Equity Strategy

Vladimir Pinto Marcelo Lima Maria Ap. Souza

January 31st, 2009

The 5 Top Picks for February

1. Telemar PNA (TMAR5): We are reiterating our overweight rating on the telecom sector, highlighting our particularly positive view of stocks involved in the BRP/TNE deal. Based on current share prices, BrOi, the resulting entity, would be trading at a discounted multiple (3.7x 09 EV/EBITDA). We expect positive news flow on the conclusion of the deal to help the share price performance of all names involved. TMAR5 is our favored investment vehicle assuming there are no major arbitrages opportunities implied. 2. ISA Cteep PN (TRPL4): The company remains being our top pick in the sector due to its very defensive features (very steady almost riskless revenues, dividend player) combined with a meaningful growth perspective through the two lots ISA Cteep was awarded at the Madeira Transmission Line auction (November 26). These two lots should mean about 9.4% growth in the companys top line and should give it the opportunity to re-leverage its capital structure to a much more valuable level and at a very low cost (no more than TJLP + 3%) since this project is to be financed by BNDES. 3. Redecard ON (RDCD3): We are introducing Redecard to the top picks list, reinforcing our expectations of very good results to come in the 4Q08, with a particular contribution from the prepayment business, which we expect to outpace the guidance provided by the management for the year of 2008. Despite the recent cut in interest rate, we do not see loan availability increasing. As a result, the prepayment business will likely continue playing an important role in revenue generation in 2009. Moreover, Redecard is a generous dividend payer with a 95% payout and estimated dividend yield for 2009 is 7.2%. 4. Bradespar PN (BRAP4): Despite the strong performance registered in January, +22.05%, we are maintaining Bradespar as top choice in the mining sector since its current discount over its underlying assets (approximately 90% VALE3 and 10% CPFE3) is ~ 22%, still far over the historical average discount of 11%. We believe that there is no reasonable explanation for this as BRAP4 provides an access to Vales control group and is a less expensive way to have participation on the board of the worlds biggest iron ore producer. 5.
Index

CBD PN (PCAR4): We continued favoring CBDs defensiveness even when shares valuation was not so compelling in relative terms. Last months 3.68% drop offers a good opportunity to get a bit of it. Very solid 4Q08 results with room for positive surprises -, relative protection to the weakening demand, low dependence on credit sales and healthy cost improvements are the main pillars behind our long lasting positive stance on the company.

The Stock Market in February ............ 2 Recommended Portfolio for February....12 Sector Analysis ...............................15

THIS RESEARCH REPORT HAS BEEN PREPARED IN WHOLE BY UNIBANCO UNIO DE BANCOS BRASILEIROS S.A. AND ITS RESEARCH ANALYSTS WHO ARE NOT ASSOCIATED PERSONS OF UNIBANCO SECURITIES INC. THESE RESEARCH ANALYSTS ARE NOT REGISTERED/QUALIFIED AS RESEARCH ANALYSTS WITH THE FINRA. FOR IMPORTANT INFORMATION RELATING TO ANALYST CERTIFICATION, THIRD-PARTY DISCLOSURES REGARDING ISSUERS THAT ARE SUBJECT OF THIS REPORT, GLOBAL DISCLAIMERS AND FOREIGN AFFILIATE DISCLOSURES, PLEASE REFER TO THE DISCLOSURE APPENDIX.

The Stock Market in February

Things should get worse before improving; backing our cautious view on equities
In January, the worlds main stock indexes presented a negative performance in USD, being the Brazilian (Ibovespa, +5.60%) and the Chinese (CSI 300, +11.27%) burses the only exceptions. As in the last two months of 2008, equity markets sketched the recovery that took place throughout January. This time, reflecting perspectives that the Fed could keep expanding its balance sheet as much as were needed and the optimism involving the beginning of Obamas Administration. Nonetheless, data on the real economy kept weakening, which coupled with renewed fears on strikes to the balance sheets of important financial institutions, paved the way for strong volatility hikes and profit taking. As a result, emerging stock indexes undid their early-in-the-year gains and now find themselves close or below to the same level that they were at the end of the last year. The following chart demonstrates that the most of equity indexes has stretched since Lehman Bros collapse (September 15th).
Figure 1 World Equity Indexes (Sep/2008 = 100)

99 87 75 79 71 67 81 74 69 62 57 68 71 65 65 58 59 50 42 63 60 89

64

65

Hong Kong

Shangai

S&P500

London

Japan

Australia

Mexico

India

Russia

Germany

Turkey

30-Dec-08
Source: Bloomberg

30-Jan-09

Going forward we see macroeconomic conditions worsening worldwide. There is no country that could be spared from the global slowdown and the hope of an emerging decoupling is no longer a possibility. In that sense, the outlook in the short/mid term for corporate growth (and, hence, equities) is tough, although we do not disregard the possibility that huge amounts of liquidity supplied by Central Banks and governments could lead to sudden hikes in indexes. However, the key point continues being: There are no economic fundamentals suggesting that the worst phase of the crisis is behind us. Moreover, the last FOMC statement present concerns and affirmed that policymakers were not certain that the global economy would bottom out in the 2H09.

Ibov

The IMF has updated its projections for global growth, altering the worlds GDP growth estimate to 0.5% from Novembers 2.2%. That expansion would be the smallest one since World War II. The Fund also pointed out that any sustained recovery will call for stabilization of financial markets and the unclogging of credit channels. A great number of measures have been adopted in an effort to restore confidence on the system through capital injections, lower interest rates and government guarantees. But the effects have been minimal until now. The table below presents the main changes made by IMF in comparison to the previous report.
Figure 2 Overview of the World Economic Outlook Projections (Percent change unless otherwise noted) Year over Year Projection 2008 World Output Advanced Economies United States Euro area Japan United Kingdom Emerging and developing economies Africa Russia Developing Asia China India Middle East Brazil Mexico Commodity prices (USD) Oil Consumer prices Advanced economies Emerging and developing economies London interbank iffered rate (percent) On U.S. dollar deposits On euro deposits On Japanese yen deposits
Source: IMF

Difference from November 2008 WEO Projections 2010 3 1.1 1.6 0.2 0.6 0.2 5 4.9 1.3 6.9 8 6.5 4.7 3.5 2.1 2009 -1.7 -1.7 -0.9 -1.5 -2.4 -1.5 -1.8 -1.4 -4.2 -1.6 -1.8 -1.2 -1.5 -1.2 -1.2 2010 -0.8 -0.5 0.1 -0.7 -0.5 -0.9 -1.2 -0.5 -3.2 -1.1 -1.5 -0.3 -0.6 -1 -1.4

2009 0.5 -2 -1.6 -2 -2.6 -2.8 3.3 3.4 -0.7 5.5 6.7 5.1 3.9 1.8 -0.3

3.4 1 1.1 1 -0.3 0.7 6.3 5.2 6.2 7.8 9 7.3 6.1 5.8 1.8

36.4

-48.5

20

-16.7

9.7

3.5 9.2

0.3 5.8

0.8 5

-1.1 -1.3

-0.8 -0.5

3 4.6 1

1.3 2.2 1

2.9 2.7 0.4

-0.7 -0.8

-1.4 -0.8 -0.3

The Fund believes that the expansionary fiscal and monetary policies will gradually allow the world economy to get back on track along 2009 and, in 2010, its expected to increase by 3%. However, following the same line of the FOMCs statement, the outlook is highly uncertain, and the timing and pace of the recovery depend critically on the strong policy actions. Therefore, the scenario continues uninviting for equities around the world. In the short term, investors may see more attractive possibilities on sovereign and corporate bonds.

Brazil still stands in a privileged condition, given that the country is among those to be hit the least when compared to other emerging countries by the crisis. Nevertheless, economic growth should decelerate sharply and the possibility of a technical recession (2 consecutives quarters of GDP contraction) is much higher than anticipated a few months back. Added to still tight credit channels and more depreciated currencies and lower commodity prices, an economic slowdown coming from a non-negligible contraction on aggregate demand sets up the final prerequisite for a very rough scenario for emerging equities. Unlike in previous slumps, when the Ibovespa suffered significantly more, we reiterate that the Brazilian economy is not still experiencing a deep deterioration of the balance of payments. However, given the global outlook, the chances for a sustainable performance on the part of Brazilian equities in the next 30 days are slim. Considering the factors we elaborated on above, we the UBB Equity Strategy team stick to the tactic we initiated in our multi-angle valuation analysis (DEFCON 1: Seeking Shelter Among Brazilian Equities, October 6th). Therefore, we favored companies presenting the following characteristics: I. II. III. IV. V. Valuation (we think deep value stories should outperform more expensive debt fueled growth names); FX exposure (current FX rate may adversely affect operating and financial results of different Brazilian companies); Leverage (un-leveraged companies should suffer the least in a credit crunch scenario); Trading activity (investors should continue to avoid illiquid names, given current uncertainty and volatility); and Capital discipline (investors should look at huge investment plans carefully keeping in mind that such announcements are expected to be punished). We have kept our defensive names. Still believing that the safe haven in domestic demand stories should continue to be viewed with caution, we only recommended very defensive investment cases linked to local demand such as food retailers, utilities and telecom. We remain fairly confident on Telecom, Mining and Utilities; although we kept our overweight status on the latter the exposure has been reduced due to expensive valuations and lower consumption perspectives. We maintained a cautious view on Oil, Consumer and Small Caps. Finally, we slightly increased the exposure to Financials and Steel in order to reallocate Utilities shares. Reducing Utilities sector OVERWEIGHT position Although we still see the Utilities sector as one of the most defensive ones, we have reduced the exposure to the sector to 8.0% from 16.0%. However, given the risks discussed above, we kept our OVERWEIGHT in the sector as the Ibovespas current weight in the sector is 6.7%. We promoted such alteration on the back of three main reasons:

1. 2.

Companies could be considered expensive in terms of multiples The economic slowdown is reducing inflation perspectives for 2009. Since the IGPM is used to adjust sectors tariffs, we see lower revenues gains for companies. 4

3.

The sector started to feel the impacts of lower aggregate demand and the sharp fall in industrial consumption registered since early December, affecting DisCos, Integrated Cos and GenCos with flexible contracts.

Its worth noting that these companies keep benefiting from their strong defensiveness (and by defensiveness we mean TransCos and GenCos with inflexible power sale contracts) and a clear dividend policy. Most of its companies should not fall victims of the BRLs weakness since they present small debt in USD (being CESP an exception). Moreover, the credit crunch has also a lower impact on them as BNDES (Brazilian Development Bank, which recently received a BRL 100 bn capital increase from the Treasury) has committed long term financing at attractive TJLP rates (6.25% in BRL) for infrastructure and energy Greenfield projects. Reducing Steel sector UNDERWEIGHT position We have increased the Steels sector weight to 8.0% from 4.5%. Although we continued very vigilant on sectors news flow, we saw the possibility of quick rebound thanks to further government measures, intended to cushion the deceleration in steel consumption. Added to that, companies have been traded at attractive multiples, in terms of EV/EBITDA09, CSN (CSNA3), Gerdau (GGBR4) and Usiminas (USIM5) have been negotiated at 3.1x, 2.8x and 2.2x respectively. The latter is also providing a utility company dividend yield, ~8.5%. However, we continue to anticipate a bleak scenario for the domestic steel market along 1Q09 given the lack of appetite from the steel chain to keep running since it built up high inventories in 4Q08 due to the huge plummet in local demand in Nov and Dec08. This is evidenced by INDA (Brazilian distributors association) inventories, which at present stand at 5 months of sales versus 2008 average of 2.5 months. It is worth mentioning that INDA members represent a ~35% of total domestic flat steel demand. Maintaining the OVERWEIGHT on the Telecom sector We have kept the Telecom, Media and Technology exposure at 12.0%, while its weight at the Ibovespa is of only 5.6%. As observed in the previous reports, the industry should be a good place to be positioned in during the current crisis and volatile times. We reiterated our preference for telcos over cellcos as the first segment boasts more defensive investment cases in a moment that earnings visibility has become crucial and rare. TMAR5 is one of the best options in the telcos segment and we may point out the following: 1) TMAR5 provides a reliable cash flow generation and has a limited exposure to FX liabilities and costs, being considered a safe harbor among its peers. Moreover, its lower exposure to competitive and regulatory threats puts it in a particular situation within the Telecom sector. 2) Its worth mentioning that though we are optimistic on TMAR5, we remain pretty conservative in terms of synergy gains from the BrT/Oi deal. In that sense, further benefits will likely be a trigger for the stocks. Liquidity should increase considerably due to the incorporation process and should be positive to the company at a time in which liquidity has become an important element to the investors. 3) In terms of multiples, the new company (BrOi) would trade at a discount in relation to its international peers like Telmex (the first would present 3.5x EV/EBITDA09 while the

latter at is negotiated at 5.0x). Although we know that the company could not achieve the same level, there is room for gains. Increasing Mining sector OVERWEIGHT position Despite the strong out-performance the sector registered over the Ibovespa in January, we remain pretty confident on Bradespars investment case as the Mining sector continues very attractive and to trade at low multiples. Its weight on our recommended portfolio increased by 2.0 p.p to 21% from 19%, while it also increased in the index to 17.4% from 15.2%. Although we remain pretty skeptical on commodity linked companies, there are some cases that seem to be exaggeratedly discounted and, in that sense, they are offering interesting opportunities, like Vale PNA. Coupled with that management is demonstrating vital agility in adapting its strategy to the new demand scenario and credit and iron ore price curves by curtailing iron ore output in 10%, closing mines and downsizing more than 1,000 workers. Considering the substantial drop on VALEs shares in 2008 (51%), we believe that great part of the negative news flow for the mining sector has already been priced in. In our opinion, the stocks are still reflecting what in our view is an unlikely scenario: Two consecutive drops of 35% in iron ore prices and USD 50/ton in the long term outlook. The UBB metals research team expects a drop between 15% and 20%, which would surprise consensus of around -40%. In addition, if the recent price recovery in China were to prove itself lasting during 1Q09, it should set the tone for the seasons negotiation on iron ore, being them a trigger for the stocks. On that same line, Beijing has been quick to respond to the domestic effects of the international crisis. Its stimulus plan to revitalize the real economy has already began to bear its first fruits hence, making of the potential positive spillovers originated from these measures possible bargaining chips for iron ore producers during the negotiations. Its worth remembering that Vale is the second biggest miner in the world, with a superior iron ore quality (66% purity vs. Australians 58%) and recently reduced freight costs (from USD 100/ton in July vs. todays USD 16.80/ton). Given these it finds itself in a privileged competitive position vs. Australian companies. Its shares have been trading at very attractive levels in terms of EV/EBITDA 09, 3.5x, and P/E 09 as well, 4.5x. Moreover, VALE5 and VALE3 have shed 51.13% and 51.72% in 2008 (vs. Ibovespas 41.22%) while BRAP4 dropped 57.95%, which increases the discount to very attractive ~22%. Therefore, Bradespar continues to undeniably be one of the best opportunities in Brazil right now. Maintaining the UNDERWEIGHT in the Oil, Gas and Petrochemicals sector We slightly increased the exposure to the Oil, Gas and Petrochemicals sector to 19.0% from 18.0%, in order to keep the difference from the index in which the weight went to 22.9% from 22.1. In January, Petrobras announced its 2009-13 business plan with an astonishing USD 174 billion in estimated capex for that period or a 55% increase in relation to the previous plan. The company announced its first estimates for the capex in the pre-salt areas (US$ 111 billion until 2020), where the company intends to take advantage of the high productivity of those fields to reduce the number of wells producing oil. We believe this plan was too aggressive for the times we are going through with low oil prices and hurdles in the funding scenario. Oil prices should be kept at low levels in the following months, still reflecting weakening demand, reduced refining margins and elevated inventories worldwide, mainly in the U.S. This combination has been translated by a widening contango curve. 6

Volatility is expected to remain high and prices should continue reacting only to geopolitical issues or announcements of economic packages. In other words, as fundamentals remain fragile, a sustainable recovery should be discarded and better fundamentals call for improvements in the OECD economies, which in turn should solve the constraints in credit and housing markets. Therefore, we should wait some months (or quarters) to see a reliable rebound in commodity prices. Maintaining the UNDERWEIGHT in Consumer, Financial and Pulp & Paper sectors Consumer: The sector was kept below the Ibovespas weight (7.7%) at 7.0% now (vs. Januarys 7.5%). We still think the upcoming news flow is very harsh, with further potential downside risk to consensus estimates that should hold back the sectors performance. Not only 1Q09 should be a bleak quarter for retailers (in terms of sales growth), but we are particularly worried about the increase in delinquency as we go into 2Q09, which should hinder demand recovery until at least the second half of 2009. The UBB Consumer research team believes that the combination of even weaker expectations for 4Q08 results (especially retailers), higher closing FX in 2008 (important for non-hedged dollar debt exposure) and more challenging macro scenario (lower growth, higher risk assumptions); ended in a combined effect that reduced our target prices by an average of 13% (New Years Housekeeping: new estimates and 4Q08, 29th). Financials: Though remaining UNDER, the weight in our recommended portfolio was slightly increased to 16.5% from 15.0%, while it has been reduced in the index to 18.6 from 19.9%. Despite the fact that the sector should continue being avoided in the short term, better news has come to aid the performance of certain shares. Besides, interest easing cycle has already begun, lowering funding costs and gradually loosening credit channels. Additionally, Central Bank measures should slowly continue showing some results. Pulp & Paper: The sector weight was kept at 1.0% while the Ibovespas exposure slightly decreased to 1.4% from 1.7%. The momentum for pulp prices remains negative on the back of high inventory levels worldwide and weak demand. Producer inventories reached 46 days in Dec-08, 16 days up YoY, but 4 days down MoM (mainly related to a short-term recovery in shipments to China, mainly as a technical response after a destocking period). Maintaining the MARKETWEIGHT in the Others sector The Other sectors weight increased to 7.5% (vs. Januarys 7.0%). We continue to see good long term opportunities in Brazilian small caps as they present low leverage levels, attractive multiples and consecutively post good quarterly results. Nevertheless, liquidity should keep being an issue for a while, limiting any good performance on the part of the shares.

Brazil: Deflation pressures allow bolder moves from the Brazilian Central Bank
Differently form its traditional behavior; the BCB aggressively cut interest rates by 100 bps on January 21st. The monetary authority considered the recent strong disinflation/deflation pressures, which could take inflation below its target for YE09 (4.5%). By taking action the BCB could avert a deeper than expected slowdown of the real economy. Its important to note that three out of the eight members of Copom (characterizing its traditional divergent and hawkish position), voted for a more modest reduction in the order of 75 bps. Despite the downward pressures that arise from demand contraction on inflation; the BCB should keep a close eye on the effects of the pass-through on the behavior of prices in the coming months. We believe that a series of negative data, which should be released during the next weeks, especially on the labor market and level of activity, should pave the way for the BCB to adopt the same posture it did in the last meeting. The UBB macro research team believes that a considerable part of the easing cycle in Brazil should occur in the 1H09 through two additional cuts of 100 bps each in the next meetings. The Selic rate is expected to reach 10% by the year end.
Figure 3 IPCA and BRL

2.4 6.4 6.1 5.6 2.1 5.0 4.5 4.2 4.2 4.1 4.2 3.7 3.7 3.2 4.6 4.6 BRL 4.7 2.0 1.9 1.8 1.7 1.6 1.5 Jan-07 Jan-08 Feb-07 Feb-08 Dec-07 May-07 May-08 Dec-08 Apr-07 Apr-08 Aug-07 Sep-07 Aug-08 Sep-08 Mar-07 Mar-08 Nov-07 Nov-08 Jan-09 Jul-07 Oct-07 Jul-08 Oct-08 Jun-07 Jun-08 6.2 6.3 6.4 6.4 2.3 5.9 5.9 2.2

3.0 3.0 3.0 3.0

IPC A
Source: Bloomberg

BRL

On another note the main price indexes have printed an important deceleration in the last two months: In December the IGP-DI dropped 0.44%, while the IPC-FIPE and IPCA registered small hikes of 0.16% and 0.28% respectively, coming in lower than in the previous month. In January, the IGP-10 fell by 0.85% MoM (vs. market consensus of 0.65%). In addition, although the first and second previews of the January IGP-M printed better than expected figures, the official number reported a performance that disappointed, -0.44% vs. -0.62%. This phenomenon could suggest that the hawkish stance taken by the aforementioned Copom members should not be totally discarded in the mid term.

Figure 4 IGP-M and IPCA (YoY)

The sharp decrease on inflation has given room for the BC B's bold cut of Selic 15.1 13.4 11.5 9.8 8.4 8.7 12.5 8.2 12.0 CDI 9.1 13.6 12.3 12.2 11.9 14.0

13.5

13.0

7.8 6.3 6.2

5.7 3.8 3.4 3.7 4.3 4.8 4.4 3.9 4.0 4.6

11.5

3.5

11.0 Jan-07 Jan-08 Jun-07 Mar-07 Mar-08 May-07 May-08 Apr-07 Apr-08 Dec-06 Dec-07 Aug-07 Nov-07 Sep-07 Dec-08 Aug-08 Feb-07 Feb-08 Nov-08 Sep-08 Oct-07 Jan-09
-5.16 Nov-08 Dec-08 -8.00

Jul-07

Jun-08

Jul-08

IGP-M
Source: Bloomberg

C DI

In contrast with what we observed in the first half of 2008, the output gap that was the BCBs main concern due inflation pressures has now considerably broadened. The capacity utilization level (CNI) in November dropped to 81.6% against 82.6% in the previous month (adjusted seasonally) as a result of the 9.9% dive real industry sales went through. This figures explain the strong deterioration of industrial production in November (-6.2% YoY) and suggest a negative outlook for December numbers (-9.2% YoY market consensus). Moreover, the absorption of the capital goods continues to show an expansion when compared to 2007 levels; however, on a MoM basis a 7.7% decline in November (SA data) can be seen.
Figure 5 Industrial Production
3.60 1.46 1.30 0.85 0.68 0.31 0.08 1.54 1.57 0.61 0.05 -0.59 -0.18 -2.07 -2.83 The international credit crunch Brazilian industrial activity has quickly impacted -0.60 0.79 3.03 1.80

0.09

-0.26

-1.09

-1.28

Nov-07

Sep-07

Oct-08

May-07

May-08

Sep-08

Jan-07

Dec-06

Dec-07

Mar-07

Jan-08

Jun-07

Oct-07

Mar-08

Jun-08

Feb-07

Apr-07

Apr-08

Feb-08

Aug-07

Source: Bloomberg

For instance, the deplorable performance the Brazilian automotive sector can already be felt on other key segments of economy, especially in the steel industry. According to ANFAVEA, vehicle production in December fell a 47% MoM. Present inventories in the distribution segment have reached 26 days in November against the average 15.6 days of the last five

Aug-08

Oct-08

Jul-07

Jul-08

years. This paints a bleak picture for the sector that should stretch well into the first quarter of 2009.
Figure 6 Auto production
The automotive sector has been one of the most affects by credit constraints and much lower consumer confidence 300 291 290 283 281 279 274 272 265 262 251 251 242 240 237 237 232 231 210 194 192 176 175 209

95

Apr-07

May-07

Apr-08

May-08

Mar-07

Nov-07

Mar-08

Nov-08

Aug-07

Sep-07

Aug-08

Sep-08

Dec-06

Dec-07

Anfavea Vehicle Production Passenger (000s)

Source: Bloomberg

In its turn, the steel industry also printed a significant retraction in December with Brazilian output plummeting 45% YoY and 29% on a MoM basis. Inventories along the distribution chain are at present sufficient to cover 5 months, well above the historical average of 2.5 months. Decembers unemployment rate (6.8% against 7.6% in November) has not yet reflected the effects of the international crisis. Yet the labor market has already begun to shed jobs, recording 654.946 redundancies in the period (the worst number since 2003). Figures should continue to weaken in the next months and as a consequence delinquency rates are expected to jump. The same negative trend appears in credit markets, the advance of non-earmarked loans (that include individuals and corporates) dropped to 31.9% vs. 34.7% in November.
Figure 7 Credit and Unemployment rate
1.6 10.1 10.1 10.1 9.9 9.7 9.3 1.4 9.5 9.5 9.0 8.7 8.4 8.2 8.0 7.4 8.7 8.6 8.5 7.9 7.8 8.1 7.6 7.6 7.5 7.6 6.8 1.2 1.0 0.8 0.6 0.4 0.2 0.0 -0.2 Mar-08 Jan-08 Dec-06 Dec-07 Aug-07 Sep-07 May-07 May-08 Nov-07 Dec-08 Mar-07 Aug-08 Sep-08 Jan-07 Feb-07 Feb-08 Apr-07 Apr-08 Jun-07 Jun-08 Oct-07 Oct-08 Nov-08 Jul-07 Jul-08 %

Unemployment (%)

C ons. C redit Total Vol. (MoM)

Source: Bloomberg

Dec-08

Feb-07

Feb-08

Oct-07

Oct-08

Jan-07

Jun-07

Jan-08

Jun-08

Jul-07

Jul-08

10

Another important variable strongly impacted by the current crisis, Brazilian exports, reversed the positive trend started in the beginning of 2008 and shows clear signs of the deceleration. The expressive drop of commodity prices can explain a significant part of the reversion of such a trend: the CRB fell 50% only in the second half of 2008. Considering that exports made a significant contribution to the growth of Brazilian GDP, (with 15%) the ~1.5% QoQ gain it reported in the last three quarters should be nothing more than a memory under the current landscape. We can see the same pattern on the imports side, which declined 24% November and 12.4% in December on a MoM comparison. This is also a reflection of the lower industry prospects, on which cuts to investment plans were made and a consequent decrease of GFCF is expected in the coming months. As result, the trade balance printed an accumulated balance for 2008 in the order of USD 24.7 billion, what is 38.2% lower than in 2007.
Figure 8 Brazilian Exports and Imports (in USD) and CRB
20 500

450

15 (USD - bn)

400 CRB

350

10

300

250

5 Nov-07 Nov-08 Sep-07 Sep-08 Jan-07 Jan-08 May-07 May-08 Dec-06 Dec-07 Dec-08 Mar-07 Mar-08 Jun-07 Feb-07 Feb-08 Apr-07 Apr-08 Jun-08 Aug-07 Aug-08 Jan-09 Oct-07 Oct-08 Jul-07 Jul-08

200

Exports
Source: Bloomberg

Imports

C RB

Another important note that illustrates the cloudy scenario for the industrial class is the 60% drop in market cap value for 35% of the Brazilian companies listed in the Bovespa throughout the last 12 months. Even tough this is an aggressive fall that in some cases can be considerate exaggerated, it seems as a good entry point to equities. Nevertheless, we still believe that risk aversion should put caution into investors mind. As consequence, the stocks performance may remain pressured in the short term and any eventual rally should not be long lasting at this point, especially when considering the low liquidity and high volatility, which usually together not regards the fundamentals.

11

Recommended Portfolio for February

In January, the recommended portfolio went up 6.27%, posting a performance above the Ibovespas (BRL +4.66%). The best performances were registered by the mining and telecom sectors, BRAP4 gained 22.05% and NETC4 climbed 10.68%. We still believe that risk aversion is at elevated levels, but commodity linked companies (in which we were and remain underweight, being mining an exception) presented a good return, PETR4 and USIM5 increased by 9.59% and 8.82% respectively. Additionally, defensive shares such as PCAR4 and TRPL4 had a timid performance of -3.69% and 3.19% respectively. In the same period, the top picks printed a good performance, +8.09%, benefited by NETC4, BRAP4 and GETI4. The markets have kept a very volatile behavior, oscillating between a short wave of optimism due to the announcement of economic packages and the tough picture painted by the recent economic data, which has demonstrated that the world should get worst before showing signs of recovery. In that sense, the performance registered in January should not be classified as the beginning of a sustainable rebound on stock markets.
Figure 9 Januarys portfolio performance Closing Price Ticker BBDC4 RDCD3 PCAR4 DROG3 BRAP4 PETR4 SUZB5 USIM5 BRTP4 NETC4 TRPL4 GETI4 WEGE3 ESTC3 CNFB4 Total IBOV Ibovespa 37550 39300 Stock Bradesco Redecard P.Acucar-CBD Drogasil Bradespar Petrobras Suzano Papel Usiminas Brasil T Par Net Tran Paulist AES Tiete Weg Estacio Confab 30-Dec-08 22.58 25.70 31.00 10.00 19.18 22.84 12.09 26.52 17.41 13.29 41.18 14.85 12.50 12.50 3.75 30-Jan-08 20.80 26.25 29.86 8.00 23.41 25.03 11.70 28.86 15.30 14.71 42.49 16.07 11.65 13.97 3.78 Change var month (%) -7.87 2.14 -3.68 -20.00 22.05 9.59 -3.23 8.82 -12.12 10.68 3.19 8.22 -6.80 11.76 0.80 6.27 4.66 Weight weight (%) 6.0 9.0 4.5 3.0 19.0 18.0 1.0 4.5 4.8 7.2 9.6 6.4 3.5 2.1 1.4 100.0 Contribution (%) -0.47 0.19 -0.17 -0.60 4.19 1.73 -0.03 0.40 -0.58 0.77 0.31 0.53 -0.24 0.25 0.01 Differential Over Ibov (%) -11.98 -2.41 -7.97 -23.56 16.62 4.71 -7.54 3.98 -16.03 5.76 -1.41 3.40 -10.95 6.78 -3.69

Source: Economatica and Unibanco

No one can deny that the Ibovespa provided a good return in January, yet the scenario for equities remains pretty tough in comparison to fixed income (public or corporative). 4Q08 results should reflect the hard-hitting economic deceleration observed in November and December. Moreover, the main spillovers of the crisis are expect to start displaying their full effects from now on, leading investors to, once again, revise down their projections for earnings growth and cash generation. Although one could argue that most of these effects have already been priced into equities, we would fairly disagree. Risk aversion remains at high levels and investors are still feeling the pain of their 2008 losses, in that sense, any wave of optimism should be quickly curbed. 12

Having tried to list factors that could lead to improvements in investor sentiment, we conclude that the odds of brisk change in portfolio strategy now are very low: 1) Economic data worldwide will, in our opinion, likely show a higher contraction of the aggregate demand due to higher unemployment and more depreciated FX rate 2) Interest rate cuts have started to face their limits in monetary autonomous regions, namely the U.S (USD), the U.K (GBP), Europe (EUR) and Japan (JPY). Therefore, further developments in that sense should have timid effects on the real economy in the short run. 3) Fiscal expansion and credit lines are only avoiding new failures and should not set up the stage for corporate growth. Regrettably that shall depend on the stabilization of financial and money markets, the recapitalization of the main institutions and the recovery of housing markets. It will take time. Considering the points above, we do not believe major investors shall be willing to take unnecessary risks, allocating any significant percentage of their portfolio to equities or ruling out gains like we saw in January. Therefore, despite some changes made to the allocation for each sector (reduction on Utilities and increases in Steel and Financials), we have kept a conservative view and a defensive investment strategy. The suggested portfolio brings along the same characteristics being stressed since September, higher exposure to defensive and deep value sectors, namely Telecom and Utilities, being Mining the exception. Oil, Gas and Petrochemicals, Steel and Pulp & Paper should continue suffering due to contracting worldwide demand. Its worth remebering that most Brazilian companies are being traded close to or below their replacement cost and that there are good deals to be found. Characteristics such as low leverage, strong cash generation and solid investment cases should be highly valued during these times of crisis. We hence suggest the following allocation:
Figure 10 Recommended portfolio for February 2009 Sector Banks & Financial Services Consumer Mining Oil, Gas & Petrochemicals Pulp & Paper Steel Telecom, Media & Technology Utilities Others Total
Source: Economatica and Unibanco

Ibovespa % 18.6 7.7 17.4 22.9 1.4 11.6 5.6 6.7 8.1 100.0

Portfolio % 16.5 7.0 21.0 19.0 1.0 8.0 12.0 8.0 7.5 100.0

Stocks RDCD3 (60%) BBDC4 (40%) PCAR4 (60%) DROG3 (40%) BRAP4 (100%) PETR4 (100%) SUZB5 (100%) USIM5 (100%) TMAR5 (100%) TRPL4 (60%) LIGT3 (40%) WEGE3(60%) CNFB4 (40%) 13 stocks

Dividend Portfolio The dividend portfolio registered the lowest return among our recommendations, +2.25%. In order to improve the defensiveness and increase the dividend yield of the portfolio, we have swapped three players, replacing PETR4 by MYPK3, TBLE3 by COCE5 and CPLE6 by EQTL3.

13

Figure 11 Februarys dividend portfolio Ticker ELPL6 GETI4 TLPP4 PETR4 TRPL4 CPLE6 TBLE3 USIM5 Total
Source: Economatica and Unibanco

Stock Eletropaulo AES Tiete Telesp Petrobras Tran Paulist Copel Tractebel Usiminas

Close Price 30-Dec-08 25.50 14.85 44.86 22.84 41.18 24.00 18.55 26.52 30-Jan-09 26.00 16.07 44.30 25.03 42.49 21.79 17.94 28.86

Change Month (%) 1.96 8.22 -1.25 9.59 3.19 -9.21 -3.29 8.82 2.25

Weight Portfolio (%) 12.5 12.5 12.5 12.5 12.5 12.5 12.5 12.5 100.0

Contribution (%) 0.25 1.03 -0.16 1.20 0.40 -1.15 -0.41 1.10 2.25

Differential Ibovespa (%) -2.58 3.40 -5.65 4.71 -1.41 -13.25 -7.59 3.98 -2.30

14

Sector Analysis
FINANCIALS MAINTAINING UNDERWEIGHT (60% RDCD3, 40% BBDC4)

On the back of measures taken by the Brazilian Central bank the sector has come to show its resiliency and completed its guidance for 2008. We continue to favor Bradesco and Redecard given the new combination of news flow in the case of BBDC4 and the low credit risk story that RCDC3 represents.

Brazilian Central Banks (BCB) loan figures for Dec/08 unveiled a deceleration in the pace of loan growth when compared to Nov/08, partly due to the absence of the Real devaluation in the period as it has been the case in the last two months. The Brazilian Development Bank (BNDES) and other State owned banks, as a result of the measures adopted to stimulate the economy, responded for the bulk of the monthly and quarterly expansion posted. Corporate loans have continued to grow at a faster pace than loans to individuals, looking at both quarterly and annually evolution, in Dec/08 loans to individuals grew at similar pace (0.5%MoM) than corporate loans (0.6% MoM), aided by the Christmas effect. The last quarter of 2008 was marked by banks decision to increase selectiveness, demanding additional guarantees for new loans, maintaining high interest rates and reducing loan tenors, as a result of fear of delinquency hiking. Delinquency rates were up slightly, yet we expect some deterioration in the coming months in light of a more challenging macroeconomic landscape, namely, reduced GDP growth affecting companies and deteriorating unemployment rates. Consequently, we remain negative with regards to provisions throughout 2009. It is important to mention that, in spite of the cut of interest rates, credit spreads continued widening because of delinquency risk and reached a record level of 30.6% in Dec/08, the highest figure since 2003. We do not see the recent cut in Selic to have an immediate effect on loan availability because credit risk remains on rise. However, we see as feasible for banks to deliver at least a 15% rise in 2009, which is slightly lower than the BCBs 16% and the Brazilian Banks Federation (Febraban) of 15%-20%. Redecard: we kept Redecard in our Jan/09 portfolio. We reinforce our expectation of very good results to come in 4Q08, with a particular contribution from the prepayment business, which we expect to outpace the guidance provided by the management for FY08. Despite the recent cut in interest rate cut, we do not see loan availability increasing and therefore, the contribution from this opportunistic business should remain strong. An important driver for Redecards story is the increasing use of cards in Brazil. The evident focus of large banks on this product (as it is a key fee-based one and continues to post strong grow rates sequentially) in combination to its low penetration of plastics in the country is bound to keep the companys shares on the spotlight. Redecard is a generous dividend payer with a 95% payout and estimated dividend yield for 2009 is 7.2%.

15

Bradesco: We decided to maintain Bradesco in our recommended portfolio. Bradesco offers an attractive upside for investors while trading at an unjustifiable the discount to its direct private peers. This is partly explained by the fear Bradesco could go after acquisition targets and either overpay or take too long to digest such acquisition. This would result in increased expenses, thereby affecting earnings. Yet, none of these negative prospects above have materialized, and the question mark that was the CEOs succession (Mr. Cypriano) has been answered with the appointment of career executive and CEO of Bradesco Seguros Mr. Trabucco as next in line. The bank has been emphasizing an organic growth strategy, which is positive and should protect earnings in the challenging year that should be 2009. Finally, we believe Bradesco is well posed to deliver +20% ROAE for the coming years, based on its solid and well diversified loan operations coupled with robust insurance activities.
Price on 01/30/09 REDECARD ON 26.25
Source: Economtica, Bloomberg and Unibanco

Price Recommendation BUY Target 09 39.00 P/BV 21.34 2009E 16.8

P/E 2010E 13.7

Price on 01/30/09 BRADESCO PN 20.80

Source: Economtica, Bloomberg and Unibanco

Price Recommendation BUY Target 09 38.59 P/BV 1.87 2009E 7.7

P/E 2010E 7.5

CONSUMER GOODS AND HEALTHCARE - MAINTAINING UNDERWEIGHT (60% PCAR4, 40% DROG3)

We continue to favor defensive names namely CBD and Drogasil and despite the relevant valuation discount that most retailers are trading at (which is the underlying reason behind those BUY recommendations), we still think the upcoming news flow is very tough, with further potential downside risk to consensus estimates that should hold back the sectors performance.

As we get closer to the 4Q08 earnings season, we stick to last month's defensive choices: CBD and Drogasil. Disappointing top line growth for discretionary retailers and healthcare providers in combination with FX variations on existing debt slamming the bottom line of protein processors, should cast a negative tone on the performance of the consumer sector. Moreover, red flags raised by recently released delinquency data should curb any relevant reaction from credit dependent retailers in the medium term, as the estimated risk is still tilted toward the downside. CBD: We continued to favor CBDs defensiveness even at times when the valuation of its shares was less than compelling in relative terms. Last months 3.69% drop currently offers a good entry opportunity to get a taste of it. Very solid 4Q08 results with room for positive surprises-, relative protection from abated demand, low dependence on credit for sales expansion and healthy cost improvements are the main pillars behind our long lasting positive stance on the company. Drogasil: Drogasil should stand out as one of the few retailers to gracefully ride unharmed the 4Q08 earnings season. The chain is set to easily deliver its 30% growth guidance for the year and does not forecast any relevant deceleration for 2009 sales although store openings could suffer some delay. In addition to solid operational

16

prospects the sectors current momentum formalization being accelerated by tax changes backs Drogasil as one of our favorite names.
Price on 01/30/09 CBD PN DROGASIL ON 29.86 8.00 Price Target 09 41.10 15.10 P/E EV/EBITDA 09 5.3 3.5 2009E 14.1 9.7 2010E 10.5 7.9

Recommendation BUY BUY

Source: Economtica, Bloomberg and Unibanco

OIL, GAS AND PETROCHEMICALS MAINTAINING UNDERWEIGHT (100% PETR4)

The Brazilian oil sector through its main player Petrobras is undergoing a period of heightened political pressure on the back of the effects of the international crisis and the exploration of pre-salt layers. As a result of this, the government-run company seems to be acting as more of an arm of PAC than as a business oriented oil company. Due to this in combination with shrinking oil prices, we chose to keep the sector as underweight.

Despite the ST pressure related to geopolitical events in the beginning of the month, oil prices continued to be affected by the weak demand in OECD economies in conjunction with revised demand figures in key markets such as China. As we stated in our Oil Monthly report (Monthly Oil Overview, January 22nd), most indicators (such as inventories, demand and supply of oil derivatives and refinery output) suggest that this scenario should stretch well into February. Petrobras announced its 2009-13 business plan with an astonishing capex in excess of US$ 174 for the period, a 55% jump in relation to the previous plan. The oil producer also made public its first estimates for capex to be directed to the development of presalt areas (US$ 111 billion until 2020), while making the most out of these fields given their promising productivity it hopes to reduce the overall number of wells. We deem this plan as too aggressive under the present circumstances - low oil prices and hurdles in the funding scenario. For the next two years, the company intends to use BNDES as its main financier with some expected US$ 22 bn in new lines. This plan was based in a scenario of constrained supply scenario as capacity expansion plans are postponed and demand should pressure prices in the medium term. The announcement of the plan may help the company to reduce the pressure for reducing derivatives prices in this quarter, given that company should be in need of this steady stream of cash to fund its capex for this year.
Price on 01/30/09 PETROBRAS PN 25.03
Source: Economtica, Bloomberg and Unibanco

Recommendation BUY

Price Target 09 55.00

P/E EV/EBITDA 09 3.3 2009E 7.9 2010E 6.4

17

STEEL MAINTAINING UNDERWEIGHT (100% USIM5)

Once again Usiminas rises as our vehicle to play the sector. Given the grim prospects for the entire steel chain throughout 1Q09, it seems as only natural to turn to a player that offers a more domestically oriented business approach, when those prospects seem to be more favorable than the ones abroad.

We keep Usiminas in our recommended portfolio by means of (i) Its attractive valuation of 2.3 x EV/EBITDA 09, the most discounted vs. peers; (ii) Low indebtedness ratio of 0.2x Net Debt/Ebitda, (iii) Most favored in a rebound of credit activity in 2H09 and (iv) Major long term upside out of a more dynamic and market-oriented positioning after the recent changes in its top management. As mentioned in our pervious report, we continue to expect a bleak scenario for the domestic steel market along 1Q09 given the lack of appetite from the steel chain to keep its engines at full throttle, as it built up high inventories in 4Q08 due to the huge plunge local demand took in Nov and Dec-08. This was clearly indicated by INDA (Brazilian distributors association) inventories, which now stand at 5 months of sales versus the 2008 average of 2.5 months. It is worth mentioning that INDA members represent the meaningful chunk of ~35% of total domestic flat steel demand. 1Q09 should be marked by de-stocking to be carried out by players along the steel chain, thus penalizing steelmaker sales in the quarter. Coupled with lower volumes, companies should follow suit the discount already announced by ArcelorMittal of 10% (we expect even further drops along the year, totaling 15%). In hindsight we view the upcoming earnings season with some skepticism due to the less than thrilling results expected, yet given the great dive the stocks experienced in late 2008 we deem these as already priced in.

Price on 01/30/09 Usiminas PNA 28.86

Source: Economtica, Bloomberg and Unibanco

Recommendation BUY

Price Target 09 64.00

P/E EV/EBITDA 09 2.2 2009E 3.6 2010E 3.0

MINING MAINTAINING OVERWEIGHT (100% BRAP4) Although we remain wary of commodity linked companies we deem some cases have been exaggeratedly discount opening a good entry point. In the mining sector Vales management is demonstrating a key sense of urgency in adapting the iron ore producers strategy to the new demand environment. Consequently we reiterate Brandespar as the way to go in the sector given its main underlying assets. We are maintaining Bradespar as top choice in the mining sector, since its current discount over its underlying assets (approximately 90% VALE3 and 10% CPFE3) is ~ 22%, still far over the historical average discount of 11%. We believe that there is no reasonable explanation for this as BRAP4 provides an access to Vales control group and is a more economical way to have participation on the board of the worlds biggest iron ore producer.

18

Despite being too soon to have a clear short term outlook, some indicators have been demonstrating a likely rebound in the iron ore market, thus the performance of mining shares should improve: (i) Inventory levels at the main Chinese ports have declined in the last weeks and currently stand at 58 million tones, down 23% from their Sept-08 peak of ~ 75 million; (ii) Iron ore spot prices in China reached USD 81/ton, a 25% climb from 2 months ago, although still far from the record of USD 198/ton in 2008. It is worth mentioning that, at current spot prices, several junior miners could likely close down shop in China, bringing additional balance to the market. (iii) ST recovery in steel prices in China: HRC domestic prices in China currently trade at USD 545/ton, up 17% from their Oct-08 low. Is it sustainable? It is still too soon to tell in our view. However, as any other aspect of the negotiation process on iron ore, timing is important, if not everything. In the case of steel prices a better-than-expected backdrop would indeed strengthen Vales bargaining power in 2009 price negotiation. Besides the discount, BRAP4s main underlying asset, VALE3, continues in our view to price in an unlikely scenario: 50% drop for iron ore contracts in 2009 (and LT price at USD 50/ton from current USD80/ton) or a 25% drop for the entire iron ore curve (with LT price at USD32/ton).
Price on 01/30/09 Bradespar PN 23.41
Source: Economtica, Bloomberg and Unibanco

Recommendation UR

Price Target 09 UR

P/E EV/EBITDA 09 UR 2009E UR 2010E UR

PAPER & PULP MAINTAINING UNDERWEIGHT (100% SUZB5)

Not a great deal has changed for the P&P sector since our last Strategy Report. Following that line we remain bearish on the sector given what still looks like puny demand and piling inventories worldwide. We favor Suzano as a result of its specific defensive features and news flow on the Brazilian P&P segment as a whole.

The momentum for pulp prices remains negative on the back of high inventories worldwide and frail demand. Producer inventories reached 46 days in Dec-08, 16 days up YoY, but 4 days down MoM (mainly related to a short-term recovery in shipments to China, mainly as a technical response after a de-stocking period). We expect the overhang in inventories to continue to put pressure on prices over next several months. Pulp prices in Europe, measured by FOEX, currently stand at USD558/ton, down 34% from the peak in mid-08. In that sense, we see Suzano as a more defensive play on its better sales mix, higher exposure to the paper business (~60% versus 40% for pulp), which is a more regional and defensive one helped by USD volatility that prevents additional pressure arising from imports of coated paper in the ST. Added to that, Suzano appears as a good option within the sector as the deal between VCP and Aracruz turned out to be expensive for the first, while the downside risks related to expectations of eventual changes to the swap ratio proposed to ARCZ6 minorities does no pay off in our view.

19

Price on 01/30/09 Suzano PNA 11.70

Source: Economtica, Bloomberg and Unibanco

Recommendation BUY

Price Target 09 27.00

P/E EV/EBITDA 09 3.5 2009E 15.2 2010E 3.6

TELECOM MAINTAINING OVERWEIGHT (100% TMAR5)

Despite its underperformance of the Bovespas benchmark index in the past month, we reiterate our overweight recommendation on the sector as we see it as unjustified. The defensive traits the sector possesses such as reliable cash generation and low FX liabilities and cost, particularly in the telco segment, make of it to a certain extent a safe haven at times of elevated risk aversion.

We continue recommending to be positioned on telcos as: (i) (ii) (iii) (iv) Fixed line telephony is perceived as a basic service, with resilient demand; Telcos generate predictable and reliable free cash flow; Most telco stocks offer high trading volumes, a major positive in times of volatility; Fixed line telcos are currently trading at low multiples and attractive valuation;

We are hence reiterating our overweight rating on the sector, highlighting our particularly positive view of the stocks involved in the BRP/TNE deal. Based on current share prices, BrOi, the resulting entity, would be trading at a discounted multiple (3.7x 09 EV/EBITDA), therefore we expect a positive news flow on the conclusion of the deal to help the share price performance of all names involved. TMAR5 is our favorite investment vehicle assuming there are no major arbitrage opportunities implied.
Price on 01/30/09 Telemar PNA 45.35
Source: Economtica, Bloomberg and Unibanco

Recommendation HOLD

Price Target 09 97.30

P/E EV/EBITDA 09 5.9 2009E 26.1 2010E 7.4

UTILITIES MAINTAINING OVERWEIGHT (60% TRPL4, 40% CPLE6)

As even a sector thats known for its defensiveness starts to feel the heat of the downturn, an opportunity to rebalance our exposure within it arises. In this scenario being positioned in companies with inflexible contracts appears as the way to go, as they should not have to turn to the spot market to deal with their energy surplus. We stress ISA Cteep and Light as our bets on the sector due to their combination of lower exposure to the industrial class and good dividend yields among others.

As power consumption figures continue to come to light, investors become aware of how sharp the fall in industrial consumption since early December has been. This affects DisCos, Integrated Cos and GenCos with flexible contracts, prompting a flight to defensiveness. By defensiveness we mean TransCos and GenCos with inflexible power sale contracts. In this sense, we are quite comfortable to state that 1H09 should be negatively biased over Discos and Integrated companies, especially those most exposed to the industrial class. ISA Cteep is definitely not one of those to be seriously affected and Light has very little exposure to industrial clients.

20

ISA Cteep (TRPL4): this remains as our top pick in the sector due to its very defensive features (very steady almost riskless revenues, dividend player) combined with meaningful growth perspectives through the two lots ISA Cteep was awarded at the Madeira Transmission Line auction (November 26). These two lots should mean about a 9.4% advance of the companys top line and should give it the opportunity to re-leverage its capital structure to a much more valuable level and at a very low cost (no more than TJLP + 3%) since this project is to be financed by BNDES. Light (LIGT3): the company has a minimal exposure to the industrial class when compared to other DisCos under our coverage (only about 10% of total sales) and this edge should not be overlooked by the market. Additionally, the company had a rather positive tariff revision of +4.26% in effect since November 7th, and should harvest its benefits in both 4Q08 and 1Q09 figures.
Price on 01/30/09 ISA Cteep PN Light ON 42.49 23.66 Price Target 09 73.00 UR P/E EV/EBITDA 09 4.4 UR 2009E 7.6 UR 2010E 6.5 UR

Recommendation BUY UR

Source: Economtica, Bloomberg and Unibanco

OTHERS MAINTAINING MARKETWEIGHT (60% WEGE3, 40% CNFB4)

As the economy continues to deteriorate and uncertainties on the solvency of financial institutions prevail, investors should keep focusing on highly liquid names. Another consequence of this would be that growth cases such as many small caps, may see their future perspectives hindered due to a more restricted credit. In such an environment we fall back on a deep value story, namely Confab and WEG, who should benefit from a Government interest in the GTD business.

Industrials WEG: The company presents an impressive track record in terms of top line growth throughout the recent years and its current guidance for 2009 estimates a 15% to 18% growth. This to be the result of USD appreciation and gains in market share obtained in foreign markets on the back of the maturity of investments made. The others segments should remain strong like generation transmission and distribution (GTD) since the government has a known interest in promoting investments in this area in order to prevent rationing risks in years to come mainly through the use of small hydroelectric plants. WEG should also benefit from lower copper prices. Confab: The stock is trading at attractive levels in terms of P/E09 3.5x and EV/EBITDA09 1.2x. The company holds contracts to keep it at full capacity until June 09. Perspectives for the company in the medium/long term remain robust given Petrobras massive investment plan for the 2009-2013 period, which plans USD 105 billion being invested in the E&P business. Its also important to highlight the company holds approximately R$ 700 million in cash; most of them in US dollars and given the FX variation in the period, company should post a decent net income.

21

WEG ON CONFAB PN

Price on 01/30/09 11.65 3.78

Recommendation BUY BUY

Price Target 09 26.50 10.70

P/E EV/EBITDA 09 5.6 1.1 2009E 10.3 4.5 2010E 9.4 3.4

Source: Economtica, Bloomberg and Unibanco

ADDITIONAL COMMENTS Real Estate January had some unexpected positive news flow that helped drive the homebuilders sector forward. First and foremost, the surprise 100 bps Selic rate cut certainly helped the sector and could facilitate an inflow to savings account. Coupled to that, there is a government stimulus plan being thoroughly discussed. The plan should contain the following measures: (i) Aggressive tax breaks for homebuilders (ii) Higher limits for SHF and FGTS utilization and also (iii) Significant incentives for very low-income projects. (< 5 MW household income). Out of conversation with a few of the sectors top managers, we know they are certainly pleased that the sector is being considered one of the main drivers for the countrys growth. Yet they do not think the plan should be a silver bullet that would solve demand problems, which should be the key issue along this first semester. A few homebuilders (MRV, PDG) released operational data this month, and PDG has been, once again proved its leading position in the sector with excellent sales speed (~24% VSO) considering 4Q08s rough waters. We continue to see the company outperforming its peers and reiterate it as the main vehicle to profit from a sector rebound. Sugar & Ethanol Risks of deterioration of market fundamentals In spite of positive prospects in operating performance as a result of better sugar and ethanol prices, we still foresee negative free cash flows for the listed companies in the current harvest and in the next one. In that scenario, a slowdown in capex programs is likely. We also foresee the risks of deteriorating market fundamentals gasoline/ethanol prices in Brazil and international sugar prices as well as ethanol export volumes world crude oil prices remaining at the currently depressed levels in the medium term. If that scenario materialized, investor appetite for the listed companies might remain low. We remain cautions about the sector as a whole. Beef Challenging Short Term, Positive Medium-term Prospects The Short-term remains challenging for the Brazilian beef sector, the disruptions in international trade are still in place, largely due to scarce credit. The numbers for Brazils meat exports in January continue to indicate weak volumes, which might negatively impact export revenues and operating performances all across the board in 1Q09. How long it will take for international trade resumes is still an important question mark. From a seasonal perspective, a recovery should start in the 2Q, considering a scenario of increasing concentration of the packing industry in Brazil as well as increasing number of certified farms to export to EU. We believe the business should face a better momentum in the second half of 2009. In the medium term, we remain positive about the beef industry given prospects for higher rates of growth of cattle herd in Brazil in 2010 and prospects for a recover of Brazils share in international trade.

22

Education We are expecting a tough year for the education companies. Our view is based on the fact that most of the target students of these companies are working young adult. In a scenario of economic slowdown, and consequently rising unemployment rates, we should start observing an increase in drop out rates and/or delinquency rates and a reduction in new enrollments. Additionally, investors are avoiding growth companies, especially those with low average trading volume, which is the case of the education sector. Nonetheless, we continue optimistic with sectors long term perspectives and comfortable with companies investment cases and our recommendations.

23

DISCLOSURE APPENDIX
STATEMENT BY THE ANALYST(S)
Each one of the analysts who has principal responsibility for the contents of this report hereby states that all the opinions expressed herein portray, precisely, solely and exclusively, his/her/their personal opinion on the companies and securities referred to herein and that this report was prepared independently and autonomously, including in relation to Unibanco, and that no part of their remuneration had, has or will have any direct or indirect relationship with the specific recommendations or opinion presented in this report. Although the analysts remuneration, as is also the case for all employees of Unibanco, is linked to the commercial performance of Unibanco as a whole and, in general, to the financial transactions carried out by the bank, the remuneration of the research analyst/s responsible for this report is not linked to the pricing of the securities of the company/ies which is/are the subject of this report, nor to the proceeds of the financial and business transactions carried out between Unibanco and the company/ies that are the subject of this report, nor to the analysts recommendations contained therein. The research analyst/s responsible for the content of this report further certify that: (i) (ii) (iii) they do not have any link whatsoever to any person who operates within the ambit of the companies whose securities are the subject of the research or discussion in this report, and who may be able to influence their research analysis in any way; they do not receive remuneration for services provided to any of the companies whose securities were analyzed in this report, and do not have any commercial link with such companies, nor with individuals, companies, funds or associations of any type who represent the interests of said companies; neither said analyst/s nor their spouses or partners (i) are directors, board members or members of any consultative body of any company that is the subject of this report;(ii) they do not directly or indirectly own securities in the said issuers representing 5% or more of their personal portfolios; and (iii) they are not involved in purchase, sale, or intermediation of or in such securities in the market; Unibanco, by itself or through any of its direct or indirect subsidiaries and/or affiliated companies, its funds, portfolios or investment clubs managed by Unibanco may have 1% or more of the common shares of any issuer recommended in this report, In order to check this information see the check box* below.

(iv)

IMPORTANT THIRD-PARTY DISCLOSURES

This report was prepared by the research department of Unibanco (Unio de Bancos Brasileiros S.A. Unibanco) on its own behalf and on behalf of its direct and/or indirect subsidiaries or affiliated companies. * Disclosures Item Disclosures Item 1 DROG3 BBDC4 RDCD3 USIM5 PETR4 SUZB5 TRPL4 Drogasil Bradesco Redecard Usiminas Petrobras Suzano CEETP 2 3 4 5 6 LIGT3 WEGE3 CNFB4 PCAR4 BRAP4 TMAR5 Light WEG Confab CBD Bradespar TELEMAR 1 2 3 4 5 6

Unibanco, its affiliated companies and subsidiaries 1. 2. 3. 4. 5. 6. owns 1% or more of the common equity of the issuer analyzed in this report has acted as Lead Manager, Manager or Contracted Manager of a public offering of securities issued by a company recommended in this report in the last twelve months; has received remuneration for investment banking services from the issuer recommended in this report in the last twelve months; has received remuneration for products or services other than investment banking services, from the issuer recommended in this report, in the last twelve months; expects to receive or intends to obtain remuneration for investment banking services from the issuer recommended in this report in the next twelve months; and is a market maker in the securities referred to in this report.

Global Stock Ratings: Definitions and Allocations Unibanco Rating BUY (B) HOLD (H) FULLY VALUED (FV) Definition Expected Total return of 25% or more over a 12-month period Expected total return between 10 to 25% over a 12-month period Expected total return of 10% or less over a 12-month period Coverage* 53% 40% 7% Servios de BI** 6% 8% 0%

* Percentage of companies globally covered in this rating category ** Percentage of companies in this rating category to which Unibanco has provided investment services in the last 12 months. *** The ratings BUY, HOLD and FULLY VALUED reflect the analysts outlook for the performance of the stock. The present rating is valid until the analyst changes the rating of the share as a consequence of information which affects the rating of the stock, or simply due to change in the price of the share (with no set period).

24

Stock Price, Price Target

DROG3
25,000.0 20,000.0 15,000.0 10,000.0 5,000.0 0.0 Buy Buy Buy Buy

BBDC4
100,000.0 90,000.0 80,000.0 70,000.0 60,000.0 50,000.0 40,000.0 30,000.0 20,000.0 10,000.0 0.0 Buy Buy RW Buy Buy

RDCD3
50,000.0 45,000.0 40,000.0 35,000.0 30,000.0 25,000.0 20,000.0 15,000.0 10,000.0 5,000.0
Jan-06 Jan-07 Jan-08 Jan-09 Jul-06 Jul-07 Apr-06 Apr-07 Apr-08 Oct-06 Oct-07 Jul-08 Oct-08

Buy Hold Buy

RW

Buy

Buy

Jan-07

Jan-08

May-06

Mar-06

May-07

Nov-06

Mar-07

May-08

Nov-07

Mar-08

Sep-06

Sep-07

Sep-08

Nov-08

Jan-09

Jul-06

Jul-07

Jul-08

0.0 Jan-08 Jul-07 Apr-08 Oct-07 Jul-08 Oct-08

Target Price

Closing

Target Price

Closing

Target Price

Closing

USIM5
160,000.0 140,000.0 120,000.0 100,000.0 80,000.0 60,000.0 40,000.0 20,000.0 0.0 Jun-06 Jun-07 Mar-06 Mar-07 Mar-08 Jun-08 Sep-06 Sep-07 Sep-08 Dec-05 Dec-06 Dec-07 Dec-08 Buy RW Buy

PETR4
140,000.0 Buy 120,000.0 100,000.0 80,000.0 60,000.0 40,000.0 20,000.0 0.0 Apr-06 Apr-07 Aug-06 Aug-07 Apr-08 Aug-08 Dec-05 Dec-06 Dec-07 Dec-08 Buy

TMAR5
140,000.0 120,000.0 100,000.0 80,000.0 60,000.0 40,000.0 20,000.0 0.0 HoldBuy Buy Buy Hold RW Buy Hold Hold

Jan-06

Jan-07

Jan-08

Jul-05

Jul-06

Jul-07

Oct-05

Oct-06

Oct-07

Apr-06

Apr-07

Closing

Target Price

Closing

Target Price

Closing

Target Price

SUZB5
50,000.0 45,000.0 40,000.0 35,000.0 30,000.0 25,000.0 20,000.0 15,000.0 10,000.0 5,000.0 0.0 Mar-06 Mar-07 Mar-08 Jun-06 Jun-07 Dec-05 Dec-06 Dec-07 Jun-08 Dec-08 Sep-06 Sep-07 Sep-08 Buy RW Buy Buy Buy

TRPL4
90,000.0 80,000.0 70,000.0 60,000.0 50,000.0 40,000.0 30,000.0 20,000.0 10,000.0 0.0 RW Buy Hold Buy Buy Buy Buy Hold

LIGT3
40,000.0 35,000.0 30,000.0 25,000.0 20,000.0 15,000.0 10,000.0 5,000.0 0.0 NR Hold RW

May-06

May-07

May-08

Nov-05

Nov-06

Nov-07

Apr-08
Aug-08

Mar-06

Mar-07

Mar-08

Feb-06

Feb-07

Sep-06

Sep-07

Sep-08

Closing

Target Price

Dec-05

Dec-06

Dec-07

Dec-08

Closing

Target Price

Closing

Feb-08

Aug-06

Aug-07

Target Price

WEGE3
35,000.0 30,000.0 25,000.0 20,000.0 15,000.0 10,000.0 5,000.0 0.0 Jun-06 Jun-07 Mar-06 Mar-07 Mar-08 Jun-08 Sep-06 Sep-07 Sep-08 Dec-06 Dec-07 Dec-08 Hold RW Hold Hold

CNFB4
14,000.0 Buy 12,000.0 10,000.0 8,000.0 6,000.0 4,000.0 2,000.0 0.0 May-06 May-07 May-08 Nov-05 Nov-06 Nov-07 Nov-08 Feb-06 Aug-06 Feb-07 Aug-07 Feb-08 Aug-08 RW Hold Buy Buy

PCAR4
70,000.0 60,000.0 50,000.0 40,000.0 30,000.0 20,000.0 10,000.0 0.0 May-06 May-07 May-08 Nov-05 Nov-06 Nov-07 Feb-06 Aug-06 Feb-07 Aug-07 Feb-08 Aug-08 Nov-08 RW Hold RW Buy Buy Buy Buy

Closing

Target Price

Closing

Target Price

Closing

Target Price

BRAP4
100,000.0 90,000.0 80,000.0 70,000.0 60,000.0 50,000.0 40,000.0 30,000.0 20,000.0 10,000.0 0.0 May-06 May-07 May-08 Nov-05 Nov-06 Nov-07 Feb-06 Aug-06 Feb-07 Aug-07 Feb-08 Aug-08 Nov-08 Buy Buy RW RW

Closing

Target Price

25

Nov-08

Jun-06

Jun-07

Jun-08

Jul-08

Conflict of Interests Unibanco, its subsidiaries and affiliated companies may make investments in securities or corresponding derivatives of companies mentioned in this report and trade them in a manner at variance with the manner discussed in this report, under Unibancos Internal Personal Trading Policy. This Policy also forbids analysts involved in the preparation of this report from buying or selling securities or the corresponding derivatives in a manner contrary to the manner recommended in this report.

GLOBAL DISCLAIMERS
This material was prepared by Unio de Bancos Brasileiros S.A. Unibanco on its own behalf and on behalf of its subsidiaries and affiliated companies for distribution to legal entities and should be distributed: (a) in Brazil and in other countries (with the exception of the United States of America, and European companies), by Unibanco, regulated in Brazil by the Brazilian Central Bank and by the CVM (Brazilian Securities Commission Comisso de Valores Mobilirios); (b) In the United States by Unibanco Securities Inc., member of the Financial Industry Regulatory Authority, Inc.; (c) in Europe, by Unibanco Cayman Bank Ltd., regulated in Cayman by the Cayman Islands Monetary Authority. The information and opinions contained herein were compiled and obtained in good faith from sources considered to be reliable. Unibanco makes efforts to use reliable information, but wishes to state that the said information was not independly confirmed. Unibanco and/or its subsidiaries and affiliated companies do not give any guarantee nor make any express or implicit statement in relation to the appropriateness, exactitude, scope, or correctness of such information and opinions all of which are subject to change without prior notice. This report is solely for informative purposes and the descriptions of issuers or securities presented herein are not intended to be exhaustive. This material should not be understood to be an offer for sale or purchase of securities or other financial instruments. In accordance with information provided by Unibanco, Unibanco, by itself or through any of its direct or indirect subsidiaries and/or affiliated companies, its funds, portfolios or investment clubs managed by Unibanco may have 1% or more of the common shares of any issuer recommended in this report, in order to check this information see the check box* mentioned above. The report does not present investment recommendations adapted to any entity in particular. Its preparation did not take into account the specific financial situation, investment objectives, or other aspects of any investors in particular. The securities or other instruments discussed herein may not be appropriate for all investors, depending on the investment objective, financial situation, or other specific aspects of investors. Unibanco recommends that investors seek the opinion of a financial consultant. The value of the assets discussed herein and the returns on investment arising from them are not guaranteed and there is a possibility that the investor may not recover the full amount originally invested. The amount of and the return arising from investments may vary as a consequence of changes in interest rates, or exchange rates, prices of securities, or market indices, the financial or operational situation of companies, or other factors. There may be limitations on the exercise of options or other rights in relation to transaction in securities. Past performance is not necessarily an indication of future performance. Future performance is based on assumptions which may not materialize. Unibanco does not assume any responsibility for losses suffered directly or indirectly by any person or person arising from any decision by investors to act, or not to act, on the basis or the information contained herein. Reproduction, distribution, or publication of this material in whole or in part for any purpose is forbidden. Additional note for readers in the United States: Unibanco Securities Inc., with offices at 570 Lexington Avenue, 47th Floor, New York, NY, 10022, a broker and distributor registered in the United States of America, subsidiary of Unibanco, distributes this material in the United States, and for this purpose takes responsibility for the contents hereof. US investors who receive this report and wish to effect transactions in securities discussed or recommended herein should do so through Unibanco Securities Inc., and not through Unibanco.

26