CICSA...Sep-05 Dec-05 Mar-06 Jun-06 Sep-06 Dec-06 Mar-07 Jun-07 Sep-07 0 2 4 6 8 10 12 14 16 Backlog...

Important disclosures/certifications are in the “Important Disclosures” section of this report. U.S. investors’ inquiries should be directed to Santander Investment Securities Inc. at (212) 583-4629/ (212) 350-3918.

* Employed by a non-US affiliate of Santander Investment Securities Inc. and is not registered/qualified as a research analyst under NASD rules.

Latin American Equity Research Company Report

Mexico City, December 17, 2007 Mexico – Infrastructure

CICSA BUYCarlos Slim’s Play on Infrastructure – Initiating Coverage with Buy Rating Gonzalo Fernandez* Vivian Salomón*Mexico: Banco Santander S.A Mexico: Banco Santander [email protected]/(5255) 5269-1931 [email protected]/(5255) 5257-8172

(12/11/07) CURRENT PRICE: US$0.89/M$9.64 TARGET PRICE: US$1.10/M$12.30 Initiation of Coverage Rating: Initiating with a Buy Price Target (US$): Introducing 1.10 per share EBITDA Estimates (US$): ’07 114 million ’08 168 million ’09 212 million

Company Statistics Bloomberg CICSAB1 MM 52-Week Range (US$) 0.73-1.26 2007E P/E Rel to the IPC (x) 1.58 2007E P/E Rel to Infra. Sector (x) 1.15 Index (US$) 2,809.8 3-Yr CAGR (06-09E) 14% Market Capitalization (US$ Mn) 2,326.9 Float (%) 25 3-Mth Avg Daily Vol (US$000) 9.2 Shares Outst - Mn 2,605 Net Debt/Equity (x) (0.07) Book Value per Share (US$) 0.31

Estimates and Valuation Ratios 2006 2007E 2008E 2009E Net Earn (M$ Mn) 944 620 1,086 1,485 Current EPS 0.40 0.24 0.42 0.57 Net Earn (US$ Mn) 87 57 97 130 Current EPS 0.04 0.02 0.04 0.05 P/E (x) 24.4 40.6 24.0 17.9 P/Sales (x) 2.14 2.06 1.80 1.52 P/CE (x) 17.4 31.0 17.9 14.3 FV/EBITDA (x) 14.8 20.1 14.2 11.3 FV/Sales (x) 2.0 2.0 1.8 1.6 FCF Yield (%) 5.8 3.2 5.6 7.0 Div per Share (US$) NA NA NA NA Div Yield (%) NA NA NA NA

NA not available. Sources: Bloomberg, Company reports, and Santander Investment estimates.

Investment Thesis: We are initiating coverage of Carso Infraestructura y Construcción (CICSA) with a Buy rating and a 2008YE target price of US$1.10 (M$12.30) per share. CICSA, a subsidiary of Grupo Carso, is one of the largest infrastructure construction companies in Mexico. It is involved in: (1) the construction of pipelines for oil, gas, and water; (2) telecom infrastructure for Telmex and America Movil; (3) the design and construction for oil platforms and petrochemical plants for PEMEX; (4) infrastructure projects; and (5) civil construction. Our Buy recommendation for CICSA is based on our positive view of Mexico’s infrastructure sector, the strong financial support from IDEAL to bid for infrastructure projects, the continued flow of projects from America Movil and Telmex, and the expected consolidation of Urvitec (a housing company) starting in 2008, which should all contribute to a significant improvement in operating results during 2008. • Year to date, CICSA has only added M$8.2 billion to its

backlog, compared with the M$30.8 billion added by its competitor ICA. As of 3Q07, ICA had 22 months of backlog compared with CICSA’s 14 months. In our opinion, the upcoming oil platform and highway projects from PEMEX should contribute to increasing CICSA’s backlog in 2008.

• CICSA’s margins declined significantly in 2007, reflecting the increased competition for projects. Nevertheless, we believe margins in the infrastructure division should improve in 2008 and, with the consolidation of Urvitec, we expect a 285-basis-point expansion in CICSA’s EBITDA margin, which should translate into a 47% increase in EBITDA in full-year 2008.

• Since its IPO in October 2005, CICSA stock has only appreciated 21%, compared with the 103% return offered by the Mexico IPC Index and 201% by ICA. As such, in our opinion, the weak performance during 2007 is already priced in, and we see a brighter outlook for CICSA in 2008.

Valuation and Risks to Investment Thesis: Our target price is based on a DCF valuation, with a 10.8% discount rate and a 2.5% terminal growth rate, implying a target FV/EBITDA of 17.4 times for 2008E, offering a potential upside of 22.6% from current levels. Risks include: Delays or cancellation of bids for infrastructure projects by the Mexican government; unexpected increases in project costs that have to be absorbed by CICSA; downward pressure on margins due to increased competition for projects; and lower-than-expected margins in the housing division, Urvitec.

Carlos Slim’s Play on Infrastructure – Initiating Coverage with Buy Rating


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Carso Infraestructura y Construcción, S.A. de C.V. CICSA is a subsidiary of Grupo Carso, operating in five different segments of infrastructure construction and engineering: (1) Swecomex in the oil and petro-chemical industries; (2) Grupo PC Constructores dedicated to civil construction; (3) Constructora de Infraestructura Latinoamericana (CILSA), a division dedicated to infrastructure construction; (4) CICSA’s segment dedicated to the installation of pipelines, providing engineering and construction services for the telecommunication industry, particularly for Telmex and America Movil; and (5) the homebuilder Urvitec merged in October 23, 2007, the operations of which will begin to be consolidated in 4Q07. The company’s shareholder structure is: GCarso has direct and indirect ownership of 72%, former Urvitec shareholders 3% and free float is 25%.

INVESTMENT THESIS We are initiating coverage of Carso Infraestructura y Construcción (CICSA) with a Buy rating and a YE08 target price of US$1.10 (M$12.30) per share. Our Buy recommendation on CICSA is based on our positive view of Mexico’s infrastructure sector, the strong financial support from IDEAL to bid for infrastructure projects, the continued flow of projects from America Movil and Telmex, and the consolidation of the housing company Urvitec starting in 2008, which would contribute to a significant improvement in margins. In our opinion, after its IPO in October 2005 CICSA’s valuation premium was justified by its above-average margin and strong backlog at that time. Nevertheless, after having been awarded projects with bids that were well above those of its competitors, the company became more conservative in its bidding during 2007, thus losing most of the significant contracts to ICA. CICSA has only added M$8.2 billion to its backlog during 2007, compared to the M$30.8 billion added by ICA. As of 3Q07, ICA had 22 months of backlog compared to CICSA’s 14 months. For 2008, we anticipate a better scenario for CICSA, estimating additional contracts for a total of M$13.7 billion and a closing total backlog of M$13.2 billion, equivalent to 11 months of sales. We forecast good opportunities for CICSA particularly in the oil platform sector, given the expected aggressive investment from PEMEX in this sector. In addition, we predict that the consolidation of the housing business, Urvitec, acquired in 4Q07, would represent 13% of additional revenues and 21% of total EBITDA. Urvitec has margins well above CICSA’s infrastructure segment, thus it should contribute to a recovery in consolidated margins. For 2008, we estimate revenue growth of 15% and a 47% hike in EBITDA due to the above-mentioned recovery in margins. During the first nine months of 2007, CICSA’s revenues were flat compared to the same period in 2006 and EBITDA margin decreased from 13.4% in January – September 2006, to 9.8% in the same period in 2007, resulting in a 27% YoY contraction in EBITDA. These poor results have led to a significant underperformance of CICSA compared both to the Mexican market and to its main competitor ICA, which in our opinion has led to attractive valuation levels. In our opinion, the weak performance of 2007 is already priced in and we foresee a better outlook for 2008. As a result of the significant underperformance compared to ICA, CICSA is now trading at a 20% discount in terms of FV/EBITDA for 2008E and at an 11% discount in terms of P/E (as compared to ICA). Thus, in our opinion, the negative results observed during 2007 are already priced in.

Important disclosures/certifications are in the “Important Disclosures” section of this report. U.S. investors’ inquiries should be directed to Santander Investment Securities Inc. at (212) 583-4629/(212) 350-3918.

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Figure 1. CICSA’s Historic Backlog

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24

6

8

1012

14

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Backlog M$ Months

Sources: Company Reports and Santander Investment Estimates.

Figure 2. Operating and EBITDA Margin Comparison CICSA vs. ICA

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EBITDA Margin ICA EBITDA Margin CICSA

Sources: Company Reports and Santander Investment Estimates.

Figure 3. CICSA’s Relative Price to ICA and IPC

CICSA +21%

IPC +103%

ICA +201%

7595

115135155175195215235255275295315335

Oct

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CICSA IPC ICA

Source: Santander Investment.



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Figure 4. CICSA – ICA Forward 12-Month FV/EBITDA

9.4

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18.2

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22.6

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ICA CICSA

Source: Santander Investment Estimates

Figure 5. CICSA – ICA Forward 12-Month P/E

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ICA CICSA Source: Santander Investment Estimates.

Positives Concerns

• Aggressive infrastructure plan 2007-2012, with government focused on infrastructure.

• CICSA should benefit from Pemex’s aggressive investment plan in 2008 and a potential energy reform.

• CICSA is the contractor of choice for Telmex and America Movil’s aggressive investment in telecom infrastructure.

• Delays or cancellation of bids for infrastructure projects by the Mexican government.

• Unexpected increases in project costs that have to be absorbed by CICSA; execution costs for projects that require company financing;

• Downward trend of margins in infrastructure due to stronger competition.


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VALUATION Our 2008 year-end target price is based on a discounted free cash flow valuation, with a 10.8% discount rate and a 2.5% terminal growth rate in perpetuity per year and implies a target FV/EBITDA multiple of 17.4 times for 2008E. Our target price implies a potential upside of 22.6% from current levels, in line with Mexico’s cost of equity during the same period. Thus we are initiating coverage with a Buy recommendation on the stock. In our opinion, CICSA is an event-driven stock with particular emphasis on the development of the backlog of its four segments. For our WACC calculation, we consider a 4.8% risk-free rate, a 158-basis-point country risk premium for Mexico, and a 5.5% equity risk premium. We also consider a 6.7% pre-tax cost of debt, a net debt/equity ratio of 0.07 times and a beta of 0.97 vs. the Mexico IPC Index.

Figure 6. CICSA – Free Cash Flow, 2009E-2018E (U.S. Dollars in Millions) 2009E 2010E 2011E 2012E 2013E 2014E 2015E 2016E 2017E 2018E Residual

Sales 1,533 1,740 2,002 2,242 2,354 2,648 2,979 3,351 3,687 4,055 EBIT 183 216 253 291 306 344 387 452 498 552 Cash Taxes 54 54 60 67 67 69 74 81 90 94 Depreciation 29 40 46 52 54 61 69 77 85 93 Capex 60 55 55 55 55 55 55 55 55 55 Changes in Working Cap 119 117 115 106 88 73 52 59 65 71 Free Cash Flow (20) 30 69 115 150 208 275 334 373 425 5,139

Source: Santander Investment estimates.

Figure 7. CICSA – Discounted FCF, 2009E-2018E (U.S. Dollars in Millions*) 2009E 2010E 2011E 2012E 2013E 2014E 2015E 2016E 2017E 2018E ResidualPresent Value (18) 25 50 76 88 111 132 145 146 150 2,008 NPV 2,912 Non consolidated Subs - Firm Value 2,912 Net debt 2008E 58 Minority Interest 1 Equity Value 2,853 Current Mkt Cap 2,327 Discount -18% # of ADRs (Mn) 2,605 Target Price ADR 1.10 Current ADR Price 0.89 Upside 22.6% TargetPrice M$ 12.30

Source: Santander Investment Estimates



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COMPARATIVE VALUATION TABLE Figure 8. CICSA – Comparative Valuation Table

Price US$/ ADR Target Upside/ P/E P/E P/E

FV/ EBITDA

FV/ EBITDA

FV/EBITDA Mkt Cap

Company Ticker Rec. 11-Dic Price Down 2007E 2008E 2009E 2007E 2008E 2008E US$ Mn

CICSA CICSAB1 MM Hold 0.89 1.10 23.2% 40.6 24.0 17.9 20.1 14.2 11.3 2,327ICA (Mexico) ICA Buy 25.77 30.00 16.4% 52.9 27.3 20.8 22.8 17.8 14.2 3,207

OHL Brazil OHLB3 Buy 14.68 22.00 49.9% 22.5 16.6 11.7 6.4 5.6 4.9 1,011

CCR (Brazil) CCRO3 Buy 18.12 22.60 24.7% 20.0 17.3 14.7 9.3 8.0 7.0 7,110

Average 31.4 20.8 16.5 14.1 11.2 9.2CICSA/ Average 29% 16% 9% 43% 27% 22%

All data in US$. Sources: Company reports and Santander Investment estimates

Figure 9. Mexico – Select Economic Projections, 2006-2009F 2006 2007E 2008F 2009FReal GDP (%) 4.8 3.2 3.4 3.6CPI Inflation (%) 4.1 3.8 3.7 3.6US$ Exchange Rate (Year-End) 10.81 10.80 11.20 11.44US$ Exchange Rate (Average) 10.90 10.93 11.04 11.34Interest Rate (Year-End) 7.0% 7.5% 7.5% 7.3%Interest Rate (Average) 7.2% 7.2% 7.5% 7.3%Fiscal Balance (% of GDP) 0.2 0.0 0.0 0.0Current Account Balance (% of GDP) -0.2 -1.2 -1.5 -1.6International Reserves (US$ Bn) 67.7 76.5 78.0 82.9Total External Debt (% of GDP) 13.4 12.8 12.1 11.5Source: Santander Investment historicals and forecasts.

BUSINESS OUTLOOK CICSA is an infrastructure construction and engineering company created in 1999 under the name Grupo Industrial Carso. CICSA participates in the engineering and construction of infrastructure projects including civil construction, network deployment for the telecommunication industry, and projects for oil and petrochemical industries. At present CICSA is organized in five divisions: Telecom Duct Installation, which represented 26.5% of revenue in 9H07; nfrastructure onstruction (CILSA, 28.5% of revenue); Civil Construction (Grupo PC Constructores, 14.1%); products and services for the petrochemical and oil industries (Swecomex, 37.7%), and the housing division, Urvitec, which will be consolidated in 2008.


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Figure 10. CICSA – Sales by Segment January - September 2007

Telecom Installation,

26.5%

Civil Construction ,

14.1%Infrastructure,

28.5%

Intercompany Eliminations

-6.8%

Products & Services, 37.7%

Source: Company reports.

Figure 11. CICSA – Backlog as of September 2007

Infrastructure, M$3,094 , 22%

Civil Construction, M$2,439 , 17%

Duct Installation, M$3,374 , 24%

Products & Services

(Sw ecomex), M$5,133 , 37%

Source: Company reports.

Figure 12. CICSA – Top Clients Sector ClientsManufacture and Services for the Oil and Chemical Industries PEMEX

Duct Installations Telmex, Telnor, América Móvil

Infrastructure Projects IDEAL, CFC Concesiones, CONCAUTO, Autopista Arco Norte

Civil Construction

Telcel, Telmex, Cnetro Histórico de la Ciudad de México (Mexico's Downtown), Grupo Sanborns, Sport City, CILSA and Administradora Mexicana de

HipódromoSource: Company reports.



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Figure 13. CICSA – Competitors Sector Competitors

ICA Flúor

Grupo RConstructora Subacuática Diavaz

Consorcio Industria

Manufacture and Services for the Oil and Chemical Industries

DragadosIMTSA

InfracomexSoluciona, S. A. de C. V. (Unión FENOSA)

Duct Installations

AlcatelICA

La PeninsularOHL

Infrastructure Projects

Sacyr Vallehermoso ICACivil Construction

GutsaSource: Company reports. CICSA was originally created as a provider of services for other companies in the group controlled by Mr. Carlos Slim, notably Telmex and America Movil. In 2006, revenues from infrastructure projects in the telecom segment represented 34.6% of CICSA’s revenues and 27.0% for the first nine months of 2007. One of the company’s primary advantages is the aggressive expansion of America Movil and Telmex in Latin America and their continued investment in Mexico, for which CICSA is the provider of choice.

CICSA aims to take advantage of the opportunities in Mexico’s infrastructure sector and in Latin America over the coming years, thus reducing its exposure to the telecom sector. Infrastructure construction represented 23.1% of CICSA’s sales in 2006. In this division CICSA has the financial support of Mr. Slim’s financial company Impulsora del Desarrollo y el Empleo en America Latina (IDEAL), the vehicle created to bid for infrastructure projects in Latin America. IDEAL participates in the bidding for public and private infrastructure projects where it can get a concession to build and operate toll roads, ports, tunnels, and projects that require short- or long-term financing. In these projects CICSA participates as the contractor for IDEAL through its infrastructure division, CILSA. The financial support from IDEAL is key because a large proportion of projects in Mexico and Latam require financing.

In 2007, Grupo Carso sold its ceramic tile company Porcelanite and its stake in cigarette producer Cigatam for US$1.8 billion dollars. Grupo Carso management has stated that, because infrastructure is among the priorities of the group, part of these resources could be used to capitalize CICSA if the upcoming projects need strong investments in working capital. With the current level of backlog, in our opinion, this capitalization is not necessary and we are not including these proceeds in our current estimates for CICSA.

During the first half of 2007 there was a slowdown in bids on infrastructure projects in Mexico because of the change in administration. Although during the second half of the year, with the release of the Infrastructure Plan 2007-2012 and the approval of the fiscal reform, the infrastructure sector showed a significant reactivation. However, most of the large projects like the La Yesca Hydroelectric Plant, the Nuevo Necaxa – Tihuatlan, and Rio Verde - Cd Valles roads; the Acueducto II water concession and the first package of roads from FARAC trust, among others, were won by CICSA’s direct competitor ICA. This resulted in a modest addition to CICSA’s backlog of only M$8.2 billion in 2007 compared to ICA’s additions of M$30.8 billion. Among the projects that have been awarded to CICSA during 2007 are:


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• Expansion of an ethylene oxide plant in the Morelos petrochemical complex at

Coatzacoalcos Veracruz; construction of a structure for an oil platform; and the manufacture of low-pressure equipment, high-pressure equipment and heat exchangers for the Laguna Verde nuclear power plant (projects worth M$750 million);

• Hydroelectric project “ Bajo de Mina” in Panama, with an installed capacity of 54 Mw and the hydroelectric project “Baitun” in Panama, with an installed capacity of 70 Mw (projects worth US$250 million);

• Construction of Altabrisa shopping center in Merida, in the Yucatan Penninsula, and additional construction work on the Banco del Bajio facilities in Leon, Guanajuato (a total of M$135 million for both projects);

• Construction of the first stage of Corporativo Polanco in Mexico City; and the construction of Paradero Ciudad Azteca (projects total around M$1.5 billion);

• Installation of fiber-optic and coaxial cable networks in Central and South America; the construction of radio bases in Colombia and Brazil, and the construction of a telecom network in Peru (contracts worth roughly US$40.6 million);

• Contracts to build fiber-optic networks in Nicaragua, Ecuador, Peru, and Chile (approximate value of the contracts: US$135 million);

• Construction and operation for a 10-year period of the water duct “Conejos Medanos” (contract valued around M$950 million).

Upcoming projects:

• CICSA plans to participate more aggressively in bids for oil platforms for PEMEX, oil drilling, refineries, ethylene plants, and projects for clean gas, in addition to the production of oil pipes for export.

• CICSA plans to participate with IDEAL in bidding for La Parota hydroelectric plant

(estimated at US$1.0 billion) and for several road projects, for example, the Irapuato bypass (estimated at US$57.4 million), and second package of FARAC roads (estimated at US$259.3 million). The bid of La Parota is pending agreement with the owners of land requiring expropriation from the government in order to build this plant.

• Civil construction will be closely linked to Grupo Sanborn’s expansion plan and to the

construction of the new corporate building “Corporativo Polanco” for Grupo Carso in Mexico City, as well as the construction of bus station Ciudad Azteca (M$1.5 billion is estimated for both projects).

One of the most important projects to be launched in 2008 is the port of Punta Colonet, a huge dock facility on the Pacific Coast. This is one of the largest infrastructure projects scheduled for President Calderon’s term. The objective is that this port will absorb business related to Asia, given that the port in Long Beach, California, is saturated. The Punta Colonet port project includes plans for a direct train line to the U.S., as well as customs facilities, an airport, highways, industrial parks, housing developments, and hotels.

PRODUCTION AND SERVICES FOR THE OIL INDUSTRY This division, through its subsidiaries Swecomex and Precitubo, is focused on the design, engineering, and construction for projects in the oil, chemical, and petrochemical industries. Swecomex, is focused on the oil, chemical and petrochemical sectors, while Precitubo produces steel pipes. The project includes oil platforms, heat transfer systems, pressure coolers and recipients for the chemical and petrochemical industries, and tubular towers for telecommunications antennas. In our opinion, through this division, CICSA is very leveraged



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to PEMEX’s aggressive investment plans going forward.

Among the most important projects in which CICSA has participated are the construction of two production platforms (PB-KU-M and PB-KU-S) installed offshore in the Sonda de Campeche oil field in the Gulf of Mexico (June 2004-December 2006) at a total of M$966.4 million plus US$266.7 million. In July 2005, PEMEX granted Swecomex the construction and supply contract for the vacuum and stabilization system of condensates at the marine terminal of Dos Bocas, for a total value of M$198.3 million. In August 2005, Swecomex won the PEMEX contract for the construction of a telecommunications platform at the Sonda de Campeche oil field in the Gulf of Mexico, worth M$65.4 million, plus US$8.8 million. This job was concluded in 2006.

In December 2006, CICSA, through its subsidiaries of Swecomex and Servicios Integrales GSM, together with the Mexican company BJ Services as technical advisor, was awarded a contract to drill and complete the construction of oil wells in southern Mexico for M$1.432 billion plus US$280 million. This project was started in January 2007 and is scheduled to be completed by December 2009. The last projects that the company was awarded were in 3Q07, valued around M$750 million and included the expansion of an ethylene oxide plant at the Morelos Petrochemical Complex in the state of Veracruz, and the construction of high- and low-pressure equipment for an oil platform, and heat transfer systems for the Laguna Verde nuclear plant, also in the State of Veracruz. As of September 2007, this division had a backlog of M$5.2 billion, and we estimate that in 2008, revenues from the oil industry will increase 5.4% in 2008 and that EBITDA will increase slightly by 0.7%.

On December 13, 2007, PEMEX’s CEO announced that Mexico’s oil company will invest M$200 billion (around US$18.2 billion) in full-year 2008 in oil and petrochemical infrastructure projects. In the announcement, the CEO urged private companies to participate in the public bidding and also to promote the creation of joint ventures in order for Mexican companies to have a higher presence in PEMEX’s projects. During the week, Pemex officials have reiterated in the media, the urgent need to increase private investment in oil in order to stop the declining trend in reserves and production. In our opinion, as a way to push the discussion for a modification in the regulation of PEMEX (energy reform) during 2008, an aggressive investment program from PEMEX would be particularly positive for CICSA.

INFRASTRUCTURE PROJECTS: CILSA The Infrastructure division of CICSA includes, among others, the construction, operation and maintenance of highways, bridges, water treatment plants, and water distribution projects. CICSA’s main infrastructure projects are the construction of Northeast Toluca bypass and the Tepic - Villa Union Highway, as well as the construction of two water treatment plants in the city of Saltillo, Coahuila. In January 2006, CICSA, through its subsidiary CILSA, was awarded a contract from IDEAL to build the 142-kilometer-long Mexico City North Bypass Highway, from the Tula Hidalgo junction to San Martin Texmelucan, Puebla. This project is worth around M$2.7 billion with a term of execution of 24 months.

In January 2002, CFC, a subsidiary of IDEAL, hired CILSA for the construction of the freeway called the Northeast Toluca Bypass Metropolitan Area of the City of Toluca, 29.4 kilometers long, in the municipalities of Lerma, Toluca, Otzolotepec, Xonacatlán, Temoaya and Almoloya de Juárez in the State of Mexico. The value of the project was M$845.5 million.

Also in April 2005, Concesionaria, a subsidiary of IDEAL, granted CILSA the construction of the Tepic-Villa Union highway, 237.8 kilometers long, from Yago, Nayarit, to Escuinapan, Sinaloa. The value of the project is M$2.4 billion.


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In the water treatment plants segment, during October 2004 the City of Saltillo, Coahuila awarded CICSA a contract for a water treatment and distribution system including the removal and final disposal of the solid residuals and mud generated in the plants, as well as the executive project and construction of the corresponding originators. The project is estimated to be completed within a 24-month period and has a total value of M$385.7 million. As of June 2007 CICSA, through its subsidiary CILSA PANAMA, together with IDEAL was awarded projects for US$250 million including the Hydroelectric Project of “Bajo Mina” in Panama, which involves construction of an electrical plant with a capacity of 54Mw, and the Hydroelectric Project of “Baitún” also located in Panama with an installed capacity of 70Mw. As of September 2007 this division had a backlog of M$3.1 million, and we estimate revenues will remain flat in this division and that EBITDA margin will expand from 6.7% to 12.0% in 2008E. On December 14, 2007, Mexico’s Communications Minister, Luis Tellez, announced that the government is ready to accept bids for the construction and operation of highways in Mexico totaling M$12.0 billion (US$1.1 billion) in the “first few days of January.” This would represent 30% of the M$40 billion in road projects targeted for full-year 2008. Among the projects to be bid on during January are the construction of the Chihuahua bypass; the Compostela – Puerto Vallarta and Oaxaca – Huatulco highways. Among the roads to be modernized are the sections between Cancun – Tulum; Zacatecas – Saltillo and Atlacomulco – Palmillas. The announcement of the winning bids is expected before the end of January. In addition, the SCT will open tender offer bids for the concession of three highways owned by FARAC during 2008. We expect an active participation of CICSA on these bids.

CIVIL CONSTRUCTION - GRUPO PC CONSTRUCTORES The main activities of CICSA in the civil construction sector include the design, engineering, management and construction of corporate and commercial buildings, industrial facilitie,s and commercial centers, as well as infrastructure works such s highways and bridges. Grupo PC Constructores is the subsidiary in charge of civil construction activities. At present, the main contracts in the civil-construction division are projects for the commercial division of Grupo Carso (Sanborns stores and restaurants, Sears, Dorian’s, Mixup Stores, El Globo pastry shops, Saks Fifth Avenue in Mexico, and Sport City sport clubs). Grupo PC also participates in the mining industry and has participated in the construction of hangars and terminals in the airports of Toluca and Mexico City, as well as retirement homes, hospitals, and bank branches. One of the company’s most important projects in this sector was the 90,000 m2-building for the Ministry of External Affairs in Mexico City. In addition, Grupo PC Constructores (GP) was involved in the remodeling of 11 properties in downtown Mexico (including offices, residences, and commercial and cultural space). During 2006, among the most important projects was a building 21,500 m2-building in Mexico City’s historic downtown including a museum, offices, and a 337-car parking lot. At present, GP is carrying out a project in the municipality of Nezahualcóyotl in the State of Mexico that involves the construction of a shopping center, an educational and cultural center, a hospital, and the closing and repair a of sanitary landfill for the construction of a sports center. GP also is in the process of constructing a development of 445 hectares in Veracruz, a project that includes housing, commercial services, educational facilities, offices, and recreational centers. During 3Q07, Grupo PC Constructores signed contracts for around M$1.5 billion, which includes



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two projects: (1) the construction of the first phase of the new corporate offices for Grupo Carso in Mexico City, including demolition, excavation, and construction of a parking lot. This project will have staggered deadlines and is scheduled to be finished by the first half of 2009; and (2) the construction of Paradero Ciudad Azteca, which is scheduled to be completed by 2Q09. As of September 2007, this division had a backlog of M$2.4 billion, and we estimate that revenues and EBITDA for this division will increase 18.8% and 67%, respectively, in 2008.

DUCT INSTALLATION The company’s duct installation business is focused on the construction, procurement, engineering, design, and installation of ducts, particularly in the telecommunication industry but also for electricity, water, gas, and oil. CICSA has started operations in several countries in Latin America following Mr. Slim’s telecom companies’ expansion in the region. CICSA has contracts with Telmex and Telnor for civil construction and installation of fiber optic cable and external plants; it also offers professional services for the execution of construction projects and modernization of copper networks and fiber optic, among others. This division also participates in the construction of radio bases for mobile communications for Telcel (America Movil). During 3Q07, CICSA formalized contracts for approximately US$135 million for fiber optic and coaxial networks in Nicaragua, Ecuador, Peru, and Chile. In addition, it was awarded the bid for a 10-year-project of construction and operation of the water system Acueducto “Conejos Medanos,” in the state of Chihuahua, Mexico, with an estimated investment of M$950 million, including construction and operation of the plant. As of September 2007, this division had a backlog of M$3.4 billion, and we estimate that revenues for this division will continue to decrease in 2008 (by 16% YoY) and EBITDA will drop 13.7%.

URVITEC

By the end of 2007, CICSA strengthened its presence in the housing market with the merger of Casas Urvitec. On October 23, CICSA, announced that its board of directors approved during an extraordinary shareholders meeting, the merger of Casas Urvitec (Urvitec) with CICSA. The transaction was structured as an all-stock, no-cash merger. Considering CICSA’s closing price of M$11.94 per share on the date of the transaction, Casas Urvitec was valued at approximately US$244 million. In exchange, CICSA issued Urvitec shareholders 221,445,827 series B1 shares. Urvitec, which began operations in 1994, develops low- and middle-income housing, with a minimum participation in the residential segment in five cities: Reynosa, Rio Bravo, Ciudad Juarez, Matamoros, and the State of Mexico. Sinca Inbursa (Grupo Inbursa’s venture capital) owns 27.55% of the company. With the approved acquisition, Urvitec shareholders will own 8.5% of CICSA. During 2006, Urvitec built 2,300 houses and has plans to build 4,000 in 2007 and 6,000 in 2008. After its full consolidation starting in November 2007, we estimate revenues of M$1,855 million and EBITDA of M$388 million for Urvitec in full-year 2008, representing 13% and 21% of consolidated revenues and EBITDA, respectively. With an estimated EBITDA margin of 20.9%, well above the 12.0% for the infrastructure division, Urvitec will contribute to a recovery in CICSA’s margin and would fuel a strong increase in EBITDA in 2008.


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EARNINGS OUTLOOK It is important to highlight that CICSA’s historical strong reliance on projects related to America Movil and Telmex in the telecom sector, in both Mexico and Latin America has provided the company with a consistent flow of projects and revenue. Nevertheless, since its IPO in 2005, the company has aimed to lessen this dependence and to make infrastructure projects for third parties a higher proportion of the sales mix. With the recent merger of Casas Urvitec, this should help improve margins going forward. Based on Mexico’s infrastructure program and the expense budget recently approved by Congress, we expect that US$20 billion worth of infrastructure projects could come up for bid over the next 18 months. We estimate that CICSA could be awarded around 9% of these potential projects, or US$1.7 billion. For 2008, we expect an increase in CICSA’s total backlog of 1.9% in real terms versus 2007E, totaling around M$13.1 billion. As a result of the reactivation of the award of projects in both Mexico and Latin America, we estimate sales will increase 15% in 2008 and 17% in 2009 in real peso terms. Regarding EBITDA, we forecast an increase of 47% in 2008 and 25% in 2009 and forecast that margins will recover from the poor margin of 10.1% estimated for 2007, to 12.9% in 2008E and 13.8% in 2009E. Finally, we expect net income to increase 69% in 2008 and 32% in 2009.



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Figure 14. CICSA – Operating Summary by Division, 2006-2009E (Mexican Nominal Pesos) Sales 2006 06/05 2007E 07/06 2008E 08/07 2009E 09/08

Manufacture and Services for the Oil and Chemical Industries 3,652.4 13.5% 4,519.7 19.2% 4,939.4 5.4% 5,197.8 1.6%Duct Installations 4,057 -34% 3,397.9 -19.3% 2,953.4 -16.2% 3,034.7 -0.8%Infrastructure 2,715 264% 3,333.1 18.3% 3,478.8 0.6% 5,549.7 54.0%Civil Construction 1,457 16.5% 1,751.4 15.8% 2,157.5 18.8% 2,586.5 15.7%Urvitec - 1,854.5 2,080.7 8.3%Eliminations (123) NM (810) (879) (910) Total 11,758 5.5% 12,192 -0.1% 14,505 14.7% 17,539 16.7%Operating Income 2006 2007E 2008E 2009E

Manufacture and Services for the Oil and Chemical Industries 540.1 2.8% 490.9 -12.4% 506.5 -0.5% 643.6 22.7%Duct Installations 289 -57.7% 135.0 -55.0% 103.1 -26.4% 135.9 27.3%Infrastructure 324.2 566% 219.9 -34.7% 412.3 80.8% 695.8 62.9%Civil Construction 69.4 -5.1% 65.6 -8.9% 113.9 67.5% 141.8 20.1%Urvitec - 367.8 430.4 13.0%Eliminations 127.1 41 42 44 Total 1,349.8 -3.3% 952.4 -32.0% 1,545.7 56.5% 2,091.1 30.6%Operating Margin 2006 2007E 2008E 2009E

Manufacture and Services for the Oil and Chemical Industries 14.8% 10.9% 10.3% 12.4% Duct Installations 7.1% 4.0% 3.5% 4.5% Infrastructure 11.9% 6.6% 11.9% 12.5% Civil Construction 4.8% 3.7% 5.3% 5.5% Urvitec 19.8% 20.7% Total 11.5% 7.8% 10.7% 11.9% EBITDA 2006 2007E 2008E 2009E

Manufacture and Services for the Oil and Chemical Industries 575.9 3.8% 533.6 -10.7% 557.1 0.7% 694.3 20.3%Duct Installations 352.3 -54.8% 201.2 -45.0% 180.1 -13.7% 212.8 14.1%Infrastructure 327.4 564.1% 224.6 -33.9% 417.9 79.4% 701.4 62.0%Civil Construction 69.8 -5.0% 66.0 -8.9% 114.4 67.2% 142.3 20.0%Urvitec - 387.6 453.2 12.9%Eliminations 236 205 221 220 -3.7%Total 1,561 -0.2% 1,231 -24.1% 1,878 47.1% 2,424 24.6%EBITDA Margin 2006 2007E 2008E 2009E

Manufacture and Services for the Oil and Chemical Industries 15.8% 11.8% 11.3% 13.4% Duct Installations 8.7% 5.9% 6.1% 7.0% Infrastructure 12.1% 6.7% 12.0% 12.6% Civil Construction 4.8% 3.8% 5.3% 5.5% Urvitec 20.9% 21.8% Total 13.3% 10.1% 12.9% 13.8%

NM not meaningful. Sources: Company reports and Santander Investment Estimates.

Figure 15. CICSA – Backlog, 2006-2009E (Mexican Nominal Pesos) 2006 2007E 2008E 2009E

Total Backlog 12,823 12,284 12,530 10,318Months 13 12 11 8 Contracted 11,900 7,236 13,080 12,770 Executed 11,869 12,988 12,804 14,979 % executed during the period 140.6 101.3 104.5 119.6% Contracted / Executed 96.6 55.7 102.2 85.3

Sources: Company reports and Santander Investment Estimates.


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INFRASTRUCTURE SECTOR IN MEXICO

In the 2006-2007 Global Competitiveness Report put out by the World Economic Forum, Mexico is ranked 58 out of 125 countries. It ranks 64th compared with Spain (22nd), Brazil (71st), and Argentina (72nd) in the infrastructure sub-index. This implies that there is still significant room for infrastructure investment in the country. In addition, according to a study by the World Economic Forum, “Benchmarking National Attractiveness for Private Investment in Latin America Infrastructure”, Mexico is ranked 10th out of 12 Latin American countries in the Infrastructure Quality Gap Index. This index illustrates the difference between a country’s current infrastructure quality and a global best performer like Germany. Chile presents the smallest infrastructure gap displaying the most developed and best quality infrastructure in the sample. In the Investment Attractiveness Index, Mexico is ranked 5th, lagging behind only El Salvador and Chile. Regarding the quality of infrastructure, Mexico ranks 10th because the gap in electricity and air transportation infrastructure is wide. Meanwhile, the gap is narrower for port and, to a lesser extent, road infrastructure. Figure 16. Mexico - Ranking in the Infrastructure Quality Gap Index and Infrastructure Private Investment Attractiveness Index IQGI Rank IIPIAI Rank Bolivia 1 Chile 1 Peru 2 Brazil 2 Colombia 3 Colombia 3 Venezuela 4 Peru 4 Brazil 5 Mexico 5 Guatemala 6 Uruguay 6 Uruguay 7 El Salvador 7 Dominican Republic 8 Guatemala 8 Argentina 9 Argentina 9 Mexico 10 Venezuela 10 El Salvador 11 Bolivia 11 Chile 12 Dominican Republic 12 Source: World Economic Forum.

According to our Economist Delia Paredes, infrastructure will become one of the main drivers of the Mexican economy with aggressive investment targeted to offset a potential reduction in exports to the U.S. The infrastructure plan 2007-2012 was presented on July 18, 2007, estimating an investment of US$230 billion during the 2007-2012 period (US$38 billion per year), on average 50% higher than investments in infrastructure over the previous six years. The public-private infrastructure package details investments of M$287 billion (US$26 billion) in highways, M$49 billion (US$4.6 billion) in railways, and M$71 billion (US$6.6 billion) in ports, over the next five years. The National Infrastructure Program 2007-2012 includes the objectives, goals, and actions to be promoted by the federal government over the next six years.

This program identifies three scenarios. I) the “Inertia” Scenario assumes that none of the structural reforms take place and that designated resources would be less than in past years due to lower income from oil revenues. Total investment should be 2.0%-3.0% of GDP. (Now that the fiscal reform was approved this scenario could be eliminated); II) Base Scenario: this assumes that the fiscal reform proposed to Congress will be accepted, and half of the resources obtained from taxes will be designated to infrastructure. This would entail an investment of 3.0%-4.5% of



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GDP. The Infrastructure Plan 2007-2012 is based on this scenario. III) the Potential Scenario: involves the realization of all of the structural reforms that the country requires; investment should be around 4.5% to 6.0% of GDP per year.

Figure 17. Mexico– Total Estimated Investment Scenarios 2007-2012 (Billions of Mexican Pesos) Sector Inertial Base OutstandingHighways 157 287 411Railroads 32 49 92Ports 45 71 109Airports 17 59 78Communications 276 283 293Drinkable Water y Water Improvement 105 154 183Irrigation and Flood Control 30 48 65Electricity 231 380 512Hydrocarbon Production 605 822 1071Gas, Refinery, Petrochemical 184 379 558

TOTAL 1,682 2,532 3,372 Sources: National Infrastructure Plan 2007-2012.

Figure 18. Mexico – Total Estimated Investment by Sector 2007-2012 (Billions of Mexican Pesos) Sector Total Annual Average Highways 287 48Railroads 49 8Ports 71 12Airports 59 10Communications 283 47Drinkable Water y Water Improvement 154 26Irrigation and Flood Control 48 8Electricity 380 63Hydrocarbon Production 822 137Gas, Refinery, Petrochemical 379 63

TOTAL 2,532 422 Sources: National Infrastructure Plan 2007-2012.

Figure 19. Mexico – Estimated Investment by Source of Finance 2007-2012 (Billions of Mexican Pesos) Sector Public Resources Private Resources TotalHighways 159 128 287Railroads 27 22 49Ports 16 55 71Airports 32 27 59Communications 19 264 283Drinkable Water y Water Improvement 108 46 154Irrigation and Flood Control 36 12 48TOTAL 397 554 951

Sources: National Infrastructure Plan 2007-2012.

COMMUNICATIONS AND TRANSPORTATION Mexico’s road system consists of more than 342,000 kilometers of highways, which require modernization and expansion. We estimate that the Mexican government needs to invest around US$5 billion per year for road construction and maintenance. For the Communications and Transportation Ministry (SCT) the total budget for 2008 was increased by 44% to M$58.3 billion, representing 2.3% of Mexico’s annual budget.


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SCT currently has tender offers open in the national highway concession scheme as well as under the public-private partnership model. Under these schemes the investment is made with private resources under concession schemes. After almost 10 years of the program of nationalization of highways, which went bankrupt due to the 1995 crisis, the model has been improved and has reopened the possibility of involving private resources in highway development in Mexico. Among the projects included in the highway concession program are the following: Figure 20. SCT: Highway Concession Programs, 2008 Project Length (km) Amount (US$) Awarded Concessions Matehuala Bypass 14.2 39.6 Mexicali Bypass 41.0 73.3 Amozoc Perote 103.0 171.6 Tepic - Villaunión 152.0 281.1 Morelia - Salamanca 83.0 161.9 Northern Bypass of Mexico City 222.0 543.5 Tecpan Bypass 4.0 16.3 Monterrey - Saltillo and Saltillo Bypass 92.0 256.1 Reynosa - Anzaldúas International Bridge 10.0 60.1 Arriaga - Ocozocoautla 93.0 199.0 TOTAL 814.2 1,802.5 Bids in Progress Perote-Xalapa and Xalapa Bypass 60.0 247.3San Luis Río Colorado International Bridge 0.4 7.4Irapuato Bypass 30 57.4La Piedad Bypass and Access to Mexico Guadalajara Highway 50.0 68TOTAL 140.4 380.1Bids in Preparation Compostela - Las Varas - Puerto Vallarta 104 329.4Chihuahua Bypass 41.0 64.4TOTAL 145.0 393.8Projects under study Guadalajara Junction - Ixtlahuacan del Río Junction 30 115.2Playa del Carmen Bypass 20 46.1Ciudad Juarez Bypass 15 46.1Salamanca - Leon 85.0 184.3Puerto Vallarta Bypass 20.0 46.1Cuapiaxtla - Cuacnopalpan 74.0 133.6Puebla Bypass 45.0 92.2La Venta - Colegio Militar 22.0 368.7Colegio Militar - Chalco 40.0 322.6Indios Verdes - Santa Clara 12.0 138.2Rio Bravo - Donna Bridge 0.2 18.4TOTAL 363.2 1511.5Source: Ministry of Communications and Transportation, November 2007.

Public-Private partnerships are the key to increasing highway infrastructure investment in Mexico. This model is being used in three main sectors: health (hospitals), education (technical colleges), and transport (roads). The existing conditions for development of this type of partnership are favorable, mainly as a result of the stable macroeconomic climate, which makes the models and projects attractive to the market. Until November 2007, 442 km were awarded, corresponding to a total investment of US$2.6 billion. According to data provided by SCT there is one more bid in progress and another one in the final stages of preparation under this scheme: the bidding process is scheduled to start in 2008. This program considers the modernization and improvement of the following toll-free federal highways:



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Figure 21. Mexico – Highway Public - Private Partnership Projects Project Length (km) Private Investment Improvement US$ Maintenance US$ Awarded Contracts Nuevo Necaxa - Tihuatlán 85 737.3 558.4Querétaro - Irapuato 93 139.6 117.8Rioverde - Ciudad Valles 112 315.9 171.3Irapuato - La Piedad 75 58.3 105.4Tapachula - Talismán with branch to Hidalgo City 45 80 140.7Nueva Italia - Apatzingan 32 70.1 117TOTAL 442 1,401 1,211 Bids in Progress Mitla - Tehuantepec Junction 163 369.7 118.8TOTAL 163 369.7 118.8Upcoming Bids Zacatecas - Saltillo 213 110.9 392.8TOTAL 213 110.9 392.8TOTAL PPP 818.0 1,881.8 1,722.2 Source: Ministry of Communications and Transportation, November 2007.

The Mexican government currently operates highways that were nationalized during the crisis in the late 1990s through a trust called FARAC. At present, SCT is creating packages of roads in order to be privatized. Resources will be re-invested in new infrastructure projects, particularly roads. After the privatization process, the concessionaire is responsible for operation and maintainance of existing toll roads, as well as for construction and operation of new highways in the concession. The SCT has prepared 11 packages of this type of concession. The first package was awarded to a consortium in which ICA participated. This first package was a 30-year concession to build, operate, and maintain the Maravatío-Zapotlanejo, Guadalajara-Zapotlanejo, Zapotlanejo-Lagos de Moreno, and León-Lagos-Aguascalientes toll roads, which have a total length of 548 km. The consortium paid M$44,051 million. The upcoming bid for the second package is made up of the Reynosa- Matamoros highway and the Reynosa Pharr International Bridge (existing), and the Reynosa Bypass and the Rio Bravo Donna International Bridge. Both CICSA and ICA have expressed their intention to participate in this bid.


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Figure 22. CICSA – SCT: Utilization of Highways Assets

Project Type of Work (construction) Length (km)

Investment (millions US$) Existing Highways

Awarded Contracts 548 4,060 Encarnación de Díaz - San Juan de los Lagos Guadalajara-Zapotlanejo Guadalajara-Zapotlanejo widening to 6 lanes highway Maravatío - Zapotlanejo Zacapu modernization access, Michoacan to Maravatio-Zapotlanejo Highway

León - Lagos de Moreno - Aguascalientes

1

El Desperdicio - Lagos de Moreno rehabilitation of the Pavement

2 and 4 lanes 548 4,060

Zapotlanejo -Lagos de Moreno Under Preparation 2,033.0 3,913.7

Atizapán - Atlacomulco Chamapa - Lechería 2 Chamapa - Lecheria

Widening 4 lanes 107.3 462.9 Atlacomulco - Maravatío

3 Mazatlan Bypass, Culiacán Bypass, Los Cabos Turistic Corridor 2 lanes 88.0 287.0

Mazatlán - Culiacán San José del Cabo -Cabo San Lucas

Reynosa Bypass Reynosa - Matamoros

Allende -Juarez Reynosa Pharr International Bridge

Sabinas - Colombia Monterrey - Nuevo Laredo 4

2 lanes 219.0 259.3 Cadereyta Reynosa Xotla - Tlaxcala 5 Tlaxcala Bypass 4 lanes 27 87.9 San Martin Texmelucan - Tlaxcala

Champotón Bypass

Champoton - Junction highway Widening Champotón- Campeche

Villahermosa Bypass 6

Reforma Junction - Villahermosa Bypass Junction 2 lanes 77.0 134.2 Agua Dulce - Cardenas

Morelia Bypass Patzcuaro - Uruapán Palmillas - Apaseo Uruapán - Nueva Italia Uruapan Bypass Nueva Italia - Lazaro Cardenas 7

Patzcuaro - Uruapan Widening 2 lanes 209.5 500.0 Queretaro Bypass Guadalajara Bypass Tepic Bypass 8 Compostela - Puerto Vallarta 2 lanes 240.0 534.3 Guadalajara - Tepic

Tuxpam - Tampico and Tampico Bypass Gutierréz Zamora- Tihuatlan

Laguna Verde - Gutiérrez Zamora Cordoba - Veracruz

9

Veracrúz Bypass 2 lanes 359.0 629.6 Cordoba - Veracruz

Cuernavaca Bypass, Acapulco Bypass and Chilpancingo Bypass

Cuernavaca - Acapulco

Cuautla - Alpuyeca

10

La Pera - Cuautla 2 lanes 165.2 648.1 La Pera - Cuautla



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Widening

Hermosillo Bypass Ciudad Obregon Bypass 11 Estación Don - Nogales Widening 2 lanes 541.0 370.4 Estación Don - Nogales

Source: Ministry of Communications and Transportation, November 2007.

PETROLEOS MEXICANOS (PEMEX) PEMEX estimates that it should invest a minimum of US$8.2 billion per year just to maintain production at current levels of three million barrels per day. According to PEMEX the potential investments in order to increase reserves and production are in the range of US$13.8 billion to US$22 billion per year. The main projects on which PEMEX will focus will be management the decline of Cantarel oil field in order to extract the highest volume possible of oil and gas over the next five years and to increase production in the Koo Maloob field in order to compensate for the decline in Cantarel.

The discussion about allowing private investment in PEMEX, the national oil and gas company, continues. President Calderon has insisted on the urgent need to increase investment in PEMEX due to declining production in crude oil, refined products and reserves. Changes in some regulations could allow private investment without the need to make any constitutional changes. The federal budget for 2008 granted PEMEX M$29.2 billion in additional resources for a total of M$209.2 billion, representing 8.1% of total budget. The new fiscal regime for PEMEX will provide the company with additional resources for infrastructure investment of around M$45.8 billion. Senator Francisco Labastida from the PRI and head of the energy commission in the senate is also pushing energy reform that would allow private investment in PEMEX.

In our opinion there is enormous potential for private investment in the various lines of business conducted by PEMEX. There is the untapped exploration potential: according to PEMEX, 55% of the prospective hydrocarbons resources is to be found in deep waters off the Gulf of Mexico, and around 34% of the prospective resources in southeast Mexico, where PEMEX currently carries out a large amount of its operations. With the modernization of the refining system, the main objectives are: (1) to increase heavy crude capacity; (2) raise output of high value-added refined products; (3) meet international quality standards for gasoline and diesel; and (4) implement real-time monitoring of the pipeline system. The main crude processing projects are:

• Reconfiguration of the Minatitlan refinery (Awarded by ICA). • Sulfur reduction in gasoline and diesel within the entire refining system. • Reconfiguration of Salina Cruz refinery. • Residual conversion in the Tula and Salamanca refineries.

In the natural gas segment, PEMEX plans to improve overall processing capacity, enhance the flexibility of transportation, and raise import-export capacity (there are currently ten interconnections with the U.S.). Included in the projects for natural gas is the capacity expansion of the processing system to capture natural gas liquids in northern Mexico, and new compression stations to increase the transport capacity in the central and southwestern regions of Mexico. In petrochemicals, the real need is for investment in profitable petrochemical processes, and the main projects are the capacity expansions in ethylene and styrene; as well as the formation of joint ventures with the private sector in a minority role with these companies to integrate the value chains.


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In September 2007, PEMEX announced six international public tenders for contracts totaling around M$12 billion:

• Rehabilitation of platforms and processing centers in off-shore facilities in the Sonda de Campeche oil field, with the support of a submergible platform. This work is scheduled to begin December 12, 2007 and an execution of 1,827 days.

• Adaptation of facilities and complementary projects in processing centers and off-shore

satellite platforms in the Gulf of Mexico with the support of a semi-submergible platform. Work should begin on January 7, 2008, with an execution deadline of 730 days.

• Installation, recovery, adaptation, and maintenance of structures, equipment, process lines

and support services of the operation in the facilities in the Gulf of Mexico. This project is due to begin on December 8, 2007, and will have an execution deadline of 1,096 days.

• A tender for the provision of hospitality and food services with the support of housing

platforms (flotels) packages B and E in the Sonda de Campeche and the Gulf of Mexico. • Provision of services with refrigerated containers for the transportation of perishable

goods to the off-shore facilities in the Sonda de Campeche and Gulf of Mexico regions with a supply vessel. This project has a delivery period of 1,137 calendar days in consignment one, and 1.041 days in consignments two and three.

In our opinion, because of CICSA’s expertise in oil platform construction and in the petrochemical industry, the company could benefit from the above mentioned projects and a potential reform that could boost investment in oil and electricity projects allowing private investment. As a result of low historical investment in PEMEX, Mexico’s national oil and gas company, the levels of reserves and production have started to decrease, and the government has prioritized increasing infrastructure investment by PEMEX.

Figure 23. CICSA – PEMEX: Capex 1995-2012 (Billions of US$)

2 3.1 4.2 5.1 5.57.5 6.9 7.8

10.1 10.9 10.813.8

18-22

14-15

0

5

10

15

20

25

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

E

2008

-201

2E

The 2007-2010 Capex budget is subject to budgetary adjustments. Source: PEMEX.



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RISKS TO INVESTMENT THESIS • CICSA, as with other infrastructure companies in Mexico, is highly dependent on

infrastructure investment programs from the Mexican government and the state-owned companies PEMEX and Mexico’s Federal Electricity Comission (CFE). Changes or delays in infrastructure programs by the government could affect CICSA’s flow of revenues.

• Some of the company’s upcoming projects are under fixed-price contracts, with penalties in the event of late delivery. Therefore, CICSA is subject to execution risk in most of the projects in which it participates. Unexpected increases in costs that cannot be transferred to the selling price, or delays in the execution of these projects, could imply significant losses for CICSA

• We estimate that for full-year 2007, 34% of CICSA revenues will come from contracts in the oil and petrochemical industry and the ducts installation segment. Changes in PEMEX’s investment policies by could negatively affect CICSA’s revenues.

• For regulatory reasons, almost all the large government infrastructure projects in Mexico must be assigned through an open international bidding process, which has effectively increased competition and reduced margins for CICSA.

• CICSA’s participation in projects in Latin America could imply higher risk because of different policies and regulations by foreign authorities. Economic, social and political problems that may occur in countries other than Mexico could negatively affect the company’s participation in that market as well as affect the possibility of expansion.

• Although contracts for America Movil and Telmex provide a consistent flow of revenue for CICSA, the fact that these companies are all owned by Mr. Carlos Slim does not ensure adequate levels of profitability for CICSA. We believe CICSA could be taking on these jobs with margins below the industry average. CICSA is also exposed to less aggressive investment plans by the above mentioned companies.

• The association between CICSA and the telecommunications companies owned by Mr, Slim can hinder of CICSA’s ability to win contracts from rival companies to the group in the fast-growing telecom sector in Mexico.

• There could also be a risk in the relationship that exists between Slim’s infrastructure investment company, IDEAL, and CICSA. If IDEAL becomes less competitive on bids for infrastructure projects, this could diminish the possibilities for CICSA to increase the backlog in its infrastructure division, CILSA. On the other hand, IDEAL could put pressure on CICSA’s construction margins in order to compete more aggressively in upcoming bids.

• Our expectations for improved margins for CICSA are explained in a significant proportion by the consolidation of housing company Urbitek, acquired by late 2007, which has margins well above CICSA’s infrastructure businesses. Lower margins from Urbitek could result in lower-than-expected margins and EBITDA.

.


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FINANCIAL STATEMENTS Figure 24. CICSA – Income Statement, Balance Sheet, and CF Statement, 2006-2009E (U.S. Dollars in Millions) Income Statement 2006 % 2007E % 2008E % 2009E %Sales 1,087 100 % 1,129 100% 1,295 100% 1,533 100 %Cost of Sales 918 84.4% 988 87.5% 1,097 84.7% 1,281 83.6%Gross Profit 169 15.6% 141 12.5% 198 15.3% 252 16.4%Oper. and Adm. Expenses 44 4.1% 53 4.7% 60 4.6% 69 4.5%Operating Profit 125 11.5% 88 7.8% 138 10.7% 183 11.9%Depreciation 20 1.8% 26 2.3% 30 2.3% 29 1.9%EBITDA 144 13.3% 114 10.1% 168 12.9% 212 13.8%Financing Costs 33 3.0% 1 0.1% 4 0.3% 2 0.1% Interest Paid -6 -0.5% -6 -0.6% -7 -0.5% -8 -0.5% Interest Earned 23 2.1% 15 1.4% 8 0.6% 7 0.4% Monetary Gain/Loss 17 1.5% (10) -0.9% ) 0.3% 4 0.3% FX Gain/Loss (1) -0.1% 2 0.2% 1 0.1% 1 0.1%Other Financial Operations 1 0.1% (4) -0.4% (3) -0.3% (3) -0.2%Profit before Taxes 125 11.5% 81 7.2% 138 10.6% 184 12.0%Tax Provision 38 3.5% 23 2.0% 41 3.2% 55 3.6%Profit after Taxes 87 8.0% 58 5.1% 97 7.5% 130 8.5%Subsidiaries - 0.0% - 0.0% - 0.0% - 0.0%Extraordinary Items - 0.0% - 0.0% - 0.0% - 0.0%Minority Interest - 0.0% 1 0.0% (0) 0.0% (0) 0.0%Net Profit 87 8.0% 57 5.1% 97 7.5% 130 8.5%Balance Sheet 2006 % 2007E % 2008E % 2009E %Assets 1,044 100% 1,175 100% 1,286 100% 1,441 100% Short-Term Assets 883 85% 960 82% 1,049 82% 1,173 81% Cash and Equivalents 278 27% 125 11% 55 4% 70 5% Accounts Receivable 435 42% 649 55% 798 62% 882 61% Inventories 170 16% 186 16% 195 15% 221 15% Other Short-Term Assets 0 0% - 0% - 0% - 0% Long-Term Assets (0) 0% (0) 0% 0 0% (0) 0% Fixed Assets 157 15% 210 18% 234 18% 266 18% Deferred Assets 4 0% 5 0% 3 0% 3 0% Other Assets 0 0% 0 0% 0 0% 0 0%Liabilities 359 34% 388 33% 418 33% 451 31% Short-T. Liabilities 270 26% 268 23% 265 21% 264 18% Suppliers 42 4% 56 5% 60 5% 63 4% Short-Term Loans 2 0% 7 1% 7 1% 7 0% Other ST Liabilities 226 22% 205 17% 198 15% 194 13% Long-Term Loans 80 8% 80 7% 107 8% 132 9% Deferred Liabilities 0 0% 0 0% 0 0% 0 0% Other Liabilities 18 2% 40 3% 46 4% 55 4%Majority Net Worth 685 66% 786 67% 867 67% 990 69%Net Worth 685 66% 787 67% 868 67% 990 69%Minority Interest - 0% 1 0% 1 0% 1 0%Cash Flow 2006 % 2007E % 2008E % 2009E %Net Majority Earnings 87 58 97 130 Non-Cash Items 16 40 33 32 Changes in Working Capital (33) (224) (176) (119)Capital Increases/Dividends (4) 38 - -Capital Expenditures (50) (81) (54) (60)Net Cash Flow 16 (164) (70) 14 Beginning Treasury 262 289 125 56 Ending Treasury 278 125 55 70 Sources: Company reports and Santander Investment estimates.



24

Figure 25. CICSA – Income Statement, Balance Sheet, and CF Statement, 2006-2009E (Millions of Mexican Pesos) Income Statement 2006 2007E 2008E 2009ESales 11,758 100.0% 12,192 100.0% 14,505 100.0% 17,539 100.0%Cost of Sales 9,929 84.4% 10,667 87.5% 12,291 84.7% 14,659 83.6%Gross Profit 1,829 15.6% 1,525 12.5% 2,213 15.3% 2,880 16.4%Oper. and Adm. Expenses 479 4.1% 573 4.7% 668 4.6% 789 4.5%Operating Profit 1,350 11.5% 952 7.8% 1,546 10.7% 2,091 11.9%Depreciation 211 1.8% 278 2.3% 332 2.3% 333 1.9%EBITDA 1,561 13.3% 1,231 10.1% 1,878 12.9% 2,424 13.8%Financing Costs 357 3.0% 10 0.1% 42 0.3% 18 0.1% Interest Paid -64 -0.5% -69 -0.6% -80 -0.5% -96 -0.5% Interest Earned 250 2.1% 166 1.4% 86 0.6% 77 0.4% Monetary Gain/Loss 181 1.5% ( 108) -0.9% 43 0.3% 49 0.3% FX Gain/Loss (10) -0.1% 20 0.2% 7 0.1% 11 0.1%Other Financial Operations 14 0.1% (46) -0.4% (37) -0.3% (36) -0.2%Profit before Taxes 1,351 11.5% 875 7.2% 1,541 10.6% 2,109 12.0%Tax Provision 407 3.5% 250 2.0% 457 3.2% 627 3.6%Profit after Taxes 944 8.0% 625 5.1% 1,084 7.5% 1,483 8.5%Subsidiaries - 0.0% - 0.0% - 0.0% - 0.0%Extraordinary Items - 0.0% - 0.0% - 0.0% - 0.0%Minority Interest - 0.0% 5 0.0% (2) 0.0% (3) 0.0%Net Profit 944 8.0% 620 5.1% 1,086 7.5% 1,485 8.5%Balance Sheet 2006 2007E 2008E 2009EAssets 11,288 100% 12,688 100% 14,404 100% 16,486 100% Short-Term Assets 9,544 85% 10,370 82% 11,746 82% 13,416 81% Cash and Equivalents 3,002 27% 1,349 11% 616 4% 795 5% Accounts Receivable 4,704 42% 7,014 55% 8,941 62% 10,091 61% Inventories 1,833 16% 2,006 16% 2,189 15% 2,530 15% Other Short-Term Assets 5 0% - 0% - 0% - 0% Long-Term Assets (0) 0% (0) 0% 0 0% (0) 0% Fixed Assets 1,701 15% 2,266 18% 2,620 18% 3,040 18% Deferred Assets 42 0% 52 0% 39 0% 30 0% Other Assets 0 0% 0 0% 0 0% 0 0%Liabilities 3,883 34% 4,191 33% 4,682 33% 5,157 31% Short-T. Liabilities 2,916 26% 2,893 23% 2,969 21% 3,017 18% Suppliers 450 4% 601 5% 676 5% 721 4% Short-Term Loans 20 0% 75 1% 75 1% 75 0% Other ST Liabilities 2,447 22% 2,216 17% 2,219 15% 2,221 13% Long-Term Loans 870 8% 863 7% 1,195 8% 1,514 9% Deferred Liabilities 0 0% 0 0% 0 0% 0 0% Other Liabilities 193 2% 435 3% 518 4% 626 4%Majority Net Worth 7,405 66% 8,490 67% 9,715 67% 11,320 69%Net Worth 7,405 66% 8,497 67% 9,722 67% 11,329 69%Minority Interest - 0% 6 0% 7 0% 9 0%Cash Flow 2006 2007E 2008E 2009ENet Majority Earnings 944 625 1,084 1,483 Non-Cash Items 177 428 367 370 Changes in Working Capital (354) (2,416) (1,972) (1,359)Capital Increases/Dividends (47) 410 - -Capital Expenditures (544) (876) (602) (681)Net Cash Flow 174 (1,771) (783) 157 Beginning Treasury 2,829 3,120 1,399 638 Ending Treasury 3,002 1,349 616 795 Sources: Company reports and Santander Investment estimates.


25

IMPORTANT DISCLOSURES CICSA – 12-Month Relative Performance (U.S. Dollars)

95100105110115120125130135140145150155160165

Dec

-06

Jan-

07

Feb-

07

Mar

-07

Apr-

07

May

-07

Jun-

07

Jul-0

7

Aug-

07

Sep-

07

Oct

-07

Nov

-07

Dec

-07

CICSA

IPC

Sources: Bloomberg and Santander Investment.

2007

IMPORTANT DISCLOSURES (CONTINUED) Key to Investment Codes Rating

Definition

% of Companies

Covered with This Rating

% of Companies Provided Investment Banking

Services in the Past 12 Months

Buy Expected to outperform the local market benchmark by more than 5.0%. 56.80% 82.35%Hold Expected to perform within a range of 5.0% above or below the local market

benchmark. 35.50% 17.65%

Underperform/Sell Expected to underperform the local market benchmark by more than 5.0%. 7.69% –The numbers above reflect our Latin American universe as of Friday, December 7, 2007. For a discussion, if applicable, of the valuation methods used to determine the price targets included in this report and the risks to achieving these targets, please refer to the latest published research on these stocks. Research is available through your sales representative and other electronic systems. Target prices are 2007 year-end unless otherwise specified. Recommendations are based on a total return basis (expected share price appreciation + prospective dividend yield) unless otherwise specified. Stock price charts and rating histories for companies discussed in this report are also available by written request to Santander Investment Securities Inc., 45 East 53rd Street, 17th Floor (Attn: Research Disclosures), New York, NY 10022 USA. Ratings are established when the firm sets a target price and/or when maintaining or reiterating the rating. Ratings may not coincide with the above methodology due to price volatility. Management reserves the right to maintain or to modify ratings on any specific stock and will disclose this in the report when it occurs. Valuation methodologies vary from stock to stock, analyst to analyst, and country to country. Any investment in Latin American equities is, by its nature, risky. A full discussion of valuation methodology and risks related to achieving the target price of the subject security is included in the body of this report. The benchmark used for local market performance is the country risk of each country plus the 1-year U.S. Treasury yield plus 5.5% of equity risk premium, unless otherwise specified. The benchmark plus or minus the 5.0% differential used to determine the rating is time adjusted to make it comparable with the total return of the stock over the same period. For additional information about our rating methodology, please call (212) 350 3974. This report has been prepared by Santander Investment Securities Inc. (“SIS”) (a subsidiary of Santander Investment I S.A which is wholly owned by Banco Santander, S.A. ("Santander"), on behalf of itself and its affiliates (collectively, Grupo Santander) and is provided for information purposes only. This document must not be considered as an offer to sell or a solicitation of an offer to buy any relevant securities (i.e., securities mentioned herein or of the same issuer and/or options, warrants, or rights with respect to or interests in any such securities). Any decision by the recipient to buy or to sell should be based on publicly available information on the related security and, where appropriate, should take into account the content of the related prospectus filed with and available from the entity governing the related market and the company issuing the security. This report is issued in Spain by Santander Central Hispano Bolsa, Sociedad de Valores, S.A. (SCH Bolsa), and in the United Kingdom by Banco Santander, S.A., London Branch (Santander London), which is regulated by the Financial Services Authority in the conduct of investment business in the UK. This report is not being issued to private customers. SIS, Santander London, and SCH Bolsa are members of Grupo Santander. The following analysts hereby certify that their views about the companies and their securities discussed in this report are accurately expressed, that their recommendations reflect solely and exclusively their personal opinions, and that such opinions were prepared in an independent and autonomous manner, including as regards the institution to which they are linked, and that they have not received and will not receive direct or indirect compensation in exchange for expressing specific recommendations or views in this report, since their compensation and the compensation system applying to Grupo Santander and any of its affiliates is not pegged to the pricing of any of the securities issued by the companies evaluated in the report, or to the income arising from the businesses and financial transactions carried out by Grupo Santander and any of its affiliates: Gonzalo Fernandez and Vivian Salomon. Grupo Santander receives non-investment banking revenue from the subject company. The information contained herein has been compiled from sources believed to be reliable, but, although all reasonable care has been taken to ensure that the information contained herein is not untrue or misleading, we make no representation that it is accurate or complete and it should not be relied upon as such. All opinions and estimates included herein constitute our judgment as at the date of this report and are subject to change without notice. Any U.S. recipient of this report (other than a registered broker-dealer or a bank acting in a broker-dealer capacity) that would like to effect any transaction in any security discussed herein should contact and place orders in the United States with SIS, which, without in any way limiting the foregoing, accepts responsibility (solely for purposes of and within the meaning of Rule 15a-6 under the U.S. Securities Exchange Act of 1934) for this report and its dissemination in the United States. © 2007 by Santander Investment Securities Inc. All Rights Reserved.

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