COCA-COLA FEMSA: Initiation of coverage - Actinver · COCA-COLA FEMSA: Initiation of coverage ... deterioration in macroeconomic variables. ... COCA-COLA EMBONOR SA-B $ 613.05800.00

1 ACTINVER

July 20, 2010

COCA-COLA FEMSA: Initiation of coverage

Solid organic and inorganic growth: In search of gr eater consolidation in the industry.

COCA-COLA FEMSA, S.A.B. de C.V.

Summary: We are initiating coverage of COCA-COLA FE MSA, S.A.B. de C.V. (KOF) with a BUY recommendation and a 12 month pric e target of MXN 96.70 per share, with an implicit return at current prices of 13.5%, including the dividend.

Sector leader: In our opinion, KOF offers one of the most interesting investment options in the Mexican beverage sector today, highlighting its leadership in the sector (it is currently the number 1 COCA-COLA system bottling company in Latin America and number 2 worldwide, both in terms of volume of sales). With the recent situation in Mexico, it has been the least affected by the recession as its franchise covers the center of the country (including Mexico City) and the southeast (including the Gulf region), compared to other bottling companies, particularly those based in the north where the region is dependent on the economic performance of the United States. In addition, its international expansion in Latin America has allowed the company to diversify its income and take advantage of the growth offered by these markets. At the end of 2009, 64% of income and 57% of EBITDA were generated through operations outside Mexico. The investment thesis: Our reasoning:

∎ Brand portfolio with good positioning in the domestic and international markets strengthened by the COCA-COLA brand.

∎ Aggressive commercial strategy with effective market segmentation, identifying the most efficient ways to get to the end-consumer.

∎ Highly developed distribution system that delivers to its different distribution channels.

∎ Important investment in advertising, in new business platforms, innovation of product portfolio and investment in returnable bottles.

Positive outlook: We believe that KOF shows positive organic as well as inorganic growth perspective, strengthened by a commercial strategy focused on promoting its extensive product portfolio and capitalizing its significant base of clients. Its acquisitions in South America (Remil in Brazil, Brisa in Colombia) have capitalized solid growth for the region. Its financial situation in terms of liquidity, generation of cash and payment of debt is positive, allowing a margin to consolidate its expansion in the industry. In our view, the main risks are political (possible expropriation in Venezuela) and a deterioration in macroeconomic variables. Considering the potential yield at current prices compared to the IPC ( Bolsa Index), our recommendation is to BUY at a 12 month target price of MXN 96.70.

1 ACTINVER

Marco Montañez Torres Food, Beverages & Retailers � [email protected] ℡ +52 (55) 1103 6694

Paulino Musi Treviño � [email protected] ℡ +52 (55) 1103 6600 ext. 5037

Corporate Headquarters: 1200 Guillermo González Camarena Pisos 9-11, Santa Fé México, D.F. 01210

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Relative Performance

Time

KOFL, base = 48.16 on 2-Jul-2007

IPyC, base = 31,421 on 2-Jul-2007

Last Price MXN 86.21

Implied return 12.2%Dividend Yield 1.3%

Expected Total Return 13.5%Outstanding Shares (mill.) 1,847

Float 14.7%Mkt. Cap. (Mill.) MXN 159,189

Enterprise Value (Mill.) MXN 166,066

T12 Price Range 53.37 --- 93.64

T12 VaR@alpha=1.50% (3.91%)

Buy

Ticker KOFL

Target Price MXN 96.70

2009 % 3m10 % 2010E % 2011E %Sales 102,767 100% 23,595 100% 108,009 100% 116,609 100%

EBITDA 19,746 19% 4,476 19% 20,978 19% 22,567 19%

Net Income 8,523 8% 2,110 9% 9,849 9% 10,607 9%

EPS 4.62 5.04 5.33 5.74

BVPS 35.84 35.28 40.55 47.97

DPS 0.73 0.00 1.11 1.28

ROE 12.4% 13.9% 13.2% 12.0%ROA 14.3% 13.4% 14.1% 13.8%

P/BV 2.4x 2.4x 2.1x 1.8xP/E 18.7x 17.1x 16.2x 15.0x

EV/EBITDA 8.5x 8.3x 7.8x 6.9x

2 ACTINVER

July 20, 2010




Our Valuation Methodology

The valuation technique used to calculate the target price of the company stock is the weighted average of 3

methodologies:

1. Target EV/EBITDA multiple: Based on the relative valuation table which presents information about companies similar to KOF, we expect a target multiple of 6.9x for 2011, which we calculate by applying the

estimated percentage of reduction for most of the industry (8%) to the estimated multiple for KOF, and

assuming a stable performance in EBITDA. It is important to note that our investment thesis does not take into account a possible acquisition by the company that could cause an increase in the multiple. Considering

previous experiences (PANAMCO over 8x, REMIL in Brazil acquired in a multiple of 7.5x), we think that if the

opportunity arises for inorganic growth, the multiple could fluctuate within this range. Under these conditions,

the target price could reach MXN 85.53. Comparative chart of similar companies: What is the right benchmark?

Relative valuation of similar companies in the indu stry

Source: Bloomberg

2. Target P/E multiple: Based on the relative valuation table which presents information about similar companies, we expect a target multiple of 13.3x for 2011 which we calculate by applying the estimated

percentage of reduction for most of the industry (11%) to the estimated multiple for KOF, assuming a stable performance in the profit per share. As mentioned in the previous paragraph, we are not taking into account a

possible acquisition by the company so as not to distort the multiple estimate. The result of this calculation is a

target price of MXN 76.14.

Name Last Px Mkt Cap Est P/E Est P/E Nxt Yr

EV/EBITDA Curr Yr

EV/EBITDA Nxt Yr

P/B

COCA-COLA FEMSA SAB-SER L 86.21$ 12,333.10$ 17.1x 14.8x 8.3x 7.5x 2.4x

CIA DE BEBIDAS DAS AME-PREF 188.00$ 59,990.22$ 17.1x 15.4x 9.6x 8.9x 4.7x

DR PEPPER SNAPPLE GROUP INC 38.88$ 9,552.45$ 16.0x 13.9x 8.9x 8.3x 2.6x

EMBOTELLADORAS ARCA SAB-NOM 45.57$ 2,845.66$ 14.7x 13.2x 7.5x 7.0x 2.3x

EMBOTELLADORA ANDINA-A PREF 1,830.00$ 2,849.48$ 13.4x 11.6x 7.8x 7.1x 3.5x

GRUPO CONTINENTAL S.A.B- * 36.20$ 2,103.43$ 14.3x 13.0x 8.1x 7.4x 2.7x

COTT CORPORATION 6.06$ 492.87$ 8.6x 7.7x 4.2x 3.6x 1.6x

COCA-COLA EMBONOR SA-B 800.00$ 613.05$ 10.1x 9.4x 5.7x 5.5x 1.4x

Average 13.5x 12.0x 7.4x 6.8x 2.7x

P/E EV/EBITDA

Industry multiple expected contraction -11% -8%Target multiple 13.3x 6.9x

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July 20, 2010




3. Discounted cash flow: We used the following assumptions to make this calculation:

• Calculation of the Weighted Average Cost of Capital (WACC): The estimated beta is 0.76, based on

observation over 24 months and taking into account the expected sensitivity of the market. We take a risk

premium on the capital of 5.5% based on empirical studies of the market. For the risk free rate in the United

States, we take the estimate for the 10 year US Treasury bond in 3.5%. We consider the sovereign premium

rate to be 1.5%. The spread of estimated implicit credit will be 200 additional basis points on the US bond

used as the point of reference. For the tax rate, we consider an effective interest rate of 30%. We estimate that the debt / (debt + capital) ratio will be 18%. Using the above figures, the calculation of WACC is 8.4%.

• Residual growth: We think that even though the Mexican beverage market is already mature, the pres-

ence of the company in Latin American markets with good potential for growth is significant and the reason

why we forecast a residual rate of 2.0%.

Weighting of the Methods

The weighting of the methods used in the calculation is as follows: 30% is assigned to the target EV/EBITDA

multiple, 30% to the target P/E multiple, and 40% is weighted on Discounted Cash Flow. Although the P/BV

multiple isn’t taken into account for the valuation, it is worth noting that it shows a positive trend to reduce

from the 2.4x estimate for 2010 to 2.0x for 2011 (implicit valuation).

Taking the above into account, the weighted target price will be MXN 96.70 in 12 m onths . If we take the closing price of the share from the day before in MXN 86.21, plus an expected yield per dividend of 1.3%,

the total estimated yield will be 13.5%. Evaluating the potential market yield measur ed by the Prices and Quotations Index (IPC), our recommendation for KOF is BUY.

Comparative table of sales vs. EBITDA of leading co mpanies in the beverage sector:

Source: Economática

2006 2007 2008 2009 Var 06-07 Var 07-08 Var 08-09 CAGR

Net sales 61,726 69,251 82,976 102,767 12.2% 19.8% 23.9% 18.5%

EBITDA $ 12,797 14,434 17,117 19,746 12.8% 18.6% 15.4% 15.6%

Net sales 16,671 18,586 20,255 24,234 11.5% 9.0% 19.6% 13.3%

EBITDA $ 4,172 4,472 4,715 4,891 7.2% 5.4% 3.7% 5.4%

Net sales 11,468 12,283 12,826 13,536 7.1% 4.4% 5.5% 5.7%

EBITDA $ 2,352 2,498 2,683 2,781 6.2% 7.4% 3.6% 5.7%

Net sales 206,100 229,468 257,124 258,531 11.3% 12.1% 0.5% 7.8%

EBITDA $ 57,388 61,868 63,785 57,658 7.8% 3.1% -9.6% 0.2%

Net sales 183,225 208,782 260,963 270,980 13.9% 25.0% 3.8% 13.9%

EBITDA $ 44,109 50,155 60,689 63,472 13.7% 21.0% 4.6% 12.9%EMBONOR B

Millions

KOF

ARCA

CONTAL

ANDINA

4 ACTINVER

July 20, 2010




Valuation

KOF2010E 2011E 2012E 2013E 2014E 2015E 2016E 2017E 2018E 2019E

(US$m)EBITDA 1,651 1,790 1,978 2,249 2,477 2,655 2,873 3,136 3,453 3,836Cash taxes (343) (372) (436) (502) (544) (594) (653) (724) (808) (907)Changes in w orking capital (118) (87) (50) (97) (116) (137) (163) (195) (235) (285)

Capex (465) (557) (616) (703) (749) (806) (875) (959) (1,059) (1,180)

Unlevered free cash flow 725 774 876 948 1,067 1,118 1,181 1,258 1,350 1,463

1,813 1,991 2,187 2,402 2,637 2,896 3,181 3,493 3,836 Cost of equityUS risk free rate (10-year US Treasury) 3.5%

Equity risk premium 5.5% 1.0% 1.5% 2.0% 2.5% 3.0% 3.5%Equity beta 0.76 9.9% 101.61 106.00 111.06 116.98 123.99 132.44 Adjusted equity risk premium 4.2% 9.4% 102.68 107.06 112.13 118.05 125.06 133.50

8.9% 103.79 108.17 113.24 119.16 126.17 134.61 Country risk premium 1.5% 8.4% 104.94 109.32 114.39 120.31 127.32 135.76

7.9% 106.13 110.52 115.58 121.50 128.51 136.96 Total cost of equity 9.2% 7.4% 107.37 111.75 116.82 122.74 129.75 138.19

6.9% 108.66 113.04 118.10 124.02 131.04 139.48 Cost of debt 6.4% 109.99 114.37 119.44 125.36 132.37 140.81 US risk free rate (10-year US Treasury) 3.5%

Implied credit spread 2.0%

Country risk premium 1.5% 5.9x 6.4x 6.9x 7.4x 7.9x 8.4xCost of debt (pretax) 7.0% 10% 80.51 87.23 93.95 100.67 107.39 114.11

5% 76.91 83.32 89.74 96.16 102.57 108.99

Effective tax rate 30.0% 0% 73.31 79.42 85.53 91.64 97.75 103.86 (5%) 69.71 75.52 81.32 87.13 92.93 98.74

Total cost of debt 4.9% (10%) 66.11 71.61 77.11 82.61 88.11 93.61

Debt/capitalization (target) 17.9%

WACC 8.4% 12.3x 12.8x 13.3x 13.8x 14.3x 14.8x10% 77.44 80.60 83.76 86.92 90.08 93.24

NPV of cash flows 2010 - 2019 6,737 5% 73.92 76.93 79.95 82.97 85.98 89.00

Residual grow th 2.0% 0% 70.40 73.27 76.14 79.02 81.89 84.76 Residual value 22,805 (5%) 66.88 69.61 72.34 75.06 77.79 80.52

NPV of residual value 10,166 (10%) 63.36 65.94 68.53 71.11 73.70 76.28

Total net present value 16,903Net Debt 81 EV/EBITDA 30% 26.90 Minorities 217 P/E 30% 24.00 2010E 2011E

DCF 40% 45.80 P/E 18.1x 16.8xEquity Value 16,605 Weighted Average Price Target 96.70 96.70 P/BV 2.4x 2.0xShares outstanding 1,847 Expected Dividend Yield 1.3% - EV/EBITDA 8.7x 7.8x

NPV per share 114.39 Expected Total Return 13.5%

Implied ValuationWeight

Residual Growth

WA

CC

EV/EBITDA Target Multiple

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hang

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E

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DA

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5 ACTINVER

July 20, 2010




Financial Analysis

1. Profitability: For 2010 we expect slight pressure on the gross profit margin due to increases in the price of sweeteners in the domestic market. It is worth mentioning that although the price of sugar on an international level has remained fairly stable over the last few months (see graph on the next page), prices in Mexico have not followed suit and in general are higher in Mexico due to specific characteristics in the industry on a national level. The behavior of this raw material is important as it represents around 20% of the total sales cost. In other countries, such as Brazil, the price of sugar reflects the behavior of the commodities markets to a much greater extent, and can even present op-portunities for hedging.

Estimates in the price of sugar over the next quarters seem more positive due to better harvests in the main producing countries which we hope will create more stability in the price. According to the futures market, the price of sugar will be fluctuating around an average of USD 16.25 cents per pound for the next two years. This will be a significant decrease compared to the maximum price of the last 16 months when it reached USD 28.38 cents per pound in January this year. Regarding the behavior of the prices in the product portfolio, despite heavy competition in the national industry, we do not expect negative effects on the prices of the product portfolio since the company has histori-cally always been able to increase prices in line with inflation or even higher. In the markets outside Mexico, there are also favorable conditions for taking prices.

82,976.3

102,767.3 108,008.8 116,609.2

127,060.5

20.6%

19.2%19.4%

19.4% 19.2%

5.0%

10.0%

15.0%

20.0%

25.0%

-

20,000.0

40,000.0

60,000.0

80,000.0

100,000.0

120,000.0

140,000.0

2008 2009 2010E 2011E 2012E

Net sales Vs EBITDAMillions MXN

Net Sales EBITDA %

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July 20, 2010




2. Balance Sheet:

A. Operating cycle: Due to the nature of the business of mass consumption and distribution, we

expect that the investment in working capital will continue to be an important factor to consider in the expansion of the business. At the end of 2009, the working capital (calculated as the arithmetic addition of the collection of debts, inventories and suppliers, to isolate other non op-erational factors) had a positive margin of MXN 1.56 billion and for 2012 we expect an average compound growth of 19% (very much in line with the growth in sales).

B. Liquidity: At the close of 2009 the current assets / current liabilities (CA/CL) ratio was 1.0x. For 2010, we estimate an increase to 1.7x and to 2.1x for 2011 based on a substantial in-crease in cash, already reported during 1Q10 triggered by an increase in the cash position.

C. Debt: At the close of 2009, the Total Debt / EBITDA ratio ended in 0.8x. For 2010, due to the emission of debt in February 2010, we don’t expect any change on the figure reported in 2009. For 2011 and 2012, we estimate levels of 0.7x and 0.5x respectively.

3. Free cash flow: As well as the considerations above such as EBITDA and the investment in working capital, the required investment in Capex (Capital Expenditure) in 2010 and 2012 will fluctuate between MXN 6,500 and MXN 9,400 respectively. This investment will be divided mainly between: maintenance (approximately 30% of the total), growth initiatives (aprox. 40% of the total) and an increase in coverage of coolers and returnable bottles (the rest of the total investment). For dividend payments, we are making a forecast based on an average historical rate of the declared dividend / EPS ratio, which we think will rise due to the great capacity to generate cash.

On another level, we expect stability in operating costs, a large part of which include advertising, a focus on strengthening innovation in products, de-veloping the non-carbonated platform and main-taining the base business. However, for interna-tional operations, particularly in Venezuela and Argentina, there could be pressure on margins due to the high labor costs in these countries. (For more information about the financial statements, please see page 14).

Sugar, Free Market, Coffee Sugar and Cocoa Exchange (CSCE) contract no.11 nearest future position, US cents pe r pound. Source: International Monetary Fund.

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Sugar prices (US cents per pound)

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July 20, 2010




KOF Company Overview

In 1979, FEMSA, the current parent company of KOF, acquired soft drink bottling companies through one of its

subsidiaries. At the time, the recently acquired bottling companies had 13 distribution centers and a production capacity of 83 million unit cases (unit of measurement that equals 24 servings), operating 701 routes of

distribution. FEMSA, transferred these new acquisitions to FEMSA Refrescos S.A. de C.V., the predecessor of

Coca Cola Femsa S.A.B. de C.V. (KOF).

KOF’s strategy has been very clear from its beginnings: organic growth in territories and in acquisitions of new bottling companies in order to take advantage of the opportunities in these territories. Between 1994 and 1997,

KOF acquired new territories in the south of Mexico as well as in Argentina. By 2003, it had acquired Panamerican

Beverages (Panamco), which made it Coca Cola’s most important bottling company in Latin America and a

reference in the industry, as Panamco produced and distributed Coca Cola products in Guatemala, Nicaragua, Costa Rica, Panama, Colombia, Venezuela and Brazil, as well as bottled water, beer and other drinks in some of

these territories.

In November 2007, a partnership between The Coca Cola Company (TCCC) and KOF acquired in equal

proportions, 100% of the representative shares of the capital of Jugos del Valle, S.A.B. de C.V. In December 2008 part of the stock of Jugos del Valle was sold to other Coca Cola Mexico bottling companies, leaving KOF with a

20% indirect share in Jugos del Valle. In turn, Jugos del Valle sold its operation in Brazil to KOF and other bottling

companies of Coca Cola products and a subsidiary of TCCC.

In May 2008, a purchase agreement was signed with TCCC to acquire in partnership a franchise in the state of

Minas Gerais (REMIL) in Brazil. Continuing the strategy of expansion, KOF acquired Agua de los Ángeles, a 5-

gallon water bottling company, in July 2008 from Grupo Embotellador CIMSA S.A. de C.V., one of Coca Cola’s

bottling companies in Mexico. In 2009, KOF acquired the Brisa bottled water company in Colombia, owned by

Bavaria, a subsidiary of SABMiller. It was acquired together with TCCC in an agreement where KOF acquired the production and distribution assets and TCCC the Brisa brand. Lastly, in May 2009, KOF and TCCC came to an

agreement to develop the bottled water brand, Crystal, in Brazil.

The history of KOF is very much linked to TCCC in its

operations. This synergy has been beneficial for both, as the positioning of the Coca Cola brand is just as important as the

know-how for the operation and distribution of its products:

something that KOF has been very successful at, representing

around 40% of the total sales in Latin America and 10% of the global sales of TCCC, as well as being the second largest

bottling company of Coca Cola worldwide.

In the graph on the right, we show the distribution of the volume

of sales per region of KOF:

1,227

424232 225 184 136

Total Sales Volume (MUC)

Source: Annual Report 2009, KOF

8 ACTINVER

July 20, 2010




49.645 43.6

28.419.5

11.4

Population served(Millions)

Mexico has the highest amount of assets

By the end of 2009, Coca Cola FEMSA had 31 bottling plants

and 210 distribution centers across Mexico, Latincentro and Mer-

cosur. Mexico has the highest number of assets due to the fact that it is the most attractive market, being the country with the

highest per capita consumption of soft drinks in the world, second

to the United States where the per capita consumption is 158

liters.

According to the company, the per capita consumption of its soft

drinks is 103.15 liters of the 140 liters of its products that are con-

sumed per capita in Mexico, representing around 70% of its sales

of the total mix.

Points of Sale: highest consumption levels in SA

KOF has around 620,255 points of sale in Mexico, serving a

population of 49.6 million. We can compare this to Colombia, for example, where it reaches 45.6 million people in a country with a

similar population to Mexico, but with a difference in per capita

consumption of 21.77 liters of soft drink per year. As can be ap-

preciated here, the low per capita consumption figures in South

America represent a clear opportunity to develop operations out-side Mexico.

620,255 368,930

211,749

189,838 106,189 80,050

Points of saleMEXICO

COLOMBIA

VENEZUELA

BRAzIL

CENTRAL

AMERICA

ARGENTINA

104 6 5 4 2

84

33 32 28 27

6

Plants & Distribution centers

Plants Distribution centers

103.2

84.9

50.641.2

34.521.8

Soft drinks consumption (per capita)





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July 20, 2010




Distribution Channels KOF’s main distribution channel is the so-called ‘traditional channel’

which includes retailers and represents approximately 70% of the

company’s total volume of sales. Its other channels are made up of

food and beverage outlets including bars, restaurants, and related businesses (on premise channel), and the ‘modern channel’, includ-

ing all supermarket formats, convenience stores and other special-

ized channels.

Product sales per category in the territories where KOF operates

are divided mainly into: soft drinks, which has the highest percent-age of sales with 81%, followed by bottled water (including 5-gallon

bottles), and in less proportion, non-carbonated drinks. Although

the share of the last categories is low compared to soft drinks, their

average compound growth rate is much faster.

The following chart shows the distribution of sales per region, with Mexico having the lowest percentage in the category of soft drinks

due to the positioning of the other categories on a national level and

the fact that in Mexico, the per capita consumption of bottled water

is the highest in the world at 234 liters per year.

70%

30%

Distibution Channels

Traditional Channel

ON-Premise/Modern

channels/Others

81%

14%5%

Sales distribution

Sparkling

beverages

Water & Bulk

water

Still beverages

Distribution of sales per region

Source: Actinver estimates



Sparkling Water Bulk Water Still

Mexico 73.40% 4.10% 17.30% 5.10%

Centroamérica 87.30% 4.10% 0.30% 8.20%

Colombia 74.60% 9.00% 9.00% 7.50%

Venezuela 91.70% 4.60% 1.20% 2.60%

Brasil 91.80% 5.00% 0.30% 2.80%

Argentina 92.50% 0.80% 0.40% 6.20%

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KOF is producer, distributor and promoter of products such as Coca Cola, Sprite, Fanta, Jugos del

Valle and other registered brand drinks. It carries out these activities in the following territories:

1. Mexico: most of the center and south of

Mexico.

2. Guatemala: Guatemala City and surround-

ing area.

3. Nicaragua: whole country.

4. Costa Rica: whole country.

5. Panama: whole country.

6. Colombia: most of the territory.

7. Venezuela: whole country.

8. Brazil: São Paulo, Campiñas, Santos, the

state of Mato Grosso do Sul, part of the state of

Goias and part of the state of Minas Gerais.

9. Argentina: Capital and surrounding area.

KOF share structure : Public traded shares are the L Series with limited voting rights, listed on the Mexican Stock Exchange (BMV: KOF L) and on the New York Stock Exchange (NYSE: KOF) as American Depositary Receipts (ADR). Each ADR represents ten L Series shares.

Company Footprint by Region

Source: 20F Report, 2008


Outstanding Percentage Ownership ofPercentage of

Capital Stock Outstanding Capital StockVoting Rights

The Coca-Cola Company

(Series D)

Total 1,846,530,201 100% 100%

583,545,678

270,906,004

32%

15% ---

37%

Public (Series L Shares)

992,078,519 54%

Owner

FEMSA (Series A Shares) 63%

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July 20, 2010




Eco-Friendly biodegradable bottles On another level, Coca Cola is the leader in the industry in introducing a new ecological bottle. The PET bottle is made using up to 30% plant by-products and has a 20% lower carbon footprint than the previous bottle used. This new bottle, called PlantBottle, is 100% recyclable and isn’t biodegradable, guaranteeing that the energy con-tained in its materials is always recoverable. In 2010, Coca Cola produced 2 billion of these innovative bottles. On a worldwide level, during the first year of production, it will reduce its con-sumption of oil by an equivalent of the amount needed to generate more than 11 million liters of gasoline. The introduction of this product in the Mexican market will begin in Valle de Mexico, Monterrey and Guadalajara in presentations of Coca Cola Classic, 400 and 600 milliliters. To date, only 6 countries in the world have this inno-vative technology: Denmark, the United States, Canada, Japan, Brazil and Mexico.

2428.6

608.6452 427

163.3 127

Total Sales Volume (MUC)

Industry KOF Positioning vs. Peers

The most important bottling companies for The Coca Cola Company in Latin America are the Embotelladora Andina S.A., Coca Cola Em-bonor S.A, Coca Cola Polar, ARCA, CONTAL and Coca Cola FEMSA (KOF), this last being the most important in sales for TCCC in all Latin America. The bottling industry in Mexico is very important due to the high per capita consumption of the market. In Mexico, we are among the highest consumers of bottled water at 234 liters per capita and soft drinks at 149 liters, for which companies are in strong com-petition to win greater market share. The most important Coca Cola product bottling compa-nies in Mexico are ARCA, CONTAL and KOF. This last one, as can be seen in the graph, represents the highest volume of sales followed by ARCA. It is worth noting that CONTAL is a Mexican company which only operates on a national level and ranked 4th place in volume of sales above bottlers such as EMBONOR and POLAR which operate in more than one coun-try. This information more than confirms the importance of Mexico as an attractive market for beverage companies.

Geographic footprint of the main competitors in Lat in America

Source: Annual reports 2009, Companies


Name Country

Embotelladora Andina S.A Chile Region Metropolitana, San Antonio, Cachapoal

Brasil Rio de Janeiro, Espiritu Santo

Argentina Mendoza, San Juan, San luis, Cordoba,

Santa Fe, Entre Ríos

Coca Cola Embonor S.A Chile De Arica - Parinacota, de Tarapáca, de Maule,

Valparaíso, Libertador General Bernardo O' H,

del Bío Bío, Arauncanía, de los Ríos y de los Lagos

Bolivia La Paz, Cochabamba, Oruro, Potosi Tarija,

Chuquisaca y Santa Cruz.

Embotelladora ARCA S.A de C.V Mexico Tamaulipas, Nuevo Leon, Coahuila, Chihuahua,

Sonora, Sinaloa, Baja California y Baja California Sur

San luis Potosi y Zacatecas

Argentina Norte de ArgentinaCoca Cola Polar Chile Santiago, Antofagasta, Coquimbo, P. Arenas

Argentina B. Blanca, Chacabuco, La Pampa, Neuquen

C. Rivadavia, Trelew, T. del Fuego

Paraguay Asuncion, Coronel Oviedo, Ciudad del EsteGrupo Continental S.A.B Mexico Aguascalientes, Coahuila, Colima, Durango, Jalisco,

San Luis Potosi y Zacatecas.

Territory

NOTE: None of these companies shares distribution in the same territory

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Market Mexico doesn’t have access to good quality drinking water which has turned it into the country with the highest per capita consump-tion of bottled water. Beverage Marketing Corporation confirms this number one ranking for Mexico, with a per capita consumption of 234 liters of bottled water per year. This consumption is higher than the United States with 110 liters and Spain which consumes around 119 liters. The consumption of bottled water in Mexico represents 13% of total worldwide sales, and has been increasing continually at 8.1% per year. Just between 2003 and 2009, this market grew 40%. Currently, the sale of bottled water reaches levels of 26 billion liters per year, of which it is estimated that 18.2 billion (70%) is sold in 5-gallon bottles and 7.8 billion (30%) in indi-vidual bottles, not to mention the consequences this has on the family budget and, particularly, the environment.

The per capita consumption of soft drinks is 149 liters, a difference of 57% compared to the consumption of bottled water. However, the amount spent on soft drinks is much higher. Even though soft drinks contain a lot of sugar, no nutrients and in some cases are considered damaging to the health, Mexicans are the second highest consumers of soft drinks per capita in the world.

Mexican families spend more on soft drinks than on water, accord-ing to the 2004 National Survey of Household Income and Ex-penses (Encuesta Nacional de Ingresos y Gastos de los Hogares – ENIGH). Low income families spend 3.7% of their total income on soft drinks and carbonated waters and 2.5% on water.

201

149

92 74 66 5238

216 2 1

Soft Drinks Consumption

(Per capita - liters)

$96 $93 $117 $130

$121 $133 $134 $147 $153 $172

$129 $147 $172 $176 $189 $200

$227 $248

$267 $285

Average spending on water vs. soft

drinksAverage Spending on Water

Average spending on Soft Drinks

Source: INEGI, ENIGH 2004. Expenditure updated with 2009 infla-tion rate.

Source: Beverage Digest

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Analysis of Strengths, Weaknesses, Opportunities, a nd Threats. To summarize and conclude our outlook on KOF with regards to external and internal factors of the business, we present here a SWOT analysis (acronym for Strengths, Weaknesses, Opportunities and Threats) that shows the strengths and risks that we perceive for the company.

Strengths Weaknesses

· Positioning of the COCA COLA brand in the market.

· The percentage of stock in the hands of the public investor compared to the total number of shares in circulation is low and could limit the marketability of the stock.

· Financial strength and solid balance with high credit rating.

· The current franchise owners have low availability to sell its rights, particularly in Mexico and Brazil, which could limit the inorganic growth opportunities.

· Highly developed distribution arm.

· Cutting edge technology.

· Diverse product portfolio and capacity to innovate.

· Highly competent managerial team with extensive experience in operations and acquisitions.

Opportunities Threats · Presence in markets with a great potential for development in per capita consumption of drinks, particularly in Latincentro and Mercosur.

· Coca Cola Company establishes the cost of concentrates in the franchise territories.

· Presence in markets with an interesting population bonus compared to developed countries.

· Drinks market highly competitive with introduction of competitively priced products.

· Development of new lines of business, taking advantage of new tendencies and dynamics in consumer preferences.

· Dependence on international prices for raw materials: sweeteners, energy supplements, packaging.

· Perception that some products are part of the regular diet.

· Political risk: nationalization of assets, restriction on foreign investment.

· Consumer habits linked to deep routed national culinary customs.

· Regulatory risk: regulations for food, public health, taxes and competition.

· Climate conditions: in general terms, its territories enjoy climate conditions that stimulate the consumption of beverages.

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COCA-COLA FEMSA Financial statements summary from 2009 to 2012E Figures in MXN million, except multiples and indica tors

Concept 2009 2010E 2011E 2012E Concept 2009 2010E 2011E 2012E

Net Sales 102,767 108,009 116,609 127,061 Total Assets 110,661 116,620 129,106 140,123COGS 54,952 58,433 62,939 68,707 Current Assets 23,639 31,485 39,366 45,673Gross Profit 47,815 49,576 53,670 58,354 Cash 9,740 15,886 22,082 27,121SG&A 31,980 33,088 35,868 39,082 Accounts Receivable 5,931 7,313 7,896 8,603EBIT 15,835 16,487 17,803 19,271 Inventories 5,002 5,729 6,191 6,621Other Expenses (Income) 1,448 1,284 1,298 1,351 Other Current Assets 2,967 2,557 3,197 3,328Net Financial Cost 1,373 581 826 212Income before taxes 13,013 14,623 15,679 17,709 Properties Plants & Equipment 31,132 29,922 32,154 34,511Taxes and Profit Sharing 4,043 4,365 4,680 5,286 Long Term Assets 2,822 2,357 2,459 2,559Minority Interest 448 408 391 442 Intangibles 50,898 51,365 53,573 55,762Mayority Net Income 8,523 9,849 10,607 11,980 Assets in other Subsidiaries 2,170 1,490 1,554 1,618

D&A 3,911 4,490 4,765 5,114 Total Liabilities 42,189 38,980 37,253 34,273EBITDA 19,746 20,978 22,567 24,385 Current Liabilities 23,448 18,788 18,996 19,412

Accounts Payables 9,368 9,979 9,929 10,465Shares (m) 1,847 1,847 1,847 1,847 Short Term Debt 5,427 2,362 2,305 1,908Book Value per Share 37.08 42.05 49.74 57.32 Other Current Liabilities 8,653 6,447 6,762 7,038EPS 4.62 5.33 5.74 6.49EBITDA per Share 10.69 11.36 12.22 13.21 Long Term Liabilities 18,741 20,192 18,257 14,861

Long Term Debt 10,495 14,551 14,034 10,466Net Sales Growth 23.9% 5.1% 8.0% 9.0% Other Liabilities 8,245 5,640 4,223 4,396EBIT Growth 15.6% 4.1% 8.0% 8.2%Net Income Growth 52.3% 15.6% 7.7% 12.9% Equity 68,472 77,640 91,852 105,850EBITDA Growth 15.4% 6.2% 7.6% 8.1% Minorities 2,296 2,763 3,269 3,767

Majority Equity 66,176 74,877 88,584 102,083Gross Margin 46.5% 45.9% 46.0% 45.9%EBITDA Margin 19.2% 19.4% 19.4% 19.2% Total Debt 15,922 16,914 16,339 12,374EBIT Margin 15.4% 15.3% 15.3% 15.2% Net Debt 6,182 1,028 -5,743 -14,747Net Margin 8.3% 9.1% 9.1% 9.4%

Source: Actinv er Estimates Source: Actinv er Estimates

Concept 2009 2010E 2011E 2012E Concept 2009 2010E 2011E 2012E

EBITDA 19,746 20,978 22,567 24,385 Liquidity 1.0x 1.7x 2.1x 2.4xNet Interests 1,491 793 971 -174 Acid - Test Ratio 0.8x 1.4x 1.7x 2.0xCash taxes 4,568 4,209 4,370 4,936 Total Debt / EBITDA 0.8x 0.8x 0.7x 0.5x

Net Debt / EBITDA 0.3x 0.0x -0.3x -0.6xFixed Asset Investment 5,751 5,920 6,997 7,471 Interest Coverage Ratio 11.1x 18.9x 16.1x 22.3xChanges in Working Capital 199 -1,499 -1,095 -601

Days in Inventory 32.8 35.3 35.4 34.7Dividends 1,344 2,046 2,365 2,547 Days Receivables 51.9 60.9 60.9 60.9Debt Variation 4,856 365 575 3,965 Days Payables 60.6 60.7 56.4 54.5Others -2,012 2,997 2,190 1,203 Operating Cycle 24.1 35.5 40.0 41.1

Free Cash Flow 3,548 6,146 6,196 5,039 ROA 14.3% 14.1% 13.8% 13.8%ROE 12.9% 13.2% 12.0% 11.7%

Source: Actinv er Estimates Source: Actinv er Estimates

Income Statement (2009 – 2012E) Balance Sheet (2009 – 2012E)

Cash Flow (2009 – 2012E) Indicators (2009 – 2012E)

Octubre 6, 2008 15 ACTINVER

Disclaimer Analyst Certification for the following Analysts: Juan Carlos Sotomayor Jaime Ascencio Pablo Duarte Roberto Galván Marco Montañez Ramón Ortiz Karla Peña The analyst(s) responsible for this report, certifies(y) that the opinion(s) on any of the securities or issuers mentioned in this document, as well as any views or forecasts expressed herein accurately reflect their personal view(s). No part of their compensation was, is or will be directly or indirectly related to the specific recommendation(s) or views contained in this document.

Any of the business units of Grupo Actinver or its affiliates may seek to do business with any company discussed in this research document. Any past or potential future compensation received by Grupo Actinver or any of its affiliates from any issuer mentioned in this report has not had and will not have any effect our analysts’ compensation. However, as for any other employee of Grupo Actinver and its affiliates, our analysts’ compensation is affected by the overall profitability of Grupo Actinver and its affiliates.

Guide to our Rating Methodology Total Expected Return on any security under coverage includes dividends and/or other forms of wealth distribution expected to be implemented by the issuers, in addition to the expected stock price appreciation or depreciation over the next twelve months based on our analysts’ price targets. Analysts uses a wide variety of methods to calculate price targets that, among others, include Discounted Cash Flow models, models based on expected risk-adjusted multiples, Sum-of-Parts valuation techniques, break-up scenarios and relative valuation models.

Changes in our price targets and/or our recommendat ions. Companies under coverage are under constant surveillance and as a result of such surveillance our analysts update their models resulting in potential changes to their price targets. Changes in general business conditions potentially affecting either the cost of capital and/or growth prospects of all companies under coverage, or a given industry, or a group of industries are typical triggers for revisions to our price targets and/or recommendations. Other micro- and macroeconomic events could materially affect the overall prospects of an individual company under coverage and, as a result, such event-driven factors could lead to changes in our price targets and/or recommendation of the company affected. Even if our overall expectations for a given company under coverage have not materially changed, our recommendations are subject to revision if the stock price has changed significantly, as it will affect total expected return.

Terms such as "price targets, our price targets, total expected return, analyst's price targets” or any other similar phrase are used in this document as complementary to our recommendation or as a condition that could change in our point of view and, according to article 188 of Securities Market Act, do not imply in any way that Actinver, its agents, or its related companies are in any form providing assurance or guarantee, nor assuming any responsibility for the risks associated with any investment in the discussed securities.

Recommendations for companies under coverage formin g part of the Indice de Precios y Cotizaciones (IPy C) Index. For stocks included in the IPyC we have two possible recommendations: a) Underweight, or b) Overweight. A stock classified as Underweight (UW) is expected to yield returns either very similar to or lower than that of the IPyC Index. We argue that for stocks expected to yield returns similar to the IPyC Index it is in the best interest of the investor to buy either a passive mutual fund or an ETF replicating the performance of the IPyC Index, since the diversification inherent in such products will reduce overall risk for the investor. Stocks rated as Overweight (OW) are expected to yield returns considerably higher than the IPyC Index. Recommendations for companies under coverage that d o not belong to the Indice de Precios y Cotizacione s (IPyC) Index. For companies within this group, we have two possible recommendations: a) BUY, or b) SELL . For a security rated as ‘Buy’ total expected return should outperform that of the IPyC Index and should also yield returns in excess of 2.5 times the 364-day expected yield on Mexican Certificados de la Tesoreria de la Federación (CETES).

Rating Distribution as of December 31, 2009

Companies that belong to the IPyC Companies not part of the IPyC Underweight: 36% Sell: 33% Overweight: 64% Buy: 67%

Octubre 6, 2008 16 ACTINVER

Research

Juan Carlos Sotomayor Salinas Head of Equity Research

(52) 55 1103-6758 (52) 55 1103-6600

x5030

[email protected]

Jaime Ascencio Economist (52) 55 1103-6600 x5032 [email protected]

Ramón Ortiz Airports, Cement, Construction & Homebuilders

(52) 55 1103-6600 x5034 [email protected]

Karla Peña Telcos & Media (52) 55 1103-6600 x5035 [email protected]

Pablo Duarte Conglomerates (52) 55 1103-6600 x5031

[email protected]

Marco Montañez Food, Beverages and Retail Stores (52) 55 1103-6600

x5033 [email protected]

Roberto Galván Technical Analysis (52) 55 1103 -6600 x5039 [email protected]

Sales & Trading

Jose Pedro Valenzuela Managing Director (52) 55 1103-6779 [email protected]

Gerardo Roman Head, Sales & Trading (52) 55 1103-6690 [email protected]

Julie Roberts Head, Institutional Sales (210) 298 - 5371 [email protected]

Tulio Chávez Institutional Sales (52) 55 1103-6762 [email protected]

Gerardo Sienra Institutional Sales (52) 55 1103-6691 [email protected]

José María Celorio Institutional Sales (52) 55 1103-6606 [email protected]

Corporate Headquarters Guillermo González Camarena 1200, Floors 9-11, Santa Fé, México, D.F. 01210

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