Recommendation: Market Outperformthis performance it has improved its position in comparison to generation. Company Overview Subsector: Stock Data 52-week range $22.81- $30.18 Enterprise

Stock Data

52-week range $22.81- $30.18 Enterprise Value (MXN Mn) 18,089

Return LTM -4.8% Market Capitaliation (USD Mn) $936

Average Daily Volume (LTM) 1.3 million Float 64%

Shares Outstanding (Mn) 593 Beta 1.02

November 2015 Bolsa Mexicana de Valores, S.A.B de C.V. BOLSAA.MX

Initiating coverage: Positive performance despite higher volatility in capital markets.

Recommendation: Market Outperform

Price: MXN 26.10 IPC: 44,138.75 S&P500: 2,088.87 NASDAQ: 5,116.14

We issue a recommendation of Market Outperform for Bolsa Mexicana de Valores (BOLSA)

with a target price of MXN 31.71 by the end of 2016. Expected total return is 25.07%,

composed from an expected upside potential of 21.51% from its closing price of MXN 26.10

on November 25, 2015; and an expected dividend yield of 3.56%. The target price was reached

through 2 valuation models: DCF (75%) and Relative Valuation (25%).

BOLSA is the only authorized exchange market which offers a vertically-integrated service for

trading, clearing and custody of all equity, derivatives and fixed-income securities in Mexico. Since

2014 has been integrated as part of Mercado Integrado de Latinoamerica (MILA), which connects

financial markets from Chile, Colombia, Mexico and Peru.

Mexico’s equity market cap has shown a positive performance with a 5-year CAGR of 6.41%. With

this performance it has improved its position in comparison to its Latin-American peers, remaining

just behind Chile in terms of Market cap to GDP. However, future growth depends on new market

regulations and the outcome of Mexico’s structural reforms in key areas such as energy, tax and

banking.

During 3Q15 total revenue showed an improved performance, registering a level of MXN 669

million, representing a YoY growth of 17.04%, with operating income increasing 14.68% vs 3Q14.

This result was supported mainly by positive results in Information Services and the OTC segments.

Competitive position presents a favorable condition for long-term profitability and cash flow

generation. BOLSA has been investing in edge technology which allows investors to execute

transactions in a mean time of 90 microseconds, this positions BOLSA among exchanges with

highest speed in the world.

We remain skeptical respective to Derivatives segment given a not clear strategy and a decrease in

notional value, due to a weaker activity with respect to currencies, swaps and TIIE futures contracts.

Valuation 2014A 2015E 2016E

EPS (MXN) $1.48 $1.43 $1.47

P/E 31.70x 22.95x 21.40x

EBITDA per share (MXN) $1.76 $2.24 $2.26

EV/EBITDA 17.53 14.00 13.03

With the company public information and team estimations.

Company Overview

Location: Paseo de la Reforma 255, Col. Cuauhtémoc, 06500, México D.F

Sector: Financials

Subsector: Diversified Financial Services

Economic activity: is the only equities and derivatives exchange in Mexico.

Products and services: BOLSA conducts operations through three principal business units: (1) Listing and

Trading; (2) Custody, clearing and settlement; and (3) Information and Valmer.

Internet webpage: https://www.bmv.com.mx/

Analysts:

Pedro Cantú

Fátima Pérez

Alejandra Rivero

Research Advisor:

Ma. Concepción del Alto Hernández, PhD.

Burkenroad Reports are produced by a select group of students at EGADE Business School, Monterrey. This report is

based on information available to the public and does not purport to be a complete statement of all data relevant to the

securities mentioned and its accuracy cannot be guaranteed. Furthermore, this report is not an offer to buy or sell the

securities mentioned.

https://www.bmv.com.mx/

2

Business Description

Grupo Bolsa Mexicana de Valores (BOLSA) is the only exchange market for equity and fixed-

income listed securities, and derivatives in Mexico. It was founded in 1894, but since 1975 was

established as the only exchange market in Mexico, after it acquired the exchange markets from

Monterrey and Guadalajara. It went public since 2008 with an IPO where shares traded at an initial

price of $16.49 MXN.

It offers a vertical integrated business model through which it offers a widely-range of services for

investors’ needs and financial market development. It generates revenues from: 1) listing and trading

of equities and fixed-income securities on Bolsa Mexicana de Valores (BMV); 2) trading of derivatives

contracts on Mercado Mexicano de Derivados (MexDer); 3) trading of OTC derivatives and fixed-

income securities through SIF ICAP; 4) custody, clearing and settlement activities, through Indeval,

Asigna and CCV; and 5) the offering of information services through Valmer. (Figure 3)

BMV is the provider of technology, systems, and autoregulation norms through which the capitals

market operates in Mexico. Its main activities include listing, trading, and recording of transactions

with stocks, CKD’s, FIBRA’s, fixed-income securities, convertible securities, and warrants. Revenues

are generated by transaction, and listing & maintenance fees. By the end of 2014 there were 131

Mexican companies listed on the BMV, with a market cap value of USD 480 billion, representing

41.51% of GDP; and 940 foreign securities listed on the Global Market (SIC) section.

MexDer, which represents the Mexican derivatives market, provides the instruments and electronic

platforms for trading of derivatives instruments since 1998. The main instruments listed on MexDer

are futures contracts on interest rates, stock indices, fixed-income instruments, FX rates; and options

on stocks, equity indices, and FX rates. By the end of 3Q15, the most traded contract on a year to date

basis (YTD), has been futures on MXN/USD currency, which represents 49% of total daily average

traded contracts.

SIF ICAP is a subsidiary of BMV since 2000. It offers a trading platform for OTC derivatives and

fixed-income securities in Mexico and Chile. The main instruments exchanged through SIF ICAP are

government and corporate bonds, mortgage backed securities, interest rate swaps and forward

contracts. ICAP Latin America Holdings, B.V. (ICAP), which is the owner of the remaining 50% stake

in SIF ICAP through a joint venture, operates in Chile and is a subsidiary of ICAP Group, the world

leader of brokerage services. (Figure 4)

Indeval is the central depository institution in Mexico since 1987, the range of services it provides

include: securities deposit, custody, management, transferring, clearing and settlement. Further, it

offers complementary services as lending of securities, repo contracts, and the management of

securities received as collateral, besides some other specialized services. Due to changes in Mexican

Securities Law, since 2008, BOLSA has acquired 39 of the 41 of the existing shares from Indeval, up

to 3Q15 there is only one share pending for payment according upon agreement, the 1 remaining share

will be held by Mexico’s Central Bank (Banxico).

Asigna. Asigna settles derivatives contracts and functions as the central counterpart of all the

transactions arranged through the MexDer. By the end of 3Q15 it maintains a credit rating of

AAA(mex)/F1+(mex) from Fitch Ratings, and mxBBB+/mxA-2+ from S&P. Contraparte Central de

Valores (CCV) is the central counterpart and settler from transactions made through BMV and settled

by Indeval; the main purpose of CCV is counterparty risk reduction. By the end of September 2015

the Value at Risk of CCV was $391 million MXN.

Figure 1. BOLSA Stock Price MXN (1 Year)

Source: Bloomberg

Figure 2. Appreciation base 100 BOLSA vs IPC

Source: Bloomberg

Source: Company Report

Figure 4. BOLSA: Corporate Structure

Source: Company Annual Report

20

22

24

26

28

30

32

80

85

90

95

100

105

BOLSAA IPC Index

BMV

Trading,

9%

CCV

Clearing,

7%

Mexder,

3%

Derivative

s Clearing,

3%

OTC (SIF

Icap), 21%

Listing

BMV, 4%

Maintance

BMV, 17%

Indeval,

19%

Valmer,

5%

Data

Sales, 8%

Others,

4%

Figure 3. BOLSA: Revenue by Segment 3Q15

3

Valmer & Information. Valmer is the leader provider for pricing and valuation in Mexico, it uses the

software Algorithmics for market pricing information analysis and valuation. The company provides

daily pricing data for fixed-income securities including government, corporate and structured, besides

equities and warrants. Revenues come from a subscription fee paid by financial institutions including

pension funds (AFORES). Real time information generated from BMV, MexDer and SIF ICAP

operations is organized and sold to global information vendors which distribute it through terminals or

proprietary platforms. BOLSA offers its own terminal service SiBolsa for information distribution to

market participants and universities, which competes with similar services in Mexico as Infosel, and

Economatica. Revenues generated are accrued to BMV, MexDer and SIF ICAP respectively.

Business Drivers

BOLSA has a widely diversified product offering for issuers and investors (Figure 7). The equity market

allows companies and financial institutions the listing of common and preferred stocks, Certificados de

Participación Ordinaria (CPO), warrants and TRAC’s. On the fixed income market issuers can list a

variety of short and long-term instruments. On 2009 the company launched Certificados de Capital de

Desarrollo (CKD’s), which are fiduciary instruments aimed to fund projects from acquired companies.

On 2010, Fideicomisos de Infraestructura y Bienes Raìces (FIBRA’s) were launched, representing an

equivalent to the Real Estate Investment Trusts (REIT’s), allowing trust entities to fund the acquisition

or construction of real estate property.

Since 2014, BOLSA has joined the Latin America Integrated Market (MILA), which is a cross-border

initiative that integrates the securities markets of Chile, Colombia, Mexico and Peru. MILA is, by

number of listed companies, the largest market in Latin America and the second largest in terms of

market capitalization and trading volume. Besides, from September 2012, BMV incorporated its new

trading platform Motor de Negociación Transaccional (MoNet), which allows investors to execute

transactions in a mean time of 90 microseconds, in substitution of its old system Sentra Capitales. This

system ranked BMV in the second place worldwide, in terms of speed execution, only behind of the

Swiss Exchange.

Equity

In the equity trading segment, total daily average operated amount (million MXN) has shown a mixed

trend from 2010 to 2014, the CAGR (2010-2014) for this indicator has been 4.2%. Foreign listed

securities through the SIC has performed better in comparison to the national market segment. Foreign

daily average operated amount has shown a CAGR (2010-2014) of 13.6%, higher than the 2.2% for

the national market. (Figure 8). Furthermore, average daily operated volume has performed better in

the foreign market with a CAGR (2010-2014) of 8.5%, meanwhile national market has had a weak

performance with a CAGR (2010-2014) of -0.5%.

The decreasing in operated amount in 2013 and 2014 has been given by poor economic growth

expectations in Mexico in terms of GDP and the increased probability of interest rates rise in the US.

Besides the pressure caused by the plummet in oil prices and the increased cost of raw materials for

companies given a stronger US dollar, caused valuations to drop. Furthermore, year-to-date volatility

in the Mexican equity market has been around 18%, which is below its 10-year average of 21%, with

a downward trend, indicating low market turmoil despite increasing volatility in China (Figure 10).

Figure 5. BOLSA’ Revenues by Activity 3Q15


Figure 6. BOLSA’ New Listings Activity

Source: Company Reports

Figure 8. Equity Daily Average Operated Amount


Figure 9. Historical Issuers Fees

Source: Company Reports & Team Analysis

Figure 10. Historical VIMEX Index

Source: Bloomberg

Listing,

22%

Trading,

32%

Post-

Trading,

29%

Information,

13%

Others,

4%

4 713

5 66 105 7 10

1 3 6 61

2011 2012 2013 2014 2015

Equity Listings CKD's FIBRAS

890 898 984 941 767

2011 2012 2013 2014 2015

Debt New Listings

-15%

-10%

-5%

0%

5%

10%

15%

20%

-

5,000

10,000

15,000

20,000

2012 2013 2014 2015E 2016E

MX

N T

h

National Foreign Revenue Growth

473 513

545 591

650

0%

5%

10%

15%

20%

-

100

200

300

400

500

600

700

2012 2013 2014 2015E 2016 E

MX

N M

n

0%10%20%30%40%50%60%70%80%

Figure 7. BOLSA’s Activities Breakdown

Price Vendor

Risk Management

Data Feeds

Information

Services

Valmer

BMV

Clearing

Settlement

Custody

SecuritiesLending

Post-Trading

CCV

Asigna

Indeval

Equities & TRAC’s

Global Market (SIC)

OTC

Derivatives

Bonds

Trading

BMV

Mexder

SIF ICAP

NationalEquities

FIBRA’s

CKD’s

Debt

Listing

BMV

4

As can be seen in Figure 8., total revenue for this segment has shown a weak performance with a CAGR

(2010-2014) of 3.3%, with a declining growth in 2013 and 2014 of -3.9% and -11% respectively. Sharp

declining in 2014 can be attached to a declining in commissions from trading, which has shown a

CAGR (2010-2014) of -0.2%, and a sharply decreasing of -14.2% in 2014, given the extraordinary

increasing registered in 2013 because of the stock repurchasing for Grupo Modelo. On the other hand,

issuers fees as seen in Figure 9, has shown a reduced growth with a 5-year CAGR of 11.06%, this is

explained by a drop in listing activity, which registered a reduction in listing fees of 5.71% in 2014 due

to a slower activity in debt and equity listings.

Derivatives

Derivatives segment has been decreasing its volume traded (thousands of contracts) in both futures

and options contracts. The futures division has shown a negative trend in number of open contracts

with a CAGR (2010-2014) of -8.6%, while the options open contracts have decreased with a CAGR

(2010-2014) of -2.9%. The notional amount in both futures and options contracts has shown a negative

trend with a CAGR (2010-2014) of -12.6%. (Figure 11). This decreasing trading activity has been

attributed to an increasing volatility in FX markets, due to changes in regulatory requirements involving

mark-to-market disclosures based on Banxico FIX exchange rate.

However, total revenue which includes trading and clearing activities, has had a positive performance

with a CAGR (2010-2014) of 14.5%, driven by an increase in the number of transactions on futures

contracts with a CAGR (2010-2014) of 21.41% in the trading segment; and an increase in options

settlement with a CAGR (2010-2014) of 1% for clearing activities; in 2014 options settlement

registered an increase of 48.5%. Besides, revenues were boosted in 2014 by an increase on values in

custody and the sale of information with a 22.8% and 162.4% respectively (Figure 11).

In the OTC segment, total revenue has shown a positive performance with a CAGR (2010-2014) of

12.6%, driven by the growth in volume traded with a 5-year CAGR of 6.3%. Volume traded has been

boosted by the increase in both the settlement operations segment with a CAGR (2010-2014) of 20.9%

and the SET TD (overnight) segment with a CAGR (2010-2014) of 13.4% attributed to higher valuation

in bonds and interest rate swaps, and a stronger US Dollar. Volume show a sharp decline in 2014

explained by the reduction of trading in certain instruments as forwards, SIPO (Sistema de Información

y Posturas) and Swaps, even though this decrease in Mexico activity was offset by trading in SIF ICAP

offices in New York, which revenues are reflected in SIF ICAP Mexico. (Figure 12)

Custody, Clearing and Settlement

Indeval volume of settled securities has been growing with a CAGR (2010-2014) of 9.1%, driven by a

good performance in equity transactions with CAGR (2010-2014) of 12.1%, debt transactions with a

CAGR (2010-2014) of 9.3%, and financial institutions’ securities transactions with a CAGR (2010-

2014) of 8%. (Figure 13). Driven by operated amount in the equity and fixed income markets, with a

decreasing trend in 2014 for the equity segment. The sharp decline for 2014 operated amount is

explained by a slower pace in debt and equity new listings, and the stock repurchasing for Grupo

Modelo.

CCV operations performance has shown a mixed trend in operated amount (Mn MXN) from 2011 to

2014 (Figure 14). The operated amount from transactions in BMV has had a CAGR (2010-2014) of

4.2%, while clearing and settlement amounts have had a CAGR (2010-2014) of 2.6% and 5.9%, mainly

due to a decrease in operated amount in 2014 with -17% and -10% for national and SIC markets

respectively, given an extraordinary increasing registered in 2013 because of the stock repurchasing

for Grupo Modelo; and in addition to the pressure on valuations from a fall in oil prices and a stronger

US dollar, adjoined to the poor economic growth expectations in Mexico in terms of GDP; as well as

to the increased probability of interest rates rise in the United States, as we mentioned previously.

Figure 11. Derivatives Segment Operations


Figure 12. SIF-ICAP Operations


Figure 13. Indeval Operated Amounts Growth


Figure 14. CCV Operated Amounts Growth


-60%

-40%

-20%

0%

20%

40%

60%

80%

-

50

100

150

200

250

2012 2013 2014 2015E 2016E

MX

N M

n

Total Revenue

Futures Contracts Growth

Options Conctracts Growth

-25%

-15%

-5%

5%

15%

25%

35%

-

100

200

300

400

500

600

2012 2013 2014 2015E 2016E

MX

N M

n

Total Revenue

Growth Volume Traded

-10%

10%

30%

50%

2012 2013 2014 2015E 2016E

Equity Debt Financial

-35%

-25%

-15%

-5%

5%

15%

25%

35%

45%

2012 2013 2014 2015E 2016E

Transactions of BMV

Clearing

Settlement

5

Ownership and Corporate Governance

BOLSA’s corporate governance practices are based on Mexican legislation, according to 2014 annual

report, the company complies with the Mexican Securities Law and completely adheres to the

principles of the Mexican Code of Best Corporate Practices, sponsored by the Consejo Coordinador

Empresarial (CCE). In this way, Board of Directors consists of 15 members, of which 8 of them are

considered independent (Figure 16). Besides, audit committee is formed by independent members only,

as it is the corporate practices committee.

As we can see in Figure 15, the executive team is formed by professionals with a long career in the

Mexican financial industry. At the beginning of 2015 after Luis Tellez departure, BOLSA incorporated

Jose Oriol Bosch as it new CEO, as well as it named both Roberto Gonzalez Barrera Director of

Custody, Clearing and Settlement, and Aida Andrade Ancira Director of Internal Audit. Based on

financial markets conditions and in the anticipation of a new participant in Mexico, we expect the new

head of the company be able to develop a sound strategy to remain competitive and push forward

market development, especially on derivatives segment, where the company has remained lagged as

new regulation has changed market conditions and market participants are able to move to international

market to fulfill its needs.

BOLSA’s outstanding equity capital is composed of common shares only, entitling holders to one vote

per share. In terms of ownership (Figure 17), the principal shareholder is a trust (The Control Trust),

consisting of Mexican brokerage firms, which as of 3Q15 controlled 36% of BOLSA’s equity.

However, the Control Trust’s ownership stake has been declining over time, as prior to BOLSA’s IPO

in 2008, Mexican brokerage firms controlled 100% of shares, and immediately after the IPO, their

ownership stake fell to 63%; gradually falling to 36% since then.

Furthermore, there are certain restrictions set by Mexican Securities Law where no person or group of

persons may directly or indirectly acquire more than 10% of BOLSA’s shares without the prior

authorization of the Mexican Secretary of Finance (SHCP). Nevertheless, under BOLSA’s bylaws, no

person or group of persons may directly or indirectly acquire 5% or more of BOLSA’s equity stake

without the approval of its Board of Directors and shareholders.

Figure 15. BOLSA Executive Team

Name Position Years at

BOLSA Profile

Jose Oriol Bosch Par CEO 0

CEO since January 1st 2015. Former JP Morgan Corporate Executive for 22 years. Part of the

executive committee at Asociación Mexicana de Intermediarios Bursátiles (AMIB). Holds a B.A.

in Administration and Finance from Universidad Panamericana.

Pedro M. Zorrilla Velasco Institutional Relations

and Corporate Services 12

Executive at Asociación de Bancos de México from 1995 to 2001. Holds a B.A. in Economics and

a Master in Public Administration from Harvard.

Aida Andrade Ancira Internal Audit N/A N/A

Pedro Diez Sánchez Markets and Information 18

BOLSA’s executive since 1997. Director of Market Surveillance since 2005 in BMV. Holds a

B.A. in Business Administration from ITESM and other Diplomas in Strategic Direction and

Market Abuse and Insider Dealing from The University of Reading and IPADE.

Roberto González Barrera Custody, Clearing and

Settlement 0

Director since January 1st 2015. Has performed in the financial sector for 22 years, participating in

BBVA, ING-Barings and Banamex Citi. Server as proprietary director in Indeval and CCV

Boards. Holds a B.A. in Business Administration from Universidad Iberoamericana.

Luis Carballo Arevalo Technology 9

Executive since 2006. Former Director of Systems Development. Holds a B.S. in Electronic

Engineering from Universidad Autonoma Metropolitana and a Master in Technology

Administration from ITAM.

José Manuel Allende

Zubiri

Strategic Planning and

Development 15

BOLSA’s executive since 2000. Former CEO of Valmer from 2011 to 2012. Former Director of

Issuers and Business Development. Holds a B.A. Business Administration from Universidad

Iberoamericana and a Master in Finance from Universidad Anahuac.


Figure 16. BOLSA Board of Directors

Jaime Ruíz Sacristan (Chairman)

Luis Robles Miaja

Alonso Garcia Tames

Ernesto Ortega Arellano

Rafael MacGregor Anciola

Carlos Hank González

Carlos Rojo Macedo

Independent Directors

Francisco Gil Díaz

Alfonso González Migoya

Ricardo Gutiérrez Muñoz

Alberto Navarro Rodríguez

John Pietrowicz

Fernando Ruiz Sahagún

Alberto Torrado Martínez

Claudio X. González Laporte


Figure 17. BOLSA Ownership Structure as 3Q15


Control

Trust, 36%

Float,

64%

6

SWOT Analysis

Industry Overview

Equity Market

Revenues from national cash equities trading represented the 18% of BOLSA’s total revenues in

2014, decreasing 11% from 2013. While there was an increase of 11.4% in the number of transactions,

the operated amount decreased 17%, this was mainly due to a slowdown in trading volumes especially

in January and February, due to a weaker market and global economy. Nevertheless at 3Q15 there

was an increase of revenues from cash equities trading amounted by a 6.3% when compared to 3Q14,

with an accumulated value of MXN 322 million. The growth of the volume of equity trading has had

a CAGR (2010-2014) of 26.0%. Most of the 50% trades are from issuers like Amx L, Walmex V,

Gfnorte O, Cemex CPO, Alfa A, Gmexico B, Femsa UBD, and Funo 11.

Mexico’s market capitalization still has a widespread opportunity for growth (Figure 19). Listed

market capitalization as a percentage of GDP was 35.5% at year-end 2014, a little higher than the

Brazilian market with 33.82%. BOLSA’s ranking is almost one third with respect to the World index,

and one quarter with respect to the United States.

Strengths Opportunities

It is the only exchange market in the Mexican Financial

System.

Vertical Integration and diversified services.

Strategic alliances to increase market share (i.e. SIC,

ICAP, MILA, CME).

Innovation and diversified financial products.

It is a member of the IPC Sustentable Index.

Maintains information and trading system based on edge

technology.

Development of equity market through new national

listings.

Increasing global presence through new alliances with

international exchanges (e.g. CME).

Development of derivatives market by adding more

contracts on commodities.

Low financial culture among Mexico population.

Increased number of online trading platforms and brokerage

services for retail investors.

Weaknesses Threats

Low number of national equity listings compared to other

emerging markets.

Low level of market cap to GDP ratio compared to others

Latin America markets.

Late adoption of international regulatory framework for

derivatives market.

Reduction in Mexder trading activity.

IPC Index exit.

Personnel reduction of 8% could harm quality of service.

There is not a clear strategy for Derivatives segment

improvement.

Potential interest rates rising from Federal Reserve (FED)

implying weak performance in the fixed-income market.

Mexico’s unstable macroeconomic environment and

changing tax legislation.

There is a high dependence on new regulation from SHCP

and CNBV.

Highly global macroeconomic uncertainty given volatility

in commodities prices, weak GDP growth and unstable

geopolitical environment.

Increased competition, given that there is proposal for a

new stock exchange pending for approval.

Figure 19. Market Cap to GDP Ratio 2014

Source: Bloomberg

Figure 20. Equity Turnover Velocity 2014

Source: Bloomberg

146%137%114%

90% 85%

52% 52% 49%36% 34%

0%

50%

100%

150%

Figure 18. BOLSA’s SWOT

7

Total operated amount in 2014 in Mexico as a percentage of the listed market cap is almost 28%,

being lower than Brazil, which is almost 72%. Notwithstanding, the tax reform in 2014 which set a

10% income tax on shares capital gains and received dividends, and also limited deductions on

employees’ benefits such as saving funds, could affect the volume and amount of transactions.

Although, it has also been established that those individual contributions to retirement funds are tax-

deductible, which motivates saving and can offset the effect of the restrictions mentioned above.

Since 2010, the Mexican Asset Under Management (AUM) industry has grown by a 5-year CAGR

of 24%, which is expected to continue in 2015 in accordance with the actual trend, even after the

global crisis that has occurred in recent months in the Chinese stock market. The AUM are distributed

among development banking, commercial banking, insurance companies, mutual funds, pension

funds and brokerage firms (Figure 22). Most of these assets are concentrated in banking by 31.34%.

The growth of investment at the Public Pension Funds (Afores) has had a 5-year CAGR of 11.4%,

with a registered increase of 15% in the last year.

According to the ranking of AUM, in 2014 the pension funds sector is the second in size with 29.84%.

The structure of the Afores is divided into sub-groups called Siefores (SB), depending on the

participant age and the social security institution future retirees belong to (IMSS and ISSSTE). The

SB1 is for people 60 and older, the percentage of accounts in this range is 7.2%, the SB2 is for people

between 46 to 59 years old with a range of 19.4%, the SB3 considers the age 37 to 45 years old, with

25% of the accounts, and SB4 includes people 36 and younger with almost a half of the assets 48.4%.

Each of these SB invests in six different asset class, as seen in Figure 23 most of AUM are invested

in national fixed income securities (FI Mx), mainly sovereigns, given that this wealth comes from

current or future retirees. Meanwhile, the SB4 which corresponds to youngest workers, must hold at

least 30% of AUM invested in low-volatility securities such as national fixed income, and the

remaining can be invested among higher-volatility instruments, which will bring higher return,

allowing it to include national and international equity, and structured instruments. In general in the

last five years it has gradually increased investment in AFORES, while the SB1 registered a CAGR

(2010-2014) of 4.6%, the SB2 being the biggest growing with a CAGR (2010-2014) of 24.5%, SB3

of 15.3% and SB4 of 14.1% Figure 24.

As we can see in Figure 21, for the last 9 years the increase in brokerage accounts has been stable.

By 3Q2015 the number of national accounts ascends to 209,524, that’s a 4% increase compared to

2014, with a 9-year CAGR of 1.7%. On the other hand foreign accounts ascends to 11,059 by 3Q15,

slightly above to last year with an increase 0.21% from 2014, and a 9-year CAGR of 10.22%. This

slower pace in new account from foreign investors, moves accordingly to the decrease in market

capitalization in Mexico and in Latin America, attached to market turmoil in Asia, and the changes

expected from US monetary policy.

International capital flows among regions can be seen in Figure 25, as measured by market

capitalization. The regions with the lowest 5-year CAGR have been Latin America and Europe-

Africa- Middle East (EMEA) with a -3.28% and 2.9% respectively; this have been given by poor

economic performance, driven by the drop in oil prices and a reduction in domestic demand. Brazil,

which represented 50% of Latam market cap has been the country with the largest drop with a 5-year

CAGR of -8.80%, followed by Chile, Colombia and Peru; Mexico has shown a 5-year CAGR of

6.41%. On the other hand, among the regions with the highest growth in market cap are the US &

Canada, and China & Hong Kong, with a 5-year CAGR of 11.15% and 9.46% respectively.

Furthermore, on an YTD basis there have been a generalized reduction in market cap of -5.5%

worldwide, where only China & HK have had a positive performance of 3.9%.

Figure 21. Mexico’s Brokerage Accounts Evolution

Source: CNBV

Figure 22. Mexican AUM Breakdown 2014

Source: Banxico, CNBV, CONSAR

Figure 23. Afores AUM Breakdown 2014

Source: CONSAR

Figure 24. Afores AUM Evolution (MXN million)

Source: CONSAR

0

2,000

4,000

6,000

8,000

10,000

12,000

170,000

180,000

190,000

200,000

210,000

220,000

ene.

-07

ene.

-08

ene.

-09

ene.

-10

ene.

-11

ene.

-12

ene.

-13

ene.

-14

ene.

-15

Fore

igners

Nat

ional

s

Nationals Foreigners

1.03 2.6827.8

0.9

2.465.1

5.43 14.35

20.5

5.4

1.0

53.36.61 17.35

19.36.7

1.1

48.8

8.62 20.4817.8 6.1

0.7

46.1

3.8 11.4 16.5 1.5 0.066.8

Equity Mx Equity Intl FI Mx Structured FI Intl FI Gov

SB1 SB2 SB3 SB4 Sad

0

200,000

400,000

600,000

800,000

1,000,000

2010 2011 2012 2013 2014

SB1 SB2 SB3 SB4

Banking

(Commerci

al and

Developme

nt) 31.34%

Pension Funds

29.84%

Mutual

Funds

23.13%

Insurance

Companies

7.30%

Brokerage

4.21%

SOFOMES

4.17%

8

BOLSA’s instrument diversification has brought Certificados de Capital de Desarrollo (CKD’s),

launched in 2009, which are securities’ trusts intended to finance projects through the acquisition of

equity in sponsored enterprises, mainly in sectors like infrastructure, real estate, mining, and

technology development. During 2015 there have been 11 new listings with an amount placed of MXN

10,099 million. Besides, Fideicomisos de Infraestructura y Bienes Raíces (FIBRA’s), which were

launched in 2010, are securities issued by trusts dedicated to the construction, leasing, buying and

selling of real estate properties. During this year, there has been 1 new Fibra listing, with an amount

placed of MXN 1,501 million. Additionally, there is an expectation for strong growth in energy and

infrastructure sectors given structural reforms made in 2012 and 2013, so Fibra E, a new instrument

created for energy and infrastructure projects announced in 2015, could have a good performance with

its first listings during 2016.

Fixed Income Market

Value of bond trading in Latin America has showed a 5-year CAGR of -11.27%, among leading

countries are Argentina, Peru and Mexico with 5-year CAGR of 20.80%, 5.77% and 12.68%

respectively; on the other hand Brazil and Colombia have had a poor performance with 5-year CAGR

of -20.66 and -15.64%. Mexico’s fixed-income registration is well distributed among different issuers,

including Federal Government entities 21%, private sector 49%, financial institutions 10%, and

mortgage backed securities 12% Figure 26. Volume traded has shown a CAGR (2011-2014) of 13% in

the Mexican Exchange.

Growth in debt issued amounts has shown an upward trend with a CAGR (2011-2014) of 6.52% for

medium and long-term maturity instruments. For short-term maturity instruments, the Mexican market

has shown a downward trend with a CAGR (2011-2014) of -9.65 (Figure 28), we consider this can be

due to an expectation of interest rates rising, which restrains issuers from long-term financing. On the

other hand, in the period of 2011-2014 an average of 792 short-term fixed income securities have been

listed in the Mexican Exchange on an annual basis, while an average of 136 long-term securities have

been listed.

Market growth potential can be measured by comparing the corporate debt to GDP ratio (Figure 27),

which in the case of Mexico (16%) is very low as compared to another Latin America markets such as

Chile and Brazil. There is a notorious gap between Mexico and developed countries, when comparing

the ratio of 81% in the case of France with Mexico 16%, there is a perception of an extraordinary upside

potential remaining, although increasing debt amounts should move according to economic growth.

According to Business Monitor International research, Mexico’s exposure to episodes of broad capital

outflows across emerging markets has risen in recent years, mainly through a greater share of foreign

ownership of peso-denominated government debt, which increased from 10% in 2009 to more than

35% to the beginning of 2015 (Figure 29). Low yields in the US following monetary easing in reaction

to global financial crisis encouraged investors to seek higher yield in other markets, including Mexico.

A narrower interest rate differential between Mexico and the US would threaten to accelerate capital

outflows and drive further sell-off of the Mexican peso, which Mexico’s central bank (Banxico) is

trying to minimize. Mexican interest rate futures contracts (TIIE) have broadly adjusted higher as it

becomes widely expected that Banxico will commence monetary tightening soon after the FED, with

an expected interest rate rise (TIIE) of 75 bps.

Derivatives Market

Total volume traded as measured by number of contracts has shown a downward trend, with a negative

CAGR (2011-2014) of -13.84% (Figure 30). Broken down into futures and options contracts, the

CAGR (2011-2014) for futures contracts has shown a negative trend with -14.18%. For options

contracts there is a total different story, showing an upward trend with a CAGR (2011-2014) of 13.84%,

driven mainly by FX contracts in 2014. Exchange-traded derivatives contracts for MXN ranks in 10th

Figure 25. Market Cap 5-year CAGR.

Source: WFE

Figure 26. Fixed Income Registration Breakdown (2014)


Figure 27. Corporate Bonds as % of GDP (2014)

Source: BIS, World Bank & SIFMA

Figure 28. Debt Amount Raised (Mn MXN)


9.84%11.15%

-3.28%

7.58%

9.46%

4.38%

2.90%

7.56%

Am

eric

as

US

& C

A

Lat

am

Asi

a

Chin

a &

HK

Japan

EM

EA

WF

E T

ota

l

Local and

Municipal

7%

Federal

Government

Entities

21%

Private

Sector

49%

Financials

10%

Mortgage

12%

Others

1%

6%16% 18% 19%

30% 31% 37%43%

69%81%

222,215 236,384

280,202 268,590

314,637

404,453352,844

232,051

2011 2012 2013 2014

Medium & Long Term Short Term

CAGR 11-14: 6.52% CAGR 11-14: -9.65%

9

position worldwide year-to-date, with an accumulated notional trading amount of USD 10,527 Million,

and the second place in Latin America just behind Brazil.

Comparing Mexico to global markets in Figures 31 and 32 (data from 58 countries compiled by the

WFE), historically Mexico has had a strong dependence to TIIE contracts, although in 2014 FX

contracts had a unprecedented growth which can be attached to Mexican peso volatility and

depreciation against US dollar in 2014. We believe the development of equities market should increase

the demand for single stocks and indices contracts in the foreseeable future, making the Mexican

market a healthier one. There is also a potential development for commodities market, where actually

only futures contract for yellow corn are listed.

The Dodd-Frank Act, which originated in the US and requires OTC contracts to go through a clearing

house, has centralized a large proportion of interest rate derivatives and credit default swap (CDS)

index in the US, with 76.5% of average daily notional volume cleared over the 2014 for interest rate

derivatives, according to the ISDA. The volume of cleared trades is likely to increase over time as

clearing houses expand their product offerings and clearing mandates come into force in other

jurisdictions. However, certain OTC derivatives contracts are likely to remain outside of clearing, given

its importance to risk management strategies among commercial end users.

Mexican derivatives market has been late in the adoption of a regulatory framework that addresses the

regulatory guidelines set by the Dodd-Frank Act, the impact of this can be seen in the downward trend

shown in volume traded since 2012, due to the European financial crisis in 2011 and stronger

competence. According to the company’s investor relations personnel, this regulatory issue will be

aligned during 2016 expecting an increase in Asigna’s cleared transactions from standardized OTC

operations. The implementation of other changes in the regulation regarding the USD Future Contracts

could bring more volume to Mexder.

Competitive Position

Overall, the national sector presents a favorable condition for long-term profitability and cash flow

generation (Figure 33). Degree of rivalry, threat of substitutes and threat of new entrants is low, as long

as Mexican legislation doesn’t change and the authorization of a new entrant is granted from Mexican

Secretary of Finance (SHCP). Buyer and supplier negotiating power is moderate, given that brokerage

firms are shareholders of BOLSA which allows them to maintain trading fees within budget, and given

that suppliers of technology can influence prices as this is the main resource for the market to operate,

respectively.

BOLSA’s main competitive advantage is its position as the only authorized securities exchange market

in Mexico. Despite of this condition, the company operates in a global competitive industry, where

consolidation is a growing trend among competitors. Product innovation and technology are the main

differentiators among global competitors, where the struggle is aimed to satisfy the preferences and

needs of investors and financial institutions. Despite of its technological lead, the number of equity

listed issuers has not had any significance increase in the last years, which remains very low in

comparison to other Latin America markets such as Brazil and Chile.

Furthermore, another competitive differentiator of BOLSA is its vertically integrated business model.

This allows the company to offer a widely variety of financial products for investors and financial

institutions, from stocks to CKD’s and FIBRA’s. Furthermore, its clearing and settlement business unit,

allows it to be independent from an outside provider, and also allows it to improve profit margins and

reduce costs from synergies.

Notwithstanding, there is a request pending for authorization from SHCP for the development of a new

exchange market in Mexico. Central de Corretajes (Cencor) aims to create Bolsa Institucional de

Valores (BIVA), which would seek the listing of equities from medium- to large-size companies. The

new exchange would implement the NASDAQ X-stream trading platform, which is the most used

Figure 29. Government Debt Ownership (Bn MXN)


Figure 30. Historical Derivatives Volume Traded


Figure 31. Mexder Derivatives Breakdown 2014

Source: Company Reports Figure 32. Global Derivatives Breakdown 2014

Source: WFE

2,3982,721 2,730

3,1343,458

595973

1,571

1,8312,119

0%

20%

40%

60%

80%

100%

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

2010 2011 2012 2013 2014Nationals Foreigns

National Gr Foreigns Gr

-

5,000

10,000

15,000

20,000

25,000

-

50,000

100,000

150,000

200,000

250,000

2007 2008 2009 2010 2011 2012 2013 2014

Volume Notional Value

Th contracts Mn MXN

Interest

Rate

27%

Stock

Index

3%

FX

70%

Interest

Rate

16%

Single

Stock

23%

Stock Index

27%

ETF's

7%

Commo

dities

18%

FX

9%

10

market system in the world. Increased competition would bring benefits for markets participants, such

as reduced transaction costs, higher liquidity, technological innovation and higher market continuity.

Relative to its peers, BOLSA remains overvalued in terms of P/E, EV/EBITDA and P/B multiples,

where is above worldwide median, and the Latin American region, with a relatively low ttm EBITDA.

However, BOLSA’s dividend yield has remained above its peers with a 4.13% in the last twelve

months, which makes it an attractive security for investors. Figure 34.

Economic Outlook

Mexico’s GDP expanded by 2.4% in the third quarter of 2015, marking the tenth consecutive quarter

in which growth has fallen below the 3% mark, driving analysts’ estimates down to 2.3% growth for

2015 and 2.8% in 2016 (Figure 36). Industrial activity has been restrained by a decline in commodities

prices, especially in oil and gas sector; industrial production is expected to grow by 2.9% in 2016.

According to The Economist Intelligence Unit (EIU), in the long term, full implementation of the

structural reforms could eliminate some competitiveness bottlenecks and raise productivity; adding 1-

2 percentage points to annual GDP growth, pushing the structural growth rate from its current level of

3-3.5% to around 4-5% by 2019.

Annual inflation recorded another historic low in September (2.5%), driven by falls in global energy

prices and local communication costs. Inflation is likely to remain low in the latter part of 2015,

expected at 2.7% and 3.6% in 2016. Although it is likely that some imported inflation will become

Figure 33. Porter’s Competitive Forces

Source: Team Analysis

Figure 36. Real GDP vs Inflation

Source: INEGI, EIU, Team Analysis

Figure 35. Americas’ Listed Companies by Exchange

Source: WFE

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

4.5%

5.0%

Real GDP Inflation

68 362

101 308

74 263 147

2,786 2,464

3,762

Figure 34. BOLSA’s Peers

Source. Bloomberg

Tic ke r &

Exc h a n g e

Mkt Ca p

(US D Mn )P /E

EV /

EB ITDA

EP S g r

(%)

EB ITDA ttm

(US D Mn )

ROE

(%)

P /

B V

Dvd Yld

TTM (%)

De v e lo p e d Co u n trie s E x c h a n g e s

J ap an Exch an g e Grou p In c 8697 J P 8,754 26.1 12.5 56.6 606 15.6 4.4 2.0

Cb oe Hold in g s In c CBOE US 5,923 29.8 13.4 42.1 376 70.5 24.0 1.2

Nas d aq In c NDAQ US 9,600 18.4 13.1 13.7 783 6.9 1.7 1.1

In tercon tin en tal Exch an g e In c ICE US 28,479 23.5 13.7 45.8 2,097 7.9 2.3 1.2

Cm e Grou p In c CME US 32,447 25.1 14.4 23.0 2,219 5.4 1.5 4.1

Eu ron ext Nv ENX FP 3,423 27.2 10.3 -4.0 240 41.1 9.4 1.8

Bols as Y Mercad os Es p añoles BME S M 2,872 15.4 8.7 6.3 288 40.7 6.1 5.9

Lon d on S tock Exch an g e Grou p LS E LN 13,762 69.0 23.1 -22.4 623 6.1 3.6 0.9

Tm x Grou p Ltd X CN 1,883 15.9 10.0 -8.2 269 3.5 0.8 3.5

Deu ts ch e Boers e Ag DB1 GR 16,440 18.8 14.0 11.1 1,345 23.6 4.4 2.6

E m e rg in g Ma rke ts E x c h a n g e s

Mos cow Exch an g e Micex-Rts P j MOEX RM 3,267 13.0 NA 71.6 152 18.6 2.29 4.1

S in g ap ore Exch an g e Ltd S GX S P 5,814 22.0 13.5 27.4 365 36.7 9.60 3.8

Hon g Kon g Exch an g es & Clear 388 HK 32,744 31.2 10.3 77.3 1,063 24.8 8.92 2.5

Mu lti Com m od ity Exch In d ia MCX IN 659 34.6 50.2 -17.9 14 9.9 3.14 1.2

J s e Ltd J S E S J 811 15.8 11.2 24.7 74 27.2 4.58 3.6

La tin Am e ric a Ma rke ts

Bols a Mexican a De Valores S a BOLS AA MM 936 29.0 14.3 5.2 67 9.1 2.88 4.2

Bols a De Valores De Colom b ia BVC CB 101 11.3 8.4 76.3 20 25.8 2.86 5.4

Bols a De Valores De Lim a-A BVLAC1 P E 141 39.1 41.0 -0.3 6 15.9 6.02 2.5

Bols a De Valores De Valp arai VALORES CI 1 NA 107.6 -58.1 0 -8.0 0.77 NA

Bm &Fb oves p a S a BVMF3 BZ 5,875 7.6 2.3 764.3 1,318 5.1 1.10 4.5

T o ta l Me d ia n 189,274 21.6 13.2 11.1 269.2 15.6 2.9 4.0

De v e lo p e d Co u n trie s Me d ia n 129,559.0 21.1 12.5 8.7 412.9 13.5 2.9 3.0

E m e rg in g Ma rke ts Me d ia n 52,660.8 21.6 13.5 26.1 144.1 21.7 3.9 4.0

La tin Am e ric a Me d ia n 7,054.6 20.2 14.3 5.2 19.5 9.1 2.9 4.3

11

evident given the peso's ongoing depreciation, according to EIU in the longer term, an increase in spare

capacity and a restrained increase in real wages will prevent domestic demand growth from exerting

significant pressures on prices.

The MXN/USD rate has been pushed above MXN$17 in the 3Q15 contributed by market turbulence

from the Chinese stock market crisis in late August, but it has strengthened slightly since then,

averaging MXN$16.8 in the first three weeks of September. Anticipated tightening by the FED later

this year, along with sluggish domestic growth will be the main drivers of further peso weakening in

the short term. Furthermore, Banxico’s monetary declared reaction to FED policy sets an expected rise

in Mexico’s overnight rate of 25 bp by the end of 2015. (Figure 37)

Foreign portfolio investment contracted by an annual 74% in the second quarter of the year, registering

an accumulated level for 2015 of 4,067 USD million. Investment flows have shown a recovery trend

for this year, attributed to a recovery of investors’ confidence in emerging markets given negative

interest rates in Eurozone, Japan and India. According to Banxico, 77% of investment was aimed to

fixed income market, leaded by Bono M from the Federal Government; while the remaining 23% was

directed to the stock market.

Investment Thesis

Market Growth Potential

Mexico’s market capitalization still has a widespread opportunity for growth in comparison to other

emerging markets. On the debt market, growth potential exists as comparing the corporate debt to GDP

ratio which in the case of Mexico is very low when compared to other Latin America markets such as

Chile and Brazil. There is a notorious gap between Mexico and developed countries, which represents

an extraordinary upside potential remaining, although increasing debt amounts should move according

to economic growth. Furthermore, we believe the development of equities market should increase the

demand for single stocks and indices futures contracts; additionally there is also a potential

development for commodities market.

Vertical Integration

It offers a vertical integrated business model through which it offers a widely-range of services for

investors’ needs and financial market development. This creates value for market participants, which

can be translated into to cash flow generation for the company. It also serves as a natural hedge when

there is difficult times in one of its business segments, related to different broad asset-classes.

Product Diversification

BOLSA has a widely diversified product offering for issuers and investors, launching new instruments

for issuers funding needs, such as CKD’s and FIBRA’s. It has also worked through the development

of international agreements and cross-markets relations such as CME and MILA.

Steady Profitability

BOLSA has had a significant increase in cash in recent years, which has been mainly due to operating

activities. We expect an estimated CAGR of 7.25% for consolidated revenue and an operating margin

of 45.4% in long run. Furthermore, EBITDA margin is expected to stay in a long-term level of around

47.10%. We have seen a strong effort in expenses constraint and a low proportion of debt on its capital

structure as compared to its peers.

Figure 37. Foreign Portfolio Investment & Exchange Rate

Source: Banxico & Team Analysis

Figure 38. Historical Revenue Growth by Segment

Source: Company Reports and Team Analysis

56,517

21,030

27,896 24,378

25,948 27,619

11

12

13

14

15

16

17

20,000

25,000

30,000

35,000

40,000

45,000

50,000

55,000

60,000

2010 2011 2012 2013 2014 2015E

MX

N M

n

Foreign Portfolio Investment MXN/USD

-15.0%

-10.0%

-5.0%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

2012 2013 2014 2015E 2016E

Listing Trading

Post-Trading Information

Total Revenue

12

Financial Analysis

Revenues

Trading activities, the most relevant segment which represents one third of BOLSA´s total revenue

(Figure 38), has grown with a 5-year CAGR of 22% and a 4% in the last year. About listing and

maintenance activities, representing 24% of total revenue, there has been a positive performance with

a 5-year CAGR of 42%, but has consecutively reduced its growth YoY. Notwithstanding, post-trading

activities, which represent 20% of total revenue is the business segment with the weakest results having

a 10% decrease from 2013 to 2014, but still having an overall growth with a 5-year CAGR of 13%; the

reduction in revenue provided by post-trading was offset with the consolidation of Indeval in 2014,

currently representing 4% of BOLSA´s revenue. However, information Services which represents 12%

of total revenue has had a steady 6 to 8% growth during the last five years (Figure 40).

During the next years we are expecting BOLSA achieves an increase in Asigna´s segment due to a

regulatory change in the derivatives market which will force clearing through a recognized clearing

house (Asigna) of OTC standardized operations. Since there will no longer be an advantage in using

other markets over MexDer, BOLSA expects for clients to prefer their platform and services. Besides,

another change given during 2014 with an expected ongoing effect, will be a greater representation of

Indeval in the total revenue due to an increase in custody fees. Additionally because the change in the

regulation for the USD futures contracts, it´s possible to see a recovery in volumes.

Margins – DuPont

BOLSA’s operating margin has been slightly increasing since a sharp decline in 2008, when it dropped

to a negative level of 15.8% due to a nonrecurring loss stemmed from the impairment on intangible

assets and goodwill; the five year average has been around the level of 37.5%, which is above the

36.2% registered from the industry median. There is a different story for net profit margin, which has

been decreasing in the last five years, with an average of 38.6%, which is above the industry median

of 23.5%, showing a strong competitiveness of the company relative to its international peers.

Furthermore, EBITDA margin has remain relatively constant through the last five years, with an

average of 41.6%, which is in relation with the industry median of 41.3%. During 2014 profitability

margins showed a reduction due to an increase in labor expenses, related to a reduction of 10% in the

employment base. (Figure 41.)

In terms of earnings power, five years’ ROE has been around 12.1 which is below the industry median

of 16.1%, showing a downward trend as seen in Figure 42. Decomposing this figure into its components

through the DuPont analysis we can notice its asset turnover has been increasing in the last five years,

with an average of 0.34x, above its industry median of 0.08x. The Financial Leverage has remained at

a five years’ average of 1.14, although in 2014 there was an increase reaching a level above average of

1.28, mainly because of the addition of a bank credit of $617.5MXN for the acquisition of remaining

Indeval’s shares. Despite of this increase in financial leverage, BOLSA remains highly conservative

compared to its international peers, which maintain a leverage of 6.92. Net profit margin has been the

main factor contributing to the decline of the ROE, in the last year the difference between ROE and net

profit margin has narrowed while leverage increased.

Balance Sheet

In this year BOLSA’s current assets have had an increase of 10% compared to the end of 2014. This

increase is the effect of net income, maintenance fees collected in advance and the dividends received.

The effect from the consolidation of Indeval has increased revenue of commissions and services, which

is therefore reflected in the increase of the non-current assets. In terms of liquidity, BOLSA is well

positioned with a 5-year average current ratio of 6.8x, above its industry mean of 1.12. On the other

hand, operational efficiency has showed good performance with receivables turnover of 4.72x average

in the last five years, above its industry mean of 1.6x. Furthermore, cash conversion cycle has

performed better compared to its industry mean with a 5-year average of 77.74 vs 112 days.

Figure 39. BOLSA’s Total Revenue


Figure 41. Historical Margins


Figure 40. Historical Revenue Breakdown


Figure 42. DuPont Analysis Components


2,098 2,275

2,434 2,680

2,840

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

-

500

1,000

1,500

2,000

2,500

3,000

2012 2013 2014 2015E 2016E

MX

N M

n

Total Revenue Growth YoY

-60%

-40%

-20%

0%

20%

40%

60%

80%

100%

EBITDA Margin Operating Margin Net Margin

Listing,

22.5%22.4% 22.1% 22.9%

Trading,

30.8%31.9% 31.9% 32.3%

Post-

Trading,

32.5%32.1% 30.0% 30.1%

Information,

10.9% 11.1% 12.6% 12.1%

2013 2014 2015E 2016E

0.2

0.4

0.6

0.8

1.0

1.2

1.4

-20%

-10%

0%

10%

20%

30%

40%

50%

60%

70%

Asset Turnover Financial Leverage

Net Margin ROE

13

In relation to its capital structure, we can say that it is a healthy company, BOLSA’s 5-year average

Debt to Equity ratio has been 12%, which is below its industry mean of 70%. It is considered that the

consolidation of INDEVAL helped the achievement of a healthier balance through tax benefits. Up to

3Q15 it maintains a negative Net-Debt-to-EBITDA, given the small proportion that represents its

current long-term debt which was acquired for the payment of Indeval’s remaining shares.

Cash Generation

BOLSA has had a significant increase in cash in recent years, according to Figure 43, this increase has

been mainly due to operating activities. Symmetry is observed in the behavior of the operating (CFO)

and investment activities (CFI), indicating that business performance is given by its natural operation.

The low level of debt is reflected in the corresponding financing activities cash flow (CFF), which has

remain negative in the last five years, due to dividends payments.

Moreover, taking a look at the historical behavior of its free cash flow, it has had a considerable unstable

behavior in the last five years, although it has achieved a CAGR of 7.18% in this period.

Notwithstanding, in the last two years, it has registered positive performance with YoY growth of

75.77% and 7.10% respectively, derived from an increase in cash flow from operating activities; in

2014 the increase in CFO was given by the registration of an unusual non-cash item of MXN 192.8

million derived from the recognition of intangible assets and goodwill impairment.

Summarizing, total assets have shown a 5-year CAGR of 3.91%, with cash and equivalents growing to

a faster pace of 4.86% annually. However, total liabilities have shown a sharp increase with a 5-year

CAGR of 39.84%, due to an increase of benefits to employees with a pace of 68.04% annually; and the

acquisition of long-term debt dedicated to the acquisition of Indeval’s shares in 2014. Furthermore,

total equity has remained stable in the same period with a 5-year CAGR of -0.06%, showing a positive

trend in retained earnings of 19.68% annually, which has been offset by a reduction in other

comprehensive income and the decrease of non-controlling interest, as Indeval’s shares have been

consolidated.

Estimates and Valuation

We are expecting an estimated CAGR of 7.47% for consolidated revenue, in the next 5-year period.

BOLSA’s segments with strongest growth will continue to be the OTC with an estimated 5-year

CAGR of 10.61%, Issuers Fees with an estimated CAGR of 9.80%, and Custody with an estimated

CAGR of 7.74%. We expect the Cash Equities segment to remain a moderate growth pace, with an

estimated 5-year CAGR of 6.31%. On the other hand, we remain skeptical respective to Mexder given

a not clear strategy and a decrease in notional value, new regulation stemming from Dodd-Frank act,

could generate positive results, increasing trading volume in Mexder, but so far this has not been seen.

Although, we are weighting three different scenarios for derivatives revenue, one with a continued

negative trend, a second scenario with a flat or zero growth, and a third one with a slightly positive 5-

y CAGR of 3%.

In the case of operating margin, we estimate an improved margin of 47.3% by the end of 2015, higher

than last year margin of 40.6%, due to the containing in personnel expense. We expect a stabilized

long-term operating margin of 45.4%. Furthermore, EBITDA margin is expected to stay in a long-

term level of around 47.10%. In the case of financial comprehensive income, BOLSA’s excess cash is

generating a higher level of interest income than the recognized interest expense due to a low

proportion of debt in its capital structure. We are assuming excess cash can be invested at the 28 days

Certificados de la Tesorería (Cetes) rate, while cost of debt is assumed to stay in line with actual cost

of TIIE + 90 bp.

Figure 43. Historical Cash Flow (MXN Mn)


Rf (5y Mbono) 5.92%

Beta 1.00 Market Premium (MXN) 6.93%

Ke CAPM 12.83%

Kd 4.20% Tax Rate 30.2%

Weight Equity 84%

Weight Debt 16%

WACC 11.25%

Figure 44. WACC Estimation


Figure 45. Revenue Estimate (2015-2020) CAGR


(1,000.0)

(500.0)

0.0

500.0

1,000.0

1,500.0

2010 2011 2012 2013 2014 2015E 2016E

CFO CFI CFF

6.31%

0.63%

10.61%9.80%

7.74%

3.72%

-3.13%

7.47%

Equit

ies

Der

ivat

ives

OT

C

Issu

ers

Cu

sto

dy

Info

rmat

ion

Oth

ers

Tota

l

14

DCF Model

In our DCF model, we estimated BOLSA’s free cash flows each year up to 2020 and calculated

terminal value with a perpetuity growth rate of 7%. We estimated weighted average cost of capital

(WACC) at 11.25%. We used WACC as the discount rate and reached a present value of future

cash flows of $14,813 million and a 12-month target price of $32.11 per share.

The cost of equity of 12.83% was calculated using the CAPM. We used a 5-year Mexican

government bond rate of 5.92% as risk-free rate, and considered a market premium of 6.93% in

MXN. Beta of 1 was computed regressing BOLSA monthly returns with the Mexican Stock

Exchange (MEXBOL) monthly returns for the last three years, and levering it with a desired capital

structure. The cost of debt of 4.2% was calculated as the actual cost of debt in MXN. We gave a

75% weight to the DCF approach because we believe that a share value relies more on the

fundamentals and therefore is unbiased by a bullish or bearish market.

Figure 47. DCF Estimations.

Relative Valuation

BOLSA was compared to 11 developed countries exchanges, 3 emerging markets exchanges and 1 in

Latin America. Comparing BOLSA’s estimates to its competitors it is undervalued in relation to the

following multiples: P/E at 17.66 when the median of the industry is 19.30; P/S 5.74 while the industry

8.7; P/CF 16.42 and 19.2 of the industry; EV/EBITDA 10.06 and industry 12.40. Meanwhile, P/BV is

projected at 2.76 which is above the median of the industry at 1.6. EV/EBITDA has the biggest weight

in comparison to the other multiples. The target price for BOLSA is $30.80 per share with an upside

potential of 16.90%.

Investment Risks

Revenues

According to the 3Q15, 83% of revenues were generated by commissions from the trading of equities,

derivatives and OTC. This percentage may vary according to various factors such as the number of

operations, volume and value of securities, derivatives contracts available, the level of interest rates,

investor confidence as the economic conditions affects financial markets.

Competition

Currently, BOLSA faces hard market competition in different segments. For instance, OTC operations

are being traded now in banking institutions. Furthermore, there is the possibility of launching a new

company that provides similar services to those provided by BOLSA; the SHCP has received a proposal

for a new stock exchange, which will be called Institutional Exchange Securities (BIVA), and if it is

approved, will start operations in October 2016.

Strategy

According to last reported results, there is not a clear strategy for the derivatives segment. This can be

seen from the decrease in the trading volume of these financial instruments by 50.9% in 3Q15. Such

Figure 46. DCF Sensitivity Analysis


Figure 48. Valuation Football Field


Figure 49. Target Price Summary

DCF $ 32.11 75% $24.08

Relative Valuation $ 30.51 25% $7.63

Target Price MXN: $ 31.71

Market Price 25/11/15: $26.10

Upside Potential 21.51%

Dividend Yield 3.56%

Expected Return 25.07%


Figure 50. Investment Risks Assessment

PR

OB

AB

ILIT

Y HIGH

R2 R3

R8 R9

MEDIUM R5 R1 R6

LOW R7 R4

LOW MEDIUM HIGH

IMPACT

R1 Revenues R6 Legal Disputes

R2 Competition R7 Subsidiaries

R3 Strategy R8 Country's Economy

R4 Security R9

International

Economic Events

R5 Fiscal Legislation


### 9.8% 10.3% 10.8% 11.3% 11.8% 12.3% 12.8%

5.5% 27.3 26.8 26.3 25.8 25.3 24.9 24.4

6.0% 29.1 28.5 28.0 27.5 27.0 26.5 26.0

6.5% 31.3 30.7 30.1 29.6 29.0 28.5 27.9

7.0% 34.0 33.4 32.7 32.1 31.5 30.9 30.3

7.5% 37.5 36.8 36.0 35.3 34.7 34.0 33.4

8.0% 42.0 41.2 40.4 39.6 38.8 38.0 37.3

8.5% 48.2 47.2 46.3 45.3 44.4 43.6 42.7

WACC %

GR

OW

TH

%

$10.00 $30.00 $50.00

P/E

P/S

P/B

P/CF

EV/EBITDA

2011 2012 2013 2014 2015 E 2016 E 2017 E 2018 E 2019 E 2020 E

NOPLAT 768 700 767 868 914 940 1,007 1,084 1,144 1,250

Depreciation and amortization 32 46 56 57 63 47 50 54 56 61

Gross cash flow 800 746 824 926 976 987 1,057 1,138 1,200 1,312

Change in operating working capital - 12 9 (527) 152 (48) 216 50 37 65

Net Capital Expenditures 129 79 54 71 149 158 168 181 190 206

Gross investment 129 91 63 (456) 300 109 384 231 227 272

Free cash flow 671 655 761 1,382 676 877 673 907 973 1,040

Terminal Value 24,496

PV 676 789 544 659 636 14,988

15

decrease is the result of a drop in currency contracts (62.8% less in relation to 3Q14), a decrease of

100% in centrally cleared swaps, additionally to a decrease in TIIE contracts of 35.9%.

Information Security

Data protection is a key factor to maintaining customer trust and investors’ confidence. The

maintenance and well-functioning of information systems is essential for market development and

trading activity. Decrease in listing and trading activity would cause operating income and cash flow

generation to be affected.

Fiscal Legislation

At the end of 2014, it was expected a negative impact on trading volume due to a 10% tax imposed to

shareholders on capital gains; however, at 3Q15 trading volume has increased by 6.1% compared to

3Q14. Despite of this result, the negative impact from this new tax is affecting national retail investors,

which are a far minority compared to institutional investors. New tax impositions could be a threat to

trading volume.

Legal Disputes

In order to deal with reputation risk, the BMV has established a Law Suit policy/department. Reputation

risk includes customer dissatisfaction due to malfunction of systems, false information and problems

in operations to name but a few. All these factors impact on the general performance of BOLSA

profitability.

International Subsidiaries

The company bears some risk in its subsidiaries in Lima, Peru and Chile. These countries maintain a

different level of country risk stemming from political and macroeconomic conditions, which would

have a minimum impact on BOLSA’s profitability and cash generation ability given the minority share

on these subsidiaries.

Country Economy

Increase in BOLSA’s revenues depends on trading activity and new listings, which are related to

markets expectations of growth. Growth expectations for listed companies depend on drivers such as

tax laws, interest rates and GDP growth. As mentioned in the economic outlook section, Mexico’s

growth expectations have had a downward trend since 2014, and is expected to maintain a moderate

growth level of around 3% up to 2017.

International Economic Events

As of today there is an increased expectation for changes in the United States’ monetary policy. The

increase in interest rates by the FED would cause capital outflows from emerging markets as investors

will be seeking higher returns and lower risk. This could represent a decrease in trading activity for

BOLSA in 2016.

16

Appendix 1. Income Statement

Appendix 2. Balance Sheet

Appendix 3. Statement of Cash Flows

MXN Millions 2011 A 2012 A 2013 A 2014 A 2015 E 2016 E 2017 E 2018 E 2019 E 2020 E

REVENUES 1,982 2,098 2,275 2,434 2,680 2,866 3,053 3,283 3,452 3,750

Cash Equities 331 396 455 408 438 463 491 521 553 588

Derivatives 243 207 181 194 192 194 195 197 199 202

OTC (SIF Icap) 323 315 349 459 522 571 624 691 737 840

Issuers 412 473 513 545 591 650 715 787 866 954

Custody 384 420 456 499 528 571 617 667 721 780

Information Services 259 279 248 270 337 345 350 366 324 336

Others 29 10 73 61 93 72 61 54 51 50

EXPENSES 1,057 1,210 1,267 1,446 1,422 1,564 1,666 1,792 1,884 2,047

Personnel 577 677 700 788 820 870 927 997 1,048 1,139

Technology 147 191 178 226 251 246 262 282 297 322

Depreciation 32 46 56 57 63 47 50 54 56 61

Rent and Maintenance 57 54 54 57 55 70 74 80 84 91

Consulting Fees 133 136 146 190 124 183 195 210 221 240

CNBV Fees 21 23 23 24 27 30 32 34 36 39

Other 88 83 110 104 81 118 125 135 142 154

Operating Income 926 889 1,008 988 1,278 1,302 1,387 1,491 1,568 1,703

Comprehensive Financing Income 121 100 80 63 (31) (45) (56) (62) (71) (88)

Other income (expenses) 53 14 11 193 - - - - - -

Income before Taxes and Minority Interests 1,100 1,003 1,100 1,244 1,309 1,347 1,442 1,554 1,639 1,791

Taxes 296 79 286 309 395 407 436 469 495 541

Subsidiaries Results 1 1 4 6 7 6 6 6 6 6

Minority Interests (102) (12) (50) (55) (61) (65) (69) (74) (78) (85)

Discontinued Operation 38 (25) - - - - - - - -

Net Income 740 888 768 885 860 881 943 1,016 1,072 1,171

EBITDA 958 935 1,065 1,046 1,341 1,349 1,437 1,545 1,624 1,765


TOTAL ASSETS 6,220 5,942 6,072 6,954 7,568 7,938 8,083 8,307 8,685 9,149

Cash and Investments 2,202 2,023 2,092 2,282 2,584 2,800 2,781 2,821 3,024 3,269

Accounts Receivable 602 459 512 430 624 662 705 758 797 866

Current Assets 2,804 2,482 2,604 2,712 3,208 3,462 3,486 3,579 3,821 4,135

Other Account Receivables 45 49 37 4 43 46 49 52 55 60

Investment in Subsuduaries 11 11 19 14 16 18 18 18 18 18

Other investments 1,443 1,443 1,443 - - - - - - -

Long Term Investments 1,499 1,503 1,499 18 59 64 67 71 74 78

Fixed Assets 466 450 439 491 506 530 556 583 612 644

Intangibles Assets 1,404 1,457 1,464 3,417 3,488 3,575 3,667 3,766 3,871 3,985

Other Assets Long Term Assets 47 50 66 316 307 307 307 307 307 307

TOTAL LIABILITIES 440 329 341 1,358 1,692 1,858 1,785 1,774 1,904 2,097

Suppliers 101 59 48 31 72 80 85 91 96 104

Bank Loans 4 - - - 93 175 175 175 175 -

Other Interest Bearing Liabilities - 21 21 16 - - - - - -

Other non-interest Bearing Liabilities 335 209 252 686 649 649 649 649 649 649

Current Liabilities 440 289 321 733 814 903 734 740 745 753

Bank Loans - - - 618 792 699 524 350 175 -

Long Term Liabilities - 40 20 625 878 954 1,051 1,034 1,159 1,344

TOTAL EQUITY 5,780 5,613 5,731 5,596 5,876 6,080 6,298 6,533 6,781 7,052

Capital Stock 4,583 4,506 4,506 4,506 4,507 4,507 4,507 4,507 4,507 4,507

Retained Earnings and Reserves 984 918 1,049 908 1,107 1,311 1,529 1,764 2,012 2,283

Minority Interest 213 189 176 182 262 262 262 262 262 262

TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY 6,220 5,942 6,072 6,954 7,568 7,938 8,083 8,307 8,685 9,149


OPERATING ACTIVITIES

INCOME BEFORE TAXES 740 960 1,026 813 1,309 1,347 1,442 1,554 1,639 1,791

Non-cash items 111 - 55.13 40.83 43.89 47.65 50.40 55.27

Cash Flow From Income Before Taxes 685 1,001 1,083 1,033 1,364 1,388 1,486 1,601 1,689 1,847

Flows Generated or Used in Operation 61 (458) (256) (13) (152) (237) (437) (425) (298) (320)

Net Cash Flow From Operating Activity 743 542 826 1,020 1,213 1,151 1,049 1,177 1,391 1,526

INVESTMENT ACTIVITIES

CAPEX - - - - (149) (158) (168) (181) (190) (206)

Net cash flow flom investment activities (257) 50 (47) (738) (149) (158) (168) (181) (190) (206)

Cash Flow Available For (Needed for Financing Activities) 486 593 779 282 1,064 994 881 996 1,201 1,320

FINANCING ACTIVITIES

Debt - - - - (93) (93) (175) (175) (175) (175)

Dividends Paid - - - - (661) (677) (725) (781) (824) (900)

Other Current Interest Bearing Arranged - - - - (8) (8) - - - -

Other Current Interest Bearing - - - - - - - - - -

Net cash flow flom financing activities (587) (772) (710) (93) (762) (778) (900) (956) (998) (1,075)

Net Increase (Decrease) in Cash (101) (179) 70 189 302 215 (19) 40 203 245

- - - - - - - - - -

CASH BALANCE AT BEGINNING OF PERIOD 1,479 2,202 2,023 2,092 2,282 2,584 2,800 2,781 2,821 3,024

CASH BALANCE AT END OF PERIOD 1,378 2,023 2,092 2,282 2,584 2,800 2,781 2,821 3,024 3,269

17

Appendix 4. Key Financial Ratios

Ratios 2011 A 2012 A 2013 A 2014 A 2015 E 2016 E 2017 E 2018 E 2019E 2020 E

Liquidity Measures

Cash Ratio 5.00 7.00 6.52 3.11 3.17 3.10 3.79 3.81 4.06 4.34

Working Capital Ratio 6.37 8.59 8.11 3.70 3.94 3.83 4.75 4.84 5.13 5.49

Productivity

Receivables Turnover 6.13 8.26 8.29 11.22 8.03 8.10 8.10 8.10 8.10 8.10

Total Asset Turnover 0.32 0.35 0.37 0.35 0.36 0.36 0.38 0.40 0.40 0.41

Suppliers Turnover 1.92 2.00 2.00 2.00 0.88 0.63 0.65 0.69 0.71 2.00

Financial Risk

Total Debt/Equity ratio 0.08 0.06 0.06 0.24 0.29 0.31 0.28 0.27 0.28 0.30

Total LT Debt/Equity Ratio 0.00 0.00 0.00 0.00 0.01 0.04 0.08 0.10 0.15 0.19

Total Debt Ratio 0.07 0.06 0.06 0.20 0.22 0.23 0.22 0.21 0.22 0.23

Interest Coverage Ratio 7.62 8.87 N/A 15.15 30.71 29.52 28.04 29.17 29.37 30.29

Cash Flow to Debt Ratio 1525.43 1991.45 2230.47 1017.46 696.22 777.12 548.91 750.44 729.67 774.04

Capitalization Ratio 0.00 0.00 0.00 0.10 0.14 0.16 0.16 0.16 0.16 0.16

Efficiency Ratio

Net Margin 37.32% 42.31% 33.76% 36.37% 31.84% 30.74% 30.90% 30.94% 31.04% 31.23%

OperativeMargin 46.70% 42.36% 44.32% 40.60% 47.34% 45.42% 45.42% 45.42% 45.42% 45.42%

EBITDA Margin 48.33% 44.53% 46.80% 42.96% 49.65% 47.06% 47.06% 47.06% 47.06% 47.06%

Profitability

Return on Assets (ROA) 11.90% 14.94% 12.65% 12.73% 11.36% 11.10% 11.67% 12.23% 12.34% 12.80%

Return on Equity (ROE) 12.80% 15.82% 13.40% 15.82% 14.63% 14.49% 14.98% 15.55% 15.80% 16.61%

18

The Latin America Burkenroad Reports from ITESM are financial analysis of companies listed in the

Mexican Stock Exchange, and capital budgeting of medium and small companies. They are elaborated by

students of both the Master in Finance program of EGADE Business School, and the Bachelor in Finance

and Accounting; under the supervition of recognized professors.

The Instituto Tecnológico y de Estudios Superiores de Monterrey (ITESM), Instituto de Estudios

Superiores de Administración de Venezuela (IESA), and Universidad de los Andes from Colombia, along

with Tulane University, started the Latin America Burkenroad Program with the support of Multilateral

Investment Fund of the Interamerican Development Bank in 2001. Actually it has been expanded to other

countries, to Guatemala by the Escuela Superior Politécnica Litoral, to Perú by the Universidad Catolica

de Perú, to Colombia by the EAFIT, ICESI, and the Universidad Del Norte, as well as Argentina by the

Universidad de Belgrano, and soon to Brazil and Chile.

This program enriches human capital by providing training in financial analysis and valuation techniques,

and also intends to facilitate access of companies to financing sources by providing financial information

to investors and financial institutions.

The reports prepared by this program, evaluate financial conditions and investment opportunities in Latin

American companies. Financial reports of listed companies are distributed to national and foreign investors

through publications and financial information systems such as Reuters, Infosel Financiero and Finsat,

among others. Investment capital budgeting reports are distributed only to beneficiary companies for future

private presentations to financial institutions or potential investors.

Investment plans and financial situation of the analyzed companies are presented to the financial

community in an Annual Meeting.

For more information about the Burkenroad Latin America Program please visit the following websites:

http://burkenroad.wix.com/pagina-hpstr www.latinburkenroad.com

María Concepción del Alto Ph.D.

[email protected]

Research Director

Burkenroad Reports, Mexico

Departamento Académico de Contabilidad y Finanzas

EGADE Business School

Tel +52 (81) 86256000 ext. 6050

http://burkenroad.wix.com/pagina-hpstr

http://www.latinburkenroad.com/

Recommendation: Market Outperformthis performance it has improved its position in comparison to generation. Company Overview Subsector: Stock Data 52-week range $22.81- $30.18 Enterprise

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