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1. Real Estate & Construction:
The Boom is Yet to Come
Rafael Pinho
July , 2007
2. Table of Contents
I. Too many companies, limited funds;
II. Covered Companies - Highlights;
III. The IPO wave: Performance;
Behind launchings: a glance of companies’ strategies;
IV.
V. The average apartment, now in the right direction;
IV. Risk of an Oversupply in São Paulo? We disagree.
VI. The next wave: Consolidation;
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3. Too many companies, limited funds…
Stock Picking: We prefer cases with proven track record and some differential.
Cyrela: Sector leader, geographically diversified and approaching lower income segments through newly launched
“Living” brand. In our view, premium to peers is justified and should be consistent.
BUY, YE2007 PT: R$28.35/share
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 agrrement with “Caixa”.
BUY, YE2007 PT: R$26.77/share
Tecnisa: A long term story at an attractive discount to peers. Investors have, in our view, underestimated company’s
ability to deliver launching’s growth. Current valuation levels consider delivery of less than 60% of forecasted
launchings.
BUY, YE2007 PT:R$17.00/share
PER 08E FV/EBITDA 08E
18.0x
24.0x
16.2x
16.2x
21.9x
16.0x
19.5x
20.0x 13.9x
14.0x
17.8x
17.1x 12.6x
12.0x
16.0x
10.3x
12.3x 10.0x
11.6x
12.0x
9.7x
8.0x
7.1x
8.0x
5.8x
6.0x
4.0x 4.0x
Tecnisa Klabin Company Average Gafisa Rossi Cyrela Tecnisa Klabin Company Average Gafisa Rossi Cyrela
Source: Bulltick
Source: Bulltick
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4. Covered Companies - Highlights
Rossi Residencial: Compared to its peers, Rossi is the more experienced in lower income segments, with
relevant experience during the 90’s in building popular housing. Currently it is the most exposed player to the
segment. Low income market is developing faster than initially expected: we view Rossi as already positioned to
profit from lower income. 1Q07 results put Rossi on a whole new operating level and called for a revision to our
numbers.
Gafisa: Gafisa’s acquisition of Alphaville, the boulder financial position after its follow-on earlier this year and its
recent low income initiatives (Fit and Bairro Novo) demand a revision in order to estimate their upside potential.
Current valuation suggest a neutral stance on the stock.
Company: Its strategy remains as our main concern for the stock. The company intent’s to focus on São Paulo
as its main market in the coming years without a clear strategy of building a land bank to support it. As São
Paulo remains as the most competitive market and many capitalized players are present, higher land prices and a
shift to lower income segments in the future could hurt margins.
Current Price PT 2007 Upside R$ Rating
Company 33.00 37.50 13.6% BUY
Cyrela 24.20 28.35 17.1% BUY
Gafisa 30.20 U.R. U.R. U.R.
Klabin Segall 20.21 26.77 32.5% BUY
Rossi Residencial 40.70 55.00 35.1% BUY
Tecnisa 11.79 17.00 44.2% BUY
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5. The IPO wave: Performance
Growth delivery = Performance. Most of the sector’s stocks tend to react to “growth-delivery” related
events. To anticipate companies with lower execution risks – those who will deliver, seems to be a winning
strategy.
Share price (Index vs. IPO prices)
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
4/07
5/07
6/07
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
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6. Behind Launchings: a glance of companies’ strategies
Average Ticket (R$) per Company
500,000
400,000
Analyzing 2006 launchings’ vs.
2005’s should provide us with an
300,000
insight of companies’ strategy.
200,000
100,000
Company Cyrela Gafisa Klabin Rossi Tecnisa Coverage
Segall Universe
2005 2006
Source: Companies and Bulltick
Average PSV / Project (R$ 000)
120,000
100,000
We see gains of scale in terms of project 80,000
size as a trend throughout the sector.
60,000
Rossi is a clear exception, with 152%
more projects in 2006 vs. 2005. 40,000
20,000
-
Company Cyrela Gafisa Klabin Rossi Tecnisa Coverage
Segall Universe
2005 2006
Source: Companies and Bulltick 6
7. The average apartment, now in the right direction…
At first, capitalized companies took advantage of financial strength to launch apartments to segments
where demand and credit were already in place in 2006. By the end of the year, attention has shifted
to lower income segments.
Average ticket (R$) during 2006 – Covered Universe
450,000
400,000
350,000
300,000
250,000
200,000
2005 1Q06 2Q06 3Q06 4Q06 2006
Source: Companies and Bulltick
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8. Sector Drivers: Credit
Upgrade trend: As credit became more affordable for higher income classes, families started to partially finance
the difference between their existing home and a new / improved one.
Family
Monthly Mortgage Initial Down Real Estate
Income
Installment Value Payment Value
(R$/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$370,000…
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.
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9. Sector Drivers: Credit
Affordable credit: Brazil’s real estate “booster”.
Low-income housing: besides interest and maturity, the loan-to-value ratio seems to be the biggest entry
barrier. However, 100% loan-to-value deals for low-income should be materializing earlier than previously
expected.
Needed Family income – R$50,000 property
Mortgage Maturity (Years)
20 21 25 30
240 252 300 360 The impact of improved mortgages on a
10% 1,619 1,592 1,508 1,434
R$50,000 unit would be a decrease of 37% in
9% 1,517 1,490 1,405 1,331
the needed family income to approve its credit
Interest 8% 1,413 1,387 1,302 1,228
risk.
7% 1,309 1,283 1,198 1,124
6% 1,205 1,178 1,093 1,019
Source: Bulltick
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
families
4.6 million new families would be potential
Population: 48.5 mn
buyers of a R$100,000 home in Brazil in
case our scenario is reached.
Investors should bear in mind, though,
families
that an R$100,000 apartment is not truly
low income in Brazil.
Source: IBGE, FGV and Bulltick
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10. Risk of an Oversupply in São Paulo? We disagree.
São Paulo’s market is able to absorb the growth in launchings. Coupling data on real interest rates and
residential units launched in São Paulo over the years give us a sense that the market is currently well below its
absorption capacity.
Additionally, data on 2007 launchings PSV in São Paulo shows that while the market grew 28.5% yoy, capitalized
players grew 73.7% vs. 2006.
In absolute terms, 50% of the growth in the market came from capitalized players. The bottom line is that
capitalized players gained market share, as the overall market did not grow at the same pace these players did.
Launchings Evolution in São Paulo 2005/06
Units Launched in São Paulo vs. Real Interest Rates 11,631
12,000
70,000 40%
35% 10,000
60,000 9,049
Launchings PSV - R$ Millions
30%
Real Interest Rate
Units Launched
50,000 8,000
25%
73.9%
40,000 20%
6,000
80.6%
15%
30,000
4,000
10%
20,000
5%
2,000 26.1%
10,000 0%
19.4%
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007E
0
Source: EMBRAESP, Central Bank and Bulltick 2005 2006
Other Players Capitalized Companies
Source: EMBRAESP and Bulltick
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11. 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
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consider this report only as a single factor in making their investment decision.
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