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MISSION: PROFITABLE. Emerging Financial Markets Professor JianPing Mei. Presentation April 30 th , 2003. APAAC. A ditya Dugar P avel Nazarov A lex Reznik A lex Shaoulpour C hristine Nilsson. Russia. Factoring. AGENDA. Valuation. Opportunity. Russia Macroeconomic Outlook - PowerPoint PPT Presentation


<ul><li><p>MISSION: PROFITABLE</p></li><li><p>Presentation April 30th, 2003Emerging Financial Markets Professor JianPing MeiAPAACAditya DugarPavel NazarovAlex ReznikAlex Shaoulpour Christine Nilsson</p></li><li><p>AGENDARussiaFactoringValuationOpportunity</p></li><li><p>GDP GROWTH Source: CBRAPAAC</p></li><li><p>CAPITAL OUTFLOW/FOREIGN DIRECT INVESTMENTSource: CBRCapital flight FDIAPAAC</p></li><li><p>INFLATION AND LABOUR COSTSSource: CBRConsumer Price ChangePercentageLabor costsUSD per hourAPAAC</p></li><li><p>CURRENT POLITICAL ENVIRONMENTMr. Yeltsin becomes the 1st President of Russia. New Constitution and democratic parliament are adopted199094959697992000010220039893929119911999 Political Instability, Rapid Succession of cabinetsMarch 2000Mr. Putin wins election 53% of vote 9/11 drastic change in foreign policy towards Western directionRussian financial crisisAPAAC</p></li><li><p>POLITICAL ACCOMPLISHMENTS AND CHALLENGES AHEADAccomplishmentsChallengesEconomic growthDeclining inflationForeign debt repaymentUnification of Federal and Regional lawsTax reformJudiciary reformLabor law reformLand reformSocial security reformExclusion from FATF black listReduction of dependency of Russian economy on natural resources War in ChechnyaDevelopment of vast and strong middle classElimination of Red Tape APAAC</p></li><li><p>SOCIAL CONDITIONSIncrease in poverty level since 1980-1999 to 37% of the entire populationCorruption: 2.1 on a scale 1 (highly corrupt) to 10 (highly clean) Transparency International Since 1999 increased level of law enforcement, elimination of tedious licensing and registration procedures; tax reform Low level of trust in the banking systemNeed of Court reformAPAAC</p></li><li><p>LEGAL FRAMEWORKCivil CodeIn line with Western standardsEnforcement is lacking</p><p>Federal Law on Banks and Banking OperationsOperating framework</p><p>Federal Law on Financial Securities MarketSpecifics on debt instruments </p></li><li><p>AVERAGE RUSSIAN CREDIT RATESRates on short-term credits extended by Russian credit institutions (adjusted for inflation)Corporate borrowersIndividual borrowersSource: CBRAPAAC</p></li><li><p>RussiaValuationOpportunity</p></li><li><p>FACTORINGWhat is factoring?Financial management service designed to help firms better manage their receivables by offloading a firms receivables and credit management onto someone else</p><p>How does factoring work?Factor collect the accounts on the due datesEffects payment to its client firmFactor assumes the credit risk associated with collection for a feeAPAAC</p></li><li><p>PROS AND CONSDisadvantagesAdvantagesCash Flows improved due to quicker payments and available for reinvestmentCan focus on growth as reduction in overhead costs by transferring troublesome chore of collectionFactoring can be expensivePerceived as option of last resortFactor contacts your customers and may damage ongoing relationshipsAPAAC</p></li><li><p>RUSSIAN CREDIT MARKET HISTORY AND PROBLEMSCommercial banking emerged in Russia in the late 1980sRussia had more than 2,500 banks by 1994Devaluation of the Ruble in 19971998 forced many banks into bankruptcyIn mid 2002 Russia had just under 2,000 registered banks and credit organizationsIndustry dominated by a few large players</p><p>Main problemsThe banking sector has failed to fulfill its main function to act as an intermediary Lack of transparencyLack of legal frameworkBanks are not willing to expand their credit card services to the middle classAPAAC</p></li><li><p>DEMAND ANALYSISIncreased level of lending by financial institutions, domestic investors and FDI since 1998Companies require advance payment terms or letters of creditHigh portion of transactions are conducted on a non-cash basis</p></li><li><p>DEMAND ANALYSIS</p></li><li><p>INTEREST RATESAPAACJanuary 2001January 2002Interest rates on Personal loansPercentageInterest rates on Corporate loansPercentage</p></li><li><p>POTENTIAL AND EXISTING COMPETITION Limited choices between three types of banks: Foreign-owned subsidiaryState-owned Russian bankVariety of Russian private commercial banksRussian Private Commercial Banks are an aggressive component but still have a limited capacity to provide servicesTop 5 include: Gazprom Bank, National Reserve Bank, Sobinbank, MDM Bank, Bank of MoscowAPAACExisting competitionPotential competition</p></li><li><p>BARRIERS TO ENTRY IN THE RUSSIAN MARKETNot many regulations to protect either party</p><p>Corruption is wide-spread and deeply rootedSerious obstacle for private sector growthIn 2002, Russian Corporations allocated an estimate of $60 billion towards bribes</p><p>Few alternative solutions to Cash Flow Problems Industry financing Banks or CorporationsAPAAC</p></li><li><p>RussiaValuation</p></li><li><p>FACTORING SERVICES TO THE TRANSPORTATION INDUSTRYTruckers clients are faced with cash flow problems prefer to delay payments</p><p>Few trucking companies agree to accept A/RDrivers are instructed to stay until payment is receivedSuch collection practice is detrimental to the business</p><p>A/R that are on the books = uncollectible debt</p><p>Shadow accountingAPAAC</p></li><li><p>Capitalize on the unrealized existing need for factoring services</p><p>No current market for factoring services, because nobody targets the transportation industry</p><p>By offering the factoring services we will create the market</p><p>OPPORTUNITYAPAAC</p></li><li><p>THE STRATEGYProvide factoring services to the transportation companies and use the established connections to gain access to the trade transactions that the transportation companies serviceAccess to the buyers and sellers will open an opportunity to offer factoring and purchase order financing services for large trade transactionsBuyer SellerAPAAC</p></li><li><p>DEAL ECONOMICS WITHOUT 3RD PARTY BUYERBuyerTransport CoSellerM2M1APAAC Inc. Net: f1 + f2 Factoring with partial collateral </p></li><li><p>DEAL ECONOMICS WITH 3RD PARTY BUYERBuyer (Wholesaler)Transport Co3rd Party(Retailer)SellerAPAAC Inc. Net: f1 + f2 M3 &gt; M1 + M2Factoring and purchase order financing with collateral </p></li><li><p>BUSINESS RISKSCollection and contract enforcement</p><p>Forced litigation to prevent or recover losses</p><p>Fraudulent actions towards APAAC</p><p>Shadow economy lack of transparency</p><p>Unexpectedly large number of bad debts (&gt;30%)</p><p>APAAC</p></li><li><p>MITIGATION OF BUSINESS RISKSExtensive due diligenceUse experienced lawyers and law enforcement officers</p><p>Work only with ASMAP members (Association of International Transporters)</p><p>Cooperation with law enforcement agencies</p><p>Deal collateralization</p><p>Build long-lasting relationshipsAPAAC</p></li><li><p>RussiaOpportunity</p></li><li><p>ASSUMPTIONSOur Cash Flows are the same as Net Income asWe are all equity financed (no interest)Our CAPEX is immaterial as it will only consist of office equipment and other suppliesWe have no depreciation expense due to the absence of capital assetsOther AssumptionsOur non-cash working capital is assumed to be stable in the short and medium termOur terminal growth rate is assumed to be 10%APAAC</p></li><li><p>VALUATION METHOD USEDBenefits of DCFIt incorporates all of the relevant cash flowsEasy to use Easy to amend if the macro or micro environment changesDrawback does not include the value of real optionsDrawbacks of other methodsOption valuation difficult to use, not acceptedComparables not available due to lack of public companies in this line of business * MinFin (2030 Eurobond rate)APAAC</p></li><li><p>PROCEEDS FROM FINANCING OF TRANSPORTATION SERVICESAPAAC~25% growth(decreasing percentage)</p></li><li><p>PROCEEDS FROM MERCHANDISE FINANCINGAPAAC4% growth(decreasing percentage)</p></li><li><p>DCF VALUATION Net IncomeTransportationMerchandisingTotal NI Cash Flows20032005200420072006TV 2008</p><p>123,7621,081,0801,204,842</p><p>129,850519,750649,600</p><p>264,0612,287,4672,551,528</p><p>340,8803,002,3003,343,181</p><p>44,174,987</p><p>219,3661,797,2962,016,662Present value of APAAC Incs NICF with 20% discount rate $17,434,979APAAC</p></li><li><p>RECEIVABLE FINANCING NEED DURING FIRST YEARTotal funds required$7.7 millionAPAACWorking capitalTransportation industryMerchandising financing</p><p>Start-up costs$7.4 million$2.4 million$5.0 million</p><p>$0.3 million</p></li><li><p>POTENTIAL EXIT STRATEGIES AND TERMINAL VALUEAttractive target for larger financial institution eg, NIKoil, SberbankStrong customer baseFoothold in growing marketAPAACValue of option to close operations anytime60 day credit periodNeed working capital for factoring servicesInitial capital raised not a sunk cost (most should be recovered) but must be discounted from exit date</p></li><li><p>DCF VALUATION REVISITED Net IncomeTransportationMerchandisingTotal NI Cash Flows20032005200420072006TV 2008</p><p>123,7621,081,0801,204,842</p><p>129,850519,750649,600</p><p>264,0612,287,4672,551,528</p><p>340,8803,002,3003,343,181</p><p>44,174,987</p><p>219,3661,797,2962,016,662Which equals an IRR of 44%Present value of APAAC Incs NICF with 20% discount rate $12,213,224APAAC</p></li><li><p>SENSITIVITY ANALYSISThe sensitivity analysis shows the range of firm values depending on pessimistic, average and optimistic scenarios </p><p>The most reasonable range of values is between the growth rates of 8%12 % and the discount rates of 18%24%APAACDiscount rate18%20%22%24%Growth rate6%10%12%11,138,21217,227,10823,316,0058%13,573,7718,374,51212,213,22415,572,0979,973,9756,336,6908,913,71910,975,3437,441,1314,778,8356,588,9707,946,5715,570,769</p></li><li><p>SALES PITCH </p><p>APAACWe make YOUR risk OURS</p></li><li><p>QUESTIONS?APAAC</p></li></ul>