Bradesco Bbi Fn 20140711 Sp Master Plan

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Luiz Mauricio Garcia - 55 11 2178 4223 [email protected] Homebuilding FLASH NOTE BBI Equity Research Friday, July 11, 2014 Our Views on São Paulo’s New Master Plan In this report we intend to assess the main changes of the new master plan for São Paulo city and the long-term consequences. We believe that the recently-approved city master plan should transform the market as it will require changes in the available mix of projects and increase costs mainly due to more expensive building permits. As the plan is set to last until 2029 with a revision in 2021, the market will need to adapt to the new conditions. Smooth short-term transition; increased long-term uncertainties. Companies’ pipelines and pre-existing land banks should provide some relief in the short term during the transition period, while scarce land plots in São Paulo city may force companies (especially turnaround players) to carry out faster launches under the new plan that would result directly in more expensive and generally worse projects due to the restrictions of the new plan (parking spots, size, etc). The new plan aims to create conditions in which homebuilders develop their projects near to the city’s mass transportation system by allowing higher verticalization in these areas (but with some restraints such as one parking spot and an average size of 80m²). Meanwhile, the plan reduces verticalization across other parts of the city by limiting the max Floor Area Ratio (FAR) to 2x, compared to up to 4x in the previous plan and fixing a height cap of 28m, with the exception being blocks that have more than 50% of their area already occupied by buildings in which case the height limitation is not valid. Margin vs. Volumes. Because of the implied higher cost related to the new master plan, we expect to see companies potentially reducing the annual size of launches, as lower returns are not an option given that many players are already unable to deliver returns even at the cost of equity. Moreover, companies that hold sizeable stakes in São Paulo city (Even for instance) may be forced to start focusing more on metropolitan areas to allow for a smoothly transition in the city of São Paulo, which will involve additional challenges. Meanwhile, the situation for larger apartments and greenfield commercial properties in premium neighborhoods still remains in question. The sector is likely to rely on two key factors to avoid significant changes in the long term: i) the contraction of land prices, and ii) some sort of income gain that allows homebuyers to afford more expensive apartments in the city of São Paulo. Since both are very uncertain, we believe that an operational size reduction is the most probable scenario for players that are heavily dependent on projects in São Paulo city (not yet reflected in our base case valuation). Thus, we currently see niche players that are more focused on affordable projects such as EZTec and Helbor for medium and high income projects as being the best positioned to deal with the full range of ongoing challenges in the sector. (…continued on the following pages…) INDUSTRY REPORT COMPANIES Market ADTV Rating Cap (BRL) Brookfield Under Review 844 4.94 Cyrela Market Perform 5,697 42.46 Direcional Outperform 1,630 5.85 Even Outperform 1,489 13.30 Eztec Outperform 3,438 11.74 Gafisa Market Perform 1,401 18.92 Helbor Outperform 1,629 2.64 JHSF Outperform 1,676 1.27 MRV Market Perform 3,414 32.55 PDG Market Perform 1,866 23.90 Rossi Market Perform 683 7.64 Tecnisa Outperform 1,253 5.41 Viver Under Review 47 0.16 BR Brokers Market Perform 620 7.19 Lopes Market Perform 1,040 4.15 EPS (BRL) P/E P/BV ROAE Net Earn. Ticker 2013 2014 2015 2013 2014 2013 2014 2013 2014 3-yr. CAGR CYRE3 1.77 1.86 1.97 8.0 7.6 1.05 0.96 13.7% 13.2% 8.0% DIRR3 1.49 1.69 2.06 7.1 6.3 1.10 1.04 16.3% 17.0% 9.6% EVEN3 1.21 1.29 1.40 5.3 5.0 0.76 0.68 15.1% 14.2% 12.4% EZTC3 3.99 3.61 3.87 5.9 6.5 1.64 1.45 31.2% 23.7% 7.2% GFSA3 2.08 0.25 0.45 1.7 14.0 0.46 0.45 30.3% 3.2% 53.4% HBOR3 1.18 1.12 1.13 5.4 5.7 1.34 1.21 27.0% 22.5% 3.7% JHSF3 0.74 0.16 0.15 5.2 24.9 0.76 0.75 18.3% 3.0% 39.9% MRVE3 0.89 0.90 1.22 8.1 8.1 0.84 0.82 10.7% 10.3% 24.6% PDGR3 -0.20 0.02 0.00 -6.9 77.2 0.40 0.40 -5.6% 0.5% 130.8% RSID3 0.10 0.09 0.03 16.6 18.3 0.29 0.28 1.8% 1.6% 53.6% TCSA3 1.22 1.47 1.64 5.7 4.8 0.90 0.83 16.2% 18.1% 12.9% BBRK3 0.36 0.21 0.29 9.2 15.3 0.89 1.01 9.9% 6.2% -3.5% LPSB3 1.23 0.47 0.71 7.4 19.2 1.65 1.62 24.5% 8.5% -17.5% Last Target Upside Ticker Price* Price 2012 BISA3 1.48 U.R U.R CYRE3 14.11 16.80 19.1% DIRR3 10.64 16.60 56.0% EVEN3 6.47 10.10 56.1% EZTC3 23.43 35.20 50.2% GFSA3 3.49 4.10 17.5% HBOR3 6.32 10.60 67.7% JHSF3 3.88 6.10 57.2% MRVE3 7.27 10.60 45.8% PDGR3 1.41 1.80 27.7% RSID3 1.63 2.70 65.6% TCSA3 6.98 10.90 56.2% VIVR3 0.14 U.R U.R BBRK3 3.25 5.00 53.8% LPSB3 9.09 12.70 39.7% *As of 7/11/14 Bradesco Corretora – Av. Paulista, 1.450 – 7 th floor – Sao Paulo – Brazil – 55 11 3556-3001 Bradesco S.A. Corretora de Títulos e Valores Mobiliários (Bradesco Corretora) does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that Bradesco Corretora and its affiliates 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. For full disclaimer and definitions, please refer to the end of this report.

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Bradesco Bbi Fn 20140711 Sp Master Plan

Transcript of Bradesco Bbi Fn 20140711 Sp Master Plan

Page 1: Bradesco Bbi Fn 20140711 Sp Master Plan

Luiz Mauricio Garcia - 55 11 2178 4223 [email protected]

Homebuilding FLASH NOTE

BBI Equity Research Friday, July 11, 2014

Our Views on São Paulo’s New Master Plan In this report we intend to assess the main changes of the new master plan for São Paulo city and the long-term consequences. We believe that the recently-approved city master plan should transform the market as it will require changes in the available mix of projects and increase costs mainly due to more expensive building permits. As the plan is set to last until 2029 with a revision in 2021, the market will need to adapt to the new conditions. Smooth short-term transition; increased long-term uncertainties. Companies’ pipelines and pre-existing land banks should provide some relief in the short term during the transition period, while scarce land plots in São Paulo city may force companies (especially turnaround players) to carry out faster launches under the new plan that would result directly in more expensive and generally worse projects due to the restrictions of the new plan (parking spots, size, etc). The new plan aims to create conditions in which homebuilders develop their projects near to the city’s mass transportation system by allowing higher verticalization in these areas (but with some restraints such as one parking spot and an average size of 80m²). Meanwhile, the plan reduces verticalization across other parts of the city by limiting the max Floor Area Ratio (FAR) to 2x, compared to up to 4x in the previous plan and fixing a height cap of 28m, with the exception being blocks that have more than 50% of their area already occupied by buildings in which case the height limitation is not valid. Margin vs. Volumes. Because of the implied higher cost related to the new master plan, we expect to see companies potentially reducing the annual size of launches, as lower returns are not an option given that many players are already unable to deliver returns even at the cost of equity. Moreover, companies that hold sizeable stakes in São Paulo city (Even for instance) may be forced to start focusing more on metropolitan areas to allow for a smoothly transition in the city of São Paulo, which will involve additional challenges. Meanwhile, the situation for larger apartments and greenfield commercial properties in premium neighborhoods still remains in question. The sector is likely to rely on two key factors to avoid significant changes in the long term: i) the contraction of land prices, and ii) some sort of income gain that allows homebuyers to afford more expensive apartments in the city of São Paulo. Since both are very uncertain, we believe that an operational size reduction is the most probable scenario for players that are heavily dependent on projects in São Paulo city (not yet reflected in our base case valuation). Thus, we currently see niche players that are more focused on affordable projects such as EZTec and Helbor for medium and high income projects as being the best positioned to deal with the full range of ongoing challenges in the sector. (…continued on the following pages…)

IND

USTR

Y REPO

RT

COMPANIES Market ADTV Rating Cap (BRL)

Brookfield Under Review 844 4.94 Cyrela Market Perform 5,697 42.46 Direcional Outperform 1,630 5.85 Even Outperform 1,489 13.30 Eztec Outperform 3,438 11.74 Gafisa Market Perform 1,401 18.92 Helbor Outperform 1,629 2.64 JHSF Outperform 1,676 1.27 MRV Market Perform 3,414 32.55 PDG Market Perform 1,866 23.90 Rossi Market Perform 683 7.64 Tecnisa Outperform 1,253 5.41 Viver Under Review 47 0.16 BR Brokers Market Perform 620 7.19 Lopes Market Perform 1,040 4.15

EPS (BRL) P/E P/BV ROAE Net Earn. Ticker 2013 2014 2015 2013 2014 2013 2014 2013 2014 3-yr. CAGR CYRE3 1.77 1.86 1.97 8.0 7.6 1.05 0.96 13.7% 13.2% 8.0% DIRR3 1.49 1.69 2.06 7.1 6.3 1.10 1.04 16.3% 17.0% 9.6% EVEN3 1.21 1.29 1.40 5.3 5.0 0.76 0.68 15.1% 14.2% 12.4% EZTC3 3.99 3.61 3.87 5.9 6.5 1.64 1.45 31.2% 23.7% 7.2% GFSA3 2.08 0.25 0.45 1.7 14.0 0.46 0.45 30.3% 3.2% 53.4% HBOR3 1.18 1.12 1.13 5.4 5.7 1.34 1.21 27.0% 22.5% 3.7% JHSF3 0.74 0.16 0.15 5.2 24.9 0.76 0.75 18.3% 3.0% 39.9% MRVE3 0.89 0.90 1.22 8.1 8.1 0.84 0.82 10.7% 10.3% 24.6% PDGR3 -0.20 0.02 0.00 -6.9 77.2 0.40 0.40 -5.6% 0.5% 130.8% RSID3 0.10 0.09 0.03 16.6 18.3 0.29 0.28 1.8% 1.6% 53.6% TCSA3 1.22 1.47 1.64 5.7 4.8 0.90 0.83 16.2% 18.1% 12.9% BBRK3 0.36 0.21 0.29 9.2 15.3 0.89 1.01 9.9% 6.2% -3.5% LPSB3 1.23 0.47 0.71 7.4 19.2 1.65 1.62 24.5% 8.5% -17.5%

Last Target Upside Ticker Price* Price 2012 BISA3 1.48 U.R U.R CYRE3 14.11 16.80 19.1% DIRR3 10.64 16.60 56.0% EVEN3 6.47 10.10 56.1% EZTC3 23.43 35.20 50.2% GFSA3 3.49 4.10 17.5% HBOR3 6.32 10.60 67.7% JHSF3 3.88 6.10 57.2% MRVE3 7.27 10.60 45.8% PDGR3 1.41 1.80 27.7% RSID3 1.63 2.70 65.6% TCSA3 6.98 10.90 56.2% VIVR3 0.14 U.R U.R BBRK3 3.25 5.00 53.8% LPSB3 9.09 12.70 39.7% *As of 7/11/14

Bradesco Corretora – Av. Paulista, 1.450 – 7th floor – Sao Paulo – Brazil – 55 11 3556-3001 Bradesco S.A. Corretora de Títulos e Valores Mobiliários (Bradesco Corretora) does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that Bradesco Corretora and its affiliates 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. For full disclaimer and definitions, please refer to the end of this report.

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INDUSTRY REPORT BBI Equity Research – Friday, July 11, 2014

The new city master plan for São Paulo has finally been approved. While it has not diverged much from what the market has been expecting for the last few months, it is definitely more restrictive and should increase costs in the medium to long term. The zoning law is the next step of the process as it will detail each neighborhood individually according to the master plan’s guidelines. The master plan established 180 days for this law to be sent to the city council. The main goals of the new plan are as follows:

• Halt the horizontal expansion of the city, preserving the “green belt” and rural areas surrounding it.

• Reduce traffic and promote the use of mass transportation alternatives by allowing the construction of higher buildings near subway stations and avenues with bus services.

• Reduce the average distance traveled by either encouraging people to live near high-density commercial zones or giving benefits to companies that establish offices in regions closer to residential areas.

• Expand the mass transportation system. • Divide the city into macro zones with standardized rules for each (figure 1).

Figure 1: São Paulo’s Macro Zones Figure 2: Mass Transportation System

Source: Municipality of São Paulo Source: Municipality of São Paulo

The calculation of the building permit fee (“outorga onerosa”) has changed, as shown in figure 3. Figure 3: Building Permit Calculation

Previous Calculation:

𝑃𝑒𝑟𝑚𝑖𝑡 𝐶𝑜𝑠𝑡 = 𝑃𝑓 ∗ 𝑆𝑓 ∗𝐿𝑎𝑛𝑑 𝐶𝑜𝑠𝑡𝐵𝑎𝑠𝑒 𝐹𝐴𝑅

New Calculation:

𝑃𝑒𝑟𝑚𝑖𝑡 𝐶𝑜𝑠𝑡 = 𝑃𝑓 ∗ 𝑆𝑓 ∗ 𝐿𝑎𝑛𝑑 𝐶𝑜𝑠𝑡𝑛𝑒𝑤 ∗𝑃𝑙𝑜𝑡 𝐴𝑟𝑒𝑎𝐵𝑢𝑖𝑙𝑡 𝐴𝑟𝑒𝑎

Where: Pf = Planning Factor – varies between 0 and 1.3. Regions that are to be stimulated have a lower multiple. Sf = Social Factor – varies between 0 and 1 depending on the income segment and other factors. Land cost – average cost of land according to the municipality Base FAR – Base Floor Area Ratio that will be reduced to 1x in the new plan. Source: Municipality of São Paulo

Needs to balance residential andcommercial area. Lots of underused area. Will be the focus ofthe next Urban Interventions

Well infrastructured area with jobsaturation. Verticalization will berestricted to 2x FAR

Residential area with aproportional mix of buildingsand houses. Promote the use ofmass transportation system andincrease job offer.

Poor infrastructure area and lowincome families. Promote theurbanization and new houses;increase jobs nearby theneighborhood.

Mass transportation area ofinfluence. FAR of 4x will beallowed but some restrictions willapply such as parking spotlimitation and average size of80m²

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INDUSTRY REPORT BBI Equity Research – Friday, July 11, 2014

The new formula should imply permit costs that are significantly higher that could translate into a gross margin 150bps to 500bps lower for a large majority of projects. There are even some cases of gross margins being whittled down by 1,100bps, mostly related to commercial properties that are outside of the axis area and a few residential areas. The main change in the formula was the price of land, as a new table has been introduced together with the master plan. This has revised land prices upwards from 150% to 398% (averaging 250bps). The adjustment criteria are still not clear. Another key change was that the base FAR has been reduced to 1x, and thus some areas that formerly required just a few permits or none (those with a base FAR of 2x or 3x) will now need additional permits.

Figure 4: Effects of New Permits’ Calculation over Gross Margin

Source: Municipality of São Paulo

In this graph, we have summarized the three main zonings in São Paulo and show the impact of the permits’ new calculations related to gross margins in relation to the prior zoning law. Some conclusions can be drawn:

• The bigger the readjustment in the price, the bigger the impact on gross margins; • A higher the price per m², leads to less importance regarding the higher permit costs. Thus, the impact on gross

margins is smaller for the more pricy units; • The High Density zoning (b) is by far the most impacted as the base FAR was reduced to 1x under the new law.

This zoning is also common in more wealthy regions; • Medium density is more common in bordering neighborhoods.

The above scenario was designed for the Campo Belo neighborhood, where permits were already more expansive than other areas as the neighborhood is relatively new. Therefore, we imagine that a slight upward shift could occur for other regions.

Furthermore, the Planning Factor has also been changed:

• Consolidated area (light red in figure 1): The planning factor for residential usage was kept unchanged and dropped in some neighborhoods, while the factor for commercial usage increased.

• Area to be improved (orange in figure 1): The factor for residential remained unchanged, while commercial decreased.

If only the formula had been changed (not the components), we could say that the permit was actually getting cheaper as, in simple terms, the previous calculation divided

-1,400

-1,200

-1,000

-800

-600

-400

-200

020,000 18,000 16,000 14,000 12,000 10,000 8,000

200%

300%

Increase inreferenced cost of land

Price per m²

Dec

reas

e in

gro

ss m

argi

n

High Density (a)Base FAR = 1xMax FAR = 2.5x

High Density (b)Base FAR = 2xMax FAR = 2.5x

Medium DensityBase FAR = 1xMax FAR = 2x

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INDUSTRY REPORT BBI Equity Research – Friday, July 11, 2014

costs by the base FAR whereas the new calculation divides costs by the maximum FAR. Nonetheless, these factors could be used to reduce the cost for permits if the conditions become too restrictive in the market. We also ran a simulation of a project that is migrating to the new law in the mass transportation axis, as shown in figure 5. Basically, the incremental PSV would compensate for the more expensive permits, although some key assumptions that we have left unchanged, would affect the result materially, such as price, usable area ratio (and this could improve in the new plan, for instance, as the corridor area is no longer counted as usable area). Moreover, the max FAR that could be boosted in the new plan through some incentives of the new plan, such as the public usage of the ground floor, inclusionary zoning and commercial activity on the ground floor. We are also assuming the same planning factor as the one from future Urban Interventions, as this point is not clear in the master plan. The conclusion is that such a migration should be studied on a case-by-case basis, in order to address the multiple options for improvements related to buildable area and the increase in FAR. We are not sure whether the same price is applicable as the project tends to be of a lower quality (fewer parking spots and reduced area). Projects with sustainable features should benefit from the new calculation. However, there are no details available concerning this step yet. Figure 5: Migrating Project to New Plan Standards

Source: Municipality of São Paulo

The previous master plan had an inventory of permits per neighborhood for residential and commercial projects. However, as some regions had already used up all of their available licenses, launching new projects had become impossible. Until the new zoning law is enacted, the new master plan will address this issue as follows: Projects within the reach of public transportation will have no limitations while residential projects outside of the transportation axis will not use such inventories as long as FAR does not exceed 2x. Commercial projects, however, will have to continue using the inventory method. Projects outside of the mass transportation axis have virtually no limitations regarding parking spots but this is something that the zoning law may change. Furthermore, as the mass transportation system expands, new areas will be subject to the same rules as existing areas. The beginning of construction will therefore be the trigger to unlock further building potential.

Previous Plan New PlanLand area m² 2,000 2,000Reference Land Price m² 1,200 4,200Social Factor 1 1Planning Factor 0.7 1.2Base FAR 2 1Max FAR 2.5 4Built Area 5000 8000

Permit per m² 420 1,260Total cost (R$mn) 0.420 7.6

Price per m² 15,000 15,000Usable area 4,000 6,400R$mnPSV 60.0 96.0Construction cost 17.5 28.0Land Cost 12.6 12.6Permit Cost 0.42 7.56Gross Profit 29 48Gross Margin 49.1% 49.8%

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INDUSTRY REPORT BBI Equity Research – Friday, July 11, 2014

The inclusionary zoning clause was included in the new master plan (cota de solidariedade). For projects of more than 20k m² in area, 10% of it must be focused on residential projects for low-income buyers; to compensate for this clause, a further 10% expansion in total area is allowed as long as the additional permit fee is paid. Alternatively, the company can develop the low income portion in a different land plot in the same region, donate a land plot to the municipality amounting to 10% of the area of the original land plot, or deposit the corresponding value of such a plot into a specific account that will be used to buy a similar plot of land or as a subsidy. The plan is intended to boost the production of new units for low income buyers, especially those within the first income range of MCMV. It will allow a floor area ratio of up to six times the area of the land plot and designate 25% of all resources coming from Urban Interventions for the acquisition of new land plots for low-income projects as well as for the mapping of new areas for this segment (117% expansion in area). Furthermore, the new master plan will change how the land is used: 60% of all designated areas will be used to construct projects for those earning 0-3x the minimum wage (MW) while the remaining areas will go to those earning above 3x the MW. The previous plan stipulated that 40% would be used for families making up to 6x the MW while the remainder would be earmarked for families making up to 16x the MW.

Figure 6: Areas for Low Income Projects Previous Plan

New Plan

Source: Municipality of São Paulo

Urban Interventions now have a clear pipeline, as shown in figure 7. This could represent a good opportunity for the sector as the areas are massive and feature large unused land plots as such regions have previously contained industries and warehouses. If the municipality does not follow the schedule (with a six-month grace period), the area as a whole will be subject to the same rules as those near the mass transportation system. On one side, this is good news as these interventions should have been approved a long time ago and a fixed deadline would finally unlock their

ZEIS 1 ZEIS 2

ZEIS 3 ZEIS 4

ZEIS 1

ZEIS 2

ZEIS 3

ZEIS 4

ZEIS 5

New Plan Previous PlanHIS 1 Up to 3 Minimum WagesHIS 2 Up to 6 Minimum WagesHMP Up to 10 Minimum Wages Up to 16 Minimum Wages

Up to 6 Minimum Wages

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INDUSTRY REPORT BBI Equity Research – Friday, July 11, 2014

potential. But, on the other side, a question mark remains as the Planning Factor (see figure 3) of such regions has been fixed at punitive levels (1.2 for residential use and 1.3 for commercial usage). In addition, we calculated the permit for such regions to be around R$1.1k per m², while there is no information on the CEPAC price. Therefore, we do not take these interventions for granted. Figure 7: Urban Interventions

Source: Municipality of São Paulo

It should be very hard to find viable projects outside of the transportation axis. For instance, in blocks where it will only be possible to build eight floors (28m height), the land plot is generally formed by acquiring neighboring houses. However, this sort of landowner is unlikely to sell his house if it cannot buy a better place or replace what exists. In blocks where more than 50% of the area is already verticalized, it will be possible to build up to the height of the neighboring building, but the FAR is restricted to 2x. Thus, a much larger area will be necessary, implying higher costs not to mention the difficulty of the low availability of land in such areas. Nonetheless, neighborhoods where the maximum FAR was already 2x could still provide viable projects. The main question for the long term is whether or not the new areas will support all of the players and provide the same volumes as today and what will be the cost of such change. Players should naturally migrate to transportation axis as it will be easier to find viable projects, thus, we could see increased competition over land and consequently lower returns, until the market adjusts again. Another factor to be considered is that market share should not change materially as non-listed players are well capitalized or have strong support from their investors. The São Paulo market sees around R$17bn in launches per year. While affordability is currently a constraint, five or six years down the line, depending on income gains, it might be possible to find viable projects outside the axis.

City Center

Ongoing

Arco LesteNo clear timeline

Jacú-PêssegoNo cleartimeline

Arco Tietê2016

Vila Leopoldina/

Jaguaré2018

Faria Lima – Águas Espraidas – Chucri Zaidan

Ongoing

Jurubatuba:2017 Cupecê:

No clear timelineTamanduateí

2015

NoroesteNo cleartimeline

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Figure 8: São Paulo Market

Source: Municipality of São Paulo

Our take. The new master plan will obviously change the game in São Paulo, but companies’ land banks will provide short-term support and ease the transition. We believe that it would even be wise for companies to retain one or two projects for better opportunities in the future (such as a building with two parking spots per unit among several with one only). Obviously those companies with few liquid land plots in their land bank (mostly turnaround names) are likely to suffer the most in this transition phase as, despite higher costs, they will have an inferior product. Another issue is that after the master plan has been formally approved by the mayor, it will be necessary to approve the zoning law, which gives more specific and in-depth details about the master plan’s guidelines. The master plan has established that the zoning law needs to be enacted within 180 days from the approval of the master plan but if it takes longer, as happened last time (712 days), we could see a shortage in new projects after the current pipeline is launched. Indeed, this is a major risk for Even that is dependent on one of the lowest landbank pipelines in São Paulo. All of the players seem to agree that land prices rarely drop, as most land owners do not need to sell their properties. For instance, players used to pay a lot for land plots located in high density (b) areas (figure 4) because the expense of permits was small, and thus, this behavior certainly seemed to create a sort of price index for land in such regions. On the other hand, unit prices seem to have reached a cap in some locations. Thus, we could see low supply in some prime neighborhoods that could result in pent-up demand as affordability is likely to stop higher prices. Meanwhile, the more affordable mid- to high-income units (up to the R$750k mark) should continue to sell well. We also believe that the following trends will be observed:

22.6 24.9 25.7

39.034.5

31.6

38.2 38.1

28.5

33.2

6.3

Avg 31.6Avg 34.5

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 4 mo2014

# units ('000)

6.8 7.8 9.8

12.811.5

9.7

14.4

17.5

14.5

19.4

3.7

Avg 12.4

Avg 16.4

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 4 mo2014

PSV (R$bn)

Cyrela

Even

EZTecHelbor

Tecnisa

Tecnisa ex-jdp

Gafisa

PDG

0.0

1.0

2.0

3.0

4.0

5.0

6.0

0.0% 10.0% 20.0% 30.0% 40.0% 50.0% 60.0% 70.0% 80.0% 90.0% 100.0%

Pipe

line

(yea

rs)

Dependency ratio (Launches in São Paulo City)

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• The existence of inclusionary zoning may lead to smaller projects for all companies and it is certainly harder to have a larger number of projects than a smaller number with the same volume of launches.

• The limitation of unit sizes near mass transportation systems (average of 80m²) and the restrictions on new construction within these neighborhoods (eight-floor limit) may cause a price increase in larger units with a couple of parking spots in the medium term.

• Companies could migrate to cities in the metropolitan area – a business area in which EZtec is a front-runner.

• Selective geographic diversification (such as deployed by Helbor) in which players that have strong local partners operating locally should also benefit, as such players can easily reduce their launches in São Paulo city.

• The benefit of having small rental space on the ground floor, which potentially reduces permit costs and is mandatory for projects above 10k m² in the mass transportation axis, could lead to a wave of empty retail spaces and higher condominium fees just for the sake of lower permit prices. Some distinction between neighborhoods could prevent such an effect.

• The future looks even more difficult for greenfield commercial properties in prime locations as we expect replacement costs to skyrocket due to more expensive permits, while the demand for commercial properties in the regions that the municipality intends to stimulate remains a question mark. Retrofitting could offer very interesting opportunities, especially in the city center.

How will this affect the companies under our coverage? As mentioned above, companies that have a sufficient land bank will find the transition easier than those without available land plots, recalling that names such as Cyrela, Even and Eztec have increased their land acquisitions sharply over the past six months or so (while Even continues to have notably reduced inventory compared to its peers). However, as new projects may face serious constraints, names heavily exposed to São Paulo city may face higher challenges after the usage of such land. In the medium to long term, the question remains whether or not there will be enough available land for all of the companies to maintain their current sizes and the implicit cost of the new plan. Companies will have to rely on the incentivized axis and Urban Interventions that should increase competition related to land and lead to falling returns. If such areas are not sufficient to support all companies, we will certainly see lower sizes that should initially impact the largest players in São Paulo city first (Even and Gafisa). Meanwhile, we expect companies such as EZtec and Helbor to suffer less as they are focused on regions where FAR is already at 2x as well as the metropolitan area, and in the case of Helbor other regions beyond São Paulo (with a healthy local partner). A pass-through in price is very unlikely as price increases in real terms are unlikely to take place due to affordability constraints in the short to medium term. Since the companies cannot afford lower margins or returns, we could see most of the players making a reduced amount of launches in the medium to long term depending on the macroeconomic conditions. This is likely up until we see renewed balance between supply and demand to adjust to this scenario. Meanwhile, our cautious view on turnaround players is supported by the various challenges that such names will face if they are disposed to expanding (or recovering) their stakes in São Paulo city. Companies’ smaller sizes mean more cash flow distribution in the long term, except for highly leveraged players. Thus, we could see a major part of the listed companies

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INDUSTRY REPORT BBI Equity Research – Friday, July 11, 2014

paying out large dividends as is already being done by Helbor (a 50% payout and a yield of 8.8%) and Direcional (40% of FCF was paid as dividends, leading to a yield of 7.9%). As dividend yields may not be enough to offset the risk of dealing with a smaller size, we currently see players that have more affordable projects – such as EZTec and Helbor in middle and high income segment – as being better positioned to deal with all of the ongoing challenges in the sector (especially macroeconomic concerns, followed by factors such as the new master plan for São Paulo).

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INDUSTRY REPORT BBI Equity Research – Friday, July 11, 2014

Analyst Certification

(i)(ii)

(i)

(ii)

Important Disclosures

X 1

X 2

X 3

5X

Definition Coverage¹ BR²

Expected to outperform the Ibovespa by more than 10%. 50% 98%

Expected to perform in the range of 10% above or below the Ibovespa. 43% 100%

Expected to underperform the Ibovespa more than 10%. 0% 0%

This indicates that both the target price and the rating are currently being revised. 8% 100%

The analyst cannot express his/her view s on the company. 0% 0%

(1)(2)

Each analyst responsible for the preparation and content of this report hereby certif ies, pursuant to SEC Regulation AC and applicable law s and regulations of other jurisdictions, that:

the recommendations indicated in this report solely and exclusively reflect his or her personal opinions, and w ere prepared independently and autonomously, including in relationto Bradesco Corretora and its affiliates ;

Company disclosures pursuant to Brazilian securities exchange commission (Comissão de Valores Mobiliários – CVM) Instruction 483/10:(i) Banco Bradesco S.A. beneficially ow ns 5% or more of equity securities issued by Cielo S.A.. Bradseg Participações Ltda., a subsidiary of Banco Bradesco, indirectly ow ns 5% ormore of equity securities issued by Fleury S.A.. BRADESPAR S.A., w hose controlling group is comprised of the same shareholders that control Banco Bradesco S.A., indirectly ow ns5% or more of equity securities issued by VALE S.A.(ii) Ágora, Bradesco Corretora, Bradesco BBI and Bradesco Group companies have relevant f inancial and commercial interests in relation to the subject company(ies) or the subjectsecurity(ies).(iii) Bradesco BBI S.A. is acting as an underw riter in a public offering of equity securities of JBS Foods S.A. and Companhia de Saneamento do Paraná - SANEPAR. (iv) Bradesco BBI have managed or co-managed a public offering of equity and/or debt securities for the follow ing companies w ithin the past 12 months: Abril Educação, Banco BTGPactual, Banco do Brasil, BB Progressivo II - FII, BB Seguridade, Biosev, BHG, BNDESPAR, BR Malls, Bradespar, Brasil Telecom, CEDAE, Chemical VII, Chemical VIII, Colinas, Comgás,CPFL Energias Renováveis, Daycoval, Ecovias, Embratel, Estácio, Fleury, Iguatemi, JBS, Marfrig, MPX, Multiplan, OAS, OI, Petropar, Raízen Energia, Restoque (Le Lis Blanc), Rodobens,Sabesp, Smiles, Vale and Via Varejo. BBI also acted as a f inancial advisor for Alpargatas in the deal w ith Osklen.(v) Ágora and/or Bradesco Corretora participated in the public offering of equity and/or debt securities for the follow ing companies w ithin the past 12 months: Abril Educação, Alupar,Autoban, Brazilian Securities, BNDESPAR, Banco BTG Pactual, BB Progressivo II - FII, BB Seguridade, Biosev, BHG, Comgás, CPFL Energias Renováveis, CVC, Estácio, Fator IFIX - FII,FII BTG Pactual Corporate Office Fund, FII - General Shopping Ativo e Renda, Fator Verità FII, Fibria, FII Brasil Plural Absoluto Fundo de Fundos, FII TB Office, FII TRX, Iguatemi, IochpeMaxion, GAEC Educação, Linx, Marfrig, Multiplan, OI, Rodovias do Tietê, Santander Agências FII, Senior Solution, SDI Logística Rio - FII, Ser Educacional, Smiles, SP Dow ntow n - FII,Triângulo do Sol, Tupy, Vale, Via Varejo and XP Corporate Macaé - FII.(vi) Bradesco Corretora receives compensation for making a market in the equity securities of Alpargatas (ALPA4), General Shopping (GSHP3), Helbor (HBOR3) and Odontoprev(ODPV3). Bradesco receives compensation for making a market in the in the f ixed income securities of BNDESPAR and USIMINAS, and shares of Fundo Imobiliário BB Progressivo II.

Rating

Outperform

the view s expressed herein accurately and exclusively reflect his or her personal view s and opinions about the subject company(ies) and its or their securities;no part of his or her compensation w as, is, or w ill be paid directly or indirectly, related to the specif ic recommendation or view s expressed by that analyst in this report; andpursuant to Brazilian securities exchange commission (Comissão de Valores Mobiliários – CVM) Instruction 483/10:

his or her compensation is based on the profitability of Bradesco Corretora and its aff iliates, w hich includes investment banking revenues;

Company-specific regulatory disclosures

Bradesco Corretora and/or its aff iliates have managed or co-managed a public or Rule 144A offering of the subject company’s(ies’) securities in the tw elve monthspreceding the date of this report;

Bradesco Corretora and/or its aff iliates beneficially ow n one percent or more of any class of common equity securities of the subject company(ies). This positionreflects information available as of the business day prior to the date of this report;

Market Perform

Underperform

Under Review

Restricted

Percentage of companies under coverage globally w ithin this rating category. As of 07/11/14 Bradesco Corretora had 127 companies under coverage globally.

Bradesco Corretora ratings are constantly revised and any temporary inconsistencies betw een the upside potential that gave rise to any such rating and the upside potential inconnection w ith the target price are at all times deliberate. The off icial rating shall prevail.Any differences betw een the rating and the target price may occur especially due to the analyst’s expectations to the effect that any short/medium term factors that cannot be priced-inyet might lead to inconsistencies betw een Bradeco Corretora valuation and the stock behavior. The factors Bradeco Corretora considered include, but are not limited to: Anyexpectations in connection w ith quarterly results, market conditions, ow nership issues and any expectations involving mergers and acquisitions.The ratings reflect only the analyst’s expectation on the future performance of the relevant stock. A “Outperform” rating does not necessarily represent that the analyst approves ofthe company and its management w hilst a “Underperform” rating does not necessarily means that the analyst has a negative view on the company. Within Bradeco Corretora coverageuniverse there are sound companies, w ith good fundamentals as per the market consensus, and fair priced stock, and w ould not be Bradeco Corretora investment pick.

Price target, rating history chart(s), valuation/method used to determine price target, and our policy for managing conflicts of interest in connection w ith investment research areavailable upon request. You may obtain this information by contacting your representative or by sending an email to [email protected].

Price target and rating history

4

Bradesco Corretora and/or its aff iliates have received compensation for investment banking services from the subject company(ies) in the tw elve months preceding thedate of publication of the research report and/or expects to receive or intends to seek compensation for investment banking services from the subject company(ies) in thethree months follow ing the date of this report;

Bradesco Corretora and/or its aff iliates w ere making a market in the subject company’s(ies’) equity securities at the date of this report;X

Any other actual material conflict of interest of Bradesco Corretora and/or its aff iliates know n at the date of this report.

Bradesco Corretora ratingsPercentage of companies w ithin this rating category for w hich [investment banking] services w ere provided w ithin the past 12 months.

Bradesco Corretora research ratings distribution

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INDUSTRY REPORT BBI Equity Research – Friday, July 11, 2014

Additional Disclosures

(i)(ii)

(iii)(iv)(v)

General Disclosures1)

2)

3)

4)

5)

6)

7)

Bradesco Corretora has no off icers (or persons performing similar functions) or employees in common w ith Bradesco Securities, Inc. In addition, Bradesco Securities, Inc. maintainsand enforces w ritten procedures reasonably designed to prevent Bradesco Securities, Inc., any controlling persons, off icers (or persons performing similar functions), and employeesof Bradesco Securities, Inc. from influencing the activities of the analyst w ho prepared this research report and the content of this research report prepared by said analyst.

The non-US research analysts are not associated persons of Bradesco Securities, Inc. and therefore may not be subject to the NASD Rule 2711 and NYSE Rule 472 restrictions oncommunications w ith a subject company, public appearances and trading securities held by a research analyst account.

Hong Kong: In Hong Kong, this report may be distributed by Bradesco Securities Hong Kong Limited (“Bradesco HK”). Bradesco HK is licensed by the Securities and FutureCommission (“SFC”) to carry on Type 1 and Type 4 regulated activities as defined in the Securities and Future Ordinance (Cap. 571 of the Law s of Hong Kong) (“SFO”) in Hong Kong,subject to conditions published on the w ebsite of the SFC from time to time. Except for Bradesco HK, none of its aff iliates, including Bradesco Corretora, carry out or islicensed/authorized to carry out any regulated activities as defined in the SFO in Hong Kong and each of these aff iliates is prohibited from carrying on any regulated activities, includingbut not limited to dealing in securities and advising in securities (as defined in the SFO), in Hong Kong. This report is directed to you by Bradesco HK based on your interest andpreference in the relevant underlying securities that you have previously communicated to Bradesco HK. You agree that this report is not intended for the promotion of any services orproducts of any of Bradesco HK’s aff iliates in Bradesco group, including those of Bradesco Corretora. All Hong Kong recipients of this report w ishing to effect transactions insecurities discussed should contact and place orders through Bradesco HK at (852) 22518716 or (852) 22518718.This report is intended for distribution only to non-Hong Kong residents or professional investors as defined in the SFO. It is provided solely for informational purposes and do notconstitute an offer to buy or sell or a solicitation of an offer to buy or sell any security, product, service or investment to the public w ithin the meaning of the Companies Ordinance (Cap. 32 of the Law s of Hong Kong) or to professional investors w ithin the meaning of the SFO. It has not been review ed by the SFC or any regulatory authority in Hong Kong.

Other Countries: This report, and the securities discussed herein, may not be eligible for distribution or sale in all countries or to certain categories of investors. In general, thisreport may be distributed only to professional and institutional investors.

No portion of this document may be (i) copied, photocopied or duplicated in any form, or by any means, or (ii) redistributed without prior consent from Bradesco Corretora.

Any additional information may be obtained by contacting your representative or by sending an email to [email protected]

This report has been prepared solely by Bradesco Corretora and is being provided exclusively for informational purposes. The information, opinions, estimates and projections constitute the judgment of the author as of the current date and are subject to modif ications w ithout prior notice. Bradesco Corretora has no obligation to update, modify oramend this report and inform the reader accordingly, except w hen terminating coverage of the issuer of the securities discussed in this report.

This report, including the estimates and calculations of Bradesco Corretora, is based on publicly available information that it consider reliable, but it do not represent it isaccurate or complete, and should not be relied upon as such.

This report is not an offer or a solicitation for the purchase or sale of any financial instrument. It is not intended to provide personal investment advice and it does not take intoaccount the specif ic investment objectives, f inancial situation and the particular needs of any specif ic person w ho may receive this report. Investors should seek financial adviceregarding the appropriateness of investing in any securities, other investment or investment strategies discussed or recommended in this report and should understand thatstatements regarding future prospects may not be realized.

Investors should note that income from securities or other investments, if any, referred to in this report may fluctuate and that price or value of such securities and investmentsmay rise or fall. Accordingly, investors may receive back less than originally invested. Past performance is not necessarily a guide to future performance. Bradesco Corretora and its aff iliates do not accept responsibility for any direct or indirect loss arising due to use of this report. Investors should consider w hether any advice or recommendation inthis research is suitable for their particular circumstances and, if appropriate, seek professional advice, including tax advice. Exchange rate movements could have adverseeffects on the value or price of, or income derived from, certain investments. Bradesco Corretora’s and its aff iliates’ salespeople, traders and other professionals may provide oral or w ritten market commentary or trading strategies to their clients andtheir proprietary trading desks that reflect opinions that are contrary to the opinion expressed in this report. Such market commentary or trading strategies reflect the differenttime frames, assumptions, view s and analytical methods of the persons w ho prepared them, and Bradesco Corretora and its aff iliates are under no obligation to ensure thatsuch market commentary or trading strategies are brought to the attention of any recipient of this report.

From time to time, Bradesco Corretora or its aff iliates and off icers, directors and employees, not including its analysts may, to the extent permitted by law , hold long or shortpositions, or otherw ise be interested in transactions in assets directly or indirectly related to this report.

Non-US research analysts w ho have prepared this report are not registered or qualif ied as research analysts w ith FINRA but instead have satisf ied the registration andqualif ication requirements or other research-related standards of a non-US jurisdiction.

are outside the United Kingdom, or

have professional experience in matters relating to investments falling w ithin Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 (asamended, the "Financial Promotion Order");are persons falling w ithin Article 49 (2) (a) to (d) ("high net w orth companies, unincorporated associations etc") of the Financial Promotion Order;

With the exception of investment company funds, Bradesco Corretora’s internal policy prohibits ow nership of securities in their respective area of coverage to analysts as w ell as tothe associates reporting to the analysts. Analysts are paid in part based on the profitability of Bradesco Corretora and its aff iliates, w hich includes investment banking revenues.Bradesco Corretora’ policy prohibits its analysts and associates reporting to the analysts from serving as an off icer or director, advisory board member or employee of any company inthe analysts’ area of coverage.

are persons to w hom an invitation or inducement to engage in investment activity (w ithin the meaning of section 21 of the Financial Services and Markets Act 2000) in connectionw ith the issue or sale of any securities to w hich this report relates may otherw ise law fully be communicated or caused to be communicated (all such persons together beingreferred to as "relevant persons").

This report is directed only at relevant persons and must not be acted on or relied on by persons w ho are not relevant persons. Any investment or investment activity to w hich thisreport relates is available only to relevant persons and w ill be engaged in only w ith relevant persons. No public offer of any securities to w hich this report relates is being made byBradesco UK or Bradesco Corretora in the United Kingdom or elsew here in the European Economic Area.United States: This report is distributed in the United States by Bradesco Securities Inc. Bradesco Securities Inc., a U.S. registered broker-dealer and a w holly-ow ned subsidiary ofBanco Bradesco S.A., is a member of FINRA/SIPC. All U.S. recipients of this report w ishing to effect transactions in securities discussed should contact and place orders throughBradesco Securities Inc. at (212) 888-9141.

are persons that are eligible counterparties and professional clients of Bradesco UK;

The follow ing disclosures are required under or based on the law s of the jurisdiction indicated, except to the extent already made above w ith respect to United States law s andregulations. Brazil: This report is distributed in Brazil by Bradesco Corretora. Any investor in Brazil w ho receives this report and w ishes to conduct transactions w ith stocksanalyzed herein should contact and request execution of orders through Bradesco Corretora at (55 11) 3556-3001.

United Kingdom and European Economic Area: In the United Kingdom and elsew here in the European Economic Area, this report may be made or communicated by BradescoSecurities UK Limited ("Bradesco UK"). Bradesco UK is authorized and regulated by the Financial Services Authority and its registered off ice is at: 20-22 Bedford Row , London, WC1R4JS. This report is for distribution only to persons w ho:

Page 12: Bradesco Bbi Fn 20140711 Sp Master Plan

Bradesco Corretora Research Team

Dalton Gardimam 55 11 2178 4275 [email protected] Denis Blum 55 11 2178 4224 [email protected]

(Senior Economist)

Tarik Migliorini 55 11 2178 4230 [email protected]

Carlos Firetti, CFA 55 11 2178 5363 [email protected] Luis Azevedo 55 11 2178 5321 [email protected]

Tales Freire 55 11 2178 4527 [email protected]

Banking and Insurance

Carlos Firetti, CFA 55 11 2178 5363 [email protected] Education

Bruno Chemmer, CFA 55 11 2178 4903 [email protected] Luis Azevedo 55 11 2178 5321 [email protected]

Rafael Frade, CFA 55 11 2178 4056 [email protected] Tales Freire 55 11 2178 4527 [email protected]

Gabriel Gusan, CFA 55 11 2178 5329 [email protected]

Financial Services

Rafael Frade, CFA 55 11 2178 4056 [email protected] Ricardo Boiati 55 11 2178 5326 [email protected]

Gabriel Gusan, CFA 55 11 2178 5329 [email protected]

Healthcare

Rafael Frade, CFA 55 11 2178 4056 [email protected]

Gabriel Gusan, CFA 55 11 2178 5329 [email protected] Auro Rozenbaum 55 11 2178 5315 [email protected]

Alan Glezer, CFA 55 11 2178 5466 [email protected] Fixed Income

Arthur Suelotto, CFA 55 11 2178 6104 [email protected] Altair Pereira 55 11 2178 4279 [email protected]

Caio Lombardi 55 11 2178 4225 [email protected]

Edigimar Maximiliano Jr. 55 11 2178 5327 [email protected]

Luiz Peçanha 55 11 2178 5324 [email protected]

André Mazini 55 11 2178 5109 [email protected] Paulo Ferreira 55 11 2178 5323 [email protected]

Leandro Fontanesi 55 11 2178 4274 [email protected] Renata Cristovão 55 11 2178 4273 [email protected]

Homebuilding

Luiz Mauricio Garcia 55 11 2178 4223 [email protected] Gabriel Lima 55 11 2178 5313 [email protected]

Rodrigo Coelho 55 11 2178 5317 [email protected]

Sales - 55 11 3556 3001

Juvenal Neves [email protected] Head of Trading

Tiago Valent [email protected] Orlando  Cardoso [email protected]

Traders

Fernanda Weber Bratz [email protected] Cássio Garcia                                                    cá[email protected]

Lucila Sakakura [email protected] Fábio Brisola [email protected]

Gustavo Ize [email protected]

Ingrid Amorim                                                [email protected]     

Rogério Queiroz [email protected] Julio Cesar Rossi [email protected]

Dauro Zaltman [email protected] Mauricio Sanchez [email protected]

Denise Chicuta [email protected] Peter Gil [email protected]

[email protected] Silene Zinhani                                                  [email protected]

Traders

Agnaldo Ishikava [email protected] Marcio Aguiar                                   [email protected]

Douglas Vieira Corazza [email protected] Wilson Pereira                                 [email protected]

Eduardo Tosin Bueno [email protected]

Joao Batista Tamassia Santos Junior joã[email protected]

Marcelo Matias Boneri [email protected]

Paulo Silva do Carmo [email protected]

Pedro Fonseca de Souza [email protected] José Lázaro Ferreira - Head [email protected]

Sandoval Marcos Iorio [email protected] [email protected]

Institutional Sales Team - USA, UK & HK

Marcelo Cabral [email protected] Luiz Fernando Silva [email protected]

Juan Briano [email protected] Jae Choi [email protected]

DeWayne Shaw [email protected]

Paulo Pereira [email protected] Sales - Fixed Income – (852) 2251

8718Vielcka Mansukhani [email protected] João Paulo Loyola [email protected]

Amex Lee [email protected]

Brent Matson [email protected] Bradesco Securities UK, Ltd

Leonardo Jafet         [email protected]

Sales – 44 207 382 0070

Robert Hulme [email protected]

Robert Vespa [email protected]

Christopher Barresi [email protected] Sales - Fixed Income – 44 207 382

0074Sean Harte [email protected] Guilherme Zraick [email protected]

Sebastian Almquist Tangen [email protected]

Raymond Ressy [email protected]

Shin Fukui         [email protected]

David Pereira [email protected]

(Chief Economist)

Syndicate Desk – 01 646 432 6642

Stock Loans Desk - 55 11 3556 3001

Economics & Research Director

Bradesco Corretora CTVM S.A. | São Paulo

Transportation, Logistics, Malls and Commercial Properties

Bradesco Securities, Inc. | New York (FINRA/SIPC Member) Bradesco Securities Hong Kong Ltd.

Head of Equity Research

Sales – (852) 2251 8716

Sales Trading - 55 11 3556 3001

Steel, Mining, Pulp & Paper

Sales - Fixed Income - 55 11 2178 6959

Consumer Goods and Retail

Telecom, Media and Technology

Electric Utilities, Water & Sewage

Food, Beverages, Tobacco & Agribusiness

Each analyst whose name is in bold print is the principal analyst responsible for the content of reports on the respective sector, as well as fulfillment of the provisions of Art. 16 of CVM

Instruction 483/10.

Sales Trading – 01 212 888 9141

Sales - Fixed Income – 01 212 888 9143

Oil & Gas, Petrochemicals and Sugar & Ethanol

Sales – 01 212 888 9141

BM&F Trading Desk - 55 11 3556 3350

Lilian Osti - Commercial Manager

Sales - Local Fixed Income - 55 11 3556 3005

Patricia Cruz Bilezikjian, CFA