Latam Consumer Monthly: Early signs of sector rotation a yellow flag for blue chips (November 2015)

Deutsche Bank Markets Research Global Emerging Markets Consumer Periodical Latam Consumer Monthly Date 6 November 2015 Early signs of sector rotation a yellow flag for blue chips (November 2015) 80% of our coverage rose in USD in October (but only 53% outperformed) ________________________________________________________________________________________________________________ Deutsche Bank Securities Inc. Deutsche Bank does and seeks to do business with companies covered in its research reports. Thus, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. DISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED IN APPENDIX 1. MCI (P) 124/04/2015. Jose Yordan Research Analyst (+1) 212 250-5528 jose.yordan@db.com Marcel Moraes Research Analyst (+55) 11 2113-5976 marcel.moraes@db.com Katina Metzidakis Research Associate (+1) 212 250-2009 katina.metzidakis@db.com The sector again rallied in October: 80% of our covered stocks had positive returns in USD terms (versus September's 47%), but a lower percentage (53% vs. 70%) outperformed their respective country indices. The last time this happened (i.e., relative % < absolute %) was in April 2015, and in our view the reversal of the 5-month trend may be an indication that investors are in the early stages of swapping from consumer names into less defensive (and perhaps oversold) sectors. Cosmetics/HPC stocks rose over 15% (the only exception), while Food stocks were flat and underperformed by 7%. Beverage and Retail stocks rose 6-7% on average, in line with the market. Walmex October SSS headline will likely be spun positively, but... Walmex reported October comp sales growth of 10.8%, with 1.8% from traffic growth and 9.0% (2x Mexican inflation) from average ticket growth. Unlike the previous month, October was positively impacted by both a calendar effect and a payday effect (the last day of the month was a Saturday), as evidenced by the comparable-4-week SSS growth of 9.2%. While this was baked into our estimate of 7%, we had assumed a lower underlying growth rate based on our negative read of the September report: recall that SSS growth for that month was 7.0% versus DBe of 11.5%, which was in turn based on the fact that the growth rates in the previous two Septembers had averaged —3.7% (the easiest two-year stack in at least 7 years). The bulls will likely point to the 1.8% traffic growth in October as a positive, but we would counter that this should be seen in the context of a 2.7% traffic decline in October 2014. In our view, the real surprise was the average ticket growth of 9.0%, which as we have stated in previous months, is probably the result of a greater contribution from Sam’s Club as the turnaround of this unit evolves; but if we are right about that, the margin-dilutive effect of Sam’s relative growth may also be larger. Ultimately, if the September negative surprise was not so regarded, this latest release should not stop the train either. The potential rotation out of WALMEX may be delayed a few months (until tough comps start, in January), but not forever... Beer production rose 4.1% in October on easy comps; CSDs fell again According to SICOBE, beer production rose 4.1% in October, while soft drinks fell for the ninth straight month (by 4.9%). For beer, easy comparisons (-2.1% in October 2014) partially explain the moderate growth last month. But in our view, the rest stems from replenishment of trade inventories. The beer industry under-produced for the past five quarters (after large overproduction in 2Q14), and is probably carrying below-normal inventory levels. Eventually, however, this trend will become unsustainable. BR protein exports: USD prices adjusting to BRL weakness October data from SECEX showed flat pork export volumes, and beef volumes fell 4.2% yoy (despite being the highest absolute volume so far in 2015). Large pork price declines (41% in USD) continued on tough comps, while beef prices also fell 17% in USD. After a 4 month growth streak, poultry volumes fell almost 10%, while pricing continued to deteriorate versus recent months (this time, it was down 22% in USD terms). So despite significant declines in USD pricing across all protein exports, Brazil beef continues to have the most pricing power in relative terms (in other words, has had to “share” a smaller percentage of the benefit of BRL devaluation on local-currency export prices). 6 November 2015 Consumer Latam Consumer Monthly Page 2 Deutsche Bank Securities Inc. Table Of Contents DB Related Research—October .......................................... 6 Latin America: Mexican Retail update (w/Liverpool d