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Global Emerging Markets Chile
Macro Strategy
21 April 2008
Monthly Market Monitor (M3)
Chile: open forbusiness!
We highlight 2 themes and 4 stocks:1) Food inflation: Soquimich (chemicals)and Multiexport Foods (fish farm); and 2)Commodity boom: CAP (iron ore & steel)
and Vapores (shipping).
We have published our fourth Monthly Market Monitor (M3).
Guilherme Paiva, CFAStrategist
(1) 212 250 2873
Andres OrlandiStrategist
(1) 212 250 2975
Deutsche Bank Securities Inc.
All prices are those current at the end of the previous trading session unless otherwise indicated. Prices are sourced fromlocal exchanges via Reuters, Bloomberg and other vendors. Data is sourced from Deutsche Bank and subject companies.
Deutsche Bank does and seeks to do business with companies covered in its research reports. Thus, investors shouldbe 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.
Independent, third-party research (IR) on certain companies covered by DBSI's research is available to customers ofDBSI in the United States at no cost. Customers can access this IR at http://gm.db.com, or call 1-877-208-6300 torequest that a copy of the IR be sent to them.
DISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED IN APPENDIX 1
Company
GlobalMarketsResea
rch
Our M3 report focus on Equity Strategy and Economics for a specific countryWe have published our fourth Monthly Market Monitor (M3). Our first, second andthird reports, entitled Colombia: waiting for lift-off, Peru: the dawn of a goldenera? and Argentina: a fragile juggling act, were published in early 2008. Everymonth, we will publish an M3 report with our Equity Strategy and Economicsviews for one of the six countries that are part of the MSCI Latin America index.
Top-down equity investment ideas and market analysisThe M3 can be divided in two main sections: A forward-looking segment in which we highlight: a) our index target andrecommendation for the equity market, b) the medium-term macro-economicoutlook for the country and c) investment themes and related stocks; and An equity market and economic guide in which we highlight: a) the main
equity indices and their constituents, b) liquidity and corporate governanceconsiderations and c) the macroeconomic and policy background of thecountry.
Our 2008 year-end target for the IPSA index is 3,200 points (8% ETR in pesos)We recommend a small overweight in Chilean stocks for three reasons: 1) soliddouble-digit earnings growth (14% in 2008 and 17% in 2009) with little downsiderisk; 2) leverage to global growth with counter-cyclical policies that mitigate
slowdowns and 3) fair equity valuations which should not prevent further re-rating.We highlight two investment themes and four related stocks Food inflation (2 stocks): Soquimich (chemicals) and Multiexport Foods (fish
farm); and Commodity boom (2 stocks): CAP (iron ore & steel) and Vapores (shipping).
The most open and leveraged to global growth economy in Latin AmericaIn the long term, we believe the country has the best macroeconomicfundamentals and the brightest growth outlook in the region. In the short term, wehave revised down our 2008 GDP forecast to a still robust 4.4%, as the Chileaneconomy continues to battle the negative supply shock from higher oil prices.
The latest inflation readings have been benign but we dont believe we are out ofthe woods yet. Our base-case scenario for interest rates envisions the CentralBank on hold during the next few quarters. However, the risk to our forecast is tothe upside, as the Central Bank should maintain a tightening bias as long asinflation remains above target.
Latin America research team
Head of ResearchRizwan Ali1 (212) 250 3712
StrategyGuilherme Paiva, CFA1 (212) 250 2873
Construction and TransportDaniel McGoey, CFA52 (55) 5201 8017
Bernardo Carneiro, CFA55 (11) 2113 5975
Energy & UtilitiesMarcus Sequeira1 (212) 250 3255
Financial ServicesMario Pierry1 (212) 250 6957
Food & Beverage and RetailReinaldo Santana52 (55) 5201 8016
MediaMiguel Garcia1 (212) 250 7977
Metals & MiningJorge Beristain, CFA1 (212) 250 2723
David S.Martin1 (212) 250 5580
Pulp & Paper and ConglomeratesMarcelo Luna1 (212) 250-7911
TelecomRizwan Ali
1 (212) 250 3712
Small & Mid CapsJosh Milberg, CFA55 (11) 2113 5971
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21 April 2008 Monthly Market Monitor (M3)
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Table of Contents
Overview ............................................................................................ 3Chile: Open for business! ............................................... ...................................................... ....3Equity Strategy.................................................................................. 4Target and recommendation.....................................................................................................4Valuation ............................................... ................................................... ................................. 5Investment themes...................................................................................................................9Correlations.................................................. ....................................................... .................... 10Macro outlook..................................................................................11Economic activity ...................................................... ...................................................... ........ 11Inflation ................................................. ...................................................... ............................ 12Monetary policy .................................................. ...................................................... .............. 12Fiscal accounts................................................. ...................................................... ................. 13External sector .............................................. ...................................................... .................... 14Equity guide..................................................................................... 16Indices............................................... ................................................... ................................... 16Index performance.................................................... ...................................................... ........ 16Market size and liquidity................................... ................................................... .................... 18Market participants ................................................... .................................................... .......... 19Corporate governance..................................................................... ........................................ 19Index sector weights and market cap..................................................... ................................ 21Stock weights ..................................................... ...................................................... .............. 22Stock liquidity................................................... .................................................... ................... 22Stock performance................................. ................................................... .............................. 23Appendix Company descriptions................................................. ......................................... 25Macro background .......................................................................... 29Economic activity ...................................................... ...................................................... ........ 29Inflation ................................................. ...................................................... ............................ 31Monetary policy .................................................. ...................................................... .............. 32External sector .............................................. ...................................................... .................... 35Fiscal accounts................................................. ...................................................... ................. 38Latam Equity Strategy reports guide ............................................ 40
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Overview
Chile: open for business!
We have published our fourth Monthly Market Monitor (M3)1. Every month, we will publish aM3 report with our Equity Strategy and Economics views for one of the six countries that are
part of the MSCI Latin America index (Brazil, Mexico, Chile, Argentina, Peru and Colombia).
The M3 report can be divided in two main sections:
A forward-looking segment in which we highlight: a) our index target and
recommendation for the equity market, b) the medium-term macro-economic outlook for
the country and c) top-down investment themes and related stocks; and
An equity market and economics guide in which we highlight: a) the main equity indices
and their constituents, b) liquidity and corporate governance considerations and c) the
macroeconomic and policy background of the country.
Equity strategy
Our 2008 year-end target for the IPSA index is 3,200 points for an estimated total return (ETR)
of 8% in local currency terms dividends included. Moreover, we recommend a small
overweight position in Chilean equities based on three arguments:
1. Solid double-digit earnings growth (14% in 2008 and 17% in 2009) and little downside
risk to our earnings estimates as cyclical stocks only account for 20-25% of the market;
2. Leverage to global growth with counter-cyclical policies that should mitigate slowdowns.
We forecast the Chilean economy should grow 4.4% in 2008 and accelerate to 4.7% in
2009, while Latin America should decelerate from 4.4% to 4.2%; and
3. Fair equity valuations which should not prevent further multiple expansion. We estimate
Chilean stocks currently trade at forward 9.9x EBITDA and 16.5x earnings.
We also highlight two investment themes and four related stocks that we deem interesting:
Food inflation:Soquimich (chemicals) and Multiexport Foods (fish farm); and
Commodity boom:CAP (iron ore & steel producer) and Vapores (shipping).
Economics
Recently, we have revised down our 2008 GDP forecast to a still-robust 4.4% as the Chilean
economy continues to battle the negative supply shock from higher oil prices. The latest
inflation readings have been benign but we dont believe we are out of the woods yet. Our
base-case scenario for interest rates envisions the Central Bank on hold during the next few
quarters. However, the risk to our forecast is to the upside as the Central Bank should
maintain a tightening bias as long as inflation remains above target.
Lastly, we analyze at length the macroeconomic trends that have impacted Chilean
fundamentals over the past decade. Our analysis can be divided in five sections: 1) economic
activity, 2) inflation, 3) monetary policy, 4) external sector and 5) fiscal accounts. Overall, Chile
has the most open economy in Latin America and it is leveraged to global growth. We
believe the country has the best long-term macroeconomic fundamentals and the brightest
growth outlook in the region.
1Our first three M3 reports entitled Colombia: waiting for lift-off, Peru: the dawn of a golden era? and Argentina: a
fragile juggling act, were published on January 16, February 20 and March 26, 2008, respectively.
Guilherme Paiva, CFA
+1 (212) 250-2873
We have published our
fourth Monthly Market
Monitor (M3)
The M3 report can be
divided in two main sections
Our year-end target for the
IPSA index is 3,200 points
We highlight two top-down
investment themes and four
related stocks
We have revised down our
2008 GDP forecast to a still-
robust 4.4%
We provide an analysis of
the macro background of
Chile
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Equity StrategyTarget and recommendation
We forecast a 3,200 points year-end target for the local IPSA index. Our 2008 estimate for
Chilean equities embeds an 8% ETR in local currency. We derive our index target from: 1)
bottom-up earnings growth forecasts (for the following 12-24 months) generated by our
fundamental analysts and 2) the forecast change to the market forward-looking P/E multiple.
Our 2008YE target for the IPSA is based on 1) a 17% earnings growth estimate for 2009 and
2) an 11% de-rating (P/E multiple contraction) for Chilean stocks during the current year.
Figure 1: Chilean IPSA index (2002-present) and DB 2008
target
Figure 2: Chile equity returns (upside), earnings growth
and P/E multiple change
0
1,000
2,000
3,000
4,000
2002 2003 2004 2005 2006 2007 2008
5%
28%19%19%
20%
78%
-12%-2%
-17%
-100%
-50%
0%
50%
100%
2000A 2001A 2002A 2003A 2004A 2005A 2006A 2007A 2008E
NTM PE Re/(De) Rating EPS Growth (12-24 months)NTM return
Source: Deutsche Bank Source: Deutsche Bank
We recommend a small overweight position in Chilean equities for three reasons:
Earnings growth and visibility: We forecast Chilean companies will post a solid 14%
earnings growth rate in 2008 and 17% in 2009. Furthermore, we see little downside riskto our earnings estimates as volatile cyclical stocks only account for 20-25% of MSCI
Chile and IPSA despite the leverage that the Chilean economy has to global growth via
copper;
Economic growth: We estimate the Chilean economy should grow a robust 4.4% in
2008 and accelerate to 4.7% in 2009, while we expect Latin American growth to
decelerate from 4.4% to 4.2% for the same years. Moreover, the Chilean economy is
among the few in the region that can implement effective counter-cyclical macro
policies;
Valuation: Chilean stocks currently trade at 12-month forward looking 9.9x EV/EBITDA
and 16.5x earnings. These multiples are on average roughly in line with their 8-year
historical mean (between minus and plus one standard deviation) and therefore have
room for further expansion (re-rating).
Figure 3: DB Latin America forecasted index targets and returns
4/21/08 2008 LC Div ETR local FX FX 2008 USD ETR
Current target Upside yield currency spot forecast target Upside USD
Brazilian Bovespa 64,923 70,000 7.8% 2.2% 10.0% 1.66 1.75 40,000 2.6% 5.2%
Mexican Bolsa 31,796 35,000 10.1% 3.4% 13.5% 10.51 10.9 3,211 6.2% 10.0%
Chilean IPSA 3,064 3,200 4.4% 3.2% 7.7% 457 464 6.9 2.9% 6.2%
Argentine Merval 2,186 2,200 0.6% 0.8% 1.4% 3.17 3.26 675 -2.1% -1.2%
Peruvian IGBVL 17,470 18,000 3.0% 5.3% 8.3% 2.75 2.87 6,272 -1.4% 4.1%
Colombian IGBC 9,657 10,000 3.6% 1.6% 5.2% 1,782 2,231 4.5 -17.3% -14.9%
MSCI Latin America 4,750 2.5% 4,900 3.1% 5.6%
Source: Deutsche Bank
Guilherme Paiva, CFA
+1 (212) 250-2873
We forecast a 3,200 points
year-end target for the local
IPSA index
We recommend a small
overweight position in
Chilean equities
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Valuation
Country
Deutsche Bank has a proprietary valuation model for four Latin American equity markets
(Brazil, Mexico, Chile and Argentina). The coverage breadth of our fundamental equity
research department is representative of the overall market, and therefore allows us to
aggregate bottom-up financial data in order to calculate country valuation metrics.
Deutsche Bank equity research department covers 18 companies in Chile. These stocks have
a combined market capitalization of approximately USD136bn, and they account for
approximately 80% of the MSCI Chile and 70% of the IPSA indices.
Our market multiples are calculated by adding nominal values of individual companies (for
example, the price-to-earnings ratio is the aggregate market cap divided by the aggregate net
income) rather than a market-cap-weighted multiple. In our opinion, this methodology better
reflects reality because of the non-linearity of the price-to-earnings ratio (i.e. it tends toward
infinity when earnings tend to zero).
Chilean stocks trade at 9.9x forward-looking Ebitda estimates, which is 7% lower than the10.6x 8-year historical average. Alternatively, the market trades at 0.5 standard deviations
below the historical mean. We should note that Chilean stocks reached a recent peak of
10.8x forward Ebitda (+2% or 0.1x standard deviations) in October 2007.
The Chilean market trades at 16.5x forward earnings, which is 10% higher than the 15.0x 8-
year historical average. Alternatively, the stocks trade at 0.8 standard deviations above the
historical mean. Furthermore, our equity composite reached a recent peak of 18.6x forward
earnings (+24% or 2.0x standard deviations) in October 2007.
Figure 4: Chile forward EV/Ebitda (2000-2008) Figure 5: Chile forward P/E (2000-2008)
9.9x
6x
9x
12x
15x
2000 2002 2004 2006 2008
Chile Avg. +1 S.D. -1 S.D.
16.5x
10x
14x
18x
22x
2000 2002 2004 2006 2008
Chile Avg. +1 S.D. -1 S.D.
Source: Bloomberg and Deutsche Bank Source: Bloomberg and Deutsche Bank
Meanwhile, Chilean stocks trade at 2.6x forward book value, which is 50% higher than the
1.7x 8-year historical average. Alternatively, the market trades at 2.1 standard deviations
above the historical mean. We should note that Chilean stocks reached a peak of 2.8x
forward book value (+65% or 2.7x standard deviations) in October 2007.
The current profitability of Chilean equities, measured by return on equity (ROE), is 15.5%,
which is approximately 4.2 percentage points (37%) higher than the 11.3% 8-year historical
average. Alternatively, current profitability is 1.6 standard deviations above the historical
mean. Therefore, the ROE generated by Chilean companies almost justifies their price-to-
book valuation level.
DB has a proprietary
valuation model for four
Latin equity markets
DB equity research covers
18 companies in Chile
Our market multiples are
calculated by adding
nominal values of individual
companies
Chilean stocks trade at anattractive 9.9x forward
Ebitda
and 16.5x forward
earnings
Chilean stocks trade at 2.6x
forward book value
and generate a 15.5% ROE
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Figure 6: Chile forward P/BV (2000-2008)
2.6x
0.5x
1.0x
1.5x
2.0x
2.5x
3.0x
2000 2002 2004 2006 2008
Chile Avg. +1 S.D. -1 S.D.
Source: Deutsche Bank
Finally, Chilean stocks trade at 3.4% forward-looking dividend yield, which is 20% lower than
the 4.2% 8-year historical average. Alternatively, the market trades at 1.1 standard deviation
below the historical mean. We should note that Chilean stocks reached a recent bottom of
2.8% forward dividend yield (-35% or -2.0x standard deviations) in December 2005.
Figure 7: Chile forward return-on-equity (2000-2008) Figure 8: Chile forward dividend yield (2000-2008)
15.5%
5%
7%
9%
11%13%
15%
17%
2000 2002 2004 2006 2008
Chile Avg. +1 S.D. -1 S.D.
3.4%
2%
3%
4%
5%
6%
2000 2002 2004 2006 2008
Chile Avg. +1 S.D. -1 S.D.
Source: Bloomberg and Deutsche Bank Source: Bloomberg and Deutsche Bank
Stocks
We calculated price-to-earnings, price-to-book value, enterprise value-to-EBITDA, dividendyield and ROE ratios for the forty companies of the MSCI Chile and IPSA indices. We depict
the data in two tables:
The first table encompasses the 18 Chilean stocks currently covered by Deutsche Bank
fundamental equity research department. Furthermore, it displays 2008 valuation
multiples based on our analysts financial forecasts; and
The second table includes the 40 constituents of MSCI Chile and IPSA, and depicts 2007
valuation multiples based on a database created using historical company fillings and
other data sources.
Chilean stocks trade at 3.4%
forward-looking dividend
yield
We calculated valuationratios for 40 stocks
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Figure 9: Chile 2008 valuation multiples companies under Deutsche Bank coverage
4/21/08 Price Target Mkt Cap EV/ Dividend
Company Bbg ticker Rating USD USD Upside (USDm) PE P/BV EBITDA yield ROE
Falabella FALAB CI Hold 5.9 5.6 -5% 14,292 18.8 4.1 5.6 1.5% 22%
Socovesa SOCOVESA CI Buy 0.4 0.6 40% 561 11.9 1.3 11.9 2.2% 11%
Consumer Discretionary 14,854 14.6 2.4 9.4 1.9% 15%
Cencosud CENCOSUD CI Hold 4.2 4.7 12% 8,402 19.2 1.9 7.6 1.6% 10%
Cervecerias Unidas CCU CI Buy 7.6 9.6 26% 2,442 14.6 2.6 3.3 4.4% 17%
Distribucion y Servicio DYS CI Sell 0.4 0.3 -20% 2,724 19.8 2.1 6.0 1.2% 10%
Embotelladora Andina ANDINAB CI Buy 21.9 20.0 -8% 2,627 13.0 4.0 1.7 6.4% 31%
LA Polar LAPOLAR CI Hold 6.1 6.2 2% 1,352 15.9 3.7 4.5 1.8% 23%
Ripley RIPLEY CI Hold 1.0 1.7 73% 1,868 11.3 1.4 7.3 2.4% 13%
Consumer Staples 19,415 16.9 2.4 5.8 2.7% 15%
Banco de Chile CHILE CI Hold 0.1 0.1 11% 6,208 10.2 2.6 nm 8.6% 26%
Banco Santander Chile BSAN CI Buy 0.1 0.1 12% 9,609 11.7 2.7 nm 4.6% 23%
Financials 15,818 11.1 2.7 nm 6.1% 24%
Copec COPEC CI Hold 16.9 16.7 -1% 22,019 18.9 2.5 5.7 2.0% 13%
LAN Airlines LAN CI Buy 14.0 17.0 22% 4,780 14.0 3.6 4.5 2.7% 26%
Industrials 26,798 18.0 2.7 5.5 2.1% 15%
Empresas CMPC CMPC CI Hold 38.3 41.7 9% 7,895 18.0 1.3 7.7 1.7% 7%
Materials 7,895 18.0 1.3 7.7 1.7% 7%
Cia Telecom de Chile CTCA CI Hold 2.1 2.5 18% 2,068 37.5 1.0 4.3 6.5% 3%
Entel ENTEL CI Buy 17.5 23.0 32% 4,147 13.0 2.8 2.4 4.5% 21%
Telecom 6,214 21.1 2.2 3.0 5.1% 15%
Colbun COLBUN CI Sell 0.2 0.2 -13% 2,686 nm 1.1 nm 0.0% nm
Endesa ENDESA CI Hold 1.6 1.6 -4% 13,623 24.9 3.9 5.6 2.0% 16%
Enersis ENERSIS CI Buy 0.4 0.5 17% 12,828 27.3 2.3 5.1 1.8% 9%
Utilities 29,137 23.7 2.9 4.8 1.7% 11%
Chile 120,131 18.3 2.6 4.9 2.7% 15%
*Sector valuations are market-cap weighted; Source: Deutsche Bank
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Figure 10: Chile 2007 valuation multiples 40 members of MSCI Chile and IPSA
4/21/08 Price Mkt Cap
Company Bbg ticker Rating USD (USDm) PE P/BV EV/EBITDA Div yield ROE
Falabella FALAB CI Hold 5.9 14,292 26.7 4.8 2.5% 18%
Forus FORUS CI NC 1.5 396 19.6 2.8 2.5% 14%
Parque Arauco PARAUCO CI NC 1.3 798 63.4 1.8 2.0% 3%
Salfacorp SALFACOR CI NC 2.2 551 11.6 1.4 1.3% 12%
Socovesa SOCOVESA CI NC 0.4 561 16.1 1.3 3.3% 8%
Consumer Discretionary 16,599 27.5 4.4 18.6 2.5% 17%
Embotelladora Andina ANDINAB CI Buy 21.9 2,627 14.7 4.3 6.4% 29%
Cencosud CENCOSUD CI Hold 4.2 8,402 18.2 2.2 1.1% 12%
Cervecerias Unidas CCU CI Buy 7.6 2,442 14.1 2.8 3.5% 20%
Concha y Toro CONCHA CI NC 2.0 1,435 19.2 2.9 1.0% 15%
Distribucion y Servicio DYS CI Sell 0.4 2,724 28.1 2.2 1.1% 8%
Empresas Iansa IANSA CI NC 0.1 161 14.9 0.4 6.6% 3%
LA Polar LAPOLAR CI Hold 6.1 1,352 18.2 4.4 1.4% 24%
Multiexport Foods MULTIFOO CI NC 0.4 443 28.4 2.2 0.0% 8%
Ripley RIPLEY CI Hold 1.0 1,868 13.1 1.6 2.2% 12%
Consumer Staples 21,454 18.4 2.7 11.7 2.2% 15%
Banco de Chile CHILE CI Hold 0.1 6,208 11.7 2.7 nm 4.8% 23%
Banco de Creditos e BCI CI NC 33.6 3,330 11.2 2.2 nm 3.8% 19%
Banco Santander Chile BSAN CI Buy 0.1 9,609 14.2 3.0 nm 4.2% 21%
Corpbanca CORPBANC CI NC 0.0 1,519 13.6 1.4 nm 1.4% 11%
Financials 20,666 12.9 2.7 nm 4.1% 21%
Banmedica BANMED CI NC 1.2 989 15.5 4.4 6.0% 28%
Health Care 989 15.5 4.4 4.0 6.0% 28%
Almendral ALMEN CI NC 0.1 1,572 11.9 1.5 7.2% 13%
Antarchile ANTAR CI NC 22.8 10,815 16.3 2.0 4.0% 12%
Copec COPEC CI Hold 16.9 22,019 20.0 2.7 2.0% 13%
LAN Airlines LAN CI Buy 14.0 4,780 15.2 4.3 4.4% 28%
Madeco MADECO CI NC 0.1 660 15.4 1.1 0.2% 7%
Sigdo Koppers SK CI NC 0.9 755 12.3 1.3 11.0% 10%
Vapores VAPORES CI NC 1.9 1,421 12.7 1.7 0.5% 1
Industrials 42,021 17.8 2.6 9.2 3.1% 15%
Sonda SONDA CI NC 1.6 1,275 25.2 2.4 1.1% 10%
Information Technology 1,275 25.2 2.4 5.9 1.1% 10%
CAP CAP CI NC 35.5 5,411 23.9 6.3 1.8% 27%
Empresas CMPC CMPC CI Hold 38.3 7,895 15.0 1.3 1.6% 9%
Masisa MASISA CI NC 0.2 1,379 39.2 1.1 0.9% 3%
Soc. Quimica y Minera SQM/B CI NC 30.4 8,541 50.1 7.4 1.2% 15%
Materials 23,225 31.4 4.7 13.7 1.5% 15%
Cia Telecom de Chile CTCA CI Hold 2.1 2,068 86.8 1.0 7.5% 1%
Entel ENTEL CI Buy 17.5 4,147 14.4 3.0 4.4% 21%
Telecom 6,214 38.5 2.4 5.4 5.4% 14%
AES Gener GENER CI NC 0.5 3,025 34.3 1.4 1.7% 4%
Colbun COLBUN CI Sell 0.2 2,686 nm 1.0 nm 0.0% nm
Cia General de Eletricidad CGE CI NC 7.7 2,712 13.1 1.9 5.6% 14%
Edelnor EDELNOR CI NC 1.6 746 12.7 1.9 0.0% 15%
Endesa ENDESA CI Hold 1.6 13,623 29.0 4.1 1.8% 14%
Enersis ENERSIS CI Buy 0.4 12,828 26.5 2.4 1.9% 9%
Inv. Aguas Metropolitanas IAM CI NC 1.3 1,286 23.9 1.2 4.0% 5%
Utilities 36,907 26.7 2.8 8.0 2.0% 11%
CHILE 169,350 22.8 3.1 10.8 2.7% 15%*Sector valuations are market-cap weighted; Source: Deutsche Bank, company data
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Investment themes
We highlight two top-down sector investment themes and four related stocks:
Food inflation
Food inflation is a current global phenomenon. In our report entitled Soft grains can earn
hard cash, published on March 11, we analyzed the four main drivers of soft grains demand:1) population growth, 2) higher GDP per capita, 3) ethanol consumption and 4) global
warming. Our conclusion was food inflation is mainly a structural investment theme on staple
goods. There are two vehicles in the Chilean equity market to gain exposure to food inflation:
Soquimich: the company produces specialty fertilizers (50% of companys sales and
50% share of the global potassium nitrate market in 2007) besides iodine, lithium and
industrial chemicals and could benefit from an increase in global arable land. Soquimich
has a sustainable competitive advantage with its exclusive access to two superior natural
endowment: 1) caliche and 2) salar brines located in the Atacama desert; and
Multiexport Foods: the firm operates fish farms and it is the third largest Chilean
salmon exporter. Multiexport Foods is short grains but could benefit from an eventual
increase in protein prices driven by cost inflation. The key is the competitive advantage
of fish versus poultry, pork and beef. The transformation ratio (number of kilos of grains
equivalent to produce one kilo of protein) is only 1.2 for fish versus 2.0 for poultry, 4.0 for
pork and 7.0 for beef.
Figure 11: Potassium nitrate main end markets and
demand growth
Figure 12: Baltic capesize freight index (rebased:
2002=100)
Vegetables
40%Industrial
crops20%
Others
15%
Fruits
25%
4.8% 2002-07 CAGR
0
500
1,000
1,500
2,000
2002 2003 2004 2005 2006 2007 2008
Source: Deutsche Bank and Soquimich Source: Deutsche Bank
Commodity boom
China has grown at an impressive pace in the 21st century, supported by secular trends. The
gradual improvement in income per capita levels continues to drive individuals from the
countryside to the main cities. Two vehicles to gain exposure to the Chinese urbanization
theme through Chilean stocks are:
CAP: the company is an integrated long and flat steel producer. The iron ore division
accounted for ~40% of the 2007 consolidated EBITDA while the steel division accounted
for ~60%. CAP intends to basically double its iron ore output from 8.2m mtons in 2007
to 15.0m mtons in 2010 and its crude steel capacity from 1.5m mtons in 2007 to 2.5-
3.0m mtons in 2012; and
Vapores: the firm is the largest shipping company in Latin America, operating more than
100 vessels. Vapores main service is container transport for which demand has grown
at an average 10% per year between 2002 and 2006. The company has benefited from
the increase in freight rates driven by Chinese demand despite its exposure to higher oil
prices.
We highlight two top-down
investment themes
Food inflation is a current
global phenomenon
China has grown at an
impressive pace
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Correlations
We calculated 2-year correlations for Chilean equities versus U.S. and regional stocks, the
foreign exchange rate, country risk and copper prices using weekly data. The analysis is
useful to have a better understanding of the potential macro drivers of Chilean stocks, even
though correlations do not necessarily imply causality.
MSCI Chile exhibits strong correlations (higher than +0.5 or lower than -0.5) with the IPSA
(+0.93) - not a surprise despite the difference in index compositions and currency returns
with MSCI Latin America (+0.79) and with the U.S. S&P500 (+0.73) prices. Furthermore, the
international equity benchmark also has a strong positive relationship with the foreign
exchange rate (+0.55). Interestingly, country risk (-0.30) and copper prices (+0.35) exhibited
weak correlations between -0.5 and +0.5.
Meanwhile, the IPSA, similarly, exhibits strong correlations with MSCI Chile (+0.93), with
MSCI Latin America (+0.73) and with the U.S. S&P500 (+0.69) prices. However, the local
equity benchmark does not have a strong relationship with the foreign exchange rate (+0.26).
Lastly, the correlations between the local equity benchmark with country risk and copper
prices are weak and fall in the -0.5 to +0.5 range.
Figure 13: Correlations between Chilean equities and selected assets
04/21/08 MSCI Chile IPSA MSCI LA S&P500 CLP 5y CDS Copper
MSCI Chile 1.00 0.93 0.79 0.73 0.55 -0.30 0.35
IPSA 0.93 1.00 0.73 0.69 0.26 -0.37 0.26
MSCI LA 0.79 0.79 1.00 0.80 0.53 -0.34 0.38
S&P500 0.73 0.69 0.80 1.00 0.44 -0.34 0.20
CLP 0.55 0.26 0.53 0.44 1.00 -0.02 0.40
5y CDS -0.30 -0.37 -0.34 -0.34 -0.02 1.00 -0.07
Copper 0.35 0.26 0.38 0.20 0.40 -0.07 1.00
Source: Deutsche Bank
We calculated correlations
for Chilean equities versus
selected assets
MSCI Chile exhibits strong
correlations with IPSA,
MSCI Latam, U.S. S&P500
and the peso
The IPSA, similarly, also
exhibits strong correlations
with other equity indices
but not with the currency
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Macro outlook
Economic activity
We revised our 2008 GDP growth projection to a still-optimistic 4.4% from 4.8% we hadbefore. The Central Bank announced that Februarys economic activity indicator (Imacec)
increased by 5.6% YoY, or above our expectation of 5.1% YoY. Our estimate had already
been revised upward recently on the back of the stronger-than-expected industrial production
figures posted during the second month of this year. According to the press release, this
reading was positively affected by one additional working day in February 2008 versus 2007.
Even though these activity numbers surprised on the upside, they do not change our view
that this years economic outlook remains worrisome because:
1. Record high inflation will impose an additional drag on households disposable income
and consumption should decelerate further in the quarters ahead;
2. Recent real exchange rate appreciation is expected to harm some manufacturing
sectors, and the positive effect that the new pulp plants had over industrial production in
2007 is expected to fade away as we are not aware of additional investments;
3. The outlook for the global economy is deteriorating; and
4. The short-term energy situation does not look promising and the likelihood of rationing
keeps mounting.
On the last point in particular, as a result of operational problems, the Nehuenco power
station is going to remain off-line for a few more months. Additionally, current forecasts
suggest another dry year for 2008 (La Nia-related), which exacerbate the problem caused by
already low water reservoir levels. Finally, the uncertainty regarding natural gas imports from
Argentina keeps increasing, as that country is facing its own energy crisis.
Figure 14: Chilean industrial production and economic activity indicator (Imacec)
-5%
0%
5%
10%
15%
2004 2005 2006 2007 2008
(annualgrowth)
Industrial production Imacec
Source: Deutsche Bank
Andres Orlandi
+1 (212) 250-2975
We revised our 2008 GDP
growth projection to a still-
optimistic 4.4%
The economic outlook
remains worrisome
partially because the
short-term energy situation
does not look promising
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Inflation
INE reported that March inflation came out at 0.8% month-on-month, or 30bp lower than
market expectations according to Bloomberg survey. As expected, inflation last month was
mainly driven by education and foodstuffs prices which advanced by 3.7% and 2.2%
sequentially. This positive surprise (lower-than-expected figures) was due to the fact that 1)
transportation cost decreased by 1.3% MoM (versus our 0.40% deflation forecast) and 2)housing prices dropped by 0.4% MoM (versus our flat estimate). This reading brought inflation
to 1.2% year-to-date and 8.5% annually, or well above the target range. Meanwhile, core
inflation met expectations at 0.8% monthly or 7.7% yearly. Additionally, non-tradable inflation
came out at 1.3% sequentially (9.7% year-on-year) while tradable inflation declined by 0.3%
month-on-month, or 40bp lower than during the same month last year.
In sum, even though these readings suggest the recent government efforts in reducing fuel
taxes, the impressive year-to-date peso appreciation and the use of the gasoline stabilization
fund, have certainly helped tame inflation, we continue to believe we are not out of the
woods. The Central Bank (CB) will need to continue to closely monitor inflation expectation in
order to prevent second-round effects. Barring another domestic supply shock, our
projections now suggest that annual inflation will most likely decline in the months ahead, butit should still be above the target range (2.0-4.0%) at the end of the year.
Figure 15: Chilean annual headline and core inflation
-2%
0%
2%
4%
6%
8%
10%
2004 2005 2006 2007 2008 2009
(
annual)
CPI CPI Forecast Core, IPCX Core, IPCX1
Source: Deutsche Bank
Monetary policy
In line with our expectations, the CB recently kept the overnight interest rate unchanged at
6.25% but removed the tightening bias. Importantly, the CB said that recent information
confirms expectations that annual inflation has already peaked and will start declining in the
months ahead. Moreover, the Board removed the tightening bias given that in March they
said that even though monetary policy will depend on the new information further
tightening could not be ruled out. This time, however, they just said that future changes in
the monetary policy rate will depend on new information. In our opinion, barring another
domestic supply shock, this statement suggests that most likely the tightening cycle is over.
We expect the Central Bank to start a prolonged pause (i.e.: a couple of quarters) as inflation
starts converging towards the target band. That is, even though the outlook for the economy
does not look promising (consumption is slowing down, energy rationing remains a real
March inflation came out at
0.8% MoM, or 30bp lower
than market expectations
We continue to believe we
are not out of the woods on
the inflation front yet
The CB recently kept the
overnight interest rate
unchanged at 6.25%
We expect the Central Bank
to start a prolonged pause
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threat, recent real FX appreciation is expected to harm some manufacturing sectors and the
global economic picture keeps deteriorating), the monetary authority will not be able to ease
monetary policy in the near future, as inflation remains well above the target range and
uncertainty from international food and energy prices remains high.
On the domestic economy, the CB reiterated that economic activity during the first quarter
has been less dynamic than initially anticipated mainly on the back of a deceleration inconsumption as investment remains relatively strong. On the inflation front, the statement
stated that even though March inflation surprised on the downside, annual figures remained
elevated. Additionally, they also suggested that in line with their expectations, the latest
information shows that inflation remained limited to a few products. As last time, they also
acknowledged that core inflation (IPCX-which excludes gasoline, perishables and some
regulated prices) remains high, but has not increased further. As expected too, they noted
that the Chilean peso, in real terms, continued to appreciate and that wage inflation has been
consistent with official projections.
On the international economy, the board stated that recent information suggests the U.S.
economy is already in a recession. Additionally, they said that growth in emerging economies
has been revised downward despite the fact commodity prices have remained at high levels.
Figure 16: Chilean overnight policy interest rate
4.5%
5.0%
5.5%
6.0%
6.5%
2007 2008 2009
Policy Rate Forecast
Source: Deutsche Bank
Fiscal accounts
We forecast this years fiscal surplus in Chile will beat 2007s record figure, as copper prices
remain at very high levels and despite the gloomy growth outlook. In particular, we project
2007s fiscal surplus above 8.4% of GDP, as the governments revenues to GDP ratio climb
to 26.0%. In late 2007, the government decided to reduce the structural fiscal surplus rule to
0.5% from 1.0% of GDP, starting in 2008.
Chiles fiscal policy is prudently managed with a structural surplus rule that ties expenditure
growth to Chiles long-term revenue capacity. We believe this decision was welfare
improving, as more funds will be dedicated to social areas (such as education and health) that
create positive externalities not well accounted for in private investment decisions.
Furthermore it could lead to lower taxes to promote investment and employment. Chile is a
country that has built a strong reputation and has enough macro-buffers to allow a
sustainable fiscal expansion without jeopardizing macroeconomic stability.
The Central Bank reiterated
that growth was lower than
expected in 1Q08
while the international
scenario is not favorable
Fiscal solvency is not an
issue
Chiles fiscal policy is
prudently managed
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External sector
On the back of the impressive year-to-date real exchange rate appreciation of the Chilean
peso, export sectors, local economists and, more importantly, the House of Representative,
asked the CB to consider intervening in the local currency markets and/or imposing capital
controls to foreign inflows. While the CB has never discarded the option of intervening in the
FX market, should the real exchange rate be inconsistent with macroeconomic fundamentals,the board has been very vocal in rejecting capital controls as the economic costs
(microeconomic distortions, amplification of external shocks, etc.) are far greater than the
potential benefits2. That is, although political pressures could increase further, we believe the
CB will not hurt its reputation by imposing capital controls as the board, especially the
President, strongly believes in a flexible exchange rate regime.
Indeed, right after the March monetary policy meeting, the Central Bank stated that between
April 14 and December 12 of 2008, the Central Bank will buy USD8.0bn in the currency
market to increase international reserves in order to strengthened the international liquidity
position of the Chilean economy to better face further deterioration in the international
condition. Additionally, the Board stated that within the inflation target regime with flexible
exchange rate this measure is justifiable given the significant uncertainty surrounding theevolution of the international financial markets. Moreover, this is consistent with the fact that
the real exchange rate is currently misaligned (stronger) with macroeconomic fundamentals.
Between April 14 and May 9, the monetary authority will buy around USD50m on a daily
basis by a competitive action mechanism.
2Moreover, under the FTA agreement with the U.S., they could only be in place for one year.
We believe the CB will not
hurt its reputation by
imposing capital controls
The CB will buy USD8.0bn in
the currency until the end of
the year
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Figure 17: Chile economic forecasts
2006 2007F 2008F 2009F
Nominal GDP (USD bn) 145.8 166.4 195.4 217.9
Population (mn) 16.3 16.4 16.6 16.8
GDP per capita (USD) 8,959 10,120 11,768 12,989
Real GDP (YoY%) 4.0 5.1 4.4 4.7
Priv. consumption 7.1 5.9 5.1 4.8
Gov't consumption 3.6 6.0 7.5 8.2
Investment 4.0 8.8 6.4 5.4
Exports 4.2 8.6 5.0 6.1
Imports 9.4 12.8 8.0 7.3
Prices, Money and Banking
CPI (Dec YoY%) 2.6 7.8 4.9 4.1
Broad Money 17.5 22.4 21.3 20.2
Credit 18.8 16.8 17.8 17.3
Fiscal Accounts (% of GDP)
Consolidated budget balance 7.9 8.7 5.4 2.9
Govt spending 18.5 18.5 19.6 19.9
Govt revenues 26.4 27.2 25.0 22.8
External Accounts (USD bn)
Exports 58.1 68.2 70.5 71.2
Imports 35.9 45.6 48.0 52.0
Trade balance 22.2 22.7 22.5 19.3
% of GDP 15.2 13.6 11.5 8.8
Current account balance 5.3 7.5 4.6 0.6
% of GDP 3.6 4.5 2.3 0.3
FDI 5.1 8.3 8.7 7.8
FX reserves 19.4 21.5 21.2 20.7
Debt Indicators (% of GDP)
Government debt 19.1 16.7 17.7 18.4
Domestic 16.2 14.2 15.1 15.9
External 2.9 2.6 2.5 2.5
Total external debt 32.6 31.3 25.9 22.3
in USDbn 47.6 52.1 50.7 48.7
Short-term (% of total) 19.6 19.5 20.1 20.9
General
Industrial production (YoY%) 3.3 3.4 5.0 5.0
Unemployment (%) 7.8 7.1 6.4 6.5
Financial Markets (end period) Current 3M 6M 12M
Overnight rate (%) 6.25 6.50 6.50 6.25
6-month rate (%) 6.60 6.50 6.50 6.25
CLP/USD 433 440 450 470
Source: DB Global Markets Research
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Equity guide
Indices
There are two main benchmarks in Chile:
1) The Selected Stocks Price index (IPSA): the local benchmark is a liquidity-weighted
index composed of the most relevant stocks traded in the Santiago Stock Exchange. The
index was created in 1977 and its portfolio is revised every quarter (March, June,
September and December). The IPSA usually has 40 companieswith market
capitalization higher than USD200 millionand their weights are calculated based on
financial turnover over the past 12 months and free float; and
2) The MSCI Chile index: the international benchmark is a free-float adjusted capitalization-
weighted index whose goal is to include 85% of the free-float adjusted market
capitalization in the country. The index was developed in December 1987 with a base
value of 100. The MSCI Chile index currently has 27 constituents and it is calculated in
both U.S. dollars and local currency.
Index performance
Chilean stocks have experience a long-lasting bull market since late 2002. Both the local IPSA
and MSCI Chile indices have been 2-baggers or more in U.S. dollars since then, as can be
seen in Figure 18. The gains have been solid but Chilean equities have also had their share of
volatilitysee Figure 19.
Figure 18: MSCI Chile and IPSA indices performance in
U.S. dollars (2002-2007)
Figure 19: MSCI Chile versus MSCI Latin America
relative performance in U.S. dollars (2002-2007)
332
308
50
150
250
350
450
2002 2003 2004 2005 2006 2007
IPSA USD MSCI Chile USD
64
128
60
80
100
120
140
2002 2003 2004 2005 2006 2007
MSCI Chile vs Latin Am erica
Source: Deutsche Bank and Bloomberg Source: Deutsche Bank and Bloomberg
The equity market has experienced a series of mini (bull market) corrections over the past five
years, and two more serious ones in 2007:
1) The first serious correction happened from June to mid-August 2007, when the U.S. sub-
prime crisis unfolded and spilled-over to Chilean equitiesthe main Chilean equity
benchmarks shed 12% in less than 45 days; and
2) The second serious correction occurred from October 2007 to mid-January 2008, after a
local regulatory body stated that local pension funds, which were heavily invested in
equities, would have one-year to comply with the statutory equity holding allocation
capsthe main Chilean equity indices lost 24% in less than 90 days.
Guilherme Paiva, CFA
+1 (212) 250-2873
There are two main
benchmarks in Chile
Chilean stocks have
experienced a long-lasting
bull market since late 2002
The equity market
underwent two periods of
turbulence in 2H 2007
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Market size and liquidity
MSCI Chile is the third largest country constituent of MSCI Latin America with a 6% weight
USD130 billion market capitalization. The countrys weight increased during the 2002-2004
period to low double-digit levels, but it has been in a steady fall since then. Meanwhile, MSCI
Latin America has a current market capitalization of USD1.5 trillion.
The average daily trading volume of the Santiago Stock Exchange was USD190m in 2007.
The liquidity has gradually increased from less than USD15m in 2002 to the current 6-year
high supported by a higher share turnover and the bull market. Lastly, a silver lining is that
local trading represents only about 80% of total volume; therefore investors can also gain
exposure to Chilean stocks via some liquid ADR instruments.
Figure 22: MSCI Latin America breakdown by country
BRZ
66%
MEX
21%
CHL
6%
PER
3%
ARG
2%
COL
2%
Source: Deutsche Bank
Chile is the third largest equity market in terms of average daily trading volume in Latin
America. The Santiago Stock Exchange accounted for ~5.5% of the aggregate trading
volume of the six main stock exchanges in Latin America in 2007. Back in early 2005, the
Santiago Stock Exchange accounted for a 6-year high 9.0% of the regional average daily
trading volume, but its share has gradually fallen since then.
Figure 23: Santiago stock exchange average daily
trading volume (12-month moving average)
Figure 24: Latin America stock exchanges average daily
trading volume composition (12-month moving average)
0
50
100
150
200
2002 2003 2004 2005 2006 2007 2008
(US$m)
0%
25%
50%
75%
100%
2002 2003 2004 2005 2006 2007 2008
Brazi l Mex ico Ch ile Peru Co lomb ia Argen tina
Source: Deutsche Bank and Bloomberg Source: Deutsche Bank and Bloomberg
MSCI Chile is the third
largest country constituent
of MSCI Latin America
The average daily trading
volume of the Santiago
Stock Exchange was
USD190m in 2007
...which also ranks Chile in
third place in Latin America
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Market participants
The average daily trading volume of the Santiago Stock Exchange was USD190m in 2007.
However, the Santiago Stock Exchange doesnt provide a breakdown of traded volume by
type of investor (i.e. individuals, pension funds, etc). Nevertheless, we calculated the weight
of foreign and local investors in on-shore trading using Chilean Central Bank (CCB) and
Superintendencia de Valores y Seguros data.
We estimate that local investors traded on average close to USD150m per day (or
approximately 80% of the onshore volume) in 2007. The local investor base is relatively
concentrated; we calculate that pension funds traded on average close to USD100m per day
(52%), while individuals traded USD40m (21%) and mutual funds USD12m (6%) last year.
Meanwhile, we estimate that foreign investors traded on average USD40m per day (or 21%).
Figure 25: Chile: local trading volume breakdown by participants (2007)
Foreigners
21%
Individuals
21%
Pension funds
52%
Mutual funds
6%USD190m
Source: Deutsche Bank, Superintendencia de Valores y Seguros, Chilean Central Bank and Bloomberg
Corporate governance
Corporate governance practices are investor friendly in Chile as the country has a robust set
of laws and regulations that protect minority shareholders. Chile has a private corporate
sector dominated by a few economic groups, which are present in several industries but
operate through holding companies. Therefore, corporate governance practices are important
to safeguard the interests of these economic groups. We discuss corporate governance
practices in Chile by focusing on three related topics:
1. Share classes;
2. Tag along rights; and
3. Tender offer regulations.
We analyze the Chilean
institutional investor base
Local investors accounted
for ~80% of the local volume
Corporate governance
practices are investor
friendly in Chile
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Share classes
The Ley de Sociedades Annimas 18.046 establishes two types of listed shares in Chile:
1) Common shares (acciones de pago):they are similar to their U.S. peers and have full
voting rights. Local regulations prohibit shareholders to have more than one vote per
each share; and
2) Preferred shares: they have limited or no voting rights. These shares have preference
over common shares in some aspects like 1) receiving dividends or 2) being reimbursed
in case of bankruptcy.
Tag along rights
Minority shareholders have tag along rights whenever a mandatory tender offer is triggered.
The tender offer price should be the maximum of 1) the price agreed with the controlling
shareholder or 2) the highest price the acquirer paid to buy stock in the market during the
previous 90 and following 120 days of the offer. Meanwhile, the size of the tender offer is
discussed in the next section.
Tender offer (Oferta Publicas de Adquisicion OPA)
The Ley de Mercado de Valores (number 18,045) establishes two types of tender offers in
Chile:
1. Voluntary:these tender offers can be made at any time for any amount of shares. The
tender price and distribution method are determined by the acquirer; and
2. Mandatory:these tender offers are triggered by three conditions:
An investor purchases 50% plus one share of the voting capital over the past twelve
months and acquires control of the company. The investor has to acquire these
shares through a mandatory tender offer;
An investors stake surpasses two-thirds of the voting capital. The tender offer size
has to be for the entire free float;
An investor acquires control of a holding company whose publicly traded subsidiaryrepresents 75% or more of the holding companys consolidated assets. The tender
offer size has to be 50% plus one share minus its current stake.
The standard distribution method for mandatory tender offers is pro-rata. For instance, if the
amount of shares tendered exceeds the offer size, each shareholder will tender an equal
proportion of their original amount.
There are two types of listed
shares in Chile
Minority shareholders have
tag along rights via
mandatory tender offers
There are two types of
tender offers in Chile
The standard distribution
method for mandatory
tender offers is pro-rata
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Index sector weights and market cap
We analyze the sector composition of the MSCI Chile and IPSA indices:
MSCI Chile: the benchmark has seven sectors: 1) Utilities (with a 25% weight), 2)
Materials (23%), 3) Industrials (21%), 4) Consumer staples (13%), 5) Financials (8%), 6)
Telecom (6%) and 7) Consumer discretionary (4%). The index is very diversified as thebiggest sectors account for only 25%; and
IPSA: the benchmark also has seven sectors and similar weights: 1) Industrials (with a
27% weight), 2) Utilities (23%), 3) Materials (17%), 4) Consumer staples (13%), 5)
Financials (10%), 6) Telecom (5%) and 7) Consumer discretionary (5%).
Figure 26: MSCI Chile sector breakdown Figure 27: IPSA sector breakdown
CD
4%
IN
21%
UT
25%
TC
6%
MT
23%
CS
13%
FN
8%
UT
23%
IN
27%
CS
13%
CD
5%
FN
10%
MT
17%
TC
5%
Source: Deutsche Bank and Bloomberg Source: Deutsche Bank and Bloomberg
The two biggest sectors in Chile are Industrials and Utilities. These industries account for
close to 50% of the MSCI Chile and IPSA indices. The Industrials sector has USD42 billion in
market capitalization while the Utilities sector has USD37 billion. Financials, Materials and
Consumer staples are next in line with USD20-24 billion, followed by Consumer discretionary
with USD17 billion and Telecom with USD6 billion. Lastly, Information Technology and Health
care round up the list, but they are in a different league with less than USD2 billion.
Figure 28: Chile sector market capitalization
42
37
2321 21
17
6
1 1
0
10
20
30
40
50
Industrials Utilities M aterials Cons.
Staples
Financials Cons.
Disc.
Telecom Info Tech Health
Care
(US$bn
)
Source: Deutsche Bank and Bloomberg
We analyze the sector
composition of the main two
indices
The two biggest sectors in
Chile are Industrials and
Utilities
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Stock weights
Copec, Endesa and Enersis are the main blue chips in Chile. These companies are the largest
stocks in both MSCI Chile and IPSA with combined 38% and 32% weights, respectively.
Furthermore, CMPC, CAP and Cencosud are also important stocks with relevant weights.
The main constituents of MSCI Chile and IPSA are:
MSCI Chile: the index has 27 companies. Its top five members are: 1) Copec (with a
16% weight), 2) Endesa (11%), 3) Enersis (11%), 4) Soquimich (8%) and 5) CMPC (7%);
and
IPSA: the index has 40 companies. Its top five members are: 1) Copec (with a 16%
weight), 2) Endesa (9%), 3) Enersis (8%), 4) CMPC (6%) and 5) CAP (6%).
Figure 29: MSCI Chile: main individual constituents Figure 30: IPSA: main individual constituents
ENDESA
11%
ENERSIS
11%
CAP
6%SQM/B
8%
COPEC
16%
OTHERS
5%
NEXT 10
29%
CENCOSUD
7%
CMPC
7%
ENDESA, 9%
CAP, 6%
CENCOSUD,
5%
COPEC, 16%
ENERSIS,
8%
CMPC, 6%
ANTAR, 5%
NEXT 10,
35%
OTHERS,
18%
Source: Deutsche Bank and Bloomberg Source: Deutsche Bank and Bloomberg
Stock liquidity
Chilean equities have recorded an average daily turnover of approximately USD250m over the
past 12 months. Liquidity is of less consideration for foreign institutional investors interested
in Chilean stocks because of the decent absolute turnover of the local equity market (close to
USD200m). Market liquidity is much dispersed; the top 3 stocks accounted for only around
30% of the overall volume, while the top 10 stocks accounted for about 65%.
There are eight stocks with an overall average daily traded volume bigger than USD10m over
the past year: 1) Enersis, 2) Lan Airlines, 3) Endesa, 4) Soquimich, 5) Santander Chile, 6)
Cencosud, 7) Copec and 8) DYS. Moreover, there are six other relevant stocks (CAP,
Falabella, La Polar, Entel, CTC and Colbun) that traded more than USD5m per day during the
past 12 months. Finally, there are 12 Chilean companies with a sponsored level three ADR
program, through which roughly 20% (USD50m) of the overall volume is traded offshore,
while the other 80% (US$200m) is traded onshore via local stocks.
There are five ADRs with an average daily traded volume bigger than USD5m over the past
year: 1) Enersis, 2) Lan Airlines, 3) Santander Chile, 4) Soquimich and 5) Endesa. Liquidity
then dries up quickly with the average daily trading volume for the other ADRs being lower
than the USD2m level. The next figure depicts average daily trading volume for the top 30
companies present in both the MSCI Chile and IPSA indices broken down in onshore and
offshore instruments.
Copec, Endesa and Enersis
are the main blue chips
Chilean equities have
recorded an ADTV of
US$250m over the past year
ENI, LAN, EOC, SQM, SAN,
CENCOSUD, COPEC and
DYS have an ADTV bigger
than USD10m
There are five ADRs with an
average daily traded volume
bigger than USD5m
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Figure 31: Chile average daily trading volume for top 30 MSCI Chile and IPSA constituents
04/21/08 Average Daily Trading Volume (USDm)
Rank Short name Company Sector 1W 1M 3M 6M 1Y ADR Local
1 ENERSIS Enersis Utilities 38.7 29.5 25.9 31.0 28.7 9.9 18.8
2 LAN LAN Airlines Industrials 13.4 13.0 15.2 21.7 25.2 9.4 15.8
3 ENDESA Endesa Utilities 19.4 21.2 19.9 21.6 19.9 6.6 13.34 SQM/B Sociedad Quimica y Minera Materials 40.0 36.1 23.7 20.2 17.5 10.0 7.5
5 BSAN Banco Santander Chile Financials 13.4 13.8 13.0 14.8 14.6 9.8 4.9
6 CENCOSUD Cencosud Consumer Staples 17.6 11.6 11.6 17.7 14.4 0.0 14.4
7 COPEC Copec Industrials 10.0 11.1 10.3 15.2 12.8 0.0 12.8
8 DYS Distribucion y Servicio Consumer Staples 7.0 5.0 9.2 10.3 11.7 1.5 10.2
9 CAP CAP Materials 23.8 9.4 8.6 10.6 8.5 0.0 8.5
10 FALAB Falabella Consumer Discretionary 7.5 5.4 5.5 7.7 7.3 0.0 7.3
11 LAPOLAR LA Polar Consumer Staples 9.5 7.0 7.9 8.2 7.3 0.0 7.3
12 ENTEL Entel Telecom 3.4 4.3 4.5 7.6 7.0 0.0 7.0
13 CTCA Cia Telecom de Chile Telecom 4.1 3.1 4.2 5.5 6.0 1.9 4.1
14 COLBUN Colbun Utilities 2.4 2.8 3.0 4.8 5.3 0.0 5.3
15 GENER AES Gener Utilities 8.7 4.2 2.7 7.0 5.0 0.0 5.0
16 ANDINAB Embotel ladora Andina Consumer Staples 10.3 3.9 3.0 3.3 4.8 0.7 4.2
17 RIPLEY Ripley Consumer Staples 2.5 1.8 2.6 5.2 4.7 0.0 4.7
18 VAPORES Vapores Industrials 2.1 1.4 2.7 3.8 4.3 0.0 4.3
19 CMPC Empresas CMPC Materials 2.3 2.7 3.3 5.8 4.2 0.0 4.2
20 CHILE Banco de Chile Financials 2.2 2.0 4.3 4.0 3.9 0.8 3.1
21 CCU Cia de Cervecerias Unidas Consumer Staples 3.0 2.9 3.6 3.9 3.4 1.3 2.1
22 SOCOVESA Socovesa Consumer Discretionary 2.1 0.7 0.6 1.4 3.3 0.0 3.3
23 MASISA Masisa Materials 1.1 18.3 6.9 4.4 3.3 0.0 3.3
24 CORPBANC Corpbanca Financials 0.6 1.3 2.4 3.4 3.1 0.3 2.8
25 SONDA Sonda Information Technology 8.5 3.5 2.9 2.3 3.0 0.0 3.0
26 IAM Inv. Aguas Metropolitanas Utilities 2.5 1.5 2.5 2.2 2.9 0.0 2.927 MADECO Madeco Industrials 1.3 1.5 1.3 3.4 2.7 0.0 2.7
28 MULTIFOO Multiexport Foods Consumer Staples 0.1 0.1 0.2 0.4 1.5 0.0 1.5
29 CONCHA Concha y Toro Consumer Staples 1.2 1.9 1.4 1.5 1.5 0.4 1.1
30 BCI Banco de Creditos e Inversiones Financials 0.5 2.5 1.2 1.4 1.5 0.0 1.5
Top 3 / Total* 27% 27% 29% 29% 30% 49% 24%
Top 10 / Total* 72% 67% 68% 66% 65% 90% 58%
CHILE 265.7 231.8 211.6 258.9 248.9 52.6 196.3
*Total includes 40 constituents of the MSCI Chile and IPSA; Source: Deutsche Bank and Bloomberg
Stock performance
We depict the performance of the constituents of the MSCI Chile and IPSA indices sorted by
sector. Year-to-date, the best performing stock has been Soquimich (+70%) while the worst
performing stocks have been DYS and Iansa (-20%). Turning to the blue chips, year-to-date,
Copec is down 5%, while Endesa and Enersis are up 31% and 22%, respectively.
At the sector level, Materials is ahead of the pack (+36%), followed closely by Information
Technology (+27%), Consumer discretionary (+21%), Utilities (+20%) and Telecoms (+13%)
in 2008. Meanwhile, Financials (+5%), Consumer staples (+1%) have recorded only single-
digit gains year-to-date, while Industrials (-2%) and Health care (-10%) are the only sectors
with negative returns.
We depict the recent
performance of the main
Chilean stocks
At the sector level Materials
is ahead of the pack (+36%)
in 2008
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Figure 32: Chile price performance for selected stocks
04/21/08 Price Mkt Cap Price change in USD %
Company Bloomberg ticker Rating USD (USDm) 1 week 1 month 3 months 6 months YTD
Falabella FALAB CI Hold 5.9 14,292 4% 10% 24% -1% 23%
Forus FORUS CI NC 1.5 396 4% -5% 25% -17% -2%
Parque Arauco PARAUCO CI NC 1.3 798 1% 13% 42% 7% 12%
Salfacorp SALFACOR CI NC 2.2 551 9% 3% 29% -16% 6%
Socovesa SOCOVESA CI Buy 0.4 561 8% 9% 36% NA 6%
Consumer Discretionary 16,599 4% 9% 25% -2% 21%
Embotelladora Andina ANDINAB CI Buy 21.9 2,627 -2% 5% 24% 3% 23%
Cencosud CENCOSUD CI Hold 4.2 8,402 4% -2% 11% -4% 5%
Cia de Cervecerias Unidas CCU CI Buy 7.6 2,442 1% 7% 22% -7% 10%
Concha y Toro CONCHA CI NC 2.0 1,435 4% 6% 12% -24% -5%
Distribucion y Servicio DYS CI Sell 0.4 2,724 6% -4% -14% -32% -20%
Empresas Iansa IANSA CI NC 0.1 161 -2% -15% -7% -36% -20%
LA Polar LAPOLAR CI Hold 6.1 1,352 5% 3% 17% -14% -6%
Multiexport Foods MULTIFOO CI NC 0.4 443 -2% 4% -4% -35% -17%
Ripley RIPLEY CI Hold 1.0 1,868 11% 6% 8% -23% -13%
Consumer Staples 21,454 4% 1% 10% -12% 1%Banco de Chile CHILE CI Hold 0.1 6,208 -1% -11% 9% -2% 7%
Banco de Creditos e Inversiones BCI CI NC 33.6 3,330 -1% -5% 16% 0% 12%
Banco Santander Chile BSAN CI Buy 0.1 9,609 1% 7% 15% -2% 4%
Corpbanca CORPBANC CI NC 0.0 1,519 -1% -2% 7% -12% -3%
Financials 20,666 0% -1% 13% -2% 5%
Banmedica BANMED CI NC 1.2 989 1% 2% 5% -9% -10%
Health Care 989 1% 2% 5% -9% -10%
Almendral ALMEN CI NC 0.1 1,572 0% 2% 29% -3% 9%
Antarchile ANTAR CI NC 22.8 10,815 4% -3% 15% 2% 3%
Copec COPEC CI Hold 16.9 22,019 -2% -6% 4% -9% -5%
LAN Airlines LAN CI Buy 14.0 4,780 -1% 2% 22% -13% 0%
Madeco MADECO CI NC 0.1 660 5% 6% 30% -4% 4%
Sigdo Koppers SK CI NC 0.9 755 5% 4% 15% 0% 11%
Vapores VAPORES CI NC 1.9 1,421 2% 1% 13% -33% -12
Industrials 42,021 0% -3% 11% -7% -2%
Sonda SONDA CI NC 1.6 1,275 3% 15% 55% 10% 27%
Information Technology 1,275 3% 15% 55% 10% 27%
CAP CAP CI NC 35.5 5,411 4% 7% 60% 12% 32%
Empresas CMPC CMPC CI Hold 38.3 7,895 1% -4% 13% -4% 5%
Masisa MASISA CI NC 0.2 1,379 0% 9% 29% -2% 21%
Sociedad Quimica y Minera SQM/B CI NC 30.4 8,541 7% 39% 94% 59% 70%
Materials 23,225 4% 15% 55% 23% 36%
Cia Telecom de Chile CTCA CI Hold 2.1 2,068 5% 2% 30% -10% 14%
Entel ENTEL CI Buy 17.5 4,147 -1% 1% 26% -1% 12%
Telecom 6,214 1% 2% 28% -4% 13%AES Gener GENER CI NC 0.5 3,025 5% 11% 33% -6% 12%
Colbun COLBUN CI Sell 0.2 2,686 1% 4% 4% -21% -12%
Cia General de Eletricidad CGE CI NC 7.7 2,712 1% 7% 8% -7% -1%
Edelnor EDELNOR CI NC 1.6 746 3% 8% 50% -9% 13%
Endesa ENDESA CI Hold 1.6 13,623 3% 9% 50% 7% 31%
Enersis ENERSIS CI Buy 0.4 12,828 4% 16% 49% 0% 22%
Inv. Aguas Metropolitanas IAM CI NC 1.3 1,286 0% 1% 21% 5% 7%
Utilities 36,907 3% 11% 41% 0% 20%
CHILE 169,350 2% 5% 26% -1% 12%Source: Deutsche Bank
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Appendix Company descriptions4
AES Gener generates and distributes electricity to customers in Chile, elsewhere in
Latin America, and the United States. The company operates thermoelectric and
hydroelectric plants. Through subsidiaries, Gener extracts coal, natural gas, and
petroleum. It also manages ports, offers ship agency and chartering services, and
transports cargo.
Almendral is a holding company engaged in investment in telecommunications, real
estate and energy sectors. The company is a primary holder of Entel Chile, a major
telecommunications service provider in Chile. It also invests in communications, real
estate and the sanitation services sector; its primary holdings are in Almendral
Telecomunicaciones, Inmobiliaria El Almendral and Compaia Hispano Americana de
Servicios.
Antarchile invests in financial instruments and operating companies, particularly in the
forestry and energy industries. Through its subsidiaries, Antarchile also distributes fuel
and operates fishing and shipping businesses. The company's primary subsidiaries are
Copec, Pesquera Iquique-Guanaye, Forestal Cholguan, Astilleros Arica and Celulosa
Arauco y Constitucion. Banco de Chile was formed through the merger of Old Banco de Chile with Banco de A.
Edwards in January 2002. With a loan market share of 18% the bank ranks as the second
largest in the country, but as the largest private bank of local capital. The bank has a retail
network of 247 branches and 1,057 ATMs nationwide.
Banco de Credito e Inversiones attracts deposits and offers retail and commercial
banking services. The bank offers credit cards, securities brokerage services, health and
life insurance, and lease financing services. It has 243 offices in Chile and also has
presence in Lima, Sao Paulo, Mexico City, Miami and Hong Kong.
Banco Santander Chile is a bank that provides commercial and retail banking services.
Its product mix includes local and foreign-currency-denominated loans, foreign currency
forward contracts and credit lines. In addition, the bank also offers financial leasing,financial advisory services, mutual fund management, securities brokerage, insurance
brokerage and investment management.
Banmedica is a holding company principally active in the provision of health and life
insurance services. It offers a range of health plans designed to cover specific needs
through a chain of 90 branches; a national contact center, and more than 8,000
agreements with various health service providers. In addition, the company holds an
interest in a portfolio of clinics and other health service providers.
CAP is a holding company that through its subsidiaries mines, processes, and distributes
iron and manganese ores for commercial and industrial uses. It also manufactures liquid,
laminated, and finished steel products. The company holds an 11% direct interest in
both Intasa and Cintac, a 60% direct interest in Tecnocap and a 53% interest in
Novacero.
Cencosud is one of the leading multi-format retailers in Chile and Argentina. In Chile,
Cencosud is the second largest food retailer through its Jumbo hypermarkets and Santa
Isabel supermarkets. It recently acquired Almacenes Paris, a department store and
consumer finance business, and the third largest department store operator in Chile.
Cencosud also operates Chile's second largest and Argentina's largest home
improvement chain under the brand name Easy.
4Source is Bloomberg and Deutsche Bank.
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CMPC is the second largest forestry company in Chile. It is an integrated paper producerwhose main products are market pulp, folding boxboard, tissue products, newsprint,
multiwalled paper sacks, corrugated cardboard boxes and P&W papers. CMPC also
holds investments in Argentina, Uruguay, Peru and Mexico.
Colbun participates in the electricity and natural gas sectors. Colbun produces,transports, distributes and supplies electric energy and natural gas with an installedcapacity of 2,364 megawatts. In addition, the company provides consulting services in
the engineering field, both in the domestic Chilean market and abroad.
Compaia de Cervecerias Unidas brews beer and produces and distributes non-alcoholic beverages in Chile and Argentina. CCU is the leading brewer in Chile and the
second largest in Argentina. On the soft drinks side, CCU is the second largest bottler in
Chile including its proprietary brands and brands under license from Pepsi. CCU has also
diversified into spirits through a JV with the leading Pisco producer in Chile.
Compaia General de Electricidad generates and distributes electricity and gas toresidential, commercial, and industrial customers in southern Chile. The company also
maintains electrical networks, and rents and markets electrical equipment. Its gas sector
spans through eight companies in Chile and Argentina, including Gasco, Metrogas, and
Gasmar. Other investments include IGSA (real estate) and Tusan (transformers).
Concha y Toro owns and operates vineyards, vinification plants, bottling plants, and awine distribution network. Via Concha y Toro produces and exports worldwide its
premium, varietal, and sparkling wines. The companys principal trademarks include
Concha y Toro, Don Melchor, Terrunyo, Marques de Casa Concha, Casillero del Diablo,
Trio, Sunrise and Frontera. It also grows and markets fruit, and bottles mineral water.
Copec is a diversified Chilean holding company whose main business areas are in theforestry and energy sectors. In the forestry sector, Arauco is one of the largest pulp and
forest products producers globally. In the energy sector Copec is the leader in the
Chilean fuel distribution business. Copec holds a minority stake in Metrogas, the natural
gas distributor of Santiago, and also participates in other sectors such as commercial
fishery, mining and energy generation.
Corpbanca offers banking services to both businesses and individuals in Chile, includingloans and leasing services to businesses, and loans, credit card services and mortgages
to individuals. The bank also provides financial advisory services, mutual fund
management, insurance brokerage and securities brokerage services through its
subsidiaries.
CTC is Chile's incumbent wireline telecommunications operator, privatized in 1988. Thecompany is controlled by Telefonica de Espana, and has a little over 2.0m fixed lines and
over 0.5 million DSL subscribers. In 2004, CTC sold its cellular business to Telefonica
Moviles, becoming a pure fixed line operator. More recently, CTC has been focusing on
segmentation and new businesses, such as pay TV (DTH and IP-TV) to offer triple play
services (voice, broadband internet and pay TV).
Distribucion y Servicio is Chile's leading food retailer. The company operateshypermarkets under the Lider banner, mini-hypermarkets under the Lider Vecino brand
and supermarkets under the Lider Express banner. DYS has also ventured into the
consumer finance business through its proprietary Presto credit card.
Edelnor is a company that is principally engaged in the generation, transportation,distribution and supply of electricity. It is based in Chile, supplying electric energy to the
1st and 2nd regions. Edelnor is also engaged in the purchase, transportation and sale of all
types of fuel: liquid, solid and gaseous. Edelnor offers advising services in engineering
and management, as well as maintenance and repair of electronic systems.
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Embotelladora Andina is the second largest Coca-Cola bottler in Latin America with 34
million potential consumers. Andina's franchised territories include Chile's capital
(Santiago) and its metropolitan area, Brazil's second largest city (Rio de Janeiro) and a
large portion of Argentina's central region including the cities of Mendoza, Cordoba and
Rosario. Andina's controlling shareholders hold close to 50% of the company while The
Coca-Cola Company holds an 11% stake.
Empresas Iansa is engaged in the production of sugar. The company is involved in all
stages of production from selection of the individual sugar beet, to extraction of the
sugar, its packaging and its distribution to all regions of Chile. It operates five plants,
located in Curico, Linares, Chillan Los Angeles and Rapaco, as well as a packaging plant
in Santiago.
Endesa and its subsidiaries generate and supply electricity. The company owns and
operates generating plants, and offers civil, mechanical, and electrical engineering,
architectural, environmental, and project management services. Endesa is Chile's largest
generation company, and through its subsidiaries, is also present in the generation
business in Argentina, Peru and Colombia, operating 46 generation plants with an
aggregate installed capacity of 11,727MW.
Enersis is a holding company with investments in generation, distribution and
transmission of electricity throughout Latin America. It is the country's largest generation
and distribution company, through its subsidiaries Endesa Chile and Chilectra. Enersis
subsidiaries are also present in Argentina, Brazil, Colombia and Peru.
Entel is Chile's second-largest wireless telecommunications provider by number of
subscribers and the largest by revenues. The company also provides long distance, local,
data and Internet services in Chile through its limited wired network and its NGN and
Wimax networks. It also has a presence in Peru, mainly on data and long distance
services.
Falabella is the largest department store operator in Chile and one of the largest in Latin
America. Falabella operates department stores throughout Chile, Argentina and Peru as
well as home improvement stores in Chile, Peru and Colombia. The company is also thelargest independent credit card operator in Chile. It has recently branched out into the
food retail segment in Peru and Chile.
Forus is engaged in the manufacturing, commercialization, import, export and
distribution of footwear, clothing and accessories via retail stores around the country.
The company operates more than 140 store locations through three subsidiaries:
Uruforus, operating in Uruguay; Argforus, operating in Argentina; and Topsafety.
Inversiones Aguas Metropolitanas is a holding company with a controlling interest in
Aguas Andinas and also engaged in the offering of all classes of audit, consulting and
other services related to sharing of technology and know-how. The company also
provides technical assistance, business and project administration related to
management and operations in sanitation.
La Polar is a Chilean lower and middle-income segment department store retailer. The
company has 31 stores and 110,000 m2 of selling space. La Polar is the fourth largest
department store with approximately 13% market share (sales). La Polar has a strong
financial division which offers credit to its clients and accounts for 25% of sales.
LAN Airlines is one of the largest airlines in Latin America and also the principal freighter
operator in the region. It provides domestic and international passenger and cargo air
transportation services, including 36 domestic routes and 63 overseas destinations,
integrating points throughout America, Europe and the South Pacific. LAN's
headquarters are located in Santiago, Chile.
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Madeco manufactures non-ferrous products from copper, copper alloys, and aluminum.
The company produces flexible packaging for the food industry, copper cables for
telecommunications operators, brass bars and coin blanks for coin manufacturing and
construction, and aluminum profiles. Madeco is based in Chile and also operates in
Argentina, Brazil, and Peru.
Masisa is a vertically integrated wood boards company that grows and harvests timberin plantations and sells its manufactured products primarily to the construction and
furniture industries. Its main products include wood boards for furniture, solid wood
products, sawn lumber and saw and pulp logs.
Multiexport Foods operates a salmon fish farm. The company exports to Japan, the
United States, Central Europe and Russia, as well as China, Korea, Southeast Asia and
Latin America. Multiexport's products include Atlantic salmon, salmon trout, smoked
salmon, mussels and cold- and hot-smoked fish products.
Parque Arauco develops and operates commercial centers in Chile that provide
shopping, entertainment, and eating facilities. The main malls controlled or owned by the
company are: Mall Parque Arauco, Parque Arauco Kennedy and Mall Arauco Maipu.
Parque Arauco also holds interests in shopping centers in Argentina and Peru, and other
commercial real estate investments.
Ripley is a department store with operations in Chile and Peru. Ripley provides credit to
customers and has over 5.8 million credit card holders. In addition, the company has a
bank in Chile. Approximately 75% of sales are generated in Chile and the rest in Peru. In
Chile it is the third-largest department store chain and in Peru it is the second largest.
Salfacorp is a real estate, construction and engineering company. Salfacorp operates
three business areas: 1) Engineering and Construction, engaged in the design and
building of various structures from small houses to thermal power stations; 2) Real
Estate, through the company's subsidiaries Geosal and Inmobiliaria Austral; and 3)
Management, which is engaged in management services.
Sigdo Koppers specializes in engineering, construction and real estate business. It also
provides internal and external supplies, including transportation and installation on site.
The company's investment activities include all types of assets and businesses,
industrial machinery, tourism and transport, and mining exploration.
Sociedad Quimica y Minera is a Chilean-based diversified, vertically integrated
specialty chemical and specialty fertilizer producer. SQM has three main business areas:
1) Specialty Fertilizers, 2) Iodine, and 3) Lithium. SQM is one of the most relevant and
lowest cash-cost producers in its three main business areas. SQM's competitive
advantages stem from access to unique caliche ore reserves, which are the most
significant commercially exploitable known source of iodine and natural nitrates. Socovesa is focused in the prospecting, development, sales and management of
residential property (buildings and houses). Additionally, the company provides interior
decoration, landscape design services and financing support. Socovesa serves a highlydiversified geographical area and socioeconomic population strata.
Sonda provides IT services and systems integrations, offering consultancy and software
development, as well as industry and business process applications and IT platform
distribution services. The company has more than 200 customer service centers
worldwide and main operations in Argentina, Brazil, Chile, Colombia, Costa Rica,
Ecuador, Mexico, Peru and Uruguay.
Vapores provides both shipping and port services. The company, using both owned and
chartered vessels, offers general and bulk cargo transport, fresh and frozen product
transport, and automobile shipping services to both coasts of South America, and ports
in North America, Europe, Asia, Africa, and Australia.
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Macro background
Economic activity
Fiscal restraint, independent monetary policy, a sound and deep financial system, and anoutward-looking trade policy have provided Chile with enviably stable rates of economic
growth and low inflation. Between 1987 and 2007, Chiles rate of economic growth averaged
5.9% a year, per capita income more than tripled in U.S. dollar terms, and the poverty rate
was cut in half. That said, Chile was not immune to macroeconomic crisis during this period.
For instance, as a result of the deterioration in the international environment in the late 1990s
and a rigid exchange rate regime, the 5% current account deficit was seen as difficult to be
financed, should capital inflows decline. Thus, the local currency suffered strong depreciation
pressures, spending sharply declined and output dropped by almost 1% in 1999. Before this
period, in 1982, a rigid exchange rate regime, fragile financial sector and disturbance in
international markets, had led to a decline in annual output by around 13%.
Given a combination of inflation below 3.0% and the fact that most of the crises in Chile havebeen associated with exchange rate rigidity, Chilean authorities decided to implement an
inflation targeting framework with a flexible exchange rate in 1999. Together with a
countercyclical based-rule fiscal policy and sound and deep financial markets, this approach
allowed the Chilean economy to grow on average by 5.0% between 2002 and 2007 with low
volatility (0.8%). That is, in comparison with other countries in the region, business cycles in
Chile have been less pronounced, which has ultimately helped foster long-term growth and
social progress. Nonetheless, the country also faces several challenges in order to spur long-
term growth such as low innovation and development expenditures, human capital (quality of