Trading Russian and Other Emerging Market Equities and their derivatives

china white

Established member
Hey lads and lasses, it is good old CW here :D, sorry i have not been publishing here in a while. I started recently as the Head of International Sales at TransKreditBank Capital ( - Russia's state-owned bank, the Kremlin owns the bank thru Russian Railways - obviously the work load is quite huge, but it is no excuse for not publishing on T2W, I know :( I am obviously focusing strongly on Russian / Kazakh / Baltic equities and their derivatives, traded both domestically in those countries and on London International thru their ADRs/GDRs.

I would not come here if I did not have something potentially interesting for you lot :sneaky:

Let me know if you want to get set-up with our Cyprus subsidiary, KIT Finance Europe, to start trading Russian and other Emerging Market equities (that I mentioned) and their derivatives both domestically and in London. I will then be opening a single account in Cyprus for you that will have 4 currencies in it (EUR, USD, GBP and RUB-Rubles). That account will give you FULL access to RTS, MICEX and FORTS – thus allowing you to trade Russian local stocks (in RUB and USD) and RTS Index futures and options on FORTS. Obviously you will also be able to trade all GDRs/ADRs in London as well - the likes of Gazprom (OGZD LI), LUKOil (LKOD LI), RosNeft (ROSN LI), Evraz (EVR LI), X5 (FIVE LI), Magnit (MGNT LI) etc........

The structure is the following. You open one SINGLE account at our Cyprus subsidiary – KIT Finance Europe. You can then transfer money into that account in any of the 4 currencies - EUR, USD, GBP and RUB, and convert your money from one currency to another within this account. There is a Non-Double-Taxation Treaty in place between Cyprus and Russia, so there will be no tax rock-spiders hiding along the way. From this account you can trade Russian local stocks in Rubles (RUB) on MICEX, in USD on RTS – and have full access to listed derivatives products on FORTS – mainly RTS Index futures and options.

What seems to be the main stumbling block for many here is the impression that Russian Ruble (RUB) is non-deliverable. People tend to think that it is impossible to open a RUB account outside of Russia. But since what we offer is a SINGLE Multi-Currency account, we can have RUB as one of the currencies there. From your perspective – you bypass non-deliverability of RUB, having one single acct. When you need to convert between the currencies, you just give my boys an order to do so within your SINGLE account. The only difference for RUB is that since MICEX is on T+0, you’ll need to have cash in RUB there before you trade. On RTS – where it is T+3 – we will allow you to trade bearing in mind that you will have to convert into USD within 3 days. Pretty much same currency rules for trading RTS Index futures and options on FORTS.

You will not have to deal with any of the Russian banks for money transfers – it can all be done thru JPM e.g.

Here is the link to Cyprus FSA:

stating that our Cyprus subsidiary has the right to conduct its own investment activity and open client accounts.

Fire away any questions that you may have - will be happy to address them. Also - may be this is for Forex discussions - but we have a strong relationship with SwissForexBank MIG Bank - which has some good tax advantages since it is based in Switzerland, and where I will be able to fast-track your application given our strategic relationships there. This is well beyond an equity discussion though, e mail me privately if you need more info on opening an FX trading acct at MIG.

I sincerely hope you are not disappointed with all this info above :cool:

By the way - question that will probably be asked by many:

We are talking some seriously liquid instruments in Russia. Let us e.g. take a look at JUN10 future on Russian RTS Index, traded on FORTS exchange:

Total value traded yesterday, 28 May 2010, including the evening session (where by the way you can trade until midnight Moscow time, i.e. 21:00 London time) was 104 bil Russian Rubles = roughly 2.4 bil Sterling. For comparison JUN10 future on FTSE100 traded in 136,000 contracts yesterday, i.e. roughly 7 bil Sterling. Russian Index is not exactly there but definitely in the same division :)

Let us move to single stocks. Gazprom's DRs (OGZD LI) traded in 265 mil USD yesterday on London International, additionally 390 mil USD worth of local shares of Gazprom traded on MICEX exchange (GAZP RX) changed hands in Moscow bringing the total daily volume traded to roughly 450 mil Pound Sterling. For comparison, British Petroleum (BP/ LN) clocked up 355 mil Sterling yesterday with Royal Dutch Shell (RDSB LN and RDSA NA) - "only" a tad above 100 mil Sterling in London and 143 mil Euros in Amsterdam = total of 223 mil Sterling.

We are talking some serious volumes and liquidity in Russia's RTS Index and selected blue chips. Yes, I will agree, the list of Russia's blue chips is thin in the sense that outside the Top 5 (Gazprom, LUKOil, RosNeft, SberBank and VTB) the liquidity gap to the next most liquid 5 stocks is huge - but there are definitely liquid things you can trade round. Not much less liquid than "Western" blue chips. :)

Russia's individual stocks - BUY LUKOil, Vyksa, AFID. HOLD MASZ and NZHK

Guys - let me know if this adds any value to you lot at all. This is obviously research intended primarily for Portfolio and Asset Managers, however, I am happy to keep you posted as to what's cooking on fundamental stock analysis front:

Some most resent pieces of research on Russia’s individual stocks:

1) LUKoil results: BUY recommendation with 40% upside retained.
2) Vyksa Plant results: Strong story just got stronger, we upgrade from HOLD to BUY with 30% upside.
3) AFID financials: Strong (albeit far from very liquid) story, Convincing BUY with 85% upside.
4) Nuclear Fuel Producers MASZ and NZHK: mixed results, we downgrade both papers to HOLD.

Now in some more detail:

* LUKOil: Lower trading volumes, EBITDA margin to decrease slightly. Lukoil will report 1Q10 US GAAP results on June 2. We expect the company’s results to be on the level of 4Q09 and forecast slight deterioration of profitability on the back of higher taxes (crude oil export duty and MET). We estimate Lukoil’s 1Q10 revenue at $23.4 bn (down by 4% q-o-q), affected by lower trading volumes (we estimate third-party purchases of crude oil and products at $9.4 bn vs. $10.5 bn in 4Q09). We forecast EBITDA margin to decrease slightly – from 15% in 4Q09 to 14% in 1Q10 due to higher taxes other than income and other factors. We estimate EBITDA at $3.2 bn (down by 12% q-o-q). Assuming finance income of $2.2 bn and effective income tax rate of 20%, we forecast net income at $1.8 bn (up by 3% q-o-q).

Tax benefits as the main trigger. Lukoil’s stock has been under pressure due to a number of factors including the lack of growth opportunities in Russia, the decision of Lukoil’s strategic investor – ConocoPhillips – to sell a part of its stake in the company, unclear strategy and dividend policy, etc. In our view, the main trigger behind Lukoil’s performance remains possible exemption from crude oil export duty of its Caspian fields that the Russian government is currently considering. Last month, Lukoil launched its first offshore Caspian field – Yuri Korchagin – and next plans to launch Filanovskoye field. These two fields combined should deliver crude oil output of 8 mn tn p.a. in the medium term (or around 9% of Lukoil’s aggregate domestic production). If granted the crude oil export duty tax breaks, Lukoil may accelerate development of its Caspian resource base.

* Vyksa Pipe Plant: announced strong 1Q10 financial statement due to good operating figures for the same period. In 2010, we expect growth of the pipe (up by 14% y-o-y) and railway wheel (up by 44% y-o-y) production. We estimate large diameter pipes output as the most lucrative business to expand by 11%. We believe these triggers confirm investment attractiveness of Vyksa Pipe. We have reviewed our company’s target price and upgraded our recommendation from HOLD to BUY. We have raised our target price by 34% from $1,300 to $1,740 per share with upside potential of nearly 30%.

* AFID Development: Revenue is on the rise, but the developer is still loss-making. Today the residential and commercial construction company – AFI Development – posted 1Q10 IFRS numbers. Revenue edged up 9% y-o-y to $18.52 mn vs. $17.02 mn in 1Q09. Higher opex negatively impacted operating profit which was down by 33% y-o-y to $7 mn. The company posted net loss of $8.63 mn in 1Q10 while it received net income of $416.85 mn in 1Q09 which included investment asset revaluation after new IFRS 40 standards were applied for the first time.
Financials are irrelevant, projects are on the radar screen. We believe 1Q10 financials do not fully reflect the current market value of AFI Development. Only 7% of commercial properties project generate operating profit. The company’s projects are mainly in a construction stage while they would generate profit only when commissioned. For example, the commission of Mall of Russia with fill rate of 80% is estimated to generate additional $78 mn in 2011 vs. total revenue of $63 in 2009. The launch of such a huge project is capable to change fundamentally the company’s investment appeal. Despite net loss for 1Q10, GRDs are demonstrating positive performance only on the back of the company’s statement that it sticks to its previous plan to complete Mall of Russia in time. We reiterate our BUY recommendation for AFI Development with a TP of $3.0 per GDR.

* Nuclear Fuel Producers MASZ and NZHK: Companies showed mixed 2009 RAS results. Russian nuclear fuel producers – Mashinostroitelny Zavod (MSZ) and Novosibirsk Chemical Concentrates Plant (NCCP) – reported their 2009 financials, which deviated from our expectations. MSZ’s revenue and EBITDA for 2009 came just 0.3% and 1.2% higher than our estimates and reached $375.7 mn and $125.5 mn, respectively. The company’s net income stood at $79.6 mn, which was 22% above our forecast due to non-operating income. On the contrary, NCCP key financial results came below our forecasts: the company’s revenue, EBITDA and net income were 14%-32% less than our projections and achieved $186.4 mn, $80.7 mn and $43.7 mn, respectively. We believe that difference of actual figures vs. our estimates is mostly explained by low NCCP export share in revenue of 5.5% vs. 48.8% for MSZ, taking into account prior year depreciation of Russian ruble.

We expect 1Q10 to be traditionally weak over the year. According to MSZ and NCCP January-March financial results, nuclear fuel producers increased revenue by 11% and 28% on y-o-y basis to $65 mn and $39 mn, respectively. At the same time, we expect 1Q will be traditionally weak over the year for both companies. Thus, MSZ and NCCP net margins declined to 13.3% and 8.5%, respectively in 1Q10 vs. 21.2% and 23.5% for the whole 2009. TVEL subsidiaries kept their net cash positions by the end of March at $17 mn for MSZ and $19 mn for NCCP that maintains their financial stability. We estimate MSZ revenue in 2010 to amount to $443 mn (up by 18% y-o-y) and EBITDA margin to come at 32%. We also expect NCCP revenue of $214 mn (up by 15% y-o-y) and EBITDA margin of 38% this year.

We downgrade our recommendations on MSZ and NCCP to HOLD. Based on released 2009 and 1Q10 financials, we have revised our DCF-models for MSZ and NCCP. According to our estimates, MSZ and NCCP EBITDA margins could slump to 26% and 31%, respectively by 2015. We also slightly decreased WACC from 14.9% to 14.6% for both companies and kept unchanged terminal growth rate at 2.0%. As a result, we derived our new end-2010 TP for MSZ of $325 per share and maintained TP for NCCP at $11 per common share. However, the ordinaries of both nuclear fuel producers posted growth of 28-47% y-t-d and the upside is less than 10%, so we have downgraded our recommendations from BUY to HOLD. We have placed our recommendation for NCCP prefs under review due to investors are incapable to participate in the company’s growth prospects as the charter stipulates the dividends per prefs of only RUR2 per share.

Pls find our research notes attached. Fire away any queries you may have.


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LUKOIL 1Q10 US GAAP review: strong cashflow . June 3, 2010

Strong EBITDA due to lower operating costs and SG&A.

Lukoil released 1Q10 US GAAP financials, which surpassed the market expectations on EBITDA and net income lines. Revenue was roughly on the 4Q09 level and EBITDA remained practically unchanged q-o-q, in spite of higher taxes. Revenue was $23,902 mn (in line with the market expectations and our forecast). EBITDA at $3,684 mn was 13% above our estimates (6% above the consensus) primarily due to lower than expected production costs. Lukoil’s operating expenses were down by 16% q-o-q, driven by a decline in the category “other operating expenses” (down by some $300 mn from 4Q09). Selling, general and administrative (SG&A) expenses were also below our expectations, down by 12% q-o-q. Non-controllable cost items – taxes other than income (export duty, MET and excise tax) and transportation costs – were on the rise, up by 15% and 9% q-o-q, respectively. Lukoil considers continuously rising transportation tariffs as the main threat to its profit margins going forward. Overall, Lukoil’s total operating costs declined by 3% q-o-q (to $21,251 mn), while we forecasted a 1% increase. EBITDA margin remained at the 4Q09 level of 15%. Net income at $2,053 mn (15% above our forecast and 10% above the consensus), up by 19% q-o-q, was also affected by lower currency loss ($40 mn vs. $183 mn in 4Q09).


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OGK-3: RUSIA Petroleum bankruptcy may lead to significant losses in 2010

Serious implications are likely.

If RUSIA Petroleum goes bankrupt than within the most pessimistic scenario, in 2010 OGK-3 would be forced to find a mechanism to pay off this amount in addition to $576 mn write-offs which may lead to major losses. The most likely option is debt increasing or additional share issue in favor of the major shareholder – Norilsk Nickel which currently owns 61% of the generation company. Since OGK-3 acquired non-core assets from Interros, the conflict between the shareholders of Norilsk Nickel and Interros may arise. It should be noted that in 1Q10, OGK-3 received RUR932.2 mn of net loss due foreign exchange loss.


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Russia's individual stocks - SEVERSTAL one of my top picks, BUY SBER Ords and Prefs.

Pls find attached our 2 most recent research notes on Severstal and Sberbank:

1) Severstal – alongside Magnit and X5 this paper is one of my top picks now.
We have revised Severstal’s fair price taken into account the company’s 1Q10 financials and recent trends on key markets. We have increased our price forecasts for steel and raw materials for next few years and excluded Severstal European division, Lucchini, from our model as Severstal put Lucchini on sale and did not consolidate it in 1Q10 financial statement. As positive triggers for Severstal we point to growing gold mining segment and hidden potential of Severstal North America. We expect SNA to turn out to be profitable in 2011. However, if it comes earlier, the market’s response will be strong positive. Our new Severstal’s fair price is $15.5 with upside potential of 46%. We STRONGLY recommend to BUY the stock WITH A 46% UPSIDE!

2) Sberbank published its 1Q10 IFRS results, which came out in line with our expectations on bottom line and surprised positively on revenues. The bank showed strong efficiency ratios, while return on equity exceeded 20%. Loan growth is still a weak point, and additional profit came from securities portfolio expansion.


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Some interesting stuff there, spasibo for the heads up ;)

No worries, my pleasure :)

Are you set-up to trade on Russian exchanges (in Rubles on MICEX, Dollars on RTS and futures on RTS Index on FORTS)? Let me know if you need any help there - as I mentioned above we can create a multi-currency account for you at our subsidiary in Cyprus whereby you will get full access to all those exchanges. Obviously tax considerations are the beautiful part of such an account, since Cyprus and Russia have a Double Non-Taxation Treaty and the tax braket in Cyprus is essentially NAUGHT.

In no way our Cyprus subsidiary will be deducting taxes according to your tax domicile. You make a million on this acct you get to keep that million. Obviously it is your responsibility to reflect that income in your Tax Returns in the jurisdiction where you are domiciled for tax. US Nationals e.g. have global taxation and have to pay at least Federal Taxes on any such income in Cyprus. For us in the UK it is far more relaxed, even though it is slowly getting closer to global taxation model :mad: In any case - what is important here - is that our Cyprus subsidiary where you will have that single trading account WILL NOT be deducting anything from your profits depending on your tax domicile.

let me know if I can be of further help.
Raspadskaya (RASP): current efficiency, future recovery . June 16, 2010

We have revised our fair price for Raspadskaya taken into account recent explosions at Raspadskaya coal mine which is the core asset of the company. Also we have upgraded our coking coal prices forecast. As a result, we have increased our fair price by 38% from $5.5 to $7.6 per share with upside potential of 80%. We recommend BUY the stock which is a long-term investment story.

I will add a personal comment here. A story with a tragedy already priced-in, where your upside is 80%, and your worst-case scenario (when the mine never recovers AND coal price goes down) is only 9% downside – is by all means a compelling story :cool:

I am getting asked - if I was to buy RASP ....what would I sell against it?

1) Belon BLNG, good company but we think RASP's growth potential is by far higher than BLNG's as RASP hit the bottom with tragedy priced-in already


2) KZRU whose main stakeholder is Norilsk - highly untransparent company, meaning KZRU's corporate risks are very high


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TAX REBATES - negative implications for ROSNEFT, Globally - for Russia.

Very quickly on negative implications for RosNeft here:

I mentioned in my today’s morning comment – see my latest post under "Indices" - that there is a massive paradigm shift that is happening as a result of BP’s tragedy. The Americans are quite used to rattling their weapons threatening to reduce US dependence on foreign imports by increasing domestic oil production. They have been using that rattling as a fantastic bargaining point with world’s oil exporting nations for quite some time now. Now - that strategy is at serious risk with little prospect of opening other areas around the US to offshore drilling. That bargaining advantage is GONE for any foreseeable future – and this is WHAT REALLY PISSES AMERICANS OFF in regard to BP’s spew.

ANY OIL-EXPORTING EM COUNTRY NOW HAS A CHANCE FOR GLORIOUS TIMES :). Where international money will end up flowing (Brasil, Russia, Middle East etc…..) will depend massively on tax regimes in respective oil-producing countries.

We will be coming out with our Strategy for Russia’ Oil&Gas sector shortly. For now - pls find attached here our today’s Daily where negative implications for RosNeft are sketched up. It is not even the reduction of tax rebates for Vankor, it is the fact that those rebates may be lifted altogether if its rate of return exceed 15% WHICH IS A VERY LOW THRESHOLD for a company of RosNeft’s variety.

The problem that will arise is HOW on Earth will the pipe to China get filled if RosNeft is entirely de-motivated to explore Vankor. One gloomy option is RosNeft becoming another Gazprom by the way it is run. We all know what sort of lid that placed on Gazprom’s share price. ON A BIGGER SCALE OF EVENTS, this may well lead to international money going to OTHER oil-exporting EMs.

This may take long to play out, still globally – this may be very negative for Russia……


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PIK LI - strong sales, cash to hand.

We all know that developers are just HIGH BETA RECOVERY BET. PIK Group’s numbers (see note attached) mean that the company is indeed sitting on a pile of cash now. And with the price mauled over the past 2 months, PIK starts looking dirt cheap.

Some numbers here:

Six-fold growth of contracted retail volumes. Today PIK Group has disclosed the preliminary data on new home retail presales for 1H10. Their total amount has grown by 531% y-o-y to RUR6.96 bn ($231 mn). For the reporting period the company has sold 94,207 sqm of the residential real estate that is 456% higher as compared to 1H09. Solid growth of consumer activity was evidenced in 2Q10 when sales surged by 700% y-o-y vs. 388% in 1Q10. It is necessary to notice that these results reflect only new home retail presales by PIK Group, and do not include other types of sales, such as sales of social residential for the state needs, wholesales and other.

Moscow Region is restoring faster, demand for the mortgage is on the rise. The demand rebound for the residential real estate is concentrated mainly in Moscow and Moscow Region. These two regions accounted for 87% of total sales of PIK Group in 1H10. The average sales have reached 15.1 apartments per day in 1H10, up by 504% y-o-y. The launch of mortgage program in June, 2010, which was jointly developed by PIK Group and Gazprombank (interest rate at 13%, initial contribution of 20%, maturity up to 25 years), positively impact growth sales. The share of mortgage transactions of residential acquisition increased by 9% in June, 2010 vs. 3% a year ago.

We keep moderately positive view. PIK Group has shown strong sales of residential in 1H10 which have surpassed our expectations. We keep moderately positive view on the company. Despite the fundamental reasons behind sustainable demand for residential in Russia, instability of financial and currency markets over the last few months indicates that fast sector recovery is unlikely. We also do not rule out negative dynamics of square meter price in 2H10. Our end-2010 target price for PIK Group is $7.2 per share.


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X5 Retail Group (FIVE LI): 2Q10 retail sales: traffic likes low prices

Discounters remain on the uptrend. On Friday, X5 Retail Group (FIVE LI) has disclosed its 2Q10 and 1H10 trading update, which shows that company’s pricing policy (price discounts on target assortment), aimed at increasing consumer traffic, still works, though at the cost of average basket. In 2Q10 X5`s net retail sales increased by 18% y-o-y in ruble terms (vs. 20% y-o-y growth in 1Q10), which consists of 4% y-o-y growth in LFL sales, 11% y-o-y growth from organic selling space expansion and 3% y-o-y sales growth contributed by Paterson stores (acquired in 3Q09 and already fully integrated). Discounters continue to win (11% y-o-y LFL sales growth in 2Q10), hypermarkets segment demonstrated significant improvement in traffic with LFL sales growth returned to a positive area (+2% y-o-y in 2Q10). Supermarkets remain the weakest performer (a 8% decrease y-o-y in LFL sales), though the company has implemented more aggressive pricing policy (20% discounts on the key assortment) in June, thus we expect to see the favorable effect on traffic in 3Q10.

We re-iterate our TP for X5 at $50 with a 44% upside.


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Strategy 2H2010: Score twice before you cut once. July 12, 2010

I am glad to be in a position to send you our latest Strategy note for 2H2010 that just came out. Pls find both Russian and English versions attached. You will find there both usual suspects (Gazprom – fundamentally undervalued, RosNeft – ruined by tax changes but still dirt cheap etc…) and, equally, unusual suspects (Raspadskaya – where all risks seem to be already priced in; SeverStal – the most attaractive play in steel sector; GlobalTrans – lucrative infrastructure play etc…) along with some compelling dividend stories of TNK-BP variety.

A big piece of research which I am hoping you will find useful. Pls fire away any questions or comments that you may have.

Here it is:

Strategy 2H2010

Score twice before you cut once

Choose Dollar over Ruble

Bearing in mind the existing risks, we bet on less risky US dollar, which may take the leading position among investment assets in 2H10, while ruble as well as other EM currencies will be under pressure. Our view on ruble may change, function of the oil price dynamics.

Choose Eurobonds over Ruble Bonds

The risks of ruble devaluation diminish attractiveness of the ruble-denominated bonds, which rallied over the last 12 months. We recommend choosing short- and medium-term Eurobonds of high-quality issuers. Investors who need to have ruble assets in their portfolio would be better off by choosing new placements with floating coupon rates.

Choose Gold over Oil

In 1H10, a period of high volatility, gold was a safe haven. Going forward the demand for gold should be supported by inflation risks. Oil remains sensitive to the market trend that determines higher volatility and uncertainty.

Choose Soya and Corn over Sugar

Lower than expected crops, as well as growing demand from China, should support soya and corn prices. We expect sugar price to continue the downward trend.

Choose Return over Risks

Excessive liquidity on the market will continue to support equities, but investors have learnt to see the risks and now should choose safe plays. We recommend betting on attractive fundamental value stories, avoiding risky stocks.

Choose Play on recovery over Highly regulated industries

We recommend choosing sectors which are best positioned to capitalize on the economic recovery, growing consumption and long-term investment demand. Meanwhile, we expect sectors with high degree of government involvement to be under pressure due to uncertainty in regulation.

Choose Banks, Retail, Infrastructure over Oil and Utilities

Among the Russian stocks we recommend banking, retail and infrastructure plays, which offer 30-50% upside potential driven by economic recovery and domestic demand. We expect weaker returns in oil and gas and utilities names on the back of uncertainty in regulation (possible tax hikes and tariff changes as well as delays in RAB schedule).

Enjoy! :)


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PIK Group: Сash from housing sales grew by 404% in 1H10 . July 28, 2010

Interesting Russian developer with MICEX, RTS and London International listing - which has all the chances of becoming 1.5 Tier - at least ("blueish chip" as I call it):

Steady sales growth. Thanks to better macroeconomic environment, increase in real disposable incomes and lower mortgage rates, PIK Group has staged impressive growth of cash collections from housing sales in 1H10. Based on given unaudited management accounts, PIK Group received RUR8.7 bn ($287 mn) from residential real estate sales in 1H10 that is five-fold higher as compared to 1H09. More than half of cash collections (51%) accounted for Moscow market, the remaining part of sales was provided by regions, including RUR3.6 bn from Moscow region. Cash collections from construction and other services declined by 5% to RUR4.2 bn. Сash collections in 1H10 totaled RUR12.8 bn ($425 mn), up by 111% y-o-y. Let us remind that according to PIK’s account standards, cash collections will be recognized as sales revenue once the residential real estate properties have been completed and committed.

Good news for investors. In the beginning of 2010 PIK Group declared the change of its development strategy, focusing on building and sale of residential real estate in Moscow and Moscow region, where demand for housing is restoring faster than in other parts of Russia. Strategic changes came as a right and timely step of the company’s development. So, in first half of 2010 the number of transactions of residential real estate in Moscow exceeded not only the level of 2009 (up by 76%), but also the pre-crisis level of 2008 (up by 32%) that was positively reflected in sales of PIK. It is worth mentioning that PIK Group sales in 1H10 stood at 58% below the corresponding figure of 2008 that is connected with the reduction of construction volumes on fears concerning rates of demand recovery, as well as with high debt ($1.27 bn according to 2009 numbers). Impressive sales in 1H10 and rates of demand rebound for residential real estate encourage the company. PIK Group confirms its intentions to complete 1 mn sqm of the residential real estate in 2010 (in 2008 and in 2009 over 0.8 mn and 0.9 mn sqm have been completed accordingly) and plans to direct about RUR10 bn (RUB3.0 bn has been already received) to project financing this year within the obtained credit lines. We believe that the release of bright sales results for 1H10 will raise investors’ interest towards the company.

We keep our BUY recommendation for PIK Group with the end-2010 target price of $7.2 per share.


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Couple of trading ideas in single stocks.

A couple of trading ideas:

1. Speculative BUY for Ulan Ude Avia (UUAZ, TP $1.8, upside 39%) vs. Kazan Helicopter (KHEL, TP $2.2, upside 20%)
Today KHEL and UUAZ posted financials for 2Q10 net income q-o-q changes:

- Thus, UUAZ posted net income of RUR2.1bn for 2Q10, which implies 4 times increase q-o-q;

- KHEL posted net income of RUR352 mn for 2Q10 – a 3 times decrease q-o-q.

Companies’ 1H10 net income look strong especially vs. 2009 figures:

- Thus UUAZ’s net income for January-June 2010 is already 4% higher than for whole 2009;

- As for KHEL it is already 91% of the company’s net income for 2009.

At the end of last week shares of KHEL rallied by 10%, while UUAZ shares advanced less 5%. Taking into account reported companies’ net income for 2Q10 we see UUAZ shares to outperform KHEL in short-term.

2. Playing spread convergence:

Over the past two weeks, LSR Group (LSRG LI) GDRs added 28%. As a result, local shares discount to GDRs increased from 23% to 38%. We recommend playing on the spread reduction between local and foreign stock exchanges and BUY local shares of LSR Group (LSRG RU). Our end-2010 target price is $11.4 per GDR and $57 per local share suggesting 97% upside from current levels.

Good trading to you!
In view of the current “separation of non-core assets” by Russian Railway, it is interesting to take a closer look at the only listed player in sector so far – GlobalTrans. You will also find in our research note - attached - some overview of the sector as a whole.

We initiate coverage of Globaltrans listed in London (GLTR LI) with the 12 months target price of $18.8 and a BUY recommendation. We consider Globaltrans shares as a perfect theme to invest into transportation segment and FOR NOW (!) he only opportunity to buy liquid stocks of a public Russian rail company. Fast recovery of transportation segment together with strong operating and financial performance of the company determine our positive view on Globaltrans. Relatively new balanced rolling stock, developed destination management and strong relations with the key customers provide competitive advantages of the company. Globaltrans targets to increase its market share through M&A activity and optimization of its routes that makes the stock attractive for investors.

* Globaltrans is the largest private railway operator by the number of owned fleet. The primary business of the Group is freight rail transportation and operation of rolling stock. The company’s business is well-balanced and diversified between different segments of Russian economy.

* Balanced rolling stock and optimal routing increase return. Exposure to the transportation of oil and oil products, as well as to freight of cyclical goods (metals) make Globaltrans immune to the economic downturn and enable to gain on the back of economic recovery.

* Economic recovery drives up volumes and efficiency. Total freight rail turnover in Russian grew by 13.8% in 1H10 thanks to recovery in metal segment. Further growth of import volumes and revival in construction segment will help to increase volumes and improve efficiency ratios of the Group.

* Comfortable level of debt gives scope for further growth. As of the end of 2009, Net Debt to EBITDA ratio was at comfortable level of 1.0. In case of interesting M&A deals the company has an opportunity to attract financing on the market.

* M&A deals to be a strong driver. Globaltrans is active in M&A deals aiming at expansion of its fleet and transportation routes. The company regularly monitors the market and we expect to see more deals in the coming future. Liberalization of locomotive segment will add value to the company’s business in a long term.

* Our forecast implies net revenue growth at CAGR 13% in 2010-2014 with adj.EBITDA margin at healthy 41-46%. Economic recovery and optimization of routing together with advanced management and fleet expansion determine higher price per trip, larger turnover volumes and reduce empty run costs.

* Our DCF valuation implies 12 months fair value at $18.8 per GDR that means a 23% upside potential from the current market price and a BUY recommendation. Globaltrans’ GDRs are traded at a 22% discount to its EM peers and in line with its DM peers on EV/EBITDA 2009-2010E. In 2009 EBITDA margin amounted to 41.2% and we expect it at healthy 41-46% in 2010-2014 that together with strong prospects of business development make the stock attractive as a mid- or long-term investment. Publication of 1H10 results and possible M&A deals may become short-term drivers.

As always – fire away any questions you may have regarding GlobalTrans or the current “separation of assets” by Russian Railway, where we - as a bank owned by Russian Railway and enjoying certain exclusivity in transport/infrastructure/integral logistics sector - are fully involved.


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Russian Single Stocks and DRs - 03.09.2010

Good morning! Probably a sour note – at least for Global EM Oils, apart from Brasil.

How much Pepsi are you gonna drink after you just have a 2-litre bottle of Coke? Petrobras agreed to pay the Brazilian government $42.5 billion in new stock for the right to develop 5 billion barrels of offshore oil reserves. The value set for the reserves will determine how much new stock Petrobras must offer minority investors in a related public offering to raise funds for a $224 billion plan to develop offshore fields and boost refinery capacity.

Of course you will argue that the Brasilian broad market (trading at pre-crisis highs and relatively way ahead of Petrobras) will find a way to get out of other equities and eventually snap up that chunk. That will be happening undoubtedly. However, you being a global fund investing in Oil&Gas, what is it telling you? You cannot avoid having Petrobras in your global portfolio, and most likely there will be an outflow of funds from other EMs (Russia included) into Brasil. Add to that consistently stronger BETAs of Brasil against other EMs, and you will probably get the broad picture

We spoke about divergence of G7 and EM markets in our previous comments. What may be happening now is divergence of major EMs one from another.

Another broad-based buying effort sent US stocks through resistance to book their second straight gain ahead of the monthly nonfarm payrolls report. DO NOT FOLLOW THEM!


1. ***ANGLO AMERICAN SEEKS COKING COAL ASSETS IN RUSSIA*** is looking for assets with annual output of as much as 20 million metric tons! No such assets in Russia with such annual output! Raspadskaya (RASP) before the accident produced some ~ 13 mln tons; Mechel (MTL US) produces ~ 10 mln tons (in perspective 30 mln tons – if we include Elga coal deposit).

2. Evraz Group (EVR LI - HOLD) announced 1H10 financial statement under IFRS yesterday. In our opinion, the company showed neutral results. We have revised our valuation of Evraz Group taking into account 1H10 financials and tendencies on the steel and raw materials markets. We believe that the company’s leverage risks remain high. At the same time, medium-term prospect for the long products segment does not look optimistic. We upgraded our Evraz Group’s target price by 28% to $32.1 per GDR but issued a HOLD recommendation. We view strong prices of raw materials and iron ore as a driver for Evraz Group since the company is integrated into coking coal and iron ore production. However, investment attractiveness of Evraz Group’s GDR remains under question on the back of high debt leverage and vague medium-term outlook for rolled steel products.

3. Gazprom’s (GAZP) 1Q10 IFRS results: strong performance. POSITIVE. In our view, Gazprom’s strong 1Q10 results should support performance of the stock. Pressure from European customers, watch for Yamal news. The main risk for Gazprom, in our view, remains pressure from the European customers to revise terms of the former’s long-term contracts…During the conference call top management rocked saying…”third-part gas purchases were lower primarily due to lower prices and volumes”... Makes me wonder - what other factors there could be?

4. Novatek (NVTK) to pay 1H10 dividend. NEUTRAL. Investors will get RUR 1.5/ordinary share ($0.049/share at the current exchange rate), or RUR 15.0/GDR ($0.49/GDR). The record will be closed on 9 September. The implied current dividend yield is 0.7%.

5. VTB (VTBR - HOLD) 2Q10 IFRS results: some grounds for price revision. We consider the numbers as neutral. During the conference-call management confirmed its forecasts of 2010 earnings and loan growth with more optimistic outlook on margins. Taking into account the published numbers and stronger forecasts we upgraded our TP of VТB shares by 12% to RUR0.087 ($5.95 per GDR). HOLD recommendation is reiterated.

6. Globaltrans’ (GLTR LI - BUY) 1H10 financials preview. We expect strong financial results and the improvement of profitability over 1H10. On 7 September Globaltrans is set to disclose its 1H10 operating and financial results and hold conference-call. Positive view on the stock maintained. We think that during conference-call the company’s management will provide guidance for further railcar park expansion in 2H10 and current price environment. We also expect to get more details regarding the company’s ambitions to purchase a 50% stake in Freight Two company. We reiterate our positive view on the company and confirmed our BUY recommendation on Globaltrans’ GDR, which trade with a discount to its peers at 11.5% and 34% on 2010E EV/EBITDA and P/E, respectively.

7. AVTOVAZ (AVAZ) will place additional common share issue at RUR40.24 per share. NEUTRAL. Valuation of 50% above market price is unlikely to be followed by buy-out offer. According to Reuters, AVTOVAZ’ shareholders will consider a deal to sell of 108,543,000 common shares to Renault at RUR40.24/share. As it was already reported, French auto producer will pay with technologies and equipment for these shares. Interfax reported yesterday other key parameters of AVTOVAZ additional common share issue:

· The car maker will announce a placement of 435,173,411 common shares under close subscription;

· Renault will purchase 108,543,355 common shares (24.94% of announced amount) paying RUR4.4 bn;

· Troika Dialog and other shareholders are expected to purchase 11,584,355 common shares (2.7% vs. possible 50% amount).

· Russian Technologies will purchase 109,228,526 common shares due to priority rights (25.1%) and also buy shares unclaimed by other shareholders up to 205,547,195 common shares (47.2%) paying totally about RUR12.7 bn;

As a result, AVTOVAZ increases the number of common share by 31.3% to 1,823 mn, Russian Technologies boost its stake of common shares up to 36.4% vs. current 25.1%, Renault keeps its 25% stake, while Troika Dialog and minorities’ shares are diluted to about 19%–20% each from 25%. The main point that Russian Technologies will have no obligation to make buy-out offer at RUR40.24 per share according to Russian law, which stipulates an exception to do it if any shareholder has more than 30% through priority rights. That is why we believe that the car maker’s minority shares will unlikely to be purchased by Russian Technologies at RUR40.24/share that is 54% higher than Thursday close price.

8. AFI Development (AFID LI - BUY) secured $74 mn project loan. POSITIVE. AFI Development announced that it has obtained a 5-year $74 mln project loan from Sberbank. The loan will be in rubles and will be used to complete construction works at the Ozerkovskaya Embankment Project (Phase III), located within the prestigious business area of Zamoskvorechie. The loan carries an initial interest rate of 13% and following project completion, expected in 2011, the interest rate will be reduced to 11.75%. We positively value activity of the company and keep our BUY recommendation for AFI Development’s shares with a target price $1.5 per share.

9. OGK-6 (OGKF) posted 1H10 IFRS damp financials. NEGATIVE.


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