Brazilian Homebuilders

Transcription

1 Americas/Brazil Equity Research Homebuilding (Real Estate (South America)/Homebuilding & Building Products (South America)) Research Analysts Nicole Hirakawa Luis Stacchini Vanessa Quiroga, CFA Brazilian Homebuilders SECTOR REVIEW Let the Bad Times Roll We continue to find shelter in the lower-income. We maintain our Outperform rating for MRV, as fundamentals in the low-income segment remain favorable and MCMV III should be a tailwind. We are downgrading Direcional to Neutral for now while maintaining an Outperform recommendation for Even and Eztec - as value propositions seem very interesting, even in the current environment for middle-income. Of note, we believe exposure to middle-income segment is only recommended to longerterm oriented investors. We are downgrading Tecnisa and the brokers (Lopes and BBRK) to Underperform to be a very difficult year for middle-income builders. (i) CS affordability index points to less favorable dynamics and rent-vs-buy indicates rental vs. ownership at a sizable imbalance in SP and RJ; (ii) contraction in consumer confidence accelerated in 1Q15; (iii) negative housing price trends constitute a significant disincentive to buy and (iv) funding for mortgage loans should become scarcer in 2015 which could be a trigger for renting instead of buying. We expect our coverage sample launches and sales to decline by 33% and 28% yoy. Lower-income housing seems to be the only bright spot. Affordability index was at 142 by the end-2014, indicating a typical lower income household (mainly 2 nd bracket) could afford a typical home with a certain margin under the MCMV. Affordability figures are 40% and 90% higher relative to middle-income families living in SP and RJ. Down payment over income is below historical average and renting vs. ownership dynamics seem in equilibrium. We expect the calibration of MCMV III parameters to be beneficial for affordability and to potentially expand addressable market. Rent-vs-buy index points to imbalances in middle income, calling for some house price adjustment. Renting vs. ownership dynamics seem to be out of equilibrium in SP and RJ metropolitan regions. Renting benefits are becoming disproportionate; regardless of financial capability, a typical household would be able to live in an apartment at least 20% larger by renting. This, combined with lower consumer confidence and negative home pricing trends, constitute strong arguments for renting. Rent-vs-buy index in SP and RJ are significantly below historical average, as rent appreciation has not come close to home price hikes. Prices would have to decline and rents appreciate to restore rent-vsbuy balance. According to CSe, home prices in SP and RJ would have to contract by ~20% or rents increase by ~25% for the rent-vs-buy index to DISCLOSURE APPENDIX AT THE BACK OF THIS REPORT CONTAINS IMPORTANT DISCLOSURES, ANALYST CERTIFICATIONS, AND THE STATUS OF NON-US ANALYSTS. US Disclosure: Credit Suisse does and seeks to do business with companies covered in its research reports. 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 as only a single factor in making their investment decision. CREDIT SUISSE SECURITIES RESEARCH & ANALYTICS BEYOND INFORMATION Client-Driven Solutions, Insights, and Access

2 return to stabilized ratio. We believe the likely outcome would be rent and buy prices meeting half way driven by increased demand for renting and lower demand for buying. Our forecast implies a 10% house price decline in real terms by Affordability equation is better in SP than in RJ. Affordability of middleincome households in SP seems 30% higher than in RJ. We expect affordability to decline 8% in 2015 in both metropolitan regions, owing to less favorable job market dynamics impairing income growth and somewhat higher mortgage loan costs. Down payment to income seems healthier in SP as well, at 16 months of gross income (vs historical) compared with 22 months in RJ, which is in line with the historical number. SP accounted for 40% of last years' launches and RJ for 10%. Potential drop in housing loan originations (SFH) could reach 35% in 2015 (CSe). We are assuming a 20% amortization rate for the outstanding loans and net withdrawals from savings deposits of R$50 billion, 10% of current balance. However, our forecast is very sensitive to the amortization rate assumption, which averaged 40% in the last six years but declined to 20% in In our view, existing home sales (~40% of originations), should suffer the most, but new home sales should be negatively impacted as well. Solid FCF prospects for the sector as whole. FCF and potentially higher distributions to shareholders to be the only positive catalysts in Sector's balance of finished units receivables was 30% higher and total construction cost to be incurred was 20% lower by end-14. In addition, we expect land-related cash outlays to decline 30% yoy and total expenses (SG&A and financial expenses) to be cutback by ~10-15% owing primarily to lower launches and deleveraging. PDG and Tecnisa should post substantial FCF in 2015, but this is already reflected into current share prices, we see downside potential for both shares.

3 Table of Contents CS Affordability and Rent-vs-Buy Indexes 4 SP: Still Decent Affordability (but declining) and Rent-vs-Buy Imbalance 7 RJ: Low and Declining Affordability Coupled with Rent-vs-Buy Imbalances 10 Low Income: The Only Bright Spot 12 Unfavorable Scenario for Housing Loans Origination 14 Cash Generation Analysis 17 Cyrela Brazil Realty (CYRE3) 19 Current Valuation Not Reflective of Outlook 19 Direcional Engenharia (DIRR3) 21 Difficult Year Ahead to Add Volatility 21 EVEN CONSTRUCTORA E INCORPORADORA (EVEN3) 23 No Reasonable Scenario Fits Current Valuation 23 EZ Tec (EZTC3) 25 Interesting value proposition for LT investors 25 Gafisa (GFSA3) 27 Positive Operating Trends Priced In 27 Helbor (HBOR3) 29 There is Still Some House Cleaning to be Done 29 MRV Engenharia (MRVE3) 31 Finding Shelter in the Lower Income 31 PDG Realty (PDGR3) 33 Strong FCF to come, but still no reason to own 33 Tecnisa (TCSA3) 35 Unattractive risk-reward 35 Brasil Brokers Participacoes (BBRK3) 37 Cost-cutting measures offset by lower volumes 37 Lopes (LPSB3) 39 Highly susceptible to middle-income turmoil 39 Q1 Preview 41 Cyrela 41 Direcional 41 Even 42 Eztec 42 Gafisa 43 Helbor 43 MRV 44 PDG 44 Brasil Brokers 45 Lopes 45 New vs. Old Estimates 46 Brazilian Homebuilders 3

4 CS Affordability and Rent-vs-Buy Indexes Launching the CS affordability and CS rent-vs-buy indexes. In this report, we focus on developing a much-needed framework to better grasp affordability and rent-vs-buy trends in SP and RJ metropolitan regions, which have accounted for ~40% and ~10%-15% of home launches, respectively, over the past several years. Our affordability index aims to assess whether a typical family earns enough to qualify for a mortgage loan on a typical home. Our rent-vs-buy index goal is to evaluate the rental vs. ownership dynamics, in particular relative to historical levels, focusing on answering the question: does it make more economic sense to rent now than it used to in the past? We believe the rent-vs-buy index is a comprehensive way to assess equilibrium in housing costs and should serve as a tool to assess how renting as opposed to buying impact the housing market. In the US, rent-vs-buy and affordability indexes have helped to identify imbalances and opportunities in the housing market. The rent-vs-buy ratio was heavily slanted against buying, at ~70%, in 2007 prior to the housing bubble. This compares with a normalized level estimated at 90% and current ratio of 120%. Rent-vs-buy in the US peaked at 150% in the post-bubble years, as home prices plunged and mortgage rates declined substantially on the back of central bank monetary easing and support to mortgage agents. Housing prices have been gaining ground after the rent-vs-buy peak, now at 120%. Analysts believe the current imbalance should continue to favor housing price dynamics, which should ultimately bring the index to a more stabilized level of 90%, potentially by In Europe, affordability and rent-vs-buy have historically been important metrics in forecasting home prices. Exhibit 1: US National Rent-vs-Buy, Stabilized Ratio Estimated at ~90% 160% 152% 140% 120% 100% 80% 60% 40% 20% 0% 71% 3Q14 1Q14 3Q13 1Q13 3Q12 1Q12 3Q11 1Q11 3Q10 1Q10 3Q09 1Q09 3Q08 1Q08 3Q07 1Q07 3Q06 1Q06 3Q05 1Q05 3Q04 1Q04 3Q03 1Q03 CY01 CY99 Source: NAR, REIS, Credit Suisse estimates 120% CS affordability index methodology: We have assembled three different indexes, one for the low-income segment and two for middle income (SP and RJ). The goal is to evaluate the extent to which the monthly mortgage payment considering the changes in LTV, interest rates, and loan terms fit a typical household budget, respecting the maximum 30% gross income commitment. An index above 100% indicates that mortgage instalments for a typical home are affordable. However, historical comparison could be even more valuable than the absolute figure. We track the evolution of the median income of households earning more than five minimum wages in our middle-income index and consider that the majority of Brazilian Homebuilders 4

5 targeted low-income households fall within the 3 5x MW range in our low-income index. A typical home is determined by the average price per square meter and median unit size of units sold. In the middle income, we have used historical figures for SP and RJ, while for the low-income segment we used MRV data points as a proxy. Mortgage terms and cost are extracted from SBPE's historical figures, in the middle-income index case, and from the CEF FGTS figures, in the low-income index. CS rent-vs-buy ratio methodology: Three different indexes exist, one for the low income and two for middle income segment (SP and RJ). We compare monthly rent cost per square meter with the required monthly mortgage payment, assuming LTV is fixed throughout the entire series at 70% in the middle-income index and at 75% in the low-income segment. The natural balance of the rent-buy equation seems to be one at which renting is usually moderately more advantageous. Thus, the stabilized index tends to be below 100%. We estimate stabilized rent-vs-buy ratio to be ~85% for SP and 65% for Rio. The natural balance of the rent-buy equation seems to be one at which renting is usually moderately more advantageous. This has to do with some intangible benefits perceived in owning a home, such as value preservation and security. In the US, it seems that the normal level of the rent-buy ratio is around ~90%. However, Sao Paulo and Rio levels seem to be around 85% and 65%, respectively. It is noteworthy that our rent-vs-buy series in not very lengthy. Stable rent-vs-buy rates below US levels could be an indication that Brazilians may have a higher inclination to own versus rent, potentially resulting from extended periods of high inflation. Down payment vs. median income also provides interesting insights. We prefer to look at the affordability index by putting the required down payment implied in historical LTV into context. We note that the down payment relative to median monthly income has been relatively stable in SP, representing 15 months of gross income, the same level observed in Meanwhile, the RJ down payment vs. income ratio increased to 20 months from 16 months in Brazilian Homebuilders 5

6 Brazilian Homebuilders Exhibit 2: Summary of Our Findings Low Income (MRV) Middle Income (SP) Middle Income (RJ) Middle Income Average Affordability Downpayment/Income Rent vs Buy Affordability Downpayment/Income Rent vs Buy Affordability Downpayment/Income Rent vs Buy Affordability Downpayment/Income Rent vs Buy % % % % % % % % % % % % % % % % % % % % % % % % % % % % Feb-15 n.a. n.a. n.a % % % Average % % % % Year Current vs avg 5% -30% -21% -3% -11% -23% -12% -3% -18% -5% -9% -22% Trend Evaluation Final Evaluation Source: IBGE, BCB, Abecip, Secovi, Fipe Zap, MRV, Credit Suisse estimates 03 May

7 Jan-09 May-09 Sep-09 Jan-10 May-10 Sep-10 Jan-11 May-11 Sep-11 Jan-12 May-12 Sep-12 Jan-13 May-13 Sep-13 Jan-14 May-14 Sep-14 Jan May 2015 SP: Still Decent Affordability (but declining) and Rent-vs-Buy Imbalance Overall, we see the SP housing market as neutral structurally (but deteriorating) and cyclically negative. On the positive side, the affordability index was in line with historical levels in February and down payment vs. income index was at a healthy level. However, affordability has been declining since mid-2013, and we expect it to slide further in In addition, rent-vs-buy index pointed to a sizable imbalance between renting and ownership dynamics, which should impact home prices. Cyclically speaking, inventories seem higher than the historical level, estimated at 27 thousand units, 15 months of sales. From a demand standpoint, depressed consumer confidence and negative home pricing trends should constitute a large disincentive to buy, especially for new homes. Affordability in SP remains decent. The affordability index in the middle-income for the SP metropolitan region was at 100 points in February Affordability above 100 means a typical middle-income household in SP could afford a typical home. Median monthly income surpassed, though by a small margin, the minimum income required to assure mortgage payments at 30% of gross income. However, affordability has been steadily declining since mid The SP metropolitan region has accounted for ~40% of Brazil's launches in recent years. Hefty price appreciation impaired purchasing power during 2011 but better credit terms and further shrinking of median home size fully restored it by In 2011, price appreciation was running at its highest pace, reaching a cumulative 115% since However, a cycle of additional marked improvements in credit terms and further shrinking in median apartment size in lifted affordability above prior levels by We note that the median apartment size has decreased by ~25% since 2008, from to 53.5 sqm in February The average term of mortgage loans has expanded significantly since 2008 as well, from 220 to 330 months, a whopping 50% increase. Loan costs declined 400 bps in 2012 relative to 2008 but have been increasing since the end of However, with median apartment size and loan terms where they are, we do not see room for affordability gains coming from these factors in the medium term. Exhibit 3: SP Affordability Index at 100 in Feb-15, Close to Historical Average but Steadily Declining since Mid Source: IBGE, BCB, Abecip, Secovi, Fipe Zap, Credit Suisse estimates Rent-vs-buy index points to existing imbalances in ownership dynamics. The benefits of renting are becoming disproportional and should constitute a headwind to buying. Rent-vs-buy index in SP reached a record low of 65 in Feb-15, from 90 in mid- 2013, as rent appreciation has not come close to home price hikes. The lower the index, the lower is monthly rent cost relative to monthly mortgage disbursement, assuming a Brazilian Homebuilders 7

8 Jan-08 May-08 Sep-08 Jan-09 May-09 Sep-09 Jan-10 May-10 Sep-10 Jan-11 May-11 Sep-11 Jan-12 May-12 Sep-12 Jan-13 May-13 Sep-13 Jan-14 May-14 Sep-14 Jan May 2015 fixed LTV. The median size of apartments sold reached 53 sq m in February, further increasing the benefits of renting, regardless of financial capacity; families could opt to rent to avoid living in even smaller apartments. Balance now much more in favor of renting. Assuming 85 as the stabilized rent-vs-buy mark (historical level), a typical household would be able to live in an apartment 18% larger by renting instead of buying. In addition, we believe households should start to increasingly favor renting, not only due to imbalances in ownership dynamics, but owing also to (i) declining consumer confidence and (ii) unfavorable home pricing dynamics. Exhibit 4: Renting Becoming Increasingly Compelling; We See Imbalances in Ownership Dynamics 110% 100% 100% 90% 90% 84% 80% 70% 60% 65% 50% Source: IBGE, BCB, Abecip, Secovi, Fipe Zap, Credit Suisse estimates Prices would have to decline or rents appreciate to restore rent-vs-buy balance. According to CS estimates, in this scenario, home prices would have to contract by 25% or rents increase by 30% for rent-vs-buy to return to our estimation of stabilized ratio: rent-vsbuy at 85%. Considering the current scenario, we believe the likely outcome would be rent and buy prices meeting half way. In our view, this movement should be driven by increased demand for renting and lower demand for buying, as currently there seems to be a disproportionate incentive to rent. Our forecast implies a 10% house price decline in real terms by Average apartment size cannot keep declining and mortgage conditions have been steadily worsening. Thus, home prices become the only aspect susceptible to adjustments in order to improve affordability and reestablish rent-vs-buy equilibrium. We expect affordability in SP to worsen in 2015 to 92 from 102 in This deterioration would be caused by less favorable job market dynamics impairing income growth and somewhat higher mortgage loan cost. The lending rate on mortgages has reached 11.7% (including TR) in February 2015, from 9.0% one year ago. Our forecast embeds a price appreciation of 3% in nominal terms in We expect the convergence of the rent-vs-buy index to a stabilized level of 85 only in the medium term could be better, but 2015 should be painful. In our view, 2016 could be a better year, as the companies halt launches in 2015 and adjust inventory levels over the year and consumer confidence recovers to some extent into In addition, we believe affordability could rebound in 2016 to 99, as income growth resumes and home prices become more compatible, after two years of real declines, for a total 10% real decline (CSe). As a result, some gross margin pressure on the builders is likely, mostly due to lower margin inventory sales. Not to mention some negative impact on the profitability of land bank projects. Brazilian Homebuilders 8

9 Jan-08 May-08 Sep-08 Jan-09 May-09 Sep-09 Jan-10 May-10 Sep-10 Jan-11 May-11 Sep-11 Jan-12 May-12 Sep-12 Jan-13 May-13 Sep-13 Jan-14 May-14 Sep-14 Jan-15 Jan-08 Jun-08 Nov-08 Apr-09 Sep-09 Feb-10 Jul-10 Dec-10 May-11 Oct-11 Mar-12 Aug-12 Jan-13 Jun-13 Nov-13 Apr-14 Sep-14 Feb-15 Jul-15 Dec-15 May-16 Oct May 2015 Exhibit 5: Weaker Income Growth Environment and Higher Mortgage Costs to Reduce Affordability in 2015; We Expect Index to Reach 92, a 8% Decline Source: IBGE, BCB, Abecip, Secovi, Fipe Zap, Credit Suisse estimates Down payment over income at healthy levels. We also assess how much of a burden the down payment involved in a home purchase is, relative to monthly income. We look at this index in conjunction with the affordability index, as changes in LTV tend to have different effects on both metrics. It is noteworthy that for homes under construction, the down payment can be spread out over more extended periods of up to three years. Exhibit 6: Down Payment over Income Index at 16.4 Months, Below Historical Level Source: IBGE, BCB, Abecip, Secovi, Fipe Zap, Credit Suisse estimates Brazilian Homebuilders 9

10 Jan-09 May-09 Sep-09 Jan-10 May-10 Sep-10 Jan-11 May-11 Sep-11 Jan-12 May-12 Sep-12 Jan-13 May-13 Sep-13 Jan-14 May-14 Sep-14 Jan May 2015 RJ: Low and Declining Affordability Coupled with Rent-vs-Buy Imbalances RJ market facing very negative combination of factors. The affordability index has been arguably low since the end of 2013, below 80, and is now 25% below SP. We expect it to decline further in 2015 to 70 for middle-income families living in the RJ metropolitan region. This 8% expected decline by year-end is in tandem with the contraction in affordability expected for SP. Down payment to income ratio is not below average, currently at 22 months, despite a prolonged period of increasing LTV. Rent-vs-buy index also points to imbalances in the housing ownership dynamics. From the demand side, depressed consumer confidence and negative home pricing trends should constitute a large disincentive to buy, especially for new homes. Affordability in RJ far less favorable, at 76, steady declines observed since mid The current affordability index in the RJ metropolitan region means a typical middleincome household could not afford a typical home. In February 2015, the median monthly income fell 24% short of the minimum income required to ensure mortgage payments of 30% of gross income. We note that affordability in RJ has been historically below that of SP, averaging 86 vs. 103 for SP. Affordability in RJ has been below 100 since mid-2010, indicating that, unlike SP, the shrinking apartment size and better mortgage conditions started in 2011 have not been enough to fully restore affordability. The RJ metropolitan region has accounted for ~10% 15% of Brazil's launches in recent years. With median apartment and loan terms where they are, we do not see further room for affordability gains coming from these factors in the medium term. Exhibit 7: Affordability in RJ Far Less Favorable Than in SP, Reaching 76 in Feb Source: IBGE, BCB, Abecip, Ademi, Fipe Zap, Credit Suisse estimates Rent-vs-buy index point to existing imbalances in ownership dynamics in RJ as well. The benefits of renting are becoming disproportionate and should constitute a headwind to buying. Rent-vs-buy index in RJ reached a record low of 54 in Feb-15 from 75 in mid-2013, as rent appreciation has not come close to home price hikes. The median size of apartments sold has declined markedly over the past few years, further increasing the benefits of renting, regardless of the income level; households can opt to lease to avoid living in smaller apartments. RJ households could live in 20% larger apartments by renting, assuming the index converges to historical levels. We are assuming 65 as the stabilized rent-vs-buy mark, which is the historical level. In addition, as is the case for SP, we believe households should start to increasingly favor renting. Current rent-vs-buy index at 54% compares with 65% in SP in February. However, we argue that the stabilized level for RJ, estimated at 65, is substantially below that of SP, estimated at 85. Brazilian Homebuilders 10

11 Jan-08 Jun-08 Nov-08 Apr-09 Sep-09 Feb-10 Jul-10 Dec-10 May-11 Oct-11 Mar-12 Aug-12 Jan-13 Jun-13 Nov-13 Apr-14 Sep-14 Feb-15 Jul-15 Dec-15 May-16 Oct-16 Jan-08 May-08 Sep-08 Jan-09 May-09 Sep-09 Jan-10 May-10 Sep-10 Jan-11 May-11 Sep-11 Jan-12 May-12 Sep-12 Jan-13 May-13 Sep-13 Jan-14 May-14 Sep-14 Jan May 2015 Exhibit 8: Rent-vs-Buy Index at 54, Down from 76 in Mid % 85% 80% 75% 70% 65% 60% 55% 50% 45% 40% 74% 75% 65% 54% Source: IBGE, BCB, Abecip, Ademi, Fipe Zap, Credit Suisse estimates Prices would have to decline or rents appreciate to restore rent-vs-buy balance. According to CS estimates, in this scenario, home prices would have to contract by 17% or rents increase by 20% for rent-vs-buy to return to our estimation of stabilized ratio: rent-vsbuy at 65. We are forecasting a 10% real decline in house price until We expect affordability in RJ to worsen in 2015 to 70 from 76 in Feb 15. As is the case for SP, this deterioration would be caused by less favorable job market dynamics impairing income growth and somewhat higher mortgage loan cost. Unlike SP, we expect affordability in RJ to remain low for a prolonged period. In addition, the local economy is experiencing several headwinds owing to its higher dependence on the oil and gas industry and government expenditures. Exhibit 9: Affordability Likely to Decline in 2015, Recovery to More Reasonable Levels Should Take Longer to Occur relative to SP Source: IBGE, BCB, Ademi, Secovi, Fipe Zap, Credit Suisse estimates Brazilian Homebuilders 11

12 2Q08 4Q08 2Q09 4Q09 2Q10 4Q10 2Q11 4Q11 2Q12 4Q12 2Q13 4Q13 2Q14 4Q14 2Q15 4Q15 2Q16 4Q16 Jan-08 May-08 Sep-08 Jan-09 May-09 Sep-09 Jan-10 May-10 Sep-10 Jan-11 May-11 Sep-11 Jan-12 May-12 Sep-12 Jan-13 May-13 Sep-13 Jan-14 May-14 Sep-14 Jan May 2015 Exhibit 10: Down payment over income index at 22 times, despite the higher LTV over time Source: IBGE, BCB, Ademi, Secovi, Fipe Zap, Credit Suisse estimates Low Income: The Only Bright Spot Lower-income homes seem 40% 90% more affordable than middle-income ones. CS affordability index was at 142 in December 14, above historical average. This indicates that a typical lower-income household could afford a typical home under the MCMV program with a certain margin. In fact, affordability seems 40% and 90% higher relative to middle-income families living in SP and RJ, respectively. We derived index's mortgage parameters from housing loans originated by CEF through the Severance Pay Fund (FGTS). In addition, we used MRV's average unit size and price per square meter as a proxy for the "typical" home and assumed the majority of the lower-income population falls within the 3 5x MW bracket. Exhibit 11: Affordability Should Decline in 2015, Owing to Macro Environment, but Current Level Provides Some Cushion Source: IBGE, FGTS, CEF, MRV, Credit Suisse estimates Brazilian Homebuilders 12

13 2Q07 4Q07 2Q08 4Q08 2Q09 4Q09 2Q10 4Q10 2Q11 4Q11 2Q12 4Q12 2Q13 4Q13 2Q14 4Q14 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 03 May 2015 Rent-vs-buy below historical average, but still at a very reasonable mark. For the lower-income households the rent-vs-buy equation seems far more balanced, at 91%, compared with 65% for SP and 54% for RJ, indicating renting is only slightly more advantageous than buying, which we deem to be the natural balance. The stabilized equilibrium tends to be below 100%, as buying has intangible benefits not captured in the analysis. Unlike the case for middle-income homes in SP and RJ, we do not believe home price decreases are due in the lower-income case. Exhibit 12: Rent-vs-Buy Still at Very Healthy Levels 170% 150% 130% 110% 90% 70% 121% 119% 91% 50% Source: IBGE, FGTS, CEF, MRV, Credit Suisse estimates Adjustments to MCMV III program to be a tailwind. Increase in maximum household income eligible to MCMV and increase in home price caps are likely to have a positive impact on affordability. However, we believe the more important outcome from a potential calibration of MCMV parameters would be an increase in the addressable market, especially if the intermediate income bracket is created. Exhibit 13: Down Payment versus Income Also Points to Favorable Overall Affordability, at 11x Gross Monthly Income Source: IBGE, FGTS, CEF, MRV, Credit Suisse estimates Brazilian Homebuilders 13

14 YTD Net Deposits (R$ bn) Mar-07 Aug-07 Jan-08 Jun-08 Nov-08 Apr-09 Sep-09 Feb-10 Jul-10 Dec-10 May-11 Oct-11 Mar-12 Aug-12 Jan-13 Jun-13 Nov-13 Apr-14 Sep-14 Effective Housing Loans & Enforceability (R$ billion) % of SBPE Enforceability 03 May 2015 Unfavorable Scenario for Housing Loans Origination Net withdrawals of savings deposits to reduce SFH origination in A potential shortfall in housing funding, whose source is savings accounts, has been a concern, especially in a period of still-strong deliveries by listed builders. SFH earmarked loans surpassed required levels, at 107% in December 2014 (140% in government owned banks and 75% in private banks), and savings accounts experienced a record net withdrawal of R$18.5 billion in 1Q15, R$30.4 billion until April 24th. The housing financing system, SFH, has a fixed interest rate of 12% plus the Reference Rate (TR) and only finances homes with selling prices of up to R$750k. Out of the total savings deposits, 65% has to be channeled to housing loans and 80% must fall within SFH parameters (52% in total). Exhibit 14: Effective SBPE housing loans surpassed the enforceability on October, 2014 % of SBPE Enforceability Effective Housing Loans (SBPE) - (R$ bn) SBPE Enforceability (R$ bn) % % % % % Source: BCB, Credit Suisse estimates Exhibit 15: During the first three months of 2015, net savings withdraws of R$18.5 billion, R$30 bn until April 24 th Source: BCB Receivables pass-through to banks should not be impacted. The worst-case scenario would be reduced credit availability impairing builders' ability to monetize receivables from 2015 deliveries. However, we see a very low likelihood of this scenario playing out. Existing home sales accounted for 43% on average of last eight year SFH originations and construction accounted for another 34%. In the construction bracket, construction financing granted to builders accounted for ~90% and to individuals, ~10% (selfconstruction). In our view, existing home sales and self-construction should suffer the most, Brazilian Homebuilders 14

15 Feb-08 Aug-08 Feb-09 Aug-09 Feb-10 Aug-10 Feb-11 Aug-11 Feb-12 Aug-12 Feb-13 Aug-13 Feb-14 Aug-14 Feb-08 Jul-08 Dec-08 May-09 Oct-09 Mar-10 Aug-10 Jan-11 Jun-11 Nov-11 Apr-12 Sep-12 Feb-13 Jul-13 Dec-13 May-14 Oct May 2015 as collateral for new home sales tends to be a higher quality one and the bank that financed the project construction has a higher incentive to transfer the receivables. However, new home sales should suffer to some extent as well. Caixa has already announced it has cut to 50% the LTV for existing home sales, compared with 80% for new home sales. Seems that the bank goal was to secure funding to new home sales, but it is worth mentioning that this measure impacts upgraders and thus, also affects new home sales. Exhibit 16: Primary Market accounts for 30% of SFH Originations and should suffer to a less extent Acquisition Primary Acquisition Secondary Construction 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Exhibit 17: Breakdown of Rolling 12-Month SFH Loan Originations (R$ billion) 100 Acquisition Primary Acquisition Secondary 90 Construction Source: BCB Source: BCB In 2003, net withdrawals amounted to 7% of savings deposits, but 2015 is shaping up to surpass this mark. We note that net deposits in savings accounts have a strong correlation with the Selic rate, as the TR + 6% yield of savings accounts becomes increasingly unattractive when the benchmark rate goes up. Changes in the average Selic rate explain ~65% of the change in net deposits as a percentage of savings account balances. The worst year in the data series was 2003, when net outflows amounted to 7% and we note that the savings received total net inflows in years of much higher Selic rates than current levels. However, net outflows until April were expressive at R$30.4 billion, leaving limited room for significant recovery. Still, we think annualizing 1Q levels could be exaggerated and prefer to use a 10% withdrawal rate as our base case, leading to R$50 billion outflows (CSe) for SFH loan originations should decline by 35% (CSe). Historical annual amortization rate of outstanding SFH loans averaged 40%, but has declined significantly in 2014 to ~20%. Assuming a 20% amortization rate for 2015 and net withdrawals of 10% of total savings accounts, we arrive at a 35% reduction in housing loan originations for However, our forecast is very sensitive to the amortization rate assumption. Contrary to common belief, the level of originations is much more sensitive to changes in amortization rates than changes in net deposits. Brazilian Homebuilders 15

16 Compulsory requirements (%) 2015 Net Deposits (R$ bn) 03 May 2015 Exhibit 18: 2015 origination capacity largely dependent on loan amortization rates. Our base case assumes amortizations of 20% and net outflows of R$50 billion Loan Amortization (as % of BoP Balance) ##### 15% 20% 25% 30% 35% (60.0) (55.0) (50.0) (45.0) (40.0) (35.0) (30.0) (25.0) Source: BCB, Credit Suisse estimates A change in compulsory deposits could free up additional R$20 billion. Compulsory deposits for savings accounts and thus housing loans are at 20% and could eventually be reduced. This number was 15% in the past and was increased to the current level in However, we are not aware of advanced discussions in this direction as of yet. For instance, under our base case assumptions 20% amortization rate and R$50 billion net outflows on savings accounts, if compulsory requirements decrease to 15%, there would be room for additional R$20 billion of SFH loans. In the case of compulsory requirements falling to 10%, additional SFH loans could reach up to R$40 billion. Exhibit 19: 2015 origination capacity could increase by R$20 billion if compulsory requirements are reduce to 15% Loan Amortization (as % of BoP Balance) ##### 15% 20% 25% 30% 35% 10% % % % % % % % % % % Source: BCB, Credit Suisse estimates Brazilian Homebuilders 16

17 Cash Generation Analysis FCF and potential distribution to shareholders to be the only positive catalysts. In this spirit, we analyze in more detail company's cash generation prospects in We based our analysis in four key cash flow drivers: (i) volume of receivables from finished units by end-14 relative to end-13; (ii) expected volume of deliveries in 2015 vs 2014; (iii) total cost to be incurred by end-14 relative to end-2013 and (iv) outlook for disbursement related to land purchase. Good cash generation prospects for the sector as a whole. Balance of receivables from finished units was 30% higher by end-14 relative to end-13. Total cost to be incurred was 20% lower by end-14. In addition, we expect land-related cash outlays to reduce by 30% for our coverage in 2015 and total other outlays (SG&A and financial expenses) to decline by ~10-15% owing primarily to lower launches impacting sales expenses and deleveraging. The higher the index the higher is the ratio of (i) finished units receivables (beginning of period) plus 60% of expected deliveries divided by (ii) total cost to be incurred, expected outlays with SG&A and financial expenses and expected land related disbursements. We expect PDG and Tecnisa to post substantial FCF in Even though we are not optimistic about Tecnisa or PDG investment cases, both seem to have the means to boost FCF significantly in Tecnisa had ~90% more receivables from finished units, 35% less cost to be incurred and deliveries are expected to be flat. PDG has 60% more finished units receivables and 50% less cost to be incurred compared with Assuming PDG transfers only 70% of finished units receivables by end-14 in 2015 no transferring of R$3.5 bn expected deliveries, and incurs the totality of construction cost backlog, delta cash generation vs (all else equal) would be R$1.4 billion. MRV's strong FCF pace to continue while Even and Eztec should increase FCF yoy. We expect MRV to continue to deliver strong FCF despite the 20% launches increase seen in 2014 owing low-income segment shorter FCF cycle and the reduction in the backlog of units pending pass through. Even and Eztec cash flow prospects are slightly better relative to We expect Even's land related cash outlay to reduce to R$200 million in 15 from R$400 million in 14. In Eztec's case, FCF should be substantial owing to Tower A sale and lower outlays related with the construction EZ Tower. Exhibit 20: FCF index: the higher yoy change and absolute number, the better the prospects PDG Tecnisa Eztec Cyrela Helbor Gafisa Even E Brazilian Homebuilders 17

18 DIRR3 PDGR3 RSID3 TCSA3 EZTC3 11% 11% 10% 7% MRVE3 EVEN3 CYRE3 HBOR3 GFSA3 03 May 2015 Exhibit 21: Direcional to have the highest recurring FCF yield Cash Yield 15E Cash Yield 16E Avg % 23% 22% 20% 16% 3% Brazilian Homebuilders 18

19 Americas / Brazil Homebuilding Rating NEUTRAL* Price (30 Apr 15, R$) Target price (R$) (from 15.00) 12.50¹ 52-week price range Market cap. (R$ m) 4, Enterprise value (R$ m) 6, *Stock ratings are relative to the coverage universe in each analyst's or each team's respective sector. ¹Target price is for 12 months. Share price performance Research Analysts Nicole Hirakawa nicole.hirakawa@credit-suisse.com Luis Stacchini luis.stacchini@credit-suisse.com Daily May 05, Apr 30, 2015, 5/05/14 = R$ May-14 Sep-14 Jan-15 Price Indexed Price Relative On 04/30/15 the SAO PAULO SE BOVESPA INDEX closed at Quarterly EPS Q1 Q2 Q3 Q4 2014A E E Cyrela Brazil Realty (CYRE3) Current Valuation Not Reflective of Outlook We prefer to wait for some recovery in the middle income segment before becoming more constructive. Cyrela shares are currently trading at 0.8x P/BV, not inexpensive in our view, considering the challenging prospects for middle-income housing. We maintain our Neutral rating for the shares. Our new price target of R$12.50 per share, yields a 11% potential total return (7% upside and 5% dividend yield). ROE to continue to trend downwards. ROE was at 12% in 2014, but we expect it to decline to 9.1% in 2015 after marking to market the more challenging scenario for the middle-income. We expect revenues to decline 17% yoy (or 10% excluding Riserva Golf impact in 2014). In addition, we expect provisioning for client indemnification to remain at high levels, R$120 mn. FCF should be lower in 2015, but likely still very positive. Cyrela's R$900 million FCF in 2014 was an important catalyst for the shares. We expect cash generation to be meaningfully lower this year, as (i) company's expectation for receivables collections (sold units) is R$1 billion lower while construction-related and land purchase outlay should be R$500 million lower, net effect of negative R$500 million and (ii) sales of finished inventory were very strong in 2014, at R$900 million, a mark that should not be easy to deliver going into Financial and valuation metrics Year 12/14A 12/15E 12/16E 12/17E Revenue (R$ m) 5, , , ,174.0 EBITDA (R$ m) 1, ,030.8 EBIT (R$ m) 1, ,008.9 Net income (R$ m) EPS (CS adj.) (R$) Dividend yield (%) P/E (x) EV/EBITDA P/B (x) ROE stated - return on equity ROIC (%) Net debt (R$ m) 2,121 1,608 1, Net debt/equity (12/15E, %) Capex (R$ m) Brazilian Homebuilders 19

20 Exhibit 22: Cyrela Corporate Profile BASICS COMPANY DESCRIPTION Sector Real Estate Ticker CYRE3 Price (R$) 11.7 Target (R$) 12.5 Recommendation NEUTRAL Mkt. cap. (R$ mn) 4,492 POSITIVES Free float (R$ mn) 2,125 SHAREHOLDING STRUCTURE ON % Horn Elie 94, % Dynamo Internacional Gestao De R 32, % Oppenheimerfunds Incorporated 30, % NEGATIVES Orbis Investment Management Ltd 22,670 6% Excessive finished inventory Blackrock 21,483 6% Unclear dividend policy Free Float 181, % Total 382, % NET DEBT (R$mn) & NET DEBT / EQUITY LAUNCHES (R$ bn) PRE SALES (R$bn) 2, % 2, % 1, % 1, % % Cyrela Brazil Realty is one of Brazil s largest developers of residential properties. The company currently operates in 16 states and 67 Brazilian cities, with 200 thousand clients and 56 thousand homes delivered. Strong reputation and brand recognition Integrated and effective business model Conservative management and strong land bank E 2016E 2017E Net debt Net debt / Equity E 2016E 2017E E 2016E 2017E FINANCIAL METRICS (R$ mn) E 2016E 2017E OP. METRICS E 2016E 2017E Net revenues 5,372 5,818 4,822 4,622 5,174 Launches 100% (PSV) 6,646 5,848 3,509 4,386 6,140 Gross Profit 1,759 1,869 1,557 1,518 1,740 PSV growth -12.0% -40.0% 25.0% 40.0% Gross Margin 32.7% 32.1% 32.3% 32.8% 33.6% Pre-sales 100% 7,175 5,684 3,581 4,803 5,623 EBIT 1,188 1, ,009 Pre-sales growth -20.8% -37.0% 34.1% 17.1% EBIT margin 22% 20% 19% 18% 19% Change in WK 662 (33) (130) (119) 71 EBITDA 1,198 1, ,031 Speed of Sales (VSO) 54.1% 45.3% 33.0% 39.4% 40.0% EBITDA margin 22% 20% 19% 18% 20% Launches/Supply 44% 28% 40% 50% Adj. EBITDA 1,198 1, ,031 Net financial expenses LEVERAGE E 2016E 2017E Taxes (136) (145) (114) (109) (106) Net debt / Equity 40.1% 33.3% 24.1% 17.1% 10.3% Net income Net debt / Ebitda 0.5x 0.4x 0.4x 0.4x 0.2x Net margin 13% 11% 11% 11% 15% Net debt / Capital 28.6% 25.0% 19.4% 14.6% 9.3% # shares ('000) Cash Burn (202) (865) (683) (630) (709) EPS (R$) NOPAT 1,052 1, Depreciation (9) (22) (25) (23) (22) RETURN / YIELD E 2016E 2017E Capex (47) (33) (14) (13) (12) ROIC 12.1% 12.1% 9.6% 8.8% 11.5% FCFE (392) WACC n.m. 0.0% 15.3% 15.3% 15.3% Dividends/ IOE Cost of Equity (ke) n.m. 0.0% 16.9% 16.5% 15.7% Total assets 14,387 13,421 13,642 13,653 13,204 ROAE 13.7% 12.3% 9.1% 8.2% 12.2% Cash 1,727 1,754 2,234 2,359 1,742 FCF Yield 0.0% 0.0% 0.0% 0.0% 0.0% Inventory 4,781 5,113 5,129 5,162 5,344 Div. Yield 3.8% 3.8% 4.7% 5.6% 13.7% Minority Interest Net debt 2,486 2,121 1,608 1, VALUATION E 2016E 2017E Book value 5,462 5,659 5,977 6,228 6,383 EV / EBITDA 5.83x 5.56x 6.53x 6.73x 5.07x Market cap. 4,492 4,492 4,492 4,492 4,492 P/E 6.72x 6.95x 8.51x 9.00x 5.84x EV 6,978 6,613 6,100 5,681 5,221 P/NAV 0.61x 0.61x 0.60x 0.57x 0.51x Invested capital 8,680 8,489 8,294 8,126 7,821 P/B 0.82x 0.79x 0.75x 0.72x 0.70x PP&E P/Tangible Book 0.82x 0.79x 0.75x 0.72x 0.70x Brazilian Homebuilders 20

21 Americas / Brazil Homebuilding Rating (from Outperform) NEUTRAL* Price (30 Apr 15, R$) 6.38 Target price (R$) (from 13.50) 7.00¹ 52-week price range Market cap. (R$ m) Enterprise value (R$ m) 1, *Stock ratings are relative to the coverage universe in each analyst's or each team's respective sector. ¹Target price is for 12 months. Research Analysts Nicole Hirakawa nicole.hirakawa@credit-suisse.com Luis Stacchini luis.stacchini@credit-suisse.com Direcional Engenharia (DIRR3) Difficult Year Ahead to Add Volatility Difficult year ahead. We remain optimistic about Direcional's long-term fundamentals and believe shares are already pricing in the worst case scenario for MCMV III, 0.6x P/BV, especially after factoring in company's operating capabilities. However, we are adopting a more cautious stance on the name until potential tail risks are off the picture outright discontinuation of 1 st income bracket or further payment delays from the government. As a result, we are downgrading DIRR to Neutral, our TP of R$7.0/DIRR implies 10% potential upside. Direcional should post the highest recurring FCF yield in our coverage, averaging 24% per year in Even after assuming delays in the government payments are not fully normalized, Direcional FCF should be substantial already in 2015 and increase further going into Becoming more active in the 2 nd income band. Direcional should step up launches in the segment during 2015 and we believe the company has what it takes to shift its focus more to it, if necessary. In addition, we believe the potential creation of the 1 st income band FGTS would constitute very interesting business opportunity for Direcional. Share price performance Daily May 05, Apr 30, 2015, 5/05/14 = R$ May-14 Sep-14 Jan-15 Price Indexed Price Relative On 04/30/15 the SAO PAULO SE BOVESPA INDEX closed at Quarterly EPS Q1 Q2 Q3 Q4 2014A E E Financial and valuation metrics Year 12/14A 12/15E 12/16E 12/17E Revenue (R$ m) 1, , , ,779.7 EBITDA (R$ m) EBIT (R$ m) Net income (R$ m) EPS (CS adj.) (R$) Dividend yield (%) P/E (x) EV/EBITDA P/B (x) ROE stated - return on equity ROIC (%) Net debt (R$ m) Net debt/equity (12/15E, %) Capex (R$ m) Brazilian Homebuilders 21

22 Exhibit 23: Direcional Corporate Profile BASICS COMPANY DESCRIPTION Sector Real Estate Ticker DIRR3 Direcional is a Brazilian real estate developer and builder founded in the state of Minas Price (R$) 6.4 Gerais. It has nearly 30 years of experience and focuses on the low-income segment Target (R$) 7.0 Recommendation NEUTRAL Mkt. cap. (R$ mn) 965 POSITIVES Free float (R$ mn) 364 Well positioned to benefit from the government's housing plan (including 0-3MWs) Low competition in the first bracket of MCMV program SHAREHOLDING STRUCTURE ON % Differentiated geographical footprint, with focus on under-served Northern and CW regions Filadelfia Participacoes 61, % Focus on large-scale developments, where it can reap economies of scale Allianca Fim Cp 9, % Cfo Adminstracao De Recursos 9, % NEGATIVES Tarpon Gestora De Recursos S.A. 7,592 5% The inherently lower margins of MCMV first bracket leaves less room for execution mistakes Ridgecrest Llc 5,248 3% Potential Payment delays from government in MCMV 1st bracket Free Float 56,985 38% CEF prossessing and credit approval capacity could be a bottleneck TOTAL 151, % Reduced stock liquidity NET DEBT (R$mn) & NET DEBT / EQUITY LAUNCHES (R$ bn) PRE SALES (R$bn) % % % E 2016E 2017E -7.4% (144) Net debt Net debt / Equity -17.4% (318) E 2016E 2017E E 2016E 2017E FINANCIAL METRICS (R$ mn) E 2016E 2017E OP. METRICS E 2016E 2017E Net revenues 1,744 1,836 1,922 1,833 1,780 Launches (PSV) 2,565 1,654 1,064 1,684 1,898 Gross Profit PSV growth -35.5% -35.6% 58.2% 12.7% Gross Margin 23.1% 23.3% 18.2% 19.4% 22.2% Pre-sales 2,652 1, ,695 1,850 EBIT Pre-sales growth -38.4% -53.4% 122.7% 9.2% EBIT margin 18% 16% 11% 12% 13% Change in WK (8) (144) (62) EBITDA Speed of Sales (VSO) 74.5% 67.1% 34.7% 60.3% 60.2% EBITDA margin 19% 17% 12% 13% 13% Launches/Supply 46% 40% 76% 67% Adj. EBITDA Net financial expenses LEVERAGE E 2016E 2017E Taxes (24) (23) (24) (23) (22) Net debt / Equity 21.7% 16.3% 6.6% -7.4% -17.4% Net income Net debt / Ebitda 0.3x 0.2x 0.1x -0.2x -0.3x Net margin 13% 11% 9% 11% 12% Net debt / Capital 17.8% 14.0% 6.2% -8.0% -21.1% # shares ('000) Cash Burn (77) (158) (224) (335) (271) EPS (R$) NOPAT Depreciation (16) (20) (18) (19) (12) RETURN / YIELD E 2016E 2017E Capex (69) (29) (22) (23) (24) ROIC 14.7% 13.1% 9.8% 10.6% 13.5% FCFE (359) WACC 0.0% 3.9% 16.5% 16.5% 16.5% Dividends/ IOE Cost of Equity (ke) 0.0% 4.2% 17.6% 16.1% 15.3% Total assets 3,434 3,956 4,273 4,394 3,818 ROAE 16.3% 12.4% 10.3% 11.0% 12.6% Cash , FCF Yield 0.0% 0.0% 0.0% 0.0% 0.0% Inventory 1,011 1,541 1,724 1,615 1,538 Div. Yield 5.9% 6.6% 7.1% 10.1% 34.4% Minority Interest Net debt (144) (318) VALUATION E 2016E 2017E Book value 1,473 1,616 1,719 1,817 1,706 EV / EBITDA 4.0x 4.1x 4.6x 3.5x 2.7x Market cap P/E 4.3x 4.7x 5.6x 4.9x 4.4x EV 1,313 1,248 1, P/NAV 0.50x 0.49x 0.52x 0.49x 0.51x Invested capital 1,949 2,019 1,961 1,792 1,508 P/B 0.66x 0.60x 0.56x 0.53x 0.57x PP&E P/Tangible Book 0.66x 0.60x 0.56x 0.53x 0.57x Brazilian Homebuilders 22

23 Americas / Brazil Homebuilding Rating OUTPERFORM* Price (30 Apr 15, R$) 4.96 Target price (R$) (from 8.50) 6.50¹ 52-week price range Market cap. (R$ m) 1, Enterprise value (R$ m) 2, *Stock ratings are relative to the coverage universe in each analyst's or each team's respective sector. ¹Target price is for 12 months. Research Analysts Nicole Hirakawa nicole.hirakawa@credit-suisse.com Luis Stacchini luis.stacchini@credit-suisse.com EVEN CONSTRUCTORA E INCORPORADORA (EVEN3) No Reasonable Scenario Fits Current Valuation There is value. We maintain an Outperform rating for the shares and believe there is value here. Even is currently trading at 0.5x P/TBV, which we believe is unjustified. Our new target price of R$6.5/EVEN3 TP implies 31% potential upside from current levels. While we would expect ROE to be somewhat under pressure owing to lower launches/sales in 2015, valuation seems compelling enough for those with a longer term horizon. However, there is no urgency to accumulate the shares, as the outlook for middleincome housing remains quite challenging and news flow should not be supportive of price action. No urgency to accumulate the shares. As pointed out in the report, the outlook for middle-income housing remains quite challenging and news flow should not be supportive of price action. While SP, Even's main market, is in much better shape relative to Rio higher affordability and lower down payment to income depressed consumer confidence and negative house pricing dynamics should keep demand subpar in Improved cash flow and distributions prospects. We expect cash yield to be around 11% in and dividend yield of 7% in 2015 already. In 2015, we expect disbursements related to land purchase to abate from R$400 million in 2014 to around half this amount in Share price performance Daily May 05, Apr 30, 2015, 5/05/14 = R$ May-14 Sep-14 Jan-15 Price Indexed Price Relative On 04/30/15 the SAO PAULO SE BOVESPA INDEX closed at Quarterly EPS Q1 Q2 Q3 Q4 2013A E E Financial and valuation metrics Year 12/13A 12/14E 12/15E 12/16E Revenue (R$ m) 2, , , ,079.2 EBITDA (R$ m) EBIT (R$ m) Net income (R$ m) EPS (CS adj.) (R$) Dividend yield (%) P/E (x) EV/EBITDA P/B (x) ROE stated - return on equity ROIC (%) Net debt (R$ m) 1,128 1, Net debt/equity (12/14E, %) Capex (R$ m) Brazilian Homebuilders 23