Russian IPOs – Review of the 2007 10th week

THIS POST WAS ORIGINALLY PUBLISHED MARCH 08, 2007

  A "knowledge absent" Russian Market – Is This True?

A very meaningful interview was published with John Connor, the manager of the Third Millennium Russia Fund. Its highlights are:

- the Russian market no longer offers cheap stocks associated with high risk. Rather, there are opportunities for participating in the high growth and domestically financed growth of a relatively stable market

- Russia is a very exciting place for investors to participate. Although it is usually associated with high political risk, Russia a stable free market.

“ It is a democratic country with a limited number of political parties and policies, which provide real choice. I am also impressed with the highly literate, ambitious, and capable people”

- The interesting sectors currently are consumer products, real estate, retail, mortgage banking, and cell phone companies.

- There are about 60 investable companies in Russia, but five years ago there were only 20.

And this correlates with the thoughts of Dr. Marc Faber in his INVESTMENT HOCUS POCUS .

“Currently, looking at the five most important asset classes - real estate, equities, bonds, commodities, and art (including collectibles) - I am not aware of any asset class that has declined in value since 2002! Admittedly, some assets have performed better than others, but in general every sort of asset has risen in price, and this is true everywhere in the world. Emerging stock markets and economies …. have performed substantially better than US asset prices. Since 2000, the Dow Jones has lost more than 50% of its value against gold and much more against industrial commodity prices. Moreover, since 2002, the Argentine and Russian stock markets, whose economies are perceived as "knowledge absent" when compared to the great "knowledge-based" American economy, are up ten-fold or more!”

OK, now let us have a look at the "knowledge absent" Russian market.

No Risks in 2008 Elections

Dmitry Vasiliev, J.P. Morgan Managing Partner, reiterated in his interview to VEDOMOSTI Daily that the upcoming 2008 presidential elections pose no major political risks to investors. In his opinion, the political vector is influenced by the requirements of the country’s economy, and any politician (a deputy or the President) would still consider this as his priority. I guess this is true – I have heard the same opinions during businessmen and government officials’ discussions in October at one of the IPO conferences in Moscow.

New LSE Rules for Russians?

United Energy Systems (UES), Russia's state-owned electricity monopoly is trying to persuade the LSE that it should waive one of its rules so the operator can list some of its regional companies on the UK market without presenting three years of accounts. This is a very interesting move. The commentaries are different, but everyone is watching the development with the great interest. If this succeeds, well, that might set an interesting precedent.

COME BACK, BABY COME BACK….

Two big players return to Moscow after their 1998 retreat. Lehman Brothers is opening its office. And Japanese Nomura bank comes back and opens its offices in Moscow next week. The bank plans to participate in IPOs, provide investment banking services for institutional investors and would not be engaged in brokerage or trading services. The Russian analysts are skeptical of the good chances for the bank, providing that a number of big players like Goldman Sachs, Morgan Stanley and Merrill Lynch are already in place.

UBS highlighted its favorite five investment ideas for the Russian market

UBS Russian Top 5 portfolio for March:

- Lukoil - a 40.7% weighting

- Unified Energy System (UES) - 22.2%

- Norilsk Nickel - 29.2%

- Evraz - 23.5%

- Sberbank - 15.9%

Wood and Timber News

The Russian Government continues its activities to minimize the raw material export from Russia. Minister of Natural Resources Yuri Trutnev is calling for a reduction in the export of timber, replacing that trade with "highly processed wood products." It was reported that as many as 16,000 of a total of 36,000 lumber operations are timber exporters.

Wall-Mart in Russia

The hypermarket chain Karusel is in indirect talks with Wal-Mart through a certain investment bank, - it was reported this week. Karusel operates 19 hypermarkets; its revenues are $361 million in 2006. The company has the plans to operate 59 hypermarkets by 2011. This is another event in the process of consolidation of the Russian retail market. Recently X5, took over Metronom AG and added 16 stores in Moscow.

Privatization Goes On

First, energy. We learned that the Unified Energy Systems (UES) expects to get some $11.5 billion after taxes from the sale of government stakes in its OGKs (GenCos) and TGKs (DisCos). UES plans to transfer its stakes in generating companies into the Federal Grid Company (FGC), which will then sell these stakes to strategic investors via auction. UES expects the government to end up holding more than 80% in FGC.

And Telco developments too. The Russian government has auctioned off a 4.6% and 7.2% block of shares, respectively, in the regional telecom providers Uralsvyazinform and Central Telecom. That brought $103.1 million and $110.3 million, respectively. It is not known however, who bought these stakes; private individuals and corporate entities participated – that was the only information supplied.

New IPO candidates

- Renova-Media - IPO sometime after 2008.

- Inprom, steel-trading company- IPO on MICEX and the RTS

- SOVCOMFLOT and NOVOSHIP, the biggest Russian ship companies are merging and planning IPO in 2008

- EmAlyans, machine-building company – IPO in 2008

- SIBUR, petrochemical holding – IPO in 2007

- Wild Orchid, the lingerie retailer sold a 20% stake sold to Wermuth Asset Management for $50 million and declared of IPO plans in 2009

- PIK Group of construction companies – IPO in nearest years

Russian Banking Sector – New Challenges

THIS POST WAS ORIGINALLY PUBLISHED MARCH 06, 2007

Russian Banking Sector – New Challenges

Recently we learned about Grant Thornton’s 14th Annual Survey of Bank Executives. When reading the paper one cannot, but think about many similarities. We know that sooner or later the global tendencies in financial markets arrive to Russia. Although GT’s findings are about the USA, I guess that we will see this in Russia. Some interesting points:

- One in three bankers (34%) says Internet banks are competitors of concern, a significant increase from the 8% who cited them as a concern in 2003. Four in 10 (39%) bankers are concerned about competition from brokerage firms, and one quarter (25%) say competition from insurance companies worries them

- 70% believe that the entry of Wal-Mart into the financial services business will be a threat to their bank

Russian parallel. Last week report: Surgutneftegas, one of Russia's largest oil producers, will buy 6.5% of the St. Petersburg-based Bank Rossiya's charter capital.

- There is a renewed interest among private and mutual bankers in taking their banks public.

Russian parallel. We know of some Russian private equity funds that are seriously mulling IPO options for them

I think that one of the most prominent changes that we witness with the Russian banks is the upsurge of IPOs. Last week there were a number of press reports that now due to new IPOs possibilities the Russian banks are not THAT much interested in working with the deposits. Because of IPOs the banks are expanding their resources, while deposits are a small part of them. On the other hand the clients are not very happy with the low interest rates. The Russian Deposit Insurance Agency evaluates that in 2007 the deposit growth rate will be about 27% only (as compared with 42.6% in 2006). The Agency reports that the drastic changes were witnessed by Sberbank – the clients’ deposits were down by 0.8% in December with 1.3% in 2006 as the whole.

At the same time the trust funds are prospering, and the market is far from saturation. Though as compared with the world markets the Russian one is relatively modest, but the growth is immense. The last issue of KOMMERSANT DENGI magazine provides the following data:

- trust funds managed volume increased twofold in 2006, and for the last four years – almost four times

- about 10 companies are managing assets of $ 1 billion; over 50 – above $ 100 million; with the total of 200 operating in the market.

So, let us watch the further developments…

A NEW PLAYER IN RUSSIAN ASSET MANAGEMENT MARKET

THIS POST WAS ORIGINALLY PUBLISHED MARCH 05, 2007

As the days are going by, we have more and more evidence that the idea of “2007 private equity funds year” is materializing very fast.

As it was announced in the press today INTEKO, a conglomerate, controlled by Russia's only female billionaire, Yelena Baturina and the wife of Moscow Mayor Yuri Luzhkov mulls creation of a set of investment funds that are oriented towards Western institutional investors. These funds will be managed by two companies domiciled in the Bermudas and in Luxemburg. This is another major step in INTEKO’s financial strategy. A few weeks ago it was reported that INTEKO has transferred it’s the assets into a newly formed CONTNENTAL equity fund. CONTNENTAL has 3.5 million rubles in cash assets, while its other assets are made up of Russian companies' shares - over half represent shares in GAZPROM, SBERBANK, ROSNEFT and other companies; shares in INTEKO company and its susidiaries make up 99% of the remaining capital.

If the intentions of INTEKO to attract by 2008 at least $ 600M - $800M into a new set of investment funds shall come true – that will be one of the biggest Russian investment portfolio.

RBC DAILY reports that according to the INTEKO’s official, the company worked out a clear financial strategy for the next 5 years. Thus, the plan calls for a number of Russian mutual investment funds, including real estate and direct investments; and four foreign domiciled ones. For all of them the beneficiary is Mrs. Baturina. Some Russian analysts think that these plans are quite feasible and the company may attract a number of foreign investors.