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Road show Europe April 2007

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Presentation used during road show visiting clients in London, Edinburgh and Amsterdam in April 2007.

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Road show Europe April 2007

  1. 1. Real Estate & Construction: The Boom is Yet to Come Rafael Pinho April, 2007
  2. 2. Table of Contents I. Too many companies, limited funds; II. The IPO wave: An asset allocation issue; III. The IPO wave: Performance; III. Sector Drivers: Credit; IV. The next wave: Consolidation V. Risk of an Oversupply in São Paulo? We disagree. VI. Our detailed view on covered companies: Cyrela, Klabin Segall, Tecnisa, Rossi Residencial, Gafisa and Company; 2
  3. 3. Too many companies, limited funds… Stock Picking: We prefer cases with proven track record and some differential. Our preferred picks: Cyrela, Klabin Segall and Tecnisa Cyrela: Sector leader, geographically diversified and approaching lower income segments through newly launched “Living” brand. Currently trading at justified premium over peers, yet still presenting attractive upside. BUY, YE2007 PT: R$28.35/share, 38.3% upside potential Klabin Segall: Middle-income segment player, business model is a plus. Cases of success: “Cores da Lapa” (690 units sold in 2 hours) and “Arena” (solutions for informal income). Taping low income through “Caixa Econômica”. BUY, YE2007 PT: R$26.77/share, 54.8% upside potential Tecnisa: A sound story at an attractive discount to peers. Investors have, in our view, sub estimated company’s ability to deliver launching’s growth. Current valuation levels consider delivery of less than 60% of forecasted launchings. BUY, YE2007 PT:R$17.00/share, 57.4% upside potential PER 08E FV/EBITDA 08E 20.0x 15.0x 18.6x 13.7x 12.2x 15.7x 16.0x 12.0x 13.9x 10.2x 9.7x 11.9x 12.0x 9.0x 9.9x 7.3x 8.8x 8.6x 5.9x 8.0x 6.0x 5.3x 3.0x 4.0x Tecnisa Klabin Company Rossi Average Gafisa Cyrela Company Tecnisa Klabin Rossi Average Gafisa Cyrela Source: Bulltick Source: Bulltick 3
  4. 4. The Real Estate IPO wave: An Asset Allocation issue The fundamental law: Supply vs. Demand. As investors relocated assets to enter into new IPOs, some stocks suffered with no fundamental reasons. Net exposure to the sector should not be increasing. This dynamic, though, seems to have shifted recently, i.e. Even’s IPO Tecnisa 2.000 Monthly trading volume (R$MM) 1.800 PDG & Rodobens 1.600 Rossi & Gafisa 1.400 Company 1.200 Klabin Segall 1.000 800 Abyara 600 400 200 jun/06 out/05 jul/06 nov/05 jan/06 out/06 mar/06 mai/06 nov/06 jan/07 mar/07 set/05 dez/05 fev/06 abr/06 ago/06 set/06 dez/06 fev/07 Cyrela Gafisa Rossi Abyara Company Klabin Segall PDG Rodobens Tecnisa Total Source: Bloomberg and Bulltick 4
  5. 5. The IPO wave: Performance Growth delivery = Performance. Most of the sector’s stocks tend to react to “growth-delivery” related events. For example, news on launchings and quarterly results. Share price (Index) 300 250 200 150 100 50 9/05 1/06 2/06 3/06 4/06 5/06 6/06 7/06 8/06 9/06 1/07 2/07 3/07 10/05 11/05 12/05 10/06 11/06 12/06 Cyrela Gafisa Rossi Abyara Company Klabin Segall PDG Rodobens Tecnisa Source: Bloomberg and Bulltick 5
  6. 6. Sector Drivers: Credit Upgrade trend: As credit became more affordable for higher income classes, families started to partially finance the difference between their existing home and a new / improved one. Family Monthly Mortgage Initial Down Real Estate Income Installment Value Payment Value (R$/month) 1,000 300 25,000 2,750 27,750 Even for families with … the highest mortgage 1,500 450 37,000 4,120 41,120 R$10,000 monthly income should be of R$280,000 2,500 750 62,000 6,860 68,860 (less than 4% of Brazilian using currently available 3,500 1,050 86,000 9,610 95,610 families)… credit lines. 10,000 3,000 250,000 27,500 277,500 Source: Bulltick 90% 82% 80% 80% 77% … especially when 82% of So how did they finance 73% those families already 71% apartments averaging owned their homes? 70% R$373,000… 60% <5 5~10 10~20 >20 Total Fam ily Incom e (Minim um Wages) Source: IBGE The answer: Pent up demand for upgrades created most of the growth opportunities for real estate developers in Brazil since 2004. 6
  7. 7. Sector Drivers: Credit Affordable credit: Brazil’s real estate “booster”. Current scenario: Expected scenario: 20 years maturity, 10% per 30 years maturity, 7% per year year Interest rate Interest rate Potential real Potential real estate buyers: estate buyers: 7.1 mm 11.7 mm families 4.6 million new families would be potential families buyers of a R$100,000 home in Brazil in Population: 48.5 mn case our scenario is reached. Investors should bear in mind that a R$100,000 apartment is not truly low families income. Source: IBGE, FGV and Bulltick Mortgage Maturity (Years) 20 21 25 30 240 252 300 360 10% 1,619 1,592 1,508 1,434 But the impact on a R$50,000 unit would be a 9% 1,517 1,490 1,405 1,331 decrease of 37% in the needed family income Interest 8% 1,413 1,387 1,302 1,228 to approve its mortgage. 7% 1,309 1,283 1,198 1,124 6% 1,205 1,178 1,093 1,019 Source: Bulltick 7
  8. 8. Risk of an Oversupply in São Paulo? We disagree. São Paulo’s market is able to absorb the growth in launchings. Coupling data on real interest rates and residential units launched in São Paulo over the years give us a sense that the market is currently well below its absorption capacity. Additionally, data on 2007 launchings PSV in São Paulo shows that while the market grew 28.5% yoy, capitalized players grew 73.7% vs. 2006. In absolute terms, 50% of the growth in the market came from capitalized players. The bottom line is that capitalized players gained market share, as the overall market did not grow at the same pace these players did. Launchings Evolution in São Paulo 2005/06 Units Launched in São Paulo vs. Real Interest Rates 11,631 100% 12,000 70,000 40% 90% 10,000 35% 9,049 80% 60,000 Launchings PSV - R$ Millions 30% 70% Real Interest Rate Units Launched 8,000 50,000 25% 73.9% 60% 40,000 20% 50% 6,000 80.6% 15% 40% 30,000 4,000 10% 30% 20,000 5% 20% 2,000 26.1% 10,000 0% 10% 19.4% 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007E 0% 0 Source: EMBRAESP, Central Bank and Bulltick 2005 2006 Source: EMBRAESP and Bulltick 8
  9. 9. The next wave: Consolidation Diversify and consolidate. After capitalizing and expanding geographically, major companies have potential to grow inorganically buying out some of the roughly 500 developers all over Brazil. São Paulo alone is known for having more than 300 active companies. Consolidation targets. Smaller, less capitalized companies, having considerable land banks or experienced/knowledgeable management or operating with complementary products. JV’s make it easier to happen. The JV model under which companies worked towards diversification facilitates this process, as companies get to know closely its partners’ modus operandi Market share in São Paulo, PSV of launchings 2001-2005 Cyrela Gafisa Tecnisa Rossi Inpar Company Even Others; Helbor 73.4% Setin Agra Redevco Others Source: EMBRAESP and Bulltick 9
  10. 10. Cyrela Brazil Realty (CYRE3) – YE2007 PT:R$28.35 – 38.3% Upside Leaps ahead: Cyrela was the first mover in the recent Brazilian real estate sector rebirth. The company delivered substantial growth in 2006 (235% YoY increase in launchings value) and also diversified its operations through JV’s in several new markets. Solid balance sheet. Among analyzed players, Cyrela is the most conservative in terms of working capital management: 70% pre-sales and 15% of client payments are received before start of construction. Once units are delivered to clients, 56% of their value has been already paid for. Management: Elie Horn (CEO) and Rogério Zylberstajn (former CEO of RJZ) are the most recognized among the company’s superior management team. Sensitivity Analysis Main Figures (R$ MM) 2006 2007E 2008E 2009E 2010E Target Price 1.00 1.10 1.20 1.30 1.40 Beta Launchings 3,618 4,000 4,600 5,060 5,566 28 12.5% 12.9% 13.3% 13.8% 14.2% WACC - Real Estate Sales 2,028 3,036 3,936 4,502 5,110 3.0% 29.50 27.27 25.25 23.41 21.72 3.5% 31.34 28.92 26.72 24.73 22.91 Net Revenues 1,117 1,483 2,074 2,765 3,907 g 4.0% 33.40 30.74 28.34 26.18 24.21 EBITDA 248 367 521 680 957 4.5% 35.71 32.78 30.15 27.79 25.65 Net income 242 320 392 484 728 5.0% 38.34 35.08 32.18 29.58 27.25 Gross Margin 42.2% 42.7% 41.8% 40.5% 39.7% Source: Bulltick EBITDA Margin 22.3% 24.7% 25.1% 24.6% 24.5% Net Margin 21.7% 21.6% 18.9% 17.5% 18.6% Revenue Recognition ROE 16.3% 15.5% 16.8% 18.2% 23.4% ROA 10.1% 9.8% 10.5% 11.4% 14.3% 1st Year 2nd Year 3rd Year % of Sales 70% 10% 20% PER 30.0x 22.7x 18.6x 15.0x 10.0x % of Cost Incurred 4% 40% 56% FV/EBITDA 27.5x 18.8x 13.7x 10.6x 7.5x Recognized Revenues 3% 32% 65% Source: Bulltick Source: Bulltick 10
  11. 11. Klabin Segall (KSSA3) – YE2007 PT:R$26.77 – 54.8% Upside Singular Story: Klabin Segall was founded in 1994 to develop and profit from the family’s land assets instead of selling them to other developers. The company, 13 years later, became one of the top players in São Paulo and Rio de Janeiro. Innovative model. Klabin Segall relies on third party construction in order to focus on its expertise: creating and executing developments. In terms of its projects, Klabin performs extensive research prior to launching. This strategy allowed the company to launch and sell at high sales velocities in some unusual neighborhoods. Financing: Besides selling at a high pace, Klabin works together with banks to bring solutions for its clients financing needs, a crucial aspect of its middle income segment clients purchase decisions. Recently the company announced a partnership with Caixa Economica to launch and finance R$250 million in low income properties. Sensitivity Analysis Main Figures (R$ MM) 2006 2007E 2008E 2009E 2010E Target Price 1.00 1.10 1.20 1.30 1.40 Beta 27 12.6% 13.0% 13.4% 13.9% 14.3% WACC Launchings 773 890 1,070 1,231 1,354 3.0% 27.80 25.97 24.30 22.77 21.37 - Real Estate Sales 406 772 895 1,111 1,231 3.5% 29.27 27.28 25.47 23.83 22.33 g 4.0% 30.91 28.74 26.77 24.99 23.37 Net Revenues 138 278 512 816 993 EBITDA 38 72 142 226 273 4.5% 32.76 30.37 28.22 26.28 24.53 Net income 4 73 100 154 192 5.0% 34.85 32.20 29.84 27.72 25.81 Gross Margin 42% 38% 38% 37% 37% Source: Bulltick EBITDA Margin 27% 26% 28% 28% 27% Revenue Recognition Net Margin 3% 26% 20% 19% 19% ROE 1.6% 17.2% 20.6% 26.4% 26.9% 1st Year 2nd Year 3rd Year ROA 1.0% 10.9% 12.5% 15.7% 16.1% % of Sales 70% 12% 18% % of Cost Incurred 25% 34% 41% PER N.R. 13.7x 9.9x 6.5x 5.2x Recognized Revenues 18% 31% 52% FV/EBITDA 19.7x 10.9x 5.9x 3.7x 3.1x Source: Bulltick Source: Bulltick 11
  12. 12. Tecnisa (TCSA3) – YE2007 PT:R$17.00 – 57.4% Upside Solid Story, compelling valuation: After 30 years in the real estate sector, the company built a respectful name among competitors and clients. Focus is on residential apartments, but the company is also experienced in commercial and leisure housing. Due to the recent shift in investors` approach to the sector, recent performance stock performance created an attractive entry point for the shares. Launchings growth: low execution risks. Tecnisa`s land bank cover 2007`s and 60% of 2008`s forecasted launchings. Besides land bank, the concerns regarding building permits in Sao Paulo impact the sector as a whole. Tecnisa, though, as other players concentrated in Sao Paulo, should bear higher than average risks. To offset such risks, the company has recently started the geographical diversification of its operations. The Telefonica imbroglio: The outcome of the controversy on the R$2 billion worth property should be a short- term catalyst for the stocks. Sensitivity Analysis Target Price 1.00 1.10 1.20 1.30 1.40 Beta Main Figures (R$ MM) 2006 2007E 2008E 2009E 2010E 17 12.2% 12.6% 13.0% 13.4% 13.8% WACC Total Launchings 369 1,550 1,714 1,760 1,815 3.0% 17.55 16.39 15.34 14.37 13.47 Launchings - Tecnisa Stake 285 1,082 1,200 1,320 1,452 3.5% 18.52 17.27 16.12 15.08 14.12 Total Real Estate Sales 333 878 1,429 1,659 1,771 4.0% 19.62 18.24 17.00 15.86 14.82 g 4.5% 20.85 19.34 17.98 16.74 15.61 Net Revenues 203 369 950 1,429 1,722 5.0% 22.26 20.58 19.07 17.71 16.48 EBITDA 47 45 257 406 486 Net income 36 63 178 267 339 Source: Bulltick Gross Margin 40.0% 38.1% 38.0% 37.6% 37.1% EBITDA Margin 23.1% 12.2% 27.1% 28.4% 28.2% Revenue Recognition Net Margin 17.6% 17.1% 18.7% 18.7% 19.7% ROE 27.6% 14.1% 21.7% 27.2% 28.0% 1st Year 2nd Year 3rd Year ROA 9.0% 6.5% 10.8% 13.1% 13.9% % of Sales 70% 20% 10% % of Cost Incurred 45% 47% 8% PER 43.1x 24.5x 8.7x 5.8x 4.5x Recognized Revenues 32% 51% 17% FV/EBITDA 35.8x 27.4x 5.2x 3.4x 2.8x Source: Bulltick Source: Bulltick 12
  13. 13. Rossi Residencial (RSID3) – YE2007 PT:R$31.22 – 25.4% Upside Closer to lower income segments: In comparison to its peers, Rossi is the more experienced in the lower income segments. It has relevant experience acquired during the 90’s in building and delivering popular housing. Uncertainties belong to the past. Rossi’s shares suffered due to investors` concerns on its ability to deliver the roughly 300% YoY growth in launchings in 2006. FY06 results released on Feb 15th made it clear that the company, besides delivering the guidance through JV’s and geographic diversification, has the breath to keep growing. Timing is everything: Rossi has been a pioneer in exploring lower income segments. Our concern is not about the aim, but the right timing to act more aggressively exploiting on those levels as our analysis shows that affordable credit should take 2 to 3 years to reach such income segments. Sensitivity Analysis Main Figures (R$ MM) 2006E 2007E 2008E 2009E 2010E Target Price 1.00 1.10 1.20 1.30 1.40 Beta Total Launchings 882 1,250 1,650 2,063 2,269 31 11.9% 12.2% 12.6% 13.0% 13.3% WACC Total Real Estate Sales 584 1,016 1,261 1,699 2,044 3.0% 31.70 29.67 27.82 26.12 24.54 3.5% 33.67 31.45 29.43 27.57 25.87 Net Revenues 411 562 833 1,163 1,597 EBITDA 51 110 194 294 416 g 4.0% 35.89 33.44 31.22 29.19 27.33 Net income 44 112 165 240 337 4.5% 38.41 35.69 33.23 31.00 28.97 5.0% 41.30 38.25 35.51 33.04 30.79 Gross Margin 31.2% 36.5% 38.0% 38.6% 38.6% EBITDA Margin 12.4% 19.6% 23.2% 25.3% 26.1% Source: Bulltick Net Margin 10.6% 19.8% 19.8% 20.7% 21.1% Revenue Recognition ROE 6.4% 9.9% 13.4% 17.5% 21.1% 1st Year 2nd Year 3rd Year ROA 3.8% 8.8% 12.8% 16.9% 20.2% % of Sales 75% 9% 16% % of Cost Incurred 29% 56% 15% PER 44.9x 15.9x 10.8x 7.4x 5.3x Recognized Revenues 22% 50% 29% FV/EBITDA 34.6x 14.6x 8.8x 5.8x 4.1x Source: Bulltick Source: Bulltick 13
  14. 14. Gafisa (GFSA3) – YE2007 PT:R$36.17 – 35.9% Upside A leader back at attractive levels: On the back of its’ shares overhang and the sector overhang, Gafisa’s shares dropped 14% since February 13th and are now trading at attractive levels. However, as the negative impact of the event should be left behind and actually, what remain are the positive effects, i.e. increased liquidity and the fact that Gafisa is the only real estate company in Brazil with ADRs listed in the NYSE. A nationwide business. Gafisa is the present leader in the geographic diversification trend, present in 13 states and 22 cities. Its model focus on local presence at new markets instead of just setting up JV’s. In some especial situations, JV’s are used to leverage its position in terms of local knowledge or access to land banks. Taping lower income segments. In order to optimize the presence in the different segments, Gafisa created two completely separated companies, “Fit” and “Novo Bairro”. The former will operate focused on the lower segments within urban areas, launching apartments in the R$80,000 – R$130,000 range, while the later will launch mostly houses in condominiums located at cities’ outskirts, thus at more affordable prices. Sensitivity Analysis Main Figures 2006 2007E 2008E 2009E 2010E Target Price 1.00 1.10 1.20 1.30 1.40 Beta 36 11.8% 12.1% 12.5% 12.8% 13.2% WACC Launchings 1,005 1,256 1,570 1,806 1,987 - Real Estate Sales 995 1,232 1,549 1,690 1,886 3.0% 36.74 35.10 33.58 32.18 30.89 3.5% 38.24 36.45 34.80 33.29 31.89 Net Revenues 664 799 1,114 1,334 1,642 g 4.0% 39.94 37.97 36.17 34.52 33.00 EBITDA 68 128 229 311 395 4.5% 41.87 39.69 37.70 35.90 34.25 Net income 46 95 175 243 310 5.0% 44.09 41.65 39.45 37.45 35.64 Gross Margin 29.8% 35.6% 37.2% 38.8% 38.3% EBITDA Margin 10.3% 16.0% 20.5% 23.3% 24.0% Source: Bulltick Net Margin 6.9% 11.9% 15.7% 18.2% 18.9% Revenue Recognition ROE 8.5% 11.2% 18.4% 21.9% 23.5% 1st Year 2nd Year 3rd Year ROA 3.8% 6.1% 10.1% 12.3% 13.7% % of Sales 80% 10% 10% % of Cost Incurred 20% 49% 31% PER 59.7x 29.0x 15.7x 11.3x 8.9x Recognized Revenues 16% 46% 38% FV/EBITDA 40.7x 21.8x 12.2x 9.0x 7.1x Source: Bulltick Source: Bulltick 14
  15. 15. Company (CPNY3) – YE2007 PT:R$37.50 – 63.1% Upside Attractive Valuation, lacking diversification: Traditionally associated with high-end segments, Company still focuses on those segments, profiting from its top-tier clients. At the same time, Company is heading towards the middle to middle high income segments in the city of São Paulo. Concerns. Different from most of its peers, Company does not maintain long-term land bank. Nevertheless, as per 3Q06 release, it already holds almost all land needed to deliver its launchings guidance for 2007, reducing execution risks. So far, Company has not disclosed any plans to diversify its operations geographically. Sensitivity Analysis Main Figures (R$ MM) 2006 2007E 2008E 2009E 2010E Target Price 1.00 1.10 1.20 1.30 1.40 Beta 37 12.6% 13.0% 13.4% 13.9% 14.3% WACC Launchings 353 800 1,000 1,200 1,320 3.0% 38.76 36.66 34.74 32.98 31.36 - Real Estate Sales 229 598 756 991 1,180 3.5% 40.40 38.12 36.05 34.16 32.42 Net Revenues 289 312 544 716 905 g 4.0% 42.23 39.75 37.50 35.45 33.59 EBITDA 57 68 121 153 181 4.5% 44.29 41.56 39.11 36.89 34.87 Net income 45 54 97 124 149 5.0% 46.61 43.60 40.91 38.49 36.30 Gross Margin 34% 33% 33% 33% 32% EBITDA Margin 20% 22% 22% 21% 20% Source: Bulltick Net Margin 16% 17% 18% 17% 16% Revenue Recognition ROE 26.7% 17.5% 26.5% 27.7% 27.1% ROA 11.6% 8.6% 12.4% 13.4% 13.7% 1st Year 2nd Year 3rd Year % of Sales 60% 20% 20% PER 18.2x 15.4x 8.6x 6.7x 5.6x % of Cost Incurred 30% 28% 42% FV/EBITDA 14.8x 12.8x 7.3x 5.8x 4.9x Recognized Revenues 18% 28% 54% Source: Bulltick Source: Bulltick 15
  16. 16. Disclaimers This report has been prepared by Bulltick Brasil Consultoria e Assessoria Empresarial Ltda, which is not an NASD member, is not registered with the US Securities and Exchange Commission, and is not regulated by any US securities or commodities exchange. Non-US research analysts who have prepared this report are not registered/ qualified as research analysts with the NASD or any other US securities exchange or regulatory body. Bulltick Brasil Consultoria e Assessoria Empresarial Ltda. is an affiliate of Bulltick LLC (The Firm). Bulltick LLC may do business with the companies covered in this report, as a result, investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report only as a single factor in making their investment decision. 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