Transcript Deutsche Bank screenshow template

Deutsche Bank AG
Russia-2011: Narrowing the EM gap
Yaroslav Lissovolik // +7 495 933 92 47 // [email protected]
Ilya Piterskiy //
+7 495 922 92 30 // [email protected]
June 2011
All prices are those current at the end of the previous trading session unless otherwise indicated. Prices are sourced from local exchanges via Reuters,
Bloomberg and other vendors. Data is sourced from Deutsche Bank and subject companies. Deutsche Bank does and seeks to do business with companies
covered in its research reports. Thus, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report.
Investors should consider this report as only a single factor in making their investment decision. DISCLOSURES AND ANALYST CERTIFICATIONS ARE
LOCATED IN APPENDIX 1. MICA(P) 007/05/2010
I. Global factors: economy and equities
Deutsche Bank
Yaroslav Lissovolik// +7 495 933 92 47
Ilya Piterskiy//
+7 495 933 92 30
June 2011
1
Global outlook
Key Economic Forecast s
US
Japan
Euroland
Germany
France
Real GDP
% grow t h b
2010 2011F 2012F
2.9
2.9
3.9
4.0
-1.5
2.4
1.8
1.9
1.5
3.5
3.3
2.0
1.4
2.0
1.4
Consumer Prices
% grow t h c
2010 2011F 2012F
1.6
3.0
2.6
-0.7
0.5
0.0
1.6
2.7
2.0
1.2
2.5
2.0
1.7
2.2
1.7
Current Account
% of GDPd
2010 2011F 2012F
-3.2
-4.0
-4.2
3.6
2.2
2.9
-0.4
-0.9
0.0
5.7
5.5
5.5
-1.8
-2.0
-2.3
Fiscal Balance
% of GDP
2010 2011F 2012F
-8.7
-9.7 -6.9
-8.7
-8.9 -9.3
-6.0
-4.6 -3.5
-3.3
-2.1 -1.5
-7.0
-6.0 -4.6
It aly
Spain
UK
Sw eden
Denmark
Norw ay
1.3
-0.1
1.3
5.4
2.1
0.3
0.9
0.8
1.8
4.5
2.0
2.5
1.3
1.0
2.0
2.8
2.0
2.5
1.6
2.0
3.3
1.3
2.3
2.4
2.7
3.1
4.2
2.5
2.5
1.9
2.1
1.6
2.0
2.0
2.0
2.2
-3.3
-4.5
-4.6
6.3
5.4
12.9
-2.6
-4.0
-4.6
6.5
4.0
13.5
-2.1
-3.4
-4.2
6.0
3.5
14.0
-4.6
-9.2
-10.0
-0.1
-5.3
10.5
-4.0
-6.5
-7.6
0.5
-4.0
7.5
-2.9
-5.0
-5.6
1.5
-2.5
9.0
Poland
Hungary
Czech Republic
3.8
1.2
2.2
3.9
3.0
2.3
3.5
3.2
3.1
2.6
5.0
1.5
3.8
4.2
1.9
3.1
3.5
2.1
-3.3
2.1
-3.9
-3.6
0.8
-3.9
-4.0
0.2
-3.7
-7.9
-4.3
-4.7
-5.8
1.5
-4.3
-4.7
-2.8
-3.6
Aust ralia
Canada
2.7
3.2
2.9
3.2
3.9
3.4
2.9
1.8
3.0
2.5
2.8
2.3
-2.6
-3.1
-1.4
-2.7
-2.3
-2.4
-4.3
-2.1
-3.5
-1.0
-2.2
-0.4
9.4
10.4
10.3
6.1
7.5
4.7
4.0
8.0
8.2
9.4
4.3
3.6
4.4
5.4
7.6
8.6
8.6
4.1
4.4
5.0
5.5
4.6
9.6
3.3
8.8
5.9
7.6
6.9
5.5
8.4
5.0
8.9
6.4
7.7
9.5
4.3
7.2
3.5
8.5
5.2
7.2
8.1
4.0
-3.2
5.2
-0.8
-2.3
0.3
4.9
4.0
-3.3
3.5
-1.1
-2.3
0.6
6.8
2.9
-3.3
3.0
-1.7
-3.0
-0.1
5.2
-3.1
-8.0
-2.5
-2.5
-2.5
-4.7
-3.9
-1.8
-7.6
-2.0
-2.3
-2.5
-2.2
1.3
-2.3
-7.2
-1.5
-2.2
-2.3
-1.5
2.0
2.8
4.9
2.0
4.0
3.0
4.4
1.4
3.2
2.6
4.2
2.0
3.4
Asia (ex Japan)
India
China
Lat in America
Brazil
EM EA
Russia
G7
World
Sources: National authorities, DB Global Markets Research
Deutsche Bank
7/20/2015
Yaroslav Lissovolik// +7 495 933 92 47
Ilya Piterskiy//
+7 495 933 92 30
June 2011
2010 DB Blue template
2
Energy price outlook
Deut sche Bank oil and gas price deck
125
WTI (USD/bbl)
Brent
(USD/bbl)
WTI- Brent
Spread
(USD/bbl)
US Gas
(USD/mmBtu)
62.09
79.61
62.67
80.34
-0.58
-0.73
4.16
4.38
120
115
2009
2010
Q1 2011
94.60
105.52
-10.92
4.20
110
Q2 2011E
110.00
120.00
-10.00
4.25
Q3 2011E
115.00
125.00
-10.00
4.00
Q4 2011E
112.00
120.00
-8.00
4.75
2011E
108.00
117.50
-9.50
4.30
Q1 2012E
113.00
120.00
-7.00
5.25
Q2 2012E
108.00
115.00
-7.00
5.00
Q3 2012E
108.00
115.00
-7.00
5.25
Q4 2012E
113.00
120.00
-7.00
5.50
2012E
110.50
117.50
-7.00
5.25
2013E
2014E
2015E
115.00
118.50
122.00
120.00
122.50
125.00
-5.00
-4.00
-3.00
5.50
5.75
6.00
105
100
95
2011
2012
DB Brent Forecast
2013
2014
Brent Consensus
Brent Futures Curve
Source: Bloomberg Finance LP, Deutsche Bank
Source: Deutsche Bank
Source: Deutsche Bank
Oil demand grow t h by region 2008-2012
4.0
Oil supply forecast s for 2008-2012
mmb/d
1.5
mmb/d
World
1.0
3.0
0.5
2.0
China
1.0
MiddleEast
Other
NonOECD
OECD
0.0
Rest of
World
-0.5
-1.0
2008
0.0
2009
2010
2011E
2012E
-1.5
-2.0
-1.0
-2.5
-2.0
FSU
2008
2009
2010
2011E
2012E
Other NonOECD
Global
Biofuels
OECD
OPEC NGLs OPEC Crude
-3.0
Source:
IEA,IEA,
Deutsche
BankBank
Source:
Deutsche
Deutsche Bank
7/20/2015
Yaroslav Lissovolik// +7 495 933 92 47
Ilya Piterskiy//
+7 495 933 92 30
June 2011
2010 DB Blue template
Source:IEA,
IEA,
Deutsche
Bank
Source:
Deutsche
Bank
3
US Equity Outlook: buy on growth
 Our
2011 RTS Index target of
2300@2011 is supported by S&P 500
end-2011 target and the current beta of
1.2x vs the US equity market
RTS Index 2011 year-end targets envisaged by 2011 S&P500 Index targets
Beta \S&P500 2011 target
1420 (consensus) 1550 (consensus)
1 (no beta, pure performance catch-up)
2228
2432
1.2 (current)
2256
2500
1.4 (LT average)
2283
2568
Q4 earnings have follow ed t he recent pat t ern of solid
The cont ribut ion from sales beat s has increased
beat s and are on t rack t o reach DB forecast of $22.9
subst ant ially
23
If companies yet to report
maintain current beat trend
S&P 500 Quarterly
Operating EPS ($)
23
S&P 500: M argins and Sales Surprise (% )
M argin
Sales
11%
19
9%
9%
18
18
17
17
7%
7%
16
16
5%
5%
15
15
3%
3%
14
14
1%
1%
13
13
-1%
-1%
12
12
Q2 09
Q3 09
Q4 09
Q1 10
Q2 10
Q3 10
Q4 10
Q1 11
Source: Bloomberg Finance LP, Deutsche Bank
15%
Q4 10
11%
19
Q3 10
20
Q2 10
20
Q1 10
13%
Surprise
Q4 09
13%
Consensus EPS
Q3 09
21
21
Q2 09
15%
Q1 09
22
22
Source: Bloomberg Finance LP, Deutsche Bank
 Our US equity strategists expect S&P500 at 1,550 (16.4x P/E) by the end-2011,
+18% upside from current levels
 Sales increasingly the driver of strong earnings growth
Deutsche Bank
Yaroslav Lissovolik// +7 495 933 92 47
Ilya Piterskiy//
+7 495 933 92 30
June 2011
4
II. Global factors: commodities and FX
Deutsche Bank
Yaroslav Lissovolik// +7 495 933 92 47
Ilya Piterskiy//
+7 495 933 92 30
June 2011
5
Oil vs the dollar
90
120
88
110
86
100
84
90
82
80
80
70
78
60
76
50
74
72
40
70
2009
30
2010
US Dollar Index (LHS)
2011
WTI oil price, $/bbl (RHS)
Source: Bloomberg Finance LP, Deutsche Bank Global Markets Research
 Historically, oil prices are strongly correlated with USD. A depreciation in USD is
associated with stronger nominal oil prices, and vice versa.
 However, throughout the 2010 wave of USD appreciation the oil price decoupled and
remained relatively stable
Deutsche Bank
Yaroslav Lissovolik// +7 495 933 92 47
Ilya Piterskiy//
+7 495 933 92 30
June 2011
6
III. Russia‘s economy
Deutsche Bank
Yaroslav Lissovolik// +7 495 933 92 47
Ilya Piterskiy//
+7 495 933 92 30
June 2011
7
Economic indicators: recovery driven by consumption
35%
25%
15%
5%
-5%
-15%
-25%
2007
2008
IP, YoY, real, %
Construction, YoY, real, %
2009
Retail sales, YoY, real, %
Agriculture, YoY, %
2010
2011
Fixed investment, YoY, real, %
Source: Rosstat, Deutsche Bank Global Markets Research
 By the beginning of 2010 all key economic indicators returned into YoY positive zone
 In 2011 we continue to see consumption as a major driver of economic growth
Deutsche Bank
Yaroslav Lissovolik// +7 495 933 92 47
Ilya Piterskiy//
+7 495 933 92 30
June 2011
8
Consumer confidence in Russia weaker in Q1 2011
1H05
2H05
1H06
2H06
1H07
2H07
1H08
2H08
Nov 08
Feb 09
Mar 09
May 09
Jun 09
Sep 09
Oct 09
Dec 09
Mar 10
May 10
Oct 10
Dec 10
Mar 10
120
100
80
60
40
20
0
Global
Russia
Source: Nielsen consumer survey, Deutsche Bank Global Markets Research
Deutsche Bank
7/20/2015
Yaroslav Lissovolik// +7 495 933 92 47
Ilya Piterskiy//
+7 495 933 92 30
June 2011
2010 DB Blue template
9
Deutsche Bank
A consumer driven recovery
 Lower inflation
 Rouble appreciation, particularly versus the Euro
 A saving reservoir preserved in the course of the gradual devaluation
 Rapid decline in unemployment
 Budget spending prioritizes the social sphere and hence household consumption
 Interaction of political and economic cycle to continue to favor current outlays
 Cash-for-clunkers program extended
 Lower interest rates and a recovery in consumer lending
 Regulated tariff increases for households contained
 The return of the migrants from the near abroad
Deutsche Bank
Yaroslav Lissovolik// +7 495 933 92 47
Ilya Piterskiy//
+7 495 933 92 30
June 2011
10
External debt, USD bn
4Q2004
1Q2005
2Q2005
3Q2005
4Q2005
1Q2006
2Q2006
3Q2006
4Q2006
1Q2007
2Q2007
3Q2007
4Q2007
1Q2008
2Q2008
3Q2008
4Q2008
1Q2009
2Q2009
3Q2009
4Q2009
1Q2010
2Q2010
3Q2010
4Q2010
1Q2011
600
500
400
300
200
100
0
State, USD bn
Banks, USD bn
Other sectors, USD bn
Source: CBR, Deutsche Bank Global Markets Research
 Corporate external debt remains a risk factor for Russia…
 … with state debt stable on the back of high fiscal revenues
Deutsche Bank
Yaroslav Lissovolik// +7 495 933 92 47
Ilya Piterskiy//
+7 495 933 92 30
June 2011
11
Debt repayment schedule, USD bn
External debt repayment schedule (face value + interest), USDbn
25
20
15
10
5
State authorities, USD bn
Banks, USD bn
4q12
3q12
2q12
1q12
Dec-11
Nov-11
Oct-11
Sep-11
Aug-11
Jul-11
Jun-11
May-11
Apr-11
Mar-11
Feb-11
Jan-11
0
Other sectors, USD bn
Source: CBR, Deutsche Bank Global Markets Research
Deutsche Bank
Yaroslav Lissovolik// +7 495 933 92 47
Ilya Piterskiy//
+7 495 933 92 30
June 2011
12
Non-oil budget deficit at nearly 10% of GDP in 2011
12%
7%
2%
-3%
-8%
2004
2005
2006
Non-oil deficit, %GDP
2007
2004-2009 average non-oil deficit, %GDP
2008
2009
Budget deficit, %GDP
2010
4M2011
2004-2009 average deficit, %GDP
Source: Economic Expert Group, Deutsche Bank Global Markets Research
Deutsche Bank
Yaroslav Lissovolik// +7 495 933 92 47
Ilya Piterskiy//
+7 495 933 92 30
June 2011
13
Government assets for sale
Company Name
Sovkomflot
Sberbank
FSK
Rushydro
Sovkomflot
VTB
OZK
Rosneft
Rosselkhozbank
Rosagrolizing
VTB
RZHD
TOTAL PUBLIC, USD bn
TOTAL NON-PUBLIC, USD bn
TOTAL, USD bn
Type of asset
(public/ nonpublic)
non-public
public
public
public
non-public
public
non-public
public
non-public
non-public
public
non-public
Government Amount t o be
st ake, %
sold, %
100.0
25% -1 share
60.3
7.6%
79.1
4.1%
60.4
8.0%
100.0
25.0%
75.5
10.0%
100.0
100.0%
75.2
25% -1 share
100.0
25.0%
100.0
50% -1 share
75.5
15.5% -1 share
100.0
25% -1 share
Amount
t o be sold,
Mcap, USD USD bn,
bn (DBe) est imat e
3.5
0.9
75.3
5.7
14.9
0.6
14.1
1.1
3.5
0.9
32.4
3.2
1.7
1.7
91.7
22.9
10.0
2.5
3.3
1.7
32.4
5.0
52.3
13.1
38.6
19.0
57.7
year
2011
2011
2012
2012
2012
2012
2012
2013
2013
2013
2013
2013
So urce: Vedo mo sti, B lo o mberg Finance LP , Deutsche B ank
 Government plans to step up privatization in the coming 3-5 years
 Government plans to extract up to USD30bn from the sale of assets
 Proceeds are expected to be used for financing the budget deficit
Deutsche Bank
Yaroslav Lissovolik// +7 495 933 92 47
Ilya Piterskiy//
+7 495 933 92 30
June 2011
14
Targeting superior investment climate – president
Medvedev’s initiatives
 General Prosecutor to prepare draft legislation on anti-corruption measures – 15 April 2011
 Lowering of outlays on state procurement by 15% via raising transparency and efficiency, with a











deadline of 15 May 2011
Legislation on the narrowing of the scope of strategic enterprises, with a deadline of 15 May 2011
Adopt the schedule of privatization for 2011-13 – deadline 15 May 2011
Facilitation of information on public-sector companies for minority shareholders, with a deadline of
1 June 2011
Lowering of social security contributions by businesses, starting from 2012, deadline for the
submission of the relevant amendments being 1 June 2011 (delayed)
Exclude federal ministers from the boards of directors of state public companies – 1 July 2011
Exclude other civil servants with their replacement by independent directors – 1 October 2011
Reduction in costs in procurement and services by public-sector companies by 10% in the next
three years – 1 October 2011 with subsequent monitoring on a quarterly basis
Presidential administration to introduce procedures on the regular coordination and discussion of
draft legislation with the business community
Assist the private sector in implementing investment projects with respect to their coordination and
interaction with state bodies
The government to prepare measures to improve the quality of services, pertaining to Russia’s
investment climate, including registration and visa requirements for foreign specialists
Representatives of the presidential administration to be present in all Russian regions to receive
complaints and feedback on the actions (or lack thereof) of state bodies
Deutsche Bank
7/20/2015
Yaroslav Lissovolik// +7 495 933 92 47
Ilya Piterskiy//
+7 495 933 92 30
June 2011
2010 DB Blue template
15
Reserve Fund and National-Well-Being Fund
250
200
150
At the peak the size of
the two oil funds
amounted to USD220bn
100
Currently funds were
reduced to around
USD120 bn
50
0
Aug-06 Feb-07 Aug-07 Feb-08 Aug-08 Feb-09 Aug-09 Feb-10 Aug-10 Feb-11
St abilisat ion Fund, $ bn
Reserve Fund, $ bn
Nat ional Well-Being Fund, $ bn
Source: Ministry of Finance of the Russian Federation, Deutsche Bank Global Markets Research
 At the start of 2010 the government planned to reduce the fund to about USD10bn
over the year, but due to more favourable conditions than initially projected, the
Fund ended 2010 at about USD25bn (USD15bn was spent to finance the budget
deficit in December)
 According to the most recent budget strategy, the fund is planned to double over
2011 topping USD50bn
Deutsche Bank
Yaroslav Lissovolik// +7 495 933 92 47
Ilya Piterskiy//
+7 495 933 92 30
June 2011
16
Pro-cyclical fiscal policy
GDP growth and Russian budget, % GDP
25%
20%
v
+3% GDP
15%
10%
5%
0%
-5%
-10%
1998
1999
Budget deficit, %GDP
2000
2001
2002
Budget expenditure, %GDP
2003
2004
Real GDP growth, %
2005
2006
2007
2008
2009
Average budget expenditure for the period, % GDP
Source: Economic Expert Group, Deutsche Bank Global Markets Research
Deutsche Bank
Yaroslav Lissovolik// +7 495 933 92 47
Ilya Piterskiy//
+7 495 933 92 30
June 2011
17
The new electoral cycle starts in 2011
Parliamentary elections
22%
17%
12%
7%
2%
-3%
-8%
1998
1999
2000
2001
2002
2003
2004
2005
Budget deficit, %GDP
Budget expenditure, %GDP
2006
2007
2008
Budget revenue, %GDP
2009
2010
Source: Economic Expert Group, Deutsche Bank Global Markets Research
Deutsche Bank
Yaroslav Lissovolik// +7 495 933 92 47
Ilya Piterskiy//
+7 495 933 92 30
June 2011
18
Expenditures on key international infrastructure projects,
Overall spending on “ special” project s is expect ed t o
Privat e involvement is expect ed t o increase
USDb
reach USD77bn over 2011-2018E
12.0
120%
10.0
100%
8.0
80%
60%
6.0
40%
4.0
20%
2.0
0%
0.0
APEC Summit 2012
2011E
2012E
APEC Summit 2012
2013E
2014E
Kazan Universiade, 2013
2015E
2016E
Sochi 2014
2017E
2018E
World Cup 2018
Source: Ministry of Finance, Vedomosti, Deutsche Bank
Kazan Universiade,
2013
Sochi 2014
Public
World Cup 2018
Private
Source: M inistry of Regional Development, Vedomosti, Deutsche Bank
 Sochi 2014 is the key project for Russia in the medium term
 Another infrastructural “hot spot” is the Far East (one of the most depressed regions
in Russia currently)
 In the longer term the most important will be the 2018 FIFA World Cup
Deutsche Bank
Yaroslav Lissovolik// +7 495 933 92 47
Ilya Piterskiy//
+7 495 933 92 30
June 2011
19
CBR reserves have already recovered by USD130bn
15
600
10
550
5
0
500
-5
450
-10
-15
400
-20
-25
350
Jul-07
Jan-08
Jul-08
Jan-09
Jul-09
CBR reserves inflow, USD bn (LHS)
Jan-10
Jul-10
Jan-11
CBR Reserves, USD bn (RHS)
Source: CBR, Deutsche Bank Global Markets Research
 CBR reserves recovered by more than USD110bn since the bottom of the crisis
peaking above USD520bn…
 …Euro weakness and capital outflows are among the main driver for decreases in
reserves, while current account surpluses and capital inflows increase the reserves
Deutsche Bank
Yaroslav Lissovolik// +7 495 933 92 47
Ilya Piterskiy//
+7 495 933 92 30
June 2011
20
Foreign direct investment into Russia
25
22 22
19
20
15
9
10
5
5
5
0
0
-5
8
8 8
5
17
11
10
18
13
9
4
15
12
11
9 9
6
8
7
1
-5
1Q04
2Q04
3Q04
4Q04
1Q05
2Q05
3Q05
4Q05
1Q06
2Q06
3Q06
4Q06
1Q07
2Q07
3Q07
4Q07
1Q08
2Q08
3Q08
4Q08
1Q09
2Q09
3Q09
4Q09
1Q10
2Q10
3Q10
4Q10
-10
FDI, $bln
Source: CBR, Deutsche Bank Global Markets Research
Deutsche Bank
Yaroslav Lissovolik// +7 495 933 92 47
Ilya Piterskiy//
+7 495 933 92 30
June 2011
21
Net capital inflows, $ bn vs RTS Index
100
3,000
54
50
0
8 2
-4 -6 -7
21
8
-5
21
12 14 14
-5 -6
-7
-50
2,500
40
4
-24 -19
9
2,000
4
-15
-35 -34
-3
-22-21
-100
1,500
1,000
500
-130
0
1Q04
2Q04
3Q04
4Q04
1Q05
2Q05
3Q05
4Q05
1Q06
2Q06
3Q06
4Q06
1Q07
2Q07
3Q07
4Q07
1Q08
2Q08
3Q08
4Q08
1Q09
2Q09
3Q09
4Q09
1Q10
2Q10
3Q10
4Q10
1Q11
-150
Net capital inflows, $bn (LHS)
RTS Index (RHS)
Source: Bloomberg Finance LP, CBR, Deutsche Bank Global Markets Research
 Q1 2011 continued the trend of capital flight from Russia (an outflow of more than
USD21bn)
 The outflow came despite favourable oil prices (USD105.5/bbl on average for Brent)
and did not stop the RTS Index from gaining 15% over the quarter
Deutsche Bank
Yaroslav Lissovolik// +7 495 933 92 47
Ilya Piterskiy//
+7 495 933 92 30
June 2011
22
Flows into funds investing into the Russian equities
Total, including ETFs
6%
4%
2%
0%
-2%
W eekly flow s (as % of AuM )
Jan-11
Jul-10
Jan-10
Jul-09
Jan-09
Jul-08
Jan-08
-4%
4-w eek av erage flow s
ETFs only
12%
9%
6%
3%
0%
-3%
W eekly flow s (as % of AuM )
Jan-11
Jul-10
Jan-10
Jul-09
Jan-09
Jul-08
Jan-08
-6%
4-w eek av erage flow s
 Institutional funds investing into the Russian equities attracted USD3.6bn of inflows
in 2011 with a majority of inflows coming through ETFs
Deutsche Bank
7/20/2015
Yaroslav Lissovolik// +7 495 933 92 47
Ilya Piterskiy//
+7 495 933 92 30
June 2011
2010 DB Blue template
23
Inflation in Russia is a monetary phenomenon
16
70
14
60
50
12
40
10
30
8
20
6
10
4
0
2
-10
0
-20
Apr-06
Oct-06
Apr-07
Oct-07
Apr-08
Oct-08
Apr-09
Oct-09
Apr-10
Oct-10
Apr-11
Oct-11
Rouble depreciation vs dual currency basket, YoY, % (RHS)
CPI inflation, YoY, % (LHS)
Core inflation, YoY, % (LHS)
M2 money supply growth, YoY, %, lagged by 15 months (RHS)
Source: CBR, Rosstat, Deutsche Bank Global Markets Research
Deutsche Bank
Yaroslav Lissovolik// +7 495 933 92 47
Ilya Piterskiy//
+7 495 933 92 30
June 2011
24
Liquidity and interest rates
1,600
25%
1,400
20%
1,200
1,000
15%
800
10%
600
400
5%
200
0
0%
Jul-03 Jan-04 Jul-04 Jan-05 Jul-05 Jan-06 Jul-06 Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11
Deposits in CBR*, USD bn (lhs)
Correspondent accounts*, USD bn (lhs)
Refinancing rate, % (rhs)
MIACR**, % (rhs)
* - 100 day MA, ** - 10 day MA
Source: CBR, Deutsche Bank Global Markets Research
 Low Interbank interest rates are coming on the back of excess liquidity in the system
 Starting from the first quarter of 2009 they declined towards the current value of 2-3%
 Most recently the effect of the CBR rate increase coupled with end-of April liquidity shortage
caused a liquidity squeeze and a short-term hike in overnight rates in early May
Deutsche Bank
Yaroslav Lissovolik// +7 495 933 92 47
Ilya Piterskiy//
+7 495 933 92 30
June 2011
25
Inflation vs refinancing rate
16
14
12
10
8
6
4
2
0
2004
2005
CPI Inflation, %
2006
2007
Refinancing rate, %
2008
2009
Repo rate, %
2010
2011
Tom-next deposit rate, %
Source: CBR, Rosstat, Deutsche Bank Global Markets Research
 After 13.3% in 2008, Russian inflation dropped to 5.5% YoY as of July 2010
 Since 1Q09 CBR reduced the refinancing rate from 13% to 7.75%
 Inflation started to recover reaching 9.6% YoY by the end of January 2011 and
stabilizing around these levels…
 Starting from late December 2010 the CBR raised refinancing rate by 50 bp to
8.25%, and deposit rate by 75bp to 3.25%
Deutsche Bank
Yaroslav Lissovolik// +7 495 933 92 47
Ilya Piterskiy//
+7 495 933 92 30
June 2011
26
Capacity utilization rates are recovering
Capacity Utilization, quarterly data (seasonally adjusted), pp
75
75
70
70
65
65
60
60
55
55
50
50
45
45
40
40
1993
1995 19961997
1993 1994
1997
Capacity utilization,
utilization, pppp
Capacity
1999 2000
20012001 2003
2005 20052007
2009 2010
1998
2003 2004
2007 2008
year moving
moving average,
pp pp
Average 2001-2009,
pp pp
11year
average,
Average
2001-2009,
Source: Gaidar Institute for Economic Policy (former Institute for Economy in Transition), Deutsche Bank Global Markets Research
 Capacity utilization is currently below its pre-crisis level albeit breaking through the
moving average as well as the 9-year average on the upside
Deutsche Bank
Yaroslav Lissovolik// +7 495 933 92 47
Ilya Piterskiy//
+7 495 933 92 30
June 2011
27
Basket/Rouble exchange rate and Urals price, USD/bbl
41
130
40
120
110
39
100
38
90
37
80
36
70
35
60
34
50
33
2009
40
2010
Rouble/basket rate (LHS)
2011
Urals oil price, $/bbl (RHS)
Source: CBR, Deutsche Bank Global Markets Research
 The recent strength in oil prices suggests further rouble appreciation
 One of the factors of the rouble weakness, which is now gone, was the weak euro
 We forecast USD/rouble rate at 27.5 at end-2010 and 27.3 at end-2011 (31.2 and
30.4 for the basket)
Deutsche Bank
Yaroslav Lissovolik// +7 495 933 92 47
Ilya Piterskiy//
+7 495 933 92 30
June 2011
28
Politics: Margin of support for Putin, Medvedev remains stable
Put in and M edvedev approval rat ings, %
9090
8585
8080
7575
7070
%
6565
6060
5555
5050
2007
2007
20082008
2009 2009
Percentage
%%
PercentageofofPutin
Putinsupporters,
supporters,
2010
2010
2011
2011
Percentage
of Medvedev
supporters,
Percentage
of Medvedev
supporters,
%%
Source: Levada Center, Deutsche Bank
 According to the recent polls the popularity ratings of Putin and Medvedev remain
above 65% albeit recent decline
 The ratings became equal in May 2011 for the first time since the start of the poll
Deutsche Bank
Yaroslav Lissovolik// +7 495 933 92 47
Ilya Piterskiy//
+7 495 933 92 30
June 2011
29
Politics: elections to support the equity market
130
120
110
100
90
80
70
60
50
40
-181
30
6M before elections
July 1996 elections
Presidential elections date
March 2000 elections
March 2004 elections
6M after elections
March 2008 elections
*all series rebased to 100 as of respective elections date
Source: Bloomberg Finance LP, Deutsche Bank Global Markets Research
 It is common for the Russian equity market, as well as the US equity market, to
reveal strong trends before the presidential elections
 Given that 2012 elections are scheduled to take place in 1Q, we expect this factor to
be one of the driver for the equities already in 2H11
Deutsche Bank
Yaroslav Lissovolik// +7 495 933 92 47
Ilya Piterskiy//
+7 495 933 92 30
June 2011
30
Politics: stronger rouble coming from the electoral cycle
Source: Bloomberg Finance LP, Deutsche Bank Global Markets Research
 Two previous electoral cycles were characterized by rouble’s appreciation vs the US
dollar
 We expect the 2011-2012 electoral cycle to be one of the positive factors for the
rouble
Deutsche Bank
Yaroslav Lissovolik// +7 495 933 92 47
Ilya Piterskiy//
+7 495 933 92 30
June 2011
31
Russia’s diarchy in the making
Medvedev as President:
 Liberal credentials, no ties with the hardliners
 Loyalty to Putin
 Looks to forging ties with Europe
Putin as Russia’s Prime Minister:
 Has a keen interest in the pursuit of the Asian model
 Looks at Asia as a promising venue for expanding energy
supplies/cooperation
 Considers Asia as a counterbalance to Europe/West
Deutsche Bank
Yaroslav Lissovolik// +7 495 933 92 47
Ilya Piterskiy//
+7 495 933 92 30
June 2011
32
Number of bureaucrats
130
120
110
100
90
80
70
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
Number of bureaucrats per 10000 citizens
Source: Rosstat, Deutsche Bank Global Markets Research
 Number of bureaucrats was rising at a pace of 4.5% per year throughout 20002009…
 … and stays now at all-time-high levels
Deutsche Bank
Yaroslav Lissovolik// +7 495 933 92 47
Ilya Piterskiy//
+7 495 933 92 30
June 2011
33
Doing Business in Russia
Ease of…
Doing business
Starting a business
Dealing with
construction permits
Registering property
Getting credit
Protecting investors
Paying taxes
Trading across borders
Enforcing contracts
Closing a business
Doing business 2011
rank
123
108
Doing business 2010
rank
116
104
182
182
51
89
93
105
162
18
103
45
87
92
103
162
18
93
Change in rank
-7
-4
-6
-2
-1
-2
-10
Source: World Bank, IFC, Deutsche Bank Global Markets Research
 The World bank and IFC made joint project on evaluating easiness of doing business in
Russia
 In 2011 vs 2010 doing business became more difficult with the major deterioration in
registering property and closing a business
 Survey comprises 183 countries
Deutsche Bank
Yaroslav Lissovolik// +7 495 933 92 47
Ilya Piterskiy//
+7 495 933 92 30
June 2011
34
Best and worst regions to do business in Russia
 Variations across cities show potential to learn from the existing local best
practices
Indicator
Best practice
Difficult
Moscow (9 procedures)
Voronezh (14 procedures)
Days to start a business
Rostov-on-Don (22 days)
Petrozavodsk (37 days)
Cost to start a business
Kazan (3,000 rubles)
Moscow (6,200 rubles)
Rostov-on-Don (22 procedures)
Moscow (54 procedures)
Days to deal with construction permits
Rostov-on-Don (194 days)
Voronezh (1,207 days)
Cost to deal with construction permits
Petrozavodsk (270.3% GNI)
Moscow (2,612.8% GNI)
Procedures to register property
Kazan, Voronezh, Rostov-onDon (5 procedures)
Petrozavodsk (7 procedures)
Days to register property
Tomsk (47 days)
St. Petersburg (117 days)
Cost to register property
Kazan (16,706 rubles)
Rostov-on-Don (40,360 rubles)
Time to export
Kazan (24 days)
Moscow (36 days)
Time to import
Voronezh (23 days)
Moscow (36 days)
Cost to export
Petrozavodsk
(1,050 USD per container)
Moscow
(2,150 USD per container)
Cost to import
Petrozavodsk
(933USD per container)
Moscow
(2,150 USD per container)
Procedures to start a business
Procedures to deal with construction permits
Source: World Bank, IFC, Deutsche Bank Global Markets Research
Deutsche Bank
Yaroslav Lissovolik// +7 495 933 92 47
Ilya Piterskiy//
+7 495 933 92 30
June 2011
35
IV. Russia‘s market: current issues
Deutsche Bank
Yaroslav Lissovolik// +7 495 933 92 47
Ilya Piterskiy//
+7 495 933 92 30
June 2011
36
Russian market vs other assets YTD performance
25
19
20
13
15
8
10
5
3 3
1
6
9
8
6
6
3
3
1
0
-1
-10
-7
-8
RUB/USD
-7
-5 -4
-5
Istanbul C.
-5
-6
Copper 3M
Aluminium 3M
LMEX Index
Nickel
Silver
Gold
WTI oil
Brent oil
USD/EUR
RUB/basket
Shanghai C.
Bovespa
MSCI EM
DS STOXX 600
S&P500
DJIA
MSCI Russia
MICEX-10
MICEX
RTS
Sensex
-11
-15
Source: Bloomberg Finance LP, Deutsche Bank Global Markets Research
 Following the downturn in May, Russian equities underperform the US, but still
outperform EM equities year-to-date
 Brent crude oil continues to be one of the best performing assets
Deutsche Bank
Yaroslav Lissovolik// +7 495 933 92 47
Ilya Piterskiy//
+7 495 933 92 30
June 2011
37
Russian market 2011 sectoral performance
10%
 Oil & gas is the only
8%
5%
sector in the positive zone
YTD
4%
3%
0%
0%
-5%
 Small caps show weak
-1%
-2%
-4%
dynamics
-6%
 Consumer goods & retail
-10%
-10%
(-6%) was one of the
worst sectors after an
impressive 83% gain in
2010
-12%
Source: Bloomberg Finance LP, Deutsche Bank Global Markets Research
SMALL CAP
MID CAP
LARGE CAP
ELECTRIC
UTILITIES
CG & RETAIL
FINANCIALS
METALS &
MINING
INDUSTRIALS
RTS INDEX
OIL & GAS
-15%
 Electric utilities are the
worst performers losing
10% YTD
Key sector drivers:
 Oil & gas, metals & mining: Strong commodity prices
 Consumer goods & retail: Rising consumer confidence, fiscal outlays
 Industrials, metals & mining: Economic recovery in manufacturing and construction
Deutsche Bank
Yaroslav Lissovolik// +7 495 933 92 47
Ilya Piterskiy//
+7 495 933 92 30
June 2011
38
Russian exporters: relative performance to market
200
180
160
140
120
100
80
60
40
20
0
Jan-07
Jul-07
RTS Index
Jan-08
Jul-08
Jan-09
Jul-09
RTS Oil & Gas Index
Jan-10
Jul-10
Jan-11
Jul-11
RTS Metals & Mining Index
Source: Bloomberg Finance LP, Deutsche Bank Global Markets Research
 Oil & gas has been underperforming the RTS Index for two consecutive years (20092010)
 At the same time, the second major exporting sector (metals & mining) has been
outperforming the RTS Index during this period
Deutsche Bank
Yaroslav Lissovolik// +7 495 933 92 47
Ilya Piterskiy//
+7 495 933 92 30
June 2011
39
Large caps catching up
190%
 MICEX Index Large
170%
Cap / Small Cap ratio
experienced an almost
2 year downward
trend…
150%
130%
 … which continued
following 3-months of
recovery of large caps
vs small caps in Q2
2010
110%
90%
70%
Jan-08
Jul-08
Jan-09
Jul-09
Jan-10
Jul-10
Jan-11
MICEX Large Cap / MICEX Small Cap ratio
Jul-11
 Large caps outperform
small caps by 16pp
YTD
Source: Bloomberg Finance LP, Deutsche Bank Global Markets Research
Drivers for a catch-up play in blue chips in 2011:
 15-20pp gap in the large-small cap performance
 Returning flow of funds into Russia
Deutsche Bank
Yaroslav Lissovolik// +7 495 933 92 47
Ilya Piterskiy//
+7 495 933 92 30
June 2011
40
Russia’s 2011 performance vs EM countries
4
4
4
4
3
2
1
0
0
-1
-2
-2
-4
-4
-5
-7
-7
-9
-10
-12
-16
-20
10
12
10
8
20
20
17
30
0
-10
-27
-20
Czech Republic
Hungary
Indonesia
Poland
Korea
WORLD
Thailand
Malaysia
Colombia
RUSSIA
China
Morocco
Pakistan
Taiwan
EM
Philippines
Sri Lanka
Chile
Mexico
Israel
Brazil
S. Africa
Jordan
Turkey
India
Argentina
Peru
Egypt
-30
Source: Bloomberg Finance LP, Deutsche Bank Global Markets Research
 After catching up with EM in late 2010, Russia continues to outperform EM in 2011
 We see further scope for Russia’s catch-up vs EM given longer-term past
underperformance
Deutsche Bank
Yaroslav Lissovolik// +7 495 933 92 47
Ilya Piterskiy//
+7 495 933 92 30
June 2011
41
Russia’s performance relative to MSCI EM
110%
105%
100%
95%
CURRENT
90%
85%
80%
2010
2011
MSCI Russia / MSCI EM ratio
Source: Bloomberg Finance LP, Deutsche Bank Global Markets Research
 Until the end of April 2010, Russia outperformed EM by 5-7pp on a YTD horizon
 The May-June 2010 sell-off pushed Russia back to 4pp YTD underperformance vs
EM
 Due to the year-end rally, Russia managed to catch up with EM by the end of 2010
 Throughout 2011Russia has been outperforming the EM
 The May 2011 sell-off narrowed the YTD outperformance to 4pp
Deutsche Bank
Yaroslav Lissovolik// +7 495 933 92 47
Ilya Piterskiy//
+7 495 933 92 30
June 2011
42
RTS Index drivers
100%
-80%
S&P500
-70%
80%
-60%
-50%
60%
-40%
40%
-30%
-20%
Oil prices
20%
Rouble
(inverted, RHS)
Euro rate
-10%
0%
0%
10%
-20%
2006
20%
2007
2008
2009
Correlation of RTS vs Urals oil price
Correlation of RTS vs Euro rate
2010
2011
Correlation of RTS vs S&P500
Correlation of RTS vs Rb/basket
Source: Bloomberg Finance LP, Deutsche Bank Global Markets Research
 The correlation of the RTS Index vs global factors stays slightly below historical highs:
 75% vs S&P500, proving US market being the key driver for the Russia’s equities
 66% vs oil prices – up from 61% on average in 2010
 65% vs the rouble rate
 Another important factor, the euro rate, is becoming less important (28% correlation)
for Russian equities
Deutsche Bank
Yaroslav Lissovolik// +7 495 933 92 47
Ilya Piterskiy//
+7 495 933 92 30
June 2011
43
Seasonality in RTS Index
10
5
5.7
5.3
3.3 1.8
0
8.3
3.8
4.2
7.7
3.3
3.1
1.6
-0.8
-3.4-4.1
6.1
3.8
-2.0-3.3
5.3
0.1
0.6
-2.4
-2.9-3.7
4.7 5.1
-0.5
-7.0
-5
-9.9
-10
-15
Jan
Feb
Mar
Apr
Average monthly return for the RTS Index, %
May
Jun
Jul
Aug
Sep
Median monthly return for the RTS Index, %
Oct
Nov
Dec
2011 monthly return, % (RHS)
Source: Bloomberg Finance LP, Deutsche Bank Global Markets Research
 May is one of the worst months for the Russian equity markets in terms of seasonality
 The RTS Index showed strong returns in January despite its seasonally weak nature on
the basis of strong oil prices and the QE2 effect
 April, a seasonally stronger month, showed weaker returns in 2011
 In line with our expectations, May was a weak month for the Russian equities
Deutsche Bank
Yaroslav Lissovolik// +7 495 933 92 47
Ilya Piterskiy//
+7 495 933 92 30
June 2011
44
May 2011 correction - too long since peak in April
40%
 The correction since the peak of 8 April to
20%
the recent trough of 23 May lasted for 45
days and was as deep as 17%
0%
-20%
 According to our analysis, on average the
-40%
corrections lasted for 33 days with only
22% lasting for more than 40 days
-60%
-80%
1
 On average, after reaching its trough (we
looked at 45 correction episodes of 13%
and deeper) the RTS Index outperforms
the S&P500 by more than 20% on a 3month horizon
21
31
Current performance since peak
Strongest performance since peak
Bottom performance since peak
Worst performance since peak
41
51
61
Days since peak
Top-15 performance since peak
140
RTS Index relative performance vs S&P500: peak-to-trough and after, %
30
30
30
120
Correction duration, days
40
11
21
20
100
17
10
10
9
12
10
12
13
80
0
60
-10
40
20
-20
-23
-22
-
-30
Peak to Trough
1W After Trough
2W After Trough
Average relative performance, %
1M After Trough
3M After Trough
6M After Trough
Median relative performance, %
-80
-70
-60
-50
-40
-30
-20
-10
0
Trough depth, %
Deutsche Bank
7/20/2015
Yaroslav Lissovolik// +7 495 933 92 47
Ilya Piterskiy//
+7 495 933 92 30
June 2011
2010 DB Blue template
45
V. Russia‘s equities and valuation
Deutsche Bank
Yaroslav Lissovolik// +7 495 933 92 47
Ilya Piterskiy//
+7 495 933 92 30
June 2011
46
The discount of Russia’s P/E to EM
Russia’s P/ E vs EM P/ E discount , %
10%
10%
10%
0%
0%
0%
+1 ST. DEV.
-10%
-10%
-10%
+1
DEV.
+1 ST. DEV.
-20%
-20%
-20%
A
AVERAGE DISCOUNT:
26%
Average:
Average: 33%
33%
-30%
-30%
-30%
-40%
-40%
-40%
-1 ST. DEV.
-50%
-50%
-50%
-1
DEV.
-1ST.
ST. DEV.
-60%
-60%
-60%
-70%
-70%
-70%
-80%
-80%
-80%
2003
2003
2004
2004
2004
2005
2005
2005
2006
2006
2006
2007
2007
2007
2008
2008
2008
2009
2009
2009
2010
2010
2010
20112011
2011
SCI Russia
12-m
trailing
P/E
SCI
trailing
P/Ediscount
discount
Russia
12-m
trailingP/E
P/E/ /M
MSCI
EM
trailing
P/E
M SCIMMSCI
Russia
12-m
trailing
M
SCIEM
EM12-m
12-m
trailing
P/E discount
Source:
Bloomberg,
Deutsche
Bank
Source:
Bloomberg
Finance
LP, Deutsche Bank Global Markets Research
 Russia historically trades with a 33% long-term average discount to EM
 In most cases the discount fluctuates within 1S.D. from the LT average
 Russia currently trades on a discount close to the lower border of the 1 S.D. band
Deutsche Bank
Yaroslav Lissovolik// +7 495 933 92 47
Ilya Piterskiy//
+7 495 933 92 30
June 2011
47
2011-2012E EPS growth, %
Relative valuation of Russia vs other countries
50%
45%
South Africa
40%
United Arab
35%
Emirates
Russia
EMEA
Argentina
30%
Poland
25% Russia without
GEM
Hungary
BRIC
LATAM
Gazprom
20%
Egypt
ASIA
Korea China
Israel
15%
Brazil
10%
Turkey
5%
0%
6
7
8
9
10
11
12M forward P/E, x
Indonesia
Mexico
Thailand
Colombia
Taiwan
Philippines
India
Malaysia
Czech Republic
12
13
14
15
Source: Bloomberg Finance LP, Deutsche Bank Global Markets Research
 On a 12M forward-looking P/E basis Russia is the cheapest market in the EM space trades at 6.1x (7.1x without Gazprom), while EM and BRIC at 9.9x
 Russia’s 2011E-2012E eps growth rate (29%; 30% without Gazprom) is one of the
largest across GEM (22%)
Deutsche Bank
Yaroslav Lissovolik// +7 495 933 92 47
Ilya Piterskiy//
+7 495 933 92 30
June 2011
48
Valuation dichotomy between sectors
35
350
30
300
25
250
20
200
15
150
10
100
5
50
0
Jan-07
Jul-07
Jan-08
Jul-08
Jan-09
Jul-09
Jan-10
Jul-10
Jan-11
Consumer goods & Retail valuation premium over Oil & Gas, % (RHS)
Oil & Gas 12M forward P/E (LHS)
Consumer goods & Retail 12M forward P/E (LHS)
0
Jul-11
Source: Bloomberg Finance LP, Deutsche Bank Global Markets Research
 The pattern of recovery was not the same for different sectors
 Retail trades around pre-crisis multiples
 Oil & gas names, especially Gazprom, are trading well below
 The 2011 strong performance of energy names vs consumer stocks narrowed the valuation
premium of the latter, but there is still scope for outperformance for oil & gas vs retail
Deutsche Bank
Yaroslav Lissovolik// +7 495 933 92 47
Ilya Piterskiy//
+7 495 933 92 30
June 2011
49
Relative valuation of Russian sectors vs GEM
60%
2011E-2012E EPS growth, %
50%
Metals & Mining
40%
Banks
Metals & Mining
Electric Utilities
CG & Retail
30%
20%
Energy
10%
Electric Utilities
Chemicals
Banks
Telecoms
Energy
CG & Retail
Chemicals
Telecoms
0%
4
9
GEM
14
Russia
19
12M forward P/E, x
24
29
Source: Bloomberg Finance LP, Deutsche Bank Global Markets Research
 While Russian Energy, Telecoms, Utilities and Banks are undervalued, consumer
names are slightly more expensive
Deutsche Bank
Yaroslav Lissovolik// +7 495 933 92 47
Ilya Piterskiy//
+7 495 933 92 30
June 2011
50
MSCI Index rebalancing
M edian perform ance of st ocks follow ing t he M SCI Russia Index rebalancing
30%
20%
10%
0%
-10%
-20%
-30%
Previous Previous 2 days
week
day
after
1 week 2 weeks 3 weeks 4 weeks 6 weeks
Inclusion into MSCI Russia
Exclusion from MSCI Russia
Source: Bloomberg Finance L.P., Deutsche Bank
 The MSCI Russia Index currently has 29 constituents
 In May, LSR Group was included into the index and OGK-4 was excluded.
 Rostelecom ords, Mechel prefs, Holding MRSK ords and UC Rusal are candidates
future inclusion
Deutsche Bank
Yaroslav Lissovolik// +7 495 933 92 47
Ilya Piterskiy//
+7 495 933 92 30
June 2011
51
Russia’s dividend plays (1/2)
 The dividend yield gap between
Russia and EM is narrowing, but still
substantial (30%)
 The dividend factor will be one of the
key market drivers in the next several
months and may feature safer plays
amidst the increased volatility in global
markets
 Q1 is the best time to invest in
dividend stocks – seasonal patterns
suggest the biggest outperformance vs
the market in Q1
Yaroslav Lissovolik// +7 495 933 92 47
Ilya Piterskiy//
+7 495 933 92 30
June 2011
15
14
13
13
United Arab Em irates
Panam a
Korea
Russia
22
19
EM EA
Poland
Chile
Israel
India
23
GEM
22
ASIA
Turkey
25
25
Hungary
M exico
27
26
Indonesia
28
27
Brazil
LATAM
30
30
Peru
Argentina
31
30
China
South Africa
35
31
Lebanon
38
36
Egypt
Colom bia
41
40
M alaysia
Philippines
42
42
Thailand
Saudi Arabia
43
Source: Bloomberg Finance L. P., Deutsche Bank
Czech Republic
Korea
Panam a
India
M exico
Russia
United Arab Em irates
Indonesia
Argentina
GEM
ASIA
Chile
Turkey
EM EA
LATAM
Brazil
Colom bia
Peru
South Africa
China
M alaysia
Hungary
Philippines
Poland
Saudi Arabia
Taiw an
Thailand
Israel
0
Egypt
0
Lebanon
10
Czech Republic
1
Deutsche Bank
55
20
Taiw an
1.4
1.3
1.7
1.6
1.8
2
1.7
2.1
30
1.9
2.3
2.2
2.3
2.3
2.4
2.4
2.7
2.5
2.9
2.8
2.9
2.9
3.1
3
2.9
3.2
40
3.2
3.7
3.7
4
50
4.0
5
4.5
60
4.7
6
53
70
6.3
7
Dividend payout rat io, Russia vs EM , %
66
Dividend yield, Russia vs EM , %
Source: Bloomberg Finance L. P., Deutsche Bank
Average quarterly performance of dividend-paying stocks, %, quarterly, relative to the RTS Index
6%
5%
4.8%
4.2%
4%
3.9%
3.1%
3%
2.5%
2.1%
2%
2.4%
1.5%
1%
0%
1Q
2Q
3Q
4Q
Average high-dividend basket quarterly outperform ance vs RTS Index, %
M edian high-dividend basket quarterly outperform ance vs RTS Index, %
Source: Bloomberg Finance L.P., Deutsche Bank
52
Russia’s dividend plays (2/2)
70%
60%
350%
50%
300%
40%
250%
30%
200%
20%
150%
10%
0%
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
100%
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
2011
High-dividend stocks Index / RTS Index relative performance
Pref/ord discount for Russia, %
Basket of st ocks based on 6 crit eria
Stock
High
Large
name
dividend
cap
story
attractive
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
Sberbank
Rusal
Evraz
Gazprom
LUKOil
MMK
MTS
Norilsk Nickel
Surgutneftegaz
Tatneft
TNK-BP
+
+
+
+
+
+
+
X5
Bashneft
Gazprom Neft
Kazmunai Gas
+
+
+
+
+
+
+
Growth Fundamentally
High
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
Number of
liquidity pref shares "+" shares
+
+
Has
+
+
+
5
4
4
4
4
4
4
4
4
4
4
4
3
3
3
 Other features pointing on good
investment opportunities:
fundamental upside, liquidity,
presence of pref shares, large
cap status and growth
 Basket: Sberbank Rusal, Evraz,
Gazprom, LUKoil, MMK, MTS,
Norilsk Nickel, Surgutneftegaz,
Tatneft, TNK-BP, X5, Bashneft,
Gazpromneft, Kazmunai Gas
Source: Deutsche Bank
Deutsche Bank
Yaroslav Lissovolik// +7 495 933 92 47
Ilya Piterskiy//
+7 495 933 92 30
June 2011
53
Key drivers of our year-end target
 Our positive view on Russian equities (RTS target 2300) is due the following factors:
 (i) Weak relative performance: While performing in line in 2010 and stronger than
EM in 2011 so far, the Russian equity market still underperforms EM on longer
horizons, given heavier losses during the crisis
 (ii) Cheap valuation: Russia trades at close to 7x 12M forward P/E, which is one of
the cheapest in the EM space. At the same time, Russia offers a 2010-11E EPS
CAGR of 30%, which is more than the EM average;
 (iii) Strong performance of global markets: Our US strategists believe in strong
2011 performance of the US market, which would be driven by both economic and
corporate recovery. Deutsche Bank’s S&P 500 2011 year-end target of 1,550 offers
18% upside potential – supporting our 2011 RTS target of 2,300 given the current
beta of 1.2x
 (iv) Further mitigation of risks regarding the situation in Europe, and recovery
of the European currency;
 (v) Russia enters the 2011-2012 electoral cycle, which will support the rouble
and the equity market
 We recommend focusing on blue chip names, which have been substantially
underperforming second-tier names for more than 2 years.
 In terms of sectors, we highlight oil & gas and financials – the weakest performers of
2010 which, in our opinion, have scope for catch-up with the market
Deutsche Bank
Yaroslav Lissovolik// +7 495 933 92 47
Ilya Piterskiy//
+7 495 933 92 30
June 2011
54
Drivers at the macro level:
 Fiscal spending to boost consumption
 High oil prices: Deutsche Bank projects USD117.5/bbl in 2011 with oil recently
peaking well above USD110/bbl
 Rouble appreciation
 Greater capital inflows/ investor interest, FDI
 Recovery in construction
 WTO accession
 Sovereign issuance and credit rating upgrades
 Lending growth
 Increase in dividend payouts
 Privatization, M&A and IPOs picking up
 Administrative reforms
 The return of the Russian investor base
 Increased use of RDRs by Russian corporates
Deutsche Bank
Yaroslav Lissovolik// +7 495 933 92 47
Ilya Piterskiy//
+7 495 933 92 30
June 2011
55
Risks:
 Unstable tax regime (unified social tax, export duties on oil products)
 Domestic political risks
 Greater pressure from domestic opposition generating hardline pressures that
may harm investment climate
 Potential terrorist risks in the Caucasus
 Significant changes in the Kremlin (Putin deciding to step down)
 Political elite becoming too “defensive” with the onset of a new electoral cycle
 Risks for the global economy
 Further mounting of the European sovereign debt crisis
 Negative effects for capital inflows into Russia, given strong investment
and trade links with EU
 High corporate debt burden
 Excessive fiscal spending renders Russia more sensitive to oil price fluctuations
 Corporate governance still a problem: corporate conflicts in Norilsk Nickel, treatment
of minorities in MTS/Comstar deal
 Further increase in inflation
Deutsche Bank
Yaroslav Lissovolik// +7 495 933 92 47
Ilya Piterskiy//
+7 495 933 92 30
June 2011
56
VI. Top picks
Deutsche Bank
Yaroslav Lissovolik// +7 495 933 92 47
Ilya Piterskiy//
+7 495 933 92 30
June 2011
57
Top picks by sectors
 Oil & gas: Rosneft, LUKoil
 Metals & Mining: Norilsk Nickel, Severstal
 Real Estate: PIK, LSR
 Banks: Sberbank
 Consumer goods & Retail: MVideo
Stock
Re c.
Price
TP
U pside ,
M cap
U S$
U S$
%
U S$ m n
10F
11F
P/E
12F
13F
P/CF
10F 11F 12F
EV/EBITD A
13F
10F 11F
Fre e Float %
12F
13F
P/B
D iv Yld %
10F
10F
Rosneft
Buy
8.58
14.00
63
82,352
6.5
6.0
7.8
6.7
4.5
4.9
4.8
4.3
4.1
3.7
4.1
3.4
8.5
1.5
1.3
LUKOIL
Buy
63.79
110
72
49,840
5.0
3.3
3.6
3.2
3.3
2.6
2.8
2.6
3.5
2.2
2.1
1.7
50.0
0.8
3.7
Norilsk Nickel
Buy
252
300
19
44,055
8.3
6.6
5.4
6.8
7.4
6.3
5.0
5.1
5.7
4.3
3.2
3.5
35.0
2.8
2.8
Severstal
Buy
18.15
21.20
17
18,281
neg
8.4
8.0
8.5
10.4 7.6
6.2
5.5
5.3
5.3
4.8
4.6
17.6
2.6
0.0
PIK
Buy
3.80
7.50
97
1,874
neg
neg
neg
nm
neg neg
2.1
2.9
13.7 nm
nm
24.7
26.0
3.2
0.0
LSR
Buy
8.67
12.80
48
4,463
28.7
13.7
7.0
4.8
22.3 11.6 7.6
7.3
13.0 8.8
5.1
3.5
26.8
2.4
0.0
M.video
Buy
8.99
11.60
29
1,617
21.5
15.2
12.5
10.8
17.9 13.2 7.7
6.9
5.4
4.6
29.3
4.8
1.2
Sberbank
Buy
3.47
5.50
58
77,304
12.9
6.8
5.8
4.7
26.5
26.1
40.0
1.5
2.4
1.7
1.4
1.1
8.1
6.4
20.6 28.6
Source: Deutsche Bank Global Markets Research estimates
Deutsche Bank
Yaroslav Lissovolik// +7 495 933 92 47
Ilya Piterskiy//
+7 495 933 92 30
June 2011
58
Oil – Rosneft and LUKoil
Em erging m arket s oil m ajors 12-m ont h forw ard P/ E, x
20.0
16.0
12.0
8.0
4.0
0.0
2007
2008
Rosneft
LUKoil
2009
TNK-BP Holding
2010
Surgutneftegaz
2011
Petrobras
Sasol
Source: Bloomberg Finance LP, Deutsche Bank estimates
 Rosneft offers a good combination of attractive valuation and production growth
 Rosneft outperformed LUKoil by 5pp in 2010, by 3pp in 2011
 LUKoil, in turn, stayed flat in 2010 while the RTS Index added 23% (added 28% while RTS
gained 7.5% in 2011)
 LUKoil is trading at extremely cheap valuations – 3.2x 2011 P/E
 DB is above consensus for 2011E oil prices and earnings
Deutsche Bank
Yaroslav Lissovolik// +7 495 933 92 47
Ilya Piterskiy//
+7 495 933 92 30
June 2011
59
Taxation – current issues and newsflow
Export duties and mineral extraction taxes account for 65-70% of costs
The average marginal tax rate for Russian VICs is ~75%:
~90% in the crude exports segment
~55% in the refined product exports segment
~45% in the sales of domestic refined products segment
Tax concessions:
■ Differentiation of the mineral extraction tax: tax discounts of up to 70% for fields with more than
80% depletion (in effect from 1 January 2007)
■ Tax holidays of 10-15 years or until cumulative production reaches 25m tonnes for new fields in
Eastern Siberia (in effect from 1 January 2009)
■ Export duty holidays for oil exports from East Siberia fields; we incorporate holidays for 1H10 only,
reduced export duty from 2H10E
Single export duty for heavy and light products at 60% level in 2013:
■ LUKoil is one of the main potential beneficiaries
■ Smaller effect on Rosneft as it is behind in refinery upgrades
Introduction of Excess Profit Tax (EPT)/supplementary tax:
■
■
■
First proposal by end of 1Q11
Likely to be applied to new projects
Likely to come into effect in 2012-13
Deutsche Bank
Yaroslav Lissovolik// +7 495 933 92 47
Ilya Piterskiy//
+7 495 933 92 30
June 2011
60
Taxation – recent proposals
upstream vs. downstream
■ The government may shift the tax burden from the upstream to downstream, making upstream projects
more attractive. Today, taxes in the downstream are smaller than those in the upstream.
■ The maximum rate of crude oil export duty may fall from 65% to 60%. This would positively impact netbacks in crude oil exports and domestic crude oil sales.
■ Simultaneously, export duties on refined products may increase to 66% of crude oil export duties from
the currently approved 60% level.
■ We assume Russian oil companies would find more upstream projects value-accretive and make a
bigger number of positive FIDs as a result of the tax changes.
■ The bigger upstream tax base is to compensate for the potential losses in the Russian budget that may
be incurred as a result of the reduction in the crude oil export duty rate.
For the new fields, the Russian government's consultants have proposed a supplementary tax rather than
a windfall tax. The proposed rate is 27%.
■ In the UK, a supplementary tax represents a 10% hike in the basic corporation tax. Thus, where UK CT
is 30%, the tax increased to 40% in the 1990s and to 50% in 2006.
■ Offsetting this are more generous capital allowances, and there are exemptions and incentives to drill
and develop.
■ Along the same lines, in Russia, a 27% hike in the basic CT of 20% would equal 47%. At USD70/bbl it is
now 65%, at USD80/bbl 68% and at USD90/bbl 70%.
■ We are unable to assess the impact on the Russian oil sector as the scale of capital allowances,
exemptions and incentives is unclear.
Deutsche Bank
Yaroslav Lissovolik// +7 495 933 92 47
Ilya Piterskiy//
+7 495 933 92 30
June 2011
61
Base Metals – Norilsk Nickel
 Deutsche Bank is bullish on metal
Strong correlation with the commodity basket
prices – both base and PGM
 Historically, Norilsk closely follows
it’s commodity basket (R2 at 80%)
 Main drivers – Copper and
Palladium
 Attractive valuation – Norilsk is trading
at a discount to peers
revenues would boost Norilsk’s fair
value – PGM companies generally
trade on higher valuations than
diversified miners
P/ E
2011
700
300
600
250
500
200
400
150
300
100
200
50
100
0
2003
 An increasing share of PGM
2010
350
2012
0
2004
2005
2006
Norilsk Nickel, USD - LHS
2007
2008
2009
2010
2011
Commodity index (50% nickel, 25% copper, 12.5% platinum, 12.5% palladium) - RHS
Source: Bloomberg Finance LP, Deutsche Bank Global Markets Research
EV/ EBITDA
2010
2011
2012
2010-2012
EPS grow t h
2010-2012
EBITDA
Russia
Norils k Nickel
Average Diversified Large Caps
Average Copper
Average Nickel
Average Platinum
Norilsk discount
9.2
6.9
5.7
6.3
4.5
3.3
86.6%
28.0%
10.4
12.5
26.4
31.4
7.8
8.4
16.3
20.7
6.1
6.2
9.4
9.1
6.1
6.0
16.2
14.0
4.9
4.4
8.7
10.9
3.6
3.1
2.1
5.3
101.9%
57.1%
198.4%
88.0%
37.8%
46.8%
46.6%
65.2%
-71%
-67%
-38%
-55%
-59%
-2%
-57%
-
-37%
Source: Deutsche Bank Global Markets Research estimates
Deutsche Bank
7/20/2015
Yaroslav Lissovolik// +7 495 933 92 47
Ilya Piterskiy//
+7 495 933 92 30
June 2011
2010 DB Blue template
62
Steels - Severstal
 Deutsche Bank is bullish on steel prices
 Attractive valuation – Severstal is one of the cheapest stocks in the Russian
steel universe – trades at 7.7X 2011 P/E
12-month forward EV/EBITDA for the Russian steel companies vs steel price
10
900
9
800
8
700
7
600
6
500
5
400
4
300
3
2
200
1
100
0
0
Jan-10
Apr-10
Evraz
NLMK
Jul-10
Oct-10
Jan-11
Severstal
Mechel
Apr-11
MMK
HRC ($/t)
Source: Bloomberg Finance LP, Deutsche Bank Global Markets Research
Deutsche Bank
7/20/2015
Yaroslav Lissovolik// +7 495 933 92 47
Ilya Piterskiy//
+7 495 933 92 30
June 2011
2010 DB Blue template
63
Real Estate – PIK and LSR
Continue to be positive on the sector
 Signs of pick up in physical real estate market
 Stocks trade ex-’solvency risk’, declining risk premiums priced-in; however,
 Valuation upside remains on further re-valuation of land banks; P/NAV discounts still
meaningful. Prefer residential, quality retail as least oversupplied segments and
construction materials as exposure to recovery in construction
PIK
LSR
 A play on demand recovery for mass market residential

A play on demand recovery for mass market residential
property and construction materials that we expect to
lead the recovery; exposure to state contracts
(USD700m+)

Construction materials: poor performance in 1Q10,
stabilization in 2Q10-3Q10, expect recovery in 4Q10

2010-2012 3-yr CAGR of 27% in sales and 60% in
EBITDA on increased capacity utilization

Land bank - mostly residential developments represents future upside; regional diversification with a
flurry of new contracts in Moscow and region

SPO in April adds financial stability and provides
acquisition currency
property; best leverage to recovery in consumer demand for
cheap housing
 Restructuring is nearly complete
 Additional financing from Sberbank now available
(RUR12.75bn)
 New projects have commenced: over 3.0m sqm of projects
are open for pre-sales
 Triggers: restructuring of Nomos Bank debt and deleveraging through SPO, leading to lower financial costs,
discount rates and higher asset valuation
Deutsche Bank
Yaroslav Lissovolik// +7 495 933 92 47
Ilya Piterskiy//
+7 495 933 92 30
June 2011
64
Banks - Sberbank
 Credit growth has returned with a strong dynamics in recent months…
 Credit costs in 2011/12 will depend on growth, write-offs and write-back potential
 Sberbank has the strongest coverage and cash flows and hence the potential for lowest credit costs
 Sberbank is also one of the best plays on rouble appreciation, given that more of its asset base is roubledenominated
 Sberbank will also likely be one of the better plays on favourable liquidity conditions and the high fiscal
spending in the social sphere ahead of the elections
VTB trades at almost the same 1.6x norm 2012E P/B despite:
 Structurally lower ROE due to wholesale funding and focus on low-margin loans
 Lower quality earnings due to high dependence on IB and trading gains
 Inferior asset quality
Why does VTB trade on the same P/B and what is going to change it?
 Only DR that offers exposure to Russian banks - DR listing of SBER planned for 1H11
 Higher beta due to IB and upside in non-core assets - IB acquisition by Sberbank (2011)
Deutsche Bank
Yaroslav Lissovolik// +7 495 933 92 47page 65
Ilya Piterskiy//
+7 495 933 92 30
June 2011
65
Consumer Goods & Retail - M. video - Well positioned for
consumer recovery, cheap on multiples
■We expect the electronics market to start to recover in 2011-12 given a
supportive macro environment for consumer spending, delayed demand
and a desire to replace old goods with new ones as consumers’
purchasing power strengthens.
■M.video is traded at a big discount to EM and DM peers
P/ E
Price
Russia
M. Video
EM
GOME
Grupo Famsa
Average EM
DM
Best Buy
Sears Holdings
Carphone
KESA
JB Hi-Fi
Dixons
RadioShack
Average DM
M .Video discount to EM peers
PT
Upside
M cap
EV
EV/ EBITDA
2010
2011
2012
2010
2011
2012
7.5
5.8
4.8
8
12
45.0%
1 438
35 135
20.1
13.8
11.4
3
21
4
23
29.2%
9.3%
5 422
787
28 891
12 083
19.1
11.6
18.1
17.1
21.0
17.6
14.2
18.7
14.7
10.9
7.6
10.5
8.3
6.1
8.0
6.5
5.3
6.4
32
72
355
146
17
20
15
37
420
139
21
22
15
17.4%
-100.0%
18.3%
-4.8%
25.8%
10.5%
-3.2%
12 563
9 500
2 599
1 245
1 869
1 158
1 621
30 554
12 909
11 220
975
955
1 871
1 131
1 725
30 787
11.8
27.6
21.8
13.6
18.1
20.4
12.2
18.4
11%
11.2
79.8
24.7
15.7
13.1
13.6
9.7
34.0
-21%
9.0
82.7
18.7
14.3
10.8
11.5
8.9
33.2
-23%
5.1
5.1
170.3
3.7
10.8
5.8
5.7
19.5
-29%
5.2
8.8
NM
4.0
8.3
4.3
4.3
6.5
-28%
3.9
8.7
NM
3.6
6.8
3.9
4.1
5.7
-24%
9%
-59%
-66%
-61%
-11%
-16%
M .Video discount to DM peers
Source: Bloomberg Finance LP, Deutsche Bank Global Markets Research estimates
Deutsche Bank
Yaroslav Lissovolik// +7 495 933 92 47
Ilya Piterskiy//
+7 495 933 92 30
June 2011
66
Statements of risk for following the recommendations (1/3)
LUKOIL (LKOH.RTS, TP USD 117.00, price 59.61, rating: Buy) Issues: LUKoil is Russia's second-largest oil company in terms of reserves and production. We believe that owing to its
recent heavy investment in greenfield operations, the company will be able to maintain growth rates above the Russian average. On the financial front, a healthy balance between
upstream and downstream segments makes LUKoil one of the most profitable oil companies in Russia. LUKoil also enjoys the most comprehensive international exposure of all Russian
oil companies, which brings its status closer to that of international peers. LUKoil stands out as one of the most likely of the oil companies to benefit from the expansion of the unregulated
Russian gas sector. We rate LUKoil Buy; the company enjoys strong fundamentals and we believe that its shares are currently undervalued.
Evaluation: Our 12-month target price is derived on the basis of DCF valuation. We use APT-based discounted cash flow valuation as we believe it provides a superior tool for estimating
company-specific risks compared with the CAPM model. It also enables us to account for a much wider range of fundamental factors than comparable multiples valuation, which often
fails to account for differences in capex plans, capital structure and growth rates. The key assumptions of our DCF model are an RWACC of 13.2% (RROE of 13.5%, including a standard
equity risk premium of 6.0% [2.5% is idiosyncratic, which accounts for a high risk of volatility in the Russian oil companies' cashflow due to changes in commodity prices and RUR/USD
exchange rate], a liquidity risk premium of 0%, and a corporate governance risk premium of 1.5%) and a long-term nominal growth rate of 2% - a function of expected increases in the
prices of crude and refined products, inflation, and the availability of proved, probable, and possible reserves in the companies' portfolios beyond our forecast horizon (2010-2020E).
Risks: We highlight the downside risks associated with commodity prices, cost inflation, and, more important, the execution of long-term investment projects. We continue to believe that
LUKoil's management is one of the most professional in the sector but it will now have to devise strategies to overcome the recent negative operating trends.
M.Video (MVID.RTS, TP USD 11.6, price 8.82, Rating: Buy) IssuesThe demand for the major types of electronics is elastic. The main drivers behind market growth are therefore rising
GDP per capita, rising incomes, declining unemployment and rising consumer confidence and loans. Given that we forecast positive trends for all of these, we expect spending on
electronic goods to increase and the market to grow by 18% and 16% in 2011-12 respectively. We view MVideo, the leading player in the market, as one of the best plays on the
consumer recovery in Russia. Buy Valuation We use DCF methodology to derive MVideo's target price as this is growth story and in our view a DCF model reflects the company's growth
potential. In addition, there are only two comparable names in the EM peer group, making a multiples-based valuation difficult. Using DCF methodology, we derive a target price of
USD11.6 for MVideo, implying substantial upside potential to the current price. Our WACC of 13.1% is based on a terminal growth rate of 3.5%, a risk-free rate of 6% and an equity risk
premium of 6%. Our beta for MVideo is 1.2 since electronics is a high-beta sector and we make an adjustment due to the stock's low liquidity. Risk The main risks to our call include, but
are not limited to, strong forex fluctuations (as it impacts consumer behavior), a slower-than-expected consumer recovery, aggressive development by international players and increasing
unemployment.
.
Deutsche Bank
Yaroslav Lissovolik// +7 495 933 92 47
Ilya Piterskiy//
+7 495 933 92 30
June 2011
67
Statements of risk for following the recommendations (2/3)
LSR (LSRGq.L, TP USD 12.80, price 9.25, rating: Buy) Issues: LSR has been a favorite real estate stock for the market that has so far focused on financial stability
and, ultimately, survival among real estate names. In the current environment, we believe LSR offers good exposure to state expenditure on both infrastructure and
social housing through its tenders with the Ministry of Defense and the St. Petersburg administration, while medium term, LSR should be a beneficiary not only of
demand revival for residential real estate but also construction materials, which we expect to lead a recovery in the construction sector beginning in 2011. With more
capital coming from the company's SPO, LSR will be well positioned to capitalize on recovery in demand for residential housing. Geographical diversification of sales
away from the company's base in St. Petersburg (LSR is already present in Yekaterinburg and has recently signed a number of deals in Moscow and Moscow region),
vertical integration with pre-fab manufacturing facilities and building materials as well as prudent financial management will be key to success. We continue to see
upside in the company's share price as land bank gets developed and the currently implied by the share price discount to market value of the land bank narrows. Thus
we rate the shares a Buy. Evaluation: Our valuation of LSR Group is based on SOTP approach. We value LSR's yielding properties, residential and office properties
already constructed and currently under development, DSKs and building materials businesses using DCF with a WACC of 12.3% (13.3% CoE, 11.5% cost of debt
and 25% debt-to-equity target ratio; we use a 3% terminal growth rate for building materials, reflecting long-term GDP trends) while we base our valuation for land
bank on the last available DTZ valuation, assigning a 20-40% discount to projects yet to be developed. We adjust the resulting valuation of LSR's assets by net debt,
minorities and NPV of corporate overhead costs to arrive at YE10e NAV of USD12.8, which is also our 12-month target price for GDRs. We set our 12-month TP for
local shares at a historical 20% discount to GDRs at RUB1,459/share and prefer more liquid GDRs. Risks: The company largely faces industry-related risks, including
exposure to GDP recovery, consumption growth and demand for real estate, price fluctuations, FX (rouble-related) as well as credit availability from the banks. In
addition to these, completion of projects, including commissioning of over 40 development projects and of a cement plant in Slantsy, that meaningfully varies from our
expectations could negatively affect our valuation of the company
Norilsk Nickel (GMKN.RTS, TP USD 300.00, price 243.00, rating: Buy) Issues: Norilsk Nickel is the global cost leader in the nickel industry and looks likely to retain
its leadership because of its unique ore body where nickel and copper are combined with platinum group metals. As the largest and lowest-cost producer of nickel in
the world, Norilsk should benefit from what we expect to be strong nickel prices in 2011 and 2012. We also see potential for a longer-term shift of the industry supply
curve, as low-cost and low-risk sources of nickel are gradually replaced by more expensive. Norilsk is also the largest palladium producer in the world. We expect
palladium to perform as a result of what we see as an ongoing substitution of platinum by palladium and growing autocat demand, waning Russian stockpiles and
supply constraints. Norilsk's PGM production offers, in our view, a diversfication into more defensive metals and could attract a premium to Norilsk's valuation. Norilsk
has, in our view, a strong balance sheet and strong cash flows. At the same time, Norilsk offers no near-term and only remote long-term growth. It also carries
company specific risks related to a shareholder conflict, government involvement, social commitments and environmental challenges. On balance though, we believe
the market does not fully appreciate the potential of Norilsk's resources: Buy. Evaluation: We value Norilsk using a DCF with a terminal growth period. Our DCF
model is based on a WACC of 11.2% (with a cost of equity of 12.6%, a pre-tax cost of debt 7% and a 25% long-term D/E) and a terminal growth rate of 3%. Our
terminal growth rate captures the longer-term cash flow opportunities of Norilsk's unique ore body and also the growth potential of expansion plans beyond our explicit
forecasting period, like the project underway in the Chita region. Our DCF yields a 12-month target price of USD300/share, which on our current earnings forecasts
implies target multiples of 4.9x 2011E EBITDA and 7.5x 2011E net income. On a flat price scenario, the implied target multiples grow to 5.9x and 9.3x, which is in line
with the peer group's long-term historical average. Risks: Commodity prices represent the largest downside risk for our valuation of Norilsk Nickel. Rouble
appreciation also represents a materal risk for Norilsk Nickel given its rouble cost base and dollar revenues. Due to a longstanding shareholder conflict and lack of
transparency, Norilsk has significant corporate governance risks. We also note that Norilsk, as a mono-employer, has special social commitments and is subject to
government interference and involvement. Like many mining companies, Norilsk faces risks related to export duties, although these have recently been reduced by the
announcement of new levels. There are also cash flow and sentiment risks related to the company's environmental program.
Deutsche Bank
Yaroslav Lissovolik// +7 495 933 92 47
Ilya Piterskiy//
+7 495 933 92 30
June 2011
68
Statements of risk for following the recommendations (3/3)
PIK (PKGPq.L, TP USD 7.50, price 3.79, rating: Buy) Issues: We continue to see upside in PIK shares as the company offers the best leverage to recovery in consumer demand for
cheap housing, first evidence of which we saw in 4Q09. We expect the trend to continue, and expect it to translate into an increase in cash collections by PIK. Recovery in demand
should also allow the company to commence new projects this year after receiving additional financing from Sberbank that will provide cash flow over 2010-2012 period. We continue to
see PIK largely as a play on volumes (as opposed to prices), but geography of its on-going and planned projects (Moscow and Moscow region) may offer additional upside if prices react
positively to anticipated supply/demand imbalance as inventory of completed housing is depleted and new construction takes time to hit the market with additional supply. Given the
above and the substantial upside based upon our price target we rate the shares a Buy. Evaluation: We value PIK via SOTP approach based on DCF analysis of the actual cash flows
from core construction and development business, and net book value of the remaining assets and liabilities not captured elsewhere in the above mentioned analysis. We discount cash
flows and terminal value at 13.8%. Our WACC reflects RROE of 14.0% (based on 6.5% sovereign RFR, 7.0% standard equity risk premium and 1.0% premium for corporate governance
risk) and 16.5% cost of debt and target debt/capital ratio of 25%. We do not include the valuation of land bank in this approach as we assume it will be used to build and sell property in
the interim forecasting period and beyond. We arrive at NAV estimate of USD7.5/share at YE10, which is also our 12-month TP. Risks: One of the major risks for PIK remains
restructuring of Nomos Bank debt. Since the company does not have an ability to pay this debt in full at the moment, failure to reach an agreement with the bank will put PIK's faith in
jeopardy once again. We are inclined to believe that Nafta-Moskva-friendly Nomos Bank will be willing to restructure company's debt, removing such a risk. Other risks are largely
industry-specific: slower-than-forecasted recovery in GDP, consumption growth and demand for real estate, a more-than-anticipated decline in prices as well as lack of credit markets
recovery (both corporate and consumer).
Rosneft (ROSN.RTS, TP USD 14.00, price 7.79, rating: Buy) Issues: We rate Rosneft a Buy. The company combines substantial reserves with rapid production growth, implying fast
monetisation of assets. Rosneft has been demonstrating some of the lowest unit costs in the industry and a highly efficient capital expenditure. The company acquired Yukos' assets and
has integrated them successfully. We forecast Rosneft to increase production by nearly 5% in 2010 y-o-y, which is well above the industry average. Sizeable benefits stemming from
export duty holidays in East Siberia should enable Rosneft to grow its EBITDA considerably in 2010. Evaluation: Our 12-month target price is derived on the basis of DCF valuation. We
use APT-based discounted cash flow valuation as we believe it provides a superior tool for estimating company-specific risks compared with the CAPM model. It also enables us to
account for a much wider range of fundamental factors than comparable multiples valuation, which often fails to account for differences in capex plans, capital structure and growth rates.
The key assumptions of our DCF model are an RWACC of 12.6% (RROE of 13.5%, including a standard equity risk premium of 6.0% [2.5% is idiosyncratic, which accounts for a high risk
of volatility in the Russian oil companies' cash flows due to changes in commodity prices and RUR/USD exchange rate], a liquidity risk premium of 0%, and a corporate governance risk
premium of 1.5%) and a long-term nominal growth rate of 4% - a function of expected increases in the prices of crude and refined products, inflation, and the availability of proved,
probable, and possible reserves in the company's portfolio beyond our forecast horizon (2010-20E). Risks: Downside risks for Rosneft include lower-than-expected oil prices, failure to
negotiate access to Gazprom's pipelines, dry-hole drilling at prospective resource areas and Yukos-related litigation. We also note the execution risk the company faces: Rosneft's
management might be unable to deliver on its targets or successfully implement its planned investment projects.
Sberbank (SBER.RTS, TP USD 5.50, price 3.21, rating: Buy) Issues: We rate Sberbank a Buy. Accelerating economic growth, spurred by strong commodity prices, SME growth and
mass-adoption of standard retail banking products like mortgages and CCs should propel 20% annual sector growth. Sberbank's dominant market shares (20-50%), unrivalled distribution
power through its network of 20,000 branches and an underutilized captive client base are unique assets to capitalize on this market opportunity. Additional impetus to earnings growth
should come from efficiency gains. Evaluation: We value CEEMEA banks using a two-stage Gordon Growth Model that bases the target price on discounted terminal value, and adds
back the value of discounted interim dividends. For Sberbank we assume a mid-cycle ROE of 23%, cost of equity of 13.0%, and terminal growth of 5%. The cost of equity is derived from
a 6.5% RFR, a 6.5% ERP and a beta of 1.0. Our USD5.3 PT implies a 2012E normalized P/BV of 2.0x and a 2012E normalized PE of 11.8x. Risks: The main downside risks for
Sberbank are declining commodity prices, which would result in a slowdown in economic growth and cause renewed asset quality deterioration. Another risk is continued margin pressure
which may arise from, amongst others, a slowdown in credit demand, even fiercer competition from bond market conditions, a significant increase in demand for FX loans and / or
monetary tightening. A weakening of the ruble would cause investors to favor Russian exporters and could adversely affect the share price performance of Sberbank. The main company
specific risks include, but are not limited to, execution on the business transformation, poor cost control and potential integration issues of an acquisition in IB.
Deutsche Bank
Yaroslav Lissovolik// +7 495 933 92 47
Ilya Piterskiy//
+7 495 933 92 30
June 2011
69
Appendix 1
Important Disclosures
Additional Information Available upon Request
For disclosures pertaining to recommendations or estimates made on securities other than the primary
subject of this research, please see the most recently published company report or visit our global
disclosure look-up page on our website at http://gm.db.com/ger/disclosure/DisclosureDirectory.eqsr.
Deutsche Bank
20/07/2015 16:44:38
Yaroslav Lissovolik// +7 495 933 92 47
Ilya Piterskiy//
+7 495 933 92 30
June 2011
2010 DB Blue template
70
Analyst Certification
The views expressed in this report accurately reflect the personal views of the undersigned lead analyst(s) about the
subject. In addition, the undersigned lead analyst(s) has not and will not receive any compensation for providing a
specific recommendation or view in this report. Yaroslav Lissovolik
Deutsche Bank
20/07/2015 16:44:38
Yaroslav Lissovolik// +7 495 933 92 47
Ilya Piterskiy//
+7 495 933 92 30
June 2011
2010 DB Blue template
71
Equity Rating Key
Equity Rating Dispersion and Banking
Relationships
Buy: Based on a current 12-month view of total shareholder return
(TSR = percentage change in share price from current price to
projected target price plus projected dividend yield), we recommend
that investors buy the stock.
Sell: Based on a current 12-month view of total shareholder return,
we recommend that investors sell the stock.
Hold: We take a neutral view on the stock 12 months out and, based
on this time horizon, do not recommend either a Buy or Sell.
Notes:
1. Newly issued research recommendations and target prices always
supersede previously published research.
2. Ratings definitions prior to 27 January, 2007 were:
Buy: Expected total return (including dividends) of 10% or more
over a 12-month period
Hold: Expected total return (including dividends) between -10%
and 10% over a 12-month period
Sell: Expected total return (including dividends) of -10% or
worse over a 12-month period
Deutsche Bank
20/07/2015 16:44:38
Yaroslav Lissovolik// +7 495 933 92 47
Ilya Piterskiy//
+7 495 933 92 30
June 2011
2010 DB Blue template
72
Regulatory Disclosures
1. Important Additional Conflict Disclosures
Aside from within this report, important conflict disclosures can also be found at https://gm.db.com/equities under the “Disclosures Lookup” and “Legal” tabs.
Investors are strongly encouraged to review this information before investing.
2. Short-Term Trade Ideas
Deutsche Bank equity research analysts sometimes have shorter-term trade ideas (known as SOLAR ideas) that are consistent or inconsistent with Deutsche
Bank’s existing longer term ratings. These trade ideas can be found at the SOLAR link at http://gm.db.com.
3. Country-Specific Disclosures
Australia: This research, and any access to it, is intended only for "wholesale clients" within the meaning of the Australian Corporations Act.
Brazil: The views expressed above accurately reflect personal views of the authors about the subject company(ies) and its(their) securities,
including in relation to Deutsche Bank. The compensation of the equity research analyst(s) is indirectly affected by revenues deriving from the
business and financial transactions of Deutsche Bank.
EU countries: Disclosures relating to our obligations under MiFiD can be found at http://globalmarkets.db.com/riskdisclosures.
Japan: Disclosures under the Financial Instruments and Exchange Law: Company name - Deutsche Securities Inc. Registration number Registered as a financial instruments dealer by the Head of the Kanto Local Finance Bureau (Kinsho) No. 117. Member of associations: JSDA,
The Financial Futures Association of Japan. Commissions and risks involved in stock transactions - for stock transactions, we charge stock
commissions and consumption tax by multiplying the transaction amount by the commission rate agreed with each customer. Stock transactions
can lead to losses as a result of share price fluctuations and other factors. Transactions in foreign stocks can lead to additional losses stemming
from foreign exchange fluctuations. "Moody's", "Standard & Poor's", and "Fitch" mentioned in this report are not registered as rating agency in
Japan unless specifically indicated as Japan entities of such rating agencies.
New Zealand: This research is not intended for, and should not be given to, "members of the public" within the meaning of the New Zealand
Securities Market Act 1988.
Russia: This information, interpretation and opinions submitted herein are not in the context of, and do not constitute, any appraisal or evaluation
activity requiring a license in the Russian Federation.
Deutsche Bank
20/07/2015 16:44:38
Yaroslav Lissovolik// +7 495 933 92 47
Ilya Piterskiy//
+7 495 933 92 30
June 2011
2010 DB Blue template
73
Global Disclaimer
The information and opinions in this report were prepared by Deutsche Bank AG or one of its affiliates (collectively "Deutsche Bank"). The information herein is believed to be reliable and has been obtained from public sources believed to be
reliable. Deutsche Bank makes no representation as to the accuracy or completeness of such information.
Deutsche Bank may engage in securities transactions, on a proprietary basis or otherwise, in a manner inconsistent with the view taken in this research report. In addition, others within Deutsche Bank, including strategists and sales staff, may
take a view that is inconsistent with that taken in this research report.
Opinions, estimates and projections in this report constitute the current judgement of the author as of the date of this report. They do not necessarily reflect the opinions of Deutsche Bank and are subject to change without notice. Deutsche
Bank has no obligation to update, modify or amend this report or to otherwise notify a recipient thereof in the event that any opinion, forecast or estimate set forth herein, changes or subsequently becomes inaccurate. Prices and availability of
financial instruments are subject to change without notice. This report is provided for informational purposes only. It is not an offer or a solicitation of an offer to buy or sell any financial instruments or to participate in any particular trading
strategy. Target prices are inherently imprecise and a product of the analyst judgement.
As a result of Deutsche Bank’s recent acquisition of BHF-Bank AG, a security may be covered by more than one analyst within the Deutsche Bank group. Each of these analysts may use differing methodologies to value the security; as a
result, the recommendations may differ and the price targets and estimates of each may vary widely.
Deutsche Bank has instituted a new policy whereby analysts may choose not to set or maintain a target price of certain issuers under coverage with a Hold rating. In particular, this will typically occur for "Hold" rated stocks having a market cap
smaller than most other companies in its sector or region. We believe that such policy will allow us to make best use of our resources. Please visit our website at http://gm.db.com to determine the target price of any stock.
The financial instruments discussed in this report may not be suitable for all investors and investors must make their own informed investment decisions. Stock transactions can lead to losses as a result of price fluctuations and other factors. If
a financial instrument is denominated in a currency other than an investor's currency, a change in exchange rates may adversely affect the investment. Past performance is not necessarily indicative of future results. Deutsche Bank may with
respect to securities covered by this report, sell to or buy from customers on a principal basis, and consider this report in deciding to trade on a proprietary basis.
Unless governing law provides otherwise, all transactions should be executed through the Deutsche Bank entity in the investor's home jurisdiction. In the U.S. this report is approved and/or distributed by Deutsche Bank Securities Inc., a
member of the NYSE, the NASD, NFA and SIPC. In Germany this report is approved and/or communicated by Deutsche Bank AG Frankfurt authorized by the BaFin. In the United Kingdom this report is approved and/or communicated by
Deutsche Bank AG London, a member of the London Stock Exchange and regulated by the Financial Services Authority for the conduct of investment business in the UK and authorized by the BaFin. This report is distributed in Hong Kong by
Deutsche Bank AG, Hong Kong Branch, in Korea by Deutsche Securities Korea Co. This report is distributed in Singapore by Deutsche Bank AG, Singapore Branch, and recipients in Singapore of this report are to contact Deutsche Bank AG,
Singapore Branch in respect of any matters arising from, or in connection with, this report. Where this report is issued or promulgated in Singapore to a person who is not an accredited investor, expert investor or institutional investor (as
defined in the applicable Singapore laws and regulations), Deutsche Bank AG, Singapore Branch accepts legal responsibility to such person for the contents of this report. In Japan this report is approved and/or distributed by Deutsche
Securities Inc. The information contained in this report does not constitute the provision of investment advice. In Australia, retail clients should obtain a copy of a Product Disclosure Statement (PDS) relating to any financial product referred to in
this report and consider the PDS before making any decision about whether to acquire the product. Deutsche Bank AG Johannesburg is incorporated in the Federal Republic of Germany (Branch Register Number in South Africa:
1998/003298/10). Additional information relative to securities, other financial products or issuers discussed in this report is available upon request. This report may not be reproduced, distributed or published by any person for any purpose
without Deutsche Bank's prior written consent. Please cite source when quoting.
Copyright © 2011 Deutsche Bank AG
Deutsche Bank
Yaroslav Lissovolik// +7 495 933 92 47
Ilya Piterskiy//
+7 495 933 92 30
June 2011
74