The Russian Equity Market:

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Nov 18, 2013 (3 years and 7 months ago)

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The Russian Equity Market:

Raising the Bar in 2003:


Strong Foundations; Heading Forward?

April 23, 2003





Boston, Mass






Timothy Seymour, Managing Director, Troika Dialog Group
/President, Troika Dialog USA

Overview:


Where are we? Recent events as evidence of change


Troika Dialog


Corporate Governance/Market infrastructure


A look back;


Key events to watch


Economic viability for growth


Can the economy broaden on weak financial system?


Sectors for growth


Market Valuations


Investment thoughts


Bar Has Been Raised Last 2 weeks:


Yukos/Sibneft


Dividend pmts soar( LUK, Rostel, Yukos)


MTS deal fair and transparent; controlling stake


Transneft capitulates


Market forces lead change (Surgut?)



EXOGENOUS FACTORS KEY…BUT RUSSIA GROWS INTERNALLY

Practicing what we Preach


1991


Among the first in the market Troika gets the license,



to operate as a broker


1992


Among first in the market Troika converts to GAAP



PWC is our auditor since 1998 until now


1993
-

1997

Troika actively participates and leads in the




building of Russia's financial market infrastructure



1998


Troika honored all of its commercial obligations




Troika helped launch the Coordination Center for



Investor

Protection




Troika began publishing weekly CG updates




Troika is among the founding members of 2015 Club


1999


The 1st CG overview report in Russia



Troika is among the founding members of the




Investor Protection Association

Building a Business on Good Governance



2000


Troika is among the founding members

of the WEF’s task



force “Changing Corporate Governance in Russia”


2001


The Perception and Cost of Corporate





Governance Risk survey for WEF, presented at the annual



meeting in Davos


2002



Troika’s president becomes a chair of the RSPP Corporate



governance Committee Management buyout


2003



Troika’s president recently elected a member of the



National Council for Corporate Governance

Role of Troika Dialog as a “Market Participant”


Key contributor in creation of NAUFOR


Co
-
founder RTS (Russian Trading System)


Market infrastructure support: DCC


helped set up exchanges


helped set up rules of trade


helped set up settlement and safekeeping systems


worked with international assistance organizations


advised government and regulators

These structures and standards survived intact the
Banking Crisis of 1998



Troika Dialog USA, Inc.



Est. 1999, 1st Russian Broker to receive license after crisis


NASD Broker/Dealer


SEC governed


Leading market share in listed and OTC Equity/Debt Securities in US
to institutional investors among “local brokers”


2
-
way flow of capital between US
-
Russia; distribution for key
Investment Banking Projects and Asset Management (Private Equity,
US Mutual fund, VC)

Corporate Governance…changing


Recent Milestones


Hurdles


Market infrastructure: 1991
-
2003

2003 milestones


FCSM to regulate price manipulation in the market


The FCSM together with the RSPP launched the National
Council for Corporate Governance


Consolidation in the telecommunication industry


The natural monopoly reorganization:


The electricity reform program is enacted on the legal level


Government to proceed to reorganization of the gas sector


2003 milestones:


State tightens control over largest domestic companies


Domestic investor base to grow


FCSM delegates some supervisory functions to exchanges


FCSM to tackle the price manipulation in the stock market


Reforms of natural monopolies:



Telecommunication sector consolidates


Electricity Law adopted



CalPERS’ current Permissible Country List (Equity).

“Prohibited for investment” List

China

Colombia

Egypt

India

Indonesia

Jordan

Kenya

Malaysia

Morocco

Pakistan

Philippines

Russia

Slovakia

Sri Lanka

Venezuela

Zimbabwe

Source:
Patient Pension Capital by William Dale Crist, Ph.D and Kayla J. Gillan, J.D.

http://www.calpers
-
governance.org/viewpoint/speeches/crist.asp



CalPERS' Permissible Country Program

Source:
Patient Pension Capital by William Dale Crist, Ph.D and Kayla J. Gillan, J.D.

http://www.calpers
-
governance.org/viewpoint/speeches/crist.asp


Category

Assigned Weight, %

1

Political Risk

10

2

Market Liquidity/Volatility

15

3

Country Development

10

4

Market Regulation/Legal System/Investor Protection

20

5

Investment Restrictions

15

6

Settlement Proficiency

15

7

Transaction Costs

5

8

Technological Growth

10

9

Social Issues


N/a

Challenges that remain


Dividend legislation is stalled in its track


Voting treasury stock


Affiliated party regulation


M&A regulation

Accounting and audit reform in Russia


The government to discuss the accounting reform
program within the next six months


Accounting dodges: RUSSIA and US


“Accounting” dangers to shareholders



Russia



US



Poor accounting standards



YES



NO



Stock option plans



NO



YES



Loans to directors and top executives



NO



YES



Auditors provide additional non
-
audit service



YES



YES



Off
-
balance liabilities



YES



YES



Next steps to watch


UES reform is underway


UES to discuss 5+5 strategy program


Deregulation postponed?


Gazprom is next in line


Economics Ministry to submit third draft of gas industry reform program


No real changes until post
-
presidential election


Capex transparency?


Liberalization of shares?

Russian Economy in 2003:

-
on the brink of an intense

structural transformation?


2003
1999
2002
2001
2000
1997
1996
1995
1998
1994
-15
-10
-5
0
5
10
15
0
2
4
6
8
10
12
14
16
18
20
Current Account (% of GDP)
Growth (%)
Moving into
this area?
Diversified economy and developed financial system should remove dependence
on current account (i.e. oil price)


Incomes rose rapidly and, with them, domestic demand. However, Russian
companies were unable to increase production accordingly.


Demand shifted toward more expensive and higher
-
quality products,
resulting in higher imports.


However, consumer services (which cannot be imported) are likely to have
grown much faster than the 0.4% growth officially reported for 2002.


An expansion in small businesses was recorded in 2002, mostly in the
service sector.

To some extent, the economy became healthier and government efforts to
de
-
regulate did bring results. However, a great deal still needs to be done.


Financial sector reform is still on the agenda.

Themes:

Growth rates (y
-
o
-
y) slowed on back of

continued strength in oil price…


100

101

102

103

104

105

106

107

1Q01

2Q01

3Q01

4Q01

1Q02

2Q02

3Q02

4Q02

GDP

Five basic sectors

Industrial output



75

80

85

90

95

100

Jan
-
01

Jul
-
01

Jan
-
02

Jul
-
02

2

3

4

5

6

7

$
bln

Import, $ bln

Real effective exchange rate (Jan
-
01=100%)


Effective real exchange rate even depreciated slightly

(by 1.7%) in 2002, while imports grew 12.7%


100

110

120

130

140

150

1999

2000

2001

2002

2003e

Investments

Real effective exchange
rate

Ruble appreciates substantially: harmful for “old” economy, but may stimulate
economic restructuring


80

90

100

110

120

130

140

150

160

170

180

1998

1999

2000

2001

2002

2003

Non
-
interest federal expenditures

GDP


In real terms non
-
interest spending grew much faster than GDP, contributing to
inefficient allocation of resources...


100

102

104

106

108

110

112

114

01/01/02

04/01/02

07/01/02

10/01/02

01/01/03

37

39

41

43

45

47

49

51

Public debt

Private debt


Domestic borrowing limited by

low monetization of economy


0

5

10

15

20

25

30

2001

2002

2003

1
-
day MIACR

Deposit rate

Credit rate

Refinancing rate


Due to oil windfalls, money market

interest rates are well below refinancing rate

Russian Market:


Oils have re
-
rated


What sectors lag


Where is growth to come from?

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

0

100

200

300

400

500

600

Russian Oils Re
-
rate

Rest of Russia Re
-
rates

Source: DATASTREAM

RTS: From Oils and Beyond

Non
-
Oil Sectors Are at Discount to
Their Global Peers

Ratio of Russian sector EV/EBITDA ‘03 to its GEM average

Source: Troika Dialog, Bloomberg

44%


24%


25%


26%


35%


46%


61%


36%


0.8


0.6


0.4


0.2

0

0.2

0.4

0.6

Oil and Gas

Telecoms

Consumer

Manufacturing

Banking

Metals

Transport

Electricity

Domestic consumption


key growth
driver for economy


Industries targeting domestic
consumption lead economic growth


Growth drivers:


Change in consumption patterns
toward branded products


6
-
7% growth in private incomes
over next three years


Consolidation and new quality
standards


FDI growth

Food industry remains a growth leader

Source: State Statistics Committee, Troika Dialog

-15%
-10%
-5%
0%
5%
10%
15%
20%
1996
1997
1998
1999
2000
2001
2002
2003E
2004F
Food industry
GDP growth
Consumer Sector: Trending beyond
2003


Consumer Sector unlikely to total
more than 10% of total Russian
market cap.


2003
-
2005 remain industrial export
oriented


Growth financed by external debt
and export revenue, not banking
sector loans


Consumer Sector will see greater
sophistication in brand awareness,;
consumers will demand improved
products and better packaging

70.0
80.0
90.0
100.0
110.0
120.0
130.0
140.0
1996
1997
1998
1999
2000
2001
2002
Real disposable income
Retail turnover
Food production
Retail and food industries have got
most benefits from economy growth

Investment opportunities in consumer
and financial sectors

Driver


Industry
consolidation by
global players




Structural changes
in economy




Emerging of new
domestic leaders



How to play


Wimm
-
Bill
-
Dann.


Upside to estimated acquisition price 50%


Danone is potential acquirer




Sberbank


Liberalization of trading with banking stock


Improved environment on reform of banking monitoring and
implementation of retail deposit insurance


Incoming IPOs


Banks: MDM, Alfa
-
bank


Retail: Pyaterochka Seventh Continent, Perekrestok

New consumer good stocks provide
extensive growth of the market


Industry is on the earlier stage of
consolidation


Current growth is financed by own
profit and direct investors


Several companies will reach
critical size to go public in 2004


Most IPO’s should be among retail
companies


Low penetration promises high
growth potential


Chains account 12% of total
turnover in Russia vs. over 30% in
eastern Europe


Low attractiveness as targets for
global players

Share of consumer good industries in 2002
FDI

23,0%

Share of consumer good companies in
market capitalization

1,7%

Pyaterochka

Retail

Sales

$
500
mln

Perekrestok

Retail

Sales

$
320
mln

M
-
video

Retail
(electronics)

Sales

$
365
mln

Kalina

Cosmetics

Sales

$
130 млн

Expected IPO’s

2004


05

What to expect in next 2
-
3 years


IPO calendar still light through 2004 as companies look to raise
valuations in line with macro re
-
rating before selling out…


…Companies will be leveraging up


Gazprom is the bellwether and will prove best liquid performer in next
18months


Russia will go investment grade late 2004


Domestic flow of funds will remain driver of valuations and should
provide technical out performance foundation.


Watch out for “ Chaebolization” effect