February 1997 Yuri Krapivin

Russia Equity Research

Yuri Krapivin

VimpelCom –Star of the Cellular

Nebula

February 1997

Renaissance Research

Table of Figures

VimpelCom February 1997

Summary 2Russian Cellular Market Overview 2The Moscow Market: Factors Underpinning Growth 4Company Description 6The AMPS/DAMPS Network 6The PCS Network 7The Competition 8Tariffs 10Subscriber Growth 13Airtime Usage 14Revenue per Subscriber 15Roaming 16Regional Licences 16Management 17Capital Expenditure 18Financial Performance 18Performance in the Future 1 9Va l u a t i o n 2 0Appendix 1: VimpelCom Earnings Model 23

Key Model AssumptionsPenetration and Market Share 23

Tariffs 23Expenses 24

DAMPS Profit and Loss 24PCS Profit and Loss 25Consolidated Profit and Loss 26

Table ofContents

Figure 1: Market Update 1Figure 2: VimpelCom vs MT Index and Dow Jones Industrial Average 1Figure 3: Summary Financial Results (1994-2000E) 1Figure 4 Cellular Subscribers in Russia (1992-1996E) 3Figure 5: Worldwide Cellular Penetration: 1995 3Figure 6: Moscow Area: Projected Cellular Market Growth 5Figure 7: Breakdown of the Moscow Cellular Market By Operator 8Figure 8: VimpelCom Tariff Plans 10Figure 9: Comparison of Basic Tariff Plans 10Figure 10: Per-minute Peak-Rate Comparison 11Figure 11: Increase in VimpelCom’s Subscriber Base 13Figure 12:Airtime Usage per Subscriber: 1995 14Figure 13:Average Monthly Revenue per Subscriber 15Figure 14: Revenue per Subscriber vs Subscriber Growth 16Figure 15: Capital Expenditure 18Figure 16:Revenues, Earnings and Margins 20Figure 17: Discounted Cash Flow Model 21Figure 18: Comparative Valuation 21

Table of Figures


February 1997 VimpelCom

VimpelCom – Star of the Cellular

Nebula

Figure 3Figure 3Summary Financial Results 1994-2000E (US$, million)


page 1

Figure 2

Sources: Bloomberg, Skate-Press

Figure 1

Market Update

Shares Outstanding 19,280,000 52-week High (US$) 38.250Market Capitalisation (US$, million) 890.09 52-week Low (US$) 22.875Free Float (24%) (US$, million) 215.25 Average Daily Traded Volumes (US$, million) 2.85

Sources: Bloomberg, Renaissance Capital

1994A y-o-y* (%)

1995A y-o-y* (%)

1996E y-o-y* (%)

1997E y-o-y* (%)

1998E y-o-y* (%)

1999E y-o-y* (%)

2000E y-o-y* (%)

Revenues 28 na 100.9 260.4% 212.3 110.4% 295 39.0% 353.1 19.7% 403.5 14.3% 464.2 15.0%

Operating Profit 17.5 na 45.4 159.4% 80.3 76.9% 103 28.3% 121.8 18.3% 139.7 14.7% 172.9 23.8%

Net Profit 9.5 na 27.6 190.5% 49.8 80.4% 55.6 11.6% 67.5 21.4% 81.7 21.0% 111.2 36.1%

P/E 93.7 32.2 17.9 16.0 13.2 10.9 8.0

*Year-on-year growth

Price (February 12 1997): US$34.625 BUY

VimpelCom


VimpelCom vs MT Index and Dow JonesIndustrial Average

Summary

...At a GlanceS u m m a r yVi m p e l C o m is Russia’s largest cellular telecoms provider. The company, whichbegan commercial operations in 1994, has proved to be one of the most successfulstart-up cellular operators in the world, with strong subscriber growth and surgingprofits. VimpelCom’s principal market is t h e Moscow region, where it alre a d yoperates a DAMPS network and has a licence to develop Moscow’s firstPCS system , which is due to start commercial operation in mid-1997.

• VimpelCom offers exposure to the Moscow cellular market, one of the fastestgrowing sectors in Russian telecommunications. C e l l u l a r penetration inthe Moscow region is currently just 0.6% and is projected to gro wto 3.8% by the year 2000, implying a six-fold incre a s e .

• VimpelCom is competing, so far very successfully, with two other cellular oper-ators in Moscow. In the short term, VimpelCom will capitalise on its s u p e r i o rcall quality, good coverage, strong brand recognition, extensive dis-tribution network and competitive roaming capabilities.

• Longer-term capacity gains, resulting from the use of PCS technology, will giveVimpelCom a sharp competitive edge: a market share of 55% to 60% isbelieved to be sustainable in the long term.

• VimpelCom is the only Russian stock currently listed on the NewYork Stock Exchange. NYSE listing, and full transparency, make the com-pany a less risky investment.

• On a consolidated basis, earnings are projected to grow at a 22% com-pound annual rate between 1997 and 2000.

• At US$34.625 per ADR, the company is traded at undemanding multiples, par-ticularly in the wake of the recent correction. Comparative analysis with inter-national cellular operators points to a fair price of US$40.00, also support-ed by our discounted cash flow valuation.

Russian Cellular Market OverviewMobile telecommunications systems were first introduced to Russia in 1991, butreally started to take off in 1994. Two factors were central to the creation of thedomestic cellular market: the rapid expansion of the country’s private business com-munity, and the transfer of radio spectrum necessary for cellular services from themilitary to the civil sector.

The Russian cellular market rocketed from just 6,000 subscribers in 1992 to an esti-mated 200,000 subscribers at end-1996 (see Figure 4). These figures translate into acompound annual growth rate of 140%, twice the world average. Despite this mas-sive growth, domestic cellular penetration is still just 0.1%, making Russia one of theworld’s least developed cellular markets (see Figure 5).

Increased business activity and Russia’s poorly developed wireline infrastructure(the country has a fixed-line penetration rate of 17% and a fixed-line waiting list of10 million subscribers, plus another 20-30 million potential applicants) point to sub-stantial opportunities for cellular development. Broader cellular penetration has sofar been precluded by high network connection fees and airtime rates, which makecellular telephones affordable only for companies and wealthy individuals. Gradualtariff cuts should, however, improve access for lower-income and price-sensitive cus-tomers, releasing the true potential of the domestic cellular market.


Renaissance Research page 2


page 3 Renaissance Research

Figure 4

Virtually all standardshave been approved foruse in Russia.

Cellular Subscribers in Russia (1992-1996E)

Sources: Ministry of Communications, Goskomstat

The Ministry of Communications (MOC) is the principal domestic market regulator,responsible both for licensing and for monitoring licence compliance. To stimulatemarket growth and increase general cellular telecoms accessibility, the MOC hasendorsed virtually all major mobile communications standards for use:

• GSM-900, a pan-European analogue/digital cellular standard

• AMPS/DAMPS-800, an American analogue/digital standard

• NMT-450, an analogue standard developed and used in Scandinavia

Figure 5

Worldwide Cellular Penetration: 1995

Sources: Mobile Communications, Renaissance Capital


The scarcity of radio spectrum available for civil use was one reason for implement-ing so many standards. Russian radio spectrum is used extensively for military andnavigational systems and freeing up this spectrum would require substantial financ-ing, which the government is unwilling to provide. As a result, the authorities haveallocated a fairly limited spectrum of frequencies to each of GSM, AMPS and NMT.For this reason, none of the standards seem capable of supporting cellular marketdevelopment alone, and their subscriber capacity is limited. However, combined theycan accommodate a substantial number of subscribers.

A study of the availability of spectrum for developing PCS networks is currentlyunderway. VimpelCom, a pioneer in Moscow’s PCS market, has been allocated spec-trum sufficient for a network of over 1 million subscribers. However, the availabili-ty of radio frequencies for the development of PCS systems in regions other thanMoscow is, as yet, unclear.

Since the birth of the Russian cellular market, the MOC has generally licensed oneoperator per region, per standard. The MOC has actually licensed two PCS operatorsin Moscow, but this should be viewed as the exception rather than the rule. Thelicensing process has now largely been completed for GSM, AMPS and NMT, andmost regions have two or three competing operators of different standards. Thelicensing process for PCS has yet to begin in earnest, with only the two licences men-tioned above granted so far.

Licences are typically issued for 10 years and specify the number of subscribers andcoverage area each operator should achieve in each given period. GSM and NMT arefederal standards as tenders for the licences are conducted by the federal authorities.AMPS is a regional standard, as prospective AMPS operators are chosen by theregional authorities and then recommended to the MOC for licensing. A GSM licencetypically requires the operator to make a contribution of US$3.00 per resident in itslicensed area to finance developments in the public switched telephone network.NMT operators make a similar contribution of US$2.50 per resident. AMPS opera-tors negotiate their contributions with the local authorities, but the MOC recom-mends that these contributions be similar to those for GSM licensees.

The Moscow Market: Factors Underpinning GrowthWhile recognising that cellular g rowth prospects are good for Russia asa whole, this re p o rt focuses on the Moscow region, by far the largestand most lucrative domestic cellular market, and also Vi m p e l C o m ’sprincipal operating site.

The Moscow region, comprising the city of Moscow and the Moscow Oblast (thearea surrounding the city), is home to over 10% of the Russian population and 50%of the country’s cellular subscribers. However, the cellular penetration rate in theregion was just 0.6% at the end of 1996. This total is projected to grow to 3.8% bythe end of the decade, implying a six-fold increase in subscriber levels.

The following factors will underpin this growth.

• Dense population. The city of Moscow and Moscow Oblast combined havea population of approximately 15 million, making the region one of the world’slargest metropolitan areas.

• Income levels well above the Russian average. Official statistics showthat per-capita income in Moscow is three times higher than the Russian aver-age. The average annual income of the highest paid 20% (1.7 million people)exceeds US$18,000.


VimpelCom has beenallocated spectrum suffi -

cient for a network ofover 1 million sub -

scribers.

A cellular penetration rateof just 0.6% in the

Moscow region showsample room for growth.



• Developed service industry. Cellular telephones have traditionally beenassociated with the service industry. The structure of Moscow’s labour forcefavours cellular growth as 3.5 million of the 5 million people who work in thecapital are employed in services.

• Large business community. Moscow is Russia’s business hub, being hometo approximately 170,000 companies. Of this total, 120,000 companies,employing 1.5 million people, are privately owned. Moscow has successfullyattracted considerable foreign investment and currently plays host to more than10,000 companies registered with foreign capital.

• Declining tariff s . Moscow’s cellular tariff rates, currently high by interna-tional standards, will likely decline gradually to make mobile phones moreaffordable for lower-income customers.

• Increased road traff i c . Worsening traffic conditions and ever-present trafficjams in the centre of Moscow will increase demand for cellular services amongpeople who need constant communication with the outside world.

• Poor development of the wireline network. Although the city appears tohave a sufficient number of fixed-line telephones, outdated switching and trans-mission technology (the digitalisation rate is around 10%) result in droppedcalls and jammed lines. The fixed-line penetration rate for the Moscow Oblast(excluding the city) of less than 20%, and a telephone waiting list that exceeds500,000 applicants, point to good potential for developing wireless networks.

Figure 6

• Status symbol. As with other developing cellular markets, in Russia the cel-lular telephone has become a much-desired status symbol.

• M a r k e t i n g . Intensive marketing and promotional campaigns by cellular oper-ators are increasing consumer awareness of wireless communications and con-sequently expanding the cellular market.

Moscow Area: Projected Cellular Market Growth

Sources: Ministry of Communications, Renaissance Capital estimates


Company Description VimpelCom is Russia’s largest cellular telecoms operator. The company’s primarymarket is the city of Moscow and the Moscow Oblast, known collectively as theMoscow region. The region has a total population of over 15 million.

VimpelCom operates the only Digital Advanced Mobile Phone System (DAMPS)network in the Moscow region, which it markets under the Bee Line trademark. Thecompany began full-scale commercial operations in June 1994 and has grown rapid-ly ever since. As of September 30 1996, the VimpelCom DAMPS networkhad 45,000 subscribers, a nine-fold increase on January 1995. Unusuallyf o r a cellular o p e r a t o r, VimpelCom has been profitable since its firsty e a r of operation. The company’s net profit jumped 190% in 1995, making it oneof the most successful start-up cellular operators in the world.

In addition to the DAMPS system, VimpelCom is licensed to establish Moscow’s firstPersonal Communications Services (PCS) network. The network should go into oper-ation by mid-1997, and is expected to start generating revenue in the near future.

VimpelCom also has AMPS licences for five other Russian regions, with a combinedpopulation of 9 million. These licences, however, have yet to make a sizeable contri-bution to the company’s bottom line as the number of subscribers covered by them sofar is relatively small.

VimpelCom has two competitors in Moscow: Mobile TeleSystems (MTS), whichruns a digital GSM-900 network, and Moscow Cellular Communications (MCC),which operates an analogue NMT-450 network. VimpelCom is competing suc-cessfully with both companies, and has increased its market share fro ma p p roximately 30% in 1994 to around 60%.

VimpelCom made an initial public offering in November 1996, placing 6.2 millionAmerican Depository Receipts (ADRs), re p resenting 4.7 million commons h a res, on the New York Stock Exchange.

The AMPS/DAMPS NetworkAMPS (Advanced Mobile Phone System) is a cellular standard developed and exten-sively used in the USA. The standard, which operates in the 800MHz range, has bothanalogue and digital modifications, the digital version being referred to as DAMPS.AMPS is currently the world’s most widely used standard – unsurprisingly, given thatthe USA is the world’s largest cellular market.

VimpelCom operates a DAMPS network in the Moscow region, which it put into fulloperation in June 1994 after running a year-long pilot project. The DAMPS licenceholder is Macrocom, a 95% VimpelCom-owned subsidiary. (The remaining 5% stakeis owned by Moscow Oblast Electrosvyaz, a public switched telephone operator.) Thelicence was issued for 10 years and expires in 2004, although in all likelihood it willbe extended.

Vi m p e l C o m ’s services are provided under the Bee Line trademark.VimpelCom was among Russia’s pioneers of the post-Communist concept of brand-ing, which has proved to be a great success: according to the company’s studies, some60% of Moscow residents recognise the Bee Line brand name.

VimpelCom has been allocated 7MHz of radio spectrum for DAMPS in the city ofMoscow (plus an additional 3MHz in the city’s central business area) and 4MHz inthe Oblast. Company management estimates that this will be sufficient to connectaround 200,000 subscribers to DAMPS.


VimpelCom has pioneeredbranding – a totally new

concept in post-CommunistRussia.

VimpelCom has been prof -itable since its first year of

operation...

...and net profits jumped190% in 1995

VimpelCom is the firstRussian stock to belisted on the NYSE.

The company has AMPSand PCS licences forMoscow, and AMPS

licences for five other cen -tral Russian regions.



At the beginning of 1997, VimpelCom had equipment in place capable of supportingapproximately 80,000 subscribers. The DAMPS network, which uses equipment sup-plied by Ericsson, is supported by two central switches and approximately 100 basestations, connected via microwave links and fibre-optic cable. Contracts signed withEricsson provide for continuous network build out and capacity increases.

The company’s principal customers include corporate accounts, businessmen,wealthy individuals, government bodies and Moscow-based expatriates.Vi m p e l C o m ’s distribution network comprises two VimpelCom saleso ffices plus some 25 independent dealers running more than 80 salesoutlets across Moscow. In addition to providing basic voice telephoneservices, VimpelCom offers a variety of special services such as voice-mail, call forwarding, call waiting, conference calling and itemisedb i l l i n g . VimpelCom also maintains a 24-hour customer service line in both Russianand English which customers can access by dialling 611. Roaming is available in theUSA, Canada, 35 regions throughout Russia and three CIS countries: Kazakstan,Kirgizstan and Georgia.

VimpelCom’s DAMPS network strategy calls for further penetration of the businessend of the market, which requires wide coverage and nation-wide roaming.Eventually, VimpelCom plans to develop a unified DAMPS network for “centralRussia”, an area including Moscow plus a number of adjacent regions, for whichVimpelCom already has cellular licences (see Regional Licences).

The PCS Network Personal Communications Services (PCS) (also sometimes referred to as PCN(Personal Communications Network) or DCS-1800 (Digital CommunicationStandard)) is a digital standard which uses the same technology as GSM. The princi-pal difference between the standards is frequency: PCS is placed at 1800 MHz, com-pared with 900 MHz for GSM. As higher-frequency radio signals do not travel far,PCS networks require a greater number of cells than GSM, and consequently havegreater capacity. The capacity to connect more subscribers appears to be the majoradvantage of PCS technology over GSM.

Unlike AMPS and GSM, which are perceived as regional standards (one Americanand the other European) PCS technology is increasingly being chosen by operatorsall over the world. Some well known examples of existing PCS networks includeOrange and One-2-One in the UK, and E-Plus in Germany. The EuropeanCommission recently ruled that all EC member-states should introduce PCS licens-ing by January 1 1998. PCS networks are also being actively developed in the USAand Pacific Asia. KB Impuls (KBI), an 88% VimpelCom-owned subsidiary (the other12% belonging to Alcatel), has a PCS licence for the Moscow region which wasissued for 10 years and expires in 2006.

Vi m p e l C o m ’s PCS network is capacity-rich, with 20 MHz worth ofspectrum allocated. Company management estimates that this spectrumwill produce a PCS system capable of supporting over 1 million sub-scribers.

VimpelCom began rolling out the PCS network in 1996 using equipment supplied byAlcatel, and it is scheduled to begin commercial operation in mid-1997. Initially,capacity will run to 40,000 subscribers. The agreement with Alcatel provides for theinstallation of cellular equipment in four phases, ending in 1999, by which time thenetwork should have a capacity of 380,000 subscribers.

VimpelCom is usingDAMPS equipment sup -plied by Ericsson to buildout the network.

The company’s distribu -tion network comprisesmore than 80 sales outletsin Moscow.

VimpelCom’s PCS networkis capacity-rich...

...and should work up to380,000 subscribers by1999.

VimpelCom is planning todevelop a unified DAMPSnetwork for central Russia.

PCS technology is increas -ingly being chosen byoperators all over theworld.


VimpelCom intends to target the PCS system at the more price-sensitive end of themarket, including subscribers who primarily require intracity services. The networkwill initially have limited coverage and roaming, which will be reflected in its pric-ing. In the longer term, the network is expected to become the dominant player in themarket, as the existing DAMPS, GSM and NMT networks will hit capacity shortagesby the turn of the century, given the limited spectrum allocated to them. The capaci-ty-rich PCS system will then likely become the largest cellular provider in Moscow.

The CompetitionVimpelCom currently competes with two other cellular operators in the Moscowlicence area: MCC and MTS.

MCC, a pioneer of the Moscow cellular market back in 1991, operates an analogueNMT-450 network. Use of NMT is limited on a global level and confined mostly toScandinavia, where it was originally developed. The use of analogue systems isalready giving way to digital technology the world over, as analogue networks havesmaller capacity, inferior sound quality, are vulnerable to fraud and do not allow formore sophisticated services such as data transmission. MCC was allocated 4.5 MHz,an insufficient amount of spectrum, which industry experts say will allow the com-pany to connect some 30,000-40,000 subscribers. As of July 1996, MCC had approx-imately 18,000 subscribers. MCC’s analogue technology and limited spectrum meanthe company is unlikely to compete effectively with Moscow’s digital operators,VimpelCom included. MCC’s 30% market share as of July 1996 is projected to dropbelow 10% over the next three years.

Figure 7


Breakdown of the Moscow Cellular Market by Operator

Sources: Ministry of Communications, Mobile Communications

VimpelCom now has 30MHz allocated to it...

...while MCC has 4.5MHz...



MTS will likely be a far more serious competitor for VimpelCom. MTS operates adigital GSM network in Moscow and numbers Moscow City Telephone Network(MGTS) and Deutsche Telekom among its founders. However, MTS has so far failedto capture a sizeable market share. Although the company became operational in1994 along with VimpelCom, as of July 1996 its market share was just 9%. A com-bination of rumoured friction between MTS’s founders, consequent delays in net-work build out, and a lack of marketing and promotional activity provide a feasibleexplanation for this poor growth rate. Despite these initial setbacks, it is likely MTSwill command a higher growth rate in the coming years. As in the case of MCC, how-ever, this growth may be contingent on the availability of radio frequencies. MTS hasbeen allocated 7.6 MHz of spectrum which, according to MTS management, is suf-ficient for 100,000 subscribers. It appears that MTS can actually connect more sub-scribers, however, as digital technology allows the division of existing cells into so-called microcells, which maximise capacity. But the process is costly, and shouldMTS decide upon it, the company is likely to become less competitive on a costbasis. In general, MTS looks likely to increase its market share to 25–30% by 2000,largely at the expense of MCC.

As 1996 drew to an end, the Ministry of Communications granted a Moscow PCSlicence to a company called Rosico, in addition to the one held by VimpelCom.H o w e v e r, although the licence was issued, no spectrum has so far b e e nallocated to Rosico. Furt h e r m o re, it appears that there may be verylimited spectrum available to the company, and the search for f re q u e n-cies has yet to begin . The MOC has also stated that no spectrum will be allocat-ed to Rosico until the “Unity-1” project is completed. “Unity-1” is a project research-ing spectrum availability for PCS technology in Russia (ironically, the research isbeing carried out by the VimpelCom subsidiary, KB Impuls). With this in view, w eexpect Rosico to enter the market around mid-1998, by which timeVi m p e l C o m ’s PCS network will be up and running and the companywill be well-positioned to compete with another PCS operator. Rosico isexpected to command a market share of under 10% in this decade.

In addition to mobile cellular systems, the MOC has endorsed the development offixed wireless systems. A licence to develop local wireless loops in the Moscowregion has recently been granted to a joint stock company named PersonalCommunications. The company intends to create a fixed wireless network usingCDMA (Code Division Multiple Access) technology. Since fixed wireless systemsdo not offer subscribers mobility, the company is not perceived as a threat toVimpelCom. The use of fixed wireless systems in the city of Moscow will be limit-ed as the city has a fairly well developed wireline network, so PersonalCommunications is expected to focus on the Moscow Oblast, with its under-devel-oped wireline network. Although Personal Communications may compete withVimpelCom in the Oblast for those customers who have no access to wireline sys-tems, this is unlikely to significantly reduce Vi m p e l C o m ’s future re v e n u es t ream since the O b l a s t is a comparatively small market, and the busi-ness community, the most lucrative segment of the market, will contin-ue to use mobile cellular o p e r a t o r s . Furthermore, the frequency band desig-nated for the CDMA fixed wireless system overlaps VimpelCom’s DAMPS frequen-cy band. Under the MOC’s regulations, VimpelCom’s mobile network takes priority,meaning allocating frequencies to Personal Communications will requireVimpelCom’s prior consent.

The MOC has issued twoPCS licences for Moscow,but only VimpelCom’s PCSnetwork has been allocat -ed radio spectrum.

Fixed wireless networksshould not pose a threat toVimpelCom...

...as business will continueto need mobile cellularservices.

...and MTS has 7.6 MHz.


TariffsUnlike fixedline telephone tariff rates, cellular rates are not re g u l a t e dby the Russian authorities and are set by operators based on underly-ing costs and market demand.

The VimpelCom connection fee includes handset price, a one-time line activation feeand a deposit. VimpelCom currently charges an average of US$650 for the handset(although the price is dependent on model), a line activation fee of US$499 and aUS$400 deposit. The total minimum cost of connection is therefore aroundUS$1,500. Customers wishing to access international telephone services mustdeposit an additional US$500.

VimpelCom also charges subscribers a fixed monthly rental fee, plus airtime rates.The company currently offers subscribers three different tariff plans, the details ofwhich are summarised in Figure 8 below.

Figure 8

The company quotes its tariffs in US dollars, but subscribers are billed monthly inroubles, the figures based on the exchange rate set by the Central Bank of Russia onthe day the invoice is issued, plus 3% to cover fluctuations in the exchange rate. Afine of 0.5% of the amount due is levied for each day of delay in making payments.

VimpelCom’s rates roughly match those charged by MCC and MTS. In fact,VimpelCom appears to be price competitive vis-à-vis its principal rival, MTS. Acomparison of basic tariff plans offered by the three operators as of December 1996is shown in Figure 9 below.


Business Basic EconomyMonthly Subscription Fee 400 50 250Free Limit 400 - 200Per Minute Charge: Peak 0.4 0.5 0.45 Off Peak 0.28 0.35 0.32

VimpelCom TariffPlans(US$)

VimpelCom is expected tohold on to its 55-60%

market share in the longterm.

VimpelCom’s rates roughlymatch those charged by

MCC and MTS...

To summarise, competition is expected to develop between VimpelCom and MTS,and possibly Rosico, although at a later stage. MCC is not regarded as a strong com-petitor for the reasons outlined in this section. In the short to medium term,VimpelCom should maintain its competitive edge over other operators due tostronger brand recognition, superior service quality (particularly indoor coverage),better domestic roaming (MTS subscribers can currently roam only in St. Petersburg,compared to 40 Russian regions for VimpelCom subscribers) and extensive distribu-tion network. In the longer term, VimpelCom’s edge will be found in capacity gainsresulting from PCS technology. In light of this, VimpelCom is expected tocontinue to dominate the market with a sustainable market share of55% to 60%.

Source: VimpelCom

VimpelCom Month year


Per-Minute Peak-Rate Comparison

Source: Renaissance Capital

VimpelCom MCC MTSLine Activation 499 495 485Monthly Subscription Fee 50 45 60Per Minute Charge Peak 0.5 0.5 0.56 Off Peak 0.35 0.35 0.37

Comparison ofBasic Tariff Plans(US$)

...but the company mustnow give the market newimpetus by reducingmonthly subscription feesand airtime rates.

Domestic cellular tariffs, however, continue to be high by international standards (seeFigure 10). Moscow-based cellular operators have yet to cut their monthly rental feesand per-minute airtime rates to encourage market growth. Instead, operators have cuthandset prices and line activation fees. Since VimpelCom began operations, forexample, the company has cut its average handset price from US$2,000 to US$650,and line activation fees from US$1,500 to US$499.

Figure 10

Source: Companies

Figure 9


Renaissance Capital page 12

VimpelCom’s hefty rates and tariffs were justified as long as the company targetedthe top end of the market. H o w e v e r, to maintain subscriber m o m e n t u m ,VimpelCom must now give the market new impetus by reducing month-ly subscription fees and airtime rates.

The DAMPS rental fee and airtime rates are projected to fall by approximately 40%over the next four years, while handset prices and line activation fees will decline by50-60%. Handset price cuts should be facilitated by cuts introduced by equipmentmanufacturers themselves.

VimpelCom management will charge less for PCS services than for DAMPS due tothe initially limited coverage and roaming offered by the system, and will the serviceat lower-income and price-sensitive customers. PCS rates are expected to be 10-20%lower than those for DAMPS initially, but will increase over time. By 2000, thepricing discrepancies should have disappeared as the initial disadvan-tages of PCS are eliminated and the system emerges as Moscow’s pri-m a ry cellular n e t w o r k .



Subscriber GrowthVimpelCom’s DAMPS subscriber base has surged from 5,400 at end-1994 to 22,600at end-1995, and 45,000 by Q3 1996. We estimate the company had 57,500 sub-scribers by end-1996. The increase in subscribers during 1995 and 1996 translatesinto a compound annual growth rate of 226%, one of the highest in the industry.

Demand for cellular phones will likely remain strong given the factors outlined inThe Moscow Market: Factors Underpinning Cellular Growth. VimpelCom isexpected to hit 55% compound annual subscriber g rowth between 1997and 2000, including subscribers to both DAMPS and PCS. By the end ofthe decade, the PCS system is expected to outpace the DAMPS network in terms ofannual subscriber additions, due to the system’s lower tariffs and larger networkcapacity. By 2000, it is projected that VimpelCom will have appro x i-mately 330,000 subscribers: 185,000 to DAMPS, and 145,000 to PCS.

Figure 11

VimpelCom’s subscriberbase has surged...

Increase in VimpelCom’s Subscriber Base

Sources: VimpelCom, Renaissance Capital estimates

...and demand will likelyremain strong, resulting ina projected total of330,000 subscribers bythe year 2000.


Airtime Usage VimpelCom’s airtime usage is very high by industry standards. Average monthlya i rtime use per s u b s c r i b e r in 1995 was 480 minutes, compared with anaverage 100-200 minutes typical for c e l l u l a r operators in other markets.

Figure 12

Although VimpelCom’s airtime usage appears massive, it is not outlandish: the rela-tively new cellular markets of Pakistan and Vietnam, for example, also see averageairtime usage exceeding 400 minutes per subscriber. This high usage is due to oper-ators’ initial concentration on the high end of the market: businesses and wealthyindividuals. In time, however, operators penetrate lower-income and more price-sen-sitive customers, who dilute airtime usage. VimpelCom is expected to follow thispattern. In fact, the company has already witnessed a drop in usage minutes: over thefirst six months of 1996, average usage totalled 433 minutes, 10% down comparedwith the 1995 level. This level is expected to fall to 425 minutes for 1996 as a whole.Airtime usage on VimpelCom’s DAMPS network is expected to fall by approxi-mately 40 minutes each year to reach 270 minutes by 2000.

Usage of the PCS system, which will target the lower end of the market from thestart, will likely be well below usage of the DAMPS network. The PCS network isprojected to initially command around 280 minutes usage per month per subscriber,which will fall by 20 minutes each year to 220 minutes in 2000. Despite this sig-nificant projected decline, PCS usage is still expected to outstrip theinternational average.


Airtime Usage Per Subscriber: 1995


The company’s airtimeusage is very high, at 480minutes per subscriber in

1995.

But this airtime usagelevel will fall, naturally, as

VimpelCom penetrateslower-income customers.



Revenue per SubscriberThe combination of high tariffs and high airtime usage make for a very generous rev-enue rate per VimpelCom subscriber: average monthly revenue per DAMPS sub-scriber was US$590 in 1995, while few other operators world-wide managed tobreak the US$100 barrier.

Figure 13

This per-subscriber revenue rate is not sustainable in the long term and will fall asnew subscribers dilute airtime usage and anticipated tariff cuts come into play. Wewould expect revenue per s u b s c r i b e r to decrease to US$135 by 2000 forboth DAMPS and PCS, this level resembling international standardsand re p resenting an average annual decline of 25%. This fall in re v e n u ep e r s u b s c r i b e r, however, will likely be more than offset by pro j e c t e ds u b s c r i b e r g rowth.

A fall in revenue per sub -scriber will be more thanoffset by subscribergrowth.

Average Monthly Revenue per Subscriber: 1995



Figure 14

RoamingVimpelCom offers its customers both domestic and international roaming. At thestart of 1995, VimpelCom initiated the creation of Association-800, a union of AMPSoperators based throughout Russia, to facilitate domestic roaming. Thanks to thesuccess of the Association, VimpelCom can now of f e r roaming in 35Russian regions and three CIS countries: Kazakstan, Kirgizstan andG e o r g i a . VimpelCom plans to expand roaming services further through agreementswith new operators in the future.

VimpelCom is the only cellular operator in Moscow to offer roaming in the UnitedStates and Canada. The company has also arranged European roaming for its sub-scribers by offering them temporary GSM handsets which they can pick up atVimpelCom’s offices prior to travelling abroad. Although the lack of automaticroaming in Europe is clearly a disadvantage, it should not be over emphasised giventhe importance of domestic roaming: most roaming revenue is generated byMoscow-based businesses travelling within Russia. Also, VimpelCom’s future PCSsubscribers will be able to roam in Europe, the United States and elsewhere in theworld. Moreover, various telecoms manufacturers, including Ericsson and Nokia,have announced that they plan to launch dual GSM/PCS handsets in 1997, which willallow free roaming between GSM and PCS networks.

Regional LicencesVimpelCom is licensed to set up AMPS networks in five regions in addition toMoscow: Samara, Tver, Ryazan, Vladimir and Kaluga. These areas have a combinedpopulation of approximately 9 million.

Samara appears to be the most promising market of the five, being one of Russia’smost populous and economically advanced regions, and one which has seen a boom


Revenue per Subscriber vs Subscriber Growth


Roaming is available in 35Russian regions, and three

CIS countries...

...plus the United Statesand Canada.

VimpelCom has licences todevelop networks in fivecentral Russian regions...



in entrepreneurial activity recently. VimpelCom has a 50% interest in Bee Line-Samara, a joint venture set up with Mercury-Samara, a local telephone operator, andInkombank, one of Russia’s largest banks, to develop the local cellular market. BySeptember 1996, Bee Line-Samara had more than 1,200 subscribers.

There is reason to be more sceptical about the short-term growth potential of the fourother regions VimpelCom has AMPS licences for, as they are relatively small both interms of population and business activity. As of September 1996, there were less than300 subscribers in these regions combined. The regions’ geographical location is,however, strategic: they all border the Moscow region, which will be useful inVimpelCom’s longer-term plan to create a unified central-Russian network focusedon Moscow. The 15% wire-line penetration rate in these regions indicates there isgood opportunity to develop wireless communications and, with time, the regionallicences should command a higher value as lower tariffs increase lower-income cus-tomer access to cellular communications.

VimpelCom also originally held AMPS licences for the Leningrad region (the areasurrounding St Petersburg but excluding the city itself) and Novgorod. The compa-ny’s management decided the most efficient way to develop the cellular infrastruc-ture in these regions would be through co-operation with St Petersburg Telecom, anAMPS operator for St Petersburg. However, the two companies failed to reach agree-ment, and the plans were eventually scrapped. Subsequently, the MOC revokedVimpelCom’s licences for these areas.

Vi m p e l C o m ’s cellular range may well expand in the future, as companymanagement has indicated it may seek additional cellular l i c e n c e sshould they become available, and provided they are economically jus-t i f i e d .

ManagementVimpelCom’s management team, which comprises both Russian and western profes-sionals, played a major role in achieving the company’s rapid growth. The manage-ment is led by VimpelCom CEO Dmitry Zimin. Prior to VimpelCom, Zimin and anumber of other senior managers held high-ranking posts in various military researchcentres involved in designing hi-tech radio systems. These people boast technicalexpertise and a deep knowledge of local market conditions. When Russia embarkedon market reform in the early 1990s, they pioneered the country’s cellular business,using their radio-engineering backgrounds and strong connections with the domestictelecommunications community to good effect. The technical expertise of theRussians is backed by rigorous financial control and aggressive mar-keting policies developed by the company’s foreign professionals, includ-ing the Chairman of the Board, Augie Fabela, who represents FGI Wireless, one ofVimpelCom’s major shareholders.

The independent directors on VimpelCom’s Board include such prominent figures asYegor Gaidar, architect of Russia’s early economic reforms, Oleg Belov, generaldirector of Rostelecom, and Gary Drook, former president of Ameritech’s NetworkServices. While these board members are not involved in running the company on aday-to-day basis, they have helped raise VimpelCom’s profile.

...although theselicences will offer mean -ingful development pos -sibilities only in thelonger-term.

The company’s manage -ment team,experienced butopen to change and inno -vation, played a majorrole in VimpelCom’s rapidgrowth.


Capital ExpenditureVimpelCom’s capital expenditure is expected to run high in the next few years as thecompany expands its DAMPS network and rolls out a new PCS system. The man-agement budgeted for US$145 million in capital expenditure in 1996, US$128 mil-lion in 1997 and US$98 million in 1998. The company may exceed its capital expen-diture targets, however, as robust subscriber growth and competition may force it toaccelerate network build out. It is worth noting that actual cash outflow over theseyears should be well below the projected investment needs, as approximately 50% ofcapital expenditure will be met by vendor financing, when payments for acquiredtelecommunications equipment are postponed for several years. Vendor financingschemes give VimpelCom more leeway in managing current cash flow and shiftmuch of the investment burden into the future, when subscriber growth should boostthe company’s cash flow. VimpelCom struck such a vendor financing agreement withAlcatel SEL AG in 1996, under which VimpelCom acquired US$135 million worthof equipment, with the payments due to commence in 2000. The management intendsto continue using vendor financing in the future.

Figure 15

Financial PerformanceVimpelCom compiles its financial statements in dollar terms, in accordance with USGAAP. The company’s external auditors are Ernst & Young.

VimpelCom has been profitable since its first year of operation. T h ec o m p a n y ’s financial performance in 1995 was very strong, with re v-enues up 260% year- o n - y e a r to US$100.9 million, and net profit jump-ing 190% to US$27.6 million. The EBITDA(earnings before interest, tax, depre-ciation and amortisation) margin, a widely accepted method of measuring cellular


Capital Expenditure

Source: VimpelCom

VimpelCom plans tomake effective use of ven -

dor financing to helpspur capital expenditure.

Unusually for a cellulartelecoms provider,

VimpelCom has been prof -itable since its first year of

operation.



operators’ profitability, was high at 48%, as was the 27% net profit margin. Growthin 1995 resulted from a 320% increase in subscriber numbers and also reflected rel-atively inelastic demand for cellular services, which led to high tariffs and airtimeusage rates. The company’s pricing policy was reflected in its revenue mix: approx-imately 52% of revenue in 1995 was generated through one-time charges, namelyhandset sales and connection fees.

This impressive growth record continued in 1996, with revenue in thenine months ending September 30 up 138% year- o n - y e a r, an incre a s eattributable to a 210% jump in subscribers. During the same period, con-nection fees were cut by approximately 40%, and handset prices by approximately25%. Profitability in the first three quarters of 1996 was down, however, the EBIT-DA margin dropping to 40% compared with 62% in the same period a year earlier,and the net profit margin falling from 36% to 24%. However, net profit in the sameperiod rose a healthy 55% to US$34.4 million. The decline in margins was expected:the 1995 margins were abnormally high, the product of very high fees and the rela-tively low expenses involved in running a small network. Expansion resulted in oper-ating expenses surging almost 270% in the first nine months of 1996, while servicecosts, primarily interconnection payments, rose 471%, reflecting a substantialincrease in traffic volumes and higher interconnection fees charged by fixed-lineoperators. Sales, general and administrative expenses jumped 300%, primarily theresult of increased staffing levels and substantially higher marketing and advertisingcosts. Meanwhile, depreciation rose 228%, in line with the company’s asset-basegrowth. VimpelCom also introduced a provision for doubtful accounts totalling 3.4%of operating revenue. No such provision was made during the first nine months of1995.

Performance in the FutureThe outlook for VimpelCom’s financial performance in 1997-2000 is generally pos-itive, with the following factors influencing profitability during this period.

• The DAMPS network will continue to be profitable, with net profit margins of27-30%, although revenue and earnings growth will slow towards the end of thedecade reflecting maturity in the business and possible capacity constrains. ThePCS network is expected to break even in 1999 and see substantial earningsgrowth from then on. On a consolidated basis, VimpelCom will post strongprofits despite initial losses on the PCS network.

• Tariffs and airtime usage will decrease as the company penetrates the lower endof the market, resulting in lower revenue per subscriber. The increase in sub-scribers will, however, more than offset declining tariffs and airtime usage.Roaming revenue and revenue from value-added services such as conferencecalling, voice mail and itemised billing will continue to grow.

• Handset price cuts will be facilitated by manufacturers rapidly reducing theirprices.

• Inter-connection costs will likely fall as a result of increased competitionbetween fixed-line providers.

• Marketing and promotional costs per subscriber will be high, reflecting com-petitive pressure and the necessity to lure lower-income customers.

• Combined DAMPS and PCS use of existing distribution, administrative andbilling systems, cites and equipment will help make the company more cost-effective.

• By the end of the decade, depreciation on the DAMPS network should stabilise,but it will continue to rise on the PCS network.

The company’s impres -sive growth continuedinto 1996...

...although expansion hasled to a reduction in mar -gins due to increasedoperating expenses.


Taking the above into consideration, EBITDAmargins of 45-48% and net profit mar-gins of 20-25% are believed to be achievable on a consolidated basis. TheRenaissance Capital VimpelCom earnings model points to a 15% compound annualrevenue growth rate and 22% compound annual earnings growth between 1997 and2000. Detailed assumptions and financial projections are provided in Appendix:VimpelCom Earnings Model (1995-2000E), page 23.

Figure 16

ValuationDiscounted Cash Flow (DCF) ValuationWe have projected VimpelCom’s free cash flows from 1996 to 2000 and discountedthem back at a rate of 25% to arrive at their present value. Although previously, withother domestic telecommunications companies, we have used a discount rate of 30%,effectively assuming a Russian base-line sovereign risk rate of approximately 10%(the Russian eurobond, maturing in 2001, currently yields 10.4%) to which we added20 percentage points to account for Russia’s specific equity risk, VimpelCom seemsto deserve a lower discount rate as its NYSE listing, high liquidity and full trans-parency make it a less risky investment. To estimate VimpelCom’s terminal value inthe year 2000, a terminal multiple of 10 has been applied to the company’s operatingcash flow in that year, and the resultant figure has been discounted back at a rate of25%. The terminal multiple was derived by analysing cash flow multiples for cellu-lar stocks throughout the world. They tend to trade at multiples of 10 and above, andVimpelCom itself is traded at 10.5 times estimated 1996 operating cash flow. Thecompany’s value is the sum of the present value of future cash flows and the presentvalue of terminal value, plus estimated net cash of US$8 million as of December1996. We have also valued the company’s regional portfolio at US$27 million, orUS$3 per POP. These calculations support an ADR price of US$40.10, indicating thatthe stock is trade at a 13.7% discount to its fair value.


Revenues, Earnings and Margins




No other domestic cellular company is currently traded. Furthermore, other domes-tic operators do not publicly disclose their financial accounts, which makes compar-ison among the domestic cellular sector virtually impossible. For this reason, wehave focused on international comparisons. VimpelCom has been compared with anumber of cellular operators in both developed and emerging markets usingEV/EBITDA and P/E multiples, as well as Market Cap per POP, an industry specif-ic valuation tool.

Discounted CashFlow Model (US$,thousand)

ComparativeValuation

1995A 1996E 1997E 1998E 1999E 2000ENet Profit 27,621 49,823 55,588 67,505 81,670 111,201Depreciation 3,104 10,420 24,630 34,525 42,420 47,946Provision for Doubtful Accounts 4,500 8,492 11,798 14,123 16,138 18,570Changes in Working Capital 6,756 15,450 15,920 12,766 12,939 9,088Operating Cash Flow 41,981 84,185 107,937 128,920 153,167 186,804Capital Expenditure* (61,295) (55,000) (53,000) (48,000) (60,000) (45,000) Free Cash Flow (19,314) 29,185 54,937 80,920 93,167 141,804 *The projected capital expenditure for 1996, 1997 and 1998 totalling US$125 million, US$108 million and US$90 million, respectively, has been adjusted for vendor financing which is a non-cash activity.

Discount Rate 25%Terminal Multiple 10

PV of Future Cash Flows 230,709

Terminal Value 1,868,043PV of Terminal Value 765,151

Total Value 995,859Net Cash as of December 1996 8,000 Regional Licenses at US$3 per Pop 27,000Equity Value 1,030,859

Equity Value per ADR (US$) 40.10

Current Price per ADR (US$) 34.625

Discount to Equity Value 13.7%

Company Market Cap EV/EBITDA P/E Market Cap/

US$ million 96E 97E 98E 96E 97E 98E POPs, US$

VimpelCom 890.09 9.7 6.9 5.6 17.9 16.0 13.2 58* 37**Vodafone Group (UK) 12648.5 12.5 11.0 9.3 23.9 21.4 18.9 94Orange (UK) 3814.1 nm 272.6 25.8 nm nm nm 66Telecom Italia Mobile 16282.0 9.1 7.9 7.0 24.3 22.2 19.7 286Netcom (Norway) 478.6 nm 24.9 12.4 nm nm nm 111NordicTel (Sweden) 863.9 nm 16.2 10.6 nm 49.6 18.7 99TAC (Thailand) 2522.4 16.6 12.0 9.7 23.2 18.6 14.9 43AIS (Thailand) 2729.0 12.5 10.3 8.6 19.2 16.1 14.5 46TRI (Malaysia) 1508.0 9.5 9.1 7.7 15.6 13.7 11.8 77Piltel (Phillipines) 904.0 10.6 8.0 6.4 21.6 16.3 14.0 naKMT (Korea) 6886.7 5.5 4.7 4.0 16.9 12.3 10.4 154Grupo Iusacell (Mexico) 824.4 12.4 9.4 7.6 nm nm nm 13*Based on the population of the Moscow licence area only**Based on the population of all regions VimpelCom holds licences for


Sources: Bloomberg, brokers’ research, Renaissance Capital estimates

Figure 17

Figure 18

VimpelComFebruary 1997

The EV/EBITDA multiple appears to be the most appropriate method of makingcross-border comparisons. EV (Enterprise Value) is defined as market capitalisationplus net debt/cash. Unlike simple market capitalisation, EV takes leverage intoaccount, and therefore offers a better understanding of a company’s value. EBITDAis used in place of simple net earnings to eliminate valuation distortions that arisefrom differing depreciation policies and tax regimes. The EV/EBITDA multiple hasbeen readily accepted by the cellular industry, principally because it is common fora cellular operator to makes losses in its first few years of operation, making com-parison on a net-profit basis impossible. EV/EBITDA multiples of 10 to 15 areregarded as normal for the industry. At 9.7 times estimated 1996 EBITDA,VimpelCom appears to be undervalued. This relative undervaluation becomes moreapparent when analysing the EBITDA multiple two years forward: the average dis-count to other operators widens from 25%, based on 1996 EBITDA, to 35% basedon estimated 1998 EBITDA. Given Vi m p e l C o m ’s better-than-average growthprospects, we believe an EBITDA multiple of 11 is well supported. This implies astock price of approximately US$40.00.

VimpelCom also presents good value on a more traditional P/E basis, trading at a dis-count to all peers excluding TRI of Malaysia. The average P/E for Vi m p e l C o mof 20.6 based on estimated 1996 earnings and 18.0 based on estimated1997 earnings also suggest a price of US$40 for VimpelCom stock.

On a per- P O P market capitalisation basis (market capitalisation divid-ed by the number of potential subscribers (POPs) in the licence are a ) ,VimpelCom is valued well below western operators. Using this ratio,VimpelCom comes out generally, although not substantially, more expensive thanmost other emerging market operators when the population of the Moscow licencearea is taken into account, but is cheaper when the population of the other regions forwhich VimpelCom has licences are factored in.




Appendix 1Key Model Assumptions

Revenues

Penetration andMarket Share

Tariffs

1995A 1996E 1997E 1998E 1999E 2000EMoscow Regional Population (thousand) 15,350 15,350 15,350 15,350 15,350 15,350Total Cellular Subscribers 42,000 97,000 177,000 282,000 417,000 577,000Total Cellular Penetration 0.3% 0.6% 1.2% 1.8% 2.7% 3.8%

DAMPS Market Share 53.8% 59.3% 51.7% 44.4% 37.4% 32.3%PCS Market Share na na 9.3% 15.4% 21.2% 24.9%VimpelCom Total Market Share 53.8% 59.3% 61.0% 59.8% 58.6% 57.2%

MCC Market Share 39.3% 27.3% 17.2% 11.2% 7.8% 5.7%MTS Market Share 6.9% 13.4% 21.8% 24.8% 26.9% 27.7%Rosico Market Share na na na 4.2% 6.8% 9.4%

VimpelCom DAMPS Subscribers 22,600 57,500 91,500 125,250 155,800 186,400VimpelCom PCS Subscribers na na 16,500 43,500 88,500 143,500Total VimpelCom Subscribers 22,600 57,500 108,000 168,750 244,300 329,900

1995A 1996A 1997E 1998E 1999E 2000EConnection DAMPS 1,300 900 500 350 250 200PCS na na 400 300 200 200

Handset PriceDAMPS 1,100 650 450 400 300PCS na na 550 400 350 300

Monthly Subscription FeeDAMPS 50 50 45 40 35 30PCS na na 40 35 30 30

Per Minute RateDAMPS, Peak 0.50 0.50 0.47 0.40 0.35 0.30DAMPS, Off-Peak 0.35 0.35 0.32 0.25 0.20 0.15PCS, Peak na na 0.40 0.35 0.30 0.30PCS, Off-Peak na na 0.25 0.20 0.15 0.15

Average Monthly Air-Time Usage (minutes per subscriber)

1995A 1996E 1997E 1998E 1999E 2000EDAMPS 481 425 380 340 300 270PCS na na 280 260 240 220



Expenses (US$)1995A 1996E 1997E 1998E 1999E 2000E

Handset CostDAMPS 750 650 500 400 350 300PCS na na 500 400 350 300

Interconnection Cost ($US per minute)DAMPS 0.1 0.1 0.09 0.08 0.07 0.06PCS na na 0.09 0.08 0.07 0.06

Marketing Cost Per Net Additional SubscriberDAMPS 220 350 350 350 300 250PCS na na 350 350 300 300

Personell Costs, Year-on-Year Growth DAMPS na 30% 15% 15% 15% 15%PCS na na 100% 50% 15% 15%

General and Administrative Expenses (% of Operating Revenues)DAMPS 9% 10% 10% 9% 8% 7%PCS na na 10% 8% 7% 6%

Provision for Doubtful Accounts (% of Operating Revenues)DAMPS 4.5% 4.0% 4.0% 4.0% 4.0% 4.0%PCS na na 4.0% 4.0% 4.0% 4.0%

Corporate Tax 33.0% 28.0% 35.0% 35.0% 35.0% 35.0%

1995A 1996E 1997E 1998E 1999E 2000EOperating RevenuesHand-Set Sales 27,753 39,710 23,400 16,200 14,100 10,710Connection Fees 24,464 34,200 20,000 15,750 11,750 10,200Monthly Fees 13,024 24,030 40,230 52,020 59,021 61,596

Air-Time ChargesLocal 24,414 91,256 142,396 155,904 153,791 141,917National 2,471 8,074 11,801 14,306 17,622 18,479International 4,917 9,924 14,751 16,256 15,514 17,247

Roaming 459 780 1,561 3,121 7,179 16,511Special Services 3,415 4,325 8,046 10,404 11,804 14,372Total Operating Revenues 100,917 212,300 262,185 283,961 290,780 291,032

Operating ExpensesSG&A 18,774 40,557 46,297 46,775 43,244 40,461Cost of Handsets Sold 17,492 29,331 22,500 18,000 15,422 13,388Service costs 11,671 38,792 59,226 69,996 74,386 78,005Provision for Doubtful Accounts 4,500 8,492 10,487 11,358 11,631 11,641

EBITDA 48,480 95,128 123,674 137,832 146,097 147,537Margin 48.0% 44.8% 47.2% 48.5% 50.2% 50.7%Depreciation and Amortization 3,104 10,420 17,157 21,893 25,315 27,420

EBIT 45,376 84,708 106,517 115,938 120,782 120,117Margin 45.0% 39.9% 40.6% 40.8% 41.5% 41.3%Net Financial Items (4,210) (1,883) 2,256 6,404 10,761 15,369

Pre-tax Profit 41,166 82,825 108,774 122,343 131,543 135,487Tax 13,545 23,191 38,071 42,820 46,040 47,420

Net Profit Before Minority Interest 27,621 59,634 70,703 79,523 85,503 88,066Minority Interest na 2,982 3,535 3,976 4,275 4,403Net Profit 27,621 56,652 67,168 75,547 81,228 83,663Margin 27.4% 28.1% 27.0% 28.0% 29.4% 30.3%

DAMPS Profit andLoss,

US$, thousand



PCS Profit andLoss,US$ thousand

1995A 1996E 1997E 1998E 1999E 2000EOperating RevenuesHand-Set Sales na 0 9,350 10,440 14,000 13,650Connection Fees na 0 6,800 8,700 10,000 13,000Monthly Fees na 0 3,960 12,600 23,760 41,760

Air-Time ChargesLocal na 0 9,890 28,800 49,611 79,678National na 0 762 2,520 4,514 7,517International na 0 817 2,700 3,643 5,846

Roaming na 0 600 1,200 2,400 4,800Special Services na 0 594 2,160 4,752 6,960Total Operating Revenues na 0 32,773 69,120 112,680 173,211

Operating ExpensesSG&A na 4,400 11,852 19,180 26,218 32,447Cost of Handsets Sold na 0 10,625 13,050 17,500 17,063Service costs na 0 5,012 15,610 28,443 43,502Provision for Doubtful Accounts 1,311 2,765 4,507 6,928

EBITDA na (4,400) 3,973 18,516 36,013 73,271 Margin na na 12.1% 26.8% 32.0% 42.3%Depreciation and Amortization na 0 7,474 12,632 17,105 20,526

EBIT na (4,400) (3,501) 5,884 18,907 52,745Margin na na -10.7% 8.5% 16.8% 30.5%Net Financial Items na -3,360 -9,658 -15,022 -18,135 -4,602

Pre-tax Profit na (7,760) (13,159) (9,137) 772 48,143Tax na 0 0 0 270 16,850

Net Profit Before Minority Interest na (7,760) (13,159) (9,137) 502 31,293Minority Interest na (931) (1,579) (1,096) 60 3,755 Net Profit na (6,829) (11,580) (8,041) 442 27,538 Margin na na -35.3% -11.6% 0.4% 15.9%



Consolidated Profitand Loss,

US$ thousand

1995A 1996E 1997E 1998E 1999E 2000EOperating RevenuesDAMPS 100,917 212,300 262,185 283,961 290,780 291,032PCS na 0 32,773 69,120 112,680 173,211Total Operating Revenues 100,917 212,300 294,958 353,081 403,460 464,244

Operating ExpensesDAMPS 52,437 117,172 138,511 146,129 144,683 143,495PCS na 4,400 28,800 50,604 76,668 99,940Total Operating Expenses 52,437 121,572 167,311 196,733 221,351 243,435

EBITDA 48,480 90,728 127,647 156,348 182,109 220,809Margin 48.0% 42.7% 43.3% 44.3% 45.1% 47.6%Depreciation and Amortization 3,104 10,420 24,630 34,525 42,420 47,946

EBIT 45,376 80,308 103,017 121,823 139,690 172,863EBIT 45.0% 37.8% 34.9% 34.5% 34.6% 37.2%Net Financial Items (4,210) (5,243) (7,401) (8,618) (7,374) 10,767

Pre-tax Profit 41,166 75,065 95,615 113,205 132,316 183,630Tax 13,545 23,191 38,071 42,820 46,310 64,271

Net Profit before Minority Interest 27,621 51,874 57,544 70,385 86,005 119,359Minority Interest 0 (2,050) (1,956) (2,880) (4,335) (8,159) Net Profit 27,621 49,823 55,588 67,505 81,670 111,201Margin 27.4% 23.5% 18.8% 19.1% 20.2% 24.0%

Earnings per ADR na 1.94 2.16 2.63 3.18 4.33Growth na na 11.6% 21.4% 21.0% 36.2%

Dirk DamrauManaging Director, Research

Patricia Anderson Nima Tayebi

Jim Bunch

Yuri Krapivin Roland Nash

David Kuenzi

Olga Karasiova Natasha Baranova

Andrea Woodrow

Sergei Polikarpov Alexei Cokin

l

© 1997 The Renaissance Capital Group. All rights reserved.

This material is for your private information, and we are not soliciting any action based upon it. This report is not to be construed as an offer to sell or the solicitation of an offer to buy anysecurity and is specifically not a recommendation to purchase or sell any securities. The material is based upon such information that we consider reliable, but we do not represent thatit is accurate or complete, and it should not be relied upon as such. We accept no liability in relation to the use of this information or any investor activity taken in the securities describedherein. Opinions expressed are our current opinions as of the date appearing on this material only. We make no representation that we will update the information discussed in this mate-rial on a regular basis, or correct any inacccuracies contained herein. We and our affiliates, directors, partners, and employees, including persons involved in the preparation or issue ofthis material may, from time to time, have long or short positions in, and buy and sell, the securities, or derivatives (including options) thereof, of companies mentioned herein.

This material has been issued by the Renaissance Capital Group. Foreign-currency-denominated securities are subject to fluctuations in exchange rates that could have an adverse effecton the value or the price of, or income derived from, the investment. In addition, investors in securities such as ADRs, the values of which are influenced by foreign currencies, effective-ly assume currency risk. Investing in Russia and Russian securities involves a high degree of risk and investors should perform their own due diligence before investing.

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February 1997 Yuri Krapivin

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