ORGANIZACIÓN CULTIBA, S.A.B. DE CV

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12 March 2013

Americas/Mexico

Equity Research

Soft Drinks

ORGANIZACIÓN CULTIBA, S.A.B. DE CV (CULTIBA)

INITIATION

The Pepsi giant awakes, initiating with

OUTPERFORM

Action: We initiate coverage of CULTIBA with an Outperform rating and a MXN

42 target price (20% upside potential). CULTIBA is the second largest soft

drinks bottler in Mexico and the third largest in Latin America in terms of

volumes.

Cultiba is the exclusive bottler of PepsiCo brands in Mexico, nonexclusive

bottler for Jarritos, and has recently signed an exclusive agreement with Jumex

(largest juice producer in Mexico) to develop Jumex Fresh (juice-based drink).

58% of revenues are derived from carbonated soft drinks, while noncarbonated

drinks account for 20% of total, and jug water for 14% of total.

Cultiba is also the fourth largest sugar producer in Mexico (8% of total

revenues), with three wholly owned sugar mills and one 49% owned mill.

Cultiba shares are traded on the Mexican Stock Exchange, under the ticker

CULTIBAB, with an average daily traded liquidity of USD 2mn.

Investment Thesis: We think that Cultiba has put in place the following:

(1) An impressive management lineup;

(2) One of the strongest portfolios of soft drinks in Mexico;

(3) Large synergies to be captured over the next 24 months; and

(4) Coherent and consistent capex commitments from all its partners to turn

around its bottling operations during the next 3-5 years.

Share price performance

28

33

38

Mar-12 Jul-12 Nov-12

Daily Mar 14, 2012 - Mar 08, 2013, 3/14/12 = $30.

Price Indexed Price Relative

On 03/08/13 the MXSE IPC INDEX closed at 44013.3

Quarterly EPS Q1 Q2 Q3 Q4 2012A — — — — 2013E — — — — 2014E — — — —

Financial and valuation metrics

Year 12/12A 12/13E 12/14E 12/15E EPS (CS adj.) (MXN) 0.77 1.07 1.90 2.42 Prev. EPS (MXN) — — — — P/E (x) 45.2 32.8 18.4 14.4 P/E rel. (%) 222.8 192.5 125.1 113.5 Revenue (MXN m) 31,990.6 35,548.0 39,336.8 42,613.9 EBITDA (MXN m) 1,467.7 2,433.4 3,267.7 3,809.2 OCFPS (MXN) -0.10 5.98 6.44 7.51 P/OCF (x) -386.8 5.8 5.4 4.7 EV/EBITDA 20.6 10.7 7.3 5.5 Net debt (MXN m) 4,966 604 -1,618 -4,303

Number of shares (m) 724.37 IC (current, MXN m) 20,809.88 BV/share (Next Qtr., MXN) — EV/IC (x) — Net debt (Next Qtr., MXN m) — Dividend (current, MXN) — Net debt/tot cap (Next Qtr., %) — Dividend yield (%) —

Source: Company data, Credit Suisse estimates.

Rating OUTPERFORM* Price (08 Mar 13, MXN) 34.98 Target price (MXN) 42.00¹ 52-week price range 40.25 - 29.25 Market cap. (MXN m) 25,338.51 Enterprise value (MXN m) 25,942.92

*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

Antonio Gonzalez, CFA

52 55 5283 8921

[email protected]

Armando Perez

+52 55 5283 3808

[email protected]

Gustavo Wigman

55 11 3701 6302

[email protected]

12 March 2013

ORGANIZACIÓN CULTIBA, S.A.B. DE CV (CULTIBA) 2

With the recent public offering of MXN 3.9bn (of which MXN 3.1bn are primary, 12.4%

dilution), we think the company is in a strong position to capitalize on additional M&A

opportunities, which we do not incorporate in our model yet.

Valuation: On an asset-based approach, CULTIBA currently trades at USD 1.4 / unit

case. KOF recently acquired Coca-Cola Bottlers Philippines, Inc. for USD 2.5 /UC and four

Coca-Cola bottlers in Mexico for USD 5-7 / UC. KO bottlers in Mexico trade at USD 9.2-

10.6 / UC.

From an EV/EBITDA perspective, CULTIBA trades at 10.7x our 2013 EBITDA estimate,

versus multiples of 14.2x and 13.1x, for KOF and Arca Continental, respectively.

While we acknowledge that there is inherently large execution risk in a bottling operation

that is planning to more than double its EBITDA in the coming two years, and that the

shares have low liquidity relative to peers, we believe risks are more than properly

reflected at current valuation levels. Our target price already reflects a 10% liquidity

discount.

12 March 2013


Table of contents Executive summary 4

Initiating Coverage on CULTIBA with Outperform Rating, MXN 42 Target Price,

20% Upside Potential 4 Investment Positives 5 Investment Risks 6

Beverages (93% Sales, 83% EBITDA) 8 A brief recap of Pepsi in Mexico 8 The Pepsi Giant Awakes 10 Three Growth Pillars Going Forward 13

Unique Opportunity for Synergies—Sole Operator with Nationwide Presence 13 Building a Leading, National Portfolio 14 Capex, Consistency Is the Name of the Game 16 Kicking Off with the Right Foot 17

Sugar (7% Sales, 17% EBITDA) 20 Selling at developed-markets prices… 20 …with emerging-market costs 20 Not just a cyclical business… GAM is a strategic hedge for GEPP 21

What’s the Justified Discount vs. Coca Cola Bottlers? 22 Earnings outlook 22 Relative valuation vs. Coca Cola bottlers 22

Appendix 1 – Management and Board of Directors 25 Appendix 2 – Coke vs. Pepsi pricing in Mexico 26 Appendix 3 – Gatorade, largest sports drink in Mexico 27 Appendix 4 – Water 28

12 March 2013


Executive summary Initiating Coverage on CULTIBA with Outperform Rating, MXN 42 Target Price, 20%

Upside Potential

Cultiba is a holding company with 51% ownership of GEPP, the second largest soft drinks

bottler in Mexico in terms of volume.

GEPP is the exclusive bottler for PepsiCo brands in Mexico, nonexclusive bottler for

Jarritos brand, and recently developed an exclusive agreement to bottle Jumex Fresh

(juice-based drink). Cultiba is the only major bottler with full-geographic coverage of the

Mexican territory.

Cultiba is also 100% owner of GAM, Mexico’s fourth largest sugar producer, with 100%

ownership of three sugar mills in Mexico and 49% ownership in one mill, partnering with

INCAUCA (a leading sugar and ethanol producer in Colombia).

Culitba’s shares are traded in the Mexican Stock Exchange under the ticker CULTIBAB,

with an average daily traded volume of USD 2 mn since its re-IPO on January 31, 2013.

Exhibit 1: Cultiba 2012 Revenue Revenues 2012—MXN 31.99 bn

Exhibit 2: Cultiba 2012 EBITDA Revenues 2012—MXN 31.99 bn

CSD, 58%

Non-

Carbonated,

20%

Jug Water,

14%

Sugar, 8%

Beverages

, 83%

Sugar,

17%

Source: Company data, Credit Suisse estimates. Source: Company data, Credit Suisse estimates.

We are initiating coverage with an OUTPERFORM rating.

1) There are large opportunities to capture synergies, which could translate into a

path of 3-5 years of very strong EBITDA growth (40% 3-year CAGR, vs. 10.4% for

Mexican Coke bottlers);

2) We think Cultiba’s management is exceptional and among the best soft drinks

operators we have met in the entire LatAm region. Admittedly, Cultiba is also

facing two of the best operators globally (AC and KOF);

3) It is our understanding that for the first time in many years, PEPSI has a strong,

consistent, and coherent capex commitment towards Mexico; and

4) Valuation is cheap, in our opinion. On an EV/UC basis (which appears to be a

preferred metric for Mexican KO bottlers with aggressive M&A agendas),

CULITBA is trading at USD 1.4/UC (and USD 2.3/UC after adjusting for jug water

exposure). To put some perspective into that number, KOF and AC trade at USD

10.6/UC and 9.2/UC, respectively; both bottlers did 5 acquisitions in Mexico over

the last 24 months at an average multiple of USD 5/UC. KOF acquired 50% of the

Philippines franchise territory for USD 2.5/UC.

12 March 2013


Investment Positives

■ Only Company with Nationwide Reach: Among the largest soft drinks bottlers in

Mexico, CULTIBA is the only company with a nationwide presence (Coca-Cola bottlers

are constrained to their franchise territories). This is a key competitive advantage, as it

allows great speed to market in negotiations with key distribution channels (national

retailers, movie theaters, and chained restaurants, among others).

Most important, it offers a platform for beverage brands, outside the Coke or Pepsi

systems, to partner with CULTIBA, in order to have a broader reach. We think that the

Coke system, which is currently operated by 7 bottlers, does not have this flexibility.

Cultiba has already entered into new agreements with companies such as Alsea

(Burger King and Domino’s Pizza), Chedraui, and Cinemex. While it has also reached

important agreements with Jumex (juices) and Jarritos (flavor CSD) to bottle and

distribute their products in Mexico.

■ Large Synergies Opportunity: New management brought from Empresas Polar

(Pepsi bottler in Venezuela) expects recurring synergies of USD 100mn at the EBITDA

level to be fully delivered by year-end 2014, representing 4.3% of year-1 revenues. Of

these synergies, 70% are cost-driven, while the remainder is related to operational

efficiencies.

■ Portfolio Positioned for Strong Growth: CULTIBA’s portfolio is comprised ~40% of

colas, versus ~69% for KO bottlers in Mexico (in terms of revenues). While colas

continue to represent 42% of the soft-drinks market and are among the most profitable

categories, their volume growth rate has been of 2%, while the rest of the market has

grown 4.9% per year in the last 6 years. Non-colas are better positioned than colas to

capture health and wellness concerns among customers, which in our opinion will

continue to be a strong trend going forward.

■ Strong Capex Commitment from Partners on the Beverage Subsidiary: In the last

6 years, PBC (~2/3 of the Pepsi system in Mexico, before the creation of Cultiba) had

a low Capex/Sales ratio below 4% (versus ~6% for the Coca Cola system in Mexico),

which translated into low pricing power for the Pepsi brand (if any).

Pepsi prices increased 1.7%, below the Coca-Cola system’s 3.0% (2006-2012

CAGR), and below cost increases in sugar and PET resin. Going forward, we think

Cultiba’s capex commitments in order to catch up with the lack of investment over the

last few years will equate to 7% of sales in 2013.

■ Mexican Sugar Industry, Selling at One of the Highest Prices in the World… but

with an Emerging Markets cost structure: Mexico and the U.S. have among the

highest prices of sugar in the world (~50% above world prices, owing to import tariffs

for all non-NAFTA members). Also, since 2008, there is a clear mechanism to set

sugarcane prices (providing cost stability for GAM), and the opportunity of vertical

integration, which could improve ROIC to the mid-teen level, above Brazilian peers

reaching levels of ~6%.

We think of the sugar business as a natural hedge for the beverage business. With the

current cost structure, our model suggests a 10% decline in sugar prices, benefits

majority net income by MXN 47 mn (6% of 2013 net income).

■ Leveraging on the Largest Direct-to-Home (DTH) Distribution Network in Mexico:

The Pepsi system reaches 2.4 mn households (versus ~1 mn for the Coke system)

through its jug water business. The company plans to leverage this distribution

network to incubate soft drinks directly at the household, creating brand awareness by

selling, bottle by bottle, brands such as Gatorade, Jumex, Jarritos, or Pepsi, which can

later be purchased at the mom-n-pops or at the supermarkets.

12 March 2013


■ Seasoned Management Team, the Best of the Best from Pepsi in Latam, and

Industry Leaders in Sugar: We think Cultiba has an impressive lineup of managers

to realize its aggressive growth plans over the coming years. Cultiba’s CEO, Juan

Gallardo, was the leading consolidator of the Pepsi system in Mexico over the last 25

years, and a lead negotiator for the private sector of the NAFTA agreement between

Mexico, the U.S., and Canada.

Miguel Antor is leading the beverage subsidiary of CULTIBA, GEPP. Mr. Antor led the

bottling operations of Pepsi in Venezuela, under Empresas Polar, which is

undisputedly one of the most successful Pepsi bottling franchises in Latin America. On

the sugar front, Juan Cortina, CEO of GAM, is the chairman of the Mexican Sugar and

Alcohol Chamber, and has been a leading figure over the last 5 years, during which

the industry has witnessed profound regulatory changes.

■ Cultiba – the (next to) last piece of the puzzle in the ABI consolidation master

plan? While we explore Cultiba’s recent acquisitions and opportunities to add-on

incremental brands to their portfolio in the coming years, we also think the end game

for Cultiba might include being a takeover candidate.

After ABI acquires Grupo Modelo in Mexico (our base case scenario is that deal will be

approved), many global investors claim that the ‘logical’ next step for ABI is to acquire

Pepsi (at the end of the day, there are not that many obvious candidates for one of the

largest beverage companies globally with a relatively underlevered balance sheet, to

realize the next growth stage). We think Mexico provides an extraordinary laboratory

to experiment soft drinks and beer integration: a natural next step after ABI and Pepsi

already operate together in Brazil; a nice way of taking synergies for both parties in

Mexico to the next level; and a very serious threat for the Femsa / Heineken system in

Mexico.

Investment Risks

■ Execution: Culitba’s plans include increasing EBITDA in its beverage business from

~MXN 2bn by year-end 2012 to ~MXN 5bn by year-end 2015. Tougher competition,

an adverse economic scenario, among others, could translate into this turn-around

story not fully materializing.

■ Excise Taxes on Beverages? A potential tax on soft drinks with high sugar content

has been informally mentioned by members of the Senate in the context of a potential

Fiscal Reform in Mexico. Although an excise tax on soft drinks was not approved on

this year’s budget, an additional tax could be approved in the future. If such a reform is

to be approved, it would have an impact on ~80% Cultiba’s beverage portfolio, which

is not currently subject to VAT.

■ Cultiba Could Lose Majority Ownership of Its Beverage Subsidiary, GEPP, in

2016: Per the existing agreement between Cultiba, PepsiCo, and Polmex (Venezuelan

partners), the two latter partners have an option to increase their combined stake in

GEPP from 49% currently, to 60% beginning in September 2016. The multiple for this

potential transaction has not yet been defined. Under certain circumstances, Cultiba

might not be able to consolidate this business going forward. In our model, we assume

that this option gets exercised at 11 times forward EV/EBITDA, and we no longer

consolidate GEPP in Culitba’s financials beginning in year 2017.

■ Volatility in Commodity Prices: In the beverage business, sweeteners (sugar and

fructose) and packaging (PET and aluminum) represent c.55% of total costs (~36% of

sales) and have proven volatile in the past years. Although the company has its own

sugar mills, the net effect of higher commodity prices for Cultiba’s profitability will still

be negative.

12 March 2013


■ Changes in the Regulatory Framework for the Sugar Industry, in Mexico or in

the U.S., Could Adversely Affect Cultiba: Current regulation defines: (1) prices of

sugar (which are significantly higher versus world prices); (2) a floor on sugar prices

(given the U.S. Farm Bill); (3) volumes that can be exported to the U.S.; (4) sugarcane

costs, and (5) vertical integration.

12 March 2013


Beverages (93% Sales, 83% EBITDA)

A brief recap of Pepsi in Mexico

In order to understand CULTIBA’s future and its aggressive growth plan going forward, we

think it is important to take a quick look at the history of the Pepsi system in Mexico.

We think Coke’s dominance in the market probably started building up in the early 1990’s.

At that time, Pepsi started investing in non-returnable plastic bottles versus the traditional

refillable and returnable glass package used heavily by the Coca-Cola system. The logic

was that although plastic was more expensive to produce, it was also more convenient to

the consumer and a sign of affluence, differentiation. Although not dominant, in 1992

PepsiCo was close to parity vs. Coca-Cola in the Mexico City market, and by the early 90s

PEPSI was gaining ground against KO.

In 1994, the fall of the Peso was a huge blow to PEP’s strategy as the cost of plastics

rose, the Peso devalued, and PEP could no longer sustain pricing or provide a viable

solution to invest against Coke’s arsenal of refillable packaging that provided value to the

customer.

PepsiCo’s major lesson from that experience was to never surrender the value of package

segmentation. By 1996, PEP’s strategy was still undefined and the KO System saw an

opportunity to leverage both returnables and non-returnables, increase the number of

SKU’s and create price gaps that would crush PEP’s former share gains. Coca-Cola

FEMSA in Mexico and saw an unprecedented moment to develop a strategy that would

once and for all win the leadership battle for Mexico’s CSD market.

By the late 1990s instead of gaining share, PepsiCo had lost it and profit margins were

down. Coca-Cola took market share and created a lead that PEP has never recovered

from.

While the chart below stops at 56% share, some Coke bottlers claim that their current

share of the cola segment stands above 70%.

Between 1990 and 1995 the Coke bottler grew volumes at a 7% CAGR and operating

income at a 23.4% CAGR. In 1994 and 1995 it launched 7 major new package formats for

brand Coca-Cola and new flavors.

12 March 2013


Exhibit 3: Cola segment market share in Mexico City area

Source: Company data, Credit Suisse estimates

Exhibit 4: Cola segment market share nationwide

77.2% 77.1% 77.6% 78.0% 78.1%

17.0% 16.5% 16.4% 16.2% 16.2%

10%

45%

80%

2008 2009 2010 2011 2012

Coca-Cola Pepsi

Source: Euromonitor, Credit Suisse estimates

In order to understand the operational struggles of Pepsi in Mexico, we think it is important

to also take a look at the history of various management and ownership changes. In 2002,

The Pepsi Bottling Group (PBG, one of the largest Pepsi bottlers globally), announced its

intention to acquire Pepsi-Gemex, the largest Pepsi bottler in Mexico.

Later on in August 2009, PepsiCo announces that they will acquire their two largest

bottlers globally, PBG and Pepsi Americas. With this transaction, PepsiCo itself became

the largest Pepsi bottler in Mexico.

Only a couple of years later, CULTIBA (at the time bottler with rights to bottle in ~1/3 of the

Mexican territory), acquired the PepsiCo bottling operations in Mexico (the remaining 2/3

of the Mexico territory).

12 March 2013


The Pepsi Giant Awakes

GEPP is the result of Cultiba’s acquisition, in September 30 2011, of:

■ Pepsi Bottling Group (PBC, Pepsi bottler with rights to ~67% of the Mexican territory

and accounting for ~57% of Pepsi system revenues in Mexico); and

■ Gatorade Mexico (~10% of Pepsi system revenues)

Before the creation of GEPP, Cultiba’s beverage subsidiary was called GEUSA, and it

accounted for ~33% of the Pepsi system in Mexico.

As a result of this merger, GEPP brought in new Venezuelan management (benchmark

Pepsi operations across LatAm, coming from Empresas Polar), which expects to

materialize synergies and recover margins after years of poor operating performance from

PBC and the Pepsi system in Mexico, in general.

Exhibit 5: Pepsi Territory Pre-GEPP

PBC

GEUSA


12 March 2013


Exhibit 6: Pepsi Carbonates Volume Market Share

44.8%42.9%

20.2% 20.2%

15.8% 14.5%13.1%

Venezuela Colombia Argentina Chile Mexico Brazil Peru

Source: Euromonitor, Credit Suisse estimates.

In this transaction, CULTIBA contributed equity of USD 220 mn, Polmex (the Venezuelan

company) contributed USD 315mn, while PepsiCo contributed USD 240mn (of which USD

150 mn was paid in three installments, the last one to be received by GEPP in 2013).

The funds were used to acquire:

a) PBC for USD 490 mn – PBC used USD200 mn of the 490 mn to pay an

intercompany loan to PepsiCo (as PBC was at 8.2x net debt to equity at the time),

b) Gatorade Mexico (also owned by PepsiCo) for another USD135 mn.

Below we present a series of tables with the cash inflows and outflows for Cultiba coming

from these transactions, as well as the implied valuations for each of them.

Exhibit 7: M&A cash flows in millions, unless otherwise stated

GEPP Cultiba

Contribution Cultiba 220 Contribution to GEPP -220

Contribution Polmex 315 Net from 51% ownership in GEPP 76.5

Contribution PepsiCo 240 Total -143.5

Acquisition PBC -490

Acquisition Gatorade -135

Total 150


Exhibit 8: GEPP Merger Summary

TTM EV/EBITDA calculated with equity contributions (non-cash) at book value

Pre

% of GEPP

Post

% of GEPP

Cash contribution

(USD mn)

TTM EV/EBITDA

implied payment

Cultiba 72.4% 51.0% 220 9.1x

Polmex 0.0% 29.0% 315 11.3x

PepsiCo 27.6% 20.0% 240 16.8x

GEPPL 100.0% 100.0% 775 11.3x


12 March 2013


Exhibit 9: GEPP Acquisitions in millions, unless otherwise stated

EV (USD mn) TTM EV/EBITDA

GATORADE 135 15.1

PBG 490 13.4


As a result, GEPP stands as the sole bottler of Pepsi in Mexico (operating in 100% of the

territory), with a 14.6% market share of soft drinks.

Exhibit 10: GEPP Market Share in millions, unless otherwise stated

Market share

Soft drinks 14.57%

Carbonates 16.19%

Colas 16.18%

Non-Colas 16.23%

Sport drinks 80.70%

Jug Water 15.00%

Source: Euromonitor, Credit Suisse estimates.

The new company is now the second largest bottler in Mexico in terms of volume and third

largest in terms of revenues.

Exhibit 11: Mexican Soft Drink Breakdown in millions unit cases—2012

72%

40%74%

10%

11%

10%

18%

49%

16%

0

300

600

900

1,200

1,500

1,800

KOF GEPP AC

CSD Non CSD Jug water


12 March 2013


Exhibit 12: Mexican beverages operations breakdown in millions, unless otherwise stated

Volume (UC) 1,560 1,720 1,071

Revenues (MXN) 29,688 60,797 41,520

Revenues per UC (MXN/UC) 19.0 35.3 38.8

EBITDA (MXN) 2,402 12,403 8,998

EBITDA per UC (MXN/UC) 1.5 7.2 8.4

EBITDA margin 8.1% 20.4% 21.7%


Exhibit 13: GEPP’s Sales Mix 2012 revenues of MXN 29.7 bn

Non-CSD,

22%

Jug water,

15%Pepsi, 39%

Other CSD, 24%

CSD, 63%

Non-CSD Jug water Pepsi Other CSD

Source: Company data, Euromonitor, Credit Suisse estimates.

Three Growth Pillars Going Forward

In our opinion, GEPP’s new management has three strong drivers that will be key in

achieving the expected turn-around in its operations: synergies, portfolio optimization, and

capex.

Unique Opportunity for Synergies—Sole Operator with Nationwide Presence

Originally, management identified USD 69.5 mn in synergies, but later increased its target

to USD 100 mn after finding new opportunities in so-called operational efficiencies.

70% of synergies are cost-driven, which we think makes those synergies relatively easier

to capture, while the portion of synergies attributable to operational efficiencies (the

remaining 30%) are a little bit more elusive, in our opinion (as in any other merger).

Importantly, there are no revenue synergies embedded in Cultiba’s estimates.

By 2012, 20% of these synergies were already captured; GEPP expects to reach 50% by

2013 and 100% by 2014.

12 March 2013


Exhibit 14: Expected Synergy Plan in millions, unless otherwise stated

Total synergies for USD 100.5mn

Cost driven synergies 69.5

Manufacturing and Logistics 17.3

Merge routes

Optimize plants and distribution centers

Integrate GEPP's logistics (completed in Sep '12)

Organization 24.4

Eliminate duplicities and redifine roles

Eliminate offices

Integrate IT and systems

Economies of scale in procurement 27.8

Operational efficiencies 31.0

Preforms and closures

Process optimization

Sweeteners

Bottle weight reduction

Others

Capex in logistics -30.0

One-time expenses -19.0


Building a Leading, National Portfolio

We believe that there is a stark difference between Cultiba and the Coke bottlers in

Mexico, in that the former is not cola-centric. As we previously mentioned in this note,

colas account for 40% of Cultiba revenues, versus 69% of all Mexican Coke bottlers.

While colas continue to enjoy among the best profitability levels in the soft drinks industry

(owing to their high price points, large drop sizes, among others), they are also among the

lowest-growth categories within soft drinks, owing to very high per-capita penetration in

Mexico (among the highest globally), as well as health and wellness concerns, which are

likely to push consumers to look for noncarbonated, healthier alternatives going forward.

Exhibit 15: Relative Volume Growth in Mexico

Sports &

Energy

Juices

CSD

Coffee & tea

0.8

1.0

1.2

1.4

1.6

1.8

2.0

2.2

2.4

2.6

2.8

2007 2008 2009 2010 2011 2012 Source: Euromonitor, Credit Suisse estimates.

12 March 2013


Among the most important steps for Cultiba to optimize its portfolio, is to rationalize some

regional brands that the two former Pepsi bottlers were operating before the merger into

GEPP.

Exhibit 16: Moving from a Regional (Inefficient) Portfolio…


GEPP started with 49 brands by year-end 2011, it has been able to downsize the portfolio

to 35 brands currently, and the target is to further downscale the portfolio to 22 brands in

total.

Exhibit 17: ...to a Winning National Portfolio


It is interesting to note that some of the main brands that GEPP will be relying on, as part

of this stronger portfolio approach, are brands that were not part of either bottler before the

merger into Cultiba.

12 March 2013


Just recently, Cultiba added Jarritos to its portfolio, among the most important multi-flavor

CSD brands (49% market share) under an agreement to bottle and distribute in

approximately 60% of the Mexican territory (not including Mexico City).

Cultiba, along with Jumex, created Jumex Fresh, a juice-based drink in PET bottle. In both

cases, GEPP has an incidence-based model (they pay to Jarritos and Jumex a

percentage of revenues), and GEPP is in charge of production, bottling, distribution, and

commercialization.

It is interesting to note that Jumex and Jarritos are leading players in their respective

segments. That is, Cultiba has created a culture of looking for the best players in each

subsegment of the soft drinks universe (irrespective of whether that includes a Pepsi

brand or not), reaching out to these players, offering a unique distribution platform (being a

bottler with nationwide presence), and creating a leading portfolio.

We wish we could see these partnership principles in all of the LatAm beverage

companies that we have analyzed!

The obvious question remains: what other opportunities are still out there for Cultiba in the

remaining subsegments of the soft drinks universe in Mexico? We believe that the usual

suspects would be teas (1.1% of soft drinks revenues), energy drinks (1.2%), and

extending the agreement with Jumex to all of the Jumex portfolio and all distribution

channels where Jumex is present (vs. the current agreement which only considers juice-

based drinks, a portion of the Jumex portfolio) – juices represent 9.7% of soft drinks’

revenues and Jumex has a 27.2% of market share in this category.

We highlight though, that in a recent conversation with Culitba’s management, we heard

that CULTIBA is 100% focused on capturing the synergies it has outlined at the outset of

the merger between the two Pepsi bottlers, and there is no imminent transaction

happening in the next ~12 months period.

Capex, Consistency Is the Name of the Game

We expect GEPP to invest MXN 2.5bn in Capex during 2013, or 7.1% of sales (versus 5-

6% of AC and KOF).

Since capacity utilization for both soft drinks and jug water are at ~50% and ~84%,

respectively, and management is optimizing routes (closing neighboring routes between

the two former Pepsi bottlers), we believe that most of the funds will be used to generate

brand equity, mostly with execution at the point of sale.

■ Returnable packages are 4% of total, versus 25%-35% for the KO system; we see

huge opportunities here (even though a specific target has not been mentioned by

management).

■ Increasing cooler penetration, currently slightly above 50% in the mom and pops, and

adding second and third doors where Cultiba already has presence.

■ A clear difference in marketing and advertising (focused on image rather than price).

Anecdotally, we have recently seen the only campaign for Pepsi in Mexico we have on

memory talking about the brand attributes of Pepsi, rather than talking about price only

(maybe since the ‘Pepsi Challenge’ in the mid-90’s).

12 March 2013


Exhibit 18: Old marketing. Price-oriented With my "PECSI" I spend less

Exhibit 19: New marketing – creating

brand equity You will love it… or not.

Source: Company data, Credit Suisse Source: Company data, Credit Suisse

Anecdotally (living in Mexico City), we could mention that visibility of the Pepsi brand in

certain key accounts in Mexico City is quite remarkable, and while still at early stages, we

are also seeing marginally more blue mom-and-pop stores versus a completely red mom-

and-pop landscape in Mexico City just a couple of years ago.

Exhibit 20: Pepsi mom & pop store Exhibit 21: Pepsi gaining visibility in key

accounts – ‘La Feria’ amusement park in

Mexico City


Kicking Off with the Right Foot

Since new management took control of Pepsi’s operations in Mexico, volumes and

profitability have improved significantly. In 2012, Cultiba’s pro forma revenues increased

7% y/y, and pro forma EBITDA margin improved from 6.9% in 2011 to 7.7% in 2012.

Importantly, volume growth rates have been markedly above the KO system.

12 March 2013


Exhibit 22: GEPP 2012 Volume Performance

6.6%

4.2%

5.4%

2.8%

-1.9%

1.9%

4.1%

-1.5%

3.1%

Soft drinks Jug water Total

GEPP

KOF

AC


Finally, we highlight that implied market share gains in order to realize this turnaround

story, look reasonable, in our opinion.

First, we highlight that Cultiba’s plans do not rely solely on volume. Secondly, the volume

portion of the story does not only rely on market share gains versus Coke specifically.

Actually, per Cultiba’s (qualitative) comments, we think that roughly one-third of the

turnaround (in EBITDA) is coming from synergies, one-third from volume growth, and one-

third from operating leverage.

We think that a couple of frequently overlooked channels to get market share gains

include (1) direct-to-home (or DTH), using Cultiba’s scale in bulk water, and (2) increasing

its participation in the modern channel (supermarkets, hypermarkets, etc.) and on-premise

accounts (restaurants, movie theaters, amusement parks, etc.).

Examples of these initiatives include:

■ Pepsi negotiated with Burger King and Domino’s Pizza (Alsea’s quick-service

restaurant formats) to sell Pepsi in exchange for advertising and including special

offers in its jug water presentations that are delivered in DTH routes, a competitive

advantage that the KO system is not able to offer.

■ Incubation of Pepsi’s products through the DTH channel.

■ A similar deal was closed with Cinemex (Mexico’s second largest movie theater chain

~2,300 screens) and La Feria, Mexico City’s flagship amusement park.

■ Negotiations with Chedraui (third largest supermarket operator in the country) led to

more selling space and increased in-store market share from low teens to high

twenties.

12 March 2013


Exhibit 23: Pepsi cooler in a Chedraui

store

Exhibit 24: CULTIBA ‘incubating brands,

leveraging on DTH


In our view, management has its feet on the ground by focusing on markets where Coca-

Cola bottlers are not exceling (gaining share exclusively from the mom-and-pops would

prove capex-intensive and a fierce battle against Coca-Cola). By taking advantage of its

nationwide presence, local marketing decisions, and DTH reach, we think that Pepsi can

gain a few percentage points in the market (where competition will not be as tough) and

have a considerable gain. Importantly, B-brands have probably a lot to lose against Cultiba

before the Coke system does.

Cultiba is planning to achieve 7-8% volume growth per year, over the coming 3-5 years.

Our model suggests that this level of volume growth will only be achieved during 2013,

while we expect a more moderate c.4% volume growth thereafter. Our volume

assumptions mean that Cultiba will gain 154 bps of market share in soft drinks over the

coming 5 years. However, we estimate over 700bps of operating leverage and MXN 5bn in

EBITDA by 2015 (for the beverage subsidiary only).

CULTIBA does not need to start an aggressive price war vs. Coke to materialize

their turnaround story. Synergies, operating leverage, market share gains vs. B-

brand operators, and taking advantage of alternative distribution channels, can be

powerful tools in the CULTIBA story.

12 March 2013


Sugar (7% Sales, 17% EBITDA)

Grupo Azucarero Mexico (GAM), is the 4th largest sugar producer in Mexico in terms of

volumes. The company owns the sugar mills of Lazaro Cardenas (state of Michoacan),

Tala (in Jalisco) and El Dorado (Sinaloa), and 49% of Benit Juarez (Tabasco), which is not

consolidated.

Selling at developed-markets prices…

Mexico is a closed sugar market. Each year prices are negotiated between all local parties

and sold exclusively for internal use. After all local needs have been satisfied, sugar

surplus (~550,000 tons annually) can be exported. In some extraordinary occasions when

harvests are hurt by extreme weather conditions and Mexico has a sugar deficit, imports

have been allowed.

Importantly, because Mexico is part of the North America Free Trade Agreement (NAFTA),

together with the US and Canada, sugar surplus produced in Mexico is free to enter the

US market without import tariffs. Importantly, Mexico has a yearly surplus of 0.5mn tons vs.

a deficit in the US of ~3mn tons per year. All other countries pay import duties when

entering the U.S.

As a result of this regulatory framework, sugar prices in the US and Mexico have

historically been 42% to 59% on average above world prices, respectively.

Exhibit 25: Sugar Prices Performance in USD per ton

World

USMexico

0

200

400

600

800

1,000

1,200

Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 Jan-13

Source: Bloomberg, Ministry of Finance, Credit Suisse estimates.

Also there is a floor to sugar prices in the US provided by the Farm Bill. Under this

legislation, sugar producers in the US are ‘rescued’ at a price of USD 402 / per tonne (for

standard sugar), effectively setting a lower limit for sugar prices.

…with emerging-market costs

The sugar industry has gone through a series of deep regulatory changes in Mexico over

the last few decades. In the last 25 years the Mexican Government has run all the mills in

the country, twice.

The latest nationalization episode took place in 2001, with several producers going

bankrupt after some episodes in which sugar prices declined below sugarcane prices, and

sugarcane growers were not willing to accept lower prices for their raw material

12 March 2013


(sugarcane was a protected industry with predefined prices, and extremely fragmented

with over 160,000 sugarcane growers in the country).

At the end of the day however, these inefficiencies were not good for anyone, as sugar

producers going bankrupt meant that sugarcane producers were not paid.

While the Mexican Government continues to be the largest producer in the country (with

c.22% of production), most mills have been privatized again, and in a notable episode,

GAM got its mills back after winning an injunction process where they claimed that the

2001 nationalization from the Government was not rightful in the first place.

The important thing going forward is that an agreement was reached in 2008 between

sugarcane growers and sugar producers in order to give long term certainty to all parties.

Beginning in 2008 sugarcane prices are set at 57% of (weighted average) sugar price

realized by the mills. This has created an unprecedented alignment in the sugar industry in

the country.

Also, under the new regulatory framework sugar producers are allowed to vertically

integrate into sugarcane, after having acquired all the sugarcane produced from third

parties.

Currently GAM produces 12% of its sugar via its own sugarcane and has plans to increase

this proportion to c.40% of total by 2016.

Having 65% capacity utilization, we believe GAM is a natural candidate to take advantage

of this vertical integration opportunity.

Interestingly, because prices of land are very low in Mexico, relative to other Latin

American countries, it is an attractive proposition to acquire land for vertical integration into

sugarcane and closing this capacity utilization gap (cost of land at ~USD 4,100 per

hectare for GAM vs. USD15,000-20,000 and USD6,000-9,000 for sugar producers in Sao

Paolo and other regions in Brazil, respectively).

Furthermore harvest costs per ton of sugar come down by 50% after vertical integration.

All in all, we think GAM’s ROIC has the potential to increase to the mid-teen level with

vertical integration by 2016 (significantly above the mid-to-high single-digit range for

Brazilian players).

Not just a cyclical business… GAM is a strategic hedge for GEPP

Beyond the opportunity to massively increase ROIC given vertical integration at GAM, we

think of Cultiba’s sugar business, as a natural hedge (for the Beverage subsidiary) against

volatility in sugar prices.

GEPP’s cost of sweeteners represents about 23% of sales with sugar representing ~1/2 of

that. As shown in Exhibit 26 the net effect of a 10% decline in sugar prices is a MXN 47mn

gain at the net income level for CULTIBA.

Exhibit 26: Cultiba – net income sensitivity to sugar prices in millions, unless otherwise stated

Consolidated -40.0% -30.0% -20.0% -10.0% 0.0% 10.0% 20.0% 30.0% 40.0%

GEPP gain/(loss) 1,331 999 666 333 - (333) (666) (999) (1,331)

GAM gain/(loss) (412) (309) (206) (103) - 103 206 309 412

Cultiba gain/(loss) 919 689 459 230 - (230) (459) (689) (919)

Additional to net income 643 482 322 161 - (161) (322) (482) (643)

Additional minority interest (457) (343) (228) (114) - 114 228 343 457

Additional majority NI 187 140 93 47 - (47) (93) (140) (187)


12 March 2013


What’s the Justified Discount vs. Coca Cola Bottlers? Earnings outlook

Cultiba has recently reported 4Q12 and FY2012 results. With 2012 revenues growing 7%

y/y, Ebitda growth of 20% y/y, and net income of MXN 691mn (vs. a loss of MXN 1,035mn

in 2011), all on a pro-forma basis.

Furthermore, we think some non-recurring expenses were reflected in 2012 results,

related to the integration of Gatorade into Cultiba’s distribution network (Gatorade was

formerly distributed by third parties, pre-merger of both Pepsi bottlers in Mexico), and

some other integration expenses.

In our numbers a 28% lower prices for sugar y/y during 2013, MXN 247 mn in incremental

synergies kicking in during 2013, plus 7% in volumes and 400 bps from operating leverage,

should lead to an Ebitda growth of 78% in 2013. We estimate earnings growth of 57% for

this same year.

On a longer term (3 year CAGR), we estimate Cultiba could deliver an Ebitda growth of

40%, and a net income growth of 53%. We estimate Coke bottlers listed in Mexico will

deliver an Ebitda CAGR of 10.4% in that same time frame, and a net income CAGR of

13.4%.

Relative valuation vs. Coca Cola bottlers

It is clear to us that Cultiba should trade at a discount to Coke bottlers listed in Mexico, on

the grounds of

1) KO bottlers’ solid track record as public companies and significantly larger trading

liquidity;

2) Higher market shares in Mexico in the key cola segment;

3) A geographically diversified revenue stream, with KO bottlers having presence in

Mexico and various South American countries (albeit this is much more of an

argument for KOF than it is for AC, whose exposure outside of Mexico is limited to

Argentina and Ecuador); and last but not least

4) Higher Ebitda margins and ROIC levels.

However the question is how much of a discount is fair?

A first approach could be to analyze the discount that Pepsi commands relative to Coca-

Cola Company, over the last few years, which stands at 19.6%

12 March 2013


Exhibit 27: PEP fwd EV/EBITDA discount vs. KO Left axis is EV/EBITDA / Right axis is PEP discount

-30%

-25%

-20%

-15%

-10%

-5%

0%

0x

2x

4x

6x

8x

10x

12x

14x

16xM

ar-

12

Ap

r-1

2

May-

12

Jun-1

2

Jul-1

2

Aug

-12

Sep

-12

Oct-

12

Nov-

12

Dec-1

2

Jan-1

3

Feb

-13

Mar-

13

PEP discount KO PEP

Source: Company data, Bloomberg estimates, Credit Suisse estimates

Now, investors could certainly claim that Cultiba has even lower market share than what a

typical Pepsi bottler has (PEP in the US has a volume share of colas of c.33%, and 21% in

total soft drinks vs. 56% and 23% for the KO system, respectively); and CULTIBA’s

exposure to sugar, which could also call for a steeper discount than the traditional PEP vs.

KO discount.

On the other hand optimistic investors could actually argue that Cultiba’s discount to KO

bottlers in Mexico should actually be narrower than the typical PEP vs. KO discount, given:

(i) A depressed Ebitda (translating into higher growth for Cultiba relative to the Coke

system over the next few years), a

(ii) Cultiba’s advantage of covering the entire Mexican territory,

(iii) An opportunity to integrate new brands into Cultiba’s portfolio and

(iv) Cultiba being a structural M&A target (for ABI),

While this debate might remain open, we derive our target price from our DCF exercise,

which leads us to a MXN 42 / share target valuation (after adding a 10% discount for lower

liquidity).

At our target price, Cultiba would trade at 8.8x EV / Ebitda 2014, which would represent a

discount to KOF and Arca Continental of 25.4% and 20.6%, respectively. Our DCF-driven

exercise assumes a cost of equity of 10.5% (lower than KOF’s or AC’s, since Cultiba is a

pure Mexico play while AC and KOF have exposure to more volatile markets such as

Ecuador, Argentina, or Venezuela), and a perpetuity growth rate of 3.5% (similar to that

assumed for KO bottlers under our coverage universe).

12 March 2013


Exhibit 28: Cultiba model summary in millions, unless otherwise stated

BASICS COMPANY DESCRIPTION

Sector Beverage Ticker CULTIBAB

Price (MxP$) 34.98

Target (MxP$) 42.0 Target (US$) 3.2 It is also the largest player in the jug water segment in the country and owns 100%

Recommendation NEUTRAL

Market Cap 25,338 POSITIVES

Daily liquidity (US$/day) - 1M avg 2.0 Sole bottler in Mexico with a nationwide presence, prov iding an attractive distribution

network for non-CSD and other beverage players to partner with Cultiba.

SHAREHOLDING STRUCTURE TOTAL Jug water business prov ides capilarity and also high returns, the largest distribution

Control Group 450 62.1% network in Mexico.

Other minorities 66 9.1%

GBM 57 7.9%

Free Float 151 20.8% NEGATIVES

Total 724 Core Pepsi brand has weak market positioning and low price points.

OWNERSHIP STRUCTURE

FINANCIAL METRICS (MxP$ mn) 2011 2012E 2013E 2014E 2015E OPERATING METRICS 2011 2012E 2013E 2014E 2015E

Revenues 14,979 31,991 35,548 39,337 42,614 Volume (MnUC) 1,458.0 1,560.1 1,670.0 1,759.3 1,830.7

Gross profit 5,840 12,022 13,899 16,126 17,655 % change y/y 7.0% 7.0% 5.3% 4.1%

Gross margin 39.0% 37.6% 39.1% 41.0% 41.4% Revenues / UC (MXN / UC) 15.2 19.0 19.8 20.7 21.4

EBIT 354- 292 2,149 3,413 4,109 Ebitda / UC (MXN / UC) 0.5 1.3 2.3 2.9 3.2

EBIT margin -2.4% 0.9% 6.0% 8.7% 9.6% Sugar produced (Metric tons) 244,726 201,353 290,593 304,114 334,704

EBITDA 657 2,446 4,353 5,773 6,666 Ebitda per metric ton 1,369 2,265 1,249 1,907 2,192

EBITDA margin 4.4% 7.6% 12.2% 14.7% 15.6%

Adj. EBITDA 657 1,468 2,433 3,268 3,809

Net financial expenses (193) (377) (163) (106) (52) LEVERAGE 2011E 2012E 2013E 2014E 2015E

Taxes 340 549 (560) (895) (1,098) Net debt/ Adj. EBITDA 8.3 4.1 0.8 (0.1) (0.8)

Net income (285) 492 773 1,379 1,754 Net debt / Equity 0.6 0.7 0.2 (0.0) (0.2)

Net margin -1.9% 1.5% 2.2% 3.5% 4.1% Foreign Debt / Total Debt 0.0 0.0 0.0 0.0 0.0

# of shares (mn) 635 635 724 724 724 Capex / Operat.Cash Flow 4.2 1.2 1.3 0.7 0.7

EPS (MxP$) (0.45) 0.77 1.07 1.90 2.42 EBITDA/Net Interest Exp. (3.4) (3.9) (14.9) (31.0) (72.8)

NOPAT (14) 840 1,590 2,520 3,015

Depreciation 1,012 2,155 2,204 2,360 2,557 RETURN / YIELD 2011E 2012E 2013E 2014E 2015E

Capex (4,150) (2,506) (2,514) (1,657) (1,884) ROIC -0.1% 3.4% 6.4% 10.3% 12.5%

FCFE (2,324) 69 391 1,999 2,462 WACC 6.3% 6.1% 9.1% 9.4% 9.6%

Div idends 0 0 409 683 819 Cost of Equity (ke) 10.5% 10.5% 10.5% 10.5% 10.5%

Total assets 29,158 29,485 29,994 31,907 34,298 ROE -5.1% 5.6% 7.0% 10.0% 11.4%

Cash 520 589 980 2,979 5,440 FCF Yield -10.5% 0.3% 1.5% 7.9% 9.7%

Change in WK 1,192 (929) (109) (239) (158) Div. Yield 0.0% 0.0% 1.6% 2.7% 3.2%

VALUATION 2011E 2012E 2013E 2014E 2015E

Net debt 5,447 6,078 1,964 (258) (2,944) EV/Sales 1.8 0.9 0.8 0.6 0.5

Book value 8,539 8,973 12,973 14,467 16,335 EV / Adj. EBITDA 40.4 18.5 10.8 7.3 5.6

Market cap. 22,227 22,227 25,338 25,338 25,338 EV / IC 1.1 1.1 1.1 1.0 0.9

EV 27,674 28,305 27,302 25,080 22,395 P/E (78.1) 45.2 32.8 18.4 14.4

Invested capital 24,559 24,850 24,687 24,290 23,870 P/B 2.6 2.5 2.0 1.8 1.6

Risks of execution in reaching synergies and recovering volumes.

ROIC VS WACC

CULTIBA owns 51% of the sole Pepsi bottler in Mexico, with agreement to bottle and

distribute brands Pepsi, Gatorade, Jarrritos, and Jumex Fresh.

of GAM, the fourth largest sugar producer in Mexico.

Potential for synergies is strong at Gatorade and PEP platforms.

Sugar business is a natrual hedge and has high returns.

-2%

0%

2%

4%

6%

8%

10%

12%

14%

2010 2011 2012 2013 2014 2015

ROIC WACC

Control Group62%Other

minorities9%

GBM8%

Free Float21%


12 March 2013


Exhibit 29: Beverages valuation comps EBITDA CAGR NI CAGR

COMPANY NAME Price TP Rating 2012 2013 2014 2012 2013 2014 2012-2015 2012 2013 2014 2012-2015

Ticker LatAm Brewers

AMBV4 AmBev 87.5 73.0 NEUTRAL 130,486US$ 17.7x 15.7x 14.5x 49.3% 49.9% 49.8% 8.8% 26.8x 23.9x 21.8x 10.2%

GMODELOC Modelo 113.5 87.5 NEUTRAL 29,103US$ 17.4x 14.8x 11.9x 30.2% 30.5% 31.6% 9.0% 30.3x 28.3x 24.3x 11.8%

FEMSAUBD Fomento Economico Mexicano 134.7 105.0 NEUTRAL 38,222US$ 20.0x 17.6x 15.3x 16.2% 16.7% 17.0% 12.1% 30.8x 25.0x 21.1x 17.9%

CCU Compañía Cervercerias Unidas 7,513 4700.0 UNDERPERFORM 5,059US$ 10.8x 9.6x 8.7x 23.1% 23.5% 23.6% 7.9% 18.8x 16.8x 15.6x 9.2%

LatAm Brewers Avg. 202,870US$ 17.9x 15.8x 14.1x 39.7% 40.2% 40.4% 9.4% 27.8x 24.5x 21.9x 11.8%

LatAm Soft Drinks

CULTIBAB Cultiba 35.0 42.0 OUTPERFORM 2,006US$ 18.5x 10.7x 7.3x 12.2% 14.7% 15.6% 40.0% 45.2x 32.8x 18.4x 53.0%

KOFL Coca-Cola Femsa SAB de CV 197 140.0 NEUTRAL 31,737US$ 14.7x 13.4x 11.8x 19.5% 20.4% 21.0% 10.3% 28.5x 25.6x 22.2x 13.9%

AC* Arca Continental 95.9 77.0 NEUTRAL 11,891US$ 14.2x 13.1x 11.1x 19.5% 19.6% 20.7% 10.6% 27.5x 25.2x 21.3x 13.0%

ANDINAB Embotelladora Andina 3,054 3000.0 OUTPERFORM 4,399US$ 11.1x 9.3x 7.9x 18.9% 19.7% 20.6% 14.5% 19.9x 16.7x 14.1x 17.5%

LatAm Soft Drinks Avg. 50,033US$ 13.7x 12.4x 10.8x 18.7% 19.3% 20.0% 10.3% 26.4x 23.7x 20.4x 13.4%

Global Brewers

ABI Anheuser-Busch InBev 89.0 90.6 NEUTRAL 143,075US$ 12.9x 10.6x 9.7x 39.3% 38.7% 39.5% 10.2% 18.8x 17.0x 15.5x 9.4%

SAB SABMiller 47.5 49.7 OUTPERFORM 75,861US$ 15.8x 13.9x 12.8x 30.9% 33.5% 34.3% 11.7% 22.4x 19.8x 17.7x 12.0%

HEIN Heineken 49.0 RESTRICTED 37,707US$ 10.2x 9.5x 8.8x 19.8% 20.5% 21.4% 10.1% 17.6x 15.5x 13.8x 14.0%

2503 Kirin Holdings 1041.0 1050.0 NEUTRAL 11,250US$ 6.5x 6.4x 6.3x 13.8% 14.0% 14.1% 2.1% 21.1x 16.7x 15.5x -1.1%

2502 Asahi Group Holdings 1882.0 1800.0 NEUTRAL 9,853US$ 7.3x 6.9x 6.8x 11.1% 11.5% 11.6% 2.1% 13.5x 13.2x 12.4x 4.0%

CARLb.CO Carlsberg 554.0 460.0 UNDERPERFORM 15,130US$ 9.0x 8.3x 7.7x 20.5% 21.7% 22.3% 8.2% 15.7x 13.5x 12.0x 13.3%

AEFES Anadolu Efes 26.9 27.0 UNDERPERFORM 9,005US$ 12.8x 10.7x 9.7x 20.6% 22.4% 22.7% 12.9% 24.1x 19.4x 17.1x 18.6%

Global Brewers Avg. 301,883US$ 12.7x 10.9x 10.0x 31.4% 32.0% 32.7% 10.0% 19.5x 17.3x 15.6x 10.5%

Global Soft Drinks

KO The Coca-Cola Company 37.2 NR 166,983US$ 13.7x 12.8x 11.6x 27.9% 28.4% 29.2% 8.8% 18.6x 17.2x 15.7x 8.0%

PEP PepsiCo, Inc. 71.7 NR 110,909US$ 10.8x 10.2x 9.6x 18.9% 19.2% 19.6% 7.9% 17.6x 16.3x 15.0x 8.2%

CCE Coca-Cola Enterprises 33.6 NR 9,650US$ 8.7x 8.5x 8.0x 16.6% 16.5% 16.7% 5.0% 15.0x 13.4x 12.0x 6.0%

CCL Coca-Cola Amatil 13.7 13.6 UNDERPERFORM 11,027US$ 11.0x 10.3x 9.7x 21.9% 22.2% 22.3% 7.7% 18.7x 17.6x 16.6x 7.8%

CCOLA Coca Cola Icecek 39.1 37.2 NEUTRAL 5,623US$ 16.8x 13.8x 12.1x 15.9% 15.8% 15.9% 18.2% 28.4x 22.6x 19.3x 18.4%

Global Soft Drinks Avg. 304,193US$ 12.5x 11.6x 10.7x 23.8% 24.2% 24.8% 8.5% 18.3x 16.8x 15.4x 8.2%

Market Cap

(US$)

EV/EBITDA P/EEBITDA margin (%)


Appendix 1 – Management and Board of Directors

Mr. Juan Gallardo (CEO of Cultiba) – Mr. Gallardo is the Chairman, CEO, and

controlling shareholder of CULTIBA.

Mr. Gallardo acquired Inmobiliaria Trieme in 1986 and started consolidating various

regional players since then. In the past decade, CULTIBA acquired some of the biggest

remaining players in the industry: Grupo Embotellador Bret (2005), Grupo Embotelladores

del Sureste (2006), and Gatorade and PBC in 2011.

Mr. Gallardo is a Board member of Caterpillar, Lafarge, and Bombardier Mexico. He was

also a leader and chief coordinator for the private sector during the NAFTA negotiations.

Miguel Antonio Antor (CEO of GEPP) – 20+ years of experience in the foods and

beverage sector, was CEO of Pepsi-Cola Venezuela.

Juan Cortina (CEO of GAM) – Chairman of the Mexican Sugar and Alcohol Chamber.

14+ years of experience in the sugar industry, Mr. Cortina is a board member of GAM and

GEPP, with an MBA from Harvard University. Mr. Cortina is Juan Gallardo’s nephew,

Carlos Orozco (CFO of GAM and Cultiba) – 12+ years of experience in the sugar sector.

Mr. Orozco previously worked at the M&A division of Scotia Bank and has an MBA from

Northwestern University.

David Saez (CFO of GEPP) – served as CFO for Pepsi-Cola Venezuela and CEO for

Polar’s operations in Colombia. 18+ years of experience in the beverage industry.

Dionisio Martin (COO of GEPP) – 28+ years in the Mexican industry, served as Interim

CEO of PBC Mexico.

Erick Scheel (CMO of GEPP) – franchise director of PepsiCo for Puerto Rico, El Salvador,

Nicaragua, Honduras, Guatemala and the Dominican Republic. Was also commercial

12 March 2013


director of Cabcorp (PepsiCo bottler in Central America) and general manager of PepsiCo

for the Andean region.

Appendix 2 – Coke vs. Pepsi pricing in Mexico

In this segment we explore Coca-Cola’s pricing premium vs. Pepsi in Mexico. While Pepsi

is perceived as a cheaper product in Mexico (20-28% cheaper vs. Coke in the modern

channel in Mexico City), we highlight that the rest of Cultiba’s brands are not necessarily

as cheap, and in some cases, some Cultiba brands even command a premium relative to

the KO brands.

In a sample of SKUs found in a supermarket in Mexico City, we found out the following.

■ The price gap between Coca Cola and Pepsi is most noticeable on colas. In Exhibit

30, we show the results on 2-Liter presentations in which Coca-Cola is 21.4% more

expensive than Pepsi; across the entire sample (54 cola SKUs), the premium of Coke

over Cola stood at 29.2% on a price-per-liter basis.

■ However, on other presentations, the gap stood at 13.3% for the entire sample (124

SKUs).

■ Similarly, 70.4% of the cola SKUs are from Coca Cola (versus 18.5% of Pepsi), while

in other brands KO has 21.8% of SKUs (versus 37.9% of GEPP). Please refer to

Exhibits 31 and 32.

Exhibit 30: Pepsi vs. Coca Cola Price (2 Liters)

GEPP

Others

MXN $14.0 MXN $17.0 MXN $16.0

Premium vs. PEPSI 21.4% 14.3%

Others

MXN $14.0 MXN $18.0 MXN $16.0


Others

MXN $11.0 MXN $10.9 MXN $16.0

Premium vs. PEPSI -0.9% 45.5%

Others

MXN $11.0 MXN $12.0 MXN $18.5 MXN $12.5

Premium vs. PEPSI 9.1% 68.1% 13.5%

Others

MXN $10.5 MXN $12.0 MXN $11.8


Others

MXN $10.0 MXN $12.7

Premium vs. PEPSI 26.5%

KO

Source: Credit Suisse estimates

12 March 2013


We think one of the main challenges for the Pepsi system in Mexico in order to close these

price gaps, is package segmentation. As shown on exhibits 31 and 32 below, an SKU map

of cola products in Mexico, shows that the Coke system has a significantly larger number

of price points and packaging sizes relative to the Blue system. When we analyze non-

colas however, package / price segmentation between Coke and Pepsi look much closer.

Exhibit 31: Cola SKUs Sample in MXN, size is number of SKUs with same volume and price

Exhibit 32: Non-Cola SKUs Sample in MXN, size is number of SKUs with same volume and price

-10

10

30

50

70

90

110

130

-1 1 3 5 7 9

Mexic

an p

eso

s

Liters

Coca-Cola

Others

Pepsi

0

10

20

30

40

50

60

0 1 2 3 4

Mexic

an p

eso

s

Liters

Others

GEPP

Coca-Cola

Source: Credit Suisse estimates. Source: Credit Suisse estimates.

Appendix 3 – Gatorade, largest sports drink in

Mexico

Gatorade is the #1 sports drink in Mexico, with 80.7% of market share as of 2012, it is

positioned as the top-of-mind in an industry growing at a 2006 to 2011CAGR of 2.3%.

GEPP acquired this brand from PepsiCo for USD135 mn (~15.1x EV/EBITDA).

In our store visit, of our sample (50 SKUs), 62% of the sport drinks’ SKUs were from

Gatorade. In this case, Powerade (Coca-Cola) sells at a discount of 11% versus Gatorade.

Exhibit 33: Sports Drinks Market Growth in millions of unit cases

Exhibit 34: Sports Drinks SKUs Sample in MXN, size is number of SKUs with same volume and price

0

10

20

30

40

50

2006 2007 2008 2009 2010 2011

Gatorade (Pepsi) Powerade (KO) Jumex Others

0

5

10

15

20

25

30

0.0 0.5 1.0 1.5

Mexic

an

peso

s

Liters

Others

Gatorade

Powerade (KO)

Source: Euromonitor, Credit Suisse estimates. Source: Credit Suisse estimates.

Interestingly, the Pepsi system did not distribute this product in house, but used a third

party network instead. After acquiring the brand, GEPP consolidated Gatorade’s

distribution into its own network, completing this process by September 2012.

12 March 2013


Appendix 4 – Water

Mexico is the third largest market for jug water globally (after US and China), with an

annual consumption of 22.7mn liters and market value of MXN 28bn in 2011, according to

Canadean. Most of the bulk water in Mexico is sold via the direct-to-home (DTH), which

represents 73% of the market.

In this market, GEPP is the biggest player in the country, with 15% market share, followed

by Danone (9%), KOF (5%) and AC (4%). We believe that the main strength of Pepsi in

this business is its DTH channel that reaches 2.4mn households, versus slightly over 1mn

for the Coke system.

Exhibit 35: Jug Water Market Share

GEPP

15%Danone

9%

Others

60%

KOF

5%

AC

4%

Bepensa

4%

Others

3%Coca-Cola System

16%

Source: Company data, Canadean, Credit Suisse estimates.

It is worth mentioning that the smaller players (mostly independent refillers) have lost 90

bps of share since 2007 and still represent 60% of all the industry.

Exhibit 36: Market Share and Volume Growth by Brand Left and right axis are market shares

Source: Company data, Canadean, Credit Suisse estimates.

12 March 2013


Being a mature industry, we believe that the opportunity of growth in volumes for GEPP

will come from (1) the know-how on DTH of Cultiba’s management in the former PBC

territory, (2) selling new products through the DTH channel, and (3) consolidation in the

sector.

12 March 2013


Companies Mentioned (Price as of 08-Mar-2013)

ARCA CONTINENTAL, S.A.B. DE C.V. (AC.MX, $94.61) Anheuser-Busch InBev (ABI.BR, €74.15) Coca-Cola Femsa SAB de CV (KOFL.MX, $205.16) ORGANIZACIÓN CULTIBA, S.A.B. DE CV (CULTIBAB.MX, $34.98)

Disclosure Appendix

Important Global Disclosures

Antonio Gonzalez, CFA, Claudio Lensing, Gustavo Wigman, 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.

Price and Rating History for ARCA CONTINENTAL, S.A.B. DE C.V. (AC.MX)

AC.MX Closing Price Target Price

Date ($) ($) Rating

28-Aug-12 80.98 77.00 N *

* Asterisk signifies initiation or assumption of coverage.

N EU T RA L

Price and Rating History for Anheuser-Busch InBev (ABI.BR)

ABI.BR Closing Price Target Price

Date (€) (€) Rating

21-Jul-10 41.48 48.00 O

21-Jan-11 41.02 53.00

19-Apr-11 43.14 NR

13-Feb-12 49.13 52.00 N *

20-Mar-12 54.60 56.00

10-Jul-12 64.00 67.00

20-Sep-12 67.04 70.00

28-Feb-13 71.76 80.00 O

07-Mar-13 72.75 90.00


O U T PERFO RM

N O T RA T ED

N EU T RA L

12 March 2013


Price and Rating History for Coca-Cola Femsa SAB de CV (KOFL.MX)

KOFL.MX Closing Price Target Price

Date ($) ($) Rating

06-Oct-10 97.23 94.00 U *

03-Jun-11 100.46 106.00 N

12-Apr-12 134.82 140.00


U N D ERPERFO RM

N EU T RA L

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

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Outperform (O) : The stock’s total return is expected to outperform the relevant benchmark*over the next 12 months.

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Rating Versus universe (%) Of which banking clients (%)

Outperform/Buy* 43% (54% banking clients)

Neutral/Hold* 38% (47% banking clients)

Underperform/Sell* 16% (39% banking clients)

Restricted 3%

*For purposes of the NYSE and NASD ratings distribution disclosure requirements, our stock ratings of Outperform, Neutral, and 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.

12 March 2013


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Price Target: (12 months) for ORGANIZACIÓN CULTIBA, S.A.B. DE CV (CULTIBAB.MX)

Method: Our discounted cash flow to equity (DCFE) analysis, based on a 10.5% cost of equity, a 3.5% perpetuity growth rate and a 10% liquidity discount, supports our MXN 42 per share target price for Cultiba. At our target price, the stock would trade at a 2013 enterprise value/earnings before interest, taxes, depreciation and amortization (EV/EBITDA) multiple of 12.8x and a price/earnings (P/E) multiple of 39.4x.

Risk: The following risks could impede achievement of our MXN 42 target price for Cultiba: 1) Low visibility on timeline and sources of synergies; 2) stronger than expected competition in Mexico; 3) weaker than expected consumer environment in Mexico; 4) higher than expected costs.

Please refer to the firm's disclosure website at www.credit-suisse.com/researchdisclosures 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 (CULTIBAB.MX, KOFL.MX, ABI.BR) 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 (CULTIBAB.MX, KOFL.MX, ABI.BR) within the past 12 months.

Credit Suisse has managed or co-managed a public offering of securities for the subject company (CULTIBAB.MX, KOFL.MX) within the past 12 months.

Credit Suisse has received investment banking related compensation from the subject company (CULTIBAB.MX, ABI.BR) within the past 12 months

Credit Suisse expects to receive or intends to seek investment banking related compensation from the subject company (CULTIBAB.MX, KOFL.MX, ABI.BR) within the next 3 months.

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 (CULTIBAB.MX, KOFL.MX, AC.MX, ABI.BR) within the past 12 months

Restrictions on certain Canadian securities are indicated by the following abbreviations: NVS--Non-Voting shares; RVS--Restricted Voting Shares; SVS--Subordinate Voting Shares.

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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.

Claudio Lensing & Gustavo Wigman each 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.

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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 ............................................................................................ Antonio Gonzalez, CFA ; Armando Perez

Banco de Investments Credit Suisse (Brasil) SA or its affiliates. .................................................................. Claudio Lensing ; Gustavo Wigman

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12 March 2013


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