Russian Construction Sector – A Viable Investment Opportunity

THIS POST WAS ORIGINALLY PUBLISHED AUGUST 08, 2007

Russian Construction Sector – A Viable Investment Opportunity

In my posts I repeatedly note that the Russian construction sector is a extremely attractive for investor community. Recent news reports confirm this. In fact today’s U.K. Independent produced a short overview “A global property boom Russian style” that describes what is going on in Russia. “The place to be for booming commercial property development right now is Moscow. According to international property analyst Knight Frank, new developments of high-grade office space in the Russian capital have doubled since 2003, with a further 1.5m square feet of space becoming available before 2011.” And it is true. Here are some latest developments that prove this idea.

The first Russian private equity fund to participate in development of infrastructure was formed. This week it was announced that Macquarie Bank (ASX:MBL) and Renaissance Capital established a joint venture, Macquarie Renaissance, to develop infrastructure advisory and fund management opportunities in Russia and other CIS countries. It is interesting that in the press-release “the 2014 Olympics in Sochi and beyond” perspectives are mentioned. Macquarie Renaissance is based in Moscow and has already a team of 10 dedicated finance professionals. According to press reports the JV projects will have at least $ 100-150 million start threshold.

London & Regional Properties, the British real estate developer announced that it plans to spend at least $1 billion on projects in Russia in the next 12 months. Very interesting obestervation is produced by the company: “Russian yields have always been higher than the rest of Europe, reflecting the perceived risks and low transparency that have traditionally deterred institutional capital. However, this year has already witnessed the successful London flotation of Russian developers such as Sistema-Hals, Mirland and AFI, and the creation of AIM-listed funds, including Metro Baltic Horizons. As more western capital flows east, the safer the market seems”. According to London & Regional Properties Russia may attract investment from foreign real estate companies worth $7 billion in 2007, up from $4 billion last year.

A Russian property development and management company R.G.I. International Limited (SEA:RGI) announced that Charlemagne Capital Ltd (SEA:CCAP), an independent investment management group acquired about 3% of its equity (at the cost of $37.5 million). RGI is involved in the development and management of high-end office, retail and residential properties in central Moscow and the surrounding areas. It is interesting to note that Morgan Stanley was the first investor to note RGI and acquired 15% of equity.

Deutsche Bank (FRA:DBK) continues its investments in Russian developer sector. Earlier it allocated $ 600 million to DekMos construction company for the project to reconstruct the Hotel Moskva (Moscow); established a JV with Austrian construction company Strabag AG (FRA:STB) that operates in Russia. At this time it was announced that DB has agreed to provide a 12 billion RUR (USD 472 million) loan to STT Group development company; the company itself announced its IPO plans.

ABSOLUTE-Development – a part of Absolute Group is planning IPO in 2008

For those who read Russian, I forward you to the Vedomosti Daily detailed analysis of the Russian developer sector.

Russian IPOs and more – Review of the 28th Week of 2007

THIS POST WAS ORIGINALLY PUBLISHED JULY 15, 2007

Russian IPOs and more – Review of the 28th Week of 2007

Sovereign Funds

I briefly touched the subject of sovereign funds earlier, and this week the international discussion is gaining its momentum. While I have neither ability, nor big desire to discuss the issue in detail, here are some observations.

An interesting table was provided by the Economist that shows the place of Russia in the system calculated by Morgan Stanley in March 2007.

Another estimate was released by Stephen Jen, global head of currency research at Morgan Stanley in May 2007. And a sound overview of the funds and the U.S. attitude was provided by Department of Treasury a few weeks ago with the text of remarks by Acting Under Secretary for International Affairs Clay Lowery – the sovereign wealth funds “raise broad, strategic issues for the international financial system”. This week International Herald Tribune examined the situation in Europe and German concern over investments of Russia and China: “Europe looks at controls on state-owned investors”.

Investments in Russia

Continuing on my earlier suggestions for investments in Russia, I would like to point to a good analysis posted by MORNINGSTAR that shows the benefits of investing in Russian telecom shares. “We also think that the political risk of investing in the telecom sector is less than in the oil and gas sector. That said, political risk still makes these firms riskier bets than telecoms in other markets; Russia's penchant for disrespecting property rights warrants a speculative risk rating and a large margin of safety before investors should consider buying.” This is in line with my previous recommendations to invest in construction, railway carriers and telecoms.

A pretty good potential for the Russian construction sector show the results of 2006 M&A deals in this sector that was released by the mergers.ru project: there were 109 transactions with the value of $ 1,939.5 million with the average transaction value of $ 16.8. Only 4 transactions were valued over $ 100 million; 9% of overall volume was acquisitions by foreign companies. And construction sector had only 3% of overall cost value for 2006 Russian M&A.

As a timely illustration for my deliberations I want to cite this week’s announcement that the European Commission cleared a joint venture between Deutsche Bank AG (DBK.XE), Austrian construction company Strabag SE's (STB.XE) investment unit Strabag Invest GmbH and Moscow real-estate consultant Dmitri Garkusha to develop large scale real-estate ventures in Russia and surrounding former-communist countries. The joint venture will finance and develop "major real- estate and infrastructure projects" not only in Russia, but also Azerbaijan, Armenia, Belarus, Georgia, Kazakhstan, Kyrgyzstan, Moldova, Tajikistan, Turkmenistan, Uzbekistan and the Ukraine. Strabag is 30% owned by Oleg Deripaska and is planning IPO this year.

Renaissance Capital Tops Russian Banks

Renaissance Capital outranks every other bank, international or local, in the Russian Equity Capital Markets in the first half of 2007, according to separate rankings produced by independent data providers Dealogic (SEA:DL.) and Thomson Financial (NYSE:TOC). Both surveys name Renaissance Capital as the leading investment bank in Russia in both value and number of ECM deals carried out in the first six months of the year. The news also follows a string of other independent rankings in which Renaissance Capital has consistently emerged as the dominant international emerging markets investment bank, including becoming the first ever emerging market-based bank to break into the top 10 rankings of bookrunners for European initial public offerings. Renaissance moved up to sixth from 20^th position at the same time last year according to Dealogic. Among the major ECM transactions Renaissance Capital has led on this year are the $8 billion IPO of VTB, as well as the IPOs of MMK, Integra, Sitronics, Volga Gas, Dixi, Nutritek and Rosinter, and also several secondary transactions and private placements. In total Renaissance Capital has advised on 12 ECM transactions in the first six months of 2007, with a combined value of $12bn.

 

GAZPROM going to Internet

Gazprom Media is the latest of the media holdings that starts investing in Internet. It was reported this week that it is now in discussions regarding acquisition of the video-exchange portal RuTube (a Russian clone of YouTube). This late arrival to Internet will have the high price for Gazprom Media (which is usual for newcomers) – according to FINAM’s estimates RuTube is highly overpriced. It is also reported that in 2008 the holding’s budget has about $ 100 million for Internet acquisitions.

More Soups for Russians

Following Starbucks (NASDAQ:SBUX), Campbell Soup (NYSE:CPB) is another newcomer to Moscow. This week the company announced that in October its products are to be sold in Moscow – with beef, chicken and mushroom varieties. So far Campbell Soup is more known to Russians through Andy Warhol’s but many analysts think that the company may have success if the promotion would be aggressive.

Although the competitor products here in Russia are widely distributed in the supermarkets and small shops (Gurmania by Mars; Knorr by Unilever) I think that the consumers would welcome the new add-on. Traditionally Russians consume more soups that anywhere in the world, and most of them are homemade. But in recent years the younger generation is becoming more and more attracted to buying these products.

And finally – INTERFAX released a commentary that discussed the Russian stock market – “An ideal model for the Russian stock market in mid-term” which is worth reading.

New Views on Investments in Russia

THIS POST WAS ORIGINALLY PUBLISHED JUNE 13, 2007

New Views on Investments in Russia

News media vividly discusses the results of the St.Petersburg Economic Forum. Regarding the hottest issue in discussions – the Russian state capitalism – First Deputy Prime Minister Sergei Ivanov reiterated President’s Putin statement to the newsmen at the G8 summit (“...in cases where we are establishing large state corporations, such as in the shipbuilding and aircraft manufacturing sectors, we are not nationalizing previously privatized enterprises but are simply bringing scattered state-owned assets under one roof, uniting them as a single corporation…We have no intention of trying to increase the number of state assets from beyond their present size. As I already said, in the case of the aircraft manufacturing and shipbuilding sectors, we are streamlining state assets and making them more viable, efficient and competitive, and we do not rule out the sale of stakes in these corporations in the future, IPO operations, but these future plans will then involve viable and competitive companies of European level and significance. We do not want to lose these sectors; we want to develop them and we want to do so with the help of private capital too.”). Mr. Ivanov stated that while creating big holdings the government intends to buy out their stock at the market price with possible future IPOs. Regarding foreign investments Sergey Ivanov suggested a new idea: “your technologies in return for our market”.

There are some new announcements that show the desire of Western financial community to work in Russia:
- Goldman Sachs Group Inc. plans to expand its Moscow office to 100 employees by adding 25 more bankers
- Deutsche Bank AG, (already about 800 employees in Moscow) plans to add consumer lending to its operations in Russia to benefit from demand for loans and financial services

- Barclays Capital Plc is likely to open a Moscow office this year

VEDOMOSTI DAILY published today the results of the poll that was conducted by the Foreign Investment Advisory Council (FIAC) “Image of Russia in the View of Foreign Investors” . One of the key results is that those who are already working in Russia have a better attitude to the country as opposed to those who are only mulling to do so. That completely supports the idea of my yesterday’s post. The Russia-based investors: 47% of polled think that Russian is moving in the right direction, while 25% consider it wrong. Potential investors – 26% and 33% respectively. Over 50% of working in Russia consider investment in the country more profitable as compared to other emerging markets. Potential investors are different – only 18% think so. 39% of working in Russia think that country risks in Russia are higher; with 59% potential investors consider Russian risks bigger than in other emerging markets. As the result of the survey FIAC suggests that investors and government officials should inform their peers of advantages of doing business in Russia.

A commentary was published today by the Australian expert Chris Mayer “Russian Stock Market on Fire, No Longer as Dependent on United States” that analyzes the market in Russia. It end with “investors should not discount the importance of the Russian market and other overseas stock markets. Increasingly, investors will want to pay attention to what happens in Moscow or Dubai or other once-backwater investment arenas.”

Russian IPOs – Review of 23rd Week of 2007

THIS POST WAS ORIGINALLY PUBLISHED JUNE 11, 2007

Russian IPOs – Review of 23rd Week of 2007

Rhetoric and Investments

This week there had been a lot of things going on regarding investments in Russia and associated discussions. Political rhetoric added more fuel to it. Richard Shaw (QVM Group) posted “Investing in Russia: The Good News and the Bad” . While analyzing positive factors Mr. Shaw ends with: “The big gains in the Russian stock market could well be more history than future. The political risks to your wealth in Russia are much greater now than they were perceived to be a few years ago.” The Motley Fool posted notes by Zoe Van Schyndel “Russian Bear or Bull?” that also chides: "Russia is an emerging economy which, a decade ago, was nearly bankrupt. A lot has changed since then, but whether the opportunities in the Russian market are outweighed by the risks is a tough decision at this point. If oil prices stay at their lofty levels, this market is a safer bet, but if oil drops significantly, I wouldn't want to be anywhere near this bear.” In my view, more realistic was CNBC discussion on June 7 on investing in Russia. Ian Hague, Firebird Management LLC fund manager, admits that tensions between the U.S. and Russia have had an impact on investor sentiment, but advises that investing in the Russian market requires a long-term commitment just the same. Investors are focusing on the wrong thing: "Political rhetoric in Russia has less of an impact on the conduct of business as you might think." Alexander Kliment, an associate in Eurasia Group's Europe and Asia Practice, spoke at the "Power Lunch" to dispel investor anxiety. He describing global business and politics as "two different voices" -- and the "political noise" hasn't dampened investors' "bullish interest." Surprisingly, he said even foreign energy companies are interested in Russia -- despite Putin having nationalized many energy assets and producers like oil giant Yukos, and the Russian government jailing Yukos' ex-CEO Mikhail Khodorkovsky. I completely agree with all this, and want to add more. Those who are here in Russia do know amore about the investment sentiments and they have a good opportunity to judge the situation by themselves – this far more reasonable than trying to understand Russia from Miami or Washington D.C. Just this week’s example - Coca-Cola intends to invest roughly $1.5 billion in its Russia’s projects in the following five to eight year.

Venture and IT Financing News

The Russian Government is seriously changing its attitude to financing of venture companies. A very descriptive article is presented by VentureBeat where one of the Russian officials describes the new efforts being made recently. To this end it is relevant to mention the results of the public poll that was conducted by FINAM INVESMENT COMPANY at the Web site:

- 65.1% of investors replied that they are interested in investments in the Russian IT sector, while only 18% showed their negative attitude

- 64.1% are ready to invest buying stock; while direct investments and staring the companies are not very popular.

In general IT sector shows extensively good growth tempo, however, so far there are virtually no companies at the public market. Many investors look for “the Russian Google” to invest into, but, I guess it is still too early. This is double sided picture – negative, if you think about absence of issuers; and positive when you think about prospects of entering the market by new players. We still do not see many public IT companies – in April both MICEX and RTS started trading stock of ARMADA, and only next week the first issuer for the MICEX’s Innovative and Growth Sector (“Russian AIM”) is launched – this is the FINAM-IT Venture Unit Fund.

New Face on the Banking Market

Bank of Cyprus was granted a license to operate in Russia. This is the first bank from Greece and Cyprus that entered the Russian banking market. Initially the bank’s activities will be focused on establishing of the credit portfolio and expansion of its services scope for existing corporate clients. Bank of Cyprus will work primarily in Moscow and St.Petersburg. According to the Russian regulations within two years after registration the bank has no sight to work in retail sector. It officials confirmed that they plan their expansion to Ukraine and Romania.

More Private Funds

UNEXIM GROUP Private Investment Fund was formed at the end of May in Moscow. The fund is based on the assets of Mikhail Prokhorov, who is the partner of Vladimir Potanin, President of the «Interros» Company. Prokhorov owns 22% of NORNICKEL, 22% of POLYUS and 50% of INTERROS that he values at $ 17 billion. UNEXIM GROUP will focus on innovation high-tech projects in energy (including hydrogen), nanotechnology and in mining and metallurgical sector. Each of investment projects for the group’s portfolio shall be valued at least $1 billion.

Russian IPOs – More to Come

According to Elena Khisamova, Vice-President of Deutsche Bank Russia, the Russian companies would attract from IPOs in 2007 three times more than in 2006 – up to $ 44 billion. According to Ms Khisamova this year Russian companies raised about $22 billion; $ 15.4 billion goes to foreign listings (12 companies), $ 6.5 billion – listings at domestic markets (4 companies). There is also a projection from Eversheds law firm in London that around 70 Russian companies are currently queuing up to list in London. Some of these companies will never make it to market while some will float on the main exchange and a good proportion are likely to make it on to AIM. Eversheds is currently working on 2 prospective AIM floats from Russia and they note that half the companies waiting to list are active in the utilities sector, while the remainders range from media companies to chemicals producers.

Here is the latest update from Business & Financial Markets on 10 latest IPOs.

	Exchange	Currency	IPO Date	Price at date of IPO	Price as of June 08, 2007	Change, per cent
PIK Group	LSE	USD	05/31/07	25.000	23.379	-6.48
ROSINTER	RTS	USD	05/31/07	32.000	35.400	+10.63
RTM	RTS	USD	05/22/07	2.300	0.00	0.00
DIXIE Grp.	RTS	USD	05/18/07	14.400	13.950	-3.13
VTB additional	MICEX	RUR	05/14/07	0.136	0.143	+5.07
PHARMSTANDART	RTS	USD	05/03/07	58.200	62.000	+6.53
NUTRINVESTHOLDING	RTS	USD	04/27/07	53.000	46.750	-11.79
VOLGA GAS	AIM	GBP	04/25/07	299.000	298.000	+0.33
SBERBANK	MICEX	RUR	02/22/07	89,0000	94,000	+5.62
INTEGRA (GDRs)	LSE	USD	02/21/07	16.755	18.815	+12.33

Source: Business & Financial Markets

New Announcements

• KIT FINANCE Investment Bank – IPO on MICEX in 2007 and LSE in 2008
• Arsagera Asset Management – IPO in 2007
• URALSIB BANK – IPO sometime before 2009
• INVESTTORGBANK - IPO at the end of 2008
• Sukhoi Civil Aircraft – IPO after 2010
• Euroset mobile handset retailer – listing on RTS in autumn 2007; IPO in 2008
• LSR Group, a St. Petersburg construction firm - IPO in November 2007
• Far East Energy Company – mulls IPO in the nearest future
• MAX Insurance Company – IPO in 2011
• SISTEMA MASS-MEDIA – IPO in 2009
• ST Group, developer company – IPO in May 2008 on LSE
• Aeroflot Russian Airlines - IPO in the near future