the russian equity market: raising the bar in 2003: strong foundations; heading forward?

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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

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April 23, 2003Boston, Mass. The Russian Equity Market: Raising the Bar in 2003: Strong Foundations; Heading Forward?. Timothy Seymour, Managing Director, Troika Dialog Group /President, Troika Dialog USA. Overview:. Where are we? Recent events as evidence of change - PowerPoint PPT Presentation

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Page 1: The Russian Equity Market: Raising the Bar in 2003: Strong Foundations; Heading Forward?

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

Page 2: The Russian Equity Market: Raising the Bar in 2003: Strong Foundations; Heading Forward?

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

Page 3: The Russian Equity Market: Raising the Bar in 2003: Strong Foundations; Heading Forward?

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

Page 4: The Russian Equity Market: Raising the Bar in 2003: Strong Foundations; Heading Forward?

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 GAAPPWC 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

Page 5: The Russian Equity Market: Raising the Bar in 2003: Strong Foundations; Heading Forward?

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

Page 6: The Russian Equity Market: Raising the Bar in 2003: Strong Foundations; Heading Forward?

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

Page 7: The Russian Equity Market: Raising the Bar in 2003: Strong Foundations; Heading Forward?

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)

Page 8: The Russian Equity Market: Raising the Bar in 2003: Strong Foundations; Heading Forward?

Corporate Governance…changing

• Recent Milestones

• Hurdles

Page 9: The Russian Equity Market: Raising the Bar in 2003: Strong Foundations; Heading Forward?

Market infrastructure: 1991-2003

Page 10: The Russian Equity Market: Raising the Bar in 2003: Strong Foundations; Heading Forward?

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

Page 11: The Russian Equity Market: Raising the Bar in 2003: Strong Foundations; Heading Forward?

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

Page 12: The Russian Equity Market: Raising the Bar in 2003: Strong Foundations; Heading Forward?

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

Page 13: The Russian Equity Market: Raising the Bar in 2003: Strong Foundations; Heading Forward?

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

Page 14: The Russian Equity Market: Raising the Bar in 2003: Strong Foundations; Heading Forward?

Challenges that remain

• Dividend legislation is stalled in its track

• Voting treasury stock

– Affiliated party regulation

– M&A regulation

Page 15: The Russian Equity Market: Raising the Bar in 2003: Strong Foundations; Heading Forward?

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

Page 16: The Russian Equity Market: Raising the Bar in 2003: Strong Foundations; Heading Forward?

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?

Page 17: The Russian Equity Market: Raising the Bar in 2003: Strong Foundations; Heading Forward?

Russian Economy in 2003:-on the brink of an intense structural transformation?

Page 18: The Russian Equity Market: Raising the Bar in 2003: Strong Foundations; Heading Forward?

20031999

20022001

2000

1997

19961995

1998

1994

-15

-10

-5

0

5

10

15

0 2 4 6 8 10 12 14 16 18 20

Current Account (% of GDP)

Gro

wth

(%

)

Moving into this area?

Diversified economy and developed financial system should remove dependence on current account (i.e. oil price)

Page 19: The Russian Equity Market: Raising the Bar in 2003: Strong Foundations; Heading Forward?

• 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:

Page 20: The Russian Equity Market: Raising the Bar in 2003: Strong Foundations; Heading Forward?

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

Page 21: The Russian Equity Market: Raising the Bar in 2003: Strong Foundations; Heading Forward?

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%

Page 22: The Russian Equity Market: Raising the Bar in 2003: Strong Foundations; Heading Forward?

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

Page 23: The Russian Equity Market: Raising the Bar in 2003: Strong Foundations; Heading Forward?

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...

Page 24: The Russian Equity Market: Raising the Bar in 2003: Strong Foundations; Heading Forward?

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

Page 25: The Russian Equity Market: Raising the Bar in 2003: Strong Foundations; Heading Forward?

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

Page 26: The Russian Equity Market: Raising the Bar in 2003: Strong Foundations; Heading Forward?

Russian Market:

• Oils have re-rated

• What sectors lag

• Where is growth to come from?

Page 27: The Russian Equity Market: Raising the Bar in 2003: Strong Foundations; Heading Forward?

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 20060

100

200

300

400

500

600

Russian Oils Re-rate

Rest of Russia Re-rates

Source: DATASTREAM

RTS: From Oils and Beyond

Page 28: The Russian Equity Market: Raising the Bar in 2003: Strong Foundations; Heading Forward?

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

0.6O

il a

nd

Gas

Tel

ecom

s

Con

sum

er

Man

ufa

ctu

rin

g

Ban

kin

g

Met

als

Tra

nsp

ort

Ele

ctri

city

Page 29: The Russian Equity Market: Raising the Bar in 2003: Strong Foundations; Heading Forward?

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

Page 30: The Russian Equity Market: Raising the Bar in 2003: Strong Foundations; Heading Forward?

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

Page 31: The Russian Equity Market: Raising the Bar in 2003: Strong Foundations; Heading Forward?

Investment opportunities in consumer and financial sectorsDriver

• 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

Page 32: The Russian Equity Market: Raising the Bar in 2003: Strong Foundations; Heading Forward?

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

Page 33: The Russian Equity Market: Raising the Bar in 2003: Strong Foundations; Heading Forward?

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