Grana y Montero - Credit Suisse
Transcript of Grana y Montero - Credit Suisse
DISCLOSURE APPENDIX AT THE BACK OF THIS REPORT CONTAINS IMPORTANT DISCLOSURES, ANALYST CERTIFICATIONS, AND THE STATUS OF NON-US ANALYSTS. US Disclosure: Credit Suisse does and seeks to do business with companies covered in its research reports. As a result, 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.
CREDIT SUISSE SECURITIES RESEARCH & ANALYTICS BEYOND INFORMATION®
Client-Driven Solutions, Insights, and Access
06 January 2015
Americas/Peru
Equity Research
Building Materials & Construction
Grana y Montero (GRAM) INITIATION
Painful Backlog Transition from Mining to
Infrastructure, Initiating with Neutral
■ We are initiating on GRAM with a neutral rating and a US$13.5/Adr TP
(10% upside). G&M is transitioning its backlog from mining to infrastructure,
and we think it has the potential to grow and create value, but see 2015-16
as a painful transition period, with difficult industry conditions. Despite the
40% y/y plunge in the Adr price, we fail to see near term catalysts or a
significant improvement in the E&C environment in Peru in the short term.
■ Low metal prices and difficult permit situation for mining projects to
impact G&M. The market anticipates US$60bn of mining projects in Peru for
the next 8 years. Our mining insight makes us hesitant to believe it. With
gold and copper prices falling to the 5-year lows and crashing IRRs for
miners in Peru, mining projects are bound to face rationalization. We dug
deep into the permit situation for mining projects, where we see difficulties to
get the green light. Sales related to mining represent ~50% of '14e total. Our
model relies on G&M's ability to keep on increasing its E&C backlog while
keeping backlog/sales at 2x, its historical levels. We rely on G&M's expertise
to win most of the mining project bids that we estimate to materialize in Peru.
■ Integration in the construction and infrastructure sector to yield by '17.
G&M's integration across segments coupled with a healthy balance sheets
puts it in an advantaged turf to benefit from Peru's infrastructure pipeline.
We expect this to ramp up thru '16, and to be visible in G&M's P&L by '17.
■ GRAM trades at 6.8x '15e EV/Ebitda. In line with LatAm peers. We
believe that the challenging macro situation is reflected in the stock's price.
Share price performance
11
16
21
Jan-14 Apr-14 Jul-14 Oct-14
Daily Jan 06, 2014 - Jan 02, 2015, 1/06/14 = US$21.35
Price Indexed S&P 500 INDEX
On 01/02/15 the S&P 500 INDEX closed at 2058.2
Quarterly EPS Q1 Q2 Q3 Q4 2013A 0.13 0.16 0.23 0.32 2014E 0.18 0.18 0.26 0.21 2015E — — — —
Financial and valuation metrics
Year 12/13A 12/14E 12/15E 12/16E Revenue (US$ m) 2,178.3 2,414.4 2,827.0 2,640.6 EBITDA (US$ m) 372.5 327.2 361.5 401.6 EBIT (US$ m) 239.7 193.1 227.4 235.0 Net income (US$ m) 110.3 108.7 125.1 126.8 EPS (CS adj.) (US$) 0.84 0.82 0.95 0.96 Dividend yield (%) — 0.7 3.1 3.1 P/E (x) 14.8 15.0 13.1 12.9 EV/EBITDA 4.2 6.1 6.3 5.4 P/B (x) 1.6 1.6 1.5 1.4 ROE stated - return on equity 14.5 10.6 11.7 11.0 ROIC (%) 14.79 8.81 8.17 8.48 Net debt (US$ m) -60 360 643 532 Net debt/equity (12/14E, %) -5.1 29.9 49.2 37.8 Capex (US$ m) -292 -398 -400 -206
Source: Company data, Credit Suisse estimates.
Rating NEUTRAL* Price (05 Jan 15, US$) 12.39 Target price (US$) 13.50¹ 52-week price range 21.97 - 11.70 Market cap. (US$ m) 1,639.90 Enterprise value (US$ m) 1,999.98
*Stock ratings are relative to the coverage universe in each
analyst's or each team's respective sector.
¹Target price is for 12 months.
Research Analysts
Santiago Perez Teuffer
52 55 5283 8901
Ana Zinser
52 55 5283 3821
Bruno Savaris, CFA
55 11 3701 6332
06 January 2015
Grana y Montero (GRAM) 2
Table of contents Graña & Montero – Peruvian Construction Champion 3 Investment Thesis 5
Negatives/Risks 5 Difficult environment for mining projects, driven by permit processes in Peru and
lower metal prices 5 Backlog transition towards infrastructure will take longer than expected 6 Limited visibility on infrastructure pipeline in Peru. The need is there, but deployment
should take time. 6 Positives/Catalysts 6
Solid balance sheet should sustain more bids in the future 6 Proven track record in mining and infrastructure and positioned among the best in
Peru 7 Business model to benefit across segments by 2017 7
Valuation 8 Relative Valuation 9
Our unique View of Graña y Montero; Seeing it Through Our Mining Lens 11 The Hassle Behind a Project's Approval 14
Political Instability the Underlying Problem behind Low Mining Investments 15 US$60bn Pipeline Could be Jeopardized by Political Risk in Each Region 16
Peru's Natural Competitive Advantage Limited by Social Unrest 17 Bullish price expectations have historically boosted capex deployments 18
G&M's Performance Reliant on the Mining Industry 19 Even if Social and Political Interests are Aligned, Projects Might not be Economically
Attractive Under Current Gold and Copper Prices 20 Backlog and Value Creation 22
Infrastructure Projects in Peru Struggling to be Approved 23 Infrastructure Investment Gap in Peru 24 Public-Private Partnerships in Peru 24 Project Delays Have Impacted E&C and Concession Investments 26
Oil & Gas Division 28 Hydrocarbon Extraction 28 Gas Processing 28 Fuel Storage Terminals 28
Appendix 30 Engineering and Construction 30 Norvial 30 Survial 31 Canchaque 32 Via Expresa Sur 33 Via Expresa Javier Pardo 34 Line 1 of Lima Metro 34 La Chira water treatment plan 35 GMP 36 Block I and V oil fields 36 Gas Processing 37 Fuel Storage Terminals 37 Real Estate Division 38 Technical Services Segment 39 Operation and Maintenance of Infrastructure Assets 39
06 January 2015
Grana y Montero (GRAM) 3
Graña & Montero – Peruvian Construction Champion Graña y Montero (G&M) is an engineering and construction company in Peru, mainly
focused on the construction of projects related to the mining industry, which represents
68% of 2014E revenue, with a current backlog of US$3.6bn and a 1.6x backlog/revenue. It
has strong complementary businesses in infrastructure, real estate and technical services.
For an in depth description of each of the company's business segments, please refer to
the Appendix on page 30.
Exhibit 1: Breakdown of G&M's 2014e Financials by Segment, Backlog Breakdown to 3Q14
E&C
68%
Infrastructure
11%
Real Estate
3%
Technical
Services
18%
Revenues
E&C
54%
Infrastructure
32%
Real Estate
6%
Technical Services
8%
Ebitda
E&C
84%
Infrastructure
13%
Real Estate
3%
Backlog
TechTechnical
Services
.4%
Source: Company data, Credit Suisse estimates
The company was listed on October 31st, 1997 on the Lima Stock Exchange and on July
23th, 2013 on the New York Stock Exchange; has a market. cap. of US$1.6bn, free float of
65.5% and average daily liquidity of US$2.9mn .
Exhibit 2: Share price and liquidity performance Share Price (LHS), Volume (RHS)
Volume
$USD mn
GRAMONC1 PE
Equity
0
20
40
60
80
100
120
140
160
180
0
2
4
6
8
10
12
14
Nov-97 Nov-99 Nov-01 Nov-03 Nov-05 Nov-07 Nov-09 Nov-11 Nov-13 Source: Company data, Bloomberg, Credit Suisse estimates
06 January 2015
Grana y Montero (GRAM) 4
Since G&M began its operations in 1933 it has consolidated its position in Peru through
strategic mergers and JVs. The latter has allowed the company to get involved in a variety
of projects that range from the operation of highways to onshore oil fields. As of 2013,
3.3% of the company's Ebitda came from JVs and the remaining, from the company's own
operations.
Exhibit 3: G&M's Timeline
GRAMONVEL is founded
Company builds the south Pan-
American highway
Hydroelectric central in Cañon del Pato is finished
Construction ofLima’s airport is
finished
Growth is focused on mining and oil projects
Oil services, IT, and engineering consulting divisions are created.
Graña y Montero islisted in Lima’s Stock
Exchange
Stracon GyMsubsidiary is created.
The company is listed in the NYSE under the ticker GRAM
1933 1953 1957 1961 1976 1983 1997 2011 2013 2014
G&M acquires Morelco, adding
~15% to the backlog.
Source: Company data
G&M is one of the most experienced mine constructors in LatAm, having participated in Peru's most important mine
projects, including Cuajone, Yanacocha, Antamina, Pierina, Alto Chicama, Cerro Verde, Antapaccay, Las Bambas, and
Toromocho. These mines account for 75% of Peru's estimated copper production in 2014 and 31% of gold production.
06 January 2015
Grana y Montero (GRAM) 5
Investment Thesis
Negatives/Risks
Difficult environment for mining projects, driven by permit processes in Peru and
lower metal prices
Peru's top quality ore bodies and below average costs, are not enough to unlock the
country's potential in the mining industry. We have a bearish view on the execution of
Peru's mining projects. Sustained by a long and inefficient process for the approval of the
Environmental Impact Assessment (EIA) and strong political issues, which have been the
main reasons for project delays in the past. In our view, the US$60bn pipeline for the
2014-2020 period is too ambitious and hard to materialize.
Exhibit 4: US$60bn Pipeline According to Execution Risk in US$bn
12.7
6.4
1.54.2
7.6
4.2
0.3
10.2
10.10.8
2015 2016 2017 2018 2019 2020
Projects with low and medium
execution risk
Projects with high execution risk
Source: Peruvian Ministry of Energy and Mining, Credit Suisse estimates
On top of an unfavorable political environment, projects will have to overcome a scenario
of low metal prices. At current price scenarios, it is hard to justify large capex deployments
and we believe the metals market is unlikely to witness a recovery in the short -run.
Exhibit 5: Sensitivity of Peruvian Gold Mining Projects to
Gold Prices X axis in US$/oz. IRR real, unlevered.
Exhibit 6: Sensitivity of Peruvian Copper Mining Projects
to Copper Prices X axis in US$/lb. IRR real, unlevered.
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
7.0%
8.0%
30%
35%
40%
45%
50%
55%
60%
65%
1,400 1,300 1,200 1,100 1,000
Ebitda Mg FCF Coversion IRR
0.0%
2.5%
5.0%
7.5%
10.0%
12.5%
15.0%
17.5%
20.0%
20%
27%
34%
41%
48%
55%
62%
4.5 4.0 3.5 3.0 2.5
Ebitda Mg FCF Coversion IRR
Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates
06 January 2015
Grana y Montero (GRAM) 6
Backlog transition towards infrastructure will take longer than expected
Infrastructure projects in Peru can take years before they enter the construction stage,
even after the project is approved. Thirteen of the 34 projects approved from 2010 to
2013, have not started the construction process, this accounts for a US$3.6bn delay in
infrastructure spending.
Our current target price assumes the company is able to execute on average 50% of its
backlog per year, failure to obtain construction permits on time would add potential
downside risk to our current target price.
Limited visibility on infrastructure pipeline in Peru. The need is there, but
deployment should take time.
Currently the country has an infrastructure gap of US$88bn, defined as the investment
needed to sustain current growth. If this infrastructure plan was successfully implemented,
poverty will be reduced ~6% between 2012 and 2016.The lack of vertical integration
between the local and federal governments, coupled with an unpredictable process for
project approval, makes it hard to predict the actual timeframe for execution of the
projects.
Our model is assuming a constant increase in the company's backlog. If the government
fails to execute a solid infrastructure plan in the upcoming years, this would represent
additional downside to our model.
Positives/Catalysts
Solid balance sheet should sustain more bids in the future
The company currently has a 2014e net debt/ Ebitda position of 1.1x, below its LatAm
peers' leverage of 2.9x. We believe that if the pipeline for mining and infrastructure
projects were to materialize G&M would be in a solid position to enhance its portfolio. Its
healthy capital structure allows the company to maintain its cost of debt at 6%, close to the
country's average of 5%. G&M will be able to increase its leverage levels, if needed,
without significantly affecting its cash flows.
Exhibit 7: 2014e Net Debt/Ebitda
-2.2-0.8 -0.5
0.3
0.3
0.3
1.1
1.3 1.4 1.72.6 2.6 2.7 2.8
4.55.3
7.2
1.8
Flu
or
Monad
elp
hous
Gro
up
Pin
fra
Leig
hto
n H
old
ings
Jaco
bs
Engin
eerin
g
AE
CO
M T
ech
nolo
gy
Corp
.
G&
M
Chin
a S
tate
Const
ruct
ion
Engin
eerin
g
AM
EC
AC
S
OH
L M
exi
co
Ferr
eyc
orp
Tra
nsf
ield
Serv
ices
Ltd
Art
eris
Ohl
SN
C L
aval
in G
roup
Em
pre
sas
ICA
Net Debt/Ebitda Average
Source: Company data, Bloomberg, Credit Suisse estimates
06 January 2015
Grana y Montero (GRAM) 7
Proven track record in mining and infrastructure and positioned among the best in
Peru
Since G&M began its operations in 1933 it has consolidated its position in Peru through
mergers and JVs. Through these strategic alliances the company has been able to
increase its asset mix, while reducing its dependence on the mining industry.
We believe one of G&M's main competitive advantage in the industry is its local know-
how. Its solid understanding of Peru's political dynamics, has provided the company with
additional bargaining power which is crucial considering the project approvals are highly
dependent on political matters. G&M's market share in mining projects has been ~50% on
average, a trend we expect to continue.
Business model to benefit across segments by 2017
Its expertise among different sectors, puts G&M in a great position to benefit from
upcoming projects. The company is able to bid for a variety of projects in the infrastructure
sector, offering its operational know-how and experience. We expect the match between
the construction and the infrastructure segments to be visible by 2017, as several of the
projects granted to the infrastructure division will feed the company's backlog during their
construction stage.
We welcome the company's strategy to offer not only construction services but a fully
integrated portfolio throughout its GMI segment, which provides engineering services. The
company expects that, in the near future, contracts awarded by G&M to GMI will account
for close to 60% of GMI contracts, today at 40%; evidence of the company's efforts to
achieve greater integration between segments.
06 January 2015
Grana y Montero (GRAM) 8
Valuation – Setting a US$13.5/Adr Target Price
We have valued G&M through a DCF method. Generally, we are taking into account a
growth expectation in new contract requests of 1.0x GDP, while we are expecting the
company is able to normalize its backlog/sales to historical levels.
We are valuing all the concessions to maturity, while adding a perpetuity value to the
period after the company's last concession expires, based on the assumption that the
company will be able to continue to secure more contracts for its E&C segment.
We believe the company will be able to achieve a CAGR of 4% in revenues and average
Ebitda growth of 7.3% from 2014 to 2018. On this front, we expect G&M to expand its
margin by around 180bps, as we expect the infrastructure projects granted during 2014-
2015 to be executed by 2017.
Our Ke is built using an updated Rf of 3% and, a country risk of 2%, which we think
reflects Peru's long-term economic situation. We are also using an equity risk premium of
6%, resulting in a yield of 10.4% Ke.
Under this assumptions and our projections on G&M's operations, we arrive to an equity
value of US$1.8bn, implying a US$13.5 per ADR target price.
Exhibit 8: G&M's DCF in millions, unless otherwise stated
2015 DCF - Equity Value 1,790
# Adr (mn) 132
Target price GRAM (US$) 13.5
Potential Upside (Downside) to GRAM 10%
Source: Company data, Credit Suisse estimates
06 January 2015
Grana y Montero (GRAM) 9
Relative Valuation
Exhibit 9: 2014e EV/Ebitda
4.4 5.05.4
5.4 5.55.7 5.8
5.8 6.1
6.6
6.97.7
8.4 8.5 9.0 9.19.6
17.20%
15% 13% 10% 12% 10%
-14%
5%
-17%
11%
-2%9% 9%
70%
35%
13%4%
13%
Leig
hto
n H
old
ings
Chin
a S
tate
Const
ruct
ion…
Flu
or
Art
eris
Tra
nsf
ield
Serv
ices
Ltd Ferr
eyc
orp
Monad
elp
hous
Gro
up A
CS
OH
L M
exi
co
G&
M
SN
C L
aval
inG
roup
AM
EC
Jaco
bs
Engin
eerin
g
AE
CO
MTech
nolo
gy
Corp
.
Besa
lco
Em
pre
sas
ICA
Sal
faC
orp
Pin
fra
EV/Ebitda Ebitda CAGR '14-'17
Source: Company data, Credit Suisse estimates
Exhibit 10: 2014e P/E
5.2 5.5 6.7 7.07.8 8.5 8.7 13.5 13.1 12.0 12.5 13.0 10.0 14.3 14.9
17.1
24.031.8
12.4
Ohl
Monad
elp
hous
Gro
up
OH
L M
exi
co
Ferr
eyc
orp
Sal
faC
orp
Chin
a S
tate
Const
ruct
ion…
Art
eris
AM
EC
AC
S
Tra
nsf
ield
Serv
ices
Ltd
AE
CO
M T
ech
nolo
gy
Corp
.
Jaco
bs
Engin
eerin
g
Leig
hto
n H
old
ings
Flu
or
G&
M
Em
pre
sas
ICA
Besa
lco
Pin
fra
14 P/E Average
Source: Company data, Credit Suisse estimates
Exhibit 11: 2014e Ebitda Margin
81%
68% 65%
43%
33%
18% 14%
12% 11% 9%
9% 8% 8% 7% 7% 6% 6% 6% 5% 5%21%
OH
L M
exi
co
Art
eris
Pin
fra
OH
L M
exi
co (
Cash
EV
/EB
ITD
A) O
hl
Em
pre
sas
ICA
G&
M
SN
C L
aval
in G
roup
Ferr
eyc
orp
Monad
elp
hous
Gro
up
AM
EC
Besa
lco
Leig
hto
n H
old
ings
AC
S
Sal
faC
orp
Jaco
bs
Engin
eerin
g
Flu
or
Chin
a S
tate
Const
ruct
ion…
Tra
nsf
ield
Serv
ices
Ltd
AE
CO
M T
ech
nolo
gy
Corp
.
Ebitda Margin Average
Source: Company data, Credit Suisse estimates
06 January 2015
Grana y Montero (GRAM) 10
Exhibit 12: G&M Corporate Template In $US millions, unless otherwise stated
BASICS COMPANY DESCRIPTION
Sector Toll Roads Ticker GRAM
Price (Ps$) 12.3
Target (Ps$) 13.5
Potential Upside (Downside) 10%
Recommendation NEUTRAL POSITIVES
Mkt. cap. (Ps$ mn) 1,624
Free Float (% ) 65.5%
SHAREHOLDERS (mn) Total
GH Holding Group 17.8% NEGATIVES
Bethel Enterprises 5.1%
ING Group 6.2%
Scotiabank 5.3%
Free Float 65.5%
US$60bn Pipeline According to Execution Risk 2014e E&C Revenues by Sector
FINANCIAL METRICS (US$mn) 2012A 2013A 2014E 2015E 2016E 2017E OPERATING METRICS 2012A 2013A 2014E 2015E 2016E 2017E
Revenues 1,944 2,178 2,414 2,827 2,641 2,864 Backlog/Revenues 2.3x 2.1x 1.7x 1.2x 1.2x 1.0x
Gross Profit 126 105 341 386 393 421 E&C % of revenues 67% 69% 70% 72% 69% 71%
Gross margin 6% 5% 14% 14% 15% 15% Infrastructure % of revenues 10% 11% 12% 11% 11% 11%
EBIT 197 240 193 227 235 252 Real Estate % of revenues 5% 5% 3% 2% 3% 3%
EBIT margin 10% 11% 8% 8% 9% 9% Serv ices % of revenue 21% 20% 18% 15% 16% 16%
EBITDA 287 373 327 361 402 427
EBITDA margin 15% 17% 14% 13% 15% 15% LEVERAGE 2012A 2013A 2014E 2015E 2016E 2017E
Net financial income (expenses) -4 -41 -28 -34 -37 -38 Net debt/ EBITDA 0.1x -0.2x 1.1x 1.8x 1.3x 1.2x
Equity Income from subs. 0 12 19 22 20 22 Net debt / Equity 0.1x -0.1x 0.3x 0.6x 0.4x 0.4x
Net income 108 111 109 125 127 138 EBITDA/Net Interest Exp. 75.4x 9.0x 11.5x 10.6x 10.8x 11.3x
Net margin 6% 5% 5% 4% 5% 5%
# Adrs (mn) 132 132 132 132 132 132 RETURN / YIELD 2012A 2013A 2014E 2015E 2016E 2017E
EPS (Us$) 0.8 0.8 0.8 0.9 1.0 1.0 ROIC 30.7% 24.3% 15.6% 16.3% 16.1% 16.1%
Effective tax rate -29% -32% -29% -30% -30% -30% WACC 9.0% 9.0% 9.0% 9.0% 9.0% 9.0%
D&A 90 133 134 134 167 174 Cost of Equity (ke) 10.4% 10.4% 10.4% 10.4% 10.4% 10.4%
Div idends 0 0 11 50 50 51 ROE 21.1% 11.0% 10.5% 11.3% 10.7% 10.8%
FCFE Generation 288 62 -136 -82 160 114 FCF Yield 17.7% 3.8% -8.4% -5.1% 9.9% 7.0%
Capex 0 -292 -398 -400 -206 -212 EV/FCF 6.3x 27.5x -15.8x -29.8x 14.8x 21.1x
Total assets 1,844 2,304 2,584 2,972 3,002 3,240 Div. Yield 0.0% 0.0% 0.7% 3.1% 3.1% 3.1%
Cash 288 350 198 65 176 238
Total debt 319 291 558 708 708 758 VALUATION 2012A 2013A 2014E 2015E 2016E 2017E
Net debt 31 -60 360 643 532 520 EV / EBITDA 6.3 4.6 6.6 6.8 5.9 5.6
Book value 514 1,010 1,035 1,110 1,187 1,274 EV / IC 2.2x 1.3x 1.4x 1.4x 1.3x 1.2x
Market cap. 1,624 1,624 1,624 1,624 1,624 1,624 P/E 15.0x 14.7x 14.9x 13.0x 12.8x 11.8x
EV 1,799 1,721 2,152 2,461 2,376 2,392 P/B 3.2x 1.6x 1.6x 1.5x 1.4x 1.3x
Invested capital 832 1,301 1,593 1,818 1,895 2,032
Graña y Montero is an Engineering and Construction Company involved in the transportation, sanitation,
housing, electricity , IT, oil, and mining industries. It currently holds concessions for 4 toll roads, Line 1 of
Lima's subway, and a water treatment plant; it also operates a gas processing plant and 9 fuel terminals.
Solid balance sheet.
Business model to benefit across segments by 2017.
Backlog transition towards infrastructure will take longer than expected.
Difficult env ironment for mining projects owing to permits processes in Peru and lower metal prices.
Limited v isibility on infrastructure pipeline in Peru. The need is there, but deployment should take time.
Proven track record in mining and infrastructure and positioned among the best in Peru.
Source: Company data, Credit Suisse estimates
06 January 2015
Grana y Montero (GRAM) 11
Our unique View of Graña y Montero; Seeing it Through Our Mining Lens Today the mining industry accounts for 9.5% of Peru's GDP and has a significant weight in
the country's exports, currently close to ~50% of the total. Copper represents close to 50%
of Peru's mining exports and gold, around 37%. Thus, our next analysis on G&M's
potential backlog will focus mainly on projects related to these two metals.
The mining industry is currently G&M's most important market, accounting for 37% of the
company's total revenues and 55% of the revenues from the E&C division in 2013.
Exhibit 13: 2014e E&C Revenues by Sector
Mining
70%
Real Estate
11%
Transportation
6%
Power
5%
Water Sewage
3%
Oil & Gas
5%
Source: Company data, Credit Suisse estimates
Peru is currently the third -largest copper producer in the world. We are expecting a 23.3%
2014-2017 production CAGR, under the assumption that Toromocho will start production
in 2014, Las Bambas in 2015, and Toquepala by 2017.
Exhibit 14: Peru's Total Copper Production in Kt
483 536 554
722845 843
1,036 1,010 1,0481,190
1,268 1,2761,204 1,202 1,260
1,369 1,322
1,711
2,281
2,481
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014E 2015E 2016E 2017E
Source: Peruvian Ministry of Energy and Mining,Credit Suisse estimates
As of now, Peru is the world's fifth largest gold producer. We are estimating Inmaculada to
begin production by 2015, Shahuindo by 2016 and other mines to adjust to our
06 January 2015
Grana y Montero (GRAM) 12
expectations of the region projected through our coverage of BVN and SCC. Under these
assumptions we arrive at a CAGR of 1.9% for production in 2014-2017.
Exhibit 15: Peru's Total Gold Production In Koz
3,029
4,131 4,2634,454
5,065
5,550 5,569
6,687 6,521
5,4735,783 5,916
5,275 5,343 5,176
4,7164,501 4,501 4,405 4,249
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015E 2016E 2017E
Source: Peruvian Ministry of Energy and Mining , Credit Suisse estimates
06 January 2015
Grana y Montero (GRAM) 13
Exhibit 16: Pipeline of Mine projects
Project Company Expected Annual Output Capex US$bn Start Date
Toromocho Aluminium Corp. of China 275kt of copper 3.5 2014
Constancia HudBay Minerals 80kt of copper 1.8 2014
Inmaculada Hochschild/IMZ 124koz. of gold and 4.2mnoz. of silver 0.4 2014
Colquijirca* Buenaventura 220kt of z inc 0.3 2015
Crespo Hochschild 28koz. of gold and 2.7mnoz. of silver 0.1 2015
Explotacion de
relavesBaiyin/Shougang 19kt of copper, 30kt of z inc, and 80kt of Iron 0.2 2015
Uchucchacua* Buenaventura Additional 1mnoz of silver 0.0 2015
Anama Guido del Castillo 60koz of gold 0.0 2015
Marcona* Shougang 3.5 mn tons of iron 1.5 2016
Las Bambas MMG/Guoxin/CITIC 400kt of copper and 5koz. of molybdenum 6.0 2016
Shahuindo Rio Alto 84koz of gold, and 167koz of silver 0.1 2016
Corani Bear Creek Mining 13.5mnoz of silver 0.6 2016
Ollachea Minera IRL 113koz of silver 0.2 2016
Toquepala* Southern Copper 100kt of copper and 3.1koz. of molybdenum 1.2 2017
Cerro Verde* Minera Cerro Verde 300kt of copper and 7,257koz. of molybdenum 4.6 2017
Tia Maria Southern Copper 120kt of copper 1.4 2017
Quellaveco Anglo American 225kt of copper 3.3 2019
Conga Newmont/Buenaventura 54kt of copper and 680koz. of gold 4.8 n.a.
Invicta Andean American Mining 160koz. of gold 0.1 n.a.
Fosfatos Pacasmayo / Mitsubishi 500kt of phosphate 0.5 n.a.
San Luis Silver Standard 12koz ofMes n.a. n.a.
Bayovar* Vale From 3.9 to 5.8 mn tons of Phosphate 0.5 2016
Toromocho* Aluminium Corp. of China 25kt of copper 1.3 2016
Pukaqaqa Votarantim Metais 40kt of copper 0.6 2016
Tambomayo Buenaventura 250koz of gold, 3mnoz of silver 0.3 2016
Pampa de PongoNanjinzhao /Zibo
Hongda15mnt of Iron 1.7 2016
Ilo refinery* Southern Copper 820kt of copper n.a. n.a.
Santa Ana Bear Creek Mining 5mnoz of gold 0.1 n.a.
Anubia Guido del Castillo 20kt of copper 0.1 2015
Quechua Pan Pacific/JX Nippon/Mitsui 60kt of copper 0.5 2015
Marcobre (Mina Justa)Bresia/Korea Resources/LS-
Nikko Copper110kt of copper 0.7 2016
Hilarion Votarantim Metais n.a. 0.5 2016
Rondoni Volcan 50kt of copper 0.4 2016
Magistral Votarantim Metais 31kt of copper 0.8 2016
Bofedal II Brescia 6.3kt of tin 0.2 2016
Chucapaca Buenaventura 500koz of gold 1.2 2017
Galeno Minmetals/Jiangxi350kt of copper, 82koz of gold, 2.3kt of
molybdenum, and 2mnoz of silver2.5 2017
La Granja Rio Tinto 500kt of copper 1.0 2017
Zafranal AQM/Teck Resources 103kt of copper and 30koz of gold 1.1 2017
Accha Zincore 60kt of z inc, 40kt of lead 0.3 2017
Cañariaco Candente Copper 119kt of copper 1.6 2018
Los Chancas Southern Copper 80kt of copper 1.6 2018
Los Calatos Metminco Limited 83kt of copper 1.3 2018
Rio Blanco Zijin Mining 200kt of copper 1.5 2019
Haquira Antares Minerals 190kt of copper 2.8 2019
Hierro Apurimac Strike Resources 20mnt of iron 2.3 2020
Don Javier Junefields companies n.a. 0.6 n.a.
Cerro OcopaneCuervo Resources/Strike
Resourcesn.a. n.a. n.a.
Salmueras de Sechura Growmax agri 250kt of potassium chloride 0.1 n.a.
Fosfatos MantaroFocus Venture/Stonegate
Agricomn.a. 0.9 n.a.
Quicay II Centauro n.a. 3.0 n.a.
EIA being evaluated
In Exploration
With EIA Approved / In Construction
*Brownfields
Source: Peruvian Ministry of Energy and Mining, Credit Suisse estimates
06 January 2015
Grana y Montero (GRAM) 14
The Hassle Behind a Project's Approval
We believe that, despite the natural competitive advantage of the country's geology, the
real obstacle for unlocking the country's potential is its social and environmental issues.
Currently, the approval of the EIA is the biggest milestone required for new projects and
expansions to receive the green light for construction. Delays occur mainly due to issues
regarding water and land, especially because mining is not a sustainable economic
alternative for the communities, which makes it an easy target for social disturbances.
Exhibit 17: Unaligned Incentives?
Agriculture vs Mining
(Community’s eyes)
Agriculture vs Mining
(Peru’s eyes)
Agriculture
20% of total
workforce
Mining
1% of total
workforce
Mining
9.4% of GDP
Agriculture
5% of GDP
Source: Company data, Credit Suisse estimates
Exhibit 18: Theoretical Timeline for a Project's Approval; It Could Take Years for a Project to Receive the Green Light
EIA is presented
The Ministry’s Environmental Office
will review the information
The EIA is presented on the Ministry’s webpage and the Public Audience is announced in local
press
Public Audience
is held
Ministry’s Environmental
Office evaluation
Additional workshops might take place, public comments are received
Successful
Cancelled
in 20 calendar days
Max 30
calendar days
Directorial
Resolution
Construction works can
begin
Successful
Max 30 calendar days
If
approved
If
operational
details are
correct
The ministry decides if it has been
resolved, after the
company corrects the issues
Operation Feasibility Study
and the environmental resolution are sent to the Ministry’s
Operation Office
New Public Audience
Observations to the study are
presented to the Company
Source: Company data, Credit Suisse estimates
06 January 2015
Grana y Montero (GRAM) 15
Political Instability the Underlying Problem behind Low Mining Investments
In our view, an unstable political environment, coupled with high poverty levels in the
majority of the mining districts, has led to significant project delays and has become the
main obstacle to unlocking the country's mining potential. In order to track this relationship
we used a (country's literacy level/GDP per capita) ratio as a proxy for political risk. The
graph below shows the strong correlation between these two variables.
Exhibit 19: Mining Investments Strongly Correlated with Peru's political risk in US$ millions, unless otherwise stated
Mining
Investment
Political Risk
0.0000
0.0002
0.0004
0.0006
0.0008
0.0010
0.0012
0
2000
4000
6000
8000
10000
12000
2004 2006 2008 2010 2012 2014 Source: Company data, Credit Suisse estimates
Cajamarca is the living proof of the effects that an unstable social environment and a
unfavorable political situation can have on the execution of mining projects. From 2011
when the local major stepped in office, through 2013, gold production declined by 11%,
while copper production contracted 20%. We expect this downward trend to continue, as a
consequence of the 55% fall in mining investments from 2012 to 2013 in this region.
Exhibit 20: Gold Production by Region
0%
20%
40%
60%
80%
100%
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013Tacna Puno Pasco Moquegua Madre de Dios Lima
La Libertad Junín Ica Huancavelica Cusco Cajamarca
Ayacucho Arequipa Apurimac Ancash Source: Peruvian Central Bank, Credit Suisse estimates
06 January 2015
Grana y Montero (GRAM) 16
US$60bn Pipeline Could be Jeopardized by Political Risk in Each Region
Exhibit 21: Mining Projects in Peru and the Political Risk of the Region
Ollachea
Corani
Constancia
Santa AnaChucapaca
Quellaveco
ToquepalaIlo Refinery
Lós CalatosTia Maria
CercanaCerro Verde
TambomayoZafranal
QuechuaAccha
Cerro
Ocopane
AnubiaHierro Apurimac
Las Bambas
Crespo
Los ChancasHaquira
Pampa de Pongo
MarconaMarcobre (Mina Justa)
E.R. Shouxin
Inmaculada
Pukaqaqa
Cerro Lindo
Invicta
Hilarión
San Luis
Magistral
Colquijirca
Fosfatos MantaroQuicay II
ToromochoRondoni
Shahuindo
Galeno Michiquillay
CongaLa Granja
Cañariaco
Rio Blanco
Salmueras de SechuraFosfatosBayovar
With E.I.A. Approved / In Evaluation
Exploration
With E.I.A. Approved / In Construction
Anama
Explotacion de Relaves
Don Javier
Bofedal II
Uchucchacua
Low Risks:
<15% poverty or 2 or
less mining conflicts
Medium Risk:
Poverty: 15%-30%
2-4 mining conflicts
High Risk:
Poverty > 30% or 4+
mining conflicts
No Mining Projects
Source: MINEM, Credit Suisse estimates
Exhibit 22: US$60bn Pipeline According to Execution Risk in US$bn
12.7
6.4
1.54.2
7.6
4.2
0.3
10.2
10.10.8
2015 2016 2017 2018 2019 2020
Projects with low and medium
execution risk
Projects with high execution risk
Source: Peruvian Ministry of Energy and Mining, Credit Suisse estimates
The company's historical market share in mining projects has been ~50%, and we believe
the company is in great position to maintain this market share in the future.
06 January 2015
Grana y Montero (GRAM) 17
Peru's Natural Competitive Advantage Limited by
Social Unrest
We believe the size of Peru's reserves, the quality of its ore grades, and its ability to
extract most metals at costs significantly below the global average creates potential for a
lot more. The government stated it expects Peru to become the second-largest global
producer of copper and silver by 2016 and 2017, respectively.
Exhibit 23: Copper Reserves and Costs Cash Cost in US$/lb
2%3% 4% 4%
6%8%
13%
29%
2.0
3.0
0.6
2.1
0.9
2.1
1.7
2.2
Congo DR Zambia Indonesia Canada Mexico USA Peru Chile
Reserves All in Cash Costs (Excluding Capex)
Global
Average (%)
2.03
Source: Wood Mackenzie
Exhibit 24: Gold Reserves and Costs Cash Cost in US$/oz.
3%4%
5% 5%5%
7%8% 9%
9%
11%
792
1,033
543 726
978
1,101
870
1,1701,100
959
Peru Brazil Indonesia China Chile Australia Russia South
africa
Canada Usa
Reserves All in Cash Costs (Excluding Capex)
987
Global Average
Source: Wood Mackenzie
Production has been growing steadily, supported by a CAGR of 41.1% in investments in
mining projects from 2003 to 2013. The government provided an expected pipeline that
adds up to US$60bn in 54 projects that range from exploration to expansions of mines
currently in operating operation.
06 January 2015
Grana y Montero (GRAM) 18
Bullish price expectations have historically boosted capex deployments
Historically, mining investments in Peru have been influenced by mineral prices; from 1996
to 2004 prices were relatively flat just as investments. The year 2006 saw a big boost in
mineral prices that marked the beginning of the ramp-up in investments, and both touched
their highest levels in 2011-2013.
Exhibit 25: Mining investments in Peru, Driven by metal prices. in US$ million, Mineral price base 100: January 1996
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 20140
2000
4000
6000
8000
10000
12000
0
200
400
600
800
1000
Mining Investments
Copper
Gold
Silver
Source: Peruvian Ministry of Energy and Mining, Bloomberg, Credit Suisse estimates
We made an exercise to assess the impact of metal prices on mining investments, all else
constant and without the introduction of new projects. Investments in this type of projects
are strongly correlated with the behavior of gold prices.
We ran a regression using historical quarterly mining investments and gold prices from
1996 to 2014. Our aim was to explain mining investments in Peru through the behavior of
gold prices and found a high correlation between them.
Exhibit 26: Mining Investments Can be Explained by Price Behavior
Y-Axis: Mining Investments US$mn, X-Axis: Gold Price /oz
R² = 0.7867
0
400
800
1200
1600
2000
2400
2800
0 500 1000 1500 2000
Gold PxLinear (Gold Px)
Source: Peruvian Ministry of Energy and Mining, Bloomberg, Credit Suisse estimates
06 January 2015
Grana y Montero (GRAM) 19
With the results of the regression we built three scenarios: (i) a base case scenario using
CSe for gold prices (which we normalize at US$ 1,250/oz), (ii) a bull case that considers
prices 15% above our original estimates and, (iii) a bear case scenario, which shows a
15% decline in prices.
Exhibit 27: Mining investments scenarios
Estimated
0
500
1000
1500
2000
2500
3000
1996 1997 1999 2000 2001 2003 2004 2006 2007 2008 2010 2011 2013 2014 2016 2017 2018 2020
Bear Case Base Case Bull Case
Source: Company data, Credit Suisse estimates
Gone are the days when gold prices hovered above US$1,600/oz., and we do not expect
them to return to this level in the foreseeable future. Using scenarios with prices varying
from US$1,000/oz. to US$1,400/oz. we found a range for mining investments in the
coming years of US$4.8bn – US$6.8bn. Within this investment range, G&M revenues
derived from the mining industry could be similar to those received in 2010.
G&M's Performance Reliant on the Mining Industry
To fully grasp how mining investments in Peru can influence G&M's performance, we took
a look at Sigdo Koppers and Ferreycorp, which provide services to the mining industry.
The correlation between mining investments and these stocks' performance is strong.
Exhibit 28: Mining investments in Chile Exhibit 29: Mining investments in Peru
Sigdo
Koppers
Mining
Investments in
Chile
0
50
100
150
200
250
300
350
400
450
500
50
100
150
200
250
300
350
Oct-05 Oct-07 Oct-09 Oct-11 Oct-13
Mining
Investments in
Peru
Ferreycorp
0
200
400
600
800
1000
1200
50
550
1050
1550
2050
2550
3050
Oct-96 Oct-99 Oct-02 Oct-05 Oct-08 Oct-11 Oct-14 Source: Chilean Mining Counsel, Bloomberg, Credit Suisse estimates Source: Peruvian Ministry of Energy and Mining, Bloomberg, Credit
Suisse estimates
06 January 2015
Grana y Montero (GRAM) 20
Both companies are very sensitive to mining investments and reached share price peaks
in years in which mining investments were at all-time-high levels. Currently, share prices
are affected by a cut in mining investments in 2014 in both countries. We are hesitant to
believe that mining investment will materialize as expected in Peru, let alone recover to the
levels reached a couple of years ago.
Exhibit 30: Mining investments in Peru have impacted G&M share price
Graña y Montero
Mining investments
in Peru US$mn
0
2000
4000
6000
8000
10000
12000
0
2
4
6
8
10
12
14
Nov-03 Nov-05 Nov-07 Nov-09 Nov-11 Nov-13 Source: Peruvian Ministry of Energy and Mining, Bloomberg, Credit Suisse estimates
Even if Social and Political Interests are Aligned, Projects Might not be
Economically Attractive Under Current Gold and Copper Prices
As witnessed since 2010, it is unquestionable that Peru has a strong challenge in aligning
political and social interests with the development of mining projects. But there is an
additional problem; metal prices. Gold and copper prices have stumbled 9% and 15% y/y,
respectively, to a level that puts at risk the high capex deployment in mining projects.
We ran an exercise using a set of data from our extensive gold and copper mining
coverage in Peru and crossed them with our data on miners to see the level of IRRs
projects get in Peru under different price scenarios.
We modeled an average mining project in Peru for each gold and copper price scenario.
The project execution assumptions are based on the following averages:
i. Average capex in Peru projects per ton for copper, and average capex per ounce
for gold projects.
ii. Mine life in major gold and copper projects in Peru.
iii. Flat maintenance capex until the end of mine life, representing the current
average maintenance capex per produced unit
We used the following assumptions for the P&L:
- Gold cash- cost assumption (C1) of US$502/oz, which is the average in Peru
provided by Wood Mackenzie.
- Copper cash -cost assumption (C1) of US$0.90/lb, which is the average in Peru
provided by Wood Mackenzie.
- Other by-product prices were based on current Credit Suisse price estimates
- We assumed the tax scheme stays as it is for mining companies in Peru
06 January 2015
Grana y Montero (GRAM) 21
With the above mentioned assumptions we tested our synthetic mine to see how, Ebitda
margins, FCF conversion, and IRRs shifted with metal prices movements and arrived at
the following results for an average Peruvian project:
Exhibit 31: Sensitivity of Peruvian Gold Mining Projects to
Gold Prices X axis in US$/oz. IRR real, unlevered.
Exhibit 32: Sensitivity of Peruvian Copper Mining Projects
to Copper Prices X axis in US$/lb. IRR real, unlevered.
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
7.0%
8.0%
30%
35%
40%
45%
50%
55%
60%
65%
1,400 1,300 1,200 1,100 1,000
Ebitda Mg FCF Coversion IRR
0.0%
2.5%
5.0%
7.5%
10.0%
12.5%
15.0%
17.5%
20.0%
20%
27%
34%
41%
48%
55%
62%
4.5 4.0 3.5 3.0 2.5
Ebitda Mg FCF Coversion IRR
Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates
Based on our experience in the mining industry, we believe that gold mining projects need
high single digit IRRs for high amounts of capex deployment to make sense. Given that
copper prices are more volatile than gold prices, we think that copper projects need to be
at least low double digit IRR's to proceed.
This leads us to conclude that a substantial part of the US$60bn capex announced and
estimated by the government is at risk of being delayed or cancelled by companies, which
will seek to get returns above ~5% in gold projects and ~10% in copper projects.
06 January 2015
Grana y Montero (GRAM) 22
Backlog and Value Creation
Exhibit 33: Impact on G&M's Numbers- 2015 Backlog 15% above CSe and 15% below CSe
in US$ million, unless otherwise stated
15% below CSe 15% above CSe
Valuation
TP 9.8 15.0
Discount to NPV -23.0% 18.6%
2015 2,697 2,876
Revenues 2016 2,307 2,768
2017 2,381 3,048
2015 354 364
Ebitda 2016 381 410
2017 397 438
2015 13.1% 12.7%
Ebitda Mg 2016 16.5% 14.8%
2017 16.7% 14.4%
2015 15.7% 16.4%
ROIC 2016 14.8% 16.6%
2017 14.4% 16.8%
Operational Impact
Source: Company data, Credit Suisse estimates
The company's future performance has great sensitivity to backlog increases. After making
an exercise to assess the impact of a +/- 15% change on G&M's 2015 backlog, we were
able to observe an important increase in revenues and Ebitda, though taking a toll on
margins. Since E&C is far from being the company's most profitable segment.
06 January 2015
Grana y Montero (GRAM) 23
Infrastructure Projects in Peru Struggling to be Approved
Peru's public and private investments as a percentage of GDP have been constantly rising
since the 1990s, reaching 4.3% in 2014, one of the highest in Latin America and above the
region's average of 3.5%.
Exhibit 34: Public and Private investments in infrastructure in Peru as a Percentage of GDP Investment (LHS), GDP Growth (RHS)
Private
Investment
GDP
Growth
-6%
-4%
-2%
0%
2%
4%
6%
8%
10%
12%
14%
16%
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
3.5%
4.0%
4.5%
5.0%
1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013
Region
Avg.
3.5%
Public
Investment
Source: CEPAL, UN, Credit Suisse estimates
According to the World Economic Forum, Peru has an average infrastructure quality
compared to that of its LatAm peers, but efforts currently being made aim to position the
country's infrastructure among the best in the region.
Exhibit 35: World Economic Forum's Ranking of Infrastructure Quality in the region.
WEF – Quality of Infrastructure 2014-2015 (1= Best performer, 148= Worst performer) Colombia Mexico ChilePeruBrazil
1 (Best performer) 148 (Worst)
Airports
1 (Best performer) 148 (Worst)
Ports
1 (Best performer) 148 (Worst)
Railroads
1 (Best performer) 148 (Worst)
Highways
1 (Best performer) 148 (Worst)
OverallInfrastructure
Argentina
1 (Best performer) 148 (Worst)
ElectricitySupply
11378 896345
122876235
110 122 1261025231
9064 73
1231201081056950
1238960 71 8054
95 96 102
90 123
91
Source: The World Economic Forum, Credit Suisse estimates
06 January 2015
Grana y Montero (GRAM) 24
Infrastructure Investment Gap in Peru
According to industry sources in Peru, the country needs to invest US$88bn to close the
infrastructure gap, defined as the investment needed to sustain current growth in the
country. G&M participates in projects in the energy, telecommunications, and
transportation sector; which account for 83% of the gap.
Exhibit 36: 2012-2021 infrastructure investment gap
Energy, 37%
Transportation, 24%
Telecommunications, 22%
Hidraulic Infrastructure, 10% Water treatment &
Sewage, 6%
Health & Education, 1%
Total:
US$88bn
Source: National Infrastructure Promotion Association Credit Suisse estimates
To close the gap, the government expects investments in energy, communications, and
transportation infrastructure of US$21.6bn in the remaining term of the current
administration.
Public-Private Partnerships in Peru
Public-Private Partnership arrangements have been used as a way to boost private
investments in infrastructure. Since July 2011 projects worth up to US$14bn have been
awarded and a US$14bn pipeline is expected in the short term, accounting for 64% of the
programmed investments in transportation, communications, and energy infrastructure of
the current administration.
While the US$4bn pipeline will most likely be granted in 2015, it will take three to four
years for the investments to start flowing and for the construction companies to start
receiving the benefits.
06 January 2015
Grana y Montero (GRAM) 25
Exhibit 37: Pipeline of PPP Projects
Project Description Scheme Location Status
Estimated
Investment
US$mn
Estimated
grant
date
G&M's Interest in
the Project.
Toll Roads
Mountain range
transveral road 4
Maintenance and operation of 965km of road, upgrade of
117km, and maintenance for 311km.
Co-financed concession with a
life of +25 years
Junin, Huancavelica,
Ayacucho, Apurimac,
and Ica
Waiting for Finance
Minister favorable opinion340 4Q15
Mountain range
transveral road 5Maintenance and operation of 422km of roads.
Co-financed concession with a
life of 25 yearsCusco and Puno To be contested n.a. 1Q15
Urban toll road in
LimaConstruction and Operation of a 33km urban toll road in Lima.
Co-Financed Private Project
InitativeLima In Evaluation n.a. 2015
Ica - Quilca section
of the pan-american
highway.
Construction and operation of 3 bypasses in the pan-american
highway.
Sustainable Private Project
InitativeArequipa In Evaluation n.a. 2015
Rail
Lima subway's line 3
& 4Construction and operation of 62 km in two subway lines.
Co-financed concession with a
life of 35 yearsLima Studies in progress ~10,000 2016
Huancayo -
Huancavelica
Railroad
Modernization of tracks, briges, and tunnels on 128kms of
railroad.
Co-financed concession with a
life of 30 yearsJunin & Huancavelica. Studies in progress n.a. 4Q15
Arequipa's monorail Construction and operation of 14km of a monorail in Arequipa. Private Project Initative Arequipa In Evaluation n.a. 3Q15
Electricity
Azangaro-Juliaca-
Puno transmission
line
Construction and operation of 114km circuit, a 220/138kV sub-
station, and extension of a 220kV Sub-station.30-year concession Puno
Contest and basis
published.68.9 4Q14
G&M didn't
participate.
Carapongo sub-
stationConstruction and operation of a 500/220kV sub-station. 30-year concession Lima
Contest and basis
published.31.3 2Q15
Quillabamba
Termical Station
Construction and operation of a 200MW thermoelectric plant, a
13.8/220 kV sub-station, and a 35km transmission line.
20-year investment
commitment contractCusco To be contested 200 2Q15
1200 MW
Hidroelectric plants
projects
Construction and operation of various hydroelectric plants to
provide 1,200MW.Supply contract n.a. To be contested 2,700 2015
The construction of
Cañon del Pato,
Ralco, and Huanza
plants have given
G&M experience in
this projects.
Hydrocarbons
Natural Gas Storage
Tanks at Melchorita
Construction and operation of a 130,000 m3 natural gas storage
tank20-year concession Lima Reprogrammed 250 n.a.
G&M could be
interested since they
have the concession
to a similar project in
Ayacucho.
Logistics
Logistics zone in the
port of CallaoConstruction and operation of a logistics yard.
Self sustainable public-private
partnershipLima
Contest and basis
published.n.a. 2015
G&M has no
previous experience
in this sector
Riverways
Amazonas river wayConstruction and operation of a navigation channel in the
Huallaga, Marañon, Ucayali, and Amazonas river.20-year concession Loreto and Uyacali
Contest and basis
published.69.4 2Q14
G&M has no
previous experience
in this sector
Water treatment
Water supply
infrastructure for
Lima
Construction and operation of two dam extensions, a water
treatment plant, and complementary works.30-year concession Junin and Lima Studies in process 400 1Q15
La Chira's
concession could
have synergies with
this project.
Chillon river dam Construction of a Dam in the Chillon river 20/30-year concession Lima To be contested 70 n.a.
G&M has
constructed the
Cerro del Aguila dam.
Ayacucho broadbandConstruction and operation of a 1,898km optic fiber network to
provide internet access to 179,000 people.
Transfer of state owned
company to private.Ayacucho
Contest has been
announced54.9 4Q14
Apurimac broadbandConstruction and operation of a 1,409km optic fiber network to
provide internet access to 123,000 people
Transfer of state owned
company to private.Apurimac
Contest has been
announced42.3 4Q14
Huancavelica
broadband
Construction and operation of a 1,327km optic fiber network to
provide internet access to 143,000 people
Transfer of state owned
company to private.Huancavelica
Contest has been
announced46.8 4Q14
Lambayeque
broadband
Construction of a 567km optic fiber network to provide internet
access to 302,000 people
Transfer of state owned
company to private.Lambayeque
Contest has been
announced19 4Q14
Aerial Lift in
Choquequirao
Construction and operation of an Aerial lift from Kiuñalla to the
Choquequirao.20-year concession Contest suspended 123 n.a.
G&M has no
previous experience
in this sector
Experience in
construction and
operation of Toll
Roads could boost
G&M's interest.
Telecommunications
Others
G&M constructed
and operates Line 1
E&C division has
experience in the
construction of
stations and
transmission lines.
G&M has no
previous experience
in this sector
Source: Peruvian Investment Promotion Agency (ProInversion)
06 January 2015
Grana y Montero (GRAM) 26
The Peruvian government, and ProInversion (government's agency that promotes private
investment) have established a program to help narrow the infrastructure and public
services deficit, by allowing private players to propose infrastructure projects.
Exhibit 38: Process for a Project Initiative
Proposal is
presented by a
private player to
ProInversion
The project is
evaluated
If the project
meets with the
requirements,
other private bids
can be presented
If there are no
additional proposals
the proponent wins
the project. If it looses
all the expenses are
reimbursed
Source: ProInversion, Credit Suisse estimates
If the project is approved it will fall into one of two categories and, depending on their
financial characteristics, they can be self-sustainable or co-financed with subsidies or
guarantees provided the government.
We welcome this new proposal and expect tangible benefits for G&M. During 2014 the
government received close to 65 proposals from the private sector, out of which 14
were presented by G&M. The projects presented by the company account for US$4bn,
two initiatives have already been rejected, these account for US$1.5bn. The government
will open in January a new window for the presentation of project initiatives, and we expect
G&M to present more project proposals.
Project Delays Have Impacted E&C and Concession Investments
While the process of awarding the projects has been relatively smooth, their actual
execution is sometimes a bumpier process. Of the 34 projects awarded between 2010 and
2013, 13 (which account for US$3.6bn) have not started. These projects are usually
delayed for three to four years due to a large number of permits and rights of way required
to start construction works.
Exhibit 39: Delay in Infrastructure Projects: a Clog in investment flows
Name of the project Date grantedInitial start of
operations date
Expected start date
of operationsDelay (years)
Initial Capex
US$mn
Autopista del sol
(Trujillo - Sullana)Jun-09 Jan-15 Jan-18 3 360
Road Network 4
(Patvilica - Trujillo)Feb-09 Jul-05 Jul-05 2 350
Source: Peruvian Minister of Communications and Transportation, Initiative for the Integration of the Regional
Infrastructure of South America, Credit Suisse estimates
06 January 2015
Grana y Montero (GRAM) 27
G&M's Main competitors
The company's main competitors have a strong international presence but differ according
to the segment.
Exhibit 40: Main Competitors in the E&C Segment Exhibit 41: Main Competitors in Real estate
E&C Country
Besalco Chile
Odebrecht Braz il
Andrade Gutierrez Braz il
Obrascón Huarte Lain Spain
JJC Contratistas Generales Peru
Cosapi Peru
Techint Italy
SSK Montajes e Instalaciones Chile
Skanska del Perú Sweden
Mota-Engil Peru Portugal
Grupo San Jose Spain
Salfacorp Chile
Constructores Interamericanos (COINSA) Peru
San Martin Contratistas Generales (ICA) Mexico
Real Estate Country
Paz Centenario Global Peru
Paz Centenario Inmobiliaria Peru
Corporación Lider Peru Peru
Urbana Peru Colombia
Los Portales Mexico - Peru
Inmobiliari Peru
Imagina Grupo Inmobiliario Chile
ENACORP Chile
Besco Peru
Gerpal Peru
Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates
Exhibit 42: Breakdown of Toll Road Concessionaires in Peru , by Km.
Odebrecht,
17.8%
Concay,
Incoequipos,
Nexus , Viviendas
del Perú, 7.0%Graña y Montero,
19.0%
JJC contratistas
Generales, 13.1%
Andrade
Gutierrez,
Camargo Correa,
Queiroz Galvao,
5.7%
Hidalgo e
Hidalgo, Casa,
Conorte, 28.4%
OHL , 6.8%
Obrainsa, 0.9%Conalvias, 1.4%
Total:
5,300km
Source: Peruvian Ministry of Transportation and Communications, Credit Suisse estimates
06 January 2015
Grana y Montero (GRAM) 28
Oil & Gas Division
Hydrocarbon Extraction
Under hydrocarbon extraction services contracts with Perupetro, the company operates
and extracts oil and natural gas from Block I and Block V, which are mature oil fields
located in the province of Talara.
Exhibit 43: G&M's Oil Fields
Contract
Maturity
Wells Avg. daily
barrels
Crude oil proved
reserves (Mbbl)
Natural Gas proved
reserves (MMcf)
Undeveloped
Acreage
Block I Dec-2021 195 1,460 3,555 14,205 21.40%
Block V Oct-2023 48 132 711 n.a. 30.30%
Blocks III & IV Apr-2045 n.a. 1,700 n.a. n.a. n.a.
Source: Company data, Credit Suisse estimates
In December the company was awarded the concession for Blocks III and IV. Both blocks
produce a daily average of 1,700 bbl/day and the company expects to increase production
to up to 5,000 bbl/day.
Exhibit 44: Contract and Fee structures
Oil Price (US$) Fee (% of price)
$80 >= 50%
For each US$ below 80 -0.05%
Contract Scheme
Oil & Gas extracted is delivered to
Perupetro in exchange of a variable fee.
Source: Company data, Credit Suisse estimates
Gas Processing
G&M owns a gas processing plant, with processing capacity of 44Mcf per day, which
transforms natural gas received from EEPSA into dry natural gas and liquids that are
returned to EEPSA or sold in the market.
Under the contract that expires in 2023, the company pays for the operating costs of the
plant but keeps the revenue from the natural gas liquids sold in the market after paying a
variable royalty that depends on volume produced. In 2013 revenues from the gas
processing plant accounted for 13.9% of the Oil & Gas division.
Fuel Storage Terminals
Through a 50% stake in Consorcio Terminales, the company operates seven fuel storage
terminals with a storage capacity of 2.6MMbbl under which revenues are obtained from
storage and throughput fee.
In June 2014 Consorcio Terminales was awarded the concession to operate five additional
fuel terminals, in which the company will have to invest US$37.2mn and a reimbursable
investment of US$180mn.
Additionally, G&M has a stake in an export terminal for gasoline, diesel, propane, and
butane (Terminal Marino Pisco Camisea), and in an export terminal for sodium
hydrosulfide, used by mining companies (Terminal de Quimicos de Matarani).
0
6 J
an
ua
ry 2
01
5
Gra
na
y M
on
tero
(GR
AM
) 2
9
Exhibit 45: G&M's Peers Comparison
Mkt Cap
Company US$ mn 14 15E 16E 14 15E 16E 14 15E 16E 14 15E 16E 14 15E 16E 14 15E 16E
Asia and Pacific
Leighton Holdings 6,114 13.7 13.8 14.7 2.2 2.1 2.0 4.4 4.2 4.2 8% 8% 8% 17% 16% 15% 0.28 0.18 0.13
Transfield Services Ltd 659 11.5 8.7 8.3 1.1 1.0 0.9 5.5 5.0 4.8 5% 6% 6% 9% 10% 10% 2.68 1.75 1.56
Monadelphous Group 704 5.5 7.2 8.7 2.1 2.2 2.2 5.8 4.1 4.5 9% 9% 9% N.A. N.A. N.A. -0.82 -1.06 -1.33
China State Construction Engineering 34,131 8.5 7.4 6.5 1.5 1.3 1.1 5.0 4.4 3.8 6% 5% 6% N.A. N.A. N.A. 1.33 1.22 0.92
Simple Average 9.8 9.3 9.6 1.7 1.6 1.6 5.1 4.4 4.3 7% 7% 7% 13% 13% 13% 0.87 0.53 0.32
Mkt Cap. Weighted Average 9.3 8.3 7.8 1.6 1.4 1.3 4.9 4.4 3.9 6% 6% 6% 3% 3% 2% 1.2 1.0 0.8
Europe
ACS 10,873 11.3 11.4 10.2 2.2 2.2 2.0 5.8 5.4 5.0 7% 7% 8% N.A. N.A. N.A. 1.70 1.51 1.27
AMEC 4,902 9.8 9.3 8.1 3.8 3.5 3.1 7.7 6.8 5.8 9% 9% 9% 9% 10% 12% 1.43 0.96 0.48
Ohl 2,193 5.2 5.9 5.1 0.6 0.6 0.6 5.5 5.3 5.1 33% 33% 32% N.A. N.A. N.A. 4.54 4.35 4.19
Simple Average 8.8 8.9 7.8 2.2 2.1 1.9 6.4 5.8 5.3 16% 16% 16% 9% 10% 12% 2.6 2.3 2.0
Mkt Cap. Weighted Average 10.2 10.2 9.0 2.5 2.4 2.1 6.3 5.8 5.2 11% 11% 11% 2% 3% 3% 2.0 1.7 1.4
North America
SNC Lavalin Group 5,506 78.3 14.1 12.1 2.5 2.5 2.3 6.9 8.1 7.3 12% 8% 9% N.A. N.A. N.A. 5.32 8.70 9.00
Fluor 9,148 14.3 12.7 10.7 2.4 2.1 1.9 5.4 4.4 4.7 6% 6% 6% 65% 70% 30% -2.24 -2.37 -1.26
AECOM Technology Corp. 4,464 12.5 9.5 8.3 1.3 1.3 1.2 8.5 5.1 4.6 5% 6% 6% N.A. N.A. N.A. 0.97 1.84 1.38
Jacobs Engineering 5,618 13.0 11.9 10.7 1.3 1.2 1.1 8.4 6.9 5.1 6% 6% 7% 9% 10% 12% 0.33 0.13 -0.80
Simple Average 29.5 12.1 10.5 1.9 1.8 1.6 7.3 6.2 5.4 7% 6% 7% 37% 40% 21% 1.1 2.1 2.1
Mkt Cap. Weighted Average 27.9 12.3 10.6 2.0 1.9 1.7 7.0 6.0 5.3 7% 6% 7% 26% 28% 14% 0.6 1.4 1.6
Latin America
G&M 1,383 14.9 13.0 12.8 1.6 1.5 1.4 6.6 6.8 5.9 14% 13% 15% 15.6% 16.3% 16.1% 1.10 1.78 1.33
Empresas ICA 698 17.1 10.3 5.7 0.4 0.4 0.4 9.1 8.9 6.5 18% 18% 19% N.A. N.A. N.A. 7.23 7.07 5.48
Ferreycorp 537 7.0 5.9 5.3 0.9 0.9 0.8 5.7 5.2 4.5 11% 12% 12% N.A. N.A. N.A. 2.59 2.30 1.99
SalfaCorp 324 7.8 8.3 7.3 0.6 0.7 0.7 9.6 9.0 8.5 7% 7% 7% N.A. N.A. N.A. N.A. N.A. N.A.
Besalco 333 24.0 11.8 8.3 2.8 1.4 N.A. 9.0 7.0 6.2 8% 11% 13% N.A. N.A. N.A. N.A. N.A. N.A.
Arteris 1,494 8.7 8.2 6.7 1.9 1.7 1.5 5.4 5.1 4.5 68% 69% 69% 11% 12% 13% 2.76 2.68 2.31
Pinfra 4,731 31.8 24.7 23.1 3.8 3.3 2.9 17.2 14.9 13.2 65% 66% 70% 18% 20% 19% -0.53 -0.74 -0.73
OHL Mexico 2,962 6.7 7.0 15.4 0.8 0.7 0.6 6.1 6.3 9.9 81% 84% 82% 18% 15% 9% 2.58 2.88 4.88
OHL Mexico (Cash EV/EBITDA) 33.8 28.8 25.2 43% 54% 65%
Simple Average 14.8 11.2 10.6 1.6 1.3 1.2 11.4 10.2 9.4 34% 35% 36% 16% 16% 14% 2.9 2.7 2.5
Mkt Cap. Weighted Average 18.5 14.8 15.6 2.2 1.9 1.7 10.6 9.7 9.5 55% 57% 58% 14% 14% 13% 1.4 1.4 1.7
P/E (x) ROICP/B (x) EV/EBITDA (x) EBITDA Margin Net Debt / Ebitda
Source: Company data, Credit Suisse estimates
06 January 2015
Grana y Montero (GRAM) 30
Appendix
Exhibit 46: G&M's Corporate Structure
Real Estate development
VIVAGyM
Land parcels
ALMONTE
Engineering services
E&C services in Chile
DSD
GMI
Construction services
GyM
Contract mining services
STRACONGyM
Construction services in Chile
VIAL Y VIVES
Water plant concession
Mass transit system concession
FERROVIASGyM
CHIRA
O&G prod., gas processing & fuel storage
GMP
Road concession
VESUR
Toll-road concession
NORVIAL
Toll-road concession
SURVIAL
Toll-road concession
CONCHAQUE
IT services
GMD 86%
Operation and maintenance of infra. assets
CONCAR 99%
Electricity network services
CAMGyM75%
86%
89%
93%
74%
80% 75%
50%
95%
99%
67%
99%
99%
98%
50%
G&M
Engineering and Construction Infrastructure Real Estate Technical Services
Source: Company data, Credit Suisse estimates
Engineering and Construction
G&M's E&C segment is one of the largest players in Peru and is engaged in engineering,
civil, electro-mechanic, and mining construction in Peru and other countries such as
Colombia, Panama, Chile, Bolivia, Dominican Republic, and Mexico. In 2013 80% of
construction revenues came from private-sector projects.
Exhibit 47: E&C Segment 2014/2015 Financials in US$ 000's, unless otherwise stated
2014 2015
Revenues 1,700.9 2,041.5
Operating expenses
and SG&A
1,594.1 1,921.1
D&A 72.5 72.2
Operating Profit 106.7 120.4
Adj. Ebitda 178.5 192.6
Adj. Ebitda Margin 10% 9%
Backlog 2,849.9 2,342.6
Backlog/Revenues
ratio
1.7x 1.1x
Source: Company data, Credit Suisse estimates
Norvial
In 2003 Norvial was awarded a the concession to operate and maintain the 183 km toll
road that connects Lima to northwestern Peru, known as Red Vial 5. The concession ends
in 2028. G&M has a stake of 67% in Norvial under a partnership with JJC Contratistas
Generales.
Under the concession, Norvial has to expand the existing road by adding two additional
lanes. The first stage of the expansion project was finished in 2008 and the second stage
will require an investment of US$105mn.
Norvial revenues come from toll rates that are established in the concession agreement
and adjusted for the PEN/USD Exchange rate and inflation.
06 January 2015
Grana y Montero (GRAM) 31
Exhibit 48: Norvial 2014/2015 Financials in US$ 000's, unless otherwise stated
2014 2015
Revenues 56.8 60.1
Operating expenses
and SG&A
39.0 40.2
D&A 3.6 3.6
Operating Profit 17.8 19.8
Adj. Ebitda 22.3 23.4
Adj. Ebitda Margin 39% 39%
Source: Company data, Credit Suisse estimates
Exhibit 49: Norvial Concession
Oyon
Huaura
Huaral
Canta
Huancho
Ancon
Lima
Huarochin
Yauyos
Canete
Ica
Callao
Supe Puerto
Barranca
CajatamboPativilca
Ancash
Pacific Ocean
PERU
Panamerican highway
Norvial
Source: Company data, Credit Suisse estimates
Survial
In 2007 Survial was awarded a concession to operate and maintain the 750 km toll road
that runs from the San Juan de Marcona port to Urcos, a city connected to the
interoceanic highway that runs to the Brazilian border. Survial revenues come from an
annual fee paid by the Ministry of Transportation and Communications that varies
according to the maintenance required by the highway. The concession expires in 2032.
06 January 2015
Grana y Montero (GRAM) 32
Exhibit 50: Survial 2014/2015 Financials in US$ 000's, unless otherwise stated
2014 2015
Revenues 37.3 28.0
Operating expenses
and SG&A
34.8 26.5
D&A 0.1 0.1
Operating Profit 2.5 1.5
Adj. Ebitda 2.5 1.6
Adj. Ebitda Margin 7% 6%
Source: Company data, Credit Suisse estimates
Exhibit 51: Survial Concession
PERU San
Juan de
Marcona
Nazca
Puquo
Chahuanca
AbancayCusco
Puerto
Maldonado
Pune
Maquegua
Arequipa
Huancayo
Brazil
Bolivia
Interoceanica highways
Panamerican highway
Survial concession(San Juan de Marcona-Urcos)
Urcos
Pacific
Ocean
Source: Company data, Credit Suisse estimates
Canchaque
In 2006 Canchaque was awarded a concession to operate and maintain the 78 km toll
roads that run from the city of Buenos Aires to Canchaque. The concession expires in
2025 and G&M fully owns it. Revenues come from an annual fee paid by the Ministry of
Transportation and Communications that varies according to the maintenance required by
the road.
Exhibit 52: Canchanque 2014/2015 Financials in US$ 000's, unless otherwise stated
2014 2015
Revenues 5.6 3.0
Operating expenses
and SG&A
3.3 1.9
D&A 0.0 0.0
Operating Profit 2.3 1.2
Adj. Ebitda 2.4 1.2
Adj. Ebitda Margin 42% 40%
Source: Company data, Credit Suisse estimates
06 January 2015
Grana y Montero (GRAM) 33
Exhibit 53: Canchaque Concession
Buenos Aires
La Matanza
San
Miguel de
El Faique
Serran
Malacasi
San Juan
de Bigote
0 km10 km
20 km
30 km
40km
50 km 60 km
75 km
La
Virgen
Yamango
Tunal
El PozoBarrios
Silla
San Francisco
Pueblo
NuevoMorropón
Polvasal
Jacocha
Salitral
Canchaque
Source: Company data, Credit Suisse estimates
Via Expresa Sur
In 2012 G&M was awarded a 40-year concession to build, maintain, and operate the
4.6km extension of one of the main highways in Lima, to connect it to the south Pan-
American Highway that runs from Ecuador to Chile.
The estimated investment in this toll road is approximately US$200mn and it is expected
to start operations in 2019. The concession's revenues will come from the toll rates
charged from users, with a guaranteed revenue of US$18mn for the first two years of
operations and US$19.6mn for the third year. The land for the project has yet to be
expropriated for construction works to start.
Exhibit 54: Via Expresa Extension Project
Actual estación
Las Flores del
MetropolitanoPaseo de la
Republica La
Merced
BARRANCO
La
Caselliana
Ayacucho
Surco
Monte de
los Olivos
Av Los
Próteres
Panamericana
Sur
RoundaboutsBridges
Length: 4.6 km
San
Juan de
Miraflores
Barranco
Zona
ampliada
1967 1st stage1969 2nd stage2019 3rd stage (Concessioned)
Via Expresa Sections
Characteristics
(road width): 70m)
Bus Lanes
17m
Estación
Central
Via Expresa Extension
Source: Company data, Credit Suisse estimates
06 January 2015
Grana y Montero (GRAM) 34
Via Expresa Javier Pardo
The company has 50% of a joint operation awarded in 1990 to build and operate a 20km
urban toll road that runs from east to west of Lima, but discussions about this concession
ceased in 1990 and were resumed in 2012.
The estimated investment in this project is US$900mn and it will take five to seven years
to build it. In the original contract the concession period was 37 years and the revenues
from the joint operation came from toll rates charged from users.
Line 1 of Lima Metro
GyM Ferrovias, company in which G&M has a 75% stake, was awarded a concession in
2011 to operate Line 1 of the Lima Metro, a 33km metropolitan railway. Under the
concession, GyM Ferrovias has to maintain five existing trains, acquire 19 new trains, and
build a railway maintenance and a repair yard by the end of the concession period in 2041
GyM Ferrovias currently operates 14 trains and the remaining 10 will begin operations
when the second stretch of Line 1 one is completed. As of December 2013 GyM Ferrovias
had spent US$196.6mn on the Lima Metro. The revenue from this concession is obtained
through a quarterly fee paid by the government based on the kilometers travelled per train.
Exhibit 55: Line 1 of Lima Metro 2014/2015 Financials in US$ 000's, unless otherwise stated
2014 2015
Revenues 58.1 65.3
Operating expenses
and SG&A
49.2 39.9
D&A 0.2 0.2
Operating Profit 8.8 25.4
Adj. Ebitda 17.0 25.6
Adj. Ebitda Margin 29% 39%
Source: Company data, Credit Suisse estimates
06 January 2015
Grana y Montero (GRAM) 35
Exhibit 56: Line 1 of Lima Metro
Pirámide Del Sol
El Angel
Miguel Grau
Nicolás Arriola
Gamarra
La Cultura
San Borja Sur
Angamos
AyacuchoLos Cabitos
Jorge Chavez
Atocongo San Juan
Villa MaríaMaría Auxiliadora
Parque Industrial
Villa El Salvador
Bayovar
Santa RosaSan Martin
San Carlos
Los Jardines
Caja de Agua
Presbítero Maestro
Los Postes
Pumacahua
PERU
LIMA
Source: Company data, Credit Suisse estimates
La Chira water treatment plan
G&M has a 50% stake in a project that was awarded the concession to construct, operate,
and maintain the La Chira waste water treatment plant. The expected investment in this
concession is US$83.1mn and the projects will receive an annual payment of US$24.2mn
(~US$9.3mn) for the investment made in the construction and an annual payment of
S$6.8mn (~US$2.6mn). The project is currently under construction and is expected to be
completed by 2015. With a 25- year period, the concession expires in 2037.
Exhibit 57: La Chira 2014/2015 Financials in US$ 000's, unless otherwise stated
2014 2015
Revenues 11.7 14.2
Operating expenses
and SG&A
10.9 13.2
D&A 0.1 0.1
Operating Profit 0.8 1.0
Adj. Ebitda 0.8 1.0
Adj. Ebitda Margin 7% 7%
Source: Company data, Credit Suisse estimates
06 January 2015
Grana y Montero (GRAM) 36
GMP
The company operates three energy businesses through GMP, a subsidiary of the
company.
Exhibit 58: GMP 2014/2015 Financials in US$ 000's, unless otherwise stated
2014 2015
Revenues 118.5 135.5
Operating expenses
and SG&A
82.2 109.6
D&A 24.6 28.6
Operating Profit 36.2 25.9
Adj. Ebitda 58.0 54.5
Adj. Ebitda Margin 49% 40%
Source: Company data, Credit Suisse estimates
Block I and V oil fields
Under hydrocarbon extraction services contracts with Perupetro, the company operates
and extracts oil and natural gas from Block I and Block V in 242 wells, which are mature oil
fields located in northern Peru in the province of Talara.
Under the contract, the company is required to deliver all of the oil and gas it produces to
Perupetro in return for a variable fee per barrel based on the level of production and
international crude oil prices. In the last three years, this fee has been on average 77% of
crude oil Brent price.
Exhibit 59: G&M's Oil Fields.
Contract Maturity Wells 2013 average daily
barrels
Crude oil proved
reserves (Mbbl)
Natural Gas proved
reserves (MMcf)
Undeveloped Acreage
Block I Dec-21 195 1,460 3,555 14,205 21.4%
Block V Oct-23 48 132 711 n.a. 30.3%
Source: Company data, Credit Suisse estimates
In December the company was awarded a concession to operate and extract oil from
Blocks III and IV. Under the 30-year contract that starts in April 2015, the company
undertakes to drill 560 wells before April 2025, with an approximate investment of
US$560mn. Both blocks produce a daily average of 2,000 bbl/day and the company
expects to increase production to up to 5,000 bbl/day.
06 January 2015
Grana y Montero (GRAM) 37
Exhibit 60: Block I and V located in northern Peru
XIX
Z-36
Z-1
XX
XXIIV
Z-34 Z-28
X
XV
XXIII
IX
IV
Z-6
XXII-A
I
Source: Company data, Credit Suisse estimates
Gas Processing
G&M owns a gas processing plant with a processing capacity of 44Mcf per day, located 7
km north to the city of Talara. Under a long-term contract with EEPSA, the company
receives wet natural gas and processes and fractions it into dry natural gas and liquids.
Dry natural gas is returned back to EEPSA and natural gas liquids are sold in the market.
Under the contract that expires in 2023, the company pays for the operating costs of the
plant but keeps the revenue from the natural gas liquids sold in the market after paying a
variable royalty to EEPSA that depends on volume produced.
Fuel Storage Terminals
G&M owns a 50% stake in Consorcio Terminales, a company that has a contract with
Petroperu to operate seven fuel storage terminals for refined petroleum located along the
Pacific coast and two inland storage terminals with capacity of 2.6MMbbl.
Revenues are earned from storage and throughput fees. Storage fees are calculated per
barrel and are correlated with stored volumes in tanks. Throughput fees are paid based on
the effective number of barrels delivered per month.
G&M has a stake in an export terminal for gasoline, diesel, propane, and butane (Terminal
Marino Pisco Camisea) and in an export terminal for sodium hydrosulfide, which is used
by mining companies (Terminal de Quimicos de Matarani).
In June 2014 Consorcio Terminales was awarded a concession to operate five additional
fuel terminals, in which the company will have to invest US$37.2mn and a reimbursable
investment of US$180mn.
06 January 2015
Grana y Montero (GRAM) 38
Exhibit 61: Fuel Storage Terminal Locations
PERU
Cusco
Juliaca
Ilo
Mollendo
Pisco
Supe
Chimbote
Salaverry
Eten
LIMA
ICA
Source: Company data, Credit Suisse estimates
Real Estate Division
The real estate segment of the company is one of the largest developers of apartment
buildings in Peru.
Exhibit 62: Real Estate Segment Developments
m2 Developed m
2 Under Construction
Affordable housing 568,000 71,000
Housing 310,000 3,900
Office space 115,000 24,000
Shopping centers 43,000 -
Source: Company data, Credit Suisse estimates
The company also owns 812 hectares of undeveloped land, of which 86% is located in
Lima and 14% in other regions.
06 January 2015
Grana y Montero (GRAM) 39
Exhibit 63: Real Estate 2014/2015 Financials in US$ 000's, unless otherwise stated
2014 2015
Revenues 67.0 66.1
Operating expenses
and SG&A
55.1 53.7
D&A 8.4 8.4
Operating Profit 11.9 12.4
Adj. Ebitda 19.6 20.8
Adj. Ebitda Margin 29% 31%
Source: Company data, Credit Suisse estimates
Technical Services Segment
The technical services segment of G&M is engaged in the operation and maintenance of
infrastructure assets, information technology services, and electricity networks services.
Exhibit 64: Technical Services 2014/2015 Financials in US$ 000's, unless otherwise stated
2014 2015
Revenues 443.8 413.3
Operating expenses
and SG&A
435.0 393.5
D&A 24.6 20.9
Operating Profit 8.8 19.7
Adj. Ebitda 27.2 40.6
Adj. Ebitda Margin 6% 10%
Source: Company data, Credit Suisse estimates
Operation and Maintenance of Infrastructure Assets
The company provides operation and maintenance services to its toll roads concessions,
for the Lima Metro, and for some government's highways. The company operates and
maintains more than 5,000km of highways and earns its revenues from fees charged
under its concessions or maintenance service contracts awarded by the government.
06 January 2015
Grana y Montero (GRAM) 40
Exhibit 65: Roads operated and maintained by G&M
CV Sullana (440 km)
CV Buenos Aires
Conchaque (77 km)
Chiclayo
CV Lambayeque (262 km)
CV Bappo (253 km)
Norvial (183 km)
Lima
CV Ayacucho-Andahuaytas (381 km)
CV Icapal (380 km)
Survival (758 km)
CV Tecna (400 km)
CV Cora Cora (526 km)
Cusco network 1 (641 km)
Cusco network 3 (532 km)
CV La Merced
(230 km)
Source: Company data, Credit Suisse estimates
IT Services
GMD, a subsidiary of G&M, provides IT outsourcing services and equipment to large
companies and public institutions in Peru. GMD also has strategic partnerships with IT
vendors such as Cisco, Microsoft, Hewlett-Packard, Oracle, SAP, Citrix, VMware, CA
Technologies, and Louis Berger Group.
Electricity Networks Services
This segment of the company offers installation, operation and maintenance of electricity
infrastructure for power utilities in Chile, Colombia, Brazil, and Peru. More specialized
services include the monitoring of electrical consumption for 420,000 industrial,
commercial, and residential customers and the development anti-theft solutions for power
utility companies. The company also operates warehouse facilities in Brazil and Chile for
power utility companies and leases residential electricity meters to power utility companies
in Chile.
06 January 2015
Grana y Montero (GRAM) 41
Companies Mentioned (Price as of 05-Jan-2015)
ACS (ACS.MC, €28.555) AECOM Technology Corp. (ACM.N, $29.02) AMEC (AMFW.L, 838.0p) AQM (AQM.V, C$0.06) Anglo American Plc (AAL.L, 1126.5p) Antares Minerals (ANM.V^L10, C$8.4) Antares Minerals (ANM.V^L10, C$8.4) Antares Minerals (ANM.V^L10, C$8.4) Antares Minerals (ANM.V^L10, C$8.4) Arteris (ARTR3.SA, R$11.74) Bear Creek Minng (BCM.V, C$1.54) Besalco (BES.SN, CLP$356.79) CITIC Resources (1205.HK, HK$1.05) CSCEC (601668.SS, Rmb7.34) Candente Copper (DNT.TO, C$0.1) Cementos Pacasmayo (CPAC.N, $8.57) Chalco China (ACH.BA, $24.1) Compania de Minas Buenaventura (BVN.N, $10.25) Empresas ICA (ICA.MX, $17.25) Ferreycorp (FER.LM, S/.1.58) Fluor (FLR.N, $58.56) Freeport-McMoRan Inc (FCX.N, $22.15) Grana y Montero (GRAM.N, $12.39) Hochschild Min (HOCM.L, 86.0p) HudBay Minerals (HBM.N, $8.63) Jacobs Engineering (JEC.N, $43.03) Jiangxi Copper Company Ltd (600362.SS, Rmb20.28) KBR Inc. (KBR.N, $16.52) Leighton Holdings (LEI.AX, A$22.97) MMG Ltd. (1208.HK, HK$2.51) Minera IRL (IRL.LM, $0.048) Mitsubishi Materials (5711.T, ¥406) Monadelphous Group (MND.AX, A$9.62) Newmont Mining (NEM.N, $19.46) OHL Mexico (OHLMEX.MX, $25.51) Ohl (OHL.MC, €18.39) Promotora y Operadora de Infraestructura, S.A.B. d (PINFRA.MX, $167.21) Rio Alto Ming (RIOM.N, $2.56) SNC Lavalin Group (SNC.TO, C$42.41) SalfaCorp (SAL.SN, CLP$445.0) Sigdo Koppers (SK.SN, CLP$930.0) Silver Standard Resources Inc. (SSO.TO, C$6.35) Southern Copper Corporation (SCCO.N, $27.04) Strike Resources (SRK.AX, A$0.038) Teck Res (TCK.N, $13.26) Transfield Services Ltd (TSE.AX, A$1.58) Vale (VALE.N, $7.73) Volcan Minera (VOLa.LM, S/.1.5) Zijin (ZIJMY.PK, $5.7)
Disclosure Appendix
Important Global Disclosures
Santiago Perez Teuffer and Bruno Savaris, CFA, each certify, with respect to the companies or securities that the individual analyzes, that (1) the views expressed in this report accurately reflect his or her personal views about all of the subject companies and securities and (2) no part of his or her compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this report.
06 January 2015
Grana y Montero (GRAM) 42
3-Year Price and Rating History for Grana y Montero (GRAM.N)
GRAM.N Closing Price Target Price
Date (US$) (US$) Rating
02-Sep-13 19.60 24.00 O *
03-Jan-14 21.43 R
03-Feb-14 20.35 24.00 O
18-Mar-14 19.03 NR
* Asterisk signifies initiation or assumption of coverage.
O U T PERFO RM
REST RICT ED
N O T RA T ED
The analyst(s) responsible for preparing this research report received Compensation that is based upon various factors including Credit Suisse's total revenues, a portion of which are generated by Credit Suisse's investment banking activities
As of December 10, 2012 Analysts’ stock rating are defined as follows:
Outperform (O) : The stock’s total return is expected to outperform the relevant benchmark*over the next 12 months.
Neutral (N) : The stock’s total return is expected to be in line with the relevant benchmark* over the next 12 months.
Underperform (U) : The stock’s total return is expected to underperform the relevant benchmark* over the next 12 months.
*Relevant benchmark by region: As of 10th December 2012, Japanese ratings are based on a stock’s total return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attractiv e, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. As of 2nd October 2012, U.S. and Canadian as well as European ratings are based on a stock’s total return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attractive, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. For Latin Ame rican and non-Japan Asia stocks, ratings are based on a stock’s total return relative to the average total return of the relevant country or regional benchmark; prior to 2nd October 2012 U.S. and Canadian ratings were based on (1) a stock’s absolute total return potential to its current share price and (2) the relative attractiv eness of a stock’s total return potential within an analyst’s coverage universe. For Australian and New Zealand stocks, 12 -month rolling yield is incorporated in the absolute total return calculation and a 15% and a 7.5% threshold replace the 10-15% level in the Outperform and Underperform stock rating definitions, respectively. The 15% and 7.5% thresholds replace the +10 -15% and -10-15% levels in the Neutral stock rating definition, respectively. Prior to 10th December 2012, Japanese ratings were based on a stock’s total return relative to the average total return of the relevant country or regional benchmark.
Restricted (R) : In certain circumstances, Credit Suisse policy and/or applicable law and regulations preclude certain types of communications, including an investment recommendation, during the course of Credit Suisse's engagement in an investment banking transaction and in certain other circumstances.
Volatility Indicator [V] : A stock is defined as volatile if the stock price has moved up or down by 20% or more in a month in at least 8 of the past 24 months or the analyst expects significant volatility going forward.
Analysts’ sector weightings are distinct from analysts’ stock ratings and are based on the analyst’s expectations for the fundamentals and/or valuation of the sector* relative to the group’s historic fundamentals and/or valuation:
Overweight : The analyst’s expectation for the sector’s fundamentals and/or valuation is favorable over the next 12 months.
Market Weight : The analyst’s expectation for the sector’s fundamentals and/or valuation is neutral over the next 12 months.
Underweight : The analyst’s expectation for the sector’s fundamentals and/or valuation is cautious over the next 12 months.
*An analyst’s coverage sector consists of all companies covered by the analyst within the relevant sector. An analyst may cover multiple sectors.
Credit Suisse's distribution of stock ratings (and banking clients) is:
Global Ratings Distribution
Rating Versus universe (%) Of which banking clients (%)
Outperform/Buy* 46% (53% banking clients)
Neutral/Hold* 38% (50% banking clients)
Underperform/Sell* 14% (43% banking clients)
Restricted 2%
*For purposes of the NYSE and NASD ratings distribution disclosure requirements, our stock ratings of Outperform, Neutral, an d Underperform most closely correspond to Buy, Hold, and Sell, respectively; however, the meanings are not the same, as our stock ratings are determined on a relative basis. (Please refer to definitions above.) An investor's decision to buy or sell a security should be based on investment objectives, current holdings, and other individual factors.
06 January 2015
Grana y Montero (GRAM) 43
Credit Suisse’s policy is to update research reports as it deems appropriate, based on developments with the subject company, the sector or the market that may have a material impact on the research views or opinions stated herein.
Credit Suisse's policy is only to publish investment research that is impartial, independent, clear, fair and not misleading. For more detail please refer to Credit Suisse's Policies for Managing Conflicts of Interest in connection with Investment Research: http://www.csfb.com/research-and-analytics/disclaimer/managing_conflicts_disclaimer.html
Credit Suisse does not provide any tax advice. Any statement herein regarding any US federal tax is not intended or written to be used, and cannot be used, by any taxpayer for the purposes of avoiding any penalties.
Price Target: (12 months) for Grana y Montero (GRAM.N)
Method: We are approaching GRAM through a DCF method. Our Ke is built by an updated Rf rate of 3%, coupled with a country risk of 2%, which we think reflects Peru's long term economic situation. We are also using an equity risk premium of 6%. This as a result yields a 10.4% Ke. We are valuing all of concessions to maturity. As such we reached our US$13.5/Adr target price.
Risk: Our model is based on Credit Suisse inflation, GDP and FX assumptions for Peru, if these were not to materialize, projections could differ significantly. Our projections might be altered at any time, depending of the actual timeframe of project execution in Peru. The before mentioned factors represent a risk to our US$13.5/Adr target price.
Please refer to the firm's disclosure website at https://rave.credit-suisse.com/disclosures for the definitions of abbreviations typically used in the target price method and risk sections.
See the Companies Mentioned section for full company names
The subject company (GRAM.N, TSE.AX, LEI.AX, KBR.N, FLR.N, PINFRA.MX, JEC.N, OHLMEX.MX, FCX.N, 600362.SS, CPAC.N, NEM.N, VALE.N, SCCO.N, AAL.L, SSO.TO, 1208.HK, 5711.T) currently is, or was during the 12-month period preceding the date of distribution of this report, a client of Credit Suisse.
Credit Suisse provided investment banking services to the subject company (PINFRA.MX, OHLMEX.MX, NEM.N, SCCO.N, AAL.L, 1208.HK) within the past 12 months.
Credit Suisse provided non-investment banking services to the subject company (SCCO.N) within the past 12 months
Credit Suisse has managed or co-managed a public offering of securities for the subject company (PINFRA.MX, OHLMEX.MX, AAL.L) within the past 12 months.
Credit Suisse has received investment banking related compensation from the subject company (PINFRA.MX, OHLMEX.MX, NEM.N, SCCO.N, AAL.L, 1208.HK) within the past 12 months
Credit Suisse expects to receive or intends to seek investment banking related compensation from the subject company (GRAM.N, TSE.AX, LEI.AX, KBR.N, FLR.N, PINFRA.MX, ACM.N, JEC.N, OHLMEX.MX, FCX.N, 600362.SS, CPAC.N, BVN.N, NEM.N, VALE.N, SCCO.N, AAL.L, SSO.TO, 1208.HK, 5711.T) within the next 3 months.
Credit Suisse has received compensation for products and services other than investment banking services from the subject company (SCCO.N) within the past 12 months
As of the date of this report, Credit Suisse makes a market in the following subject companies (GRAM.N, KBR.N, FLR.N, ACM.N, JEC.N, FCX.N, CPAC.N, BVN.N, NEM.N, VALE.N, SCCO.N).
As of the end of the preceding month, Credit Suisse beneficially own 1% or more of a class of common equity securities of (PINFRA.MX, ARTR3.SA).
Credit Suisse has a material conflict of interest with the subject company (SCCO.N) . The analyst Ivano Westin has a relationship with a natural person who may provide remunerated services to one or more of the companies covered in this report
Credit Suisse has a material conflict of interest with the subject company (1208.HK) . Credit Suisse Securities (Europe) Limited is acting as financial advisor in connection with the GlencoreXstrata sale of its interest in the Las Bambas copper mine project in Peru to a consortium owned 62.5% by MMG Limited, 22.5% by GUOXIN International Investment Corporation Limited and 15.0% by CITIC Metal Co. Limited.
For other important disclosures concerning companies featured in this report, including price charts, please visit the website at https://rave.credit-suisse.com/disclosures or call +1 (877) 291-2683.
Important Regional Disclosures
Singapore recipients should contact Credit Suisse AG, Singapore Branch for any matters arising from this research report.
The analyst(s) involved in the preparation of this report have not visited the material operations of the subject company (GRAM.N, GRAM.N, TSE.AX, LEI.AX, KBR.N, FLR.N, PINFRA.MX, ARTR3.SA, AMFW.L, ACM.N, JEC.N, OHLMEX.MX, FCX.N, CPAC.N, BVN.N, NEM.N, VALE.N, SCCO.N, AAL.L, SSO.TO, 1208.HK, 5711.T) within the past 12 months
06 January 2015
Grana y Montero (GRAM) 44
Restrictions on certain Canadian securities are indicated by the following abbreviations: NVS--Non-Voting shares; RVS--Restricted Voting Shares; SVS--Subordinate Voting Shares.
Individuals receiving this report from a Canadian investment dealer that is not affiliated with Credit Suisse should be advised that this report may not contain regulatory disclosures the non-affiliated Canadian investment dealer would be required to make if this were its own report.
For Credit Suisse Securities (Canada), Inc.'s policies and procedures regarding the dissemination of equity research, please visit http://www.csfb.com/legal_terms/canada_research_policy.shtml.
The following disclosed European company/ies have estimates that comply with IFRS: (AAL.L).
Credit Suisse has acted as lead manager or syndicate member in a public offering of securities for the subject company (GRAM.N, PINFRA.MX, ARTR3.SA, OHLMEX.MX, NEM.N, SCCO.N, AAL.L) within the past 3 years.
As of the date of this report, Credit Suisse acts as a market maker or liquidity provider in the equities securities that are the subject of this report.
Principal is not guaranteed in the case of equities because equity prices are variable.
Commission is the commission rate or the amount agreed with a customer when setting up an account or at any time after that.
I, Bruno Savaris, CFA, certify that (1) The views expressed in this report solely and exclusively reflect my personal opinions and have been prepared independently, including with respect to Banco de Investimentos Credit Suisse (Brasil) S.A. or its affiliates ("Credit Suisse"). (2) Part of my compensation is based on various factors, including the total revenues of Credit Suisse, but no part of my compensation has been, is, or will be related to the specific recommendations or views expressed in this report. In addition, Credit Suisse declares that: Credit Suisse has provided, and/or may in the future provide investment banking, brokerage, asset management, commercial banking and other financial services to the subject company/companies or its affiliates, for which they have received or may receive customary fees and commissions, and which constituted or may constitute relevant financial or commercial interests in relation to the subject company/companies or the subject securities.
To the extent this is a report authored in whole or in part by a non-U.S. analyst and is made available in the U.S., the following are important disclosures regarding any non-U.S. analyst contributors: The non-U.S. research analysts listed below (if any) are not registered/qualified as research analysts with FINRA. The non-U.S. research analysts listed below may not be associated persons of CSSU and therefore may not be subject to the NASD Rule 2711 and NYSE Rule 472 restrictions on communications with a subject company, public appearances and trading securities held by a research analyst account.
Casa de Bolsa Credit Suisse (Mexico), S.A ..................................................................................................... Santiago Perez Teuffer ; Ana Zinser
Banco de Investments Credit Suisse (Brasil) SA or its affiliates. .......................................................................................... Bruno Savaris, CFA
For Credit Suisse disclosure information on other companies mentioned in this report, please visit the website at https://rave.credit-suisse.com/disclosures or call +1 (877) 291-2683.
06 January 2015
Grana y Montero (GRAM) 45
References in this report to Credit Suisse include all of the subsidiaries and affiliates of Credit Suisse operating under its investment banking division. For more information on our structure, please use the following link: https://www.credit-suisse.com/who_we_are/en/This report may contain material that is not directed to, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction where such distribution, publication, availability or use would be contrary to law or regulation or which would subject Credit Suisse AG or its affiliates ("CS") to any registration or licensing requirement within such jurisdiction. All material presented in this report, unless specifically indicated otherwise, is under copyright to CS. None of the material, nor its content, nor any copy of it, may be altered in any way, transmitted to, copied or distributed to any other party, without the prior express written permission of CS. All trademarks, service marks and logos used in this report are trademarks or service marks or registered trademarks or service marks of CS or its affiliates. The information, tools and material presented in this report are provided to you for information purposes only and are not to be used or considered as an offer or the solicitation of an offer to sell or to buy or subscribe for securities or other financial instruments. CS may not have taken any steps to ensure that the securities referred to in this report are suitable for any particular investor. CS will not treat recipients of this report as its customers by virtue of their receiving this report. The investments and services contained or referred to in this report may not be suitable for you and it is recommended that you consult an independent investment advisor if you are in doubt about such investments or investment services. Nothing in this report constitutes investment, legal, accounting or tax advice, or a representation that any investment or strategy is suitable or appropriate to your individual circumstances, or otherwise constitutes a personal recommendation to you. CS does not advise on the tax consequences of investments and you are advised to contact an independent tax adviser. Please note in particular that the bases and levels of taxation may change. Information and opinions presented in this report have been obtained or derived from sources believed by CS to be reliable, but CS makes no representation as to their accuracy or completeness. CS accepts no liability for loss arising from the use of the material presented in this report, except that this exclusion of liability does not apply to the extent that such liability arises under specific statutes or regulations applicable to CS. This report is not to be relied upon in substitution for the exercise of independent judgment. CS may have issued, and may in the future issue, other communications that are inconsistent with, and reach different conclusions from, the information presented in this report. Those communications reflect the different assumptions, views and analytical methods of the analysts who prepared them and CS is under no obligation to ensure that such other communications are brought to the attention of any recipient of this report. Some investments referred to in this report will be offered solely by a single entity and in the case of some investments solely by CS, or an associate of CS or CS may be the only market maker in such investments. Past performance should not be taken as an indication or guarantee of future performance, and no representation or warranty, express or implied, is made regarding future performance. Information, opinions and estimates contained in this report reflect a judgment at its original date of publication by CS and are subject to change without notice. The price, value of and income from any of the securities or financial instruments mentioned in this report can fall as well as rise. The value of securities and financial instruments is subject to exchange rate fluctuation that may have a positive or adverse effect on the price or income of such securities or financial instruments. Investors in securities such as ADR's, the values of which are influenced by currency volatility, effectively assume this risk. Structured securities are complex instruments, typically involve a high degree of risk and are intended for sale only to sophisticated investors who are capable of understanding and assuming the risks involved. The market value of any structured security may be affected by changes in economic, financial and political factors (including, but not limited to, spot and forward interest and exchange rates), time to maturity, market conditions and volatility, and the credit quality of any issuer or reference issuer. Any investor interested in purchasing a structured product should conduct their own investigation and analysis of the product and consult with their own professional advisers as to the risks involved in making such a purchase. Some investments discussed in this report may have a high level of volatility. High volatility investments may experience sudden and large falls in their value causing losses when that investment is realised. Those losses may equal your original investment. Indeed, in the case of some investments the potential losses may exceed the amount of initial investment and, in such circumstances, you may be required to pay more money to support those losses. Income yields from investments may fluctuate and, in consequence, initial capital paid to make the investment may be used as part of that income yield. Some investments may not be readily realisable and it may be difficult to sell or realise those investments, similarly it may prove difficult for you to obtain reliable information about the value, or risks, to which such an investment is exposed. This report may provide the addresses of, or contain hyperlinks to, websites. Except to the extent to which the report refers to website material of CS, CS has not reviewed any such site and takes no responsibility for the content contained therein. Such address or hyperlink (including addresses or hyperlinks to CS's own website material) is provided solely for your convenience and information and the content of any such website does not in any way form part of this document. Accessing such website or following such link through this report or CS's website shall be at your own risk. This report is issued and distributed in Europe (except Switzerland) by Credit Suisse Securities (Europe) Limited, One Cabot Square, London E14 4QJ, England, which is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. This report is being distributed in Germany by Credit Suisse Securities (Europe) Limited Niederlassung Frankfurt am Main regulated by the Bundesanstalt fuer Finanzdienstleistungsaufsicht ("BaFin"). This report is being distributed in the United States and Canada by Credit Suisse Securities (USA) LLC; in Switzerland by Credit Suisse AG; in Brazil by Banco de Investimentos Credit Suisse (Brasil) S.A or its affiliates; in Mexico by Banco Credit Suisse (México), S.A. (transactions related to the securities mentioned in this report will only be effected in compliance with applicable regulation); in Japan by Credit Suisse Securities (Japan) Limited, Financial Instruments Firm, Director-General of Kanto Local Finance Bureau (Kinsho) No. 66, a member of Japan Securities Dealers Association, The Financial Futures Association of Japan, Japan Investment Advisers Association, Type II Financial Instruments Firms Association; elsewhere in Asia/ Pacific by whichever of the following is the appropriately authorised entity in the relevant jurisdiction: Credit Suisse (Hong Kong) Limited, Credit Suisse Equities (Australia) Limited, Credit Suisse Securities (Thailand) Limited, regulated by the Office of the Securities and Exchange Commission, Thailand, having registered address at 990 Abdulrahim Place, 27th Floor, Unit 2701, Rama IV Road, Silom, Bangrak, Bangkok 10500, Thailand, Tel. +66 2614 6000, Credit Suisse Securities (Malaysia) Sdn Bhd, Credit Suisse AG, Singapore Branch, Credit Suisse Securities (India) Private Limited (CIN no. U67120MH1996PTC104392) regulated by the Securities and Exchange Board of India (registration Nos. INB230970637; INF230970637; INB010970631; INF010970631), having registered address at 9th Floor, Ceejay House, Dr.A.B. Road, Worli, Mumbai - 18, India, T- +91-22 6777 3777, Credit Suisse Securities (Europe) Limited, Seoul Branch, Credit Suisse AG, Taipei Securities Branch, PT Credit Suisse Securities Indonesia, Credit Suisse Securities (Philippines ) Inc., and elsewhere in the world by the relevant authorised affiliate of the above. Research on Taiwanese securities produced by Credit Suisse AG, Taipei Securities Branch has been prepared by a registered Senior Business Person. Research provided to residents of Malaysia is authorised by the Head of Research for Credit Suisse Securities (Malaysia) Sdn Bhd, to whom they should direct any queries on +603 2723 2020. This report has been prepared and issued for distribution in Singapore to institutional investors, accredited investors and expert investors (each as defined under the Financial Advisers Regulations) only, and is also distributed by Credit Suisse AG, Singapore branch to overseas investors (as defined under the Financial Advisers Regulations). By virtue of your status as an institutional investor, accredited investor, expert investor or overseas investor, Credit Suisse AG, Singapore branch is exempted from complying with certain compliance requirements under the Financial Advisers Act, Chapter 110 of Singapore (the "FAA"), the Financial Advisers Regulations and the relevant Notices and Guidelines issued thereunder, in respect of any financial advisory service which Credit Suisse AG, Singapore branch may provide to you. This information is being distributed by Credit Suisse AG, Dubai Branch, duly licensed and regulated by the Dubai Financial Services Authority (DFSA), and is directed at Professional Clients or Market Counterparties only, as defined by the DFSA. The financial products or financial services to which the information relates will only be made available to a client who meets the regulatory criteria to be a Professional Client or Market Counterparty only, as defined by the DFSA, and is not intended for any other person. This research may not conform to Canadian disclosure requirements. In jurisdictions where CS is not already registered or licensed to trade in securities, transactions will only be effected in accordance with applicable securities legislation, which will vary from jurisdiction to jurisdiction and may require that the trade be made in accordance with applicable exemptions from registration or licensing requirements. Non-U.S. customers wishing to effect a transaction should contact a CS entity in their local jurisdiction unless governing law permits otherwise. U.S. customers wishing to effect a transaction should do so only by contacting a representative at Credit Suisse Securities (USA) LLC in the U.S. Please note that this research was originally prepared and issued by CS for distribution to their market professional and institutional investor customers. Recipients who are not market professional or institutional investor customers of CS should seek the advice of their independent financial advisor prior to taking any investment decision based on this report or for any necessary explanation of its contents. This research may relate to investments or services of a person outside of the UK or to other matters which are not authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority or in respect of which the protections of the Prudential Regulation Authority and Financial Conduct Authority for private customers and/or the UK compensation scheme may not be available, and further details as to where this may be the case are available upon request in respect of this report. CS may provide various services to US municipal entities or obligated persons ("municipalities"), including suggesting individual transactions or trades and entering into such transactions. Any services CS provides to municipalities are not viewed as "advice" within the meaning of Section 975 of the Dodd-Frank Wall Street Reform and Consumer Protection Act. CS is providing any such services and related information solely on an arm's length basis and not as an advisor or fiduciary to the municipality. In connection with the provision of the any such services, there is no agreement, direct or indirect, between any municipality (including the officials, management, employees or agents thereof) and CS for CS to provide advice to the municipality. Municipalities should consult with their financial, accounting and legal advisors regarding any such services provided by CS. In addition, CS is not acting for direct or indirect compensation to solicit the municipality on behalf of an unaffiliated broker, dealer, municipal securities dealer, municipal advisor, or investment adviser for the purpose of obtaining or retaining an engagement by the municipality for or in connection with Municipal Financial Products, the issuance of municipal securities, or of an investment adviser to provide investment advisory services to or on behalf of the municipality. If this report is being distributed by a financial institution other than Credit Suisse AG, or its affiliates, that financial institution is solely responsible for distribution. Clients of that institution should contact that institution to effect a transaction in the securities mentioned in this report or require further information. This report does not constitute investment advice by Credit Suisse to the clients of the distributing financial institution, and neither Credit Suisse AG, its affiliates, and their respective officers, directors and employees accept any liability whatsoever for any direct or consequential loss arising from their use of this report or its content. Principal is not guaranteed. Commission is the commission rate or the amount agreed with a customer when setting up an account or at any time after that.
Copyright © 2015 CREDIT SUISSE AG and/or its affiliates. All rights reserved.
Investment principal on bonds can be eroded depending on sale price or market price. In addition, there are bonds on which investment principal can be eroded due to changes in redemption amounts. Care is required when investing in such instruments. When you purchase non-listed Japanese fixed income securities (Japanese government bonds, Japanese municipal bonds, Japanese government guaranteed bonds, Japanese corporate bonds) from CS as a seller, you will be requested to pay the purchase price only.
Initiation.doc