OUTLOOK RESEARCH

Construction, Homebuilding and

Building Materials Latin America
2018 Outlook

DECEMBER 4, 2017
 Contacts

Sandra Beltran Martina Gallardo Barreyro Marcos Schmidt

Assistant Vice President - Analyst Assistant Vice President - Analyst Vice President - Senior Analyst
sandra.beltran@moodys.com martina.gallardobarreyro@moodys.com marcos.schmidt@moodys.com
+52.55.1253.5718 +54.11.5129.2643 +55.11.3043.7310

Carolina Chimenti
Analyst
carolina.chimenti@moodys.com
+55.11.3043.7318

This publication does not announce a credit rating action. For any credit ratings referenced in this publication, please see the ratings tab on the
issuer/entity page on www.moodys.com for the most updated credit rating action information and rating history.

Construction, Homebuilding and Building Materials Latin America

2018 Outlook, December 4, 2017
2
 2018 Outlook: Latin America E&C

NEGATIVE STABLE POSITIVE

What could change outlook The stable outlook reflects What could change outlook
to negative Engineering and construction
to positive
Lower revenues through (E&C) revenues will grow by More than 6% growth in
early/mid-2019 up to 6% through early/mid- organic revenues through
2019 early/mid-2019
Backlog replacement ratio
below 1.0x due to weaker- Backlog replacement ratio of Growing order backlog with
than-expected GDP growth at least 1.0x at least 1.25x book-to-bill
and weaker industrial activity Improving economic trends ratio
Lower infrastructure Numerous projects across Acceleration in construction
spending; slowdown in region, but private financing works and infrastructure
construction work will gain importance with spending supporting
uncertainty of elections in revenue growth and margin
Chile, Colombia and Mexico; stability
slow economic growth
limiting public spending

Note: A negative industry outlook indicates our view that fundamental business conditions will worsen. A positive outlook indicates that we expect fundamental business conditions to
improve. A stable industry outlook indicates that conditions are not expected to change significantly. Since industry outlooks represent our forward looking view on conditions that factor
into ratings, a negative (positive) outlook indicates that negative (positive) rating actions are more likely on average.

Construction, Homebuilding and Building Materials Latin America

2018 Outlook, December 4, 2017
3
Regional rebound supports E&C sector
Activity stable in 2018, gradually increasing in 2019

Key credit themes

Argentina and Peru
Rebound in growth signals economic recovery
Public spending through infrastructure projects will boost growth
Argentina: Main public projects include expansion of highway network and airports
Peru: Main projects include reconstruction after El Nio damage; as economy
recovers, fiscal outlook and business confidence will likely improve and attract
private investment
Brazil
Government budget cuts, weak orders, project cancellations after corruption
scandals keep sector under stress
No sign of sustained medium-term recovery
Fiscal constraints still weigh on new infrastructure investment
Corporate investment likely to remain slow through at least 2019
Construction, Homebuilding and Building Materials Latin America
2018 Outlook, December 4, 2017
4
Regional rebound supports E&C sector
Activity stable in 2018, gradually increasing in 2019

Key credit themes

Chile, Colombia and Mexico
Investment as percentage of GDP will remain stable but below 2015 levels
Upcoming presidential elections make future economic policy uncertain
Chile best positioned to attract private investment, with strong regulatory and
institutional framework
Modest oil prices keep public spending subdued in Mexico and Colombia
Odebrecht scandal and ongoing NAFTA negotiations will further shape investment
Ecuador and Panama
Investment declining after intense period of infrastructure spending
Business-friendly market environment remains attractive for E&C
companies

Construction, Homebuilding and Building Materials Latin America

2018 Outlook, December 4, 2017
5
Regional rebound supports E&C sector
Activity stable in 2018, gradually increasing in 2019

Engineering and construction activity set to rise across most major Latin American economies
Gross investment as percentage of GDP

Argentina Brazil Chile Colombia Ecuador Mexico Panama Peru

50%

46%
45%

40%

35%

30%

26%
25%
22%
20% 21%
18%

15%

10%
2011 2012 2013 2014 2015 2016 2017E 2018E

Source: Moodys Investors Service

Construction, Homebuilding and Building Materials Latin America

2018 Outlook, December 4, 2017
6
Latin America Engineering & Construction
Governance and liquidity are key credit considerations for 2018

Issuers of interest
Odebrecht Engenhariae Construo (Caa2 negative)
Largest E&C company in Latin America with $4.5 billion in net revenues,
$15 billion backlog for 12 months through June 2017
Main risks: deterioration in backlog and liquidity; uncertain timing for
operational recovery
Andrade Gutierrez Engenharia (Caa2 negative)
Improving but still weak E&C market fundamentals in Latin America,
particularly Brazil
Tight liquidity ahead of $500 million maturity due April 2018
Insufficient internal cash generation to meet short-term debt maturities without
selling assets
Fines associated with settlement in corruption investigations

Construction, Homebuilding and Building Materials Latin America

2018 Outlook, December 4, 2017
7
Latin America Engineering & Construction
Governance and liquidity are key credit considerations for 2018

Issuers of interest
Electroingeneria (Ca stable)
One of Argentinas largest E&C companies with backlog concentrated in
public works for electricity sector
Liquidity problems after delays in government payments should improve
through 2018, but short-term liquidity still highly constrained

Construction, Homebuilding and Building Materials Latin America

2018 Outlook, December 4, 2017
8
2018 Outlook: Brazil Homebuilding

NEGATIVE STABLE POSITIVE

What could change outlook The stable outlook reflects What could change outlook
to negative Sector revenues growing to positive
Revenues and launches within -10% to 10% range Launches growing by more
decreasing by more than 10% through mid-2019 than 15% annually
Industry gross margin falling Weighted industry adjusted Consolidated gross margins
below 15% gross margins of 16%-34% improving to more than 35%
in 2018-19
Delays in recovery of job Evidence of healthy
market and inflation further Launches improving in increase in housing prices
reducing housing prices 2018-19 from 2017 levels and increased funding
Stable to slight real availability for construction
increase in housing prices and home acquisition
in 2018

Note: A negative industry outlook indicates our view that fundamental business conditions will worsen. A positive outlook indicates that we expect fundamental business conditions to
improve. A stable industry outlook indicates that conditions are not expected to change significantly. Since industry outlooks represent our forward looking view on conditions that factor
into ratings, a negative (positive) outlook indicates that negative (positive) rating actions are more likely on average.

Construction, Homebuilding and Building Materials Latin America

2018 Outlook, December 4, 2017
9
Brazil: Slow recovery in home sales
But activity will remain below pre-crisis levels
Key credit themes
Home sales recovery so far limited to low-income segment
Middle- and middle-high income segment sales will increase slowly
and gradually in 2018, reducing inventories and supporting launches
Sales and launches improving only in low-income segment; inventories' duration remain high

Others High- and medium-Income Low-income Duration

140,000 18.0
131,251 15.8 months 15.8 months
13.2 months 15.4 months 15.4 months
16.0
120,000 112,206
13.2 months
103,086 105,325 14.0
12.0 months 12.0 months
100,000
12.0
Housing units

80,000 75,833 73,275 10.0

Months
69,803
64,026
60,000 8.0

6.0
40,000
4.0
20,000
2.0

0 0.0
Launches Sales Launches Sales Launches Sales Launches Sales
2014 2015 2016 LTM 2017

Note: LTM indicates 12 months through August 2017. Data for 2014 do not separate sales and launches by segment.
Source: Abrainc

Construction, Homebuilding and Building Materials Latin America

2018 Outlook, December 4, 2017
10
Lower interest rates support financing
But banks will remain selective about offering mortgages
Brazils interest, mortgage rates are declining while savings balances are increasing
Savings account balance (SBPE) Real estate financing
Regulated mortgage rates Interest rate (SELIC) BRL 700 BRL 637BRL 654
BRL 595
16%
BRL 600 BRL 532
14% BRL 467
BRL 500
12% BRL 389 BRL 522 BRL 509 BRL 516BRL 537
BRL 411
BRL 400 BRL 331 BRL 318

Billions
10% BRL 300
BRL 300 BRL 254 BRL 246
8% BRL 215
BRL 188 BRL 180
6% BRL 200 BRL 150 BRL 131
BRL 99
BRL 74
4% BRL 100 BRL 62
Jan-12

Jan-13

Jan-14

Jan-15

Jan-16

Jan-17
Apr-12

Oct-12

Apr-13

Oct-13

Apr-14

Oct-14

Apr-15

Oct-15

Apr-16

Oct-16

Apr-17

Oct-17
Jul-12

Jul-13

Jul-14

Jul-15

Jul-16

Jul-17
BRL 0
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

House prices stabilizing in most of Brazil, and will increase slightly in 2018
12-month change in real house asking prices
20.0%

15.0%
Moodys forecast
10.0%

5.0%

0.0%

-5.0%

-10.0%

-15.0%

Source: Bacen, Fipe Zap

Construction, Homebuilding and Building Materials Latin America
2018 Outlook, December 4, 2017
11
Brazil Homebuilding
Issuers of interest
Cyrela Brazil Realty (Ba2 negative)
Diversification and brand recognition make profitability less volatile than
peers
Good liquidity profile, cash generation and leverage, despite shrinking size
Even (B1 negative)
Revenues, profitability will gradually improve in 2018, with more
comprehensive recovery only in 2019
Improved leverage and liquidity, but cash generation depends on pace of
recovery of middle-/middle-high-income home sales
Gafisa (B3 negative)
Weak liquidity, high leverage
Operating performance will remain weak through 2018
Exposure to commercial properties poses risk for cash generation
Construction, Homebuilding and Building Materials Latin America
2018 Outlook, December 4, 2017
12
2018 Outlook: Mexico Homebuilding

NEGATIVE STABLE POSITIVE

What could change outlook The stable outlook reflects What could change outlook
to negative Revenues growing by roughly to positive
Higher-than-anticipated cut in 18% through 2018; gross Annual revenue growth of
subsidies or take-out margins flat between 25%- 15% or higher
financing 28%
Consolidated gross
Annual revenue growth of 5% Infonavit's higher mortgage- margins around 30%
or lower loan caps, increased lending
from private banks continuing Ample funding availability
Significant deterioration in to fuel demand for higher- from external sources
gross margins priced homes
Cuts in federal housing
subsidies supporting better
portfolio mix for rated
homebuilders, reducing
reliance on government as
2018 presidential election
approaches

Note: A negative industry outlook indicates our view that fundamental business conditions will worsen. A positive outlook indicates that we expect fundamental business conditions to
improve. A stable industry outlook indicates that conditions are not expected to change significantly. Since industry outlooks represent our forward looking view on conditions that factor
into ratings, a negative (positive) outlook indicates that negative (positive) rating actions are more likely on average.

Construction, Homebuilding and Building Materials Latin America

2018 Outlook, December 4, 2017 13
Mexico: Homebuilders are growing
Still profitable despite volatile operating environment
Key credit themes
Ara, Cadu and Javer have maintained adequate profitability in
volatile industry; margins consistently above 27% since 2013
Strong regional market positions give companies clout with
suppliers, local permitting authorities

Profits holding steady for main rated Mexican homebuilders

Revenue (non-gross margin) Gross profit Gross margin Total revenue
25,000 22,831 30%
29.5% Total revenue
Total revenue 20,645
Total revenue 18,706
20,000 28.9% 6,322
Total revenue 16,826 29%
Total revenue Total revenue 15,452 5,776
13,513 13,765 5,251

Gross margin
Million

15,000 4,751
4,264 27.7%
28.2% 28%
3,990 3,980 27.6% 28.1% 28.0%
10,000
12,075 16,508
11,188 14,869
13,455 27%
5,000 9,523 9,785

- 26%
2012 2013 2014 2015 2016 2017E 2018E

Note: Composite based on data from ARA, Javer and Cadu.

Source: Moodys Financial Metrics; Moodys Investors Service (estimates)

Construction, Homebuilding and Building Materials Latin America

2018 Outlook, December 4, 2017
14
Mexico: Homebuilders are growing
High-priced segments offer support amid record-low subsidies
Federal homebuying subsidies at record low increasing focus on non-subsidized homes
Annual subsidies for low income borrowers
New Used Others
MXN 14,000 Subsidized Non-susbidized
Total
MXN 11,494 Total 100%
MXN 12,000 MXN 10,996
90%
Total 28.2% 25.5%
MXN 8,908 80% 44.5% 39.6%
MXN 10,000 Total
Total 70% 54.9%
MXN 7,812 64.0% 65.0%
MXN 7,374 Total 68.8% 70.0%
MXN 8,000 Total 73.5%
MXN 6,525 60%
Millions

81.8%
MXN 5,795 Total 92.0%
MXN 5,170 50%
MXN 6,000
Approved/ 40%
pending 71.8% 74.5%
MXN 4,000 MXN 3,977 30% 55.5% 60.4%
20% 45.1%
MXN 2,000 31.2% 35.8% 30.0% 35.0%
26.5%
10% 18.2%
8.0%
MXN 0 0%
2010 2011 2012 2013 2014 2015 2016 2017 2014 2015 2016 2017E 2014 2015 2016 2017E 2014 2015 2016 2017E
ARA JAVER CADU

along with emphasis on middle-income and residential sales

Affordable entry-level Middle-income Residential Other
100% 2.2% 2.8% 4.7% 2.7% 2.6% 3.4% 2.6% 4.4% 4.4% 7.1% 12%
90% 18.3% 18.7% 15.0%
20.7% 27.0%
27.4% 27.9%
80% 35.1%
70%
60% 43.5% 41.0% 47.6%
28.3%
50% 28.6% 55.8% 95.6% 95.6% 92.9% 88%
40% 54.4% 63.0%
30%
20% 35.8% 37.5% 39.6% 34.8%
33.6%
10% 20.1% 15.1% 10.0%
0%
2014 2015 2016 2017E 2014 2015 2016 2017E 2014 2015 2016 2017E
ARA JAVER CADU

Source: Company financial reports and presentations; Moodys Investors Service (estimates)

Construction, Homebuilding and Building Materials Latin America

2018 Outlook, December 4, 2017
15
Mexico Homebuilding
Increasing emphasis on middle-income and residential sales
Issuers of interest
ARA (Ba2 stable)
Mexicos top homebuilder; conservative growth strategy and prudent
financial policies
Low leverage and strong cash in hand, supporting liquidity profile
Scale and diverse, flexible product portfolio will help keep operations strong
Cadu (B1 stable)
Regional homebuilder with solid earnings growth and credit profile
Recent debt repayments, stronger-than-expected cash flow in 2018 will help
accelerate growth without threatening credit profile
Has gradually increased offering of higher-priced homes
Risk from lack of geographic, product diversification

Construction, Homebuilding and Building Materials Latin America

2018 Outlook, December 4, 2017
16
Mexico Homebuilding
Increasing emphasis on middle-income and residential sales
Issuers of interest
Javer (B2 stable)
Leading homebuilder with increasing market share
Efficient, flexible operating structure
High leverage historically, but working to refinance roughly $160 million in dollar-
denominated debt due 2021, using proceeds from MXN1.8 billion ($97 million)
IPO in 2015

Construction, Homebuilding and Building Materials Latin America

2018 Outlook, December 4, 2017
17
2018 Outlook: Building Materials

NEGATIVE STABLE POSITIVE

What could change outlook The stable outlook reflects What could change outlook
to negative Operating margins to positive
Operating margins falling by fluctuating in -2% to 2% Operating margins growing
more than 2% range by more than 2%
Cement sales volumes falling Cement sales volume Cement sales volume
by more than 3% through growing within -3% to 5% growing by more than 5%
early/mid-2018 range through mid-2019 through early/mid-2018
Reversal of broader economic Increase in infrastructure
indicators, suggesting spending, with higher
recessionary conditions construction and industrial
activity

Note: A negative industry outlook indicates our view that fundamental business conditions will worsen. A positive outlook indicates that we expect fundamental business conditions to
improve. A stable industry outlook indicates that conditions are not expected to change significantly. Since industry outlooks represent our forward looking view on conditions that factor
into ratings, a negative (positive) outlook indicates that negative (positive) rating actions are more likely on average.

Construction, Homebuilding and Building Materials Latin America

2018 Outlook, December 4, 2017
18
Regional trends: cement demand
Cement demand stable or growing in Latin Americas biggest economies
Argentina Brazil Mexico Peru
15.0%

10.0% 8.7%
7.0%
5.3%
6.3%
5.0% 2.4% 6.8% 2.9%

0.6% 2.7%
-0.3%
0.8%
0.0% 0.0%
-2.8%
0.2%

-5.0% -3.9%

-6.4%
-10.8%
-10.0%
-8.7%

-11.6%
-15.0%
2014 2015 2016 2017E 2018E

Source: Moodys Financial Metrics; Moodys Investors Service (estimates)

Construction, Homebuilding and Building Materials Latin America

2018 Outlook, December 4, 2017
19
Cement demand will vary by country
Key credit themes
Brazil
Demand will stabilize in 2018, recovering slightly with 1.5% rise only in 2019
Follows 7% decline in 2017, on top of cumulative 19% decline since 2014
Weak infrastructure investments, high unemployment constrains wholesale and retail cement
sales

Mexico
Infrastructure growth to remain subdued in 2018, but stable residential and
commercial construction will support cement demand
Investors will take wait and see attitude towards presidential elections and NAFTA negotiations
Modest oil prices will keep straining federal public investment
Ample availability of mortgage loans and private-bank credit will benefit residential and
commercial construction

Construction, Homebuilding and Building Materials Latin America

2018 Outlook, December 4, 2017
20
Cement demand will vary by country
Issuers of interest
Peru
Positive prospects for building materials sector
Rising business sentiment and stronger metal prices benefiting private investments
Delayed public projects will likely resume in 2018 with economic recovery
Repairs to damaged infrastructure ongoing following El Nio Costero in early 2017
New infrastructure for 2019 Pan American Games in Lima also increases cement
demand
Argentina
Economic recovery will increase cement demand by around 6% in 2018, on
top of 9% gain in 2017
Construction and building materials sectors will recover as public and private
investment activity increases

Construction, Homebuilding and Building Materials Latin America

2018 Outlook, December 4, 2017
21
Latin America Building Materials
Issuers of interest
Elementia (Ba2 stable)
- Some execution risk from recent acquisition of 55% of Giant Holdings,
fourth-largest cement company in US East Coast
- Strong liquidity and business diversification offset likely leverage increase
- Recent expansion in Mexicos cement division will support revenues and
profitability in 2018
HolcimArgentina (B2 stable)
- Renewed public infrastructure spending will gradually benefit credit metrics
in 2018-19
Second-largest Argentine cement company serves around one-quarter of local
demand for Portland cement
Support from parent LafargeHolcim (Baa2 negative) keeps rating above
Argentinas sovereign rating

Construction, Homebuilding and Building Materials Latin America

2018 Outlook, December 4, 2017
22
Latin America Building Materials
Issuers of interest
Unacem (Ba2 stable)
- Credit profile weak but strength in Peru supports improvement by mid-2018
Leverage above 3.5x and interest coverage below 3.0x in late 2017
Main markets in Peru and Ecuador experienced production slowdown in 2016-17
Votorantim Cimentos (Ba2 negative)
- Above average EBITDA margins among global peers
Brazils cement leader, with large scale, integrated operations, adequate liquidity
Good diversification; generates almost 50% of revenues outside of Brazil
Credit metrics weak for Ba2 rating, with high leverage

Construction, Homebuilding and Building Materials Latin America

2018 Outlook, December 4, 2017
23
Credit conditions will improve as
global economy strengthens
Global credit conditions will improve in 2018 as economic growth picks up and low interest rates keep funding
costs under control. Risks to this favorable outlook include the buildup of corporate leverage globally after a
decade of low interest rates, the potential for a sizeable and synchronous equity and asset markets adjustment,
and continued political and geopolitical uncertainty. In addition, a number of credit challenges loom, including
disruptions from new technology, population aging and climate change.

Learn more: moodys.com/2018outlooks

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2018 Outlook, December 4, 2017
25