ORBE INVESTIMENTOS

Orbe Value Latam - 4th Quarter letter 2012

The year of 2012 was very positive for our portfolio positions. For its second year of operation, Orbe Value Latam ended with a relevant gain of 34.1%, therefore accumulating +40.6% since inception (see the chart above, returns in USD ). The Latin American countries keep showing strong growth in their economies. Chile, Peru and Colombia should have grown in 2012 between 5% and 7%. This movement has created great opportunities for strong companies in these countries, particularly in some sectors of the economy, capturing much of the new consumer market and the wealth generated. Construction companies, machinery and equipment in Peru, for example, grew at rates close to 20% per year, and nothing indicates that this will change anytime soon. Likewise there are growing retailers, producers of consumer goods and local service companies. A long series of good news - this would be a good summary of the year for all companies which we are partners with in Peru and Chile. We will briefly summarize some of the most important points in the following pages. What we have done throughout the year in our portfolio holdings was simple: withdraw large profits over winning positions, and added to those who have not moved much in the direction that we expect, and we also used capital to add a new position in what we have great conviction, a provider of port services, logistics and tugboats present in several countries of the region, called SAAM, of Chilean origin, that we will talk about next.

New position - SAAM (Sudamericana Agencia Areas y Martimas) - Chile

The port operation company of Chilean origin operates in several countries in Latin America, from southern Chile to Mexico. It has three major business areas: own ports operation, tugboats and logistics. In the total, working in 59 different ports across the Latin American region. Directly 10 ports are owned by the company and represent the business operation of ports itself (exactly the same business of Santos Brasil listed on Bovespa - and in this business the Chilean company is 30% larger than Santos Brasil), and makes approximately one third of SAAMS revenue. The logistics business, directly linked to the operation of ports, is the offer of an integrated service to customers - from simple services such as primary custody of containers, refrigerated warehouses up till other more sophisticated services and integrated logistics packages. Represents another third of the company. The last third of the company's revenues comes from the operation of 126 tugboats, the largest fleet in the region and the fourth largest in the world. These are scattered in almost all 59 ports in the region, and provide services to the most diverse logistics operators. It is equivalent to the core business of Wilson, Sons here in Brazil (which by comparison has 76 boats in operation). Here, like Wilson in Brazil, they are also growing stronger with the offshore services business, which is a wide range of services to oil platforms. And recently the company won a major contract with Pemex in Mexico for this type of service. Below is a visual representation of the business, extracted from 3rd quarter results release of the company.

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Our interest in the company came when it was decided that it would be separated, a spin-off, from the largest company in the group, which was the only entity listed on the stock exchange, CSAV (Compania SudAmerica de Vapores). Vapores, as it is known, is a large sea freight operator, competitors of giants like MSC and Maersk. It is a prominent company on the Santiago Stock Exchange and went through serious problems in recent years. The Luksic family, probably the largest and most successful business group in Chile, took control of the entire Vapores group and began a process of restructuring. During the restructuring it was agreed to spin-off the healthier and more valuable part of the business, which was hampered by the problems of the larger operation, and from that decision SAAM came out. When listed on the Exchange, as often happens, by being smaller and less liquid, there was a big pressure to sell by index funds and large pension funds who "won" the shares by being the shareholders of the big and liquid Vapores. When shares of SAAM came to the market, it came in a strong downward trend, despite the great business it is. Therefore we took advantage and bought with a huge discount an extremely interesting business, with enormous competitive advantages, and very well managed. In future reports we will better detail the operation of the company and our investment case. In general the company is a well managed combination of a Santos Brasil and a Wilson, Sons. But bigger than both, with a presence in Latin America, and still not worth even half of the current valuation of the Brazilian players, mainly because it is new in the market, the result of a spin-off, with restricted liquidity and listed in a smaller market. But that should gradually attract the attention of investors, and the companys stock will move towards its real value.

Portfolio Relevant Events Grana y Montero - Peru The powerful Peruvian construction company followed the same pace throughout 2012, with record after record revenue and backlog. In the next chart we can see the extraordinary evolution of the portfolio of contracts until the third quarter. GyM started a joint venture with a major Australian company, Stracom, to provide services for mining operations. Services are often executed in many cases daily, operating the mines, such as earth and rocks moving, explosions and related.
CAGR: 34%

3,576

16%

3,075

1,883 1,281 830

So Graa y Montero keeps giving demonstrations that it has enough breath to 720 592 continue growing. Recently, since the 4th quarter, in this new business unit to 2006 2007 2008 2009 2010 2011 set/12 mines service, closed a major contract of USd 800 MM, which alone represents Engineering & Construction Services Infrastructure Real Estate additional 23% to the current backlog. In it, is planned to build facilities for the extraction of copper, as well as supplies for mining services to the huge Hudbay Constancia mine. These additions to backlog of services are especially important because they increase the proportion of recurring revenues, which lessen the volatility of the big
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construction segment. The closing of this large contract exemplifies not only the space for the growth of the conglomerate, but also the effort and success of the company to become a unique solution to its customers, offering everything from the basic engineering projects, until operating assets when these are ready.

Alicorp - Peru Two points stood out during the year of 2012 for Alicorp, with greater strength in the second half of the year: strategic review of operations in Peru and M&A transactions in greater numbers than in the recent past. The first set, defined the broaden scope of activities focusing even more on lower income classes in Peru. With that, besides defending its competitive position and counter attacking the entry of competitive brands (with lower prices), it can gain in scale production and distribution of their products, and additional capillary. What makes this strategy even more relevant is the country's economic growth and income redistribution projects like those we saw here in Brazil (including our Bolsa Famlia, which is officially the model for the Peruvian government). This emerging new consumers increase sales in the short term, but also have the potential to keep consuming the company's brands as their incomes increases. Regarding M&A activities, throughout 2012, Alicorp made four acquisitions totaling US$ 162 million, and two divestitures of small units and in areas where there was no leadership position. The largest acquisition was announced in last week of 2012 and it is the Peruvian Teal Industries, headquartered in Lima and acting also in food categories of mass consumption. Teal used to compete directly against Alicorp in some categories, such as pasta, biscuits and flour, and adds new presence in other categories like chocolates, candy and panettone (fruitcake). With revenue of US$ 104 million in the past 12 months, the company adds about 13% to the revenue of Alicorps consumer goods business in Peru. Other acquisitions were smaller, but very representative of the strategy, as the small UCISA. Although a small company to Alicorp (revenues of USD 28 mm), this company had outstanding portfolio of strong brands of edible oils, in the poor northern region Peru. This region represents the greatest growth in the country, and a profound transformation and ascension of socioeconomic classes, as in the recent case of North and Northeast Brazil. Therefore, Alicorp keeps occupying the spaces that the development of Peru keeps creating and adding to its portfolio regional brands that stand out, maintaining its leadership position absolutely secure.

Ferreyros - Peru The Peruvian company, Caterpillar's exclusive representative in Peru for over 70 years (one of only 5 in the world with such a long relationship with the American equipment producer), keeps with its strong pace of expansion. It has also started selling the product line Bucyrus, a major acquisition for global Caterpillar, since the third quarter of 2012. In these last two years, Ferreyros is undergoing a phase of accelerated sale of machinery and equipment, which is directly linked to the boom in construction projects of infrastructure and mining in Peru. Another important source of revenue for the company is the provision of maintenance services and sale of spare parts, and is now accounting for over 30% of the company's revenue and also grows very quickly following the fleet expansion. In fact, the machines sold will become part of the existing fleet and that will inevitably need maintenance and parts replacement at some point. The company, which thoroughly understands this dynamic, substantially increased its staff of service area professionals to prepare to the increase in demand that will certainly follow. Another business that has gained relevance with great speed, and we are extremely pleased due to its excellent margins, is the equipment rental business. In the coming quarters it will quickly gain importance in the matrix of revenues and earnings of the company.

BCP/Credicorp - Peru Regardless of the strong results of Credicorp this last quarter, following the tone for the whole year, it is important to emphasize two very important strategic moves underway in the company. The first is the banks profile change, occupying, before their competitors, a leadership position in key retail segments. For this, Credicorp has expanded its already strong capillarity to meet the huge demand from the new mass of consumers of financial services. Also began to give greater focus on expanding its services to small businesses and micro-credit and other forms of entry into the banking system. Remembering that Peru has the lowest levels of banking among all countries of South America, and this has been changing rapidly in this phase of strong economic growth and social inclusion in the country. With this change of profile, the bank aims to further strengthen its competitive position against potential entrants in the increasingly attractive Peruvian banking market.
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Parallel to domestic strategy, the bank acquired two international assets: IM Trust (Chile) and Correval (Colombia). Although still small, these assets mark the beginning of the geographic expansion of the conglomerate, and will serve as a platform for growth in these Latin American markets, as they integrated further.

Cementos Pacasmayo According to the official statistics agency of the Peruvian government, in the northern region of the country companies that are part of the group Pacasmayo (Cementos Pacasmayo and Cementos Selva) controlled 99.6% of the cement market in 2012. So it's easy to understand how the company took advantage of the very strong growth in the region, which is still higher than all other parts of the country put together, for being a region that still lacks in infrastructure and housing. By the end of the third quarter of 2012 the company's revenue was 19% higher than the previous period and net income was 197% higher. The company continues to invest strong in expanding, with a growth of capacity of the smallest unit Cementos Selva, and moving forward with the construction of a new large unit in the city of Piura, which will serve to meet the extreme north of the country and eventually the south of Ecuador (see map below).

Another important element of its strategy, which has been a major focus in recent periods, is the strong expansion of Dino retail network. Pacasmayo is certainly one of the only cement companies in the world that is fully integrated from mining to a retail network of building material stores. Dino stores, which operates on a franchise system, which avoids Capex by Pacasmayo, should reach an incredible 300 points of sale throughout northern Peru in 2013.

Hites - Chile The year of 2012 was not so good for the Chilean retailers, even with the great dynamism of the local economy. Despite continuing with good growth, rates were below those observed in 2011. Some effects contributed to this, mainly in the department stores space, where Hites, operates: unfavorable weather conditions, with a mild and short winter, and especially the new rules governing the use of credit information in the country. The new law became more judicious to the use of information of default customers (it cant be used in hospitals, for example), and deleting delinquency history. This last effect reduces profit margins in the short run, due to the need for increased provisions for credit portfolios. Even in the midst of this scenario, we have good reason to continue enjoying the business model and management of Hites. Having to prepare for the new rules of the maximum rate to be charged in the financial business, the company began a job repositioning prices and focus on its own branded products with good results - expansion of more than 3.0 points in gross margin in third quarter. In the first nine months of 2012 the revenue expanded 15.7%, partly in the same stores, partly the result of an ongoing expansion program. Despite the adverse scenario that could generate uncertainty and aversion of investors, another sample that the company is on the right track was having a successful issuance of US$ 48 million in bonus in the local market - the first time Hites accessed the debt market in its history. The funds will be used for the expansion project of the company in 2013, which provides for the opening of 3 new stores (Hites had 14 department stores in Dec/2012). Finally, we are also pleased that the company keeps attracting new investors - its shares have gained better liquidity, and now for 2013 it has been added to the IPSA, the Santiago Stock Exchange index. This movement must continue to attract attention and new buyers for the company's shares.

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Sigdo Koppers - Chile The year of 2012 has been a consolidation phase of SK's new strategy. To focus on the business of providing products and services to the industrial sector and especially for mining. Besides the important acquisition of Belgian Magotteaux, world leader in solutions for grinding balls used in mineral processing, some other smaller companies have also been incorporated, all in full accordance with the strategic guidelines. The growth rate of the main subsidiaries remain strong, due to both the robust dynamics of mining and infrastructure in Chile and Peru, and much of what we believe dueto good management decisions. Looking ahead, it seems that the coming years will be exceptional. The portfolio of mining projects in both countries for years to come now total more than US$ 100 billion, the highest ever seen. As for infrastructure, there are still many projects to develop to bridge the existing deficit seen in this region, particularly in Peru. Sigdo now should slow down on acquisitions and focus on the process of consolidation. The crown jewel of the group, the exceptional Enaex explosives company, continues to grow strongly, and this past year a major milestone in the expansion strategy was the entry into Brazil through the acquisition of leading local company Britanite. We continue considering the company one of the most extraordinary business groups in the region, and with its focus, one of the best ways to participate in the current stage of the economies of South America.

Cruz Blanca Salud - Chile Our exposure to the Chilean health segment continues to bring good results through our investment in Cruz Blanca. By the side of the insurance business unit, the company has successfully implemented its plan MaxSald, to compete for low-income segments with the Chilean public health system. This is a private plan, whose coverage of medical expenses is restricted to establishments and professionals linked to Cruz Blanca itself, having thus much greater cost control. Better yet, through this vertical format, the new plan is not increasing the insurer's loss ratio - which would be expected in its initial phase of market penetration. The current condition of low unemployment in the country also contributed to the increase in the number of beneficiaries of health insurance, which grew 9% - about a quarter of this growth derived from the new plan MaxSald. In the segment of medical services, while hospitals have suffered with a more competitive environment, the Integramdicas clinics and exam venues - continue to grow revenues at double-digit rates in the 13 existing units as they prepare for the opening of more 4 centers throughout the 1st quarter of 2013. The purchase of Amil in Brazil by US-based UnitedHealth in October, although not directly affect the performance of Cruz Blancas stock, creating a reference valuation for the company, which has very similar business model. Its shares reacted strongly, appreciating over 20% since then, and with increasing liquidity, which ultimately put the company as a new member of the Santiago Stock Exchange index - the IPSA - from January 2013. Our expectations for the company are still excellent, as the plan MaxSald tends to gain participation in the insurance market, competition among hospitals tend to find a balance and maturity of new units Integramdica increase participation of the more profitable segment. Moreover, the Amil event, the gradual increase in liquidity and entry in the index should attract more attention, analyst coverage and new investors to the company.

We appreciate the confidence, Orbe Investimentos

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