MEXICO TMT SECTOR JANUARY 2011

Transcription

1 Latin American Equity Research Mexico City, January 31, 2011 Sector Preview Mexico Telecom, Media & Technology MEXICO TMT SECTOR JANUARY 2011 Post-Cancun Update and 4Q10 Previews Gregorio Tomassi*, CFA Valder Nogueira* Diana Leyva* Mexico: Banco Santander S.A. Brazil: Banco Santander S.A. Mexico: Banco Santander S.A This report shares our views on the sector, updated after our 15th Annual Latin American Conference held in Cancun earlier this month, and includes our estimates of 4Q10 results of the companies under coverage, expected to be disclosed beginning February 3, as well as our reference for eventual guidance on 2011 results to be provided by companies. We continue to recommend a neutral to underweight investment stance in the Mexican TMT space relative to the Mexbol IPC. Post Cancun, we maintain our recommendations and leave unchanged our model estimates in the companies we cover. Thus, we reiterate the absence of a Buy rating within the Mexican TMT space. Our relative top picks within the Mexican TMT sector are currently AMX and Axtel. For a pair trade recommendation, we suggest combining a long position in AMX with a short position in Telmex. At current prices, we believe that investors in the AMX-ex-TMX pair trade would enjoy the potential favorable surprise from AMX s exposure to mobile data services, while being shielded from its exposure to what we believe is Telmex s overpriced business. The case of Axtel, as one of our top picks is a much riskier proposition than the one on AMX, and acting on it can wait, in our view, until 4Q10 results are disclosed. We believe that there is still downside risk from upcoming 4Q10 results, but thereafter, 1Q11 will benefit from a favorable comparison with the disastrous 1Q10, a cost-saving plan will be under way, and downside risk potential from 4Q10 results (as detailed in our 4Q10 Previews section) should be priced-in. Additionally, one upside catalyst for Axtel s stock price a potentially favorable court decision that we expect in 1H11 from a dispute with AMX over past mobile termination rates applied could trigger the recognition of over a M$1.8 billion noncash gain, free of taxes, in Axtel s income statement. Such a court decision would increase the likelihood of Axtel collecting the claimed balance within a two-year period, which, in our view, is currently absent from the market s expectations for Axtel. Our updated 4Q10 results previews compared with our FY2010 estimates reflect some downside risk, mostly in Axtel and Megacable, and slight upside risk for AMX and Axtel. We estimate 6% YoY EBITDA growth (in local currency) for the sector in Mexico in 4Q10 driven by AMX (+8.5%), Televisa (+13.0%), and Megacable (+15.0%), offsetting EBITDA drops from Telmex (-8.9%) and Axtel (-6.1%). Company Metrics (U.S. Dollars in Millions a ) Curr. Price Company Ticker Rec. 21-Jan Target Price (US$) Growth Ups./ EBITDA EPS/ADS FV/EBITDA P/E Down. 11E 12E 11E 12E 10E 11E 10E 11E Market Cap (US$ Mn) America Movil AMX Hold % 25% 2% 14% 7% ,988 Telmex TMX Underp % -8% -4% -11% 3% ,271 Televisa TV Hold % 13% 5% 5% 10% ,398 Megacable MEGACPO Underp % 9% 12% 10% 10% ,140 Axtel AXTELCPO Hold % 3% 6% NM NM NM NM 737 Average 8% 20% 2% 11% 7% ,535 a Except per share/adr amounts. NM: Not meaningful. Sources: Company reports and Santander estimates. Important disclosures/certifications are in the Important Disclosures section of this report. * Employed by a non-us affiliate of Santander Investment Securities Inc. and is not registered/qualified as a research analyst under FINRA rules.

2 Mexico TMT Sector: Post-Cancun Update and 4Q10 Previews TABLE OF CONTENTS Sector and Company Topics... 3 Telmex: Mixed Blessings and Curses, but No TV Yet... 3 MTRs: Is the Discussion Over with the Recent Agreement among the Big Three?... 3 Axtel: Over M$1.8 Billion to Be Collected?... From Disputes on Past MTRs Q10 Previews... 5 America Movil 4Q10 Preview:... 6 Telmex 4Q10 Preview: No Inflection Point Yet... 6 Televisa 4Q10 Preview: Coming back from World Cup... 7 Megacable 4Q10 Preview: Slower Progress toward Targets... 8 Axtel 4Q10 Preview: No Increase in Sales, EBITDA Drop 6.1% YoY... 9 Valuation and Risks Important disclosures/certifications are in the Important Disclosures section of this report.

3 SECTOR AND COMPANY TOPICS Our revised sector and company-specific views follow. TELMEX: MIXED BLESSINGS AND CURSES, BUT NO TV YET Consolidation of local service areas pushed back by legal process. We understand that Cofetel s plans to reduce by half the 400 local service areas in which the country is divided, needs to go through another lengthy (over 2-year) complex legal process, before it can be enforced.. We see this as favorable for Telmex, as the original consolidation plans represented, in our view, material reductions in Telmex s potential interconnection and domestic long distance revenue. The new interconnection framework was also pushed back by a legal process. A recent suspension obtained by Telmex in a lower court of Cofetel s plans to enforce a new interconnection framework also represents a reduction in Telmex s investment risks. However, two sanction proposals against Telmex prepared by Cofetel are on the desk of the Undersecretary of Communications. The sanction proposals relate to Cofetel s claim that Telmex has failed to comply with existing interconnection rules, first with Marcatel and second with Axtel. Although these sanction proposals may have no material consequences, they represent, in our view, part of the State s negotiation currency with Telmex. Do not expect TV license soon. We do not recommend an overweight position in Telmex if it is driven by the assumption that its license will be extended for TV services in 2011 or In our view, despite what could be public declarations from government officials (including the president of Cofetel), the uncertainty regarding the timing of this event is high, and the government has not run out yet of negotiation power. As we approach election year 2012, the issue whether or not to grant a TV license to Telmex would be increasingly subject to complex political considerations. MTRS: IS THE DISCUSSION OVER WITH THE RECENT AGREEMENT AMONG THE BIG THREE? By the end of 2010, the industry needed to define new mobile termination rates (MTRs) for the upcoming years. The general industry agreement on MTRs accepted by most operators in 2006 with the introduction of the calling party pays system defined rates from 2007 to 2010 (from M$1.34 per minute in 2007 to M$1.00 in 2010). AMX s mobile service operator, Telmex, and Telefonica agreed in December on MTRs that would be applied on traffic among them during the years 2011 to The agreed upon rates, in nominal terms, represent a 5% drop in 2011 and an average annual drop of 8.9% from 2010 to These rates will be applied on a per-second basis after the first minute, but will continue to be rounded to the minute for shorter calls. These rates are substantially higher than those that Cofetel and the SCT established when resolving in 2008 and 2010 particular disagreements among operators. Regulation establishes that MTRs can be freely agreed upon among operators, but if operators fail to agree, any party can call for the regulator to intervene and set the interconnection price. For example, while the December 2010 agreement among the large operators establishes M$0.95 per minute, the rate decided by Cofetel and the SCT has been M$0.42, applicable on a persecond basis. Important disclosures/certifications are in the Important Disclosures section of this report. 3

4 Mexico TMT Sector: Post-Cancun Update and 4Q10 Previews Telmex s participation in the December 2010 MTRs agreement cannot be taken, in our view, as an indication of what other fixed line operators might aim. From the perspective of a Telmex shareholder, doubts can be raised about why Telmex accepted the new MTRs, which were significantly higher than those that Cofetel enforced in particular cases. Being controlled by AMX cannot be overlooked as a potential source of conflict of interest in a negotiation that should be carried out in an arm s-length relationship. So the story may not be over yet. First, with official references of significantly lower rates provided by Cofetel and SCT s decisions about MTRs, other fixed line operators and cable companies have a stronger stance for negotiating MTRs with AMX and Telefonica, lower than the ones defined in the December 2010 MTRs agreement.. Second, we understand that there is a pending process in the Mexican anti-trust agency, Cofeco, to determine whether there is substantial market power (Cofeco uses alternatively the term dominance) in the mobile termination market. Should the mobile operators be declared dominant, the door would be open for Cofetel to determine MTRs without having to wait until it is called in to resolve a dispute. Lower MTRs would prompt a transfer of value from the mobile operators to fixed line operators, and hopefully for Cofetel, lower end-user prices. Beneficiaries among our covered companies, in our opinion, would be Telmex, Axtel, Megacable, and Televisa. For AMX, the adverse impact would be partial, we believe, as AMX currently owns 60% of Telmex. AXTEL: OVER M$1.8 BILLION TO BE COLLECTED?... FROM DISPUTES ON PAST MTRS Axtel s management expects in 1H11 a lower court s decision in second instance (after first appeal) related to a legal injunction introduced by AMX against SCT s decision on MTRs applied between 2005 and 2007 favoring Axtel s claim of its right to lower rates. The first instance decision favored Axtel, denying AMX s injunction. Axtel expects another favorable decision in the second instance, which, according to the company s management, would be definitive. A second favorable court decision would trigger a significant noncash gain in Axtel s income statement. According to Axtel s calculations, should the SCT rates become enforceable, Axtel would have the right to ask for reimbursement of over M$1.8 billion of the price paid in excess of the enforceable rate during the period, plus interest and other costs. A favorable decision in the second instance, as expected by Axtel s management, would trigger recognition of a noncash gain exceeding M$1.8 billion, free of taxes, on its income statement. Collection of this M$1.8 billion-plus receivable would start immediately under the assumption of a second decision favorable to Axtel, and would take 12 to 18 months to collect according to Axtel s management. We believe that the increased likelihood of collecting the claimed balance is not reflected in the market s expectations for Axtel. 4 Important disclosures/certifications are in the Important Disclosures section of this report.

5 4Q10 PREVIEWS In aggregate terms, we estimate 6% YoY EBITDA growth (in local currency) for the sector in Mexico in 4Q10 driven by AMX (+8.5%), Televisa (+13.0%), and Megacable (+15.0%), offsetting EBITDA drops from Telmex (-8.9%) and Axtel (-6.1%). We see downside risks in our model estimates from 4Q10 results specifically for Megacable and Axtel. Our 4Q10 previews reflect our most updated views and do not necessarily coincide with our current model assumptions on each company for full-year Figure 1 shows what our updated 4Q10 estimates in this report represent in a full-year 2010 view, compared with our model estimates. For Megacable and Axtel, our 4Q10 preview implies that full-year EBITDA would fall 3% short of our current model estimates (in local currency terms). Conversely, we see slight upside risks for AMX and Telmex. Figure 1. Mexico TMT Sector: Fourth Quarter 2010 EBITDA and Earnings per Share Previews (EPS) U.S. Dollars in Millions a Mexican Pesos in Millions a Quarterly Data and YoY % FY10E Quarterly Data and YoY% FY10E With 4Q10 With 4Q10 Model % 4Q10 % Ch Model 4Q09 % Ch Y/Y 4Q09 4Q10 SI Est Preview Estimate Diff. SI Est Y/Y Estimate Preview EBITDA c 6,683 5, % NA NA NA 82,774 78, % NA NA NA America Movil Non-adjusted 5,132 3, % 16,685 16, % 63,568 39, % 210, , % Pro Forma b 5,132 4, % NA NA NA 63,568 58, % NA NA NA Telmex % 3,640 3, % 11,148 12, % 46,002 45, % Televisa % 1,739 1, % 6,403 5, % 21,955 21, % Megacable % % % 3,105 3, % Axtel % % % 3,286 3, % EPS NM NM 6.5% NM NM 2.3% NM NM 5.9% NM NM 1.4% America Movil % % % % Telmex % % % % Televisa % % % % Megacable % % % % Axtel % (0.01) (0.01) -8.2% (0.02) % (0.17) (0.19) -8.8% a Except per share/adr amounts. b Adjusted to assume consolidation of Telmex and Telmex Internacional within AMX for the entire period referred to. c Aggregate numbers and variations represent the sum of EBITDA for companies listed. NA: Not applicable. NM: Not meaningful. Sources: Company reports and Santander estimates. Our 4Q10 previews on a per company basis follow. % Diff. Important disclosures/certifications are in the Important Disclosures section of this report. 5

6 Mexico TMT Sector: Post-Cancun Update and 4Q10 Previews AMERICA MOVIL 4Q10 PREVIEW: 8.5% EBITDA GROWTH (APPLES TO APPLES), AND EPS OF M$0.60, FLAT YOY 4Q10 Preview: AMX is scheduled to report 4Q10 results around February 9. We expect AMX to have posted EPS of M$0.60, flat relative to last year s M$0.60. On a YoY comparison to pro forma 4Q09 results (assuming consolidation of Telmex and Telmex Internacional) we estimate growth rates of 6.3% and 8.5% in revenue and EBITDA, respectively. These adjusted YoY growth rates are slightly higher than the comparable 5.3% and 6.0% increases posted respectively for revenue and EBITDA in 3Q10. Our 4Q10estimates include the following key assumptions: (1) mobile net additions of 7.4 million, leading to 11.4% YoY subscriber growth; (2) mobile ARPUs in Argentina and Peru higher YoY by 9% and 3%, offset by YoY declines in ARPUs mainly in Brazil and Mexico of over 9.0% and 1.5%, respectively; (3) an 8.9% YoY decline in EBITDA from fixed line business in Mexico (slightly better than the 11.3% YoY decline posted in 3Q10); and (4) an 13.8% YoY rise in EBITDA from what used to be the individual operations of Telmex Internacional (slightly better than the 13.8% YoY rise posted in 3Q10). Our reference for eventual guidance on 2011 results. We estimate revenue and EBITDA to be M$649 billion and M$264 billion, respectively in 2011, which would represent an EBITDA margin of 40.7%. AMX already provided guidance of US$8.3 billion of capex in America Movil Fourth Quarter 2010 Preview U.S. Dollars in Millions a Mexican Pesos in Millions a 4Q10E 4Q09 % Ch Y/Y 4Q10E 4Q09 % Ch Y/Y 3Q10 % Ch Y/Y Sales 12,886 8, % Sales 159, , % 153, % Operating Profit 3,360 1, % Operating Profit 41,613 21, % 41, % EBITDA 5,132 3, % EBITDA 63,568 39, % 63, % EBITDA Margin 39.8% 36.6% 3. 2pp EBITDA Margin 39.8% 36.6% 3.2 pp 41.1% 0.6 pp Net Income 1,949 1, % Net Income 24,142 19, % 23, % EPADR % EPS % % Except per share/adr amounts. Sources: Company reports and Santander estimates. TELMEX 4Q10 PREVIEW: NO INFLECTION POINT YET... 4Q10 Preview: Telmex is scheduled to report 4Q10 results around February 3. We believe that results would follow operating trends similar to those in the first nine months of We expect consolidated YoY declines in revenue and EBITDA of 2.6% and 8.9%, slightly lower than the 3.2% and 11.3% declines posted in 3Q10. We estimate EPS to drop 25.3% YoY in local currency, mostly driven by the 12.5% drop we expect in operating profit. We estimate lines in service to have continued their declining trend, and broadband growth to have maintained a pace similar than the one posted in the last twelve months. We expect 129,000 net losses in billed lines, which is better than the 234,000 net losses posted in 4Q09 (excluding the 1.2 million disconnections of inactive lines executed in 4Q09). We estimate broadband subscriber net additions to have increased by 220,000, which would be in line with the 221,000 posted in 4Q09, and slightly higher than the 218,000 average quarterly additions posted during the last 12 months. Our reference for eventual guidance on 2011 results. We estimate revenue and EBITDA to be M$113 billion and M$43 billion, respectively in 2011, which would represent an EBITDA margin of 37.9%, around a 200-basis-point loss from our 2010 estimates. We estimate capex of US$830 million in Conference call: February 3 at 10:00 a.m. (EST); Dial-in: (866) , or from outside the U.S.; Passcode: Telmex. 6 Important disclosures/certifications are in the Important Disclosures section of this report.

7 Telmex Fourth Quarter 2010 Preview U.S. Dollars in Millions a Mexican Pesos in Millions a 4Q10E 4Q09 % Ch Y/Y 4Q10E 4Q09 % Ch Y/Y 3Q10 % Ch Y/Y Sales 2,340 2, % Sales 28,981 29, % 28, % Operating Profit % Operating Profit 6,804 7, % 7, % EBITDA % EBITDA 11,148 12, % 11, % EBITDA Margin 38.5% 41.1% -2.7 pp EBITDA Margin 38.5% 41.1% -2.7 pp 40.2% -3.7 pp Net Income % Net Income 3,728 4, % 3, % EPADR % EPS % % a Except per share/adr amounts. Sources: Company reports and Santander estimates. TELEVISA 4Q10 PREVIEW: COMING BACK FROM WORLD CUP 4Q10 Preview: Televisa is scheduled to report 4Q10 results on February 17, after the market closes. The 2010 FIFA World Cup ended in 4Q10, and with it, YoY growth in broadcasting revenue should have declined, margins should have improved, and net additions of pay TV subscribers should have returned to levels lower than those reached in the first nine months of the year. Consequently, we expect consolidated revenues to have increased 5.1% YoY (lower than the 12.3% posted in 2Q10), but the EBITDA margin to have risen 280 basis points YoY to 40.2%, leading to a 13.0% YoY increase in EBITDA (higher than the 11.5% rise posted in 3Q10). Operating profit was flat YoY, as increased depreciation and amortization expenses should have offset the EBITDA increase, in our opinion. Estimated earnings per share of M$0.86 are twice those of 4Q09, as the YoY comparison is favored by noncash, nonrecurring charges posted in 4Q09 for an amount close to M$800 million. Our reference for eventual guidance on 2011 results. For Televisa s TV broadcasting in 2011, we estimate a 4.2% YoY increase in sales and a 46.1% EBITDA margin. We also understand that upfront sales completed by year-end 2010 may have been negatively affected by the change in pricing methodology (from cost per rating point to cost per thousand) that Televisa implemented beginning 2011, as this may have introduced a new variable in discussions with advertisers. We estimate revenue from Univision to be nearly US$250 million (higher than the US$150 million estimated for 2010), and capex to amount to US$630 million. Unlike in 2010, we expect Televisa to pay dividends in 2011 for an amount close to US$200 million (US$0.35 per ADR). We understand the payment of any dividend in excess of the statutory M$0.35 per share (equivalent approximately to US$0.14 per ADR) would depend on how close Televisa may be seeing opportunities to deploy cash in further consolidating the cable sector or expanding its telecom footprint. Conference call: February 18 at 10:00 a.m. (EST); Dial-in: (800) , or from outside the U.S.; Conf. ID: Televisa Fourth Quarter 2010 Preview U.S. Dollars in Millions a Mexican Pesos in Millions a 4Q10E 4Q09 % Ch Y/Y 4Q10E 4Q09 % Ch Y/Y 3Q10 % Ch Y/Y Sales 1,287 1, % Sales 15,943 15, % 14, % Operating Profit % Operating Profit 4,678 4, % 4, % EBITDA % EBITDA 6,403 5, % 5, % EBITDA Margin 40.2% 37.4% 2.8pp EBITDA Margin 40.2% 37.4% 2.8pp 39.2% -0.3pp Net Income % Net Income 2,380 1, % 2, % EPADR % EPS % % a Except per share/adr amounts. Sources: Company reports and Santander estimates. Important disclosures/certifications are in the Important Disclosures section of this report. 7

8 Mexico TMT Sector: Post-Cancun Update and 4Q10 Previews MEGACABLE 4Q10 PREVIEW SLOWER PROGRESS TOWARD TARGETS 4Q10 Preview: Megacable is scheduled to report 4Q10 results around February 24. We estimate YoY revenue and EBITDA growth of 9.8% and 15.0%, respectively. We forecast net profits to have reached M$465 million, 28.5% lower than in 4Q09 due mainly to an unfavorable comparison on income taxes: an estimated M$79 million income tax provision in 4Q10 vs. M$123 million tax credit posted in 4Q09. Net additions for 2010 are likely to be below original guidance, more in line with 3Q10 results. We estimated net additions of approximately 25,000 for TV and Internet services each, and 18,700 for telephony subscriptions in 4Q10. As a result, we believe that instead of 15% and 30% growth in TV and telephony subscribers, respectively in 2010, as guided after 2Q10 results, Megacable would have reached growth rates of 11% and 15%, respectively. There could be some additional downside risk to our estimates given potentially increased churn that could have resulted from what we understand was Megacable s implementation of a more stringent strategy regarding reconnection of subscribers in November and December The digitalization project should have made progress, but we believe it is still far below target. We understand the company may have ended 2010 with over 500,000 digital boxes installed, half of its 1 million target. Digitalization, in our view, is a key lever to allow for profitability improvement. The addition of mobile services to the offer, supported by an MVNO agreement with Telefonica, is delayed, as the parties are reassessing pricing structures considering fixed-to-mobile rates agreed between Telefonica, AMX, and Telmex back in December Our reference for eventual guidance on 2011 results. We estimate revenue and EBITDA to be M$8,510 million and M$3,570 million, respectively, in 2011, which would represent an EBITDA margin below 42%. We also forecast capex in 2011 to be US$125 million, slightly over our US$120 million estimate for Megacable Fourth Quarter 2010 Preview U.S. Dollars in Millions a Mexican Pesos in Millions a 4Q10E 4Q09 % Ch Y/Y 4Q10E 4Q09 % Ch Y/Y 3Q10 % Ch Y/Y Sales % Sales 1,966 1, % 1, % Operating Profit % Operating Profit % % EBITDA % EBITDA % % EBITDA Margin 40.8% 40.2% 0.6 pp EBITDA Margin 40.8% 39.0% 1.9 pp 40.2% -1.4 pp Net Income % Net Income % % EPADR % EPS % % Except per share/adr amounts. Sources: Company reports and Santander estimates. 8 Important disclosures/certifications are in the Important Disclosures section of this report.

9 AXTEL 4Q10 PREVIEW NO INCREASE IN SALES; 6.1% EBITDA DROP YOY 4Q10 Preview: Axtel is scheduled to report 4Q10 results around February 22, and we believe that results will not be favorable for the stock price. We expect flat revenue growth and a 6.1% YoY EBITDA drop, which would be better than the 13.9% drop posted in 3Q10. However, if our current expectations on 4Q10 are met, full-year EBITDA would come in 3% below our model estimate of M$3,389 million. We believe that sustained weakness in international traffic prices and difficulties in competing in the corporate segment are curbing revenue growth. We expect Axtel to post a net loss of M$24 million, which compares unfavorably with the M$97 million gain posted in 4Q09. Lower EBITDA, higher depreciation charges, and a lower foreign exchange gain explain the YoY difference in net profits. On the mass market business, we expect Axtel to have maintained recent line and subscriber growth trends. We forecast net additions of fixed lines and broadband at 17,000 and 43,800, respectively, similar to the 16,000 and 44,400 posted in 3Q10. We believe that our margin estimates have downside risk, as Axtel may have to post already in 4Q10 results, some one-time charges related to cost-reduction efforts that will be launched in 1Q11. The cost-reduction program aims to cut M$20 million per month in costs and expenses, but could require an initial cash disbursement that would have to be provisioned in 4Q10. Our reference for eventual guidance on 2011 results. With the current cost structure, Axtel s EBITDA margin appears to be capped at 32%, and with a successful cost saving program as the one aimed at, the margin could reach 34%. Our official model estimates (still not considering our current 4Q10 preview) assume for 2011 revenue and EBITDA of M$10,994 million and M$3,575 million, respectively (32.5% margin). We also estimate lines and broadband subscribers to grow to 1,144,000 and 390,000 by year-end 2010, and capex of US$235 million. Axtel Fourth Quarter 2010 Preview U.S. Dollars in Millions a Mexican Pesos in Millions a 4Q10E 4Q09 % Ch Y/Y 4Q10E 4Q09 % Ch Y/Y 3Q10 % Ch Y/Y Sales % Sales 2,698 2, % 2, % Operating Profit % Operating Profit % % EBITDA % EBITDA % % EBITDA Margin 31.6% 33.7% -2.1 pp EBITDA Margin 31.6% 33.7% -2.1 pp 30.9% -4.6 pp Net Income (2) % Net Income (24) % (19) -67.3% EPADR (0.00) % EPS (0.02) % (0.01) -67.3% a Except per share/adr amounts. Sources: Company reports and Santander estimates Important disclosures/certifications are in the Important Disclosures section of this report. 9

10 Mexico TMT Sector: Post-Cancun Update and 4Q10 Previews VALUATION AND RISKS America Movil (Hold): Our DCF-derived YE2011 target price of US$62.00 per ADR (M$41.00 per share) assumes a WACC of 9.1% in U.S. dollar terms and a 2.75% nominal perpetuity growth rate. Main risks are related to regulatory changes, competition, and macroeconomic conditions. Telmex (Underperform): We derived our YE2011 target price of US$15.00 per ADR (M$9.90 per share) using a 10-year DCF valuation, with a WACC of 7.5% in nominal U.S. dollar terms, with no growth in perpetuity. Main risks are related to competition and migration to mobile services, regulatory changes, and macroeconomic conditions. Televisa (Hold): Our YE2011 target price of US$28.00 per ADR (M$71.00 per share) is based on a DCF valuation applied to a 10-year cash-flow forecast, using a U.S. dollar WACC of 9.3% and 3.0% U.S. dollar nominal growth in perpetuity. Main risks are related to trends in TV advertising, competition in the pay-tv and telecom business, and macroeconomic conditions. Megacable (Underperform): Our YE2011 target price of M$34.00 (US$2.58) per share is based on a DCF model applied to a 10-year cash-flow forecast, assuming a WACC of 9.5% and 2.5% perpetuity growth rate, both in U.S. dollar terms. Main risks are related to competition mainly from satellite TV providers and Telmex, management turnover experienced recently relative to the CFO and Network director posts, macroeconomic conditions, and reduced float. Axtel (Hold): Our YE2011 target price of M$9.00 (US$0.68) per share is based on a 10-year DCF valuation, using a WACC of 9.1% in nominal U.S. dollar terms, and 1.25% nominal growth in perpetuity. Main risks are related to competition mainly from Telmex, technology choices and their impact on capex and free cash flow, potential block sales of relatively large equity stakes, and macroeconomic conditions. 10 Important disclosures/certifications are in the Important Disclosures section of this report.

11 IMPORTANT DISCLOSURES America Movil 12-Month Relative Performance (U.S. Dollars) America Movil IPC 80 J-10 M-10 M-10 J-10 S-10 N-10 J-11 Sources: Bloomberg and Santander. America Movil Three-Year Stock Performance (U.S. Dollars) B $ /13/07 B $ /10/08 B $ /1/08 H $ /23/09 H $ /8/09 H $ /8/09 B $ /2/10 H $ /27/10 3,400 2,900 2,400 1,900 1, Analyst Recommendations and Price Objectives B: Buy H: Hold UP: Underperform UR: Under Review 0.0 D-07 M-08 J-08 S-08 D-08 M-09 J-09 S-09 D-09 M-10 J-10 S-10 D America Movil (L Axis) IPC (R Axis) Source: Santander. Important disclosures/certifications are in the Important Disclosures section of this report. 11

12 Mexico TMT Sector: Post-Cancun Update and 4Q10 Previews Axtel 12-Month Relative Performance (U.S. Dollars) IPC 60 Axtel J-10 M-10 M-10 J-10 S-10 N-10 J-11 Sources: Bloomberg and Santander. Axtel Three-Year Stock Performance (U.S. Dollars) B $2.68 4/2/08 **Change in Analyst Coverage B $ /1/08 H $0.62 5/7/09 B $0.90 9/16/09 H $1.12 1/21/10 H $0.87 3/16/10 B $ /15/10 B $0.74 6/9/ H $1.70 B $3.40 B $1.12 **8/18/08 12/11/07 12/8/ D-07 M-08 J-08 S-08 D-08 M-09 J-09 S-09 D-09 M-10 J-10 S-10 D-10 3,400 2,900 2,400 1,900 1, Analyst Recommendations and Price Objectives B: Buy H: Hold UP: Underperform UR: Under Review Axtel (L Axis) IPC (R Axis) Source: Santander. 12 Important disclosures/certifications are in the Important Disclosures section of this report.

13 Televisa 12-Month Relative Performance (U.S. Dollars) IPC Televisa 80 J-10 M-10 M-10 J-10 S-10 N-10 J-11 Sources: Bloomberg and Santander. Televisa Three-Year Stock Performance (U.S. Dollars) B $ /3/08 B $ /1/08 B $ /3/09 UP $ /8/09 H $ /21/10 H $ /22/10 H $ /15/10 5 B $33.00 UP $19.00 H $ /9/08 7/20/09 10/6/10 B $ /1/10 D-07 M-08 J-08 S-08 D-08 M-09 J-09 S-09 D-09 M-10 J-10 S-10 D-10 3,500 3,000 2,500 2,000 1,500 1, Analyst Recommendations and Price Objectives B: Buy H: Hold UP: Underperform UR: Under Review Televisa (L Axis) IPC (R Axis) Source: Santander. Important disclosures/certifications are in the Important Disclosures section of this report. 13

14 Mexico TMT Sector: Post-Cancun Update and 4Q10 Previews IMPORTANT DISCLOSURES Telmex 12-Month Relative Performance (U.S. Dollars) IPC Telmex 75 J-10 M-10 M-10 J-10 S-10 N-10 J-11 Sources: Bloomberg and Santander. Telmex Three-Year Stock Performance (U.S. Dollars) H $ /1/08 UP $ /25/09 H $ /8/10 3,500 3,000 2,500 2,000 Analyst Recommendations and Price Objectives B: Buy H: Hold UP: Underperform UR: Under Review 16 H $ /26/07 UP $25.00 H $ UP $9.90 8/5/08 11/19/09 10/27/10 10 D-07 M-08 J-08 S-08 D-08 M-09 J-09 S-09 D-09 M-10 J-10 S-10 D-10 1,500 1, Telmex (L Axis) IPC (R Axis) Source: Santander. Megacable 12-Month Relative Performance (U.S. Dollars) Megacable IPC 80 J-10 M-10 M-10 J-10 S-10 N-10 J-11 Sources: Bloomberg and Santander. 14 Important disclosures/certifications are in the Important Disclosures section of this report.

15 Key to Investment Codes IMPORTANT DISCLOSURES Rating Definition % of Companies Covered with This Rating % of Companies Provided Investment Banking Services in the Past 12 Months Buy Expected to outperform the local market benchmark by more than 10% % 65.00% Hold Expected to perform within a range of 0% to 10% above the local market benchmark % 27.50% Underperform/Sell Expected to underperform the local market benchmark % 7.50% Under review The numbers above reflect our Latin American universe as of Thursday, January 20, For a discussion, if applicable, of the valuation methods used to determine the price targets included in this report and the risks to achieving these targets, please refer to the latest published research on these stocks. Research is available through your sales representative and other electronic systems. Target prices are 2011 year-end unless otherwise specified. Recommendations are based on a total return basis (expected share price appreciation + prospective dividend yield) unless otherwise specified. Stock price charts and rating histories for companies discussed in this report are also available by written request to Santander Investment Securities Inc., 45 East 53 rd Street, 17 th Floor (Attn: Research Disclosures), New York, NY USA. Ratings are established when the firm sets a target price and/or when maintaining or reiterating the rating. Ratings may not coincide with the above methodology due to price volatility. Management reserves the right to maintain or to modify ratings on any specific stock and will disclose this in the report when it occurs. Valuation methodologies vary from stock to stock, analyst to analyst, and country to country. Any investment in Latin American equities is, by its nature, risky. A full discussion of valuation methodology and risks related to achieving the target price of the subject security is included in the body of this report. The benchmark used for local market performance is the country risk of each country plus the 1-year U.S. Treasury yield plus 5.5% of equity risk premium, unless otherwise specified. The benchmark plus the 10.0% differential used to determine the rating is time adjusted to make it comparable with the total return of the stock over the same period. For additional information about our rating methodology, please call (212) This research report ( report ) has been prepared by Santander Investment Securities Inc. ("SIS"; SIS is a subsidiary of Santander Investment I, S.A. which is wholly owned by Banco Santander, S.A. ["Santander"]) on behalf of itself and its affiliates (collectively, Grupo Santander) and is provided for information purposes only. This report must not be considered as an offer to sell or a solicitation of an offer to buy any relevant securities (i.e., securities mentioned herein or of the same issuer and/or options, warrants, or rights with respect to or interests in any such securities). Any decision by the recipient to buy or to sell should be based on publicly available information on the related security and, where appropriate, should take into account the content of the related prospectus filed with and available from the entity governing the related market and the company issuing the security. This report is issued in Spain by Santander Investment Bolsa, Sociedad de Valores, S.A. ( Santander Investment Bolsa ) and in the United Kingdom by Banco Santander, S.A., London Branch. Santander London is authorized by the Bank of Spain. This report is not being issued to private customers. SIS, Santander London and Santander Investment Bolsa are members of Grupo Santander. The following analysts hereby certify that their views about the companies and their securities discussed in this report are accurately expressed, that their recommendations reflect solely and exclusively their personal opinions, and that such opinions were prepared in an independent and autonomous manner, including as regards the institution to which they are linked, and that they have not received and will not receive direct or indirect compensation in exchange for expressing specific recommendations or views in this report, since their compensation and the compensation system applying to Grupo Santander and any of its affiliates is not pegged to the pricing of any of the securities issued by the companies evaluated in the report, or to the income arising from the businesses and financial transactions carried out by Grupo Santander and any of its affiliates: Gregorio Tomassi*, Valder Nogueira*, Diana Leyva*. *Employed by a non-us affiliate of Santander Investment Securities Inc. and not registered/qualified as a research analyst under FINRA rules, and is not an associated person of the member firm, and, therefore, may not be subject to the FINRA Rule 2711 and Incorporated NYSE Rule 472 restrictions on communications with a subject company, public appearances, and trading securities held by a research analyst account. 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From time to time, Grupo Santander and/or any of its officers or directors may have a long or short position in, or otherwise be directly or indirectly interested in, the securities, options, rights or warrants of companies mentioned herein. Any U.S. recipient of this report (other than a registered broker-dealer or a bank acting in a broker-dealer capacity) that would like to effect any transaction in any security discussed herein should contact and place orders in the United States with SIS, which, without in any way limiting the foregoing, accepts responsibility (solely for purposes of and within the meaning of Rule 15a-6 under the U.S. Securities Exchange Act of 1934) for this report and its dissemination in the United States by Santander Investment Securities Inc. All Rights Reserved. 2011