0 2.9 6.6 6.3 5.4
Premium/Disc. To Avg. 17% 21% 6% 41% 30% 2% 39% 41% 8% 22% 43% 45% 26% 16% 56% 32% 37% 5%
Upside to Avg. -14% -17% -6% -29% -23% -2% -28% -29% -8% -18% -30% -31% -21% -14% -36% -24% -27% -5%
Upside to Max. 17% 14% 37% 5% 8% 39% 5% 5% 33% 11% 3% 3% 9% 36% 5% 4% 4% 34%
Upside to Min -51% -55% -44% -61% -58% -42% -60% -62% -43% -50% -64% -65% -54% -52% -70% -58% -59% -43%
1 Stdev 1.7 1.9 1.5 2.2 2.3 1.5 2.2 2.3 1.4 1.3 3.4 2.2 1.7 1.6 1.7 2.0 2.1 1.5
Z-Score 1.0 1.2 0.4 2.0 1.7 0.1 2.0 2.1 0.5 1.4 2.2 2.1 1.6 0.7 2.0 1.9 2.0 0.3

Financial Financial Oil, Gas & Pulp & Telecom,

Agribusine Capital Institutions Institutions Food & Homebuild Income Petrochem Forest Media & Transportat
ss Goods Education - Banks - Others Beverage Healthcare ing Properties Mining icals Products Retail Steel Technology ion Utilities
Current 11.7 28.6 8.5 10.1 21.3 20.1 17.7 14.8 22.8 7.1 9.8 14.5 28.0 8.9 15.5 22.9 13.1
Avg. 10.9 18.1 8.6 7.5 12.6 16.4 14.5 7.9 18.2 7.4 9.0 12.0 20.5 12.3 11.6 14.7 7.7
Max 16.6 31.0 15.6 11.8 22.0 22.8 22.0 16.7 25.4 12.5 15.3 18.5 29.6 24.0 18.2 22.9 13.6
Min 5.0 6.7 2.9 4.6 7.0 8.4 8.6 2.7 11.1 3.4 5.3 4.4 10.9 3.9 6.9 5.4 3.2
Premium/Disc. To Avg. 8% 57% -1% 34% 69% 23% 23% 87% 25% -4% 10% 21% 36% -28% 34% 56% 70%
Upside to Avg. -7% -36% 1% -25% -41% -19% -18% -47% -20% 4% -9% -17% -27% 39% -25% -36% -41%
Upside to Max. 42% 8% 83% 17% 3% 13% 24% 13% 11% 76% 55% 28% 6% 171% 18% 0% 4%
Upside to Min -57% -77% -66% -54% -67% -58% -52% -82% -51% -52% -46% -70% -61% -56% -56% -77% -76%
1 Stdev 2.0 5.1 2.4 1.6 2.9 2.5 2.5 3.3 2.9 2.2 1.7 2.7 3.9 4.2 2.9 2.9 2.4
Z-Score 0.4 2.0 0.0 1.6 3.0 1.5 1.3 2.1 1.6 -0.1 0.5 0.9 1.9 -0.8 1.3 2.9 2.3

29
(1) Sources: Santander and Bloomberg. Ibovespa weightings by company were used to calculate each company’s weight in categories.
Could Stronger Brazilian Internal Activity Be Enough for Domestic Companies’ Performance to Detach
from Potential Deterioration Globally? We Found High Outperformance after Global Corrections
Domestic Cyclical Companies’ Performance vs. Global  Given the recent deterioration in the global economic outlook, we
Equities in Selected Years (in US$) (1)
looked at the past to assess how Brazilian domestic companies
400 performed in different global market environments.
350  Our main finding was that Brazilian domestic companies performed
300 negatively and in line with MSCI World (MSCI World Index for
250 developed markets) when the latter had a nearly 10% price decrease
200 in a one-month period, but domestic companies had a strong average
150
outperformance of 20% vs. global equities in the 12 months after each
period of significant price corrections. A few examples below and in
100
the two tables below:
50
 In 2010, when the Brazilian economy posted 7.1% real GDP YoY,
0
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
domestic companies were up +30% vs. +9.6% for MSCI World.
Bz Domestic Cyclical Companies Avg. 2008 Bz Domestic Cyclical Companies Avg. 2009  We continue with a positive view on Brazilian economic recovery on a
Bz Domestic Cyclical Companies Avg. 2010 Bz Domestic Cyclical Companies Avg. 2016 12-month horizon, but we recognize that the currently slower-than-
Bz Domestic Cyclical Companies Avg. 2018 MSCI World 2008
MSCI World 2009
MSCI World 2016
MSCI World 2010
MSCI World 2018
expected GDP trend may be a headwind in the coming quarters.
Domestic Cyclical Companies Performance Following Global
Domestic Cyclical Companies Performance Following Global Equities’ Sharp Corrections—Prices in Local Currency for Brazilian
Equities’ Sharp Corrections (in US$) (1) Domestic Companies (1)
Performance 28-Sep-08 26-Apr-10 23-Jul-11 16-Sep-14 26-Jul-15 29-Dec-15 Average Performance 28-Sep-08 26-Apr-10 23-Jul-11 16-Sep-14 26-Jul-15 29-Dec-15 Average
1-Month After -28.6% -14.3% -16.1% -8.1% -9.3% -9.1% -14.2% 1-Month After -28.6% -14.3% -16.1% -8.1% -9.3% -9.1% -14.2%
3-Months After -28.5% -9.0% -11.4% -4.5% -2.2% -3.4% -9.9% 3-Months After -28.5% -9.0% -11.4% -4.5% -2.2% -3.4% -9.9%
MSCI World MSCI World
6-Months After -34.0% -0.5% -8.6% -0.7% -12.0% -4.6% -10.1% 6-Months After -34.0% -0.5% -8.6% -0.7% -12.0% -4.6% -10.1%
12-Months After -9.0% 10.8% -8.9% -6.1% -2.2% 4.4% -1.8% 12-Months After -9.0% 10.8% -8.9% -6.1% -2.2% 4.4% -1.8%
1-Month After -41.1% -14.7% -16.2% -7.9% -13.4% -9.7% -17.2% 1-Month After -41.1% -14.7% -16.2% -7.9% -13.4% -9.7% -17.2%
3-Months After -33.0% -5.2% -20.2% -12.3% -4.6% 1.7% -12.3% 3-Months After -33.0% -5.2% -20.2% -12.3% -4.6% 1.7% -12.3%
MSCI EM MSCI EM
6-Months After -28.2% 6.8% -14.0% -10.9% -21.9% 0.8% -11.3% 6-Months After -28.2% 6.8% -14.0% -10.9% -21.9% 0.8% -11.3%
12-Months After 11.5% 16.5% -19.1% -23.9% -4.4% 5.2% -2.3% 12-Months After 11.5% 16.5% -19.1% -23.9% -4.4% 5.2% -2.3%
Bz Domestic 1-Month After -45.6% -11.4% -11.8% -12.1% -16.4% -14.6% -18.7% Bz Domestic 1-Month After -35.4% -6.1% -9.0% -6.9% -10.6% -10.5% -13.1%
Cyclical 3-Months After -44.7% 8.2% -14.6% -26.6% -24.5% 33.4% -11.5% Cyclical 3-Months After -29.2% 9.3% -2.5% -15.1% -11.7% 24.8% -4.1%
Companies 6-Months After -36.5% 32.1% -9.1% -38.1% -41.5% 49.4% -7.3% Companies 6-Months After -21.7% 28.8% 3.7% -13.8% -27.8% 30.2% -0.1%
Avg. 12-Months After 60.8% 42.3% -13.4% -57.0% 29.6% 66.5% 21.5% Avg. 12-Months After 55.3% 28.5% 13.1% -28.3% 26.4% 40.0% 22.5%

30
(1) Sources: Bloomberg and Santander.
Ibovespa Upside Potential and Sensitivity: Maintaining YE2019 Target of 115,000 Points
Target P/E Multiple Model
 Our Ibovespa forecast for YE2019 is 115,000 points. Our
estimate implies a 13% return from current levels (or 10% upside,
Main Assumptions for Our Target P/E Multiple Model (1) plus dividends). We use a 12-month forward P/E target multiple of
EPS CAGR 2Y 13.3x, 21% above the historical average, considering a more positive
##### 0.0% 5.0% 10.0% 15.0% 17.6% 20.0% 25.0% 30.0% 35.0% macro scenario and lower long-term interest rates. (Our target
10.0 62,318 68,706 75,405 82,416 86,151 89,738 97,372 105,318 113,575 multiple is derived using a conservative 10-year nominal interest rate
11.0 68,550 75,577 82,946 90,658 94,766 98,712 107,110 115,850 124,933
of 9.5%; nominal interest rate currently at 7.3%.)
Fair P/E

12.0 74,782 82,447 90,486 98,899 103,381 107,686 116,847 126,382 136,290
13.3 83,048 91,561 100,488 109,831 114,809 119,590 129,763 140,352 151,356  Our 13.3x target P/E implies an equivalent of 7.0% nominal
14.0 87,246 96,188 105,567 115,383 120,612 125,634 136,321 147,445 159,005 earnings growth (used in a single-stage Gordon Growth Model),
14.5 90,362 99,624 109,338 119,503 124,919 130,121 141,190 152,711 164,684
which we break down as: (i) 5% real growth during the first 10 years
15.0 93,478 103,059 113,108 123,624 129,227 134,608 146,059 157,977 170,363
(9% nominal growth); and (ii) 6.8% nominal growth in perpetuity
(composed of 3% potential GDP growth, in line with our economists’
estimate, plus 3.75% inflation). For the multiple calculation, we use a
cost of equity (Ke) for Brazil of 15.0% (5.5% market risk premium
and Brazil 10-year interest rates of 9.5%, considerably above the
DCF Upsides + 2019E Dividends (1)(2) current 7.3%).
 DCF Upsides: We cross-checked the bottom-up Ibovespa implied
target price when factoring in analysts’ DCF estimates for each
company in the index. In this analysis, our Ibovespa implied target
price would be 123,634 points (plus dividends), above our model
target price.

DCF Upsides + 2019E Dividends – By Categories (1)(2)

Upside +
Category Upside Div. Yield 2019 Dividend
s
Domestic Cyclical 15.5% 3.5% 19.0%
Global Cyclical 24.1% 1.9% 26.0%
Domestic Defensive -2.3% 3.1% 0.8%
Commodity 21.6% 1.8% 23.4%
Non-commodity 11.9% 3.5% 15.5%
31
(1) Source: Santander estimates. (2) Since we currently cover ~98% of the Ibovespa, we extrapolated our EPS growth forecast to the index.
1) Valuation – Investor Mood: How Much Is Priced In in Brazil?
Target P/E Multiple Model
 Brazil: Ibovespa is trading at a 12.1x forward P/E, compared to a bear
Brazil: Ibovespa New Macro Scenario Probability (1) scenario of 8.0x and a bull scenario of 14.5x.
12M P/E Bull Case
11.9 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
100% 8.0  We believe the market is pricing in a 60-70% likelihood of a bull-case
Current P/E: 90% 8.6 scenario.
12.1 80% 9.2
70% 9.8

Bear Case

60% 10.4 Investor mood: In historical bull markets for Brazil, the Ibovespa
50% 11.0 traded at 14-15x forward P/E; in historical bear markets, the Ibovespa
40% 11.7 traded at 8-9x P/E.
30% 12.4
20% 13.1
10% 13.8  Adding global context: We believe that looking at external factors and
0% 14.5 the risk-on or risk-off sentiment among global investors is also an
Mid Range Down/Upside -27% -22% -16% -11% -5% 0% 6% 13% 19% 26% 32% important angle when considering the Ibovespa index target, in
Current Prices -34% -29% -24% -19% -14% -9% -3% 3% 8% 14% 20%
Asymmetry 0.59 addition to considering Brazil’s local fundamentals. In this exercise,
our final weighted target is ~117,000 points, which is in line with our
Investor Mood: Historical P/E Ranges (1)
target P/E multiple model of 115,00 points.

32
(1) Sources: Santander estimates and Bloomberg.
Ibovespa Bottom-Up Valuation P/E Sensitivity—Upside/Downside if Index
Converges to Average, Maximum, and Minimum Historical Multiples

12M-Forward EPS Target 2019E Target 2020E

Upside: 37.3% Upside: 43.0% Upside: 50.0%

Maximum
Current-year Ibov EPS YE2020E EPS YE2021E
Estimate: 143,442 Target: 149,485 Target: 156,762

12M-Forward EPS Target 2019E Target 2020E

Current: Upside: -18.7% Upside: -15.3% Upside: -10.7%

P/E 12M Forward: 12.2x Avg.
Ibovespa: 104,535 points Current-year Ibov EPS YE2020E EPS YE2021E
Estimate: 84.998 Target: 88,566 Target: 93,343

12M-Forward EPS Target 2019E Target 2020E

Upside: -57.3% Upside: -56.0% Upside: -56.0%

Minimum Current-year Ibov EPS YE2020E EPS YE2021E

Estimate: 44,571 Target: 46,035 Target: 46,011

33
Sources: Bloomberg and Santander estimates.
We Think Ibovespa Valuation Is Reasonable: Valuation and Earnings Diffusion

Companies in Ibovespa Index Trading 5% Above/Below Their  15% and 37% of companies are trading at a discount to their
historical P/E and FV/EBITDA multiples, respectively. We see 25%
Historical Average Valuation (1) and Operating Statistics 2019E (2)
of companies trading at a discount to price to book.
Above (#) Neutral (#) Below (#) Above (%) Neutral (%) Below (%)
PE 39 7 8 72% 13% 15%  We see 75% of companies growing revenue above LTM inflation.
FV/EBITDA 21 10 18 43% 20% 37% We forecast 70% of our coverage with increasing EBITDA margins
P/BV 38 2 13 72% 4% 25% and 68% with higher net margins YoY in 2019.
Revenues EBITDA EPS EBITDA Margin Net Margin
Growth Growth Growth Expansion Expansion  From a sectorial perspective, we see 13 sectors of 17 trading at a
Expansion 41 43 45 38 37 higher-than-10% premium to historical P/E, while we see 18% in
Neutral 7 3 1 3 2 line and 6% below.
Contraction 7 8 12 13 15
Expansion (%) 74.5% 79.6% 77.6% 70.4% 68.5%
 Assuming companies return to average historical multiples,
Ibovespa would trade at 84,998 points, 19% downside from
Neutral (%) 12.7% 5.6% 1.7% 5.6% 3.7%
current levels (12-month forward P/E).
Contraction (%) 12.7% 14.8% 20.7% 24.1% 27.8%
Ibovespa Valuation Sensitivity—Upside/Downside if Index Converges
to Average, Maximum, and Minimum Historical Multiples (P/E 12-Month
Historical 12-Month Forward P/E by Sector (3) Forward)(4)
Ibovespa Index:
Our Portfolio:
Upside to Average Upside to Average
Multiples -17.3% Multiples -18.7%
Target Ibovespa 84,998

Upside to Maximum
Multiples 38.4% Upside to Maximum
Multiples 37.3%

Upside to Minimum Target Ibovespa 143,442

Multiples -56.8%
Upside to Minimum
Multiples -57.3%
Target Ibovespa 44,571

34
(1) Are considered above or below historical average by +5% or -5%, respectively; Sources: Bloomberg and Santander estimates. (2) Multiples are based on 12M forward estimates by
consensus. Sources: Bloomberg and Santander estimates. (3) Note: Bloomberg consensus. Source: Bloomberg. (4) Sources: Bloomberg and Santander estimates.
Ibovespa Performance Mainly Led by Multiple Re-rating, While Earnings Revision Had
Lower Contribution  In a recent study, we noted that Ibovespa had a multiple re-rating of
Ibovespa (In Points, R$), EPS 12-Month Forward and P/E 12- 25% to 12.2x P/E 12-month forward, from 9.8x, since 14 September
Month Forward (1) 2018 to date (when, in our view, investors began to anticipate
outcome of October elections). This re-rating represented 73% of
market performance in the period, according to our estimates.
 Simultaneously, Ibovespa EPS 12-month forward was revised
upward by +10% in the same period (accounting for 27% of market
performance).
 Looking at the breakdown by categories (see next page),
commodities were impacted by a mix of positive earnings
revisions and multiple re-rating, while domestic companies’
performance was mostly explained by multiple re-rating.
 We believe that the main source of upside going forward should
be earnings growth for domestic companies (although the
economic recovery is slower than expected in recent months),
while commodities companies have additional multiple re-rating
potential.
Estimated Contribution to Ibovespa Performance:  Rates vs. Ibovespa. There is a historical high negative 0.8 correlation
Accumulated Change of EPS and P/E Multiple (in %) vs. between interest rates and Ibovespa in USD. Current LT rate is at
Brazil 10Y Real Interest Rates (2) 7.3% nominal and 3.3% inflation-linked NTN-B.
Ibovespa (In Points, R$) vs. Brazil 10Y Real Interest Rates (2)

35
Sources: (1) Santander and Bloomberg. (2) Santander estimates, Anbima and Bloomberg. Note: EPS estimates from Bloomberg consensus.
Ibovespa Domestic Performance Mainly Led by Multiple Re-rating, While Earnings
Revision Had Lower Contribution—Breakdown by Categories
 Looking at the estimated contributions to the Brazilian stock market’s +38% rally from September 14, 2018 (when
investors started to anticipate the outcome of the October elections) through Sep 16, we found that multiple re-rating
contributed to 77% of market performance, while EPS revisions represented 23%. See below the key highlights:
 Domestic companies saw a re-rating to 15.5x P/E 12-month forward from 12.3x in the same period (representing 77%
of the performance estimate), while EPS 12-month forward was revised +9% in the period (accounting for 23% of
performance).
 Commodities companies saw a re-rating to 9.4x P/E 12-month forward from 8.6x in the same period, while EPS 12-
month forward was revised +3% in the period (accounting for 30% of performance since 14 September 2018).

Domestic Companies Estimated Contribution to Performance: Commodities Estimated Contribution to Performance:

Accumulated Change of EPS and P/E Multiple (in %) vs. Brazil Accumulated Change of EPS and P/E Multiple (in %) vs.
10Y Real Interest Rates (1) Brazil 10Y Real Interest Rates (1)

36
Sources: (1) Santander estimates and Bloomberg. Note: EPS estimates from Bloomberg consensus.
2) Earnings Trend: Brazil EPS Trend Expected to Be Slightly Negative
Ibovespa Historical Earnings Revisions Pattern:
 From 2010 to 2016, Ibovespa earnings were revised downward in six of seven
Ibovespa Consensus EPS Revisions (1)
years. In the same period, consolidated EPS for the Ibovespa was revised
downward by an average of 23%, with the highest negative revision reaching
45% in 2012.
 Looking at 2010, when we had positive GDP revisions, earnings estimates were
revised upward by 9.4% from the start to the end of the year.
 EPS for 2019E has been revised downward 9.3% YTD and down 3.7% over the
past month. We see near stability in EPS revisions from now on, with slower
than expected economic recovery already priced into domestic company
estimates, while upward revisions in Food & Beverage sector (especially protein
segment) partially offset other Global Cyclical companies negative reviews.

Consensus Revision for 2019 Forecasts, Last Three Months—20

Best and Worst Stocks (2)
Best 20 Stocks Worst 20 Stocks
Sales EBITDA Net Income Sales EBITDA Net Income
BRFS3 -1.2% 22.6% 109.1% MEAL3 -3.6% 31.3% -56.4%
EMBR3 -1.2% 1.7% 61.0% LLIS3 -13.0% -17.6% -45.2%
ROMI3 -4.1% 7.4% 57.6% BRKM5 -4.9% -9.0% -44.0%
Ibovespa Consensus EPS Revisions (1) BRPR3 -2.3% -1.8% 52.6% SUZB3 -4.7% -9.9% -40.1%
BEEF3 3.3% 6.2% 47.6% KLBN11 -0.9% -4.6% -37.4%
GOLL4 7.5% 18.3% 41.0% ELET6 -12.9% -17.8% -20.1%
JBSS3 2.5% 15.5% 33.1% CAML3 -1.7% -11.9% -18.5%
HBOR3 12.6% 110.2% 27.2% STBP3 -0.4% 9.2% -11.7%
EVEN3 3.2% 18.0% 26.2% CIEL3 -0.5% -6.1% -11.3%
AZUL4 6.8% 11.5% 24.8% VLID3 3.7% 0.7% -7.8%
CPFE3 15.6% 12.6% 23.7% ANIM3 0.6% 2.9% -7.8%
EZTC3 14.4% 28.2% 22.9% UGPA3 -3.4% -5.2% -7.1%
QGEP3 4.4% 16.2% 18.2% PETR3 -6.2% 0.2% -6.2%
CYRE3 4.8% 12.2% 17.8% GGBR4 -3.0% -2.7% -5.6%
PRIO3 3.9% 4.8% 17.5% ESTC3 0.1% -0.8% -4.4%
MOVI3 10.0% 7.9% 16.8% USIM5 0.8% -0.2% -4.0%
RAPT4 3.4% 8.8% 16.3% MGLU3 8.8% 6.8% -3.5%
JSLG3 8.4% 9.3% 15.1% VVAR3 1.4% 0.9% -3.5%
TOTS3 -1.1% 10.1% 14.5% TUPY3 -0.2% -2.4% -3.5%
RAIL3 2.0% 3.5% 14.4% QUAL3 2.6% 1.4% -3.4%

37

(1) Sources: Santander and Bloomberg consensus. (2) Source: Bloomberg consensus.
2) Earnings Trend: Tracking Earnings Revisions & Consensus GDP Forecasts
GDP YoY Growth Consensus Forecasts – 2020E (1)
 After weaker-than-expected economic activity data released in
1H19, consensus estimates for 2020 GDP were revised downward
to 2.0% YoY growth (vs. 2.5% in the start of the year). Our
economics team is below the consensus with a lower 2020 GDP
growth estimates of 1.6%.

 EPS estimates for domestic companies have been revised slightly

downward, along with commodities companies group.

Largest contributors to consensus 2020E YoY growth of 20%:

 Pulp & Paper represents 4 p.p. of the 20% YoY EPS growth for
2020E.
 Banks account for 3 p.p. of consolidated growth.
 Oil & Gas represents 3 p.p. of Ibovespa growth.
EPS 2020E Earnings Revisions by Sectors—Last 3 Months and  Transportation and Food & Beverage account for 2 p.p. of growth
Last 6 Months(2) each.

Decomposition of Ibovespa Growth Contribution by Sector (in

Percentage Points)—2020E (1)

38
(1) Note: Total GDP is projected at market prices; sectorial GDPs are projected at added value. Source: Brazil Central Bank - Focus survey. (2) Source: Bloomberg consensus. NA: Not applicable. NM: Not meaningful.
Playing the Hurdle Race: Looking at Earnings Trend by Sector
EBITDA Growth by Sector Category—Ibovespa, 2019–2021E (R$) EPS Growth by Sector Category—Ibovespa, 2019–2021E (R$)
(1) (1)

Strategy Categories Weights CAGR Strategy Categories Weights CAGR

2018 2019E 2020E 2021E 2018 2019E 2020E 2021E
2019-21E 2019-21E
Global Cyclical Global Cyclical
Oil, Gas & Petrochemicals 14% 31.8% 20.7% 7.3% 2.2% 4.7% Oil, Gas & Petrochemicals 14% 59.7% -11.6% 20.1% 4.2% 11.8%
Mining 8% 20.3% 28.0% -3.8% -10.9% -7.4% Mining 8% 19.5% 4.2% 24.8% -13.0% 4.2%
Steel 2% 67.0% 8.5% 3.4% -2.0% 0.7% Steel 2% NM -20.4% 9.6% -1.1% 4.1%
Pulp & Forest Products 2% 45.6% 57.2% 10.0% 6.4% 8.2% Pulp & Forest Products 2% -78.8% NM NM 16.9% NA
Agribusiness 1% -5.3% 135.0% 9.6% 5.5% 7.5% Agribusiness 1% 140.7% 2.2% 12.9% 10.6% 11.7%
Total 27% 28.5% 29.9% 4.9% -2.0% 1.4% Total 27% 6.1% -2.2% 22.3% -1.1% 10.0%

Domestic Cyclical Domestic Cyclical

Financial Institutions - Banks 28% NM NM NM NM NM Financial Institutions - Banks 28% 10.2% 20.4% 10.3% 9.6% 10.0%
Financial Institutions - Others 6% 44.2% 15.8% 12.3% 7.7% 10.0% Financial Institutions - Others 6% 1.5% 15.4% 9.9% 10.9% 10.4%
Retail 8% 13.3% 27.7% 19.8% 17.6% 18.7% Retail 8% 37.0% 15.3% 20.5% 18.1% 19.3%
Transportation 4% 3.1% 36.9% 30.0% 11.0% 20.1% Transportation 4% -18.3% 106.3% 47.9% 17.2% 31.7%
Homebuilding 1% -13.8% 29.7% 23.5% 19.9% 21.7% Homebuilding 1% 5.6% 10.9% 35.7% 22.8% 29.1%
Capital Goods 2% 24.2% 14.2% 14.5% 12.9% 13.7% Capital Goods 2% 17.7% 12.4% 15.5% 12.7% 14.1%
Total 48% 17.2% 26.3% 20.4% 13.7% 17.0% Total 48% 12.4% 25.0% 15.4% 12.0% 13.7%

Domestic Defensive Domestic Defensive

Food & Beverage 13% 3.2% 27.1% 11.6% 6.7% 9.1% Food & Beverage 13% -26.9% 8.8% 15.1% 8.6% 11.8%
Utilities 6% 73.5% -5.2% 13.9% 7.9% 10.9% Utilities 6% 34.5% -13.2% 12.4% 10.3% 11.3%
Telecom, Media & Technology 4% 18.9% 0.5% 4.7% 5.2% 5.0% Telecom, Media & Technology 4% 92.2% -35.4% 10.7% 11.5% 11.1%
Income Properties 1% 10.8% -9.1% 7.2% 8.6% 7.9% Income Properties 1% 25.1% -16.3% 11.0% 12.7% 11.9%
Healthcare 0% 14.4% 4.3% 7.8% 7.9% 7.8% Healthcare 0% 5.2% 16.1% 12.8% 10.3% 11.5%
Education 1% 0.0% 45.6% 7.6% 8.6% 8.1% Education 1% -18.3% 1.6% 6.2% 5.5% 5.8%
Total 25% 24.9% 9.8% 10.2% 8.3% 9.3% Total 25% 20.1% -5.9% 12.2% 11.5% 11.9%

Ibovespa 100% 24.4% 22.5% 10.6% 5.4% 8.0% Ibovespa 100% 13.0% 10.5% 16.7% 8.1% 12.3%

Commodity 30% 26.7% 34.7% 5.5% -1.9% 1.7% Commodity 30% 6.1% -2.7% 22.2% -0.6% 10.2%
Non-commodity 70% 22.6% 13.2% 14.5% 11.0% 12.8% Non-commodity 70% 14.7% 15.4% 14.4% 11.9% 13.2%

39
(1) Market cap as of September 20, 2019. NM: Not meaningful. NA: Not applicable. Sources: Bloomberg consensus and Santander.
Mismatch Between Valuation and Expectations Surprise: Current Valuations Could Be Lagging,
with Potential Earnings Revisions on Acceleration of Economic Activity after Pension Reform
In periods of optimism when the Ibovespa reaches high multiple valuation
Ibovespa—P/E 12-m Fwd, EPS 12-m Fwd and Index Price (1) levels (~14x P/E 12-month forward) due to elevated prices, we note that
there is usually a mismatch between prices and market estimates, as
200 16
120000
120,000
earnings expectations often are increased following those periods of
180 14
100000
100,000
optimism, showing that the apparently high valuations were lagging and
would actually be lower with the materialization of higher-than-initially-
160 12
8000080,000 expected activity and earnings.
 In 2007, Brazilian GDP growth was revised to +5.1% in December from
140 10
6000060,000 +3.5% in January. Ibovespa P/E 12-m fwd reached 13.1x in October,
and EPS 12-m fwd was revised up 18% in the following 12 months.
120 84000040,000
 In 2010, Brazilian GDP growth was revised to +7.6% in December from
5.2% in January. Ibovespa P/E 12-m fwd reached 14.4x in January, but
100 62000020,000
EPS 12-m fwd was revised +32% higher in the next 12 months.
80 40 0  In 2017, when economic expectations became more positive (GDP
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 growth was revised to 1.0% in December vs. 0.5% in January), Ibovespa
EPS 12-m Fwd - 100 Basis P/E 12-m Fwd Ibov Price
P/E reached 13.7x in October, and EPS 12-month forward was
increased by 40% in the following 12 months.
Ibovespa EPS 12-Month Forward Evolution Amid Accelerating Domestic Cyclical Companies Category—Reported Quarterly
Economic Activity Expectations (2) Results YoY Growth vs. Real GDP YoY Growth (3)
10.0% GDP 2007 (LHS) GDP 2010 (LHS) 135
EPS 2007 (RHS) EPS 2010 (RHS)
9.0% 130

125
8.0%
120
7.0%
115
6.0%
110
5.0%
105
4.0% 100

3.0% 95
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

40
(1) Sources: Santander and Bloomberg. (2): Sources: Santander, Brazil Central Bank and Bloomberg. (3) Company data and Santander.
Key Economic Indicators to Track: Confidence, Cycle of Credit, Formal Job
Creation and Long-Term Interest Rates
Confidence: Consumer, Business and Services (1) Brazil 10Y Nominal Rates vs. Ibovespa (in US$) (3)

Credit Growth (YoY RHS) and Household Indebtedness (% of

Household Income LHS) (2) Net Formal Job Creation (thousands) (4)

41
(1) Sources: FGV and Bloomberg. (2) Sources: BCB and Santander. Notes: Household Debt excluding Mortgage Loans. (3) Sources: Santander and Bloomberg. (4) Sources: CAGED and Santander estimates.
3) Macro—Fiscal Policy Challenges Remain
Social Security Spending, % of GDP(1) Primary Budget to Stabilize Debt/GDP, % of GDP (2)

Real interest GDP Growth (%)

No reform rate (%) 0 1 2 3 4 5
19.2
18.8 0 0.0 -0.8 -1.5 -2.3 -3.1 -3.9

14.7 1 0.8 0.0 -0.8 -1.5 -2.3 -3.1

10.6 Minimum Retirement Age 13.5 2 1.5 0.8 0.0 -0.8 -1.5 -2.3
9.9 (65/60)
3 2.3 1.5 0.8 0.0 -0.8 -1.5
8.8
8.6 4 3.1 2.3 1.5 0.8 0.0 -0.8
Minimum Retirement Age (65/60) +
elimination of other distortions 5 3.9 3.1 2.3 1.5 0.8 0.0
6 4.6 3.9 3.1 2.3 1.5 0.8
7 5.4 4.6 3.9 3.1 2.3 1.5
2018

2020

2025

2030

2035

2040

2045

2050

2055

2060
8 6.2 5.4 4.6 3.9 3.1 2.3

Gross Public Debt-GDP Ratio Versus Primary Balance

Plan B . . . ? Privatization and the End of Tax Exemptions (3) Baseline Scenario (4)
4 90
Primary balance Gross debt
3
Market Gov't Potential Small enterprises (Simples ) 69.2
Company 80
value share revenue 2
Payroll tax breaks 35.2
Petrobras 357.2 29% 102.5
Income tax breaks 39.2 1
Banco do Brasil 137.0 56% 76.0
Eletrobras 42.3 41% 17.3
Manaus free economic zone 23.2 70
Caixa Econômica Federal 84.1 100% 84.1 Agriculture/foodstuff 21.7 0
Correios 2.7 100% 2.7 Non-profit entities 19.5
Infraero 4.0 100% 4.0 -1
Savings/financial products 7.5 60
IRB 7.6 27% 2.1
Banco da Amazônia 3.3 51% 1.7 Others 54.6 -2
Total 290.4 Total 270.1
-3 50

42
Sources: (1) Ministry of Economy, Paulo Tafner, Santander estimates. (2) Santander Estimate. (3) GO Associados, Bloomberg, Santander estimates (as of January 10, 2019). (4) BCB and Santander estimate.
4) Style & Thematic Investing:
The Local Flavor—2019 Value Investing Conference in São Paulo
 We attended the 2019 Value Investing Conference in São Paulo on May 9, 2019. The event included the attendance of 10 Investment Managers pitching
their main top picks and discussing their portfolio construction. Four main takeaways below:

 How do the Top Picks Compare to our Brazil Equity Strategy? (five names included in our portfolio were mentioned)
 The pitched stocks include: Bradesco, Eneva, Energisa, Itausa, Springs, Suzano and Unipar.
 Among these companies, our Portfolio includes: Bradesco (faster private bank EPS growth); Energisa (quality utility offering 7% real IRR with capital allocation
opportunities); Itausa (cheaper way to buy Itau); and Suzano (attractive FX hedge with double-digit FCF yield).
 Stocks that caught our attention and are not in our portfolio: Eneva.

 Can we find similarities among the Top Picks? Domestic Cyclicals dominated the pitches
 Domestic Cyclicals dominated the pitches: 5 mentions (although the pitches’ reasoning was more bottom-up, company-specific than linked to macro). We are OW
in domestic cyclicals.
 Electric Utilities had 2 mentions this time, versus one in last year’s forum.
 Commodities had only one mention: Suzano.

 Understanding Local Portfolio Manager Sentiment (locals are slightly positive)

 With the exception of one PM who sees Brazil as expensive and with domestic companies trading with undeservedly similar valuations as U.S. companies, local
portfolio managers presenting at the event were slightly positive: valuation (cyclically adjusted) still interesting and with operating leverage for faster EPS growth.

 Key Global and Thematic Insights: From Short Selling Through Platform Business Model and Factor Investing Themes (see below more explanation by
PMs)
 What to look for in short selling? Revenue, margins, ROIC changes for three reasons: (i) Change in competitive scenario, (ii) End of benefits and (iii) Structural
breaks (Versa).
 Platform business model: belief that we may be in a world where there is no mean reversion: winner takes all. Data is the new oil. Mercado Libre is an example of
a LatAm platform company. (Verde)
 Pension reform offers opportunity in 3 types of companies to play: (i) (+) Benefiting from real rate and suffering fewer disappointments (Utilities, Malls, Retail less
discretionary); (ii) (+) Cheap high betas (Retail, Industrial and Steel); (iii) (-): Sector that suffers: BRL seems cheap currently (Mining and Pulp). (GTI)
 Building a Convex Credit Relative Value Portfolio: perception that there is opportunity to short some U.S. Industrial names. U.S. sectors at risk: Life Insurance,
Shopping malls, Retail. (Mill Hill)
 Investment Managers Who Made History - Systematic perspective: Low-beta stocks tend to have higher returns than predicted (low beta anomaly). (AQR)

43
(1) Sources: Santander and Bloomberg.
Style Investing Overview: Selection of Best-Ranked Companies in Our Studied
Styles Shows Good Performance
 Momentum: Acceleration (increasing YoY rate of growth), along with
Highest Momentum Quartile Portfolios Performance vs. other well-ranked momentum screenings, is associated with greater
Ibovespa and CDI (1) outperformance.
 Net income QoQ acceleration was the best-performing quartile, up
680% in 2006-2017 (excess return of 581% vs. Ibovespa and with
2.25 LTM Sharpe ratio).
 Value: We found encouraging results for trailing P/E and forward
FV/EBITDA, the former reaching 549% from the beginning of 2006 to
2017 (alpha of 236%) and the latter 486% (alpha of 179%).
 Competitive advantages: LatAm screened moat companies’
accumulated return, and return adjusted by volatility has been higher than
benchmark MSCI LatAm in local currency and US$ since 2013.
 Performance of +28% in local currency (+5.1% in US$) vs. -19% for
MSCI LatAm in US$.
 +0.34 return adjusted by volatility in local currency (+0.17 in US$), vs.
-0.06 for benchmark in US$.

Value Portfolios: P/E Trailing Portfolios Performance Moat Companies vs. Benchmark: Five-Year Performance (100
Comparison (1) Basis)—US$ for Companies (1)

44
(1) Sources: Santander and Bloomberg.
Style Investing—Quant Series: Does Earnings Momentum Work in Brazil?
Estimates Revision Net Income 4-Months (X Axis),
Net Income Acceleration (Y Axis) and Mkt. Cap (Bubble Size) (1)
Highest Momentum Quartile Portfolios
Performance vs. Ibovespa and CDI (2)
(1) Sources: Bloomberg consensus and Santander estimates. (2) Sources: Bloomberg and Santander.
 In the second edition of our Style Investing—Quant Series (dated
December 3, 2018), we reassessed and back-tested the Brazilian
equities universe, looking for evidence of style investing
outperformance, focusing on earnings momentum calls, i.e., stocks
that have growing or positively revised operating results and
earnings.
 We focused on three main indicators—growth, acceleration, and
estimate revisions—using two variables: earnings and EBITDA.
 Our main finding was that acceleration (increasing YoY rate of
growth) is associated with higher outperformance, followed by
growth: net income QoQ acceleration of the fourth quartile portfolio
(with higher acceleration) was the best performing, up 680% in
2006-2017, with an excess return of 581% over the Ibovespa and a
2.25 LTM Sharpe ratio.
 What did we back-test? In this report, we looked at the earnings
momentum of IBX-100 stocks. We built four portfolios, using three
parameters (estimate revisions, growth, and acceleration) for two
metrics (net income and EBITDA). Each portfolio represented a
ranked quartile (25% of our universe of stocks); the first quartile
comprised companies with the lowest parameter (the “low earnings
momentum” stocks), while the fourth quartile had companies with
the highest parameters in the screening (high momentum).
45
Style Investing—Quant Series: Does Value Work in Brazil?

ROE vs. P/E 12-Month Forward by Sector (Size = Market Cap) (1)  We reassess and back-test our Brazil equities universe, looking for
35%
evidence of style investing outperformance.
Ibov P/E
10.6 Financials

30%
Food & Beverages  In the first of our Style Investing – Quant Series (July 23, 2018), we
focused on value calls, i.e., stocks that were trading at lower than
Pulp & Paper average benchmark multiples. We focused on three main
25%
Retail
indicators: P/E, FV/EBITDA, and P/B. We concluded that the
Banks Healthcare
former two work: the trailing P/E first quartile portfolio had the best
20% Capital Goods
Mining performance, up 549% from the start of 2006 to 2017, with a
Oil & Gas Transportation Jensen’s alpha of 236%.
15%
Agribusiness Ibov ROE
Tech & Telecom 15.0%  We also aimed to screen stocks that, in our view, offer good value
10%
Utilities Steel in P/E (focusing on trailing multiples and cross-checking with
Homebuilding Income
Properties
forward multiples) and/or FV/EBITDA. Six stocks we like: Banco do
5% Brasil, Bradesco, Itaúsa, Iochpe-Maxion, MRV, and Sul América.
6x 8x 10x 12x 14x 16x 18x 20x 22x 24x 26x
P/E Trailing Portfolios Performance Comparison (2)
 What are we back-testing? Academia and the investment
community have studied style investing for some time. In this
report, we analyzed whether value-style investing works in Brazil
(IBX-100 index), and we constructed four portfolios for each of the
three indicators most commonly used by analysts (P/E,
FV/EBITDA, and P/B). Each portfolio represents a ranked quartile
(25% of universe of stocks). The first quartile comprises the
companies with the lowest multiple relative to the sample, the most
"inexpensive" stocks, while the fourth quartile comprises
companies with the highest multiples in the screening.

46
(1) Sources: Bloomberg consensus and Santander estimates. (2) Sources: Bloomberg and Santander.
Thematic Investing
Are Brazil Quality Companies Expensive? A Look at PEG Ratios
Quality Companies: P/E 12-Month Forward Current & Historical, Fair P/E Sensitivity for Different Levels of ROE and EPS
Performance YTD and EPS 2019E Revisions Last1-3 Months (1) Growth(2)
Hist. Diff. to 3-Month
CAGR (19-21E) PEG
P/E 12-m YTD
Avg.
Hist. Hist.
Diff. to CAGR (19-21E) 2019- Month
1- EPS
3-Month ROE Growth 25%
P/EFwd
12-m PEG Perf.
YTD EPS Growth 5%
Company P/E
Avg. Avg.
Hist. Perf.
21E Month
EPS EBITDA 2019- Revision
EPS
Fwd Perf. Inputs ROE Perpetuity 20% Ke Growth 15%
Company
Equatorial 22.3 P/E
10.4 Avg.
114% EPS
28% EBITDA
23% 21E
0.6 Perf.
5% 35% Revision
20% EPS Perpetuity 6% Ke Perpetuity 15%
Equatorial
Smiles 22.3
7.3 10.4
10.5 114%
-31% 28%
9% 23%
10% 0.6
0.8 5%
6% 35%
-6% 20%
-4% Fair P/E ROE in Growth Period
Smiles 7.3 10.5 -31% 9% 10% 0.8 6% -6% -4% 7.9 5.0% 7.5% 10.0% 12.5% 15.0% 17.5% 20.0% 22.5% 25.0% 27.5% 30.0%
Ultrapar 15.9 17.2 -7% 20% 12% 0.9 -2% -31% -12%
0% 6.9 6.9 6.9 6.9 6.9 6.9 6.9 6.9 6.9 6.9 6.9
Ultrapar
Bradesco 15.9
9.8 17.2
8.0 -7%
22% 20%
11% 12%
NA 0.9
1.1 -2%
1% -31%
6% -12%
2% 2.5% 5.2 6.1 6.6 6.8 7.0 7.1 7.2 7.3 7.4 7.4 7.5
Bradesco
Telefonica Brasil 9.8
14.3 8.0
8.6 22%
66% 11%
9% NA
5% 1.1
1.4 1%
3% 6%
22% 2%
-1% 5.0% 3.1 5.1 6.1 6.7 7.1 7.4 7.6 7.8 7.9 8.0 8.1
7.5% 0.7 4.0 5.6 6.6 7.2 7.7 8.1 8.3 8.5 8.7 8.9
Telefonica
IRB Brasil 14.3
17.6 8.6
14.6 66%
21% 9%
13% 5%
NA 1.4
1.7 3%
4% 22%
28% -1%
2%
10.0% (2.2) 2.6 5.0 6.4 7.4 8.1 8.6 9.0 9.3 9.6 9.8

EPS Growth
IRB
Itaú Unibanco 17.6
11.6 14.6
7.7 21%
51% 13%
10% NA 1.7
1.6 4%
6% 28%
10% 2%
0% 12.5% (5.6) 1.0 4.3 6.2 7.6 8.5 9.2 9.8 10.2 10.5 10.8
Itaú Unibanco
Localiza 11.6
28.0 7.7
16.8 51%
67% 10%
24% NA
21% 1.6
1.8 6%
1% 10%
51% 0%
1% 15.0% NM NM NM NM NM NM NM NM NM NM NM
17.5% (14.3) (3.2) 2.4 5.8 8.0 9.6 10.8 11.8 12.5 13.1 13.6
Localiza
Sul America 28.0
15.0 16.8
8.3 67%
81% 24%
12% 21%
NA 1.8 1% 51%
62% 1%
20.0% (19.9) (5.8) 1.3 5.5 8.4 10.4 11.9 13.1 14.0 14.8 15.4
Sul America
Lojas Renner 15.0
27.8 8.3
18.3 81%
51% 12%
21% NA
19% 1.8
1.9 1%
2% 62%
30% 1%
-1% 22.5% (26.5) (8.9) (0.1) 5.2 8.8 11.3 13.2 14.6 15.8 16.8 17.6
Lojas
HyperaRenner 27.8
16.7 18.3
17.3 51%
-3% 21%
8% 19%
10% 1.9
2.2 2%
6% 30%
10% -1% 25.0% (34.2) (12.5) (1.6) 4.9 9.2 12.3 14.6 16.5 17.9 19.1 20.1
27.5% (43.2) (16.7) (3.5) 4.5 9.8 13.6 16.4 18.6 20.4 21.8 23.0
Hypera
Natura 16.7
35.9 17.3
17.4 -3%
106% 8%
27% 10%
14% 2.2
1.9 6%
7% 10%
53% -1%
-2% 30.0% (53.8) (21.6) (5.6) 4.0 10.5 15.0 18.5 21.2 23.3 25.0 26.5
Natura
Arezzo 35.9
20.7 17.4 106%
19% 27%
17% 14%
17% 1.9
1.7 7%
1% 53%
-10% -2%
-1%
Arezzo
Fleury 20.7
19.4 17.4
15.6 19%
25% 17%
12% 17%
10% 1.7
2.0 1%
3% -10%
29% -1%
-3%  Net/Net: We like the quality strategy but are further screening it: we prefer
Fleury
CVC Corp. 19.4
17.2 15.6
14.9 25%
15% 12%
13% 10%
12% 2.0
2.1 3%
-6% 29%
-16% -3%
-5% companies trading at mid-teens forward P/E and whose PEG 2019E-2021E
CVC Corp.
OdontoPrev 17.2
23.5 14.9
19.7 15%
19% 13% 12% 2.1 -6%
-5% -16%
15% -5%
-3% ratio is below ~2.0x: i.e., in our portfolio we hold Sul America, Bradesco, IRB,
Localiza, Lojas Renner and Itaú Unibanco.
OdontoPrev
RD 23.5
46.9 19.7
26.9 19%
74% 13%
30% 12%
23% 2.1
2.2 -5%
6% 15%
65% -3%
-4%
RD
Ambev 46.9
22.7 26.9
17.1 74%
33% 30%
12% 23%
10% 2.2 6%
2% 65%
25% -4%
-2%  According to our calculations, it is necessary to grow EPS at a 30% CAGR for
Ambev
CCR 22.7
15.3 17.1
14.0 33%
9% 12%
18% 10%
6% 2.2
2.4 2%
12% 25%
55% -2% 10 years with ROE above 20% to justify a multiple of ~20x P/E forward.
CCR
Multiplan 15.3
28.4 14.0
21.0 9%
35% 18%
16% 6%
10% 2.4
2.3 12%
-4% 55%
10% -2%
-3%  PEG ratio limitations: David Einhorn’s 2005 speech at The Value Investing
Multiplan
WEG 28.4
29.6 21.0
17.9 35%
65% 16%
14% 10%
14% 2.3
2.5 -4%
1% 10%
35% -3%
3% Congress using Peter Lynch's PEG ratio is insightful, in our view, as it points
WEG 29.6 17.9 65% 14% 14% 2.5 1% 35% 3%
out the limitations of the PEG ratio. According to Einhorn: (i) the PEG ratio
Iguatemi 25.9 19.2 35% 13% 7% 2.4 -2% 11% -4%
does not tell us anything about valuation: i.e., if a stock has a PEG ratio of 3x, it
Iguatemi
Kroton 25.9
12.7 19.2
12.4 35%
2% 13%
5% 7%
8% 2.4
4.5 -2%
-1% 11%
28% -4%
-17% may be cheap if its P/E is 3x and growth is 1x, and may be expensive if the P/E
Kroton
Energisa 12.7
19.2 12.4
15.8 2%
22% 5%
21% 8%
12% 4.5
3.9 -1%
-4% 28%
31% -17%
-3% ratio is 60x and growth is 20%; (ii) P/E multiples and earnings growth have a
Energisa
B3 19.2
24.4 15.8
13.2 22%
85% 21%
14% 12% 3.9
2.8 -4%
0% 31%
66% -3%
2% nonlinear relationship; and (iii) the PEG ratio does not tell us anything about the
B3
Lojas Americanas 24.4
34.1 13.2
31.0 85%
10% 14%
16% 12%
11% 2.8
4.7 0%
5% 66%
-5% 2%
-7% quality of growth (whether it comes from the top line, margin expansion, or
Lojas
leverage, or if it is secular growth or cyclical growth).
Cielo Americanas 34.1
11.3 31.0
11.3 10%
1% 16%
0% 11%
1% 4.7
72.0 5%
3% -5%
-9% -7%
-12%
Cielo 11.3 11.3 1% 0% 1% 72.0 3% -9% -12%

47
(1) Ibovespa performance of +4,3% in 1-m period and 18% YTD. (2) NM: Not meaningful. NA: Not applicable. Sources: Bloomberg and Santander estimates. (2) NM: Not meaningful. Source: Santander estimates.
5) Performance, Flows & Technicals: Breakdown of Ibovespa Performance—
Domestic Defensives (Utilities) the Highlight
Returns by Strategy Category in Ibovespa—
Accumulated YTD—2018 and 2019  We looked into the Ibovespa index and broke down the
stocks by our strategy categories, sectors, and exposure to
commodities.

 We found that Ibovespa’s +18% performance YTD was

mostly driven by domestic defensive sectors (+35.4%
performance, while domestic cyclical companies had +19.8%
and global cyclicals rose 5%).

 Looking at commodities breakdown, we see commodity-

related stocks +12.8% YTD, with non-commodity names
+20.5%.

Returns by Commodity Exposure in Ibovespa—

Accumulated YTD—2018 and 2019

Yearly Accumulated Return in 2014 to 2019 to Date

2014 2015 2016 2017 2018 2019 YTD

Market -2.9% -13.3% 38.9% 26.9% 15.0% 17.7%
Global Cyclical -33.7% -18.0% 71.1% 28.4% 30.1% 5.0%
Domestic Cyclical 13.7% -13.7% 41.6% 31.8% 20.0% 19.8%
Domestic Defensive 11.1% -8.7% 10.8% 16.1% -13.1% 35.4%

Commodity -25.2% -14.1% 50.0% 19.9% 24.7% 12.8%

Non-commodity 11.3% -12.8% 34.4% 30.4% 10.7% 20.5%

48

Sources: Santander and Bloomberg.

Breakdown of Ibovespa Performance by Sector: Domestic Defensives and
Cyclicals Are the Highlights
 Sectors that contributed to the positive performance of domestic companies in 2019 YTD: Healthcare (+51%), Financials
Institutions – Others (+41%), Utilities (+34%) and Transportation (+29%) had the highest performance. Commodities sectors:
Agribusiness (+65%) and Food & Beverage (+52%).
 Sectors with the steepest declines were Pulp & Paper (-10%) and Mining (-4%).

Ibovespa Monthly Accumulated Return—by Strategy Categories, Commodity Exposure and

Sector

Jan-19 Feb-19 Mar-19 Apr-19 May-19 Jun-19 Jul-19 Aug-19 Sep-19 09-Sep-19 2018 2019 YTD

Market 10.8% -1.9% -0.2% 1.0% 0.7% 4.1% 0.8% -0.7% 2.0% 0.2% 15.0% 18%
Global Cyclical 4.8% 2.5% 3.5% -3.7% -4.4% 4.9% -4.0% -5.3% 5.0% 2.4% 30.1% 5%
Domestic Cyclical 12.8% -3.2% -2.8% 1.1% 4.1% 4.0% 0.3% 1.0% 2.0% -0.1% 20.0% 20%
Domestic Defensive 16.7% -4.8% 0.9% 8.1% 0.3% 3.0% 9.8% 1.8% -1.7% -1.6% -13.1% 35%

Quality 13.4% -3.1% -2.8% 1.1% 3.2% 3.2% 1.7% -0.3% 2.0% 0.0% 26.7% 19%
Non-Quality 8.6% -0.5% 2.3% 0.6% -1.5% 4.9% 0.0% -0.8% 2.0% 0.5% 45.9% 17%

Commodity 5.9% 1.3% 4.4% -0.7% -4.0% 4.3% -1.9% -2.3% 3.9% 1.7% 24.7% 13%
Non-commodity 13.6% -3.3% -2.5% 1.7% 3.3% 3.9% 2.2% 0.2% 1.1% -0.4% 10.7% 21%

Agribusiness 32.5% -1.6% -2.4% 10.7% 3.5% -2.1% 10.6% -1.7% 5.0% 1.5% -16.8% 65%
Capital Goods 7.6% -1.8% -2.0% 2.9% 2.0% 12.1% 12.7% -5.5% 0.4% -1.1% -3.9% 29%
Education 29.2% -6.7% -3.4% -3.4% 5.2% 3.3% 17.2% -15.5% 1.9% -1.0% -42.6% 22%
Financial Institutions - Banks 13.0% -3.9% -2.0% -0.7% 4.4% 3.1% -5.8% -2.1% 5.9% 1.6% 33.9% 13%
Financial Institutions - Others 18.1% -0.1% -3.0% 4.6% 4.3% 2.8% 8.1% 7.1% -2.4% -2.6% -5.9% 41%
Food & Beverage 14.7% -5.4% 3.6% 18.0% -2.9% 1.3% 13.5% 4.0% -0.7% -0.8% -23.6% 52%
Healthcare 17.0% -7.4% 4.0% 6.0% 4.0% 10.5% 5.0% 13.9% -5.2% -3.2% -43.8% 51%
Homebuilding 15.5% -4.6% -1.3% 5.9% 6.6% 17.7% 12.5% 0.2% -13.8% -5.1% 9.7% 33%
Income Properties 9.7% -6.2% -6.3% -1.7% 4.2% 12.6% 3.5% -6.0% -2.3% -3.0% 3.9% 3%
Mining -10.1% 3.5% 8.2% -2.7% -2.1% 5.8% -4.3% -8.6% 5.1% 3.1% 30.2% -4%
Oil, Gas & Petrochemicals 12.8% 2.1% 1.4% -3.3% -4.7% 4.4% -3.7% -2.6% 5.1% 1.5% 30.8% 12%
Pulp & Forest Products 20.2% 1.7% -3.2% -8.9% -19.4% 3.2% -5.7% -5.1% 6.3% 5.0% 49.6% -10%
Retail 8.9% -4.8% -3.7% 5.0% 0.6% 4.7% 7.6% 6.6% -3.2% -1.8% 6.9% 20%
Steel 8.2% 3.5% 7.1% -8.5% 3.9% 7.0% -6.0% -8.7% 2.1% 5.0% 16.5% 12%
Telecom, Media & Technology 5.9% -4.2% 1.6% 0.0% 0.6% 4.4% 5.9% 2.4% -2.9% -2.9% 0.1% 11%
Transportation 11.5% -0.3% -6.3% -0.4% 7.4% 6.9% 8.5% 0.0% 1.1% -1.3% 8.5% 29%
Utilities 22.7% -3.1% -0.2% 2.7% 2.9% 1.8% 5.4% 3.7% -2.3% -1.8% 25.7% 34%

49

Sources: Santander and Bloomberg.

Funds & Flows
Drop in the Ocean: Opportunity Ahead?
Mapping Global Fund Industry—Size (in US$ trillions)  LatAm equities are a drop in the ocean with respect to total
assets under management worldwide (US$134.9 trillion).
 Considering that emerging markets (EM) have ~US$1,126
billion in AUM (US$642 billion active), each 100 bps of
allocation could drive a meaningful ~R$44 billion to the market
(3.8 days of trading volume).
 In terms of allocation, Brazil is below historical allocation among
international active investors’ portfolios, according to EPFR’s
latest available data as of the end of August 2019. Meanwhile,
US$134.9t
Brazil allocation is positive (0.63 p.p.) vs. the benchmark.
Weight of LatAm Countries in GEM Active Funds
GEM Funds Allocations by Country—Active and Passive

Active
Benchmark Current Allocation
Current Hist. Avg. Diff. Current Weight vs. Benchmark
LatAm 13.1% 18.5% -5.4 p.p. 12.5% 0.60 p.p.
Argentina 0.5% 1.1% -0.6 p.p. 0.30% 0.18 p.p.
Brazil 8.6% 11.4% -2.8 p.p. 8.00% 0.63 p.p.
Chile 0.47% 1.2% -0.7 p.p. 0.90% -0.43 p.p.
Colombia 0.26% 0.3% 0.0 p.p. 0.40% -0.14 p.p.
Mexico 2.5% 6.5% -3.9 p.p. 2.40% 0.13 p.p.
Peru 0.57% 0.6% 0.0 p.p. 0.40% 0.17 p.p.

50
Note: Funds allocations data as of August 30, 2019. Source for all charts: EPFR.
Funds & Flows:
YTD Inflows for Brazil Driven by ETFs
 Emerging markets had outflows of -US$30,040 million in
Emerging Markets and Regions (1) 2019 to date.
Flows by ETF Funds (US$ Millions)—All Emerging
Total Flows through Regions YTD (US$ Millions)
All Funds - Current Week % of Last 4
Markets  Latin
America had negative flows totaling US$980 YTD.
Regions (US$ Mln) AUM Weeks YTD The main drivers were:
EM 8 0.0% -7,349 -30,040
LatAm -139 -0.1% -244 -980
Brazil
Mexico
-147
-20
-0.2%
-0.07%
-254
-6
-636
-292
 Brazil: -US$636 million YTD.
Chile 25 0.3% 58 -125  Mexico: -US$292 million YTD.
Peru
Colombia
-3
-1
-0.1%
-0.01%
-24
6
-25
237
 Chile: -US$125 million YTD.
Argentina -3 -0.04% -29 -120  Argentina: -US$120 million YTD.
 Peru: -US$25 million YTD.
 Colombia: +US$237 million YTD.

Local Domestic Pension Funds Equity Holdings

Brazil (1) (% of Total AUM) Near Lows (2)
Weekly Flows to Brazil and 4 Weeks Moving Avg., Last
Flows to Brazil by ETF Funds (US$ Millions)
Three Years to Date (US$ Millions)

51
(1) Source: EPFR Global. (2) Source: Abrapp - Associação Brasileira das Entidades Fechadas de Previdência Complementar.
Ibovespa Technical Indicator (At More Reasonable Levels Following Correction)
 The Ibovespa experienced a rebound in June-July 2019 after it entered a near oversold technical condition in May; at the start of 2019
it neared an overbought position from this perspective. Recently, a global and domestic market correction brought Ibovespa to more
reasonable technical levels.
 Typically, in an overbought condition, the market sees sharp corrections (fear-related selling pressure, large positions unwinding, stop
losses and others).
Ibovespa Technical Indicator Entered Overbought Territory

52
Note: Chart Criteria: Ibovespa divided by the moving average of the previous six months minus one. We consider the overbought zone to be the region beyond one standard deviation above the average of the series since early
2004. We consider the oversold zone to be the region beyond one standard deviation below the average. Numbers at the far right indicate the equivalent Ibovespa levels for the overbought, the oversold, and the neutral zones.
Sources: Santander and Bloomberg.
Risks to Monitor in Brazil
Potential Trade War Impact on Brazil—Direct and Indirect Risks
Brazilian Commodity Exports and Share of
Commodities in Total Exports  Brazil has not been a target of U.S. trade barriers, as bilateral trade has been
positive for the U.S. for more than a decade (USD 7.6 billion surplus in 2017).

 The (narrow) trade channel: it’s all about China. In our view, the biggest risk for
Brazil would be collateral damage, if the trade war leads to a slowdown in the
global economy and in Chinese growth.

 Slower Chinese growth could hurt commodity prices, which comprise ~60%
of Brazilian exports. In addition, it could have a spillover effect on Brazil’s
other trading partners. Brazil sends 41% of its exports to China or LatAm,
and many other LatAm countries are exporters and have strong trade ties
with China.

 The (broad) financial channel: the risk of a change in tides. A trade war would
Brazilian Exports: Main Destinations (%)
also affect international and local financing conditions. Considering this broader
scenario, we estimate that Brazilian GDP could be affected by 1.1 p.p. in 2019.
(Exercise was done when our economics team had a 3.0% GDP 2019E growth
estimates, as a matter of size impact.)
 Our Economics Team modeled the impact a 25% tariff imposed by the U.S.
and China on each other’s imports would have on the global and Brazilian
economy.

53
Sources: MDIC, IBGE, BCB, FGV, CPB, CBOT, CRB, Bloomberg, and Santander estimates
Risks to Monitor in Brazil:
Macro—Positioning in Global Risk Context
EM Vulnerability Scoreboard for 2018 (% of GDP) (1)  In terms of external vulnerability, Brazil is relatively well positioned.
The country’s vulnerability is more fiscal in nature, so we believe its
prospects depend on approving a major overhaul (including pension
reform, public expenditures, and wages and tax simplification) to
secure fiscal sustainability.

 Looking at our Economics Team’s vulnerability index heatmap, the

bigger LatAm EM economies (i.e., Brazil, Mexico, and Argentina) look
more prone to another sudden repricing considering the structural
nature of the risks involved. Indeed, the ability to service public
service debt amid political uncertainty remains center stage.
Emerging Markets —Current Account Balance and External Debt (2)

10.0%
Thailand
Current Account Balance, % of GDP

8.0%

6.0%
Saudi Arabia Korea
Russia
4.0%
Israel
Hungary
2018E

2.0% Malaysia
China
0.0%
Brazil Poland
-2.0% Mexico Chile
Indonesia South Africa
India Colombia
-4.0%
Argentina Turkey
-6.0%
10 20 30 40 50 60 70 80
4Q17 Total Foreign Currency Denominated Debt (Public + Private),
% of GDP

54
(1) Green indicates stronger fundamentals. Red shows weaker fundamentals. All data is % of GDP. Sources: IMF and Bloomberg. Estimates are 2018, except Reserves, which are 2017. (2) Sources: IIF, IMF, Santander.
Risks to Monitor in Brazil
LatAm Market and Commodities: Decoupling? Lower but Still High Correlation (0.63) with Commodities
(Mainly Metals)
MSCI World Metals & Mining Index vs. MSCI LatAm (In US$) (1)
MSCI LatAm Sectors Weightings in Index (1)
We did an analysis of LatAm relative to commodities in the last 5 and 15
years and found that the region has a declining, albeit still high,
correlation with the MSCI World Metals & Mining Index, while the
relationship with the CRB Index (which comprises a different set of other
commodities) is lower.
 MSCI LatAm has a 0.63 and 0.83 correlation with the MSCI World
Metals & Mining Index (and a 0.40 and 0.69 r-squared coefficient,
respectively) for the last 5 and 15 years, while the relation with the
CRB Commodities index is lower, with a 0.17 correlation (and 0.02 r-
squared).
 Brazil has a correlation of 0.56, with MSCI Metals & Mining (0.31 r-
squared) in the past five years.
 Mexico has a 0.49 correlation, with MSCI M&M (0.22 r-squared).
 Chile has a 0.47 correlation, with MSCI M&M (0.22 r-squared).
 Peru has a 0.66 correlation, with MSCI M&M (0.43 r-squared).
 Colombia has a 0.42 correlation, with MSCI Metals & Mining (0.17 r-
squared).
 Merval is the least correlated (0.41 correlation), with MSCI M&M (0.17
r-squared).

MSCI LatAm and Country Indexes Correlation with MSCI World Metals
& Mining Index and CRB Commodities Index—in the Past Five Years (1)
MSCI
Metals & MSCI Iboves SP
CRB Mining LatAm pa Mexbol IPSA Peru Colcap Merval
R-sqr 1.00 0.11 0.03 0.02 0.01 0.01 0.07 0.01 0.01
CRB
Correl 1.00 0.33 0.17 0.15 0.10 0.09 0.26 0.11 0.09
R-sqr 0.11 1.00 0.40 0.31 0.24 0.22 0.43 0.17 0.17
M&M
Correl 0.33 1.00 0.63 0.56 0.49 0.47 0.66 0.42 0.41

55
(1) Sources: Bloomberg and Santander estimates.
Risks to Monitor in Brazil
Commodities and Ibovespa EPS Decoupling: Downside Risk for EPS Revisions
Ahead?
Ibovespa EPS 12-Month Forward vs. Commodities CRB Index—  We did a preliminary assessment of how commodities’ high
3MMA YoY (1)
representation in the index may affect Ibovespa’s performance
and earnings revisions. Given the recent commodities price
(CRB) decrease of 7% in the past four months, we believe it
could potentially present some additional downside risk for
Ibovespa’s earnings revisions in the next few months.
 A look at Ibovespa EPS 12-month forward shows that it
moved in tandem with the Commodities CRB Index since
the start of the series in 2005, with a 0.60 correlation of
LTM YoY change between both metrics (and 0.72
correlation from 2005 to 2016).
Ibovespa Weightings—by Commodities and Non-Commodities(1)  We note that Ibovespa EPS has decoupled from the
Commodities CRB Index since 2017.
 Although commodities have decreased their representation
in the index to 32% currently (from the 56.5% peak weight
in mid-2009), we highlight that the weightings decoupling
started in 2011, whereas the decoupling of EPS and CRB
Commodities index occurred only in 2017, mostly given a
better outlook for an economic recovery and domestic
companies.

56
(1) Sources: Santander and Bloomberg.
Risks to Monitor in Brazil
Brazil CDS Increase May Pose Some Downside Risk in Case of Higher Movements
Sensitivity – CDS and
Ibovespa in US$  Brazil CDS 10Y recently reached ~208 points, -32% vs. 2018 average. We studied the relationship
between Ibovespa (in US$) and the Brazil 10Y CDS.
CDS IBOV (US$)
100 43,020
125 36,586  The inverse correlation of 78% and a 0.69 r-squared highlights the importance of monitoring both
150 32,049
Sensitivity Analysis

175 28,656
indicators.
200
225
26,008
23,876
 When plotting the current CDS of 208 points in our sensitivity, it would imply 1% downside for
250 22,118 Ibovespa in US$ at 25,278 (vs. the current 25,525 points).
275 20,639  In our sensitivity, considering a more negative scenario of CDS reaching 300 points, Ibovespa
300 19,375
would have 24% downside to 19,375 points in US$.
325 18,281
 In a positive scenario, if CDS reaches 150 points, it would imply 25% upside to Ibovespa at
Implied Current Expected

- 25,278 32,049 points in US$.

208 25,525  We acknowledge the nonlinear relationship and that Brazilian companies are expected to see a positive
earnings growth cycle in the next two years, with a 11% EPS CAGR for 2018E-2020E, along with lower-
-1%
than-historical long-term and monetary policy rates.

Ibovespa in US$ vs. CDS 10Y—Historical Ibovespa in US$ vs. CDS 10Y—Scatterplot

57

Sources: Santander and Bloomberg.

Other Themes to Be Monitored: BNDES Stake, Dividends Taxation and Import Tariffs
BNDES Stake in Listed Companies and Trading Days  The Brazilian economy is currently constrained in fiscal accounts, and
Potential Impact (1) the new government’s initial willingness to reduce state participation
Stake BNDS Stake Trading Days Stake BNDS Stake Trading Days in the economy could have some impacts that we believe should be
Company Ticker Company Ticker
(%) (R$ Million) Impact (%) (R$ Million) Impact monitored, e.g., Brazilian development bank BNDES could sell its
Copel CPLE3 26.4% 2,063 231.2 Klabin KLBN11 5.2% 862 15.3 stake in listed companies, and there is the potential for taxation of
Petrobras ON PETR3 10.0% 23,123 69.6
Eletrobras ON ELET3 19.9% 9,353 66.0
Copasa CSMG3 3.5% 295 7.9 dividends or interest on capital payments (Brazil is one of the few
Tupy TUPY3 28.2% 717 66.0 Engie Brasil EGIE3 1.0% 343 5.7 countries in the world in which dividends are exempt from taxation).
JBS JBSS3 21.3% 17,299 62.2 Iochpe Maxion MYPK3 2.0% 60 3.0
Marfrig MRFG3 33.7% 2,090 51.1 Gerdau PN GGBR4 2.2% 332 1.9  We also note that import tariffs could be lowered by the new
Cemig CMIG3 11.1% 870 33.7 Energisa ENGI11 0.4% 77 1.3 government in the context of a more liberal and open economy, which
Copel PN CPLE6 21.2% 1,356 33.2 MRV MRVE3 1.6% 126 1.1
Petrobras PN PETR4 19.1% 29,084 23.6 could affect sectors such as steel, automotive and apparel. Currently,
Cyrela CYRE3 1.3% 112 1.0
Suzano SUZB3 11.0% 5,059 20.1 the average Brazil import tariff is at 8.3% vs. 1.6% in the U.S.
CSN CSNA3 0.6% 127 0.9
Eletrobras PN ELET6 13.9% 1,652 17.6
Gerdau Met. PN GOAU4 0.2% 9 0.1
Embraer
Vale
EMBR3 5.4%
VALE3 6.1%
770
15,719
16.9
16.2
 In the top left table, we show BNDES’s current stake in listed
companies and the potential impact of a hypothetical unwinding of
positions in terms of trading days.
Impact on Market Cap Interest on Capital Tax Shield Perpetuated (2)

Value of Perpetuating IoC Tax Shield

 In the two tables below, we ran a sensitivity on the potential extinction
Sector IOC Tax Shield Market Cap Impact on Market
of interest on capital, which is a dividend payment recognized as a tax
Agribusiness 0 24,993 0.0% deductible expense for Brazilian-listed companies.
Impact on
Capital Goods 1,925 55,032 3.5% Impact on Market CapMarket
Company
Interest-on-Capital
Cap
Tax Shield Perpetuated (3)
Education 0 30,078 0.0% Impact on
Transmissao Paulista
Company 14.3%Cap
Impact
Market on Impact on
Financial Institutions - Banks 53,596 711,117 7.5% Company Market Cap
Valid
Company
Transmissao Paulista 13.2%
Market
14.3%Cap
Financial Institutions - Others 8,259 213,035 3.9% Ambev 6.9%
Telefonica Brasil
Transmissao
Valid Paulista 10.6%
14.3%
13.2%
Food & Beverage 18,875 361,040 5.2% Mahle Metal Leve 6.7%
Energias doBrasil
Valid
Telefonica Brasil 10.4%
13.2%
10.6%
Healthcare 500 21,678 2.3% Vale 6.4%
Tupy doBrasil
Telefonica
Energias Brasil 9.4%
10.6%
10.4% Copasa 6.3%
Homebuilding 0 23,557 0.0%
TAESA do Brasil
Energias
Tupy 9.3%
10.4%
9.4% Sabesp 6.2%
Income Properties 723 34,727 2.1%
TIM Participações
Tupy
TAESA 9.1%
9.4%
9.3% B3 5.7%
Mining 16,670 261,370 6.4% Copel 5.6%
Hypera
TAESA
TIM Participações 8.9%
9.3%
9.1%
Oil, Gas & Petrochemicals 9,088 454,139 2.0% Gerdau 8.5% Multiplan 5.2%
TIM Participações
Hypera 9.1%
8.9%
Pulp & Forest Products 2,103 80,610 2.6% Itaú Unibanco
Hypera 8.4%
8.9%
Fleury 5.1%
Gerdau 8.5%
Retail 7,538 259,044 2.9% Cesp 4.9%
Fras-le
Gerdau
Itaú Unibanco 8.3%
8.5%
8.4%
Steel 1,952 54,832 3.6% Banco do Brasil 4.8%
Marcopolo
Itaú Unibanco
Fras-le 8.1%
8.4%
8.3% CVC Corp. 4.5%
Telecom, Media & Technology 10,254 121,756 8.4% Bradesco
Fras-le
Marcopolo 8.1%
8.3%
8.1% Duratex 4.5%
Transportation 969 135,372 0.7% Banrisul
Marcopolo
Bradesco 7.9%
8.1% Romi 4.5%
Utilities 12,203 302,790 4.0% Porto Seguro
Bradesco
Banrisul 7.9%
8.1%
7.9% Engie Brasil 4.3%
Total 144,654 3,145,171 4.6% Banrisul
Porto Seguro 7.9%
Porto Seguro 7.9%
58
(1) Sources: BNDES, Bloomberg, and Santander. (2) Sources: Bloomberg and Santander estimates. (3) We considered only the perpetuation of interest on capital tax shield effect in B3’s market capitalization, but it could have higher
secondary impact given potential effect on listed companies’ market capitalization for B3. Sources: Bloomberg and Santander estimates
Risks to Monitor in Brazil
U.S. Treasuries Yield Curve Slope Historical Assessment
The Top-Down Investor—Santander Global Asset Allocation Summary
US—10y-2y Government Yield Curve Slope, 1961 to 2018  The last seven U.S. recessions have been preceded by the
slope of the U.S. yield curve (10y minus 2y) turning negative.

 The flattening of the slope of the yield curve below 50 bps, as

happened recently, has historically preceded U.S. recessions
only 41% of the time, anticipating the event by a median of 22
months.

 According to these metrics, a recession in the U.S. could

occur by early 2020, although we caution that the past is no
indicator of the future.

 The U.S. yield curve flattening process as the economic

cycle matures has been traditionally relatively positive for
equities vs. bonds, although the relationship was not as clear
during the 1970s and 1980s.

 We believe it is too early to make a call based on the shape of

the U.S. yield curve (and hence on the U.S. economic cycle) to
start reducing equity weights relative to bonds.
US – 10y-2y Government Yield Curve Slope and Equity/
Bonds Performance, 1989-2018 (1) US—10y-2y Yield Curve Slope and Time until Recession (1)

59
Sources: NBER, Bloomberg, Santander. (1) Bonds/ Equity = Total Return of a synthetic US 10y bond/ S&P 500 Total Return.
Risks to Monitor in Brazil
What If U.S. Treasury Rates Go Back to 3%? LatAm Markets Historical Performance (Slightly Negative)

 Following the recent rise in U.S. Treasury rates and increasing investor concerns about the Fed’s next monetary policy steps, we assessed how LatAm
equities performed when the U.S. 10Y rate reached 3% levels in an upward trend since 2010. We found that MSCI LatAm showed increased volatility,
with -10% and -14% maximum drawdown three and six months after Treasury rates reached 3%. But we also note that LatAm had a smoother average
performance of -1.3%, -0.6%, and -7% in the 3, 6, and 12 subsequent months, when Treasury rates climbed to 3% levels.
 Brazilian equities reacted comparatively worse than MSCI LatAm and Mexico, with -13.7% and -17.7% maximum drawdown three and six months
after U.S. Treasuries rates reached 3%. Average performance after 3, 6, and 12 months was -3.6%, -0.3%, and -6.4%.
 Mexico had relatively better performance than LatAm and Brazil, albeit still negative, with -9.1% and -11.0% maximum drawdown three and six
months after Treasury rates reached 3%. Average performance after 3, 6, and 12 months was +1.2%, +0.4%, and -3.0%.

MSCI LatAm, Ibovespa, and Mexbol Performance in US$ after US 10Y Rates Reached 3% Levels in an Upward Trend (1)

60
(1) Sources: Santander and Bloomberg.
Risks to Monitor in Brazil
What If U.S. Treasury Rates Go Back to 3%? LatAm Markets Historical Performance (Slightly Negative)
(continued)
US 10Y Rates vs. MSCI LatAm, Ibovespa and Mexbol in US$
MSCI LatAm—Maximum Drawdown in US$ after U.S. 10Y Rates
(100 Basis)—Green Lines Refer to Periods when U.S. Rates
Climbed to 3% (1)
Reached 3% Levels in an Upward Trend (1)

Date 1-Month After 3-Months After 6-Month After

Average: -5.3% -9.8% -13.6%
3-Dec-10 -3% -8% -10%
5-Sep-13 -4% -10% -19%
26-Dec-13 -9% -12% -12%

Ibovespa—Maximum Drawdown in US$ after U.S. 10Y Rates

Climbed to 3% (1)

Date 1-Month After 3-Months After 6-Month After

Average: -6.5% -13.7% -17.7%
3-Dec-10 -5% -10% -13%
Flows to LatAm (Three Months Accumulated; US$ Millions) vs. 5-Sep-13 -6% -18% -27%
Treasury 10Y Rates (2) 26-Dec-13 -9% -13% -13%

Mexico—Maximum Drawdown In US$ after U.S. 10Y Rates

Climbed to 3% (1)

Date 1-Month After 3-Months After 6-Month After

Average: -5.1% -9.1% -11.0%
3-Dec-10 -1% -6% -8%
5-Sep-13 -7% -9% -13%
26-Dec-13 -7% -13% -13%

61
(1) Sources: Santander and Bloomberg. (2) Sources: Santander, EPFR Global and Bloomberg.
Risks to Monitor in Brazil
Corporate Leverage: We Believe the Worst Is Over
Firm Value Composition and Net Debt/EBITDA LTM—Ibovespa
Index (R$, Bn) (1)
 IFRS16 Impact: Since 1Q19, Brazilian companies have started
reporting under the new accounting methodology of IFRS16,
which has generated distortions of different magnitudes in
companies’ net debt and EBITDA, making the results not
comparable to those of previous years.

 Net/Net: In 2Q19, consolidated net debt/EBITDA decreased to

1.9x vs. 2.2x in 1Q19 and the peak of 3.5x in 3Q15.

 Three sectors account for 68% of consolidated net debt

(Oil & Gas, Utilities and Pulp & Paper), but only 22% of the
Leverage of Ibovespa Sector (2) Ibovespa by weight.
Debt weight Net debt/ FV/
Weight in in Total Ibov EBITDA EBITDA
Sector
Oil, Gas & Petrochemicals
Ibovespa
14.8%
Debt (1)
48.6%
(1)
2.4x
(1)
5.4x
 Leverage: domestic or global phenomenon? The answer is
Utilities 5.4% 10.2% 2.3x 7.7x “global,” in our view. The corporate debt of nonfinancial
Pulp & Forest Products 1.9% 9.7% 4.9x 9.3x
Food & Beverage 9.3% 8.5% 1.5x 10.6x emerging market companies quadrupled between 2004 and
Mining 8.9% 6.2% 0.7x 4.6x
Steel 1.7% 5.9% 3.0x 7.3x 2014, reaching US$18 trillion. According to an IMF study
Transportation 5.8% 4.1% 2.5x 11.8x
Retail 8.1% 2.5% 1.4x 13.3x
(Global Financial Stability Report, October 2015), Brazil ranks
Telecom, Media & Technology 1.8% 1.4% 0.4x 4.5x
Education 0.9% 1.2% 2.8x 11.6x
fourth among those with the largest increases; China ranks first
Agribusiness 0.5% 1.2% 2.3x 7.2x (+32%).
Income Properties 1.2% 0.6% 1.3x 10.6x
Homebuilding 0.6% 0.4% 2.5x 16.6x
Capital Goods 0.0% 0.0% 0.1x 22.7x
Healthcare 1.9% 0.0% 0.0x 6.2x
Financial Institutions - Banks 28.5% 0.0% NA NA
Financial Institutions - Others 6.7% -0.5% -0.5x 15.0x

62
Note: last 12 months for EBITDA. (1): Sources: Economatica and Santander estimates. (2): (1) Last reported data as of 2Q19 financial statements. NA: Not applicable. Sources: Bloomberg, Economatica, company filings,
and Santander estimates.
Brazilian Equities in LatAm & Global Context:
Performance, Valuation, Earnings Growth/Trend and Long Interest Rates

EPS 12-m
Index Premium/
Current Earnings Earnings Generic 10Y Diff. Fwd 3 EPS
Performance Historical Discount
Country P/E 12-m Yield Yield Gap 10Y Avg. From EPS EPS months CAGR PEG
Last 3 Months P/E to
Fwd Gap (average) Rates Generic Hist. Avg. Growth Growth Revisions 2018- 2018-
US$ Historical
(%) 10Y (%) (p.p.) 2019E 2020E (Local) 20E 20E
World 2% 15.8 14.3 10.2% NA NA NA NA NA 8% 9% -0.2% 8% 2.16
EM -1% 12.2 11.3 7.8% NA NA NA NA NA -1% 11% -0.8% 5% 2.52
LatAm -3% 12.2 12.6 -3.1% 1.7% -1.0% NA NA NA 9% 12% -2.1% 10% 1.39
Argentina -42% 5.0 9.8 -48.5% NA NA NA NA NA -33% 24% 26.3% -9% -0.45
Brazil -2% 11.8 11.4 3.5% 1.2% -2.5% 7.3 11.5 -4.2 21% 13% 2.8% 17% 0.93
Chile -2% 13.5 15.8 -14.3% 4.6% 2.2% 2.8 4.4 -1.6 13% 9% 6.5% 11% 1.46
Colombia -1% 11.7 15.4 -24.2% 2.5% 0.0% 6.0 7.1 -1.0 -3% 12% 2.6% 4% 3.08
Mexico -1% 13.1 16.3 -19.2% 0.4% -0.5% 7.2 6.7 0.5 13% 13% 0.0% 13% 1.25
Peru -4% 12.9 12.0 7.9% 3.6% 3.7% 4.2 5.8 -1.6 0% 13% -0.4% 6% 2.24
US 2% 17.0 15.0 13.5% 4.1% 4.3% 1.8 2.5 -0.7 8% 10% 0.5% 9% 2.20
Europe 1% 13.5 12.0 12.2% 7.9% 7.2% -0.5 1.3 -1.8 22% 10% 0.1% 16% 1.12
Germany -1% 13.1 11.9 10.2% 8.1% 7.2% -0.5 1.3 -1.8 25% 13% -2.7% 19% 0.95
UK -2% 12.3 12.5 -1.5% 7.4% 6.1% 0.7 2.1 -1.4 14% 7% -0.7% 11% 1.38
France 0% 13.9 12.7 9.9% 7.4% 6.3% -0.18 1.8 -2.0 26% 11% 0.6% 18% 1.04
Japan 3% 15.6 16.8 -6.7% 6.5% 5.6% -0.2 0.6 -0.7 -3% 3% -2.1% 0% NA
China -1% 10.9 11.9 -8.4% 6.1% 5.4% 3.1 3.5 -0.4 13% 10% 0.7% 11% 1.14
Turkey 10% 5.9 8.8 -33.2% 1.4% 1.2% 15.5 10.5 5.0 3% 31% 3.6% 16% 0.46
South Africa -5% 12.7 13.4 -5.4% -1.0% -0.7% 8.9 8.4 0.6 0% 9% 5.5% 4% 3.04
India -10% 16.8 15.8 6.4% -0.8% -1.2% 6.7 7.7 -1.0 17% 13% 0.8% 15% 1.36
Russia 1% 6.0 6.2 -3.5% NA 8.9% 0.0 7.9 -7.9 -8% 6% 0.1% -2% -3.78
South Korea -4% 11.3 10.0 13.5% 7.3% 7.0% 1.5 3.2 -1.7 -14% 18% -2.1% 1% 14.26
Malaysia -4% 16.0 15.3 5.0% -1.0% -1.1% 7.3 7.7 -0.4 8% 7% -1.7% 7% 2.47
Indonesia 0% 13.9 14.3 -2.6% -0.1% -0.6% 7.3 7.7 -0.4 6% 13% 8.6% 9% 1.72
Taiwan 2% 15.4 14.0 10.4% 5.8% 6.0% 0.7 1.2 -0.5 0% 9% 0.8% 5% 3.46

63

NA: Not available. As of September, 2019. Sources: Bloomberg and Santander.

Appendix—Reforms For Speeding Up Growth And Increasing Potential

Main Measures Description Next Steps

• Second voting round in the House of Representatives on Aug. 06th.
Needs 308 of the 513 votes.
Estimated savings of around BRL 0.9 trillion in the ten years (improving the • Analysis of its constitutionality by a Senate comission.
Social security reform(PEC 06/2019)
primary balance in around 1.9 p.p. of GDP by 2027). • Two voting rounds in the Senate. Needs 49 of the 81 votes. Changes
made at this point must be sent to the House of Representatives.
• Expected to be approved in 2019.
Combat embezzlement of social
Expected savings of R$ 9.8 billion in 12 months • Presidential approval.
security benefits (MPV 871/19)
Merger of federal taxes (PIS/COFINS, IPI, CSLL and IOF) into the Federal Single • Legislation being prepared by the Government.
Tax reform
Tax. • Instrument: PEC and infra constitutional measures.
Reduction and streamlining of subsidies granted by the Government, which
Subsidies reduction • Instrument: Congressional approval.
amount to around 4.7% of GDP in the 2019 budget.

• Expand the Agreement for Economic Supplementation with Mexico are

The openness degree (exports plus imports over GDP) is targeted to increase
Trade liberalization underway.
from 22% to 30% of GDP in four years.
• Instrument: Government decrees and resolutions.

Central Bank Independence (Senate On April 11th, the Government sent to Congress a bill establishing formal • Congress approval.
PLP 19/19) independence to the Central Bank of Brazil. • Instrument: Supplementary Bill.

Fight corruption, criminal organizations

Changes to the Code of Criminal Procedure, Criminal Code, Criminal Law, • Proposal submitted to Congress on February 19th.
and violent crimes(PL-881/2019, PL-
Electoral Code, among others. • Instrument: 3 Infra constitutional.
882/2019 and PLP-38/2019)
Initiatives such as The Digital Citizenship Platform (access and provision of
digital public services); GovData (crossing and information analysis of the main • Broader digital integration, services provision, and database unification;
Digital Government
official databases); and ConectaGov (connection and exchange of information Changes in the legal framework; among others.
between government systems).
On April 11th, the Brazilian president enacted a fast track bill granting one
additional allowance per year for the 14 million households covered by • Interim order must be issued in Oct. 2019
Extreme poverty reduction
conditional cash transfers (Bolsa Família Program). There is no fiscal impact, • Reduction of bank´s compulsory rate from 33% to 31%.
due to the relocation of public expenditures.

64

Source: Ministry of Economy.

Appendix—Reforms For Speeding Up Growth And Increasing Potential
Main Measures
Employment
Emprega Mais: new workforce training Economic Freedom Bill: reduces red tape and Government intervention,
strategy.
Positive Credit Registry
Ombudsman for Direct Investments
National Tourism Policy
Public administration overhaul (Decree
9.725/19)
Restrictions to public banks
Fiscal sustainability of subnational
entities
Auction of Assignment Agreement
Privatization
Source: Ministry of Economy.
Description Next Steps
The registers of the unemployed were opened to private recruitment • New Work Booklet (Verde e Amarela) to ease access to the labor market.
companies, extending the use of the national employment system dataset. • Emprega Mais: new workforce training strategy.
• Simplifica: Set of 50 measures to reduce red tape to production.
• Brazil 4.0: Encourage companies' digitization and modernization.
facilitating the opening of new businesses. • Pró-mercado: regulatory changes to end barriers to market operation
and competition.
Law that includes individuals and companies in a database with information on
their credit track record, aiming at broadening and easing credit opportunities
for those with a good payment record.
Provide consultation for foreign investors about legislation or administrative
procedures related to investments in Brazil.
Decree 7.763/19: develop and promote the tourism segments related to the
World Cultural and Natural Heritage of Brazil, within the scope of the National
Tourism Policy.
21,000 commissioned positions eliminated.
Limitations for creating collegiates. Elimination of unnecessary collegiates.
Restrictions for hiring civil servants and rules for hiring senior officials.
Central Bank must approve the appointment of directors and administrators of
public financial institutions, in accordance to the technical criteria established • Congress approval.
by the National Monetary Council.
Federal support to states with some counterparts, such as fiscal adjustment
• Launch of the Financial Equilibrium Plan and elimination of the Federal
measures and opening of regional markets for gas distribution.
exclusivity to the Social Fund.
Sharing resources from the pre-salt with states and municipalities.
The auctioning of the surplus of around 5 to 6 billion barrels will result in a
• Auction scheduled for Nov. 6th, 2019
compensation for Petrobras of US$ 9.0 billion.
The sale of state-owned companies and Voluntary Dismissal Programs are
• On June 6th, 2019, the Supreme Court ruled that subsidiaries do not
under preparation. There are 134 companies owned by the Fed. Govt. (being 88
need Congress approval to be sold.
subsidiaries), with more than 450,000 employees.
65
Appendix—Investments, Concessions And Privatizations

52 PPI Projects Auctioned or Renewed

47 Ongoing PPI Projects

66

Source: Ministry of Economy.

Appendix – African Swine Fever (ASF) Spreading Across China: Brazil Impacts
Global Pork Consumption (2018)(1)
Brazil Beef Exports to China and Hong Kong (2)
Sources: (1) USDA and Santander. (2) Secex and Santander.
 Since August 2018, African swine fever (ASF) has been rapidly
spreading across China, having affected 30 provinces to date. The
damage has been so severe that some analysts believe it will affect the
world protein supply chain for years to come.
 The USDA estimates that total swine inventory will decline 18% in
2019, to 350 million heads, while others forecast a much worse
outcome, at ~30%. As such, we expect a demand shift in China to
other proteins, mainly poultry and beef, with the U.S. and Brazil as the
main suppliers.
 China’s rapid switch to other proteins is evident in increasing beef and
poultry imports from Brazil. In 2018, Brazil’s beef exports to China and
Hong Kong (“grey trade”) increased 31%, with these markets already
accounting for 44% of the country’s total beef exports.
 China’s 1.4 billion inhabitants’ increasing demand for meat (primarily
beef and poultry) has experienced robust growth. With the outbreaks of
ASF expected to spread in the next two years, we expect this demand
to increase, subsequently leading to higher global protein prices.
 We estimate that protein prices will begin to increase from 3Q19
onward, though we expect more of an effect on 2020 inflation.
 Strategy View: We are OW a Basket of Protein Stocks.
67
LatAm: Our Thesis and Key Conclusions
 Argentina (Overweight): Ex-Frontier market (Upgraded to EM), trading at 5.0x forward P/E. There is uncertainty regarding the binary presidential
elections on 27 October 2019. Focus on regulated sectors (e.g., Utilities) and USD-linked growth.
 Brazil (Overweight): Valuation is still supportive (12.2x P/E for 12-m Fwd, slight above historical and attractive 0.9x PEG), attractive EPS growth (2019-
21E CAGR of 12.5%), with flattish EPS revisions; economic activity expected to speed up following approval of pension reform.
 Chile (Underweight): Slowing economy, tougher bottom-up; new centrist government, with slowing economic momentum (activity +1.3% YoY in June
vs. 3% in December/2018); valuations cheap at 13.5x 12MF P/E but with lack of bottom-up opportunities.
 Colombia (Neutral): Attractive valuation of 11.7x P/E relative to historical average and a gradual (3.2% 2019E GDP) recovery. We struggle to find
positive short-term catalysts; with volatile oil prices and volatility in global markets, risk-appetite sentiment necessitates some caution investing in the
country.
 Mexico (Neutral): Focus on solid balance sheet and beneficiaries of higher rates, alongside USD exposure and without material regulatory risk, plus
selected consumption growth stories. Valuation 13.1x P/E (below six-year historical), with possible de-rating justified by lack of visibility of new
administration. Deteriorating macro, with downward revision to GDP (our forecast is 0.5% for 2019E vs. previous 1.0%).
 Peru (Overweight): Attractive long-term story (3.8% GDP, LatAm’s fastest). Focus on consumer recovery.
What Caught Our Attention:
 Earnings momentum: Region offers decent 2018-2020E EPS CAGR of 10%, backed by cyclical recovery and slight GDP acceleration of 2.2%, up
from 1.2% in 2019E.
 Valuation: Neutral/Fair when adjusted for growth (12MF P/E of 12.2x, with PEG at 1.4x), slightly above historical average of 12.6x. Argentina has the
lowest P/E at 5.0x, while Colombia has one of the largest historical discounts, 24%. LT tailwind remains: low market capitalization/GDP.
 Macro: Expect ongoing downward revisions to region’s 2019E GDP YoY due to Brazil, Mexico, and Argentina. We see easing monetary policy, more in
tandem with the U.S. Fed (four countries reducing rates in 2019E). Colombia and Peru may be the exceptions.
 Quality: 43 companies (19% of our coverage) passed our screening: (i) the ability to generate ROIC above WACC over a cycle; and (ii) market share
stability) vs. 32 in 2017. Mexico, with 14 companies, has better diffusion (29% of coverage).
 Flows: GEM Funds allocation in LatAm is flattish to 13% in June; Brazil & Mexico still slightly OW, as per latest released data.
One-Year Real Interest Rates vs. Market Capitalization/GDP PEG 2018-20E (LHS) and EPS CAGR 2018-20E

68
Note: Bubble size refers to market capitalization magnitude in US$. Sources: Bloomberg and World Bank. Source: Bloomberg. Top-down calculations based on LatAm historical data.
LatAm Countries Equity Strategy Snapshot: Top Picks by Region

69

Source: Santander estimates.

The Sweet Spot for Equities? Peru and Brazil at Accelerating GDP and Controlled
Inflation  The sweet spot for equities, in our view: Brazil
Investment Strategy—Clock Rate Hike has positive short-term quadrant
combinations for equities: accelerating GDP
Brazil “Overheating”
“Recovery” coupled with controlled inflation, favorable to
Peru real EPS growth (see our investment clock).

 We expect marginal GDP acceleration of

Economic Growth Trend

80 bps for Brazil (1.6% for 2020 vs. 0.8%

Equity Commodities in 2019E). Peru and Colombia continue
Colombia with high GDP growth pace of 3.0% and
Cyclical Growth Cyclical Value
3.1% for 2020E, respectively.

 Mexico’s downward activity trend

Argentina continues to be monitored, while
Argentina still lags with lower GDP and
Bonds Cash high inflation.

Defensive Cyclical Mexico

Chile Growth
Growth
“Stagflation”
“Reflation”
LatAm Comparison: Delta GDP and Inflation Trend Quadrant

Rate Cut
Inflation Trend
GDP Inflation Interest Rate
2018 2019E 2020E 2018 2019E 2020E 2018 2019E 2020E
Argentina -2.5% -2.2% 0.2% 34.9% 51.5% 37.0% 59.3% 42.5% 29.0%

Brazil 1.1% 0.8% 1.6% 3.7% 3.3% 3.5% 6.5% 4.5% 4.5%
Chile 4.0% 2.5% 3.0% 2.4% 2.3% 2.9% 2.8% 2.1% 2.0%

Colombia 2.7% 3.1% 3.0% 3.2% 3.4% 3.3% 4.3% 4.3% 4.2%

Mexico 2.0% 0.5% 1.5% 4.9% 3.8% 3.5% 8.3% 7.6% 7.0%
Peru 4.0% 3.0% 3.5% 1.3% 2.3% 2.4% 2.8% 2.8% 3.1%

70

Source: Santander estimates.

Secular Drivers – Population Dynamics: Long-Term Bonus Remains Intact
LatAm Countries Population – Ages 15-64 Last 15 Years
CAGR (x axis) and Total Population Next 7 Years CAGR
Estimate (y axis) Population YoY Growth Rate

Source: World Bank.

LatAm Countries Population Dynamics
Next 7 Years
Inhabitants
15 Years CAGR CAGR % of Total Population (1)
(Mln)
Estimate

ages 15- Total Total ages 15- ages Total

Country ages 0-14 64 ages >65 Population Population ages 0-14 64 >65 Population
Argentina 0.4% 1.3% 1.7% 1.1% 1.1% 25% 64% 11% 43
Brazil -0.5% 1.5% 4.1% 1.1% 0.7% 24% 69% 8% 206
Chile -0.7% 1.5% 3.5% 1.1% 1.1% 20% 69% 11% 18
Colombia -0.5% 1.7% 3.8% 1.2% 1.1% 25% 69% 7% 48
Mexico 0.0% 2.0% 3.1% 1.4% 1.2% 28% 66% 6% 125
Peru -0.1% 1.8% 3.6% 1.3% 1.5% 28% 65% 7% 31

71
Sources for all charts: World Bank and IMF forecasts.
Secular Drivers – Latin America Has Changed Structurally in the Last 25 Years

72
Source: Santander CEO Presentation, Cancun, 14 January 2016.
LatAm Monitor Indicators
MSCI PERFORMANCE (US$) 10 Year Rates (%)
Index P/E 2019E Current 1 Week % MTD 30 Days % LTM %YTD LatAm Current 31-Aug 31-Jul 30-Jun 31-May 30-Apr
MSCI Argentina 7.1 1,366 6.9% 7.1% -7.0% -40.8% -33.5% Argentina NA NA NA NA NA NA
MSCI Brazil 13.7 2,112 -2.1% 2.9% 2.3% 27.7% 8.6% Brazil 7.17 7.43 7.23 7.45 8.45 8.98
MSCI Chile 14.7 1,455 0.1% 6.1% 5.4% -18.0% -9.0% Chile 2.78 2.68 2.87 3.35 3.72 4.16
MSCI Colombia 11.6 642 0.6% 4.2% 4.6% -1.7% 16.9% Colombia 6.00 6.06 5.97 6.14 6.64 6.84
MSCI Mexico 14.7 4,595 1.5% 4.4% 11.0% -15.3% 4.3% Mexico 7.10 6.99 7.52 7.59 8.02 8.10
MSCI Peru 14.4 1,616 -0.9% 2.4% 4.1% -6.7% -2.7% Peru 4.20 4.17 4.40 4.72 5.05 5.15
MSCI World
(1)
16.8 2,205 -0.1% 3.1% 4.0% 0.4% 17.0% World
MSCI EM 13.1 1,017 -1.0% 3.3% 3.7% -2.0% 5.3% United States 1.79 1.50 2.01 2.01 2.12 2.50
MSCI LatAm 13.7 2,694 -0.9% 3.6% 4.3% 7.3% 5.0% Germany -0.51 -0.70 -0.44 -0.33 -0.20 0.01
MSCI Asia 14.4 508.8 -1.3% 2.9% 2.7% -2.7% 6.6% United Kingdom 0.65 0.48 0.61 0.83 0.89 1.19
MSCI EMEA NA 253 0.1% 4.0% 5.0% 2.8% 5.4% Japan -0.21 -0.27 -0.15 -0.16 -0.09 -0.04
MSCI ACWI 16.3 527 -0.2% 3.1% 4.0% 0.1% 15.6% India 6.79 6.56 6.37 6.88 7.03 7.41
S&P 18.3 3,007 -0.1% 2.7% 3.7% 2.6% 19.9%
NASDAQ 24.7 8,183 -0.1% 2.8% 2.9% 1.9% 23.3%
Note: (1) Developed

LOCAL MARKETS INDEX PERFORMANCE (LC) COMMODITY PERFORMANCE

Index P/E 2019E Current 1 Week % MTD 30 Days % LTM %YTD Index/Commodity Current 1 Week % MTD 30 Days % LTM %YTD
Argentina (Merval) 5.9 30,414 4.5% 23.6% 11.7% -11.9% 0.4% Commodity Indices
Brazil (IBOV) 13.6 104,339 0.0% 3.2% 5.2% 33.6% 18.7% CRB Index 178 2.1% 4.7% 4.4% -7.4% 5.1%
Chile (IPSA) 14.3 5,073 3.9% 5.6% 5.7% -5.3% -0.6% Metals Unit
Colombia (COLCAP) 12.8 1,594 0.4% 2.2% 2.9% 7.3% 20.2% Aluminum USD/MT 1,777 0.3% 3.0% 0.8% -10.8% -4.6%
Mexico (MEXBOL) 14.3 43,017 0.6% 0.9% 8.4% -13.1% 3.3% Copper USD/MT 5,759 -1.4% 1.4% 0.1% -4.9% -3.5%
Peru (S&P/BVL) 14.2 19,491 0.4% 2.0% 2.1% 0.0% 0.7% Gold USD/OZ 1,501 0.8% -1.3% -0.4% 24.3% 17.0%
Nickel USD/MT 17,430 -4.0% -3.2% 9.3% 40.3% 64.4%
Iron Ore USD/MT 95.8 2.2% 9.2% 3.4% 49.1% 35.8%
Oil
CURRENCY PERFORMANCE Brent Crude USD/bbl 65 7.7% 7.3% 8.0% -17.6% 20.5%
Currency Current 1 Week % MTD 30 Days % LTM %YTD West Texas USD/bbl 59 7.1% 6.6% 4.2% -17.1% 29.3%
Argentina (ARS) 56.57 -0.8% 5.2% -3.1% -30.5% -33.4% Crops/Grains
Brazil (BRL) 4.17 -2.0% -0.5% -2.7% -2.2% -6.9% Coffee USD/lb 99 -0.5% 5.8% 8.3% -0.8% -2.8%
Chile (CLP) 717 -1.3% 0.7% -0.8% -6.6% -3.1% Corn USD/bu 372 4.5% 3.8% 3.3% 5.4% -0.9%
Colombia (COP) 3,385 -0.6% 1.7% 1.5% -10.5% -3.9% Cotton USD/lb 60.8 -2.5% 3.3% 2.7% -20.1% -17.1%
Mexico (MXN) 19.46 -0.3% 3.1% 1.6% -3.2% 1.0% Soybeans USD/bu 890 0.6% 3.9% 4.0% 4.7% 0.8%
Peru (PEN) 3.36 -0.9% 1.1% 0.9% -1.5% 0.4% Wheat USD/bu 488 0.5% 8.2% 6.1% -6.8% -3.0%
Sources: Bloomberg and Santander estimates.

73

NA: Not available. Sources: Bloomberg and Santander.

Companies Mentioned
Current Current
Company Ticker Inv Code Target Price Company Ticker Inv Code Target Price
Price Price
Alliar AALR3 Hold 19.1 14.5 Cyrela Brazil Realty CYRE3 Buy 23.4 23.4
Alupar ALUP11 Buy 26.0 26.6 Direcional Engenharia DIRR3 Buy 12.9 9.2
Ambev ABEV3 Hold 19.4 21.0 Duratex DTEX3 Buy 12.9 17.0
Anima Educação ANIM3 Buy 21.0 24.0 Ecorodovias ECOR3 Buy 13.4 16.6
Arezzo ARZZ3 Hold 49.8 56.0 Eletrobras ELET6 Hold 44.7 29.2
Azul AZUL4 Buy 49.3 73.0 Eletrobras ELET3 Hold 42.6 25.9
B2W Digital BTOW3 Buy 47.5 45.0 Eletropaulo ELPL3 Not Rated 48.6 NR
B3 B3SA3 Hold 44.6 29.0 Embraer EMBR3 Hold 19.5 22.5
Banco do Brasil BBAS3 Buy 46.8 65.0 Enauta Participacoes ENAT3 Hold 12.0 11.9
Banrisul BRSR6 Buy 24.3 33.0 Energias do Brasil ENBR3 Buy 19.6 19.5
BB Seguridade BBSE3 Buy 34.4 38.0 Energisa ENGI11 Buy 50.6 45.9
BR Properties BRPR3 Underperform 11.1 8.7 Eneva ENEV3 Buy 28.0 21.1
Bradesco BBDC4 Buy 33.6 45.0 Engie Brasil EGIE3 Hold 45.2 35.7
Braskem BRKM5 Hold 30.8 38.0 Equatorial EQTL3 Buy 102.2 88.1
BR Distribuidora BRDT3 Buy 26.9 33.0 Even EVEN3 Buy 10.6 10.7
BRF BRFS3 Buy 37.7 47.0 EZTec EZTC3 Buy 39.1 33.8
brMalls BRML3 Buy 14.3 16.3 Fleury FLRY3 Hold 24.5 25.0
Burger King Brasil BKBR3 Buy 19.6 25.0 Fras-le FRAS3 Buy 4.6 6.5
Camil CAML3 Not Rated 6.9 NR Gafisa GFSA3 Underperform 6.4 15.0
Carrefour Brasil CRFB3 Hold 22.0 25.0 Gerdau GGBR4 Buy 13.4 19.2
CBD PCAR4 Buy 83.8 132.0 Gol GOLL4 Buy 34.1 50.0
CCR CCRO3 Buy 17.3 17.4 Hypera HYPE3 Buy 33.2 37.0
Cemig CMIG4 Buy 14.4 15.2 Iguatemi IGTA3 Buy 47.5 50.0
Cesp CESP6 Buy 28.7 34.5 Iochpe Maxion MYPK3 Buy 19.4 32.0
Cia Hering HGTX3 Underperform 33.7 24.0 IRB IRBR3 Buy 112.1 88.0
Cielo CIEL3 Underperform 8.5 8.0 Itaú Unibanco ITUB4 Buy 34.7 47.0
Comgas CGAS5 Hold 89.8 61.6 Itausa ITSA4 Buy 13.1 16.2
Copasa CSMG3 Buy 68.1 64.8 JBS JBSS3 Buy 29.6 35.0
Copel CPLE6 Hold 52.2 37.1 JSL JSLG3 Hold 18.1 7.1
Cosan Energia CSAN3 Hold 54.0 40.0 Klabin KLBN11 Hold 15.6 19.0
CPFL Energia CPFE3 Buy 33.2 40.4 Kroton KROT3 Hold 11.3 12.0
CSN CSNA3 Buy 14.2 18.0 Linx LINX3 Not Rated 34.0 NR
CVC Corp. CVCB3 Buy 54.0 67.0 Localiza RENT3 Buy 45.9 38.6

74
Prices as of 20 September 2019. Sources: Santander estimates and Bloomberg.
Companies Mentioned
Current Current
Company Ticker Inv Code Target Price Company Ticker Inv Code Target Price
Price Price
Lojas Americanas LAME4 Buy 19.7 25.0 Transmissao Paulista TRPL4 Hold 25.3 19.0
Lojas Renner LREN3 Buy 50.7 46.0 Tupy TUPY3 Buy 17.8 26.0
Magazine Luiza MGLU3 Hold 35.8 22.4 Ultrapar UGPA3 Hold 18.3 19.0
Mahle Metal Leve LEVE3 Buy 24.4 34.0 Unidas LCAM3 Buy 53.8 45.4
Marcopolo POMO4 Hold 3.4 5.0 Usiminas USIM5 Hold 8.3 9.4
Marfrig MRFG3 Hold 10.5 12.0 Vale VALE3 Buy 48.3 67.7
MRV Engenharia MRVE3 Buy 18.3 18.4 Valid VLID3 Buy 13.1 26.0
Multiplan MULT3 Buy 28.2 30.0 Via Varejo VVAR3 Buy 7.4 6.0
Natura NATU3 Hold 36.6 48.0 WEG WEGE3 Underperform 23.7 19.5
OdontoPrev ODPV3 Buy 16.3 16.5 YDUQS Part YDUQ3 Buy 35.1 31.0
OI OIBR3 Not Rated 1.1 NR Alicorp ALICORC1 PE Buy 9.9 14.0
Petro Rio PRIO3 Underperform 18.1 9.6 Alsea ALSEA* MM Buy 40.9 51.0
Petrobras PETR3 Buy 30.2 39.0 Arca Continental AC* MM Buy 104.9 132.0
Porto Seguro PSSA3 Hold 58.3 61.0 BanBajio BBAJIOO MM Buy 35.0 47.0
Qualicorp QUAL3 Buy 28.3 22.0 Banco de Chile BCH US Buy 103.3 120.0
Randon RAPT4 Buy 9.9 11.5 CCU CCU US Hold 9,568.0 10,400.0
RD RADL3 Underperform 93.1 74.0 Cementos Pacasmayo CPAC US Buy 8.6 11.1
Restoque LLIS3 Buy 21.7 37.0 CMPC CMPC CI Buy 1,655.0 2,620.0
Romi ROMI3 Buy 13.5 12.0 Concha y Toro CONCHA CI Buy 1,370.0 1,600.0
Rumo Logistica RAIL3 Buy 23.5 22.5 Davivienda PFDAVVND CB Hold 41,020.0 44,000.0
Sabesp SBSP3 Buy 50.8 37.3 Gruma GRUMAB MM Buy 177.3 260.0
Santos Brasil STBP3 Underperform 6.5 3.9 GCC GCC* Mm Buy 100.7 135.0
São Martinho SMTO3 Hold 19.6 21.2 Grupo Supervielle SUPV US Buy 7.3 10.6
Ser Educacional SEER3 Buy 23.5 26.0 IFS IFS PE Buy 39.9 50.0
Smiles SMLS3 Buy 39.1 66.0 Nutresa NUTRESA CB Buy 25,280.0 29,000.0
Sul America SULA11 Buy 45.9 30.0 Pampa Energia PAM US Buy 32.2 49.0
Suzano SUZB3 Buy 33.0 40.0 Transener TRAN AR Buy 45.7 79.8
TAESA TAEE11 Hold 29.4 25.3 TGS TGS US Buy 14.8 19.8
Tegma TGMA3 Buy 30.7 32.0 Vesta VESTA* MM Buy 29.8 37.0
Telefonica Brasil VIVT4 Not Rated 54.2 NR YPF YPF US Buy 15.7 23.0
Tenda TEND3 Buy 26.1 34.7
TIM Participações TIMP3 Not Rated 11.9 NR
Totvs TOTS3 Not Rated 55.6 NR

75
Prices as of 20 September 2019. Sources: Santander estimates and Bloomberg.
Valuation & Risks

Alliar – Valuation & Risks

Our target price is based on a DCF analysis, assuming a WACC of 11.5% and a 5.5% nominal
perpetuity growth rate (in Brazilian reais).
Risks include: M&A execution risk; stiffer competition; dependence on healthcare plan operators.
Alupar – Valuation & Risks
Our target price is based on a DCF valuation using an average WACC of 9.38% and no
perpetual growth. Risks include: (1) regulatory risk; (2) execution risk for greenfield projects.
Ambev – Valuation & Risks
Our target price is based on a DCF analysis for which we consider a WACC of 10.1% and a
perpetuity growth rate of 5.0%. Main risks include changes to taxation of alcoholic beverages,
increasing competition from multinationals and micro-brewers, changes to consumption patterns
and overall macroeconomic conditions.
Anima Educação – Valuation & Risks
Our target price is based on our DCF model, and implies a WACC of 13% in reais and a
perpetuity growth rate of 5%.
Main risks include regulatory risk, competitive environment, dependence on positive
macroeconomics, execution and acquisition risks.
Arezzo – Valuation & Risks
Our target price is based on a DCF analysis for which we consider a WACC of 10.6% and a
perpetuity growth rate of 4.5%. Main risks include: (1) stronger than expected economic
slowdown, (2) competitive environment, (3) delayed store opening, (5) lower profitability with new
brands, and (6) delayed breakeven in the US operation.
Azul – Valuation & Risks
Our target price for Azul implies a 2020E FV/EBITDAR multiple of ~7.3x.
Risks include: stronger than expected competition; higher than expected volatility in jet fuel
prices; unfavorable macroeconomic scenario; implementation of new aircrafts; and government
influence.

76
Valuation & Risks (continued)
B2W Digital – Valuation & Risks
Our target price is based on a blended 50/50 DCF and multiples valuation analysis, on the back
of the company’s transitioning process to a marketplace focused business. Our DCF uses a
WACC of 10.9% and a perpetuity growth rate of 4.75%, whereas our multiple analysis uses a
target P/Sales of 0.7x for the 1P operation and a target of 1x P/GMV for the 3P operation. Main
risks to the case include (1) Lower marketplace growth and its contribution to P&L; (2) Further
deterioration of macroeconomic indicators in the country; (3) Increased competition and
aggressive pricing policy from some players in the market; (4) Higher than expected capex needs
in the following years; (5) Additional capital needs, driving to another equity capitalization; (6) Still
very limited visibility regarding B2W’s bottom-line figures.
B3 – Valuation & Risks
Our valuation is based on a two-stage DDM. Risks to the company include trading volume being
significantly different than our estimates, competition from foreign exchanges and other trading
platforms, as well as regulatory and pricing policy.
Banco do Brasil – Valuation & Risks
We valued the bank with a three-stage valuation model based on residual income approach, with
a terminal cost of equity of 13.0%. In the first stage, we considered the explicit modeling of the
next three years, and for the second stage, we evaluate until year seven using an ROAE of 14%
with a dividend payout of 40%. Lastly, the final stage is based on terminal growth rate of 6.0% for
a perpetual ROE of 17.0%.
Upside risks include: (i) Potential sale of assets that present lower ROAs; (ii) dividend payout
ratio returning to 40%. Downside risks include: (i) higher than expected NPLs from potential
weakening of the Brazilian economy given the current high household leverage ratios in the
country; (ii) governance risk derived from its public sector ownership and control; (iii) high
exposure to volatile weather and commodity prices affecting its agricultural loan book along with
its insurance operations through its subsidiary (BB Seguridade).
Banrisul – Valuation & Risks
We valued the bank with a three-stage valuation model based on residual income approach, with
a terminal cost of equity of 13.4%. In the first stage, we considered the explicit modeling of the
next three years, and for the second stage, we evaluate until year seven using an ROAE of 16%
with a dividend payout of 40%. Lastly, the final stage is based on terminal growth rate of 6.0% for
a perpetual ROE of 18.0%.
The main risks to our investment thesis are: (i) lower than expected loan growth due to a weaker
than expected economic recovery; (ii) higher than expected NPLs in the individual segment
stemming from: high household indebtedness in Brazil, and/or government further payments
arrears to public employees; (iii) regulatory risk of lower lending rates and spreads due to
government intervention in the industry; and (iv) risks inherent to investing in preferred shares
with no-voting rights.

77
Valuation & Risks (continued)
BB Seguridade – Valuation & Risks
We valued the company using a SOTP - sum of the parts valuation model, combining each one of
the main companies which integrate BB Seguridade: SH1, SH2, BrasilPrev, Brasilcap, BB
Corretora and IRB. For the valuation of each one of these companies, we use a DDM-dividend
discount model with three stages.
Main risks are related to regulatory and political issues. We also note the Banco do Brasil-BB
Corretora contract renegotiation risk, as well as risk to our growth estimates and Solvency II
requirements.
BR Properties – Valuation & Risks
Our target price was derived from a free cash flow to the firm analysis, using a WACC of 10.4% in
reais and a nominal terminal growth of 4.5%.
Risks include: (1) Further increase in vacancy rates, which could reduce rental revenues and
increase vacancy expenses; (2) Lower than expected leasing spreads, driving rental revenue
downwards and pressuring margins; (3) Sale or acquisition of assets at subpar valuation levels;
(4) Slower than expected recovery in economic activity; and (5) Significant depreciation of local
currency, impacting the market value of its US dollar denominated perpetual bond and
consequently its leverage.
Bradesco – Valuation & Risks
We valued the bank with a three-stage valuation model based on residual income approach, with
a terminal cost of equity of 12.4%. In the first stage, we considered the explicit modeling of the
next three years, and for the second stage, we evaluate until year seven using an ROAE of 20%
with a dividend payout of 35%. Lastly, the final stage is based on terminal growth rate of 6.0% for
a perpetual ROE of 19.0%.
Risks include regulatory risks, risk of lower lending rates and spreads due to ongoing government
intervention in the industry, macroeconomic risks related to commodity prices and country risk.
Risk of lower than expected loan growth due to a weaker than expected economic recovery as
well as risks of higher than expected NPLs from high household indebtedness in Brazil. Also,
there are risks inherent to investing in preferred shares with no-voting rights.
Braskem – Valuation & Risks
Our target price is based on a DCF valuation. Risks include a sharp and sustained drop in
chemical prices, a significant and long-lasting increase in oil/naphtha prices, and the appreciation
of the Brazilian real.
BR Distribuidora – Valuation & Risks
Our target price is based on a DCF valuation using a nominal WACC of 8.4%. Main risks include:
(i) unexpected drop in fuel consumption; (ii) slower than expected execution of operating
improvements; and (iii) lackluster GDP growth.

78
Valuation & Risks (continued)
BRF – Valuation & Risks
Our target price is based on a DCF analysis for which we consider a WACC of 10.4% and a
perpetuity real growth rate of 0.5%. Main risks include: The main risk factors to our constructive
scenario are: (i) stricter access and intensified competition when exporting protein to some of the
main import markets, (ii) a high indebtedness level, and (iii) potential disruptions to operations
while the new management restructures the business.
brMalls – Valuation & Risks
Our target price based on a free cash flow to firm analysis, using a WACC of 10.8% in reais, and
nominal terminal growth of 4.8%.
Risks include (1) Competition increase in oversupplied regions, (2) delayed recovery in retail
leading to an increase in vacancy rates and delayed payments from tenants, (3) capex overruns,
and (4) overpaying for acquisitions or selling assets at a discounted valuation.
Burger King Brasil – Valuation & Risks
Our target price is based on a DCF analysis for which we consider a WACC of 11.0% and a
deflated perpetuity growth rate of 0.5%. Main risks include lower than expected dynamism of the
Brazilian economy and potential deterioration in the competitive environment.
Carrefour Brasil – Valuation & Risks
Our target price is based on a DCF analysis for which we consider a WACC of 9.5% and a
perpetuity growth rate of 4.5%. Main risks are: (1) further deterioration in macro indicators,
especially in food inflation, (2) margin deterioration in the retail unit with no SSS rebound, (3)
fiercer competition in the cash & carry business.
CBD – Valuation & Risks
Our target price is based on DCF analysis that includes Exito (assumes a 80% acceptance in
CBD's tender offer), with a blended WACC of 9.9% and a blended perpetuity growth rate of 4.0%.
Main risks are: (1) further deterioration in macro indicators, especially food inflation, (2) a delayed
recovery in the Multivarejo unit, especially in the Extra brand, (3) addition of Exito affecting capital
allocation of CBD in Brazil (4) fiercer competition in the cash & carry business.
CCR – Valuation & Risks
Our target price for CCR is based on a target real IRR grounded on the historical IRR spread of
the companies vs. the NTN-B (risk-free inflation-linked bond).
Risks include unexpected deceleration in Brazilian economic activity, leading to a slowdown in
traffic volume in general, adverse government interference in the sector, stepped-up competition
and lower returns on new projects.

79
Valuation & Risks (continued)

Cemig – Valuation & Risks

Our target price is based on a DCF valuation using a WACC of 10.6%. Risks include (1) lower
than expected generation prices, (2) additional capex in projects under construction, and (3)
concession renewal terms for old concessions.
Cesp – Valuation & Risks
Our target price is based on a DCF valuation using a cost of equity of 12.4% and no perpetuity.
Risks include (1) concession renewal risks, (2) risk of indemnification lower than expected, (3)
earnings volatility due to US$-denominated debt, and (4) provisions off-balance-sheet.
Cia Hering – Valuation & Risks
Our target price is based on a DCF analysis for which we consider a WACC of 13.2% and a
perpetuity growth rate of 4.5%. Main risks include (1) declining profitability in the franchise
network, (2) misses in product collections, (3) elimination of current tax incentives, (4) economic
slowdown, and (5) increased competition from local and foreign players.
Cielo – Valuation & Risks
Our valuation is based on a two-stage DCF model, with a Gordon Growth Model at perpetuity.
Risks are mainly related to ongoing regulatory and legislative initiatives that could affect the
profitability of the industry, stronger competition from new entrants and/or existing competitors,
and the execution risk related to its prepayment business.
Comgas – Valuation & Risks
Our target price is based on a DCF valuation using a WACC of 10.3% and growth in perpetuity of
4.5%. Main risks include worse regulatory parameters for upcoming revision cycles, lower growth
in gas demand, natural gas supply shortages and changes in gas market.
Copasa – Valuation & Risks
Our price target is based on a 10-year DCF model. We assumed a WACC of 10.9%. Risks
include uncertainty on tariff revision, provisions, lower volume curve, political interference and
potential changes in sector regulation.
Copel – Valuation & Risks
Our target price is based on a DCF valuation using a WACC of 10.8% and perpetual growth rate
of 4% per year. Risks include (1) lower than expected generation prices; and (2) investment in
new ventures at lower than expected return.

80
Valuation & Risks (continued)
Cosan Energia – Valuation & Risks
Our target price is based on the SOTP of the company.
Main risks include: (1) declining sugar and ethanol prices; (2) capital discipline; and (3) price war
in fuel distribution business.
CPFL Energia – Valuation & Risks
Our price target is based on a DCF valuation using a WACC of 8.4% and perpetual growth rate of
4.0%. Risks include: (1) corporate governance; (2) lower GDP driving energy consumption down;
(3) overpayment in potential M&A opportunities; and (4) change in regulatory parameters.
CSN – Valuation & Risks
Our price target is based on a DCF analysis using a WACC of 11.6% and a 3.5% nominal growth
rate in perpetuity.
Main risks include: (i) lower than expected iron ore and steel prices, (ii) drop in domestic steel
demand, and (iii) high leverage for longer period.
CVC Corp. – Valuation & Risks
Our target price is based on a DCF analysis for which we consider a WACC of 10.1% and a
perpetuity growth rate of 4.5%. Main risks include: (1) delayed recovery in the economy, (2) FX
volatility and limited credit availability, (3) tougher competition coming from players entering the
franchise model and from pure OTC players, (4) store expansion may require new operators that
do not necessarily share the same culture, (5) new stores could be less productive versus the
current base, (6) significant changes in the suppliers' dynamics.
Cyrela Brazil Realty – Valuation & Risks
Our target price is based on a FCFF analysis, using a WACC of 12.6% in reais and nominal
terminal growth rate of 3.8%.
Risks include: (1) macroeconomic risks, (2) suboptimal capital allocation, (3) substantial increase
in sales cancellations, (4) working capital management, and (5) rising inventory levels in
challenging regions, especially finished units.
Direcional Engenharia – Valuation & Risks
Our target is based on a FCFF analysis, using a WACC of 13.6% in reais and nominal terminal
growth rate of 4.0%.
Risks include: (1) working capital management and profitability, (2) execution during the migration
towards the Group 2 and 3 of the MCMV program, (3) unexpected losses or delays in payments
from the government regarding the Group 1 projects of the MCMV program, and (4)
macroeconomic risks.

81
Valuation & Risks (continued)
Duratex – Valuation & Risks
Our price target is based on a DCF analysis using a WACC of 12.9% and a 6.0% nominal growth
rate in perpetuity.
Main risks include slower than expected growth in domestic economic activity, stiffer competition,
cost pressures and overpayment for acquisitions.
Ecorodovias – Valuation & Risks
Our target price for Ecorodovias is based on a target real IRR grounded on the historical IRR
spread of the companies vs. the NTN-B (risk-free inflation-linked bond).
Risks include: A macroeconomic downturn, leading to a slowdown in traffic volume in general,
stepped-up competition, adverse government interference in the highways concession sector,
and lower returns on new projects.
Eletrobras – Valuation & Risks
Our target price is an average of a DCF valuation and a SOTP valuation for each of Eletrobras’s
subsidiaries. Risks include: (1) Concession renewal; (2) Political interference; (3) problems in the
privatization.
Embraer – Valuation & Risks
Our target price for Embraer is based on a DCF valuation where we have discounted our
estimated cash flow for the airline by a WACC of 8.7% (in U.S. dollars). Risks include higher than
expected competition; downturn in the global economic activity; appreciation of the BRL; delays in
the development of the E2.
Enauta – Valuation & Risks
Our target price is based on a DCF valuation. Main risks include: (i) declining oil prices; (ii) capital
discipline; and (iii) exploratory and production execution risks.

Energias do Brasil – Valuation & Risks

Our target price is based on a DCF model using a nominal WACC of 10.3% and perpetuity
growth of 4.5%. Risks include overbidding for projects, delays/higher than expected project capex
or distribution losses, and weak industrial activity.
Energisa – Valuation & Risks
Our target price is based on a DCF model using a nominal WACC of 9.7% and terminal value
equivalent to 50% of RAB and 50% perpetuity growth of 4.5%. Risks include (1) lower GDP
driving energy consumption downward; (2) worse than expected tariff review parameters; (3) new
acquisitions; and (4) slower than expected improvements in the units acquired from Rede Group.

82
Valuation & Risks (continued)
Eneva – Valuation & Risks
Our target price is based on a DCF valuation using a WACC of 10.0% nominal terms in BRL.
Main risks include lower than expected gas supply and, consequently, electric generation;
engineering; greenfield projects; procurement and construction (EPC) risk; funding, and financing
costs.
Engie Brasil – Valuation & Risks
Our target price is based on a DCF valuation using a WACC of 9.2% nominal in R$. Risks include
lower than expected generation prices, losses in electricity trading, and related-party transactions.
Equatorial – Valuation & Risks
Our target price is based on a DCF model using a WACC of 9.1% and a perpetual growth of
4.5%. Risks include: (1) weaker than expected GDP driving electricity consumption down; (2)
slower than expected improvements in Celpa unit; and (3) construction problems in transmission
projects
Even – Valuation & Risks
Our target price is based on a FCFF analysis, using a WACC of 12.6% in reais and nominal
terminal growth rate of 3.8%.
Risks include: (1) high exposure to land price appreciation due to the maintenance of a short-term
landbank, (2) potential margin disappointment attributable to an increase in sales cancellations,
(3) working capital management, (4) macroeconomic risks.
EZTec – Valuation & Risks
Our target price is based on a FCFF analysis, using a WACC of 12.7% in reais and nominal
terminal growth rate of 3.8%.
Risks include: (1) an economic downturn impacting demand for housing, (2) an unexpected
decrease in profitability, (3) execution on new launches within the Minha Casa Minha Vida
program; and (4) Scarcity of credit supply.
Fleury – Valuation & Risks
Our target price is based on a DCF analysis, assuming a WACC of 10% and a 5.5% nominal
perpetuity growth rate (in Brazilian reais).
Risks include: customers with bargaining power; stiffer competition; execution risk.
Fras-le – Valuation & Risks
Our target price is based on a DCF model with a WACC of 11.9% and a growth in perpetuity of
6%.
Main risks include: challenges in international expansion; higher than expected prices of key raw
materials; increasing competition and; low share liquidity.

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Valuation & Risks (continued)
Gafisa – Valuation & Risks
Our target price was derived from a free cash flow to firm analysis, using a WACC of 14.1% in
reais and a nominal terminal growth of 3.5%.
Risk include (1) higher than expected sales cancellations, (2) working capital management, (3)
macroeconomic risks, and (4) an unexpected decrease in profitability
Gerdau – Valuation & Risks
Our price target is based on our DCF analysis, using a WACC of 11.7% and a 3.0% nominal
growth rate in perpetuity.
Main risks include (1) lower than expected steel prices, (2) weaker than estimated demand for
main markets, and (3) higher–than-estimated increases in raw material prices.
Gol – Valuation & Risks
Our target price for Gol implies a 2020E FV/EBITDAR multiple of ~7x.
Risks include: stronger than expected competition, leading to a potential pricing war and lower
than estimated profitability; fuel price and FX volatility could lead to lower than expected earnings;
and infrastructure bottlenecks could limit Gol’s growth in the long term.
Hypera – Valuation & Risks
Our target price is based on a DCF analysis for which we consider a WACC of 11.2% and a
perpetuity growth rate of 5.3%. Main risks: (1) changes in the regulatory framework for pharma
products, (2) elimination of tax incentives (i.e., ICMS), (3) increased competition in the market, (4)
reputation risk.
Iguatemi – Valuation & Risks
Our target was derived from a FCF to firm analysis, using a WACC of 10.5% in reais and a
nominal terminal growth of 4.8%.
Risks include: (1) Competition increase in oversupplied regions; (2) overpaying for future
acquisitions; (3) delayed recovery in retail leading to an increase in vacancy rates and delayed
payments from tenants; (4) lack of funding to support future growth.
Iochpe Maxion – Valuation & Risks
Our target price is based on a DCF analysis, assuming a 10.9% WACC and nominal perpetuity
growth of 4.5%.
Risks include: Lower than expected growth in the GDP in Brazil, Europe, and the United States;
Higher than expected prices of key raw materials; and sharp interest-rate and currency
fluctuations.

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IRB – Valuation & Risks
We valued the reinsurer with a three-stage valuation model based on residual income approach,
with a terminal cost of equity of 12.1%. In the first stage, we considered the explicit modeling of
the next three years, and for the second stage, we evaluate until year seven using an ROAE of
38% with a dividend payout of 75%. Lastly, the final stage is based on terminal growth rate of
5.8% for a perpetual ROE of 35.0%.
We list as risks to the company: (i) potential regulatory changes in order to foster the competitive
environment (similar to the CNSP Resolution #325 from 2015); (ii) potential conflict of interest
among the company's Controlling Shareholders, which may result in economic losses; (iii) the
high concentration in the Brazilian insurance market (10 largest insurers holds ~70% of market
share) may generate a stressed customer base or even cause a dependency on a few clients.
Itaú Unibanco – Valuation & Risks
We valued the bank with a three-stage valuation model based on residual income approach, with
a terminal cost of equity of 12.4%. In the first stage, we considered the explicit modeling of the
next three years, and for the second stage, we evaluate until year seven using an ROAE of 20%
with a dividend payout of 35%. Lastly, the final stage is based on terminal growth rate of 6.0% for
a perpetual ROE of 21.4%.
Upside risks include: (i) Potential purchase of assets that present higher ROAs in order to foster
the best usage of the current excess of capital. Downside risks include: (i) higher than expected
NPLs from potential weakening of the Brazilian economy given the current high household
leverage ratios in the country; (ii) investing in non-voting shares, which limit minority
shareholders’ voting rights.
Itausa – Valuation & Risks
We value Itausa with a sum-of-the-parts model, applying our latest target prices for Itaú and
Duratex, to value Itausa’ stakes in these companies. We use current market values for other
listed investments and a 1.0x P/BV multiple for non-listed assets.
Risks include Santander rating changes for Itaú and Duratex, the lower value of non-voting
shares in the event of a change in control at Itausa, reinvestment risk in case of portfolio sales,
potential changes in the company’s portfolio mix, a significant widening in the discount to Itausa’s
NAV driven by long/short trading activity, and overhang risk.
JBS – Valuation & Risks
Our target price is based on a DCF analysis for which we consider a US Dollar WACC of 7.5%
and a perpetuity growth rate of 0.5% (real terms). Main risks include the US-China trade war
affecting exports and grain prices, a potential reversion in the U.S. cattle cycle and potential
litigations associated with past corporate governance issues

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JSL – Valuation & Risks
Our target price for JSL’s shares is based on a DCF valuation for which we have discounted our
estimated cash flows by a WACC of 10.7% (in BRL).
Risk include: Loss of bargaining power with the OEMs, decrease in prices of used vehicles, thus
increasing the spread between prices of new and used vehicles and loss of market share to other
large competitors.
Klabin – Valuation & Risks
Our price target is based on a DCF analysis using a WACC of 12.2% and a 6% nominal growth
rate in perpetuity. Main Risks include (1) Lower than expected pulp prices, (2) BRL appreciation,
(3) cost pressure, and (4) slower than expected recovery of paper packaging volume sold in the
domestic market.
Kroton – Valuation & Risks
Our target price is based on our DCF model, and implies a WACC of 12.7% in reais and a
perpetuity growth rate of 5%.
Main risks include regulatory risk, competitive environment, dependence on positive
macroeconomics, execution and acquisition risks.
Localiza – Valuation & Risks
Our target price is based on a DCF valuation in which we discount Localiza’s free cash flow by a
WACC of 9.6% in nominal Brazilian reais. Risks include an unexpected strong deceleration in
Brazil’s economic momentum, a higher than expected increase in Brazilian interest rates, an
unexpected downturn in the financing market, and an increase in the spread between the cost of
a new car for Localiza and the price it receives for its used cars.
Lojas Americanas – Valuation & Risks
Our target price is based on a sum of the parts model, composed of: (i) DCF analysis for LAME's
B&M operation, for which we consider a WACC of 10.6% and a perpetuity growth rate of 4.3%
and (ii) 62% stake at B2W, which we evaluate through a blended 50/50 DCF and multiple
analysis, considering the 1P and 3P operation. Main risks include: (1) lower than expected SSS,
(2) increased competition, (3) delayed store openings and (4) lower profitability from e-commerce
(B2W Digital).
Lojas Renner – Valuation & Risks
Our target price is based on a DCF analysis for which we consider a WACC of 10.0% and a
perpetuity growth rate of 4.5%. Main risks include: (1) lower than expected SSS; (2) increased
competition; (3) deterioration in the Consumer Finance business, with rising NPLs and
delinquency rates; (4) disruptions in push & pull logistics, leading to possible wrong orders or
stock-outs at the store level; and (5) FX depreciation weighing on imported goods.

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Magazine Luiza – Valuation & Risks

Our target price is based on a blended 50/50 DCF and multiples valuation analysis, on the back
of the company’s transitioning process to grow its online presence. Our DCF uses a WACC of
9.7% and a perpetuity growth rate of 5.3%, whereas our multiple analysis uses a target
EV/EBITDA of 10x for the B&M operation and a target of 1.5x P/GMV for the online operation.
Main risks include: (1) economic slowdown, (2) higher costs with logistics due to regulatory
decisions, (3) increased competition on both physical stores and e-commerce.
Mahle Metal Leve – Valuation & Risks
Our target price is based on our DCF model, which assumes a WACC of 12.9% and a nominal
growth rate in perpetuity of 5.5% per year in Brazilian reais.
Risks include: Increasing competition, higher than expected prices of key raw materials, and
stronger than expected slowdown in the global economy.
Marcopolo – Valuation & Risks
Our target price is based on a DCF model with a WACC of 11.5% and a growth in perpetuity of
6%.
Main risks include: challenges in international expansion; exporting sector exposed to currency
fluctuations and dependent on long-term interest rates and financing; higher than expected prices
of key raw materials; increasing competition; and contingencies and growth in air travel.
Marfrig – Valuation & Risks
Our target price is based on a DCF analysis for which we consider a WACC of 12.2% and a
perpetuity growth rate of 4.5%. Main risks include: volatility in grain prices, changes in
consumption habits, and sanitary/commercial barriers in the export market.
MRV Engenharia – Valuation & Risks
Our target price was derived from a free cash flow to firm analysis, using a WACC of 13.7% in
reais and a nominal terminal growth of 4.0%.
Risk include (1) unfavorable changes in the MCMV program, (2) further sizable withdrawals from
the FGTS fund, (3) higher than expected delinquency rates on receivables, and (4)
macroeconomic risks.
Multiplan – Valuation & Risks
Our target price was derived from a free cash flow to firm analysis, using a WACC of 10.2% in
reais and a nominal terminal growth rate of 4.8%.
Risks include: (1) Competition increase in oversupplied regions; (2) overpaying for future
acquisitions; (3) delayed recovery in retail leading to an increase in vacancy rates and delayed
payments from tenants.

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Natura – Valuation & Risks

Our target price is based on a DCF analysis for which we consider a WACC of 9.9% and a
perpetuity growth rate of 4.5%. Main risks include: (1) fiercer competition from local and foreign
players, (2) problems integrating operations and capturing synergies from The Body Shop
acquisition, (3) Higher than expected investments in The Body Shop's turnaround, (4) stagnation
of productivity levels, (5) complexities of operating a multichannel strategy, (6) diminishing returns
from alternative distribution channels, and (7) FX depreciation.
OdontoPrev – Valuation & Risks
Our target price is based on a DCF analysis with a WACC of 11.7% and a nominal perpetuity
growth of 6% (in Brazilian reais).
Main risks include stronger competition, execution risk, heavy reliance on domestic demand and
regulatory issues.
Omega Geração – Valuation & Risks
Our target price is based on a DCF valuation using a WACC of 10.9% nominal in R$. Risks
include lower than expected generation prices, losses in electricity trading, and related-party
transactions.
Petro Rio – Valuation & Risks
Our target price is based on a DCF valuation.
Main risks include: (1) declining oil prices; (2) capital discipline; and (3) acquisition/growth
strategy.
Petrobras – Valuation & Risks
Our target price is based on a DCF valuation using a nominal WACC of 10.2%. Main risks
include: oil prices, execution of divestment plan, and capital discipline.
Porto Seguro – Valuation & Risks
We value Porto Seguro using a discounted surplus capital model, which discounts to the present
the capital generated in excess of the capital required to fund expected growth. Risks includes:
increasing competition, execution risk in the integration of Itaú’s insurance portfolio, a change in
mix in the company’s noninsurance divisions, and the commoditization of insurance products.
Qualicorp – Valuation & Risks
Our target price is based on a DCF analysis with a WACC of 15.8% and a nominal perpetuity
growth of 5% (in Brazilian reais).
Main risks include: regulation issues, exposure to macroeconomics, competitive environment and
execution risk.

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Valuation & Risks (continued)
Randon – Valuation & Risks
Our year-end 2019 target price is based on our DCF model, which assumes a WACC of 12.1%
and a nominal growth rate in perpetuity of 6% per year in Brazilian reais.
Risks include lower than expected growth in the agricultural and industrial sectors, higher-
thanexpected prices of key raw materials, and sharp increases in interest rates.
RD – Valuation & Risks
Our target price is based on a DCF analysis for which we consider a WACC of 9.9% and a
perpetuity growth rate of 4.3%. Main risks include: (1) increased competition, (2) higher
cannibalization effect, (3) changes in sales mix (lower-margin categories), (4) changes in industry
regulations, (4) higher tax burden on medicaments and (5) shortage of good locations (lowering
new stores’ IRR).
Restoque – Valuation & Risks
Our target price is based on a DCF analysis for which we consider a WACC of 13.2% and a
perpetuity growth rate of 4.0%. Main risks include: (1) delayed economic recovery and lower than
expected SSS, (2) fiercer competition, (3) collection assertiveness and brand cannibalization, (4)
changes in demand elasticity for high-end/premium goods, (5) supply chain optimization and (6)
liquidity risk.
Romi – Valuation & Risks
Our target price is based on our DCF model, which assumes a WACC of 13% and a nominal
growth rate in perpetuity of 5% per year in Brazilian reais
Risks include increasing competition, execution risk (margins) and macroeconomic volatility
Rumo Logistica – Valuation & Risks
For our DCF-based target price, we discounted the company’s estimated cash flow by a WACC
of 11.8% (in local currency).
Uncertainties related to potential changes in the Brazilian railroad regulatory framework,
uncertainties related to the return of new projects in which Rumo Logistica might become
involved, unfavorable government intervention, and potential increases in Brazilian interest rates
affecting Rumo Logistica’s bottom line.
Sabesp – Valuation & Risks
Our target price is based on a DCF valuation using a WACC of 10.6% and terminal value as an
average of 3.15% growth perpetual rate and value of asset base in last year of estimate. Risks
include (1) tariff revision methodology and application, (2) political interference, (3) capex related
to water production; (4) reservoir levels, (5) U.S. dollar debt and refinancing needs; (6) provisions;
and (7) capital increase

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Santos Brasil – Valuation & Risks

Our target price is based on a DCF valuation, for which we discounted the company’s estimated
cash flow by a WACC of 11.1%, in BRL terms. Risks include: the expected performance of the
Brazilian foreign trade not materializing; uncertainties about volume performance; Further
deterioration in Economic Activity.
São Martinho – Valuation & Risks
Our target price is based on a DCF valuation.
Main risks include: (1) declining sugar and ethanol prices; (2) the company’s hedging strategy; (3)
capital discipline; and (4) acquisition/growth strategy.
SER Educacional – Valuation & Risks
Our target price is based on our DCF model, and implies a WACC of 13.1% in reais and a
perpetuity growth rate of 4%.
Main risks include regulatory risk, competitive environment, dependence on positive
macroeconomics, execution and acquisition risks.
Smiles – Valuation & Risks
We valued the company with a three-stage dividend discount model (DDM), with a terminal cost
of equity of 13.3%. In the first stage, we considered the explicit modeling of the next three years,
and for the second stage, we evaluate until year fourteen based on proceeds' CAGR '18-'21
leading to a growth rate of 10.3%, when for the fifteenth year we reduced the net margin by 5
percentage points. Lastly, the final stage is based on Gordon Growth Model at perpetuity with
terminal growth rate of 6.0% for a dividend payout of 100%.
Risks are mainly related to banks pressuring for lower unit prices, competition with banks and
peers loyalty programs intensifying, breakage ratio level in the long term, and the evolution of its
relationship/dependence on Gol — as well as conflicts of interest risks.
Sul America – Valuation & Risks
We valued Sul America using a discounted surplus capital model, which discounts to the present
the capital generated by the company in excess of the capital required to fund the growth we
expect.
Risks: the company could engage in a strategy to grow via acquisitions; other risks include lower
than expected growth; regulatory risks in the individual health segment; and increasing
competition.

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Suzano – Valuation & Risks
Our price target for Suzano’s shares is based on a DCF analysis, using a WACC of 13.3% and a
6.0% nominal growth rate in perpetuity in BRL terms. Main risks include (1) weaker than expected
pulp and paper prices, (2) domestic currency appreciation, (3) weaker than expected domestic
economy and (4) tax barriers.
TAESA – Valuation & Risks
Our target price is based on a DCF valuation using a WACC of 8.7% until the end of the
concession contracts. Main risks include leverage, acquisitions, regulatory risk, and greenfield
projects’ risk.
Tegma – Valuation & Risks
Our target price is based on a DCF valuation, for which we discounted the company’s estimated
cash flow by a WACC of 12.6%, in BRL terms.
Risks include high dependency on the automotive sector, client concentration, execution risk
when operating in nonautomotive markets, and low stock liquidity.
Tenda – Valuation & Risks
Our target price was derived from a free cash flow to firm analysis, using a WACC of 13.6% in
reais and a nominal terminal growth of 4.0%.
Risk include (1) unfavorable changes in the MCMV program, (2) scarcity of FGTS funding, (3)
potential bottlenecks in mortgage concessions from Caixa Econômica Federal, (4) higher than
expected delinquency rates on receivables, and (5) macroeconomic risks.
Transmissao Paulista – Valuation & Risks
Our target price is based on a DCF valuation using a WACC of 9.9% until the end of CTEEP’s
concession contracts. Main risks include worse regulatory parameters for revision cycles, the
contingency with Eletrobras and a worse than expected reimbursement for transmission assets.
Tupy – Valuation & Risks
Our target price is based on our DCF model, which assumes a WACC of 11.9% and a nominal
growth rate in perpetuity of 4.5% per year in Brazilian reais.
Risks include: increasing competition (from peers and potential new technologies), higher than
expected prices of key raw materials, challenges in international expansion and stronger than
expected slowdown in the Brazilian and global economy.
Ultrapar – Valuation & Risks
Our target price is based on a DCF valuation. Main risks include: (1) a decline in the growth of the
Brazilian economy; (2) a sharp and sustained drop in chemical product prices; and (3) the
potential impact of a consolidation strategy on the company’s balance sheet and working capital.

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Unidas – Valuation & Risks
Our target price is based on a DCF valuation in which we discount Unidas’s free cash flow by a
WACC of 11.1% in nominal Brazilian reais. Risks include an unexpected strong deceleration in
Brazil’s economic momentum, a higher than expected increase in Brazilian interest rates, an
unexpected downturn in the financing market, and an increase in the spread between the cost of
a new car for Unidas and the price it receives for its used cars.
Usiminas – Valuation & Risks
Our price target is based on a DCF analysis using a WACC of 11.0% and a 4.0% nominal growth
rate in BRL terms.
Main risks include (1) lower than expected steel prices and/or demand, (2) lower than expected
economic growth in Brazil, and (3) lower than expected raw material prices.
Vale – Valuation & Risks
Our target price is based on a DCF analysis, using a WACC of 9.3% and a 2.5% nominal growth
rate in perpetuity.
Main risks include: (i) decline in iron ore and nickel prices; (ii) weaker than expected
macroeconomic growth in Asia; and (iii) FX appreciation
Valid – Valuation & Risks
Our valuation is based on a two-stage DCF, with a Gordon Growth Model at perpetuity.
Main risks are related to (i) execution risk on new acquisitions; (ii) unfavorable market conditions
on the several markets Valid operates such as means of payments (cards) in Brazil and in the
US, telecom, printing, identification systems, and others; and (iii) contract renewal.
Via Varejo – Valuation & Risks
Our target price is based on a blended 50/50 DCF and multiples valuation analysis, on the back
of the company’s transitioning process to grow its online presence. Our DCF uses a WACC of
11.4% and a perpetuity growth rate of 4%, whereas our multiple analysis uses a target
EV/EBITDA of 6x for the B&M operation and a target of 0.5x P/GMV for the online operation.
Main risks include: (1) further deterioration in macroeconomic indicators; (2) Sale of Via Varejo by
GPA group; (3) lower than expected implementation of digital initiatives (4) aggressive pricing
policies from competitors.
WEG – Valuation & Risks
Our target price is based on our DCF model, which assumes a WACC of 9.9% and a nominal
growth rate in perpetuity of 6% per year in Brazilian reais.
Risks include: increasing competition, higher than expected prices of key raw materials,
challenges in international expansion and stronger than expected slowdown in the global
economy

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YDUQS Part.– Valuation & Risks
Our target price is based on our DCF model, and implies a WACC of 13.5% in reais and a
perpetuity growth rate of 5%.
Main risks include regulatory risk, competitive environment, dependence on positive
macroeconomics, execution and acquisition risks.
Alicorp – Valuation & Risks
Our target price is based on a DCF analysis using an 8.8% discount rate, and a 3% terminal
growth rate. It implies a target FV/EBITDA multiple of 10.3x for 2020.
Main risks include a weaker than expected revenue growth, higher than expected commodity
prices, execution risk related to M&A, higher than expected financing costs, political and
regulatory risk, increased competition (including expansion of supermarket chains) and relatively
low stock liquidity.
Alsea – Valuation & Risks
We arrive at our target price using a discounted cash flow analysis, which assumes a WACC of
10.7%: cost of equity of 13.2%, a risk-free rate of 3.0%, an equity risk premium of 5.6%, and a
beta of 1.0. The perpetuity growth rate considered is 2.4%.
Potential risks include: a follow-on offering; a material depreciation of the MXN/USD; high inflation
in Mexico; weaker than expected SSS; and the company's inability to pay down its debt, among
other potential risks.
Arca Continental – Valuation & Risks
Our target price is based on a DCF model, using a WACC of 9.7% and perpetuity growth of 3.0%.
Main risks include: weaker economic growth; potential increase in taxes, volatility in the price of
raw materials and currencies, M&A and execution risk and health and fiscal risks.
BanBajio – Valuation & Risks
Our target price is based on our 3-stage DDM, which assumes a Ke of 15.5%, a risk-free rate of
8.60%, an equity risk premium of 5.5%, and a beta of 1.25. The perpetuity growth rate is of 3.0%
and the stable ROE of 25% (adjusted to its excess of capital).
Risks include: (i) stricter regulatory environment, (ii) downgrade by credit agency S&P, and (iii)
weaker domestic demand.
Banco de Chile – Valuation & Risks
We valued the bank with a three-stage valuation model based on residual income approach, with
a terminal cost of equity of 10.1%. In the first stage, we considered the explicit modeling of the
next three years, and for the second stage, we evaluate until year seven using an ROAE of 19%
with a dividend payout of 50%. Lastly, the final stage is based on terminal growth rate of 5.0% for
a perpetual ROE of 19.0%.
Risks include: regulatory risks (e.g. capital requirements, lower lending rates or caps, increasing
tax rate, among others), and macroeconomic risks related to commodity prices and country risk.

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CCU – Valuation & Risks

Our target price is based on a sum-of-the-parts DCF analysis approach to value each of the
company’s operations in Chile, International Operations, Colombia and Wines.
Risks include different than expected macro figures in Argentina and Chile, volatility in raw
material prices (malt, sugar, PET resin), different than expected competitive scenario, weather
risks affecting volumes, different than expected scenario for Colombia expansion and M&A
activity.
Cementos Pacasmayo – Valuation & Risks
Our target price is based on a DCF analysis using a 9% discount rate, a 2.5% terminal growth
rate. It implies a target FV/EBITDA multiple of 10.8x for 2019.
Main risks include increased competition or regulation, economic slowdown and political risks in
Peru.
CMPC – Valuation & Risks
Our target price is based on our DCF analysis, with a 7.5% WACC and a 3.0% perpetuity growth
rate.
Risks include different than-expected pulp and tissue prices, dispute on an insurance payment for
Guaiba stoppage and appreciation/depreciation of local currencies against USD.
Concha y Toro – Valuation & Risks
Our price target is based on a DCF analysis. We are assuming a WACC of 7.3% and a nominal
growth rate in perpetuity of 3.0%.
Risks include a different international competitive environment, agricultural risks related to wine
business and potential delay in the implementation of efficiencies.
Davivienda – Valuation & Risks
We valued the bank with a discounted surplus capital model, with a terminal cost of equity of
12.4% and a 15-year RWA CAGR of 12.1%. The perpetuity value is derived from a Gordon
Growth Model, with a terminal growth rate of 4.3% and a sustainable ROE of 16.1%. We valued
the bank’s stock of surplus capital (deficit) at 1.0x P/BV. We value investments in non-banking
subsidiaries, if any, at the after-tax unrealized capital gain.
Risks include: regulatory risks, macroeconomic risks related to slower growth and potentially
higher NPLs due its larger exposure to consumer credit, overhang risks due to potential share
offering.

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Valuation & Risks (continued)

Gruma – Valuation & Risks

Our target price is based on our DCF analysis, with FV/EBITDA multiple as a cross reference.
Our DCF analysis is based on a blended WACC of 7.5% which considers different country risks
and betas for the U.S., Mexico, Europe and Latam operations. Our target price implies the stock
would be trading at a forward FV/EBITDA multiple of ~9.5x.
Main risks include: (1) weaker than expected economic growth in the Americas; (2) volatility in the
prices of corn and wheat; (3) currency and political risk; (4) higher than expected competition in
the US; and (5) aggressive growth and M&A.
Grupo Cementos Chihuahua – Valuation & Risks
Our target price is based on our DCF model, which assumes a WACC of 10.5%: cost of equity
12.9%, and a beta of 1.3. The after-tax cost of debt is estimated at 6%, and the debt/EV structure
considered is 30%. The perpetuity growth rate considered is 2.3%.
Risks include: Lower cement demand in key regions in the U.S. or in the estate of Chihuahua in
Mexico; a slower than expected demand growth in the U.S; weakness in infrastructure spending
and the formal residential construction sector in U.S. and Mexico.
Grupo Supervielle – Valuation & Risks
We value SUPV US based on a Surplus Capital Model, discounting future capital generation
above the regulatory capital requirement to distribute dividends, plus current excess capital above
regulatory requirement at 1.0x PBV. We use US-dollar cashflows and discount rate of 16.4%,
Sustainable ROE of 17.5%, and Terminal PBV of 1.1x
Risks include: 1) currency devaluation, 2) lower than expected loan growth, 3) lower than
expected interest margins, 4) adverse regulatory changes, 5) change in discount rates.
IFS – Valuation & Risks
We valued the bank with a discounted surplus capital model, with a terminal cost of equity of
10.0% and a 15-year RWA CAGR of 12.6%. The perpetuity value is derived from a Gordon
Growth Model, with a terminal growth rate of 3.0% and a sustainable ROE of 15.7%. We valued
the bank’s stock of surplus capital (deficit) at 1.0x P/BV. We value investments in non-banking
subsidiaries, if any, at the after-tax unrealized capital gain.
Risks include: stronger than expected margin contraction due to higher than expected funding
cost. Also, a weak economy may lead to a stronger deterioration in asset quality and slower than
expected loan growth. Other risks include cost pressures affecting efficiency. Finally, there are
risks of conflicts of interest in related party transactions and agreements.

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Valuation & Risks (continued)
Grupo Nutresa – Valuation & Risks
Our target price is based on a DCF analysis for the food business using a 9.6% discount rate,
and a 2.5% terminal growth rate, plus a SOTP for the company’s investments. It implies an
adjusted target FV/EBITDA multiple of 10.2x for 2019.
Main risks include a weaker than expected revenue growth, higher than expected commodity
prices and/or FX depreciation, regulatory risk , volatility in company's investment portfolio,
increased competition (including expansion of supermarket chains), execution risk in recent
acquisitions and relatively low stock liquidity.
Pampa Energia – Valuation & Risks
We value Pampa Energía based on a sum-of-the-parts analysis consisting primarily of DCF
valuations for transmission, distribution and generation using WACC of 9.77%. Risks include: (1)
regulatory risks; (2) sensitivity of earnings to changes in tariff; (3) potential natural gas shortfalls;
(4) geological risk in its E&P segment; and (5) the potential depreciation of the local currency.
Transener – Valuation & Risks
We valued Transener based on a DCF model, using a WACC of 8.9% and a long-term growth
rate of 2.5%.
Risks include: (1) Regulatory risk; (2) higher than expected depreciation of the local currency; (3)
potential delays in the implementation of the Federal Plan; and (4) potential penalties imposed by
regulatory authorities.
Transportadora de Gas del Sur – Valuation & Risks
We valued TGS based on a DCF model, using a WACC of 12.2% and a long-term growth rate of
2.5%.
Main risks include regulatory risk, sensitivity of earnings to changes in regulated tariffs and crude
oil prices, the current gas supply restrictions and volume risk in Vaca Muerta's midstream project.
Vesta – Valuation & Risks
Our target price is based on our DCF model, which assumes a WACC of 8.1%: cost of equity of
11.5%, a risk-free rate of 6% (blended), an equity risk premium of 5.5%, and a beta of 1.0. The
cost of debt is estimated at 5.4%, and the equity/debt structure considered is 52%. The perpetuity
growth rate considered is 2.1%.
Risks include: Adverse changes in national or international economic conditions that could result
in decline in rents or less favorable terms of renewed leases, occupancy rates or an increased
incidence of defaults under existing leases. Vesta’s business evolution is significantly related to
general economic conditions. Real estate markets tend to be cyclical and tied to macroeconomic
conditions in the U.S. and Mexico.
Risks include: Vesta’s business would be adversely affected if a significant number of tenants
were unable to meet their lease obligations or if Vesta were unable to renew existing leases or to
lease vacant space, or unable to lease properties at existing rental rates.

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YPF SA – Valuation & Risks

We valued YPF based on a DCF model using a WACC of 12.4% and perpetuity of 2.5%.
Main risks include: regulatory risks; sensitivity of earnings to changes in crude oil prices and
related products; and poorer than expected production growth and reserve replacement ratios.
Almacenes Exito (EXITO, Hold, CP: CO$17,620, TP: CO$18,000) – Valuation & Risks
Our target price is based on a DCF analysis for Exito’s operations in Colombia, Uruguay, and
Argentina at a 9.3% discount rate, and a 2.5% terminal growth rate. We are assuming that Exito
accepts the price offered by Casino for CBD (R$113/share) and uses those proceeds to pay
down its debt. Finally, our minority interest line reflects our estimated market value for minorities
at VivaMalls and Uruguay.
Risks include weaker than anticipated SSS, fiercer than expected competition, delays in
company’s expansion plan and bleaker than anticipated working capital.

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 Important Disclosures
Key to Investment Codes
% of % of Companies Provided
Companies Investment Banking
Covered with Services in the Past 12
Rating Definition This Rating Months
Buy (B) Expected to outperform the local market benchmark by more than 10%. 53.36 6.36
Hold (H) Expected to perform within a range of 0% to 10% above the local market
38.16 3.53
benchmark.
Underperform Expected to underperform the local market benchmark. 8.13 0.35
Under Review (U/R) 0.35 0.35
The numbers above reflect our Latin American universe as of Wednesday, September 25, 2019.
For a discussion, if applicable, of the valuation methods used to determine the price targets included in this report and the risks to achieving
these targets, please refer to the latest published research on these stocks. Research is available through your sales representative and other
electronic systems.
Target prices are year-end 2019 unless otherwise specified. Recommendations are based on a total return basis (expected share price
appreciation + prospective dividend yield) unless otherwise specified.
Stock price charts and rating histories for companies discussed in this report are also available by written request to Santander Investment
Securities Inc., 45 East 53rd Street, 17th Floor (Attn: Research Disclosures), New York, NY 10022 USA.
Ratings are established when the firm sets a target price and/or when maintaining or reiterating the rating. Ratings may not coincide with the above
methodology due to price volatility. Management reserves the right to maintain or to modify ratings on any specific stock and will disclose this in the
report when it occurs. Valuation methodologies vary from stock to stock, analyst to analyst, and country to country. Any investment in Latin American
equities is, by its nature, risky. A full discussion of valuation methodology and risks related to achieving the target price of the subject security is included
in the body of this report.
The benchmark used for local market performance is the country risk of each country plus the 1-year U.S. Treasury yield plus 5.5% of equity risk
premium, unless otherwise specified. The benchmark plus the 10.0% differential used to determine the rating is time adjusted to make it comparable
with the total return of the stock over the same period. For additional information about our rating methodology, please call (212) 350 3974.
This research report (“report”) has been prepared by Santander Investment Securities Inc. ("SIS"; SIS is a subsidiary of Santander Holdings USA, Inc.
which is wholly owned by Banco Santander, S.A. "Santander"]) on behalf of itself and its affiliates (collectively, Grupo Santander) and is provided for
information purposes only. This report must not be considered as an offer to sell or a solicitation of an offer to buy any relevant securities (i.e., securities
mentioned herein or of the same issuer and/or options, warrants, or rights with respect to or interests in any such securities).
Any decision by the recipient to buy or to sell should be based on publicly available information on the related security and, where appropriate, should
take into account the content of the related prospectus filed with and available from the entity governing the related market and the company issuing the
security. This report is issued in Spain by Santander Investment Bolsa, Sociedad de Valores, S.A. (“Santander Investment Bolsa”) and in the United
Kingdom by Banco Santander, S.A., London Branch. Santander London is authorized by the Bank of Spain. This report is not being issued to private
customers. SIS, Santander London and Santander Investment Bolsa are members of Grupo Santander.
The following analysts hereby certify that their views about the companies and their securities discussed in this report are accurately expressed, that
their recommendations reflect solely and exclusively their personal opinions, and that such opinions were prepared in an independent and autonomous
manner, including as regards the institution to which they are linked, and that they have not received and will not receive direct or indirect compensation
in exchange for expressing specific recommendations or views in this report, since their compensation and the compensation system applying to Grupo
Santander and any of its affiliates is not pegged to the pricing of any of the securities issued by the companies evaluated in the report, or to the income
arising from the businesses and financial transactions carried out by Grupo Santander and any of its affiliates: Daniel Gewehr* and Ricardo Peretti*.

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 Important Disclosures (continued)

*Employed by a non-US affiliate of Santander Investment Securities Inc. and is not registered/qualified as a research analyst under FINRA rules and is
not an associated person of the member firm, and, therefore, may not be subject to FINRA Rule 2241 and Incorporated NYSE Rule 472 restrictions on
communications with a subject company, public appearances, and trading securities held by a research analyst account.
As per the requirements of the Brazilian CVM, the following analysts hereby certify that we do not maintain a relationship with any individual working for
the companies whose securities were evaluated in the disclosed report. That we do not own, directly or indirectly, securities issued by the company
evaluated. That we are not involved in the acquisition, disposal and intermediation of such securities on the market: Daniel Gewehr and Ricardo Peretti.
Grupo Santander receives non-investment banking revenue from Alicorp, Alliar, Alsea, Arca Continental, Arezzo, Cia Hering, CVC Corp., Davivienda,
Energisa, Equatorial, Fleury, Gruma, Grupo Cementos Chihuahua, Grupo Supervielle, Localiza, Mahle Metal Leve, Natura, OdontoPrev, Pampa
Energia, Petro Rio, Qualicorp, RD, Restoque, Romi, Tegma, Transener, Transportadora de Gas del Sur, Tupy, Unidas, Valid, Vesta, and YPF SA.
Within the past 12 months, Grupo Santander has managed or co-managed a public offering of securities of Alsea, Alupar, Azul, BR Distribuidora, CPFL
Energia, Eneva, Gol, JBS, and Porto Seguro.
Within the past 12 months, Grupo Santander has received compensation for investment banking services from Alsea, Alupar, Azul, BR Distribuidora,
CPFL Energia, Eneva, Gol, Gruma, JBS, and Porto Seguro.
In the next three months, Grupo Santander expects to receive or intends to seek compensation for investment banking services from BanBajio, BR
Distribuidora, Braskem, Cemig, Direcional Engenharia, Sul America, and YPF SA.
Alicorp, Almacenes Exito, Cementos Pacasmayo, Davivienda, IFS, and Grupo Nutresa currently are, or were within the past 12 months, clients of SIS.
Within the past 12 months, SIS has provided investment banking services to Alicorp, Almacenes Exito, Cementos Pacasmayo, Davivienda, IFS, and
Grupo Nutresa.
Within the past 12 months, SIS has provided non-investment banking securities-related services to Davivienda.
Santander or its affiliates and the securities investment clubs, portfolios and funds managed by them do not have any direct or indirect ownership
interest equal to or higher than one percent (1%) of the capital stock of any of the companies whose securities were evaluated in this report and are not
involved in the acquisition, disposal and intermediation of such securities on the market.
The information contained within this report has been compiled from sources believed to be reliable. Although all reasonable care has been taken to
ensure the information contained within these reports is not untrue or misleading, we make no representation that such information is accurate or
complete and it should not be relied upon as such. All opinions and estimates included within this report constitute our judgment as of the date of the
report and are subject to change without notice.
From time to time, Grupo Santander and/or any of its officers or directors may have a long or short position in, or otherwise be directly or indirectly
interested in, the securities, options, rights or warrants of companies mentioned herein.
Any U.S. recipient of this report (other than a registered broker-dealer or a bank acting in a broker-dealer capacity) that would like to effect any
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report and its dissemination in the United States.
© 2019 by Santander Investment Securities Inc. All Rights Reserved.

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