ARE ALL ANIMALS EQUAL?data.cbonds.info/publication/TRUST Regional Telecoms Apr 16 2003.… · Now...

REGIONAL TELECOMS: ARE ALL ANIMALS EQUAL? VIACHESLAV NIKOLAEV T +7(095) 789-3594 E [email protected]

REGIONAL TELECOMS WWW.TRUST.RU

REGIONAL TELECOMS: INITIATION OF COVERAGE

ARE ALL ANIMALS EQUAL? Now is a good time to take another look at the Russian fixed line telecommunications sector. The consolidation of local telecommunications operators has been completed from a legal viewpoint, and corporate restructuring, now well underway, suggests additional upside in local telecoms’ shares.

Company Ticker Price, US$ Target Price, US$

Upside/ Downside Rating

North-West SPTL 0.35 0.38 7% Hold

Central ESMO 0.25 0.21 -15% Sell

Volga NNSI 1.57 2.42 60% Buy

South KUBN 0.08 0.11 44% Buy

Urals URSI 0.016 0.017 6% Hold

Siberia ENCO 0.027 0.033 22% Buy

Far East ESPK 0.66 0.73 11% Hold Source: RTS; TRUST estimates

Russian telecoms look better than international peers The Russian telecommunications story is different from the Western one, as growing demand, modest capex requirements and clean balance sheets ensure impressive cash flows.

Super-regionals are our pick Smaller local operators that did not participate in the consolidation process are less attractive than super-regional operators due to their high political risks and insignificant size.

Sector re-rating: not all super-regionals are equally attractive While there is definite room for a sector-wide re-rating and all Local Telephone Operators have much in common, we argue that not all are equally attractive, as the differences between them are the key factor for determining future cash flows.

All prices in this note are given as of April 14, 2003

15 April 2003

VIACHESLAV NIKOLAEV

T +7(095) 789-3594

E [email protected]

TELECOMMUNICATIONS

SECTOR PERFORMANCE

40%

50%

60%

70%

80%

90%

100%

110%

120%

130%

04/0

2

05/0

2

06/0

2

07/0

2

08/0

2

09/0

2

10/0

2

11/0

2

12/0

2

01/0

3

02/0

3

03/0

3

04/0

3

Russian RTS IndexTRUST Telecom Index

Source: RTS; TRUST estimates

FIXED LINE SECTOR: ARE ALL ANIMALS EQUAL? 3/35


CONTENTS

Investment Summary ____________________________________________________________________________4 Valuation ____________________________________________________________________________________5

Share Price Drivers______________________________________________________________________________7 Legal issues ___________________________________________________________________________________7 Pace of Restructuring ____________________________________________________________________________9 State Control __________________________________________________________________________________10 Fixed Line Industry: Round-up & Models ____________________________________________________________11

1. Local Telephony: Tariffs _____________________________________________________________________11 2. Local Telephony: Lines ______________________________________________________________________12 3. Time-Based Billing & mobile-to-fixed calls _______________________________________________________13 4. Long Distance _____________________________________________________________________________14 5. Other Services. ____________________________________________________________________________16

Cost Side_____________________________________________________________________________________18 Capital Expenditure_____________________________________________________________________________20 North-west Telecom ____________________________________________________________________________21 CentreTelecom ________________________________________________________________________________23 VolgaTelecom _________________________________________________________________________________25 Southern telecommunications Company ____________________________________________________________27 Uralsvyazinform _______________________________________________________________________________29 SibirTelecom telecommunications Company _________________________________________________________31 Far East Telecom (DalSvyaz) _____________________________________________________________________33



INVESTMENT SUMMARY

The Russian telecommunications sector went out of fashion in the aftermath of the 1998 financial crisis – and for obvious reasons. Now, however, the time is right to look at the sector again. The situation has changed and the Russian telecoms landscape looks very different following three years of reform.

On Western markets all the telecoms indices are down. In 2002, Western European telecoms lost over 30% of their value, and the US telecommunications services sector lost almost half its value. Global telecoms operators’ 2002 capex decreased by similar amounts, according to information released recently by Lucent Technologies. Lack of top line growth, massive negative bottom lines, disappointing development in the mobile data sector and huge debt burdens are all contributing factors to the drop in investment.

The situation in Russia is quite different, however. Even in a difficult 2002 Russian telecoms were up 7%, and they are already up 20% in the year-to-date. This boom can largely be attributed to growing demand for communications services as the Russian economy expands – we see decent 20-30% annual top line increases in dollar terms. Another contributing factor is that telecoms is the only sector in which serious restructuring is close to completion. The ongoing restructuring in the utilities sector and Gazprom grabs most of the headlines in the press, but with telecoms we see reforms actually being completed. The non-transparent legal environment will be also improved later this year when the new Law ‘On Communications’ is approved by the Russian Parliament. Capital requirements remain very modest, increasing telecoms operators’ attractiveness further.

Not so long ago the telecoms sector offered investors only four companies - two in the mobile sector (MTS and VimpelCom), and one each for the long distance and alternative sectors. Apart from them there were almost a hundred smaller companies, which were illiquid, non-transparent, and unpredictable. Now there are 7 companies in the fixed-line sector that in terms of size, liquidity, and potentially transparency, are closer to Russian blue chip telecoms. Corporate restructuring still needs much attention, but investors’ and analysts’ horizons in Russian telecoms are now broadening rapidly.

Figure 1 Russian Telecoms:

Local Fixed Line

70+ small illiquid ops

MGTS

Standalones

Non-SvyazinvestSvyazinvestLensvyaz, Komi,

DagestanKazan GTS,

BashinformsvyazBlue Chips

Alternative

Rostelecom

MobileVimpelCom

MTS

Golden Telecom

Long Distance

7 Super-Regionals

Source: TRUST

Restructuring has left several standalones that can be divided into two categories:

• those that still have a decent chance of being consolidated into corresponding super-regionals, such as Lensvyaz, Komi Svyaz, and even Dagsvyazinform;

The Russian telecoms story is very different from the depressing Western one



• companies such as Bashsvyazinform and Tattelecom that are controlled by local governments.

This category carries high political risks, and fundamental analysis is hardly applicable here.

MGTS is a similar story. It is the only standalone that is large enough to attract investors. Unfortunately, after several years of negotiations the company’s two main shareholders, Svyazinvest and Sistema, still have not reached an agreement on the destiny of MGTS. It could either go for an additional share offering on Western markets, which would be the ideal solution for the company, or Sistema may attempt to merge its alternative operators and launch an IPO of the merges entity. However, MGTS could then lose control over its main asset, MTU-inform, one of Moscow’s largest alternative operators. This uncertainty makes MGTS a political story too. Therefore, in the local landline operator sector, our focus remains on the super-regionals.

Not all Local Telephone Operators are equally attractive

Although there is clear room for a sector-wide re-rating and all Local Telephone Operators (LTOs) have much in common (similar network conditions, tariffs regulated by the government, obligation to route long distance traffic through Rostelecom, etc.), we argue that not all are equally attractive, as the differences between them (such as geographical location and access to the cellular market), are the key factor for future cash flows.

VALUATION

We use two traditional methods of valuation: comparative valuations against major EMEA peers, and DCF analysis.

We see significant upside for Russian Local Telephone Operators (LTOs) based on valuation multiples: on an EV/EBITDA 2003 basis they are traded at an average 53% discount to their international peers. However, there are significant differences within the 7 new super-regional operators: for example Far Eastern Telecom is traded at valuations 2.75 times lower than Uralsvyazinform. We will show that although this gap is largely justified, high valuations will not allow for significant growth of Uralsvyazinform shares. On a multiples basis our favourite stock is Volga Telecom, whose potential is made particularly clear by its low EV/EBITDA to growth ratio.



Figure 2 Russian LTOs and their international peers

Price MC EV EV/Sales EV/EBITDA EBITDA CAGR, %

2003 EV/EBITDA

US$ US$ mn

Country US$ mn 2002E 2003E 2004E 2002E 2003E 2004E 2002-05E to Growth

Telekomunikacja Polska 3.0 4251 Poland 8056 1.8 1.7 1.7 4.4 4.2 4.0 8% 50.7 Hellenic Telecommunications 9.0 4518 Greece 5927 1.4 1.3 1.3 3.3 3.2 3.1 15% 22.0 Matav 3.7 3835 Hungary 5780 2.3 2.2 2.1 5.7 5.5 5.3 2% 280.1 Cesky Telecom 10.6 3407 Czech Rep. 4146 2.4 2.4 2.3 4.8 5.0 5.0 34% 15.0 Eesti Telekom 5.7 782 Estonia 725 2.5 2.4 2.3 5.4 5.3 5.5 -2.5 na Lietuvos Telekomas 0.4 292 Lithuania 382 1.1 1.1 1.1 3.3 2.9 2.9 -0.2 na Average 1.9 2.0 1.9 4.6 4.6 4.5 8% 55.7 Northwest 0.35 301 Russia 353 1.1 0.9 0.8 3.1 3.1 2.6 13% 22.8 Central 0.25 489 Russia 622 1.1 1.0 0.8 3.2 3.1 2.2 21% 14.3 Volga 1.57 470 Russia 517 1.5 1.2 1.0 3.6 2.7 2.0 31% 8.7 South 0.08 284 Russia 370 1.1 1.0 0.9 3.2 2.7 2.4 16% 16.3 Urals 0.02 628 Russia 784 1.7 1.3 1.1 5.6 4.6 4.3 19% 23.9 Siberia 0.03 390 Russia 435 1.1 0.9 0.8 3.6 3.1 2.6 23% 13.3 Far East 0.66 79 Russia 85 0.5 0.5 0.4 1.7 1.5 1.4 13% 11.8 MGTS 6.64 592 Russia 744 1.8 1.4 1.3 3.7 2.8 2.4 18% 15.5 Average 1.2 1.0 0.9 3.5 2.9 2.5 19% 15.8 Source: TRUST estimates

In our DCF models we took a conservative approach to WACC calculations. We use a risk-free rate of 8%, based on the yield on Russian government long term Eurobonds, and apply a 10% equity risk premium justifying the lack of transparent IAS-based financials, corporate governance risks and political risks. We also applied the highest beta (1.6) among super-regionals (we use a period of relatively active trading – from November 2002 to date), which is incidentally equal to the beta of some EMEA peers. We therefore arrive at a WACC varying from 21.2% to 22.7%, depending on the particular company’s leverage.

Figure 3: Valuations and target prices – common shares

Northwest Central Volga South Urals Siberia Far East

WACC 21.8% 21.3% 22.7% 21.2% 21.5% 22.5% 22.7% Target Price, US$ 0.38 0.21 2.42 0.11 0.017 0.033 0.73 Current Price, US$ 0.35 0.25 1.57 0.077 0.016 0.027 0.66 Upside 7% -16% 55% 44% 5% 25% 11% Rating Hold Sell Buy Buy Hold Buy Hold Source: TRUST estimates

Based on the results of our DCF models confirmed by the multiples valuation, we rate VolgaTelecom, Southern Telecommunications Company (STC) and Siberia Telecom as a Buy; Uralsvyazinform, Far East Telecom and North West Telecom as a Hold, and CentreTelecom as a Sell at current levels.

We believe that the traditional average discount of 40% on preferred shares reflects their lack of voting rights and uncertainty regarding their possible conversion into common shares (although any conversion is unlikely in the foreseeable future).



Figure 4: Target prices – preferred shares Northwest Central Volga South Urals Siberia Far East Target Price, US$ 0.23 0.13 1.45 0.07 0.010 0.02 0.44 Current Price, US$ 0.21 0.17 1.04 0.058 0.012 0.018 0.52 Upside 9% -26% 40% 16% -17% 13% -15% Dividend yield 3% 4% 6% 11% 3% 4% 4% Rating Hold Sell Buy Buy Sell Buy Sell Source: TRUST estimates

Our ratings for preferred shares therefore differ from those for common stock. We assign a Sell rating to Uralsvyazinform and Far East Telecom (Dalsvyaz) prefs, as we believe that a dividend payout ratio of 10% will hardly offset the negative features of prefs, especially given that local operators are unlikely to post impressive earnings under Russian Accounting Standards, which are used in dividend calculations.

SHARE PRICE DRIVERS

1. Local access fee hikes – upside potential, one of the strongest price drivers.

2. Long distance tariffs – downside potential, especially in ILD (International Long Distance).

3. Long distance traffic – upside potential, as current average minutes of use are several times lower than in EMEA countries.

4. Payments to Rostelecom – short-term negative, likely to increase from the current 17% for DLD services to roughly 30%. In the longer term, however, along with heavy tariff decreases, this is likely to go down to around 20%.

5. Cellular exposure – upside potential only for companies with broad exposure, e.g. the Volga, Urals, Siberia and, potentially, Far East super-regional operators.

6. Internet and other value added services (VAS) – upside potential, as demand for Internet is growing. Local telecoms could also benefit from other VAS (videoconferencing, call forwarding, answering systems, etc.) in the longer term, network upgrades would allow companies to provide such services on a wide scale.

LEGAL ISSUES

The legal environment in Russia has always been considered among the main risks associated with investing in local equities. This concern particularly applies to the telecoms sector. Legislation in this area is notorious for its non-transparency and ‘flexibility’. The investment community still remembers the scandals involving frequency revocation in September 2000 and cellular GSM licences being issued without tenders.

We are pleased to see that the situation has begun to change significantly in the last year or two, and the government has tried to convince investors that there will be no more shenanigans in the industry. However, at the end of last year the GSM licence for the Urals region was issued to an unknown company, without a tender in a totally non-transparent manner. In these still unpredictable conditions the adoption of the new law “On Communications” is gaining increasing importance.

While the legislation itself is still being prepared, overall practices in the industry are improving gradually, and this is being reflected in credit agencies’ ratings. Standard and Poor’s has now assigned a Corporate Governance Rating to a number of LTOs (the rating itself is not considered particularly important by the investment community, but the very fact that S&P issued the rating is in itself an indicator of overall improvements in corporate standards).



The Draft of the Law ‘On Communications’, which regulates the majority of issues in Russian telecommunications, is now being discussed in Duma committees and is likely to be approved by all legislative bodies by the end of the year.

The most important elements of the new law are:

- Introduction of a so-called Universal Service Fund. All telecommunications operators in the country will have to contribute a certain percentage of their revenues to the fund. (According to the draft issued at the beginning of the year, telecoms companies will be required to contribute 0.6% of their revenues. However, this figure could be changed during the Duma debates.) Those telecom operators that agree to provide socially important services, such as telephone services in rural and remote areas, will be entitled to receive compensation from this fund. If no operator in any given region volunteers to become a ‘Universal Service Operator’, the government would then choose one itself. Local operators are therefore likely to become net recipients of the fund, while mobile operators and landline alternative operators will probably become net donors to it. The legislative bodies’ approval of this step would be a positive development for LTOs, especially those operating in rural areas (Central and Southern) and in difficult geographical areas (Siberia and Far East). However, some Duma members have been debating this innovation, as they see payments to the fund as a new tax, and taxes in the Russian Federation can only be introduced through amending the Tax Code.

- Introduction of a uniform approach to interconnecting companies. Previously, LTOs were in a position to take an individual approach in signing commercial agreements with other operators willing to connect to the Public Switch Telephone Network. This led to widespread abuse – management of some LTOs created ‘pocket companies’ which had almost zero interconnection costs and therefore very attractive margins. If the new Law is approved, all alternative (non-incumbent) operators would receive equal interconnection conditions and a healthy competitive environment would develop. This development would, in a sense, be negative for LTOs, however. The problem is that the Anti-Monopoly Ministry required all regional telecoms to separate their non-regulated businesses (such as Internet service, Mobile services, etc.) into 100%-owned separate legal entities so that LTOs would not have more favourable conditions for providing value-added services than other market participants. At the beginning of 2003 this regulation was revoked, but the Ministry is now planning to find another way of guaranteeing that all telecommunications market participants receive equal interconnection conditions to Public Switch Telephone Networks. As the market has always believed that LTOs had a competitive advantage in this field, this would be negative for regional telecoms, especially the more advanced ones such as Uralsvyazinform.

The adoption of the new law “On Communications” is gaining importance



PACE OF RESTRUCTURING

Following the 1998 crisis regional telecoms were among the first stocks to go out of fashion. Now, however, the fixed-line industry in Russia has become the reform leader and indeed the only industry in which reforms are close to completion.

As part of the government’s effort to restructure the country’s natural monopolies, more than 70 Russian local telephone operators have already been merged into seven super-regional companies. The ultimate goal of consolidation is to make the Russian telecoms sector more efficient and appealing to investors.

Figure 5: Super-Regional Companies by territory

Urals Region

Siberia Region Far East RegionFar East RegionVolga Region

North Caucasus

Region

Northwest Region

Central Region

Source: Svyazinvest

To facilitate the consolidation, a local operator – the ‘hub’ company – in each of Russia’s seven macro regions (usually the largest company in the respective macro region) issued additional shares that were subsequently swapped for the shares of other local operators in their respective macro regions. As a result, these companies now have the same ticker symbols but new names (except for Uralsvyazinform), a different number of shares and new scales of business and market capitalisation.

Figure 6 New Incumbents New number of shares (mn) Share Price

Region Company Name Ticker common preferred common preferred

MC (US$ mn)

N-West North-West Telecom SPTL 735.92 202.02 0.35 0.21 305.02 Central CentreTelecom ESMO 1578.01 525.99 0.25 0.17 497.60 Volga VolgaTelecom NNSI 245.97 81.98 1.57 1.04 372.23 South STC KUBN 2960.51 972.15 0.077 0.058 265.65 Urals Uralsvyazinform URSI 32298.78 7835.94 0.016 0.012 552.46 Siberia SiberiaTelecom ENCO 12011.40 3908.42 0.027 0.018 346.76 Far East DalSvyaz ESPK 95.58 31.17 0.66 0.52 83.47 Source: Svyazinvest; TRUST estimates

All super-regional companies have ADR programs – some inherited these from their hubs (like Uralsvyazinform or Nizhnovsvyazinform), while others started Level 1 ADRs in September 2001. Svyazinvest has also voiced its intention to upgrade the ADR programs of its super-regional



subsidiaries to the second level, and subsequently to issue new shares and list them on the NYSE in the form of Level 3 ADRs.

Figure 7: Hub Companies’ ADR Programs

Old Name New Name Super-Region ADR Program Status

St Petersburg Telephone North-West Telecom North-West Level 1 since September 2001

Moscow Regional Electrosvyaz CentreTelecom Central Level 1 since September 2001

Nizhnovsvyazinform Volga Telecom Volga Level 1 since october 1997

Kubanelectrosvyaz Southern Telecommunications Company(STC) South Level 1 since February 1998

Uralsvyazinform Uralsvyazinform Urals Level 1 since July 1997

Novosibirsk Electrosvyaz Siberia Telecom Siberia Level 1 since September 2001

Primorye Electrosvyaz DalSvyaz Far East Level 1 since September 2001

Source: Svyazinvest

STATE CONTROL

While the consolidation of local operators will create a more efficient telecoms sector, it will not automatically lead to the surrender of state control. The state currently controls local operators through its 75% stake in Svyazinvest. Svayzinvest was a 51% shareholder in each of the 70+ local operators, while Mustcom, a consortium of Western institutional investors, owns the remaining 25% of Svyazinvest. Svyazinvest after consolidation still holds a 51% stake in each of the seven super-regional companies, and the state continues to hold a 75% stake in Svyazinvest.

Figure 8: Svyazinvest Structure

Mustcom Government

Svyazinvest

75%-1 share25%+1 share

70 Regional Operators Rostelecom MGTS 3 Regional

Operators

51% 51% 28% Minority

Mustcom Government

Svyazinvest


Rostelecom 3 RegionalOperators

51% Minority51% 51%

7 Super-Regional Operators

MGTS

28%

Mustcom Government

Svyazinvest



Operators


Mustcom Government

Svyazinvest



51% Minority51% 51%

7 Super -Regional Operators MGTS

28%

Mustcom Government

Svyazinvest



Operators


Mustcom Government

Svyazinvest



51% Minority51% 51%

7 Super-Regional Operators

MGTS

28%

Mustcom Government

Svyazinvest



Operators


Mustcom Government

Svyazinvest



51% Minority51% 51%

7 Super -Regional Operators MGTS

28%

Source: Svyazinvest

Earlier this year the government once again announced its intention to privatise another package of Svyazinvest shares. The Russian authorities raise this issue every year, but in practice the task is far from simple. One obstacle is the low value of the holding – the combined market worth of Svyazinvest’s stakes in Russian telecoms today is US$1.78 bn, while the government wants to earn some US$1 bn from selling 25% of that stake. Furthermore, the second package to be privatised is a non-blocking one – 25% minus 2 shares. Bearing in mind

The government recently proposed selling all 75% of the Svyazinvest stake



the fate of Mustcom, whose members are hoping to exit the structure, we find it difficult to see another investor ready to become a shareholder in Svyazinvest.

In the light of these difficulties, the government recently proposed selling all 75% of its Svyazinvest stake as a possible solution, while introducing a ‘golden share’ to the charter of the company to ensure that that all major decisions would have to be approved by the government. Even under this scenario the government may face certain difficulties, however, as Mustcom members could introduce their own conditions before allowing the transaction to go ahead.

We still believe that the simplest step for the government would be the dissolution of Svyazinvest, as a result of which Mustcom members would receive direct ownership in regional telecoms and Rostelecom, a move they already agree to. The government would then be able to sell its stakes in super-regional operators to strategic investors, simultaneously writing into operators’ charters its right to veto any decision by the companies’ new shareholders.

FIXED LINE INDUSTRY: ROUND-UP & MODELS

As all 7 LTOs are planning to report their IAS consolidated financials by the end of the year, and most of them in early summer, we have limited the extent of our models to estimating EBITDA, as we believe forecasting the bottom line has little sense at present. Our revenue and operating costs models are based on the operating and financial results of all Svyazinvest subsidiaries for the first 9 months 2002, along with our assumptions, which are presented below.

1. LOCAL TELEPHONY: TARIFFS

Local access tariffs in Russia are traditionally much lower than in other countries for social reasons. Even after most other prices were liberalised in 1991, the situation in the fixed-line industry did not change. Local operators’ tariffs remained regulated by the Anti-Monopoly Ministry as ‘natural monopolies’. For over a decade various government agencies have been debating tariff reform in the telecoms sector, but each time political populism has proved to be more important than economic progress.

The tariff situation therefore only started to change in 2002, when the Anti-Monopoly Ministry started approving more material tariff increases, to the current average level of RUB110 (US$3.5) per line per month, which Svyazinvest says is close to the break-even level.

Svyazinvest, along with the government and hired consultants, has been working on developing a new methodology for tariff setting in the industry for the last year. Local telecoms are planning to introduce a new cost calculation procedure: under the new scheme they would have to divide the costs for different types of services: local access, long distance, and other services. Based on these costs, the regulator would determine tariffs for the services – including some normal rate of return and a so-called investment component.

The tariff situation therefore only started to change in 2002…



Figure 9: Tariff Assumptions

150170

260280

300

80

105

200220

240

2.7

3.3

4.5

4.9

5.4 5.55.7

5.96.1

6.2

50

100

150

200

250

300

350

2001 2002 2003E 2004E 2005E 2006E 2007E 2008E 2009E 2010E

RUB

2

3

4

5

6

7

US$

Line rental (RUB) Line rental (US$)

Source: Svyazinvest; TRUST estimates

The new system will hopefully be in operation before the end of 2003, and therefore we expect the Anti-Monopoly Ministry to gradually increase tariffs to a level closer to that of Eastern European peers. However, as there is a high probability that the rapid development of mobile telephony and subsequent lower cellular ARPU figures would not allow fixed-line charges to reach current European levels, preferring to err on the side of caution, we assume eventual local access tariff saturation at a level of US$5.7-US$6.0 per line, depending on the region. This is still almost a twofold increase from current levels.

However, within the next two years a significant increase in local tariffs is extremely unlikely, particularly considering the upcoming State Duma and presidential elections in December 2003 and March 2004, respectively. The pending elections present an obstacle to implementation, as politicians will be unwilling to risk their re-election by advocating the politically sensitive issue of tariff hikes in the run-up to the polls. Low per capita income (roughly US$95 a month) and the uneven distribution of income are other limitations to adopting a sharp increase in local rates. But the anticipated 10-15% annual growth in per capita income in dollar terms on the back of economic growth and real rouble appreciation should provide room for tariff increases in the medium term (See Figure 9).

2. LOCAL TELEPHONY: LINES

Fixed-line penetration in Russia currently stands at around 22%, which is much lower than in emerging European countries, where penetration of landline phones is usually closer to 40%. Unfortunately Russia’s current telecommunications scene is materially different from the situation which European fixed-line operators faced at their major points of growth. Those who expect Russia to reach the same level are likely to be disappointed.

The main difference is in mobile telephony maturity. When Eastern European landline companies were growing fastest, mobile telephony was at the very beginning of its development and was therefore too expensive to compete with landline phones. In Russia, however, the cellular business is currently booming, and rapidly penetrating the regions. We expect overall mobile penetration in Russia to equal landline penetration before the end of 2003, while mobile penetration in the regions should reach the level of landlines in the next three years.

…however, a significant increase in local tariffs within the next two years is extremely unlikely

Those who expect Russia to reach the level of European penetration are likely to be disappointed



We therefore forecast a slowdown in fixed-line client base growth from the current 4%-6% per year to 1% - 2% in 2008.

Figure 10: Fixed Line Penetration Assumptions

18.4%19.4%

17.0%18.1%

21.8%

24.1% 24.1%

21.8%

16%

19.7%

26%

19%

24%

29%

0%

5%

10%

15%

20%

25%

30%

35%


2002 2010E

Source: Svyazinvest; TRUST estimates

3. TIME-BASED BILLING & MOBILE-TO-FIXED CALLS

The story of time-based billing has been followed by investors since the emergence of the Russian equity market. In global telecommunications the time-based system originated in the early 1970s, but has only developed fully in the last few years.

The Anti-Monopoly Ministry, along with the Communications Ministry and Svyazinvest, have been arguing that the introduction of time-based billing (TBB) would not increase the social burden. Moreover, as the introduction of TBB means lower fixed monthly fees, people in the low income bracket should actually get some relief, as they would be able to control communications expenses by limiting outgoing calls (with incoming calls free of charge). At the same time, people who use their home telephone for business purposes (and therefore create the heaviest capacity) would pay more, which seems only reasonable. However, politicians at all levels have traditionally used Russian consumers’ dim view of TBB to boost their popularity. Among the examples of this opportunism was Moscow Mayor Yuri Luzhkov’s campaign against TBB, and the Duma’s attempts to amend the law so that people would be able to choose between TBB and a flat monthly fee. The latter would be totally unacceptable for fixed line operators, as occasional users would choose TBB, heavy users would go for the flat monthly fee, and local operators would go bankrupt.

A more recent episode in the battle between politicians and telecommunications companies occurred at the end of March, when contradictory announcements were issued almost simultaneously by VolgaTelecom and the Saratov Legislative Assembly. VolgaTelecom announced its Saratov branch was introducing time-based billing for local calls in the city of Saratov starting from April 1. At the same time, the Saratov Region Legislative Assembly adopted a moratorium on the introduction of time-based billing in the region until the new law ‘On Communications’ is approved by federal legislative bodies. The outcome of this local battle brought mixed feelings – TBB was introduced in Saratov, but only for businesses. This happened despite the fact that, according to the letter of the law, the introduction of TBB by LTOs does not fall under the jurisdiction of local legislative authorities. However, we believe that

Politicians at all levels have traditionally used Russian consumers’ dim view of TBB to boost their popularity



the resistance of the political establishment to introducing TBB will be fairly strong, at least until the two next election periods are over in the middle of 2004.

On the other hand, investors should not be too disappointed by the postponement of the introduction of TBB. While in theory its implementation would allow local telecoms to benefit from Russians' growing wealth, in practice the margins it delivers are fairly low, as the snail’s pace of Russia’s postal service makes the billing system ineffective. A spectacular example of this problem occurred in the city of Perm, where Uralsvyazinform introduced TBB for all users of its network several years ago. Having failed to find a viable customer billing scheme, the company decided simply not to bill them at all. Uralsvyazinform clients now have to call their provider’s call centres to check their account or to go there in person to pay their phone bills.

In addition to the unclear economics of introducing TBB due to high billing costs, world practice shows that the psychological effect of the move would last for several years, during which people would limit their use of fixed-line phones and landline operators would likely see decreasing revenues from local telephony. Our models anticipate a gradual introduction of TBB by local telecoms over the next 5 years.

Another opportunity for LTOs is the introduction of the calling-party-pays (CPP) principle in interconnection with mobile operators, under which landline phone users would pay an additional charge for calling mobile numbers1, while incoming calls on all networks (mobile and fixed-line) would be free. LTOs would pay part of this additional charge to a mobile operator for termination of the call. In return, LTOs would receive payment for terminating calls originating from mobile users. This system can only be introduced after metering equipment is installed on all landline phone switches, however, and the political problems of adopting such a decision (which would require approval from the Anti-Monopoly Ministry as LTOs are considered natural monopolies) could cause further delay. In our models we therefore assume the introduction of CPP in 2005 and with very modest tariffs.

4. LONG DISTANCE

Domestic Long Distance (DLD) traffic is the only area where genuine growth in operating indicators is to be found. Although DLD traffic has been growing every year since the 1998 crisis, saturation level is a long way off, as the current traffic per line of 30 minutes per month is still much lower than that in European countries. By comparison, EMEA sees DLD traffic of 40-50 minutes per line per month. Moreover, given that the EMEA peers are much smaller and better integrated into the global economy, some of the international traffic of East European countries (such as a call from the Czech Republic to Hungary or Poland) when compared to Russia should be considered domestic.

International long distance traffic was growing slower than domestic traffic after the 1998 crisis, particularly when the crash caused many foreign companies to close their offices in the country. However, in the current conditions of an improving economy and the growing interest of the international community in Russian business, we expect more pronounced growth in ILD traffic from the current 20 minutes per subscriber per year to 50-80 minutes (depending on the region) in 2010.

The most lucrative segment of long-distance growth should be attributed to alternative operators rather than LTOs/Rostelecom. On the one hand, it is practically impossible to create a network which would be able to fully compete with Rostelecom, as to do this the competitor would have to deliver the whole mix of LD traffic to every city and village of the country. This, of course, is not financially viable and Rostelecom will carry most of the individual user traffic in Russia for the foreseeable future. On the other hand, the ‘pyramid effect’ means that over 80% of long distance traffic is created by 20% of the largest users in each given region. Alternative operators

1 Currently all calls to and from cellular phones in Russia are charged to the cellular subscriber.

Domestic Long Distance (DLD) traffic is the only area where genuine growth in operating indicators is to be found



meanwhile offer their services (which are not just long distance, but also quality local access, Internet access and sometimes even converged fixed/mobile solutions) to the biggest companies in the largest cities of the country. While their total number of clients cannot be compared to those of local operators or Rostelecom, the amount of traffic they can potentially carry could reach levels similar to LTO/Rostelecom long distance traffic.

In our models we therefore assume a gradual decrease in the DLD market share of domestic operators from the current 90+% to a conservative estimate of 70%. Again, the figure will depend on the region - the Central, North West and Far East regions are already penetrated by alternative operators, and the long distance market (particularly the international one) in those areas is much more competitive, so in these regions we forecast a greater loss of market share by local incumbent operators.

Figure 11: Fixed Line Statistics: Russia vs. EMEA Cesky Telecom Matav Svyazinvest

2001 2002 2001 2002 2001 2002 Lines

Teledensity 38% 38% 39% 39% 19% 20%

Residential Lines 69% 69% 77% 74% 85% 85%

Business Lines 28% 26% 11% 10% 15% 15%

ISDN Lines 3% 6% 10% 14% 0% 0%

Other (Payphones etc) 0% 0% 1% 1% 0% 0%

Traffic per Line per Day

DLD 1.60 1.41 1.02 0.87 0.98 1.11

ILD 0.60 0.59 0.52 0.50 0.08 0.11

Total 2.20 2.00 1.53 1.38 1.06 1.22

Monthly Subscription 4.50 4.60 6.10 7.20 2.50 3.34

Long Distance Tariff (Average) 0.13 0.13 0.15 0.14 0.12 0.11

Monthly ARPU 18 18 26 25 7.58 8.49

Source: Company Data, Svyazinvest, TRUST estimates

Last-mile operators will benefit from traffic growth in the short-term anyway, however, as nobody is able to build a comparable parallel network to reach end-customers (the ones that are not targeted by alternative operators are also likely to increase long distance line usage). In the longer term, though, mobile operators are likely to take a larger share of the domestic long distance market, as their tariffs are becoming more competitive against those of local telecoms. Moreover, when the leading mobile players become truly national (a step which is only one or two years away), intra-network calls even across the country may be charged at lower rates than calls to fixed-line operators in the home city of the caller.

Both DLD and ILD tariffs also have a clear downside

Both DLD and ILD tariffs also have a clear downside compared to their international peers. Distance is becoming less important in defining tariff levels, while originating and terminating the call and customer loyalty are becoming of greater value. We expect that in the medium-term long distance tariffs in Russia will become closer to those in developed countries, i.e. not more than US$0.05 per minute, regardless of the distance. This will not happen until nearer the liberalisation of the long-distance market, however.



Figure 12: DLD Tariffs

2426

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27

72

0.110.12

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Russia Poland Hungary Czech Rep. USA

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DLD tariff

Source: Company Data; TRUST estimates

5. OTHER SERVICES.

Mobile services and Internet access are two other services provided by local telecoms that are worth mentioning. Many local operators do promote such services as videoconferencing, but as these services are still somewhat exotic for the Russian telecommunications market we do not see them as potential sources of revenue in the near future. At the same time, revenues from Internet service are currently rising too slowly to be considered a serious source of cash for LTOs, and growth in this segment is still not particularly impressive (in 2002 LTOs received around US$55 mn from Internet service, only 29% up from US$42.7 mn in 2001).

Exposure of landline operators to the mobile market has so far been well appreciated by investors: Uralsvyazinform, which traditionally has the most developed mobile operations, boasts by far the highest EV per access line of the super-regionals.

Mobile services and Internet access are the main value-added services



Figure 13: EV/Access Line

137

270

129

81

115113107

0

50

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150

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300


US$

Source: RTS; Company Data; TRUST Estimates

Most of the seven super-regional LTOs have highly fragmented cellular assets that would not be able to compete with the larger federal operators. The history of the cellular industry shows that a single ‘oblast’ cellular operator gradually loses market share when a federal operator enters its area of operations. There are a number of reasons for this: the stronger brands of larger operators, economy of scale, experience in operating in a competitive environment, and cheaper funding, to name but a few. The main question here is whether a super-regional operator is able to defend its position on the local market against the ‘Big Three’. While it is too early to draw firm conclusions here, we believe that most of the advantages of the national operators could be applied to a super-regional one, and the latter could therefore maintain decent market share in its home region. On the other hand, we believe that only GSM assets are of any value to operators, as NMT and CDMA standards have proved to be only a marginal force in Russia.

In view of the above arguments, we rate the mobile exposure of only three super-regional companies - VolgaTelecom, Uralsvyazinform and Siberia Telecom - at present. Of these three, Uralsvyazinform is close to setting up complete coverage of the Urals macro region, while the other two still have to purchase a number of local operators to reach this stage. However, Svyazinvest has announced that it is to start a ‘pilot’ project to consolidate all Volga Telecom’s mobile assets and purchasing stakes in the remaining local mobile operators to reach seamless coverage in that macro region. VolgaTelecom chief Vladimir Lyulin also said recently that the company is negotiating possible co-operation with SMARTS, the largest independent operator in the region. The situation with SibirTelecom appears a little more complicated, as it has controlling stakes in local operators in only 5 fragmented districts.

Most of the seven super-regional LTOs have highly fragmented cellular assets



Figure 14: Market share assumptions

8.7%

38.5%

11.4%12.8%

33.6%

10.9%

16.2%

0.5%2%1.5%0% 0%0%0%

0.0%

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10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

40.0%

45.0%


2002 mobile market share

2006E mobile market share

Source: AC&M;TRUST estimates

We believe all super-regionals may still obtain cellular licences and could grow into alternative national operators. There are two possible ways this could happen:

- The Communications Ministry would issue GSM licences for all super-regional telecoms that would cover their entire territory,

or;

- Svyazinvest would reach an agreement with other large players in the market such as Tele2, MCT Corp., and SMARTS to create a joint operator.

The second scenario would involve the risk of LTOs losing control over cellular assets and therefore not being able to consolidate cellular results into their IAS financials.

The possible purchase of PrimTelefon (which has a GSM 900/1800 licence for the whole Far East macro region) by DalSvyaz is another development to watch. The asset has already been up for sale by MCT Corp. for some time, and we see DalSvyaz as the most likely buyer.

In our models we anticipate the most likely scenario of macro-regional cellular companies being created in the Urals, Siberia and Volga macro regions, along with DalSvyaz’s purchase of PrimTelefon. In our view the other super-regionals have little chance of taking any revenues from the cellular market, and this assumption translates into zero cash flows.

COST SIDE

Local telephone operators’ expenditures are the main area for financial improvement. The legislative part of industry restructuring has been completed, and the market appreciates this. However, corporate restructuring is still underway, and companies first need to reduce their staff numbers. The current average number of lines per employee in the 7 super-regional LTOs is below 80, while the similar figure in EMEA operators is over 200. Here we note that network service efficiency and maintenance is clearly linked to the quality of equipment. The fact that 65% of all Svyazinvest access lines in service are still analogue does not help.

Local telephone operators’ expenditures are the main area for financial improvement



Figure 15: Digitalisation vs. Employees per line

110

75 73 7581

67

54

34%32%

39% 39%

53%

45%

38%

8% 8% 7% 7%

13%

8%6%

34%31%

49%

38%

34%36% 35%

0

40

80

120

160

Northwest Central Volga South Urals Siberia Far East0%

10%

20%

30%

40%

50%

60%Lines per Employee (LHS)Digitalisation (RHS)Urban Digitalisation (RHS)Rural Digitalisation (RHS)

Source: Svyazinvest; TRUST Estimates

As the chart above shows, digitalisation is not linked directly to effectiveness, but the two do show a strong correlation. North-West Telecom can be excluded from this analysis, as the main reason for its high lines per employee figure is the fact that 54% of all access lines in its macro region are in the city of St. Petersburg. Having this many lines in a limited area is clearly more effective – the number of lines served by one MGTS (the incumbent Moscow operator) employee is closer to 200, although it has the lowest digitalisation level of any LTO (14%). However, it is clear that all incumbents have plenty of room for improving their networks (as discussed in the next section), and this would also be followed by lower headcount figures. At the same time, staff costs are unlikely to decrease in nominal terms, as the current average wage of US$150 is low, and in view of the strengthening Russian economy we anticipate significant increases in salaries, which would only be partially offset by staff cuts.

We also anticipate a fall in maintenance and utilities costs as analogue lines are changed to digital ones. This would be a modest drop, however, as utilities prices are only likely to go up. Therefore we anticipate that the current RUR310 (US$10) per line of annual maintenance/utilities expenses will only fall to RUR250 (US$8) in 10 years’ time.

One of the main areas of long-distance operators’ expenses is payments to Rostelecom, the long distance traffic carrier of local telephone operators. LTOs currently pay roughly 17% of their proceeds from domestic long distance (DLD) traffic and 50% of proceeds from international long distance (ILD) traffic to Rostelecom. The latter claims that 17% is not nearly enough, and this position seems to be supported by the Communications Ministry, Svyazinvest and the Anti-Monopoly Ministry. These circumstances lead us to believe that LTOs’ payments to Rostelecom for routing their long distance traffic will rise to 30%-35% of overall proceeds in this area. However, as DLD tariffs go down and the long distance market is liberalised we see this share dropping to a more reasonable 20% (the usual global distribution of long distance proceeds is around 40-20-40, where 40% is received by each originating and terminating landline operator and 20% goes to the long distance carrier).

Payments to Rostelecom are likely to go up in the short-term



CAPITAL EXPENDITURE

Capital expenditure is also a key factor for the modernisation of LTO networks. As mentioned above, we do not expect any significant growth in local operators’ access lines, mostly due to increasing mobile competition. LTOs should therefore be able to direct their investments into making their networks more competitive. The cost of one line’s modernisation is close to the cost of building a new one (RUB5900, or US$190), as the upgrade requires more than simply changing the switch, and some communication wiring also has to be replaced. We anticipate that by 2010 all LTOs should have a digitalisation level of at least 90%, while the cost of ‘digitalising’ the line will fall to US$100-120. We have also increased our capex estimates in geographically difficult regions such as Siberia, the Far East and South (the latter is included here due to its very low level of urbanisation).

In addition to fixed-line capex, we estimate the mobile capex of operators in the Volga, Urals, Siberia and Far East regions on an expenditures-per-subscriber basis. As a benchmark we have taken capital expenditure per new subscriber by MTS and VimpelCom, which on average spend just under US$100 per new client. However, we note that the mobile LTOs’ expenditures should be much lower than that of MTS or VimpelCom, as local fixed-line operators have existing infrastructure, sales network, real estate, etc., and therefore an advantage over the stronger mobile competitors.

LTOs would be able to direct capex to network upgrades and mobile expansion



NORTH-WEST TELECOM

Figure 16: North-West Telecom Price Performance

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Russian RTS IndexNorth-West TelecomNorth-West Telecom, pref

Source: RTS

Figure 17: North-West Telecom Free Cash Flow

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US$ mln EBITDA Capex Free Cash Flow

Source: TRUST estimates



Figure 18: North-West Telecom Financial and Operational Data REGIONAL DATA 2001 2002E 2003E 2004E 2005E 2006E

Total population (mn) 13.3 13.3 13.3 13.3 13.3 13.4 Total enterprises ('000) 324 324 324 324 324 324 Total number of ALIS (mn) 3.3 3.4 3.5 3.6 3.7 3.8 Mobile Users (mn) 0.3 0.8 1.3 1.8 2.7 3.3 Internet Users (mn) 0.2 0.2 0.3 0.3 0.5 0.6 Fixed line penetration 25% 26% 26% 27% 28% 28% Mobile penetration 2% 6% 10% 14% 20% 24%

COMPANY SPECIFIC DATA 2001 2002E 2003E 2004E 2005E 2006E

Number of employees 30,500 29,475 27,411 25,492 23,962 22,524 Number of lines served (mn) 3.3 3.3 3.4 3.5 3.5 3.6 Market share (%)

Local access 99 98 97 97 96 95 Domestic long distance 95 93 90 87 84 81 International long distance 80 78 76 75 73 71 Internet provision 10 10 10 11 11 12

FINANCIAL DATA

2001 2002E 2003E 2004E 2005E 2006E REVENUES (US$ mn)

Revenues from monthly fee payments 106.4 132.1 173.1 197.3 216.0 226.9 Revenues from Installation 10.4 13.7 14.6 16.9 12.4 11.0 Fixed-to-mobile revenues 0.0 0.0 0.0 0.0 34.5 37.6 Mobile-to-fixed revenues 0.0 0.0 0.0 0.0 6.9 7.5 Revenues from DLD services 105.4 99.4 113.4 135.2 145.7 151.9 Revenues from ILD services 26.4 42.6 32.7 33.6 32.3 30.6 Revenues from data and Internet 6.4 7.2 11.6 16.0 24.3 35.8 Other revenues 21.0 22.4 26.0 29.8 31.9 33.6 Total revenues 275.9 318.4 372.3 429.6 504.8 535.7

COSTS (US$ mn) Payroll costs 89.0 91.8 131.4 140.1 144.6 146.3 Interconnection

Payments to other carriers 20.7 33.2 36.3 55.4 56.2 55.8 Fixed-to-mobile termination costs 0.0 0.0 0.0 0.0 24.1 26.3

Maintenance & utilities costs 34.7 28.0 27.0 27.0 25.7 24.3 Provisions for doubtful accounts 11.0 15.9 18.6 21.5 25.2 26.8 Other costs 4.5 16.4 20.8 25.9 32.6 37.0

EBITDA (US$ mln) 99.4 113.5 115.4 133.4 165.6 186.6

EBITDA margin (%) 36 36 31 31 33 35 Source: Company Data, Goskomstat, TRUST estimates



CENTRETELECOM

Figure 19: CentreTelecom Price Performance

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Russian RTS IndexCentreTelecomCentreTelecom, pref

Source: RTS

Figure 20: CentreTelecom Free Cash Flow

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EUS$ mln EBITDA Capex Free Cash Flow




Figure 21: CentreTelecom Financial and Operational Data REGIONAL DATA 2001 2002E 2003E 2004E 2005E 2006E





FINANCIAL DATA






EBITDA (US$ mln) 137.6 192.7 200.0 277.4 333.6 357.9




VOLGATELECOM

Figure 22: VolgaTelecom Price Performance

40%

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Russian RTS IndexVolgatelecomVolgaTelecom, pref

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Figure 23: VolgaTelecom Free Cash Flow

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Figure 24: VolgaTelecom Financial and Operational Data REGIONAL DATA 2001 2002E 2003E 2004E 2005E 2006E





FINANCIAL DATA


Revenues from monthly fee payments 120.7 126.1 163.2 234.0 259.3 276.4 Revenues from Installation 16.5 18.0 22.2 19.6 21.6 19.6 Fixed-to-mobile revenues 0.0 0.0 0.0 0.0 56.5 55.7 Mobile-to-fixed revenues 0.0 0.0 0.0 0.0 11.3 11.1 Revenues from DLD services 112.3 132.4 139.0 153.3 158.6 161.3 Revenues from ILD services 28.1 23.4 25.4 29.4 31.0 31.7 Mobile Revenues 8.8 17.4 34.4 52.4 69.6 80.9 Revenues from data and Internet 5.5 11.7 18.9 24.2 33.7 46.5 Other revenues 5.3 7.7 11.2 17.2 22.3 27.4 Total revenues 288.4 336.7 414.4 530.1 663.9 710.5



Maintenance & utilities costs 39.0 28.0 27.5 28.0 27.1 26.2 Provisions for doubtful accounts 11.5 3.4 4.1 5.3 6.6 7.1 Other costs 4.4 -9.8 -7.2 -2.9 4.1 12.7

EBITDA (US$ mln) 105.2 143.5 189.2 253.9 318.6 347.4




SOUTHERN TELECOMMUNICATIONS COMPANY

Figure 25: Southern Telecom Price Performance

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Russian RTS IndexSouthTelecomSouthTelecom, pref

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Figure 26: Southern Telecommunications Company Free Cash Flow

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Figure 27: Southern Telecommunications Company Financial and Operational Data REGIONAL DATA 2001 2002E 2003E 2004E 2005E 2006E





FINANCIAL DATA





Maintenance & utilities costs 34.2 28.0 27.0 27.0 25.7 24.4 Provisions for doubtful accounts 11.3 3.3 3.8 4.2 4.9 5.4 Other costs -6.2 21.3 27.4 33.6 42.7 51.7

EBITDA (US$ mln) 112.9 115.3 136.3 150.5 180.1 219.4




URALSVYAZINFORM

Figure 28: Uralsvyazinform Price Performance

0%

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Russian RTS IndexUralsvyazinformUralsvyazinform, pref

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Figure 29: Uralsvyazinform Free Cash Flow

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Figure 30: Uralsvyazinform Financial and Operational Data REGIONAL DATA 2001 2002E 2003E 2004E 2005E 2006E





FINANCIAL DATA






EBITDA (US$ mln) 116.9 140.4 169.7 182.5 235.1 256.6




SIBIRTELECOM TELECOMMUNICATIONS COMPANY

Figure 31: SibirTelecom Price Performance

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Russian RTS IndexSibirtelecomSibirtelecom, pref

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Figure 32: SibirTelecom Free Cash Flow

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Figure 33: SibirTelecom Financial and Operational Data REGIONAL DATA 2001 2002E 2003E 2004E 2005E 2006E





FINANCIAL DATA






EBITDA (US$ mln) 116.6 140.6 158.6 183.1 240.0 271.4




FAR EAST TELECOM (DALSVYAZ)

Figure 34 Far East Telecom Price Performance

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Russian RTS IndexDalsvyazDalsvyaz, pref

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Figure 35: Far East Telecom Free Cash Flow

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Figure 36: Far East Telecom Financial and Operational Data REGIONAL DATA 2001 2002E 2003E 2004E 2005E 2006E





FINANCIAL DATA





Maintenance & utilities costs 10.8 11.8 11.5 11.3 10.6 9.9 Provisions for doubtful accounts 5.8 8.4 9.2 10.5 12.0 12.6 Other costs -22.8 13.4 16.0 19.5 23.8 26.6

EBITDA (US$ mln) 41.2 49.2 55.9 59.0 69.1 75.3




TRUST INVESTMENT BANK

4/4, Kolpachny Pereulok, Moscow, Russia 101990

T 7 (095) 247-2583 F 7 (095) 956-9965 [email protected] http://www.trust.ru/ TIBM <GO> (Bloomberg) EQUITY PRODUCT GROUP: RESEARCH: 7 (095) 789-3592

[email protected] Alexander Bubnovsky, managing director EPG Ruslan Nickolov, head of research

7 (095) [email protected]


Sam Barden, director of sales and trading 7 (095) 789-9906

[email protected]

Trading:

Analysts:

Aslan Khalishkov Nikolai Kashcheev, economist 7 (095) 789-3612

[email protected] 7 (095) 247-9075

[email protected] Koltsov Vladislav Metnev, oil and gas



Viacheslav Nikolaev, telecoms Sales: 7 (095) 789-3594

[email protected] Eremin


Publishing:

Svetlana Golodinkina Patrick Gill, research editor 7 (095) 247-9872

[email protected] 7 (095) 789 9831

[email protected] Avdeeva Alexander Fomichev, editor & database developer


7 (095) 789 [email protected]

Sophie Miller 7 (095) 789 9906

[email protected]

This report is not an offer or solicitation to buy or sell any securities or related financial instruments or to participate in any trading strategy. Although the information and opinions expressed in this report are believed to be accurate as of this date, no express or implied warranties or representation are being made as to accuracy or completeness. The information and opinions presented have not been tailored to any specific individual financial situation or trading objective. Our opinions may change with out further notice to you. The information and opinions expressed in this report are not a substitute for an independent assessment of an individual’s investment needs and goals. Any statements regarding past performance are not necessarily indicative of future performance. TRUST Investment Bank, its affiliates, officers, directors and/or employees (TRUST Investment Bank Group) may hold interests in or may have performed services for one or more of the companies mentioned in this report and/or may hold such interests and perform or seek to perform such services in the future. The TRUST Investment Bank Group does not accept any liability arising from the use of any of the information or opinions expressed in this report. Any U.S. person wishing to effect a transaction in any security should contact a U.S. registered broker-dealer. Quotations or full or partial use of the information in this report shall be permitted only with the express written permission of Trust and Investment Bank.

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