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CFA Institute Research ChallengeHosted in México

Instituto Tecnológico y de Estudios Superiores de Monterrey,Campus Querétaro

1

CEMEX S.A.B. DE C.V.

Debt reduction strategy and capital renegotiation:

SUMMARY

INVESTMENT HIGHLIGHTS

Valuation Date: January 5th, 2018 Current Price: 7.89 USDTicker: CX US

Stock Exchange: (NYSE)Sector: Industrials Industry: Construction Materials

Recommendation: BUYTarget Price: 10.25 USD

NYSE

Stable Industry Growth:

Figure 1

PROFILEClosing Price ADS ( Jan 5th, 2018)

Outstanding CPO’s

Number of CPO’s in ADS

7.89 USD

10

14,039,298,127

12.00

10.00

8.00

6.00

4.00

2.00

0.00

Dec

-12

Dec

-13

Dec

-14

Dec

-15

Dec

-16

Jan-

17

Feb-

17

Mar

-17

Apr

-17

May

-17

Jun-

17

Jul-1

7

Aug

-17

Sep-

17

Oct

-17

Nov

-17

Dec

-17

Jan-

18

Dec

-18

Volume Price

Source: Bloomberg, CEMEX Annual Report 2016 and Team Analysis

Source: CEMEX Annual Report 2016

Figure 2

BMVTicker: CEMEX CPO Ticker: CX

Source: Team Analysis

Figure 3VALUATION DATE

Methodology

DCF

Relative Method

12 Month Target Price

Target Price Return

JANUARY 5th, 2018

9.80

11.31

10.25

29.97%

70%

30%



-6.09%

8.63%

0.68x

55.79%

5.4x

-8.25%

-5.65%

10.13%

0.52x 0.51x 0.86x 1.48x 1.74x

58.88%

5.5x

-2.60%

10.94%

61.09%

5.2x

-4.07%

0.55%

12.03%

61.52%

5.2x

0.87%

5.57%

14.06%

58.47%

4.22x

9.10%

-7.07%

13.05%

50.92%

3.98x

10.90%

KEY FINANCIALS

2012 2013 2014 2015 2016 2017 Q3

Net Income Margin

OperatingIncome Margin

EBIDTA toInterest Expense

Debt toCapital Margin

ConsolidateLeverage Ratio

ROE

Figure 4

CEMEX S.A.B DE C.V. (CEMEX) and subsidiaries, produce, market, distribute, and sell cement, ready-mix concrete, aggregates, clinker, and other construction materials in more than 50 countries around the world, having as its main markets the United States (USA or US) and Mexico. CEMEX is listed with an Ordinary Participation Certificate (CPO) in Bolsa Mexicana de Valores (BMV) under the ticker CEMEX.CPO and in New York Stock Exchange with an ADR under the ticker CX.

We issue a BUY recommendation with a 1-year target price of 10.25 USD per American Depositary Share (ADS) (19.79 MXN per CPO considering an exchange rate of USDMXN 19.31); representing a return of 29.97% from January 5, 2018 with a closing price of 7.89 USD. Our target price is calculated by the weighted sum considering 70% of a discounted free cash flow to the firm (DCF) model and 30% of a relative valuation model (see figure 3). Our recommendation is driven by the following key factors:

CEMEX acquired the Australian company Rinker to keep on with its expansion strategy in 2007 but, just right after CEMEX had to face the Financial Crisis of 2008. This crisis had a big impact in the world’s economy and in CEMEX’ results, as it led to a decrease in sales while confronting huge indebtedness. Back then, in 2010, the company had a consolidated leverage ratio of 7.40x, to solve this issue, CEMEX began to improve their cash flows to repay their debt and reach an investment grade in order to have access to lower interest rates. This strategy has been successful for the firm, as for 2017, CEMEX achieved a consolidated leverage ratio of 3.98x and improved its credit rating up to a BB, with a stable outlook according to Standard & Poor’s (S&P), and a BB- with a positive outlook according to Fitch Ratings.

CEMEX is located in strategic sites considering their potential growth, consumption per capita, population growth and political stability. Emerging markets, such as Colombia, Guatemala, Nicaragua, Costa Rica and other countries in Central, South America and the Caribbean as well as the Philippines, represented around 16% of the company’s sales in 2016 and are expected (according to the firm) to have higher growth in Gross Domestic Product (GDP). Considering this, within their capital expenditures (CAPEX), the company contemplates strategic investments which are expected to be canalized to those areas. Meanwhile, in those countries where a moderate growth is expected as USA, Mexico, France, United Kingdom (UK), Spain and Germany, the CAPEX is contemplated to be used only for maintenance purposes and in a smaller portion for strategic investments. Moreover, as the current trend is moving towards a more sustainable consumption, CEMEX has responded to this demand by providing products that cover those needs.

NYSE

Weight Price

-7.90%

2

BUSINESS DESCRIPTION:

Capable management platform:

Business strategy and efficient cost management:

Products and services description:

Geographic Locations:

Worldwide Presence (As of June 30th, 2017)

Presence in more than 50 countries worldwide with approximately 41,000 employees.

Annual production capacity of approximately 93 million tons of cement.

2016 annual production levels of 53 million cube meters of ready-mix concrete and 151 million tons of aggregates.

regate 4 cement plants,1,555 ready-mix concrete facilities, 305 aggquarries, 247 land-distribution centers and 63 marine terminals.

Source: CEMEX website.

Business strategy:

Figure 5

0.8%5.1%

20.3%23.5%

ALTERNATIVE FUELS

1990 2006 2010 2016

Figure 6

INITIATIVESPROGRESS TO 2017Q3

KEYELEMENTS

TARGET

Assets Divestments

Total Debt Reduction

USD 2.7 billion

USD 3.8 billion

USD 2.7 billion

USD 4 billion

USD 2.7 billion divestments

to 3Q of 2017USD 3.8 billion debt reduction to 3Q of 2017

Figure 8

SALES PARTICIPATION IN 2016

USAUKFranceGermanyMexicoSouth America & The CaribbeanPhilippinesRest of the world

27%

8%

6%3%

21%

12%

4%18%

Figure 9

SALES PER PRODUCT

CementConcreteAggregates

45%

16%

39%

Figure 10

PRODUCT SUBPRODUCT

Cement

Concrete

Aggregates

Other products

Gray Ordinary Portland Cement, White Portland Cement, Mansory or Mortar, etc.

Standard Ready-Mix Concrete, Architectural Concrete, Rapid-Setting Concrete, among others.Crushed Stone and Manufacturated Sand, Gravel, Sand and Recycled Concrete.Asphalt, Concrete Block, Roof of Tiles, Architectural Products, Pipe and other precast products.

CEMEX SAB de CVCRH PLCHeidelbergCement AGLafargeHolcim Ltd

NORTH AMERICA

LATIN AMERICA & CARIBBEAN

CENTRAL & EASTERN EUROPE

WESTERN EUROPE

MIDDLE EAST &AFRICA

ASIA PACIFIC

22.21%

51.93%

15.56%

37.86%20.06%

25.52% 30.07%

46.18% 100%1

48.07%2

68.77%

68.27%

25.26%

6.47%

26.90%

4.33%

Figure 7

CEMEX has more than 100 years of history, in which they have shown an accurate management and how they have effectively adapted to world´s trends, opportunities and adversities. Their managers have accomplished their main objectives, focusing in the past with an aggressive expansion, facing a critical situation in 2008 and, since then, moving towards a strategy that could help them achieve an investment grade. Through the years, the company has worked under an objective-guided-framework, where the goals, progress and key strategies are previously planned and established, as it can be seen in figure 6.

CEMEX’s strategy stands up on four pillars: valuing their employees as their main competitive advantage, helping their customers to succeed, pursuing markets with long-term profitability and ensuring sustainability of the business. This is why CEMEX has a diversified portfolio and is regularly updating it to more sustainable products that will satisfy customers’ needs, but also guarantee CEMEX’s operations. The firm has implemented an effective strategy to reduce costs that resulted, a decrease of 1.78% in this field from 2015 to 2016, mainly due to cost reductions in freights by using its own fleet and timely contracting transportation, as well as lowering energy costs (as CEMEX has improved the use of alternative fuels developing clean power projects and having a higher certainty of its costs in the future).

CEMEX was founded in 1906 and has been consolidated as a producer and marketer of cement, concrete, aggregates and other construction products. It also provides building solutions for housing projects, pavement projects, information technology and green building consultancy services. It operated as a privately-owned company until its initial public offer (IPO) in January of 1976 (see company´s history timeline in appendix 1).

CEMEX is the third largest cement producer in the world with an annual cement production capacity of 93.0 million tons as of the end of 2016. Nowadays, it is considered as the second largest ready-mix concrete company in the world with annual sales volumes of approximately 52.1 million cubic meters and one of the largest aggregates companies with annual sales volumes of approximately 150.8 tons.

Its products are divided into four major branches: Cement, concrete, aggregates, and construction related services. They have been moving towards a customer centric focus, which has become their core strategic goal, accompanied with offering sustainable products, solutions and services backed by a strong research and development team. CEMEX also develops a great variety of services to provide efficient solutions to its clients (see figure 10).

CEMEX has gone through an expansion process in the past 26 years to diversify its cash flows and venture into new markets that have different economic cycles from the ones in Mexico. Their network of operations produces, distributes and markets cement, ready-mix concrete, aggregates and other related products in more than 50 countries, while maintaining business relationships in approximately 102 nations. USA and Mexico are the most representative countries in terms of sales, as they accounted about 48% of the total sales in 2016 (see appendix 2 and figure 8).

CEMEX’s strategy is to create value by constructing and managing a global portfolio composed of cement, concrete, aggregates and related businesses. It lays on four factors that guide the actions of the entire organization.

Source: CEMEX 3Q Presentation


Source: Bloomberg

Source: CEMEX Annual Report 2016 and Team Analysis



UTILIZATION RATE

3

INDUSTRY OVERVIEW AND COMPETITIVE POSITIONING

Financial strategy:

World macroeconomics:

EMDEs

Forecast

Japan

Western Europe

US

Mexican economy:

Figure 11


CUSTOMER CENTRIC GOALS

Digital Commercial Model

Customer Centricity Foundations

Customer Segmetation

Sales Force Management

Value Before Volume

Figure 12


SERVICES24/7 LoadATM-like Bulk Cement Dispatch SystemConstruramaCustomer-oriented Educational and Training ServicesConstruction Financing ServicesMobile SolutionsMultiproductsService CentersSmart SiloTechnical Support

Figure 13

2012

2013

2014

2015

2016

2017

2018

2019

5.00%

4.00%

3.00%

2.00%

1.00%

0.00%

Global GDP GrowthGlobal Average Advanced economies

Source: Oxford Economics

Figure 14

Source: S&P and Team Research

DATE CREDIT RATING2015

January 2017

September 2017

Expected 2019

B+

BB

BB-

BBB-

Figure 15

Source: CEMEX website

CREDIT RATING SEPTEMBER 20, 2017S&P

Long-Term Global

Long-Term National

Long-Term National

RATINGS OUTLOOK

mxA

BB

mxA-A

Stable

Figure 16

Source: CEMEX website

CREDIT RATING MARCH 13, 2017S&P

Long-Term Global

Long-Term National

Long-Term National

RATINGS OUTLOOK

A(Mex)

BB-

F2(Mex)

Stable

Figure 17Construction: Output growth


121086420-2-4-6-8

2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

% year


3.53

2.52

1.51

0.50

-0.5-1

-1.52011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021

Developed Countries: Construction output growth % year

Forecast

Figure 18

The first factor considers valuing their people as its main competitive advantage, with programs that cover health, safety, professional growth and leadership to avoid injuries, resulting in an Employee Lost-Time Injury (LTI) Frequency Rate of 0.6 in 2016 (in contrast to a 1.7 rate in 2013). In the same year, CEMEX invested USD 24.7 million in training programs for its employees and currently more than 80% have insurance benefits superior than what is established in local legislation. CEMEX aims to become the most customer-oriented company in the industry by increasing their customer centricity network and moving towards a digital transformation service with their “Commercial Digital Model” (MDC), which identifies the needs of its clients and allows the company to offer appropriate solutions while improving their customer experience. The company also measures customers’ satisfaction with the metric "Net Promotor Score" (NPS), which permits them to monitor customer satisfaction and level of loyalty. They also provide innovative and sustainable product and services.

Moreover, CEMEX pursues markets that are expected to have a long-term profitability with a diverse set of assets over its locations to grow in the medium and long-term. For 2017, CEMEX completed its expansion projects in the Philippines and Colombia, and purchased a majority portion of Trinidad Cement Limited (TCL), a company with operations in Trinidad and Tobago, Jamaica and Barbados. Besides, they participate in complementary businesses such as the development of alternative and renewable sources of energy. To ensure sustainability in the business, the firm counts with a Sustainability Committee, who focuses on corporate social responsibility actions. For instance, during 2016 the company was enrolled in more than 1,200 sustainable projects.

Their financial strategy focuses on regaining their investment grade, reducing costs and having price initiatives (such as value before volume) and optimizing capital expenditures. CEMEX has lowered their costs through a strict cost management, improving efficiencies, while moving to alternative fuels, closing not strategical cement lines, selling fixed assets and moving to more centralized operations.

CEMEX has also reduced their capital expenditure in relation with maintenance and expansion to generate cash flows in order to pay debt, improve their credit rating and strengthen their capital structure.

The market structure, in which the cement industry operates, can be considered as an oligopoly due to the homogeneous product and the interdependence in terms of production and prices that exist. In the oligopoly, the decision that each market leader takes, affects the price and, therefore, reduces the benefits of market followers. This happens as a consequence of the high needs of capital investments that are required to produce cement and to the high transportation and energy costs. Since they produce a homogeneous good, there is necessarily interdependence between competitors and, consequently, their behavior must be strategic (meaning that the participants must be cautious when setting prices and quantities). Suppliers generally do not have a big market power and, diversification among them, due to the size of the companies, is quite common (see appendix 4).

Global growth is reinforcing, contributing to an improvement in confidence and, according to Oxford Economics (2018), it is projected to accelerate to 2.9% in 2018-19 as shown in figure 13. Investment across advanced economies has firmed, while private consumption growth has been moderate. The recovery in global trade coincides with strengthening investment and financial markets; volatility has been low despite elevated policy uncertainty and investors are reflecting risk appetite.

The financial markets have improved as the peso appreciated with respect to the US dollar in the last few months. GDP is expected to expand by 2.3% in 2018. Construction output is expected to rise by 1.1% in 2018, and over the following 10 years, the construction output is expected to grow on average by 2.0% per year. Overall, industrial production is forecasted to rise by 1.9% in 2018, accompanied with an increase in world industrial production of 3.4% in the same year.

4

European economy:

World Construction Growth:

Energy:

US economy:

DRIVERSPopulation and urbanization growth:

INDUSTRY TRENDS

Sustainability:

Emerging Countries: Construction output growth

% year

Figure 19

8

7

6

5

4

3

2

1

02011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021

Forecast

3

2

1

0

-1

-2

-32010 2011 2012 2013 2014 2015 2016 2017 2018 2019

Eurozone: Contribution to GDP Growth% year

Forecast

Net exportsStockbuildingGovernment spendingInvestmentConsumptionGDP

Figure 20


CONSTRUCTION2011-2015 2016 2017 2018 2019 2020 2021 2022-2026

United StatesEuropeUnited KingdomJapanDeveloped Countries

Western EuropeBrazilRussiaIndiaChinaEmerging marketsWorld

2.8 3.3 0.2 2.8 3.3 2.7 2.6 -0.5-2.5 1.4 3.3 2.7 2.2 2.0 1.8 -0.41.9 3.8 3.8 -0.3 1.1 2.0 2.3 -0.5

3.3 1.8 2.3 2.7 1.9 0.9 0.7 -0.1

1.0 31.9 2.0 2.3 3.3 1.7 1.8 -0.4

0.9 -5.9 5.9 4.1 3.0 2.9 2.9 -0.61.3 -5.2 -5.4 0.8 2.8 3.2 3.4 -0.70.5 -4.4 -0.7 2.5 1.6 1.6 1.7 -0.30.5 -4.4 -0.7 2.5 1.6 1.6 1.7 -0.39.0 6.7 4.6 4.2 5.1 5.1 5.0 -1.04.9 3.1 2.8 4.0 4.5 4.6 4.5 -0.9

2.8 2.5 2.4 3.2 3.3 3.1 3.2 -0.6

Figure 21


Figure 22

65

55

45

35Jun 16 Sep 16 Dec 16 Mar 17 Jun 17 Sep17

Brent oil priceWTI

World oil benchmark pricesUS $ pb


Figure 23Fuel: Output growth

2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

1086420

-2-4-6-8

-10

US

Japan

Western Europe

%year


Private consumption has been the main driver of growth over the last three years, led by a solid job creation, rapid credit growth, and record-high remittances. The inflation is expected to re-enter the target range (3%+/-1%) by mid-2018. (Oxford Economics, 2018).

Although presidential elections will take place in 2018, CEMEX does not expect a direct effect from the outcome, as they mention that the company has no specific political position or relation. Nevertheless, variations on other economic variables might indirectly affect them.

In accordance with Oxford Economics, the GDP growth forecast for 2018 is 2.5% driven by three factors: Business investments and exports are expected to be stronger engines of growth, while consumer spending (expected to grow 2.7%) trends would reflect a mature economy. Stronger-than-projected growth in employment and retail sales due to an unemployment rate unchanged at a 17-year low and soaring consumer confidence. On the Federal Reserve front, a more hawkish Federal Open Market Committee (FOMC) is expected to deliver three rate hikes, despite core inflation remaining below the 2.0% objective. Business fixed investment should grow by about 4.5% this year and leading indicators point to a firmer momentum of around 6.0% in 2018, supported by strong global activity. The US economy is presumed to grow at a 2.5% on average over 2017- 18 and then, slow to around 1.5-1.7% during 2019-22 as the economy grows in line with its potential.

Euro area real GDP is foreseen to grow by 2.3% in 2018, 1.9% in 2019 and 1.7% in 2020 (see figure 20). Real GDP growth is supported by growth in private consumption and investments as well as exports benefitting from the broad-based global recovery. In 2017, Europe kept strong value-added growth in the industry and slightly lower growth in the construction and services sectors. The unemployment rate stood at an 8.8% in October 2017. Consumer confidence rose further in November 2017 as a result of households being more optimistic about their future financial circumstances and the general situation in the Euro area. Consumer confidence is now close to its historical highs, which might mean strong underlying consumption dynamics in the near term. Housing investment increased in 2017, reflecting a continuation of the recovery in the Euro zone as a whole and in many individual Euro area countries. (Oxford Economics, 2018).

The global urban population is expected to grow approximately 1.8% per year between 2015 and 2020, 1.6% per year between 2020 and 2025, and 1.44% per year between 2025 and 2030. Currently, around 50% of the urban population worldwide, which corresponds to 2.0 billion people, lives in small or medium-size cities with less than 500,000 inhabitants. The urban population is expected to continue growing, so that by 2050, it will be one third rural and two-thirds urban, roughly the reverse of the global rural-urban population distribution of the mid-twentieth century. This continuous development is going to incentive the strategic planning in infrastructure and housing.

“US housing starts” grew for a second consecutive month in November, climbing to a 3.3% month-on-month. The S&P Case-Shiller house price index grew by an annual rate of 6.2% in September 2017, demonstrating the ongoing demand for US housing. In the UK, construction output fell in October 2017, declining by 1.6% month-on-month in seasonally-adjusted terms. Uncertainty around Brexit is likely to cap activity in the sector going forward. House prices stagnated in November 2017 with the Nationwide House Price Index growing by just 0.1% on the month. German construction has raised at a yearly rate of 4.5% and 2.6% in 2017 and 2018 respectively, French construction in 1.9% and 2.4%, and Spain in 4.7% and 3.1% respectively for the same years. In the long-term, construction growth its expected to moderate. Population projections in the Eurozone are expected to decline in the long-run once the current migrant inflows cease, which will sap demand for new construction projects. (Oxford Economics, 2018).

Currently, Oxford Economics considers that the vast majority of analysts and investors are assuming that the output cut of 1.8 million barrels per day (mb/day) will be extended to the end of 2018 ie. by an additional nine months. Yet this bullish scenario would probably not change prices much if it is confirmed. Total oil production fell by 0.5% in October 2017, after rising by 0.6% in January- September. This situation is being driven by a combination of both voluntary and involuntary cuts. In terms of fuel, which showed a similar picture in the US, fuel production grew by 4% yearly in June and then fell by 0.2% in September 2017. Europe also saw a slowdown in fuel production from 10% yearly in June to 1% in August 2017.

The Organization for Economic Cooperation and Development, estimates that buildings in developed countries account for more than 40% of energy consumption over their lifetime, 30% of the use of raw materials, 30-40% of emissions of greenhouse gases, and between 30-40% of the generation of solid waste.


5

Competitive Positioning:

Strategy growth recovery:

Oil prices and efficient cost management:

Debt reduction and capital structure:

INVESTMENT SUMMARY

CORPORATE GOVERNANCE

Figure 24


OIL PRICE REAL

INDEX (WORLD)

OIL WORLD PRICE (WEST TEXAS

INTERMEDIATE)

UnitsScaleMeasurement201020112012201320142015201620172018 F2019 F2020 F2021 F2022 F2023 F2024 F2025 F

77.192.8100.5101.8103.2106.3109.4111.3113.0114.6

43.250.855.957.759.662.665.768.370.973.4

Index2005=100

Level131.3171.4174.6172.3158.690.9

USD per BarrelNA

Level79.495.194.297.993.348.7

Figure 25

Source: Bloomberg

GLOBAL MARKET SHARE (BY REVENUES)

CEMEX, S.A.B. de C.V. (BMV:CEM)

Heldelberg Cement AG (DB:HEI)

CRH plc (ISE:CRG)

Lafargel Holcim Lid (SWX:LHN)

Vicat SA (ENXTPA:VCT)

Vulcan Materials Company

7.09%

5.72%

4.87%

4.50%

3.60%

2.08%

14.00%12.00%10.00%8.00%6.00%4.00%2.00%0.00%

2010

2012

2014

2016

2018

E20

20E

2022

E

GLOBAL AVERAGE CONSTRUCTION

Figure 26


OPE

RA

TIN

G C

OST

EFF

ICIE

NC

Y

LOW

HIGH

HIGHGEOGRAPHIC LOCATIONS

COMPETITIVE POSITIONING MAP

CEMEX

HEIDELBERGLAFARGE

HOLCIM

CRH

Figure 27

Source: Companies’ reports and team analysis

Sustainable construction aims to meet present day needs for housing, working environments and infrastructure without compromising the ability of future generations to meet their own needs in times to come. It involves issues such as the design and management of buildings; materials performance; construction technology and processes; energy and resource efficiency in building; adherence to ethical standards; socially-viable environments; among others.

The construction products industry has been characterized to be a local business with high volumes and low margins. However, CEMEX’s strategy addresses global trends and seeks to achieve the company´s penetration during the following years offering value before volume in global markets. CEMEX is one of the biggest companies in the world according to their geographic expansion and its market share (see the appendix 6). In the global market CEMEX has three main competitors LafargeHolcim LTd, HeidelbergCement and CRH.

In this industry there are key factors for business success mainly in terms of cost efficiency derived from distribution networks, geographical expansion (due to the high costs involved in transporting products) and energy supply. CEMEX is positioned within the three leaders of the industry, characterized mainly by its efficient use of alternative energies and installed capacity (see appendix 5). According with global expansion is positioned as the third one (determined based on the countries in which they are located). The company has sought to meet the needs of global markets in terms of product development, however, in comparison to its main competitors, CEMEX is still below them.

We issue a BUY recommendation of CEMEX SAB de CV ADR (CX) with a target price of 10.25 USD per ADS (19.79 MXN per CPO considering an exchange rate of USDMXN 19.31), expecting a 29.97% profit upside from its closing price of 7.89 (January 5th, 2017). This valuation is supported by a mix of 70% discounted cash flow to the firm model and 30% of a relative valuation model. The key drivers for the recommendation are:

The variables taken into account for the valuation mainly focus in projections of the general construction, buildings, residential and non-residential projects, civil engineering activities, cement prices and industrial production indexes, which were weighted by the regional historical sales (see figure 26) in the main countries of operations (Colombia, Mexico, United States, Philippines, France, Germany and United Kingdom). Continuing with the growth strategy mentioned by the company and its proven ability to take advantage of market opportunities, CEMEX is expected to follow these macroeconomic variables for future sales.

Due to the fact that cement industry highly depends on transport logistics, that increases its costs and reduces its profits, the main element to be considered in the cost structure is the oil price, which is expected to increase by 29.33% over the next five years. These changes could considerably reduce the value of the firm. However, the company is currently working on the development of alternative energies to reduce the effect of these phenomenon, as made on the last five years where costs lowered in a 7.45%. As a consequence of this behavior, the company expects to maintain a neutral position regarding its cost structure. The production of cement requires huge amounts of energy in its manufacturing, mainly two processes are involved: the dry process and the wet one. At the end of 2016, 52 out of 54 CEMEX’s operative production plants used the dry process which requires less fuel and leads to a cost reduction. Besides, CEMEX has opted to search for alternative sources of energy to diminish those costs.

Until the third quarter of 2017, the company has reduced its debt by USD 3,769 million and it is expected that by the end of the year it will have achieved its goal of USD 4,000 million. The main objective of this debt reduction strategy has been to increase its credit rating from B+ to BBB- through the sell of non-strategic fixed assets and cost reductions. The company believes that having a consolidated leverage ratio of 3.0x will help to achieve this objective, this would also decrease its portion of debt which directly affects the financing costs and the capital structure.

In the last three years CEMEX has experienced a broad reorganization in terms of strategies and objectives. Since the arrival of the new CEO, Fernando González Olivieri, CEMEX has focused its efforts in improving its credit rating through the sale of non-strategic assets. This strategy has been working for the company, which in 2016 made operating gains after seven years of constant losses.

(INYSE:VMC)

INDEXES GROWTH 2010-2022

6

Directors Experience:

Shareholder Structure:

Corporate Governance:

Social Responsibility:

VALUATION

Figure 28

BOARD OF DIRECTORS

NON-INDEPENDENT DIRECTORS

CHARIMAN OF THE BOARD

INDEPENDENT DIRECTORS

SECRETARY

Rogelio Zambrano Lozano

Fernando Ángel González OlivieriTomás Milmo SantosIan Christian Armstrong Zambrano

Armando J. García SegoviaRodolfo García MurielRoberto Luis Zambrano VillarealDionisio Garza MedinaJosé Manuel Rincón Gallardo PurónFrancisco Javier Fernández CarbajalArmando Garza SadaDavid Martínez GuzmánEverardo Elizondo Almaguer

Ramiro G. Villareal Morales (not a board member)

Figure 29

NYSE

Ticker: CEMEX.CPO

Ticker: CX

CPO’S Outstanding 14,039,298,127

Shares “A” 2

1Shares “B”

CPO LISTED ON BMV

CPO COMPOSED BY:

CPO 10

ADS COMPOSED BY:

Investment Managers (375 Holders)

Hedge Fund Managers (29 Holders)

Banks (38 Holders)

Goverment Pension Sponsors (9 Holders)

Corporate Pension Sponsosr (3 Holders)

Family Trust (21 Holders)

88%

4%4%

2%1% 1%

SHARE OWNERSHIP

Figure 30

The new administration has implemented aggressive measures with successful results, showing that the top-management has a clear vision of the company´s future.

The actual team of directors of CEMEX has a long career in the cement company. Each of them has at least fifteen years working for the company in different areas. Rogelio Zambrano Lozano, New Executive Chairman of the Board, has been a board member since 1987 and chairman of the company's Finance Committee since 2014. He majored as Industrial and Systems Engineer from the Tecnológico de Monterrey, and holds a Master's Degree in Management from the Wharton Business School of the University of Pennsylvania. He is also a member of the Advisory Board of Grupo Financiero Banamex, SA de CV, Zona Norte, and member of the boards of Directors of Carza, SA de CV, and of the Tecnológico de Monterrey. His predecessor, Lorenzo Zambrano, joined the company in 1968. During his role the firm became a multinational company due to a mergers and acquisitions strategy and he also led the IPO of CEMEX’s ADR in the NYSE. The current CEO, Fernando A. González holds a Bachelor´s Degree and a Master´s Degree in Business Administration from Tecnológico de Monterrey, he has served in CEMEX since 1989 in different senior management roles that include President of major operations in South America, Europe, the Middle East, Africa and Asia, in different areas such as Finance, Planning, Administration and Human Resources. Furthermore, CEMEX’s CFO, José Antonio González, started working at CEMEX in 1998, has been in Areas such as Finance and Strategic Planning, has a Bacheor’s in Science in Industrial Engineering from Tecnológico de Monterrey and a MBA from Stanford University (see appendix 7).

CEMEX´s common equity consists of series “A” shares and series “B” shares. Each of its CPOs, represent two “A” series shares and one “B” series share.

According to Capital IQ, CEMEX’s ownership is mainly composed of investment managers with a participation of 87.49%, in which CEMEX’s top holders are Dodge&Cox with a 10.56% ownership followed by BlackRock Inc with a 4.70% and Carmignac Gestion S.A. with a 4.03%. CEMEX’s ownership is totally public, as a 100% of their shares are floating. Additionally, it is important to highlight that more than half of their investors are located in the United States.

Since its listing, CEMEX has complied with the regulations that both the Mexican Stock Exchange and the NYSE require including the Sarbanes-Oxley Act of 2002 implemented by U.S. President George W. Bush for those non-US companies that issue securities in the US or those traded on US securities exchanges in order to encounter corporate and accounting fraud. Besides complying with those laws, CEMEX added the SEC´s Regulation Fair Disclosure to reinforce the integrity of security markets which ensures that the CEO and the CFO sign the Certification of Financial Reports that states that no material omissions where made. The company also takes into account the Internal Certification in which senior executives certify the accuracy of information. Finally, CEMEX has to comply with internal controls, the Independent Audit Committee and with the Code of Ethics.

CEMEX’s Sustainability Committee is comprised by three of CEMEX’s Board of Directors members who directly report to the Board of Directors, along with the Audit and the Corporate Practices and Finance Committees. The company has included Corporate Social Responsibility (CSR) as a fundamental component of the business and is committed to advance with the agenda of United Nations’ Sustainable Development Goals, focused on contributing to end poverty, gender inequality, provide decent employment and develop sustainable communities. CEMEX counts with “Patrimonio Hoy” to provide low-income families with access to funds to build or expand their houses, in 2016 it had expanded to more than 1,000 of their offices across Latin America. CEMEX is an active member of the UN Global Compact´s Advisory Group on Supply Chain Sustainability. They have focused on using low-emission alternative traditional fossil fuels to decrease their carbon emissions. In 2016, 94% of the waste generated by the production process was recovered, reused or recycled; the rest was sent to disposal sites. In 2016 the firm invested USD 80 million in sustainability related projects, including more than 70 projects to monitor and reduce air emissions.

For the valuation, two different valuation methods were used: A discounted cash flow to the firm and a relative valuation approach. The discounted cash flow to the firm was used to find the intrinsic value of the company, isolated from any market “moods” and to understand the business as a whole and the drivers that conduct the value of the firm. However, it is important to bear in mind how is the market valuing similar assets in order to have a broader approach, which is why a relative valuation method is also taken into account.




BMV

7

Relative valuation:

Discounted cash flow to the firm

9.00%8.00%7.00%6.00%5.00%4.00%3.00%2.00%1.00%0.00%

2017 2018 2019 2020 2021 2022

SALES GROWTH

4.95%

8.15%7.17%

6.35% 6.17% 8.09%

Figure 31

Figure 32

6.00%

5.00%

4.00%

3.00%

2.00%

1.00%

0.00%

20 1

2

2013

2014

2015

2016

2017

2018

E

2019

E

2020

E

2021

E

2022

E

CAPEX

2017 2018 2019

11.02%

10.65%

10.16%

WACC

Figure 33




FCFF (MM)PV (TV)PV of FCFFEnterprise valueCashDebtMinority interestImplied value of equityShares outstanding

19,572.006,886.6.0026,458.00

454.0011568.001,583.00

13,760.0014,039.30

$$$$$$$

$$$$$$$

Price per ADS $9.80$

$

Weight

PV (TV)PV of FCFFEnterprise valueCashDebtMinority interestImplied value of equitySharesoutsanding

Relative Valuation (MM)

70%

Weight 70%

21,692.006,886.00

28,578.00454.00

11,568.001,583.00

15,880.0014,039.30

Price per ADS 11.31

Target Price $10.25 USD


Figure 34

We obtain a target price of 10.25 USD per ADS, composed by a weighted average of 70% from the DCF valuation (with a target price of 9.80 USD) and 30% from the relative valuation (with a target price of 11.31 USD). The relative valuation has a lower percentage than the DCF, considering that the material construction industry has a similar structure to an oligopoly that could mislead the valuation (as CEMEX has few similar peers to be compared with) (see appendix 10 and 16). .

The main inputs to the model are the following (see appendix 11):

Sales:

For the forecast of sales, the variables considered were the projections for 2018 up to 2022 of the building construction, non-residential buildings, civil engineer, and the industrial production index according to Oxford Economics, in each of the main countries in which CEMEX participates (see appendix 12). Then, it was calculated the growth on those indexes per country and, finally, a weighted average was calculated considering the sales share per country in 2016 , ending with the growth rates showed in figure 31.

Taxes:

According to the participation in the countries where CEMEX operates and the corporate tax rate in each of them, a weighted average tax rate was calculated (using the sales share per country). United States was not taken into account as CEMEX presented losses in the past years that have been and will be amortized in the future, and the projected revenues of the company will not surpass those losses (see appendix 14).

Terminal growth:

For the terminal growth, it was determined an annual growth rate of 3.49%. To select this rate, projections of the 10-year US Treasury bond for 2022 according to Oxford Economics were used. Considering a conservative position, this bond represents an opportunity cost for investors and a reflection of what investors expect of the economy.

Capital expenditures (CAPEX):

The CAPEX has shown a stable behavior in the last five years with an average value of 4.59% of investment in fixed assets to sales (figure 32). Therefore, the CAPEX forecast will follow this same ratio, considering that with this proportion the company has been able to maintain its level of sales. A fraction of the annual expenditure is expected to be used on maintenance and the rest on strategic assets to increase sales and to make its cost structure more efficient (see appendix 13).

Weighted Average Cost of Capital (WACC):

As the calculated free cash flows were cash flows to the firm, a WACC was used to calculate the value of the company. This WACC varied for the years 2018 and 2019 (and kept constant after on) (figure 33), since it is expected that CEMEX will reduce its consolidated financial leverage which, as a consequence, generates changes in the capital structure of the company. For the cost of debt, it was considered the interest-bearing debt and financial obligations. The cost assigned to each component of debt was the one disclosed by the company in its periodic reports and was changed in 2018 and 2019 to reflect the impact that an investment grade could have over it and the changes resulting from monetary policy decisions. For the cost of equity, a capital asset pricing model (CAPM) was employed, in which the equity risk premium was retrieve from a survey-study done by the IESE Business School (Spain); the risk-free rate used was a 10-year US Treasury bond rate and; the Beta was calculated considering two methods which are detailed in appendix 15. Both the risk-free rate and the Beta were also adjusted according to forecasts of interest rates and the expected variation in capital structure until 2019. For a more detailed description, see appendix 15.

An EV/EBITDA multiple was used. This multiple gives an overview of the company at an operative level, leaving aside issues that arise from different capital structures and taxation. Specially in the industry of Construction Materials, these considerations are important, since it is an industry in which firms have different capital structures and because the main participants of the industry are huge multinationals with different taxation treatments. EV/EBITDA will isolate the company’s valuation from these concerns, expecting, then, a more reliable result.

8

Montecarlo Simulation:

Revenue growth:

Major operating costs and expenses efficiencies:

FINANCIAL ANALYSIS

$ 10.53$ 10.44$ 10.18

3.080.173.13


SIMULATION STATISTIC

MeanMedianModeStandard DeviationSkewnessKurtosis

Figure 35

72%15%13%

$7.89>$8.68

$7.11 - $8.68<$7.10

Actual Price per ADSBuyHoldSell

BuyHoldSell

Probability Distribution


Figure 37

Min

Med

Max 61.00% 17.30%%

35.47% 12.49% 6.19%%

CEMEX34.54%

CEMEX13.05%

10.20%

CEMEX7.07%

26.30% 7.57% 4.89%

GROSS INCOMEMARGIN

OPERATINGINCOME MARGIN

NET INCOME MARGIN

Figure 38

Source: Team Analysis and Capital IQ

Figure 40INCOME STATEMENT COMMON SIZE-MAIN ELEMENTS

2012 2017 3Q

Cost of sales70.40%

Cost of sales65.46%

Operating expense 20.98%

Operating expense 21.49%

Net income 4.99%

Net income 7.07%

Financial expense 9.40%

Financial expense 7.77%

Figure 36

Source: Capital IQ

COMPANY NAME EV / EBITDA

CRH plc

Vulcan Materials

CEMEX

Lafarge Holcim

Heidelberg Cement

Vicat SA

10.2X

20.7X

9.0X

9.9X

9.3X

10.0X

Figure 39

70000

60000

50000

40000

30000

20000

10000

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[0.0

,0.5

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[2.0

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0,31

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0,32

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0,33

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TARGET PRICE: $10.25

Probability of a BUY: 72%


Different comparable companies were used in order to calculate the terminal value of the enterprise. These comparable firms were determined using different criteria, ending up with six different companies including CEMEX (appendix 16). It is expected that the obtained firms (shown in the following table) have similar characteristics in terms of business, financing structure, growth and size, making them comparable to CEMEX.

Over the five past years, CEMEX has been increasing its revenues at a yearly compounded growth rate of 5.2% considering the reported sales in MXN, after recovering from negative annual growth rates that reached -12.3% annually in 2009 caused by the financial crisis of 2008. The improvements in revenue growth were due to the recovery of the world economy after the crisis, which reactivated both the private and public consumption in the different countries in which CEMEX operates. On the other hand, the company has been implementing strategies (that include in some cases pricing strategies, among others) that had enabled them to increase their revenues. The compounded annual growth rate reached by the company is above the median of its comparable companies of 4.9%, locating the company above Lafarge Holcim, Heidelberg Cement and Vicat SA. It is important to recall, however, that looking at the compounded annual growth rate over five years of CEMEX in USD, the rate has generally remained negative, due to currency conversion issues (by the end of 2016, it was of -2.50%) and to the fact the currencies different to the USD have depreciated towards the USD in the past years. For instance, the Mexican Peso, in the las five years, depreciated at an average rate of 6.96% towards the USD.

In line with their strategy, the organization has been able to reduce their operating costs and expenses. Including practices such as using renewable energy, shutting down factories under periods of low demand, using innovative processes for the production of their products, implementing a vertical integration, among others, have been crucial for the creation of new efficiencies. In fact, the gross margin has increased from 29.60% in 2012, to 34.54% at the end of 2017Q3 considering Last Twelve Months(LTM), and the operating margin from 8.63% to 13.05% in the same period, as it can be deducted from the cost structure exposed in figure 40. Compared to its peers, CEMEX has a gross margin lower than the median of 35.50% but an operating margin above the median (which is 12.49%), suggesting that the operating efficiencies have been useful to overpass its competitors (as seen in figure 38).

The cash conversion cycle (CCC) of CEMEX, according to the reported information, was of 4.23 days at the end of 2016. Since 2012, when the CCC was of 36.87 days, the ratio has been reducing with incredible jumps both in 2015 and 2016. The main driver of these decreases has been the fact that the company has extended their provider payment delay, which has helped them to finance their operations, leveraging more in suppliers rather than from other sources that could increase their cost of financing as well as their potential risks.

A Montecarlo simulation was run with 1,000,000 iterations, modeling four variables that are the drivers of the valuation. These variables were sales, capex, WACC and terminal growth rate. The simulation results in a mean price of USD 10.53 and a 72% of probability of a BUY, that was obtained from a 10% above the actual price of USD 7.89 and a probability of 13% to change the recommendation to SELL, that resulted from a 10% below the actual price. Then, the Montecarlo simulation is aligned with target price of USD 10.25 per ADS (see appendix 17).


COMPARABLES’ MAIN INCOME MARGINS

9

From negative to positive net income margin:

MR1 – Country Instability (Probability: Low/Impact: High)

INVESTMENT RISKS

Solvency improvement:

Consolidated leverage ratio reduction strategy:

DuPont Analysis:

10.90% = 7.07% x 0.47 x 3.30ROE NET PROFIT

MARGINASSET

TURNOVEREQUITY

MULTIPLIER

Market Risks (MR)

Figure 41

10.00%

5.00%

0.00%

-5.00%

-10.00%

-15.00%

2010 2011 2012 2013 2014 2015 2016 2017

7.07%5.57%

0.55%

-5.65%-6.09%

-7.59% -2.67%

-13.11%

NET INCOME MARGIN

60.00%

50.00%

40.00%

30.00%

20.00%

10.00%

0.00%

Median = 37.60%

51.5

8%

37.5

0%

40.9

0% 36.9

0%

34.5

0%37.7

0%

DEBT TO CAPITAL RATIO AS OF 2017 Q3

CH

R p

lc

Vul

can

Mat

eria

lsC

ompa

ny

CEM

EX,

S.A

.B.

de C

.v.

Lafa

rger

Hol

cim

Ltd.

Hei

delb

erg

Cem

ent

AG

Vic

at S

A

Figure 42

Source: Team analysis

18.50x

16.50x

14.50x

12.50x

10.50x

8.50x

6.50x

4.50x

2.00x

1.80x

1.60x

1.40x

1.20x

1.00x

0.80x

0.60x

0.40x

0.20x2012 2013 2014 2015 2016 3Q2017LTM

NET Debt to EBITDA

NET

Deb

t to

EBIT

DA

EBITDA to Interest Expense

EBIT

DA

to In

tere

st E

xpen

se

EBITDA to Interest Expense & NET Debt to EBITDA

Figure 43


Figure 44

8.00x

7.00x

6.00x

5.00x

4.00x

3.00x

2.00x2010 2011 2012 2013 2014 2015 2016 20173Q

7.40x

6.60x

5.40x 5.50x5.20x 5.20x

4.22x3.98x

CONSOLIDATES LEVERAGE RATIO

From 2010 until 2014, the company had been consistently reporting losses. These negative margins came after the crisis of 2008, mainly due to reductions in sales, increases in operating costs and expenses and, higher financial expenses. For these years, the net income margin was, on average, of -7.01% in MXN, where the total cost of sales and operating expenses represented a 91.60% on average and the financial expenses a 9.12% on average for the same period of time. While the profit margin was improving, the strategies of CEMEX (both business and financial strategies) were being implemented accompanied by a slow recovery and reactivation of the economy. As a result, for the LTM reported at 2017 Q3, CEMEX presented a profit margin of 7.07% in USD (see figure 41), backed up by operating costs and expenses that represented an 86.9% and financial expenses that represented a 7.77% of the total sales (these reductions were due mainly to the exploitation of efficiencies and to the renegotiation and payments of debt). The median of the profit margin of the comparable firms that CEMEX faces was of 6.19%, making CEMEX, apparently, a more profitable company than its peers (figure 38).

Derived from the considerable amount of debt that CEMEX owes, solvency is an important aspect to bear in mind. Through the years, the organization has been known to be a highly indebted company, with total debt to capital ratios that went around 58% in the last five years. As a matter of point, company has disclosed that one of their main objectives is to lower their financial leverage. Therefore, the company has been repaying debt and lowering their financial leverage to the point that, until 2017 Q3, the total debt to capital ratio was reduced to 51.58%, which is still above the median of comparable firms (which is 37.60%), in fact, the highest, suggesting that CEMEX continues to have a high financial leverage (as shown in figure 42). Also, as a consequence of new debt agreements, renegotiation and their financial strategy, the company has been improving their capacity to cover their debt related obligations, for instance, from 2012 to the 2017 Q3, the company’s EBITDA to interest expense ratio passed from 0.68x to 1.74x. On the same time frame, the net debt to EBITDA ratio went from 14.44x to 5.55x (figure 43). All of these are signs that CEMEX is improving their ability to meet its obligations and that its credit risk is lowering.

One of the main financial goals of CEMEX consists on reducing its financial leverage in the road to upgrade their credit rating. They expect that by 2019, their consolidated leverage ratio would be lower than 3.00x. Through time (as shown in figure 44)), the company has been able to reduce their ratio from 7.40x in 2010 to 3.98x by the end of 2017 Q3 by repaying their debt using cash flows obtained from disinvesting and operative activities. The objective of upgrading their credit rating is to obtain an investment grade, which will be make the company more attractive to investors and private funds, as well as a suitable asset in which pension funds are able to invest.

The negative net income that has been accounted in the last years affected the return on equity (ROE) by delivering a negative ROE. However, due to better results of the company, the ROE at the end of 2017 Q3 was of 10.90%. This value comes from the efficiency of the cost structure (represented by the profit margin, which was analyzed previously), the efficiency of the assets of the company (assets turnover) and the financial leverage that the company faces. The assets turnover of the company has been stable, by only changing from around 0.39x to 0.47x in the last five years, mainly due to proportional changes in net revenues and in the total assets base. Calculating the return of the assets (ROA), results on a return of 3.30%. Nevertheless, as a consequence of the financial leverage, represented with an equity multiplier of 3.30x, the ROE rises up to 10.90%.

Comparing the DuPont analysis components with similar firms, it can be seen that CEMEX shows a ROE and a net profit margin higher than the medians, which are of 7.27% and 6.19% respectively. However, the asset turnover is still below the median (of 0.50x) and the equity multiplier continues to be higher than the median; meaning that the company is less efficient in the use of its assets and has a higher default risk derived from a greater financial leverage. Graphically, these comparisons detailed in figure 45.

The infrastructure construction is highly correlated with the GDP, so an instability in the government (An internal war, a “coup d’état”, a possibility of default, a radical change of government, an expropriation, etc.), will lead to a decrease in the construction investment, which would translate into lower sales. The instability in Egypt is a good example, where it can be seen a reduction from the company’s sales in this country of 30% from 2014 to 2016. Mitigant: CEMEX has operations in 4 different continents and more than 50 countries, then it is diversified around the world and it does not depend of just one market.


Source: CEMEX Annual Report 2016 and Team Analysis

10

MR2 – Energy Prices (Probability: Moderate/Impact: High)

MR3 - Dollar Appreciation (Probability: Moderate/Impact: High)

BR1 – Competitors & Mergers (Probability: Low/Impact: Moderate) Business and Operational Risk (BR):

FR1 – US Interest Rates (Probability: High/Impact: Low) Financial Risk (FR):

LR1 - Antitrust Proceedings and Environmental Suits (Probability: Moderate /Impact: Low)Legal Risk (LR):

PR1 – Foreign Trade Policies (Probability: Low /Impact: High)

PR2 – Concessions (Probability: Low /Impact: Moderate)

Political Risk (PR):

Figure 45

Min

Med

Max 10.90% 4.59%

7.27% 3.24% 0.50X

CEMEX 10.90% CEMEX 3.30X

CEMEX3.30%

0.82X

CEMEX0.47%

6.27% 2.58% 0.41X 1.95X

2.09X

3.30X

ROE ROA ASSETTURNOVER

EQUITYMULTIPLIER

LOW

MO

DER

ATE

HIG

H

LOW MODERATE HIGH

IMPACT

PRO

BABI

LITY

FR1

MR2

MR3MR1PR2

LR1

BR1

PR2

Figure 46

69%

23%

7%

US Dollars

Euro

Others

Mexican Peso

TOTAL DEBT PER CURRENCIE

Source: CEMEX 2016 annual report


Source: Team Analysis AND Capital IQ

Figure 47

Source: FRED Economic Projections

Figure 48

3.50%

3.00%

2.50%

2.00%

1.50%

1.00%

0.50%

0

1.40%

2017 2018E 2019E 2020E

2.10%

2.70%2.90%

FEDERAL FUNDS RATE

Fixed

Variable

Source: CEMEX 2016 annual report

TOTAL DEBT BY INTEREST RATE TYPE

31%

69%

Figure 49

From the total costs of CEMEX, 25% comes from the use of electricity and fuel. These kind of commodities have a variable price, and for 2020 Oxford Economics is expecting a rise of 17% in the West Texas Intermediate barrel price. This implies an increase in the price of the fuel, and as a consequence, higher cost of goods sold for the company. Mitigant: 25% of their cement operations uses renewable energy and 23% of the fuel they use, come from alternative resources such as slag, fly ash and pozzolans. CEMEX is expecting to increase this use of alternative fuel to 35% of their operations for 2020, which has a lower price than the traditional fuel.

69% of CEMEX’s total debt is denominated in USD, and just 24% of their total sales come from the United States as of 2017 Q3. For instance, an appreciation in this currency against foreign currencies, would mean lower sales when converted to USD, implying a higher cost of the debt in USD. Mitigant: Even if they have a lot of independency from the Mexican Peso, the 40% of their net income comes from more than nine different currencies, which are neither USD nor Mexican Peso. Meaningg that they have a well diversified portfolio with all kind of currencies as Euro, Pound, Colombian Peso, Philippine Peso, Egyptian Pound etc.

The Construction Materials industry is an oligopoly, because it exists a similar product and there are just a few relevant competitors around the world, as a consequence, every industry participant needs to be aware of the action of the others. Since , mergers in the industry are relevant, if the competitors become bigger, they would have a higher market power and, therefore they could move the cement prices. Then, the risk is to dependend on competitors’ prices movements, that would have a negative impact in future cash flows. Mitigant: CEMEX is looking for a differentiation strategy, this is why they have a group in Switzerland that focuses on research and development. One example is CEMEX Go, where clients can buy cement and generate invoices, just using a mobile application.

CEMEX depends on the US yield, as 20% of their total debt is denominated in USD at a variable rate. In addition, CEMEX’s strategy is to achieve a higher credit rating to access to lower interest rates. Taking into account that the FED is expecting to double its federal one-year fund rate from a level of 1.4% in 2017 to 2.9% in 2020, it is highly probable that the cost of certain components of debt will increase. Mitigant: 69% of their debt is at a fixed rate, meaning that the effects of rate variations, are not expected to be critical. Finally, they have also implemented interest rate swaps to hedge and mitigate this risk.

CEMEX has an open environmental litigation in Colombia and several cases of antitrust policies in countries such as Spain, Poland, USA and Costa Rica. If the resolution of these processes has an adverse result for the company, their cash flows and operations could be negatively impacted. Mitigant: These legal issues tend to take a long time, so CEMEX has been creating accounts provisions in the scenario of a negative resolution.

The president of the US has shown a protectionist posture, which has conducted to a renegotiation of the North American Free Trade Agreement (NAFTA) and a withdrawal from the Trans-Pacific Partnership (TPP). This could trigger a higher protectionism measures that could affect commercial relationships and, as a consequence, the Mexican industries. Mitigant: CEMEX exports only 1.25% of its cement production in Mexico to the USA, as most of the cement commercialized in the US is manufactured in that country. The reason behind this relates to expensive freights that can be avoid following the mentioned strategy.

CEMEX has mines to extract its raw materials, they depend on concessions and permits given and issued by local governments. If the authorities take any action that goes against the firm’s interest, the company would suffer a negative impact as they need these raw materials to manufacture its main products. Mitigant: In the main markets where CEMEX operates, different quarries exist, if one quarry stops the production or the concession is revoked, the company will still have the capacity to mine raw material from other sites.

COMPARABLES’ Du Pont ANALYSIS

RISK MATRIX

11

APPENDIX 1: CEMEX’s history timeline

Source: CEMEX web site and other electronic sources.

Expansion or entrance in new markets.Competitive positioning.Stock exchange events.Other general events.

1906. CEMEX was founded in northern Mexico.1920. Cementos Portland Monterrey initiates operations.1921. Cementos Hidalgo and Cementos Portland Monterrey merge in order to create Cementos Mexicanos S.A.1966. CEMEX acquires Cementos Maya’s plants.1973. CEMEX acquires the Cementos Portland del Bajío plant in central Mexico.1976. CEMEX lists on the Mexican stock exchange.1985. CEMEX decides to divest non-core assets.1986. CEMEX consolidates its export program.1987. CEMEX acquires Cementos Anáhuac.1989. CEMEX acquires Cementos Tolteca which was Mexico´s second largest cement producer. This made CEMEX one of the ten largest cement companies at the time.1992. CEMEX acquires Valenciana and Sanson (Spain’s two largest cement companies), beginning its expansion in Europe.1992. CEMEX establishes Neoris what nowadays is Cemtec, CEMEX’s supplier of information-technology services.1994. CEMEX acquires Vencemos, Venezuela’s largest cement company, beginning its operations in South America.1994. CEMEX acquires Cemento Bayano in Panama, beginning is operations in Central America.1994. CEMEX starts its strategy in respect to alternative fuels.1994. CEMEX establishes its eco-efficiency program.1995. CEMEX acquires Cementos Nacionales, Dominican Republic’s leading cement company. With this it begins its operations in the Caribbean.1996. CEMEX becomes the world’s third largest cement company with the acquisition of Colombia’s Cementos Diamante and Samper.1997. CEMEX initiates operations in Asia, with the acquisition of Rizal Cement in Philippines.1999. CEMEX begins operation in Africa with the acquisition of the Assiut Cement Company, one of Egypt’s leading cement producers.1999. Presence consolidation in Central America and the Caribbean by acquiring Cemento del Pacifico, Costa Rica´s largest cement producer.1999. CEMEX lists on NYSE.2000. CEMEX becomes North America´s largest cement producer when it acquired US-based Southdown.2000. S&P upgrades CEMEX’s credit rating to an investment grade.2001. CEMEX begins Construrama and Online customer service.2005. CEMEX doubles its size with the acquisition of RMC.2006. CEMEX’s 100th anniversary.2007. CEMEX started the integration of Rinker.2008. Financial Crisis, due to huge indebtedness, CEMEX losses its investment grade.2012. CEMEX lists its South and Central America operations on the Colombian Stock Exchange.2015. Lafarge and Holcim merge.2016. CEMEX lists its Philippine’s operations on the Philippine Stock Exchange.2017. Credit rating upgrades to BB.

12

APPENDIX 2: CEMEX and competitor’s world presence

2

Western Europe Participation Cemex SAB de CV 22.21%CIMPOR Cimentos de Portugal SG 1.53%HeidelbergCement AG 30.07%LafargeHolcim Ltd 46.18%Central & Eastern Europe HeidelbergCement AG 100.00%Asia Pacific Cemex SAB de CV 4.33%HeidelbergCement AG 26.90%LafargeHolcim Ltd 68.77%North America Cemex SAB de CV 16.56%CRH PLC 37.86%HeidelbergCement AG 20.06%LafargeHolcim Ltd 25.52%Latin America & Caribbean Cemex SAB de CV 51.93%LafargeHolcim Ltd 48.07%Middle East and Africa Cemex SAB de CV 6.47%HeidelbergCement AG 25.26%LafargeHolcim Ltd 68.27%

1

CEMEX SAB de CVCRH PLCHeidelbergCement AGLafargeHolcim Ltd

NORTH AMERICA

LATIN AMERICA & CARIBBEAN

CENTRAL & EASTERN EUROPE

WESTERN EUROPE

MIDDLE EAST &AFRICA

ASIA PACIFIC

22.21%

51.93%

15.56%

37.86%20.06%

25.52%30.07%

46.18% 100%1

48.07%2

68.77%

68.27%25.26%

6.47%

26.90%

4.33%

(1) It is considered Heidelberg Cement AG’s participation in Buzzi Unicern SpA to calculate its total market share.

(2) It is considered LafargeHolcim’s participation in CIMPOR Cementos de Portugal SG. to calculate its total market share.

This map weights CEMEX’s and its three main competitors’ participations in base of 100% in order to visualize its presence and its market share.

13

APPENDIX 4: Porter’s Analysis THREAT OF NEW ENTRANTS

BARGAINING POWER OFCUSTOMERS

THREAT OF SUBSTITUTES

5

4

3

2

1

RIVARLY AMONG EXISTING

COMPETITORS

BARGAINING POWER OF SUPPLIERS

APPENDIX 3: SWOT AnalysisStrengths Weaknesses

ThreatsOpportunitiesSource: CEMEX Annual Report 2016 and Team Analysis.

Global range with presence in more than 50 countries worldwide, with around 41 thousand employees.Expertise in the industry with over a hundred years in the business.Raw materials reserves to keep operating. As of December 31, 2016 CEMEX estimated to have a reserve of cement raw materials with remaining life of approximately 82 years, assuming the last five years annual average cement production and most of it is for its own use.Wide distribution: CEMEX has presence in more than 50 countries, accounts with 247 distribution centers and 63 maritime terminals. Research and Development towards a more sustainable production and products, counts with nine laboratories.

High interest as it does not have investment grade due to its credit rating of BB, leading to bigger financial costs.

Have faced antitrust investigation in Spain, Ohio and Colombia.

High financial leverage with a consolidated ratio of 3.98x.

Average age of the Board members is high.

Low gender diversity through the company (only 12% of the employees were woman in 2016).

Huge dependence on no renewable raw materials.Customer centric oriented with improving customers’ experience, offering digital solutions for example since 2017 they are collaborating with IBM Ix for technological applications to have a more personalized customer involvement, besides CEMEX is continuously innovating and measuring satisfaction.Have the capacity to be an inclusive business with social responsible programs such as “Patrimonio Hoy”, that gives access to financing options to low-income families to build or expand their homes.

US infrastructure plans that could increase consumption of construction materials.Potential growth in emerging markets that are expected to increase their material consumption in the next decade.Population growth, according to CEMEX Annual Report, the United Nations estimates that the world population which lives in cities will increase up to 66% by 2050.Technological development in construction industry.Use of sustainable energy and production of sustainable materials.

Expansion and continuous acquisitions or merges of their main competitors. For example, Holcim

and Lafarge in 2015.Increase in operating costs such as

fuel and energy. Substitutes for cement or construction regular materials such as recycle materials.

(alternative products)Depreciation of currencies as they are in several

emerging markets.Volatility in interest rates.

Resource scarcity as the construction industry is the number one consumer of global raw materials.

Environmental penalties are frequent, considering the impat that the industry has, it produces 50% of the solid waste in United States and

30% of the global greenhouse come from buildings.

14

APPENDIX 5: Competitive Profile Matrix

WEIGHT CEMEX HEIDELBERGCEMENT

CRH LAFRGEHOLCIMLTD.

Distribution Network

Alternative Energies

Installed Capacity

Research and Development

Global Expansion

Total

25.0%

18.0%

15.0%

20.0%

22.0%

100%

5.0

7.5

7.5

5.0

5.0

5.8

7.5

10.0

5.0

10.0

7.5

8.1

2.5

2.5

2.5

2.5

2.5

2.5

10.0

5.0

10.0

7.5

10.0

8.6

Source: Team analysis and companies´ reports

THREAT OF NEW ENTRANTS- LOW Locally, companies might get to compete with the large holdings that are part of this industry.Globally, due to the power and size of the companies, it is quite difficult for new players to get to compete.Also, the needs of a large fixed asset base require big capital expenditures that are not affordable by all of the competitors.Getting permissions and rights is not always fairly accessible to everyone.

BARGAINING POWER OF CUSTOMERS- LOWBuyers can vary from the common public, to big companies or even governments.Depending of the type of buyer, then the power that it has over the company might vary.

THREAT OF SUBSTITUTES-MODERATEAmong the same industry, construction materials offer a wide variety of products that can be substituted.However, substituting all of the products of the industry would be a huge challenge, since the current products offered by the industry, have lotsof cost-efficiency and quality adavntages that are not easy to overcome in the long-term.

BARGAINING POWER OF SUPPLIERS-LOW Diversification among suppliers, due to the size of the players, is quite common.The nature of the business requires domestic suppliers in the countries where the companies have presence. This enables participants of theindustry to have a broad quantity of suppliers, in which no provider has a high power over the firm.

RIVALRY AMONG EXISTING COMPETITORS-VERY HIGHAs a global industry, it is quite competitive and can be subject of aggressive competition.Mergers, acquisitions and strategic alliances have been common in the industry.Companies tend to be large holdings that include lots of subsidiaries around the world, to provide their services. The use of rights (emission, exploring, exploiting, etc) are commonly needed in the industry and can cause rivalry among the industry.

This matrix identifies the principal competitors of the company and compares them through the use of key factors of success in the industry. The analysis also reveals the strengths and weaknesses as opposed to the competitors.

The first step to construct this table is to identify the key factors of the industry and competitors. Once identified, the company is given a grade in terms of the position in each of the factors, which for questions of this analysis goes from 2.5 to 10 (10 been the maximum score). Next, a weight is given to the key factors according to their relevance and, finally, these qualifications are weighted with the percentages previously granted. The result will be a rating by company, where the highest rating refers to the leading company in the industry.

For the construction of our competitive profile matrix the considered key factors were measured in the following way: Distribution Network: Number of countries where the company has presence and its distribution centers. Alternative energies: In terms of percentage of the total use of energy, how much comes from alternative sources. Installed Capacity: Cement capacity in millions of tons. Research and Development: Investment and centers of Research and Development. Global expansion: Number of countries.

15

APPENDIX 7: Corporate organization chart

Source: December 31, 2016 CEMEX Annual Report 2016

BOARD OF DIRECTORS

Audit Committee

Corporate Practice andFinance Committee

Sustainability Committee

CEO:Fernando A. González

EVP Strategic Planning & Business

Development:

Juan Pablo San Agustín

President CEMEX México:

Juan Romero

President CEMEX SXA&C:

Jaime Muguiro

President CEMEX Europe:

Jaime Elizondo

President CEMEX USA:

Ignacio Madridejos

President CEMEX AMEA:

Joaquín Estrada

EVP & Organization:

Luis Hernández

EVP Legal:

Ramiro Villarreal

EVP Finance (CFO)

José Antonio González

EVP Investor Relations,

Communication & PA:

Maher Al Haffar

EVP Corporate Affairs & ERM:

Mauricio Doehner

APPENDIX 6: Competitive Positioning Map

OPE

RA

TIN

G C

OST

EFF

ICIE

NC

Y

LOW

HIGH

HIGHGEOGRAPHIC LOCATIONS

COMPETITIVE POSITIONING MAP

CEMEX

HEDELBERGLAFARGE

HOLCIM

CRH

Source: Team analysis and companies´ reports

This tool allows to understand the profile of a company with respect to its competitors in a graphic form according with two key factors of the industry and its market share.

For the analysis, the key factors used were: the operating cost efficiency (using the ratio operating profit margin) and the geographic locations (using the number of countries in which CEMEX and their competitors are).

16

APPENDIX 9: M Score Analysis

Income Statement 2012 2013 2014 2015 2016 2017

Net SalesCost of GoodsNet ReceivablesCurrent AssetsPropoerty, Plant and EquipmentDepreciationTotal AssetsSGA ExpenseNet IncomeCash Flow from OperationsCurrent LiabilitesLong Term Debt

14,984.00

(10,548.00)

2,825.57

4,925.76

16,581.71

1,362.26

37,260.47

(3,561.00)

(911.83)

462.96

4,186.23

13,816.26

$$$$$$$$$$$$

14,815.00

(10,170.00)

2,253.80

5,291.03

15,763.75

1,084.59

38,017.62

(3,522.00)

(837.34)

97.32

4,564.14

14,331.11

$$$$$$$$$$$$

14,975.00

(10,096.00)

2,329.73

4,813.98

13,767.16

929.65

34,936.30

(3,591.00)

(388.73)

813.57

5,442.67

12,980.12

$$$$$$$$$$$$

13,788.00

(9,141.00)

2,527.28

4,275.39

12,427.92

862.74

31,472.08

(3,178.00)

75.16

1,108.24

4,212.13

13,298.03

$$$$$$$$$$$$

13,403.00

(8,647.00)

2,121.51

4,441.60

10,960.96

779.30

28,944.40

(2,960.00)

747.05

1,885.62

3,963.13

11,342.47

$$$$$$$$$$$$

13,466.07

(8,740.96)

1,891.53

3,449.63

11,954.97

850.47

29,395.48

(2,813.47)

960.24

2,274.17

4,600.65

13,812.92

$$$$$$$$$$$$

YEAR 2013 2014 2015 2016 2017

DSRIGMIAQISGIDEPISGAILVGITATA

80.67%

98.07%

105.54%

98.87%

84.87%

100.03%

102.87%

-2.46%

102.26%

99.27%

104.92%

101.08%

98.18%

100.87%

106.10%

-3.44%

117.82%

99.33%

100.24%

92.07%

102.62%

96.12%

105.51%

-3.28%

86.68%

98.93%

99.70%

97.21%

102.26%

95.82%

95.04%

-3.93%

88.41%

100.24%

101.73%

100.47%

100.06%

94.60%

118.46%

-4.47%

APPENDIX 8: Income statement

Source: CEMEX reports and team analysis

Income Statement 2012 2013 2014 2015 2016 2017 2018E 2019E 2020E 2021E 2022E

SalesCost of salesGross profitOperating expensesOperating earnigns before expenses netShare of Profit/Loss of Associate & Joint VenturesOther Expenses, netFinancial expenseOther financial (expense) income, netEarning (loss) before income taxesDiscontinued Operations, net of taxProvision for Income TaxMinority Interest (After Tax)Controlling interest net income (loss)

14,984.00

(10,548.00)

4,436.00

(3,143.00)

1,293.00

56.65

(418)

(1,408.00)

74.00

(402.35)

(459.18)

(50.31)

(911.83)

$$$$$$$$$$

$$$

14,815.00

(10,170.00)

4,645.00

(3,144.00)

1,501.00

17.78

(378.00)

(1,549.00)

134.00

(274.22)

8.00

(476.53)

(94.58)

(837.34)

$$$$$$$$$$

$$$

14,975.00

(10,096.00)

4,879.00

(3,241.00)

1,638.00

19.95

(350.00)

(1,609.00)

194.00

(107.05)

9.00

(226.84)

(63.83)

(388.73)

$$$$$$$$$$

$$$

13,788.00

(9,141.00)

4,647.00

(2,988.00)

1,659.00

42.83

(190.00)

(1,237.00)

(77.00)

197.83

80.00

(144.73)

(57.94)

75.16

$$$$$$$$$$

$$$

13,403.00

(8,647.00)

4,756.00

(2,872.00)

1,884.00

33.20

(88.00)

(1,147.00)

237.00

919.20

55.00

(164.70)

(62.46)

747.05

$$$$$$$$$$

$$$

13,466.07

(8,740.96)

4,725.10

(2,891.58)

1,833.53

26.57

78.11

(1,026.05)

130.81

1,042.97

185.61

(6.50)

(70.87)

960.24

$$$$$$$$$$

$$$

14,502.95

(9,414.02)

5,088.94

(3,121.68)

1,967.31

33.53

(70.32)

(1,084.16)

105.45

951.81

(5.93)

(64.67)

881.21

$$$$$$$$$$

$$$

15,416.64

(10,007.10)

5,409.54

(3,318.28)

2,091.26

35.64

(74.75)

(1,015.52)

112.09

1,148.71

(7.15)

(78.05)

1,063.51

$$$$$$$$$$

$$$

16,263.01

(10,556.49)

5,706.52

(3,500.46)

2,206.07

37.59

(78.85)

(1,015.52)

118.24

1,267.53

(7.89)

(86.12)

1,173.51

$$$$$$$$$$

$$$

17,128.21

(11,118.09)

6,010.11

(3,686.68)

2,323.43

39.59

(83.05)

(1,015.52)

124.54

1,388.99

(8.65)

(94.38)

1,285.96

$$$$$$$$$$

$$$

18,012.02

(11,691.79)

6,320.23

(3,876.91)

2,443.32

41.64

(87.33)

(1,015.52)

130.96

1,513.06

(9.42)

(102.81)

1,400.83

$$$$$$$$$$

$$$

Beneish Model is a mathematical model that with the help of financial ratios and the eight following variables evaluates if the tested company is manipulating their earnings. Then those variables are combined into a M Score and if the value is less than -2.22, the results show no evidence of manipulation.

In all the years analyzed, M Score shows no manipulation of data what reinforce our analysis as our results are taken from a trustful information.

17

APPENDIX 11: Valuation assumptions


Sales growth rate

WACC

Terminal rate

CAPEX as % of sales

Tax rate

Consolidated leverage ratio

Debt to equity

2018E

7.60%

10.05%

-

4.59%

19.89%

3.5x

75.82%

2019E

6.30%

10.09%

-

4.59%

19.89%

3.0x

61.29%

2020E

5.49%

10.09%

-

4.59%

19.89%

3.0x

61.29%

2021E

5.32%

10.09%

-

4.59%

19.89%

3.0x

61.29%

2022E

5.16%

10.09%

-

4.59%

19.89%

3.0x

61.29%

PERPETUITY

-

10.09%

3.50%

-

-

-

-

APPENDIX 12: Country participation in sales growth rate

Source: CEMEX Annual Report 2016 and team analysis.

COUNTRY PARTICIPATION IN SALESFrance

Germany

Mexico

Great Britain

USA

Philiphines

Latin America

7.10%

4.00%

25.75%

10.33%

33.47%

4.71%

14.64%

APPENDIX 13: CAPEX

Source: CEMEX reports and team analysis

Income Statement 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022

SalesCAPEXCAPEX / Sales

$14,815.00

$700.00

4.72%

$14,975.00

$645.00

4.31%

$13,788.00

$800.00

5.80%

$13,403.00

$650.00

4.85%

$13,466.07

$730.00

5.42%

$14,502.95

$665.43

4.59%

$15,416.64

$707.35

4.59%

$16,263.01

$746.18

4.59%

$17,128.21

$785.88

4.59%

$18,012.02

$826.43

4.59%

APPENDIX 10: Projected free cash flow to the firm

2017 2018E 2019E 2020E 2021E 2022E

Net RevenuesCOGS

Gross ProfitOperating Expense

Operating income

EBITTaxes

EBIT (1-t)Depreciation + amortization

Change in NWCCAPEX

Free cash flow to the firm

13,466.07(8,740.96)

4,725.10(2,813.47)

1,911.63

1,911.63(380.29)1,531.35

871.46276.65

(730.00)1,949.46

14,502.95(9,414.02)

5,088.94(3,191.94)

1,897.00

1,897.00(377.37)1,519.62

939.39(364.32)(696.14)1,398.55

15,416.64(10,007.10)

5,409.54(3,393.03)

2,016.51

2,016.51(401.15)1,615.36

992.12154.11

(770.83)1,990.76

16,263.01(10,556.49)

5,706.52(3,579.31)

2,127.21

2,127.21(423.17)1,704.041,047.74

(91.42)(845.68)1,814.69

17.128.21(11,118.09)

6,010.11(3,769.73)

2,240.38

2,240.38(445.69)1,794.701,106.32

26.56(924.92)2,002.65

18.012.02(11,691.79)

6,320.23(3,964.25)

2,355.99

2,355.99(468.68)1,887.301,167.92

(30.05)(1,008.67)

2,016.50


18

APPENDIX 15: Weighted Average Cost of Capital assumptions and methods

Capital structure

Cost of debt

Cost of Equity

APPENDIX 14: Tax rate calculation

Source: Team Analysis, KPMG and PwC

COUNTRY TAX RATE SALES PARTICIPATION WEIGHTED AVERAGEUSA (1)UKFranceGermanyMexicoSouth America & TheCaribbean (2)PhilippinesRest of the wordRest of EuropeSpainRest of Asia, Middle Eastand Africa (3)

0.00%19.00%34.43%29.79%30.00%30.19%

30.00%24.25%19.54%25.00%23.95%

27.32%8.43%5.79%3.26%

21.02%11.95%

3.85%4.20%4.09%2.28%7.82%

0.00%1.60%1.99%0.97%6.30%3.61%

1.15%1.02%0.80%0.57%1.87%

Weighted Tax 19.89%

(1)

(2)

(3)

United States was not taken into account as CEMEX presented losses in the past years that have been and will be amortized in the future.It was an average of the following countries: Colombia, Costa Rica, Brazil, Guatemala, Panama, Argentina, Puerto Rico, Dominican Republic, Nicaragua, Peru, Jamaica, Trinidad and Tobago, and El Salvador It was considered an average of Asia and Africa.

When calculating the WACC, different variables were determined and calculated. In this section, a detailed explanation of the calculation of these elements is provided:

The capital structure plays an important role in the calculation of the WACC, since it is the way to converge both the cost of debt and capital into one rate. The weight of each of the components was determined using their market value. In the case of the debt, an annuity considering the cost of debt, the interest expense, the maturity of debt and the total debt was used. For the cost of equity, the market capitalization was employed as the market value of equity. This structure, however, was variated through 2018 until 2019, as, according to CEMEX, it is expected that the company reaches a consolidated leverage ratio lower than 3.00x by 2019. Therefore, the capital structure was changed year by year to reflect this.

To calculate the cost of debt, the information provided in the different company fillings was applied, where the cost of the different sources of interest bearing debt was considered. As interest bearing debt, only short and long-term debt was acknowledged, because other financial (interest bearing) obligations did not represent a significant portion of the debt (only 4.55% of the total interest-bearing debt). After having a weighted average cost of the two different sources of debt, a debt adjustment factor was used (provided by Bloomberg) which reflects a prime in the interest rate that proceeds from the credit rating that the company has. Then, the effect of taxes was included in the cost. Accompanied to the variable capital structure, the cost of debt was changed considering the following factors: the projections of the risk-free rates (the 1-year US treasury bond rate), which affected directly the cost of the variable portion of debt; the prime in the cost of debt of the variable portion of debt due to the upgrade in credit rating that CEMEX expects and; the debt adjustment factor which also variates in function of the credit rating.

A Capital Asset Pricing Model was the method used to stablish the cost of equity. The inputs of the CAPM were a risk-free rate, an equity risk premium and a leveraged Beta. The risk-free rate which was used was a 10-year US treasury bond rate. This rate was employed considering that the maturity of the rate resembles to a long-term horizon (which is the one expected by the valuation) and mitigates a reinvestment risk that could appear with lower maturity rates. The equity risk premium was extracted from a study performed by a professor of the IESE Business School, Spain, in which the average equity premium obtained from different investors (1613 investors for the case of the equity premium from the US) is presented. Lastly, the Beta of the company was determined as an average of the Betas resulting of two methods. The first one consisted on calculating an average of 52 two-year-weekly moving Betas and using the average as the Beta. The second method was based on a proposal of a professor from the New York University (Aswath Damodaran) which consisted on calculating Betas of comparable companies to CEMEX (the ones used in the relative valuation), unleveraging all of the Betas with the capital structures of each of the companies and their effective tax rate to, then, calculate the average of the Betas and use this average as the unleveraged Beta of CEMEX. Finally, the Beta was leveraged with the capital structure and the tax rate applicable to CEMEX.

19

APPENDIX 17: Monte Carlo Simulation

VARIABLE MEAN STANDARD DEVIATION

Sales 2018Sales 2019Sales 2020Sales 2021Sales 2022Long-Term debt Risk PremiumRisk free RateGrowth RateCAPEX

7.70%6.30%5.49%5.32%5.16%5.96%5.48%2.32%3.49%4.59%

0.04%0.04%0.04%0.04%0.04%1.68%1.44%0.41%0.47%1.61%

APPENDIX 16: Criteria used to determine comparable companies

Active public companies

Capital Structure Compounded AnnualGrowth rate

Construction Materialsindustry

Operations in theAmericas or Europe

Total Assets base

It is important to mention that the risk-free rate and the Beta of the company were variables that also varied based on the forecasts of the 10-year US treasury bond and the changes in capital structure. The risk-free rate was simply shifted considering forecasts of the rate. The Beta, instead, was modified by unleveraging the calculated Beta (the average between the two methods) using the capital structure of 2017 and leveraging it back using the forecasted capital structures for the years 2018 and 2019.

A Monte Carlo Simulation is a method to model the probability of an outcome, given some random variables. This why it was used to have a probability of the different ADS prices that CEMEX couldhave at a 95% level of confidence.

It was generated by modeling the following variables: sales, CAPEX, WACC and terminal growth rate. Each variable had a mean and a standard deviation to move in a normal distribution

In order to select the companies to perform the relative valuation and the financial analysis, the criteria presented in the figure above was used. Throughout this Appendix, each of the implemented criteria is described:

Active public companies: All of the companies selected as comparable needed to be active and public, because it was important to check how is the market valuing the companies in the present and to compare their financials at an updated basis.

Construction Materials industry: It was considered relevant that the firms that were used perform activities similar to the ones of CEMEX. This could ensure, until a certain point, that some of the macroeconomic variables that affect the companies, were the same.

Operations in the Americas or Europe: In line with the industry criteria, it was believed that the companies should operate in the geographic segments where CEMEX operates, so that, again, the variables affecting the firms could be similar.

Total Assets base: The asset base was considered as a relevant issue because it can be used as a representation of size which can be related with both the efficiencies and the capacity that this type of companies can reach.

Capital structure: Generally, financial leverage plays an important role in the results of a company and the risk that investors perceive from it. This is why, the capital structure was considered as a measure that could standardize to a certain point, these two issues.

Compounded annual growth rate: Growth was an essential factor when selecting the companies, as it represents the growth stage in which the firms might be. With this, it was ensured that the comparable firms were around a mature stage (in which CEMEX actually is).

20

APPENDIX 18: References

70000

60000

50000

40000

30000

20000

10000

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0,10

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0,11

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0,12

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0,13

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[14.

0,14

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0,15

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[16.

0,16

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0,17

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[19.

0,19

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[20.

0,20

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0,21

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0,23

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0,24

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[25.

0,25

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0,26

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[31.

0,31

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[32.

0,32

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[13.

0,33

.5]

TARGET PRICE: $10.25

Probability of a BUY: 72%

Sales: To obtain the standard deviation, it was used the historical and projected data from the indexes described in the valuation (2010-2022). For the mean, it was selected the growth in sales each year, without the inflation to model just the real growth. The inflation was excluded from the model, as it is a more stable variable, so the inflation was kept constant.

WACC: For the cost of debt it was used the standard deviation considering the spreads from a credit rating between B+ to BBB-. For the cost of equity, the market risk premium and the risk-free rate were model, using a standard deviation from historical value (2010-2017).

CAPEX: The historic results (2005-2017) for the ratio CAPEX/Sales were useful to obtain the standard deviation applied to CAPEX from 2017 to 2022. The mean taken into account was the CAPEX/Sales ratio used each year.

Terminal Growth: It was model with the projected value of the 10-year US Treasury Bond (2017-2022). So, the future variation was reflected in the standard deviation. As a mean, it was used the 3.49% from the DCFF.

Bloomberg (2018). Retrieved from Official Bloomberg TerminalsCapital IQ (2018). Retrieved from https://www.capitaliq.com/CIQDotNet/my/dashboard.aspxCEMEX. (2017). CEMEX Reports. Retrieved from https://www.cemex.com/investors/reports/homeCFI. (2018). Market Value of Debt. Retrieved from https://corporatefinanceinstitute.com/resources/knowledge/finance/market-value-of-debt/Corrales, S. (2017). The cement industry in Mexico. Retrieved from http://www.sciencedirect.com/science/article/pii/S0301703617300068 CRH. (2017). Financial Statements. Retrieved from http://www.crh.com/investors/key-financials/financial-statementsDamodaran. (2017). Ratings, Interest Coverage Ratios and Default Spread. Retrieved from http://pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/ratings.htmDamodaran (2014). Valuation. Retrieved from https://www.youtube.com/watch?v=znmQ7oMiQrM&list=PLUkh9m2BorqnKWu0g5ZUps_CbQ JGtbI9ECB (2018). Retrieved from https://www.ecb.europa.eu/home/html/index.en.htmlFederal Reserve (2018). Retrieved from https://www.federalreserve.gov/Federeal Reserve Economic Data (2018). Retrieved from https://fred.stlouisfed.org/Fernández, P. (2017). Discount Rate (Risk-Free Rate and Market Risk Premium) Used for 41 Countries in 2017: A Survey. Retrieved from https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2954142Garza, P. A. (2018). CEMEX Call. (ITESM Qro, Entrevistador)González, J. A. (2017). CEMEX Overview.Heidelberg. (2017). Reports and Presentations. Retrieved from http://www.heidelbergcement.com/en/reports-and-presentationsInternational Monetary Fund (2018). Retrieved from http://www.imf.org/external/index.htmKPMG. (2017). Corporate tax rate table. Retrieved from https://home.kpmg.com/xx/en/home/services/tax/tax-tools-and-resources/tax-rates-online/corporate-tax-rates-table.htmlLafargeHolcim. (2017). LafargeHolcim Reports. Retrieved from http://www.lafargeholcim.com/reports-presentationsLafargeHolcim. (18 de august de 2017). Understanding sustainable construction. Retrieved from https://www.lafargeholcim-foundation.org/about/sustainable-constructionNations, U. (2014). World Urbanization Prospects. Retrieved from https://esa.un.org/unpd/wup/publications/files/wup2014-highlights.pdfOrganization, W. H. (2017). World Health Stadistics. Retrieved from http://apps.who.int/iris/bitstream/10665/255336/1/9789241565486-eng.pdf?ua=1Oxford Economics (2018). Retrieved from http://www.oxfordeconomics.com/PWC. (2017). Worldwide Tax Summaries Online. Retrieved from http://taxsummaries.pwc.com/ID/Philippines-Corporate-Taxes-on-corporate-incomeUrbanet. (2018). The World Urban Popullation. Retrieved from http://www.urbanet.info/world-urban-population/World Bank (2018). Retrieved from http://www.worldbank.org/

Disclosures: Ownership and material conflicts of interest: The author(s), or a member of their household, of this report does not hold a financial interest in the securities of this company. The author(s), or a member of their household, of this report does not know of the existence of any conflicts of interest that might bias the content or publication of this report. Receipt of compensation: Compensation of the author(s) of this report is not based on investment banking revenue. Position as a officer or director: The author(s), or a member of their household, does not serve as an officer, director or advisory board member of the subject company. Market making: The author(s) does not act as a market maker in the subject company’s securities. Disclaimer: The information set forth herein has been obtained or derived from sources generally available to the public and believed by the author(s) to be reliable, but the author(s) does not make any representation or warranty, express or implied, as to its accuracy or completeness. The information is not intended to be used as the basis of any investment decisions by any person or entity. This information does not constitute investment advice, nor is it an offer or a solicitation of an offer to buy or sell any security. This report should not be considered to be a recommendation by any individual affiliated with CFA Society Mexico, CFA Institute or the CFA Institute Research Challenge with regard to this company’s stock.

CFA Institute Research Challenge

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