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“The stock market is filled with individuals who know the price of everything, but

the value of nothing.”

(Phillip Fisher)

This report covers the

following issues:

• Macro Stress Scenario

• Bull Market Cycle

• Results in Review

• Portfolio

We have also provided a brief

update on the fund’s principal

holdings.

Enjoy!

HIX Capital is an independent asset management firm focused on investing in Brazilian Equities. We manage local (BRL) and offshore (USD) funds whose goal is to maximize return on invested capital through a concentrated portfolio of highquality companies. In other words, we look to invest in companies that: have simple business models; (b) are well managed; and (c) offer compelling potential returns. We strive to achieve the deepest possible knowledge about the companies and sectors we invest in.

Performance since inception

About HIX Capital

*HIX Equities 1 SP Inception Date: September 15th, 2016. The fund was fully allocated as of November 2016. Performance Net of Fees in USD.

LETTER TO INVESTORS1st Half of 2019

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Dear Investors,

During the 1st Semester of 2019, the HIX Equities 1 SP (USD offshore fund) presented a 20.89% gain whilst the Ibovespa (in USD terms) increased by 16.25%. Since the fund’s inception (September 2016), the HIX Equities 1 SP has presented a 27.26% gain versus a USD Ibovespa gain of 50.10%. The HIX Capital FIA, HIX Equities 1 local mirror fund had a 19.60% increase, compared with 14.88% by the Ibovespa in the first six months of 2019. Since inception, HIX FIA has accumulated a positive performance of 164.9% or 15.3% in the last 12 months, compared to a 76.9% or 8.7% growth in the last 12 months by the Ibovespa. Please note that the performance numbers included in this letter from this point on refer to the local fund (in BRL).

2019 began with the strong valuation of the equities market, as well as of the pre-fixed government bonds tied to or not to inflation (NTN-Bs). The more favorable perspective for the Brazilian economy following the election of President Bolsonaro translated into a positive impact on prices. Our portfolio companies presented strong performance, thanks to the combination of the aforesaid factor and the strong evolution of the companies’ fundamentals not only YTD, but also in recent years. We nonetheless believe that in spite of the recent spike, the long-term perspective for our investments remains extremely attractive.

Our letter includes a brief description of the macro scenario, as Brazil seems to be undergoing yet another bull-market cycle, as well as a few red flags that may be present in such environment. We will then address the portfolio results, the relevant changes and portfolio evolution, in addition to the key fundamentals of our largest equity holdings.

In July, Brazil’s Lower House of Congress voted to approve the base text of the pension reform, having furthered the market agents’ understanding that the reform bill is likely to be passed by the Senate, with substantial savings potential (ranging from BRL 900 billion to BRL 1 trillion, according to experts). The much-awaited bill, when approved, will be a milestone in Brazil’s fiscal status, which we believe will offer the safety businesses and domestic and foreign investors have been longing to profit from the administrations “liberal” opening of the market to kick start a higher investment cycle in the country. Brazil has huge investment potential in several industries, especially in infrastructure, among others. This trend may just be the starting point of the acceleration phase in Brazil’s economy. Inflation is also under control, thus opening way for an unprecedented interest rate drop. Short-term interest rates at 5% and real interest rates ranging from 2% to 3% (long-term) have become part of our reality, and it is very likely that this will become the new operating level in the country.

As investors, such an ever-changing country as Brazil calls for a certain level of skepticism when it comes to highly positive scenarios. On the other hand, it seems that the new macro scenario will deeply affect perspectives on equity investments, signaling the beginning of a new and strong bull market.

Current Macro Scenario

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The stability and fiscal consolidation that provides for lower tax rates also triggers the possibility of substantially higher multiples for listed equities. Most people understand this rationale in practice, but in order to put into perspective the impact of the changes in the macro scenario on company value, below is a formula that simplifies the value of a company or its stock:

Brazil’s current scenario is marked by two phenomena: first, the interest rate drop, which has dramatically reduced the opportunity cost required for equity investments; at the same time, the expected GDP increase leads analysts to foresee stronger growth rates in the future. Based on such method, a 1% increase in the projected growth rate (G) and a 2% drop in the capital cost (Ke) implies increase in a company’s theoretical value of up to 100%. For instance, any company worth BRL 18.00 in the past, based on the assumptions of Scenario 1, below, would double its value in Scenario 2; Scenario 1: DPS:1, G:7%; Ke:13% | Scenario 2: (DPS:1, G:8%; Ke:11%).

This is precisely the effect seen in the Brazilian equity market. Capital cost has gradually decreased, together with interest rates, and analysts and investors have factored in stronger growth perspectives in their projections. Such equity valuation is likely to lead stock market investors to stronger gains in the upcoming years.

The following chart shows the aforementioned subject and in comparison with Brazil’s last cycle – we believe in recent years the Ibovespa lived a similar period as the 2002 - 2004 spike, when it almost quadrupled, in USD. Though it may seems like quite a lot, the trend continued and Ibovespa jumped from 9,000 to 42,800 points, totaling a multiplication of 18 times during the cycle! The current scenario opened with an increase from 9k to 26k points in USD, or 2.8 times. It seems we are still undergoing the complete cycle and we are very excited with the positive perspectives in Brazil’s equity market.

P = DPS * (1+G) / (Ke – G);

Where P is the market value of the stock; DPS is the dividend per share, for the current year; G is the growth rate; and Ke is the capital cost investors require.

A new bull market

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The new cycle also brings about another very important effect: a new wave of IPOs and follow- ons. Certain companies have already joined the market from 2017 to date, and we believe more offers are likely to be made in the next two or three years. As long-term investors, this process is especially in our interest for two reasons: (i) more traded companies means more choices, which translates into a higher probability of finding good investment opportunities; and (ii) based on the law of supply and demand, an increase in offers allows investors who want to increase their exposure to equities to do so at lower prices than they usually would.

At times like these, caution is key. The growing excitement felt around Brazil’s hottest financial districts in São Paulo and Rio de Janeiro should allow many companies to make offers to investors. By definition, sellers generally put an extra glow on their products and advertise dreams and expectations in order to nail down better offers. That is precisely where danger lies: selling (and buying) dreams and expectations implies great risk, for probability laws are often forgotten (as to the materialization thereof). For the sake of clarification, below is a brief review of the offers made during the last stock market valuation cycle, from 2002 to 2007.

From 2002 to 2004, the Ibovespa increased fourfold in USD, leading cosmetic company Natura to launch a new IPO cycle in the Brazilian market, in May 2004. There were a total of 101 IPOs from 2004 to 2007; the figures are nonetheless alarming and deserve to be further understood:

2004. The year ended with 7 IPOs, mostly of excellent companies, 6 of which turned out to be good investments at an average rate of return of 17% p.a., and only one had a mediocre performance of 2% yearly.

2005. The number of IPOs slightly increased to 8, with a mild decrease in quality. Five IPOs had solid return with average IRR of 17%, two had mediocre IRRs of 3% and one IPO turned into almost full capital loss (-94%).

2006. Volume of IPOs increased dramatically, which also translated into considerable loss of quality. Out of twenty-five IPOs, seven had great return (average IRR of 23% p.a.), eight had poor return, averaging -5% IRR, and ten (almost 40%!) of the IPOs resulted in massive capital losses.

2007. The year for sellers, not buyers. The December edition of business magazine Exame was an excellent anecdote:

IPOs and Follow-ons Are Back:

The cover of business magazine Exame, in December 2007, (“over one billionaire per month” – issue describing the large amount of IPO’s during the period):

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We believe that the most sensible conclusion is that it is key to avoid bad investments and substantial losses during the Bull Market period. The market’s current “natural high” leads companies to place their bets on ever-the-more optimistic storytelling to boost fund raising via offerings. Bull markets generally bring about long-forgotten projects, generally exaggerated growth expectations and accounting can become slightly more “creative”. We have no intention whatsoever to send out a red alert on IPOs or equity offers in general, especially because we believe it is possible to obtain solid results therefrom. As a matter of fact, we have bought equity in such scenarios at excellent returns in the past, as was the case of Omega Geração and Eneva. However, it is key to keep an eye out under such conditions, and especially to focus on stock picking, in order to invest in companies with strong teams, operating in big markets, which consequently have the greatest growth potential – valuation, of course, is also of the essence.

IPOs skyrocketed, putting quality to the test, and it failed. Only one-third of the 61 IPOs had satisfactory returns, at average IRR of 9%; 23 companies had slightly negative returns (yearly IRR of 4%). Seventeen companies filed for bankruptcy or faced almost full loss of the invested capital.

Our Assessment:

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Our performance in the first six months of 2019 was largely affected by Eneva’s share performance, which have not only been recently subject to improving market interpretation, but also its intrinsic value expectation has substantially risen during the period. Such scenario is attributable to certain developments in its business activities, as we will further address below. As a result, a considerable portion of our upside potential has remained intact, distributed in other holdings.

As per our June 2018 report, the alpha our strategy generates is volatile and unpredictable in the short term. The report also included our opinion that it was likely to recover upon the materialization of our main theses, which did in fact occur in the past six months, as may be seen in the following chart (Alpha 6 Months vs. Ibovespa). We still believe that the potential alpha of our holdings is substantial and we are excited about the future perspectives of our portfolio.

Performance Attribution

Below is our portfolio in review for the first six months of 2019:

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In addition to the regular reviews on the expected profit of such companies, we have made several adjustments to our portfolio throughout the year, in order to maximize our risk-reward ratio of our portfolio (“HIX Holding”). We believe the companies’ operating and net results are likely to grow at an average of 13% and 27%, respectively. This scenario has kept our optimism high vis-à-vis the performance of our positions in the second half of 2019. It is worth mentioning that the trend seen in the 1Q19 results disclosed support our numbers, as they have increased at an average of circa 30%.

The Price Earnings ratio (“P/E”) has also risen from 11.5x to 16.1x, partially thanks to the price increase of our positions, but also as a result of a company mix with slightly higher growth profile, which are thus naturally traded at higher multiples. We believe that such increase does not in any way affect the attractiveness of our portfolio, and the expected average IRR for the next five years is currently of 20.3%, practically the same level seen in December 2018 (20.2%), thus revealing that the equity valuation is essentially in line with the profit made in the period and with future expectations.

We often say that the key long-term driver of equity price variation is the evolution of company profitability. Prices are likely to vary in the short term, according to market conditions, whereas prices systematically end up in line with the leading fundamentals in the long term. As always, below is the weighted valuation chart and result growth of our portfolio.

Results in Review (HIX Holding Simulation)

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We have made a few changes to our portfolio during the first six months of 2019. There were 23 companies in our portfolio in December 2018 (91.5% exposure), we have divested in eight, having thus made cash available (20.0%). Half of the divestments were triggered by valuations exceeding the target price, whereas the other half relate to facts that negatively affected our long- term vision for the asset. On the other hand, we have added 7 new companies to our portfolio, three of which we had already invested in the past. Our top holdings are now (in descending order) Eneva (ENEV3), Biotoscana (GBIO33), Jereissati Participações (JPSA3) and Hapvida (HAPV3). Together, the Top 5 positions account for 44% of our portfolio, and the fund’s cash levels are approximately 4%.

Aside from individually analyzing each investment and looking out for the best risk-reward opportunities, we also believe that it is important to ensure our portfolio is diverse and ready to navigate the upcoming years. It is nonetheless worth mentioning that that in the recent months, we have gradually included companies in our portfolio that should profit from a stronger economic scenario. Utilities are still the highest sectoral exposure, at almost 28%, followed by Local retail accounting for circa 16.2% of the portfolio, as well as Properties at 10.3%.

Portfolio

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We have decided to include a brief update on the key events of the top companies of our portfolio, in order to provide for the better understanding of the portfolio, instead of focusing on specific cases, as is usually our practice.

We are still very excited about the potential future value creation for the company, and we also believe that despite the recent positive stock performance, Eneva is still among the top investment opportunities (high return and low risk) we have seen in quite a while.

Eneva had a positive start to the year, without any material downside, whereby our expected intrinsic value for the company has grown substantially during the period, including the following highlights:

1) In January 2019, the company added 4 BCM of gas to its reserves, further reducing its exploration risk perception. Such volume accounts for a 286% reserve replacement rate and a +21.3% increase when compared to the gas reserves in the end of 2017. Most of the reserve increase came from existing fields; in other words, at a very low marginal cost. Eneva has consistently added new gas reserves in the past years, which more than compensate annual consumption.

2) Eneva was the winning bidder of the Energy Supply Contract for the State of Roraima, under the Azulão-Jaguatirica integrated project. As a result, the company will be able to monetize the Azulão field reserves, purchased from Petrobras in 2018, under a long-term contract on predictable income. Project investments will total BRL 1.8 billion, with value generation at BRL 4.5/share (~17.6% of the market cap), which may hit BRL 7/share if the company manages to sell the leftover gas in the Manaus region. The contract was a huge milestone for the gas company, as aside from the possibility of monetizing the acquired reserves, it provides for the implementation of exploration studies in a high-potential new basin.

3) It is also worth mentioning that the company’s recent issue of BRL 2 billion in bonds has significantly reduced its financial cost. The company plans on refinancing over BRL 2.5 billion in debt in 2019. The refinancing process is likely to translate into a cut-down on annual expenses of BRL 50 Million.

Investment Theses: Update

Eneva

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1 Outstanding shares; in other words, all shares that are not held by controlling companies or otherwise blocked for trade under

shareholders’ agreements.

Jereissati Participações

Biotoscana

We have always believed that the company’s improved liquidity on the stock market would be one of Jereissati’s key drivers. On this matter, the event we had anticipated for quite a while occurred in January 2019, when PREVI and Fundação Atlântico (two large pension plans) drastically reduced their holdings via block trade. As expected, the sale reflected positively on share prices, from ~BRL 21 (average of 90 days prior to the sale) to ~BRL 25 following the PREVI divestment. PREVI’s second sale in early July reduced its holding to circa 4% of the company, which led the company’s float1 to 40% of the share, largely surpassing BRL 1 Billion value. Once again, the event improved the company’s liquidity and opened way for more investors to trade. In spite of the recent spikes, with shares currently trading at BRL 31.00, we nonetheless believe the discount for Iguatemi is too high (circa 37%) and the return perspectives are still promising.

The company was expected to face a challenging first semester since last year, when compared with 2018, especially considering the loss of the Actelion contract and the foreign exchange variation of the Argentina operation; there have been no surprising results thus far. However, it is worth mentioning that internal agendas had improvements in different fronts, such as: (i) approval of key products and their top indicators in large regions, (ii) increased pipeline of approved generics outside Argentina, (iii) team restructuring in the Argentina operation to adapt to the new purchase model and (iv) maturation of new contracts.

The assessment of the last highlight, largely responsible for leveraging the company’s value, reveals that the contracts signed between 2016 and 2018 jumped from BRL 2 million in annualized income in 3Q17 to BRL 94 million in 1Q19 (vis-à-vis 1Q18, income has grown fourfold). This number is likely to continue growing over the next periods, considering the volume of approvals and ramp-up of drugs rolled out in each one of the countries, to be the company’s leading growth leverage in the next 4-5 years.

Lenvima is by far the key product of these contracts; in the past 12 months, it has received the breakthrough therapy designation (FDA indication to expedite research development for promising drugs of substantial public health impact), for two new therapies. The produced has matured at incredible speed, from USD 450 Million in annualized global sales in 2Q18 to USD 920 Million in 2Q19. Experts have therefore reviewed their expectations for the drug, currently forecasting sales of at least USD 3.5 Billion by 2023 (comparable to the USD 2.6 Billion expectation applicable when of our report on the first six months of 2018). It is also noteworthy that Merck, which has purchased the rights to market the drug, believes that should the outcome of current research be positive, the drug’s potential could hit USD 5 Billion p.a. Such improvements may bring remarkable additional upside to the shares.

We continue excited about the company’s operating developments and the speed at which the new contracts have matured; the second half of 2019 should bring in the results of the adjustments made, with strong acceleration trends for 2020.

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Hapvida

The company took a big step towards its consolidation strategy in healthcare in the first half of 2019, marked by two material purchases. The main highlight was the buyout of the São Francisco Group (“GSF”), marking Hapvida’s entry in the Brazilian Southeast and Midwest markets. The Group brings in 1.8 million lives to the portfolio (800k in medical and 990k in dental plans), accounting for one-third of Hapvida’s pre-purchase beneficiaries, aside from being a leading player in several cities in the States of São Paulo and Minas Gerais (for instance, over 50% market share in the city of Ribeirão Preto and of 20% in other cities), in areas with low competition with large national operators. As far as the operation is concerned, São Francisco Group works on a partial verticalization model (mix of its own network and a referral network), which has sound performance in cities with strong market dominance, as it is easier to successfully control and work with service providers on clearer and standardized bases. The purchased operation is likely to substantially benefit from the synergies arising out of the integration, especially with respect to (i) administrative expense reduction, (ii) reduced material and equipment costs brought forth by increased scale and improved bargaining power and (iii) implementation of the medical protocols Hapvida has extensively developed. In addition to the synergies in the purchased company’s operation, the successful track record of the Referral Network model in cities with strong dominance should be positive for Hapvida’s operation itself and for its expansion model.

Investments made totaled BRL 5Bi, accounting for an entry multiple of 9x EBITDA 2020 post- synergies (vs. Hapvida’s current multiple of 23x). Given the company’s strong organic growth profile (25% p.a.) and the new possibilities for expansion and consolidation in a new region, we believe the transaction was very positive. Based on our calculations, the transaction resulted in a ~BRL 3 to BRL 4 increase per share to our fair market price. In addition to the amount individually generated by the purchase, the transaction plays a material strategic role, as it helps design a platform strategy for purchases, implementing its winning business model for healthcare and medical protocols, unlocking value for the purchased companies. In order to accelerate this phase of the company, Hapvida has disclosed a share offer that is currently in progress, in order to raise approximately BRL 2.5 Bi, which we believe will be mostly used for future purchases.

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In the end of last year, Vulcabrás purchased the operations and long-term license of the Under Armour brand in Brazil. The company has launched its first locally developed collection this semester, and our channel checks2 indicate acceptance has been good, with likely substantial volume growth. In addition, the Olympikus brand has once again performed well, despite the challenging scenario. However, the effects of inventory liquidation and growing investment on the operation are still reverberating on Under Armour, coupled with the sharp drop in Olympikus sales in Argentina (the company’s distributor is undergoing difficult conditions), are still likely to take their toll on 2Q19 results. Ongoing improvements expected for the second half of 2019, with the decreased effect of the Argentina operations and continued growth in Brazil for both Olympikus and Under Armour should bring stronger results for the company. Shares are currently traded below 9x the expected profit for 2020, and Vulcabras is still deemed one of the cheapest consumption companies in the market.

Sinqia has still delivered exceptional performance and strong growth capacity. Such growth has been backed by (i) steady rhythm of purchases and (ii) considerable rise in its organic growth rate. We believe the company has everything it needs to become the most complete full-banking software solutions platform in Brazil. We still strongly believe in the future investment perspectives.

The first half of 2019 was marked by the purchase of three companies, Atena (Pension Software), ADSPrev (Pension Software) and Softpar (Banking Solutions Software), which have rendered furthered strengthened Sinqa’s market share. The acquisitions totaled BRL 55 M, accounting for a EV/Earnings multiple of 1.6x, at a discount of approximately 56% for Sinqia’s current multiple3. Purchase-based growth is expected to remain one of the pillars supporting the company’s long- term growth.

Sinqia has been taking action since 2017 to accelerate its organic growth, whereby it has expanded its software contracts portfolio by 14.8% in 1Q19. Among others, such measures include (i) incremental product improvements, (ii) changes to the business model, in the pursuit of reducing replacement costs for new clients by subsidizing implementation, (iii) investments in talent acquisition for the sales division and (iv) branding, to increase Sinqia’s market recognition.

Vulcabrás

Sinqia

2 As perceived in conversations with stakeholders: clients, suppliers, competitors and others.

3 Considering the SQIA3 share price of BRL 53.00.

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In line with the profitable investment alternatives the company is currently pursuing (as mentioned in previous reports, in 2019, the Board of Directors approved Project Puma II, which covers the building of two paper plants to produce integrated pulp, in two separate phases). The first plant will produce Kraftliner and White Kraftliner, with production capacity of 450k ton and expected start-up for the 2Q21. This phase will already cover a material portion of the necessary investments for the next phase, which should be another 470k-ton Kraftliner machine. The second phase provides room for the machine to be adapted to produce cards, depending on the 2021 scenario (when construction is due to begin).

The expected return on the full project is quite attractive: 17% leveraged nominal return, with the first phase accounting for 15% and the second phase, for 22%. Project attractiveness stems from certain factors: (a) short-fiber kraftliner innovation with benefits both in cost and in physical properties (for light grammage); (b) synergies with the current operation of the Puma Unit in what concerns the use of the installed administrative and sales structure, production expansion and optimization of other existing lines, together with logistics gains arising out of larger scale and flexibility (providing for a mixed container and bulk operation); (c) global demand on the rise coming from the food and e-commerce markets, in addition to the greater pursuit of sustainable packaging.

As for the pulp cycle, inventory has increased as from the second half of 2018, together with a sharp drop in the pulp price as from 1Q19. Our understanding, in the short term, is that prices will have to meet the industry cost curve to trigger capacity closings and to ensure consumption of the inventory stored at ports and pulp producers. As for the upcoming years, the lack of disclosed material projects and the more predictable nature of global pulp consumption, we believe the asymmetry for the 2020-2022 cycle is likely to be upward.

Klabin’s current valuation, coupled with the delivery of the projects, bring exciting perspectives on the share’s return in the next few years.

Klabin

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Sanepar managed to aprove its tariff readjustment by 12.8% in 2Q19; however, a few days later, the State Accounting Court (TCE) objected to the index and authorized the company to increase it by 8.6%, and the remaining portion was conditional upon a “study” period under the scope of a provisional remedy of undefined duration. As the discussions progressed, we had the chance to strategically increase our Sanepar holding under BRL 70. Sanepar still remains as an investment alternative in a predictable business, with fee increase above inflation contracted for the upcoming years (due to the grant of the latest adjustment for inflation into the above mentioned fee), traded at a far more attractive valuation.

As of June 2019, HIX managed R$ 857 million. In July, the HIX Institucional FIA fund (Local fund for Brazilian Pension Funds which mirrors the HIX Capital FIA and HIX Equities Fund) achieved the BRL 100 Million mark in assets under management.

Sanepar

HIX Capital Update

We Appreciate your trust.

HIX Capital Team

AuM Evolution:

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LETTER TO INVESTORS1st Half of 2019