April 23, 2003
Boston, 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
• 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
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
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 GAAP
PWC 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
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
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
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)
Corporate Governance…changing
• Recent Milestones
• Hurdles
Market infrastructure: 1991-2003
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
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
CalPERS’ current Permissible Country List (Equity).
“Prohibited for investment” List
China
Morocco
Colombia
Pakistan
Egypt
Philippines
India
Russia
Indonesia
Slovakia
Jordan
Sri Lanka
Kenya
Venezuela
Malaysia
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
CalPERS' Permissible Country Program
Category
1
Assigned Weight, %
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
8
Technological Growth
9
Social Issues
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
5
10
N/a
Challenges that remain
• Dividend legislation is stalled in its track
• Voting treasury stock
– Affiliated party regulation
– M&A regulation
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
Poor accounting standards
Stock option plans
Loans to directors and top executives
Auditors provide additional non-audit service
Off-balance liabilities
Russia
YES
NO
NO
YES
YES
US
NO
YES
YES
YES
YES
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?
Russian Economy in 2003:
-on the brink of an intense
structural transformation?
Diversified economy and developed financial system should remove dependence
on current account (i.e. oil price)
15
10
2000
Moving into
this area?
5
2002
Growth (%)
2003
1999
1997
0
0
-5
2001
2
1998
4
6
8
10
12
1996
1995
-10
1994
-15
Current Account (% of GDP)
14
16
18
20
Themes:
•
•
•
•
•
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.
Growth rates (y-o-y) slowed on back of
continued strength in oil price…
107
106
105
104
103
102
101
100
1Q01
GDP
2Q01
3Q01
4Q01
1Q02
Five basic sectors
2Q02
3Q02
4Q02
Industrial output
Effective real exchange rate even depreciated slightly
(by 1.7%) in 2002, while imports grew 12.7%
100
7
95
6
90
5$
bln
85
4
80
3
75
Jan-01
2
Jul-01
Import, $ bln
Jan-02
Jul-02
Real effective exchange rate (Jan-01=100%)
Ruble appreciates substantially: harmful for “old” economy, but may stimulate
economic restructuring
150
140
130
120
110
100
1999
2000
Investments
2001
2002
Real effective exchange
rate
2003e
In real terms non-interest spending grew much faster than GDP, contributing to
inefficient allocation of resources...
180
170
160
150
140
130
120
110
100
90
80
1998
1999
2000
2001
2002
Non-interest federal expenditures GDP
2003
Domestic borrowing limited by
low monetization of economy
114
51
112
49
110
47
108
45
106
43
104
41
102
39
100
01/01/02
04/01/02
07/01/02
Public debt
10/01/02
Private debt
37
01/01/03
Due to oil windfalls, money market
interest rates are well below refinancing rate
30
25
20
15
10
5
0
2001
2002
1-day MIACR
Deposit rate
2003
Credit rate
Refinancing rate
Russian Market:
• Oils have re-rated
• What sectors lag
• Where is growth to come from?
RTS: From Oils and Beyond
600
500
400
300
200
Rest of Russia Re-rates
Russian Oils Re-rate
100
0
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
Source: DATASTREAM
Non-Oil Sectors Are at Discount to
Their Global Peers
0.6
–0.4
–26%
–35%
–36%
Electricity
–25%
Transport
–24%
Metals
Manufacturing
–0.2
Oil and Gas
0
Consumer
0.2
Telecoms
0.4
Banking
44%
–46%
–0.6
–61%
–0.8
Ratio of Russian sector EV/EBITDA ‘03 to its GEM average
Source: Troika Dialog, Bloomberg
Domestic consumption – key growth
driver for economy
Food industry remains a growth leader
• Industries targeting domestic
consumption lead economic growth
20%
• Growth drivers:
15%
• Change in consumption patterns
toward branded products
• 6-7% growth in private incomes
over next three years
• Consolidation and new quality
standards
• FDI growth
10%
5%
0%
1996
1997
1998
1999
2000
2001
2002 2003E 2004F
-5%
-10%
-15%
Food industry
GDP growth
Source: State Statistics Committee, Troika Dialog
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
Retail and food industries have got
most benefits from economy growth
140.0
130.0
120.0
110.0
100.0
90.0
80.0
Consumer Sector will see greater
sophistication in brand awareness,;
consumers will demand improved
products and better packaging
70.0
1996
1997
1998
Real disposable income
1999
2000
Retail turnover
2001
2002
Food production
Investment opportunities in consumer
and financial sectors
Driver
How to play
•
•
•
•
Industry
consolidation by
global players
Structural changes
in economy
Emerging of new
domestic leaders
•
•
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
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
Share of consumer good industries in 2002
FDI
23,0%
Share of consumer good companies in
market capitalization
1,7%
Expected IPO’s 2004 – 05
Pyaterochka
Retail
Sales
$500 mln
– Low penetration promises high
growth potential
Perekrestok
– Chains account 12% of total
turnover in Russia vs. over 30% in
eastern Europe
M-video
– Low attractiveness as targets for
global players
Kalina
Retail
Sales
$320 mln
Retail
(electronics)
Sales
Cosmetics
Sales
$365 mln
$130 млн
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