Russia's RTS Index futures - liquid tradable instrument.

We all need a smile from time to time :)

Sept. 1 (Telegraph) -- Russia’s finance minister has told people to smoke and drink more, explaining that higher consumption would help lift tax revenues for spending on social services.

Speaking as the Russian government announces plan to raise duty on alcohol and cigarettes, Alexei Kudrin said that by smoking a pack, “you are giving more to help solve social problems such as boosting demographics, developing other social services and upholding birth rates”.

“People should understand: Those who drink, those who smoke are doing more to help the state,” he told the Interfax news agency.

Voila :)
 
Morning comment - 03.09.2010

Good morning! Probably a sour note – at least for Global EM Oils, apart from Brasil.

How much Pepsi are you gonna drink after you just have a 2-litre bottle of Coke? :) Petrobras agreed to pay the Brazilian government $42.5 billion in new stock for the right to develop 5 billion barrels of offshore oil reserves. The value set for the reserves will determine how much new stock Petrobras must offer minority investors in a related public offering to raise funds for a $224 billion plan to develop offshore fields and boost refinery capacity.

Of course you will argue that the Brasilian broad market (trading at pre-crisis highs and relatively way ahead of Petrobras) will find a way to get out of other equities and eventually snap up that chunk. That will be happening undoubtedly. However, you being a global fund investing in Oil&Gas, what is it telling you? You cannot avoid having Petrobras in your global portfolio, and most likely there will be an outflow of funds from other EMs (Russia included) into Brasil. Add to that consistently stronger BETAs of Brasil against other EMs, and you will probably get the broad picture :)

We spoke about divergence of G7 and EM markets in our previous comments. What may be happening now is divergence of major EMs one from another.

Another broad-based buying effort sent US stocks through resistance to book their second straight gain ahead of the monthly nonfarm payrolls report. DO NOT FOLLOW THEM!


CORPORATE NEWS:

1. ***ANGLO AMERICAN SEEKS COKING COAL ASSETS IN RUSSIA*** is looking for assets with annual output of as much as 20 million metric tons! No such assets in Russia with such annual output! Raspadskaya (RASP) before the accident produced some ~ 13 mln tons; Mechel (MTL US) produces ~ 10 mln tons (in perspective 30 mln tons – if we include Elga coal deposit).

2. Evraz Group (EVR LI - HOLD) announced 1H10 financial statement under IFRS yesterday. In our opinion, the company showed neutral results. We have revised our valuation of Evraz Group taking into account 1H10 financials and tendencies on the steel and raw materials markets. We believe that the company’s leverage risks remain high. At the same time, medium-term prospect for the long products segment does not look optimistic. We upgraded our Evraz Group’s target price by 28% to $32.1 per GDR but issued a HOLD recommendation. We view strong prices of raw materials and iron ore as a driver for Evraz Group since the company is integrated into coking coal and iron ore production. However, investment attractiveness of Evraz Group’s GDR remains under question on the back of high debt leverage and vague medium-term outlook for rolled steel products.

3. Gazprom’s (GAZP) 1Q10 IFRS results: strong performance. POSITIVE. In our view, Gazprom’s strong 1Q10 results should support performance of the stock. Pressure from European customers, watch for Yamal news. The main risk for Gazprom, in our view, remains pressure from the European customers to revise terms of the former’s long-term contracts…During the conference call top management rocked saying…”third-part gas purchases were lower primarily due to lower prices and volumes”... Makes me wonder - what other factors there could be? :)

4. Novatek (NVTK) to pay 1H10 dividend. NEUTRAL. Investors will get RUR 1.5/ordinary share ($0.049/share at the current exchange rate), or RUR 15.0/GDR ($0.49/GDR). The record will be closed on 9 September. The implied current dividend yield is 0.7%.

5. VTB (VTBR - HOLD) 2Q10 IFRS results: some grounds for price revision. We consider the numbers as neutral. During the conference-call management confirmed its forecasts of 2010 earnings and loan growth with more optimistic outlook on margins. Taking into account the published numbers and stronger forecasts we upgraded our TP of VТB shares by 12% to RUR0.087 ($5.95 per GDR). HOLD recommendation is reiterated.

6. Globaltrans’ (GLTR LI - BUY) 1H10 financials preview. We expect strong financial results and the improvement of profitability over 1H10. On 7 September Globaltrans is set to disclose its 1H10 operating and financial results and hold conference-call. Positive view on the stock maintained. We think that during conference-call the company’s management will provide guidance for further railcar park expansion in 2H10 and current price environment. We also expect to get more details regarding the company’s ambitions to purchase a 50% stake in Freight Two company. We reiterate our positive view on the company and confirmed our BUY recommendation on Globaltrans’ GDR, which trade with a discount to its peers at 11.5% and 34% on 2010E EV/EBITDA and P/E, respectively.

7. AVTOVAZ (AVAZ) will place additional common share issue at RUR40.24 per share. NEUTRAL. Valuation of 50% above market price is unlikely to be followed by buy-out offer. According to Reuters, AVTOVAZ’ shareholders will consider a deal to sell of 108,543,000 common shares to Renault at RUR40.24/share. As it was already reported, French auto producer will pay with technologies and equipment for these shares. Interfax reported yesterday other key parameters of AVTOVAZ additional common share issue:

· The car maker will announce a placement of 435,173,411 common shares under close subscription;

· Renault will purchase 108,543,355 common shares (24.94% of announced amount) paying RUR4.4 bn;

· Troika Dialog and other shareholders are expected to purchase 11,584,355 common shares (2.7% vs. possible 50% amount).

· Russian Technologies will purchase 109,228,526 common shares due to priority rights (25.1%) and also buy shares unclaimed by other shareholders up to 205,547,195 common shares (47.2%) paying totally about RUR12.7 bn;

As a result, AVTOVAZ increases the number of common share by 31.3% to 1,823 mn, Russian Technologies boost its stake of common shares up to 36.4% vs. current 25.1%, Renault keeps its 25% stake, while Troika Dialog and minorities’ shares are diluted to about 19%–20% each from 25%. The main point that Russian Technologies will have no obligation to make buy-out offer at RUR40.24 per share according to Russian law, which stipulates an exception to do it if any shareholder has more than 30% through priority rights. That is why we believe that the car maker’s minority shares will unlikely to be purchased by Russian Technologies at RUR40.24/share that is 54% higher than Thursday close price.

8. AFI Development (AFID LI - BUY) secured $74 mn project loan. POSITIVE. AFI Development announced that it has obtained a 5-year $74 mln project loan from Sberbank. The loan will be in rubles and will be used to complete construction works at the Ozerkovskaya Embankment Project (Phase III), located within the prestigious business area of Zamoskvorechie. The loan carries an initial interest rate of 13% and following project completion, expected in 2011, the interest rate will be reduced to 11.75%. We positively value activity of the company and keep our BUY recommendation for AFI Development’s shares with a target price $1.5 per share.

9. OGK-6 (OGKF) posted 1H10 IFRS damp financials. NEGATIVE.


TRADING ACTIVITY:

Yesterday we started the day working orders in GAZP, GMKN, SBER, VTBR – all from domestic accounts; later on sellers emerged in OGKA (ongoing one) and OGKE; we also were working to sell AVAZ at careful discretion all day long; after lunch we had buyers in VZRZ, AMMO, MRKK, MRKU, ESMO, IRGZ (were sellers there in the morning), CMST LI; we were sellers in ENCO, MRKV, SILVp, HYDR, AMEZ; turned seller in GAZP right before the closing bell. Clients’ activity in regional telecoms cooled a bit and as you can see from the flows we had only ESMO to buy and ENCO to sell + we kept on off-loading RTKMp (competitors yesterday upgraded RTKMp to BUY…). Domestic clients’ activity continue to dominate these days, volumes increased quite a lot and yesterday buyers’ flows were almost equal to sellers’ orders in absolute terms. Will not be original saying that today activity will be subdued till NONFARM PAYROLLS release.



GOOD TRADING TO YOU!
 
Morning comment - 06.09.2010

Good morning! Global asset polls show equity holdings among top investors at the lowest level in at least six years and bond holdings at the highest. Still the markets generally tending to run ahead of the economy are NOT at the bottoms of 2003 and 2009. With cash at a solid 5.8 percent of portfolios, this reflects a highly cautious state, but also one that we have been viewing as a contrarian indicator. Both for equity and bond holdings, the pace of decline-rise have been leveling off lately (!)

An interesting thing to notice – if you try to gauge whether investors are adequately positioned for a potential return to risk – is not JUST easing frenzy for sovereigns (polls show allocations to the sector dropping to 55.8 percent in August from 61.2 percent three months earlier) BUT the fact that the investors have been snapping up investment-grade corporate debt, still a defensive play, but further up the risk food chain!

We re-iterate our view that equities look very cheap on a risk premium basis to bonds. There is one nagging problem though – CRAP MACRO. No wonder in this environment where you get a 27K up tick in private payrolls - would you notice that in 2006-07? :) - you get buyers across the board :)


CORPORATE NEWS:

· OGK-1 (OGKA) to place additional share issue in London. NEUTRAL. Global plans. OGK-1 plans to place on the London Stock Exchange the shares of additional issue in the amount of 85% of the capital and has already chosen banks-organizers. InterRAO manages the controlling stake in the company now. The volume of OGK-1 additional issue is 38 bn shares. The company plans to begin road-show in September. Its investment program is estimated at RUR90 bil, and the company needs to raise funds for its implementation. We believe that the news is neutral for OGK-1 stock performance because the placement is partly of a technical nature (the need to raise funds from strategic investors) and was widely expected. However, a full SPO on the open market involving a strategic investor could lead to new price tags for power generation assets that may become a benchmark for investors in the medium term in evaluating thermal generation companies. In our view, speculative market reaction to newsflow regarding the placement of OGK-1 is likely in the near future.

* The growth of railway cargo transportation load in Russia decelerated to 5.3% in August. NEUTRAL.

· Transneft’s (TRNFP) head says the privatization would trigger issues with debt. NEUTRAL. Head of Transneft Tokarev believes that the sale of Transneft is unlikely. If the state’s holding in Transneft falls below 75%, the company would have to offer to redeem all the eurobonds and would need to refinance the debt. Further, changes in the shareholders structure could trigger downgrades of Transneft’s credit ratings. Finally, according to Tokarev, if an oil company acquires a major stake in Transneft, then the rule of equal access to the pipeline system will be violated.



TRADING ACTIVITY:

On Friday we started the day with selling orders in GAZP, GMKN, HYDR, later on turned sellers in AKRN, OGKA. Apart from flows in liquid stocks we continued to buy AMMO, MRKU, IRGZ and sell telecoms - ENCO and RTKMp (domestic accounts right before the closing bell). International clients were selling PIK, KZOS, DGBZ, MRKH, MMBM at our bid levels. These days we continue to monitor the situation when less liquid stocks outperform blue chips in performance.

Good trading to you!
 

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Morning Comment - 07.09.2010

Good morning! Bid talks continue to come in thick and fast – world oil companies have been rumoured to line up for British Gas, now – it looks like – Singapore Telecoms, AT&T or – and I love this bit :) – “one of its rivals” are on the prowl for C&W Worldwide. We commented on this before – companies have loads of cash, which – instead of spending on hiring and growing – they spend on buying targets at hefty premium.

This is a mega-dichotomy and a mega-problem of current markets. Good micro, crap micro. The only real reason why I do not believe in the ghost of “recession’s 2nd dip” is that we are – STILL – deep in the recession macro-wise. But micro runs ahead of macro when it is strong, and I doubt very much that we have topped out –YET – in this leg up.


CORPORATE NEWS:

1. Severstal (SVST LI) posted strong IFRS financials in 2Q10. POSITIVE. Severstal remains our top-pick – see Bloomberg link {NSN L8BWEN3PWT1C <GO>}, also attached. We consider the company’s 2Q10 financial statement as positive and confirm our BUY recommendation on the stock with a target price of $15.5/share. However, 2H10 is likely to be weaker as compared to 1H10 due to lower steel prices and fragile demand on rolled steel products. Nevertheless, its gold mining segment, which is gaining momentum, and high vertical integration into the production of coking coal and iron ore to some extent offset negative market developments. As for North America assets, in our view, temporary improvement may help the company to sell them. Key numbers here are:

· 2Q10 net income in line with our expectations. The company’s revenue increased by 35% q-o-q to $4,245 mn, EBITDA doubled q-o-q to $955 mn. 2Q10 net income was $192 mn vs. $785 mn of net loss in 1Q10.

· Solid results in Russia. Steel division’s EBITDA climbed by 31% q-o-q to $528 mn. EBITDA margin climbed 2 ppt to 22%. Severstal Recourse’s EBITDA jumped by 2.3 times q-o-q to $420 mn, and EBITDA margin added 18 ppt to 48%.

· Gold mining segment: growth continues, on track to transparency increase. EBITDA surged 33% q-o-q to $89 mn and EBITDA margin rose 4 ppt to 54%.

· Severstal North America: 2Q10 positive EBITDA. Severstal’s North American EBITDA (SNA) amounted to $59 mn vs. $83 of EBITDA loss in 1Q10. SNA’s revenue increased by 24% q-o-q to $1,447 mn.

· Comfortable debt load. We forecast Net debt-to-EBITDA ratio at 1.5 for the year-end that implies a comfort debt load.

2. Fortum sells a 31% stake in St. Petersburg Energy Sales Company (PBSB) to Inter RAO (IRAO). NEUTRAL. We view the news as neutral for St. Petersburg Energy Sales Company, but note that the acquisition of a 31% Inter RAO’s stake will be followed by a formal buy-out offer to minority shareholders. Company as a part of Joint Energy Sales Company is owned by RusHydro (57.4%), but is managed by Inter RAO.

3. Gazprom Energoholding announced plans and projections in the utilities sector. POSITIVE. We believe any announced details Gazprom’s strategy regarding the utilities sector is a positive development, since this is partly clarifies the prospects of all affiliated generation companies. The bet on increasing value of assets, in our opinion, is beneficial for the affiliated gencos’ minorities, especially providing that the asset consolidation may lead to synergies. It should be noted that in some forecasts of Gazprom Energoholding is rather conservative.


TRADING ACTIVITY:

We churned quite a bit of volume yesterday on both ends of the stick in Norilsk, increased activity in the name is quite obvious. US bank hol put a lid on trading activity generally, there were quite a few cautions buyers round, not willing to get out of their foxholes into the open though. We were active in local stories of AVAZ and APTK variety.

Good US Open to you! :)
 

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Morning comment - 09.09.2010

Good morning! A sharper eye among us will notice that in EMs the stock-bond yield ratio is relatively high, meaning that EM Bonds are in a clear bubble, but EM equities are far from that. The earnings yield on the MSCI Emerging Market Index has climbed 1.16 percentage points to 7.05 percent this year, according to data compiled by Bloomberg through yesterday - bond yields in EMs, on the other hand, have fallen in tandem with declines in developed markets. The yield on JPMorgan EMBI+ Index, a benchmark for emerging-market debt, hit bottom last month at 5.40 percent, the lowest reading since at least 1997, according to Bloomberg.

EM stocks are indeed quite cheap by comparison with earnings estimates and asset values - which support our bullish stance for Russian and Frontier equities. But make no mistake - this will be a very different rally this time round. The times of "show me offers in ANY Russian blue chip, MINE, show me offer behind" :) is gone and gone for good. Russia has not got the size of Chinese market, nor the vibrancy of the Brasilian market. This will be a selective long play, with individual stories at the forefront.


CORPORATE NEWS:

1. Norilsk Nickel (GMKN): new shape of the shareholders' conflict. NEUTRAL

* "Save Norilsk Nickel". Ahead of Norilsk Nickel' EGM, yesterday RUSAL presented a detailed strategy aimed at increasing the value of Norilsk Nickel and protecting the interests of its all shareholders. Also RUSAL launched the web-site <http://www.savenornickel.ru/> www.savenornickel.ru. Thus, the conflict between Norilsk Nickel's key shareholders (Rusal and Interros) takes a new shape involving the other tools of a battle.

* Short-term driver. It should be noted that Norilsk Nickel's EGM is scheduled on 21 October, the register closing date is 10 September, i.e. this Friday. Obviously, RUSAL uses these measures in order to bring Norilsk Nickel's minorities on its side. We regard this news as neutral for Norilsk Nickel, since the conflict between its key shareholders does not have any impact on the company's operating activities. Meanwhile, this conflict could be a short-term trigger for the stock. Now we do not have an official recommendation on Norilsk Nickel.

2. Russian auto market slowed down. NEUTRAL

* Car and LCV sales slumped 4% m-o-m in August. The domestic auto market declined by 4% m-o-m to 168,627 vehicles due to the combination of factors: peak of summer holiday season, weather conditions (hot temperature and fire calamity) and related suspension of vehicle output in early August. At the same time, the Russian car market advanced 51% y-o-y last month that translated into a 14% y-o-y increase in total vehicle sales over 8M10 to 1.14 mn units.

* Sollers kept its leading position in recovery dynamics. The company expanded its vehicle sales by 37% y-o-y to 47,597 units over 8M10 vs 29% y-o-y for Russian peers vs 7% y-o-y for foreign peers.

* Autumn could spur auto market growth. We maintain our 2010 target for the Russian car and LCV market of 1.75 mn units that implies a 20% y-o-y increase.

3. FAS approved X5 Retail Group's (FIVE LI) deal to acquire three Kopeyka's subsidiaries. POSITIVE

* In expectation of green light for the deal. According to the independent appraiser's estimate, Kopeyka's business value is more than RUR34 bn (about $1.1 bn) or about 9.2 in terms of 2009 EV/EBITDA (X5 Retail Group trades at 15.7 2009 EV/EBITDA).

4. FAS has dropped investigations to Mechel (MTL) and Novolipetsk Steel (NLMK). POSITIVE

* FAS: Mechel and NLMK are "innocent".

* Favourable development for the companies. We regard this news as positive for Mechel and NLMK. It should be noted that in case of any violations, the companies would be threatened with the penalty of 1-15% of the revenue on the domestic market. We maintain our positive view on Mechel due to strong prices of coking coal. We recommend BUY the stock with the fair price of $29.5/ADR. We confirm HOLD recommendation for NLMK with the fair price of $3.21/share.


TRADING ACTIVITY:

Most notable from yesterday - we were buyers of telecoms all day yesterday, buyers of OGK-6, sellers in OGK-1,2. We crossed chunks in PIK, URSI, Volga and Centre Telcos, and TransNeft Prefs. Aggressive buyers of ROSN in the after-market.

Good trading to you!
 

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Morning comment - 10.09.2010

Good morning! A couple of observations:

Looking for a success story? Check ARM Holding since 2007 (chart attached). As a guy who traded the stock on a daily basis back in 2000-02 (stop giggling :) ), I tend to keep a close eye on it – and for one main reason. We mentioned in our comment from 25 August (see Bloomberg link {NSN L7PD743PWT1C <GO>}) that developed nations are essentially already deep in a deflationary environment. Possibly the easiest and quickest way OUT of deflation is a revolutionary change of “consumer’s base basket”. This is happening and happening rapidly, and it is chip and gadget makers that are at the forefront of such change. No wonder ARM, the UK designer of semiconductors used in Apple’s iPhone – and Apple products are spearheading that revolution in consumer’s basket – flies to the sky after unveiling a new Cortex-A15 MPCore Processor. This new product is a potential game changer offering five times the performance of existing smartphone processors. Add to that winning an order from Samsung. for a GPU socket in their latest application processor chip – and you cannot but get to the conclusion that it is companies capable of rapidly changing the consumer’s basket that are the success stories of today.

Interestingly enough, HMV on the other hand, is another clear example of this ongoing revolution in consumer’s basket. Their music and DVD sales at outlets open at least a year in the UK and Ireland fell 15 percent in the 19 weeks ended Sept. 4. Why buying a DVD when you can listen to your fave track on your Apple’s iPhone with an ARM chip in it? :)


THING TO NOTE IN RETAIL SECTOR: We comment on X5 developments below – and to be frank the alternative of Wal-Mart stepping in to snap up Kopeika seems a pure craze to many. However they successfully played this sort of game in Mexico, creating 2nd largest Mexican company by cap - WALMART DE MEXICO (WALMEXV MM). Another success story by the way :) I would not be entirely snubbing this possibility!


CORPORATE NEWS:

(for details see our Daily note at http://www.tkbc.ru/eng/research/research/stock_analysis/ or in Bloomberg at {TKBC <GO>})

1. The Russian government may extend cash-for-clunkers program until 2012. POSITIVE

* State reserved RUR13.5 bn for srappage certificates in 2011 federal budget. According to Vedomosti, the Russian government plans to allocate RUR13.5 bn for the cash-for-clunkers program in 2011 federal budget. We remind that the state launched RUR10 bn cash-for-clunkers program on 8 March 2010 to support domestic car makers. We believe that this program is one of the most successful initiatives of the Russian government. Thus, the first part of 200,000 scrappage certificates was fully used by the end of June vs. autumn as it was expected.

* Supportive for AVTOVAZ and IzhAuto. AVTOVAZ is a key beneficiary of cash-for-clunkers program (above 80% of scrappage certificates provided for LADAs). It will also be positive for IzhAuto, which in September launched the assembly of Classica models (LADA 2105/2107) to realize AVTOVAZ strategy to cancel Classica production next year and commission new Lada Granta by the end of 2011.

2. FAS allowed X5 Retail Group’s (FIVE LI) to acquire Kopeyka. POSITIVE

* FAS gave the green light to acquire Kopeyka, except of some stores. We remind that according to the independent appraiser’s estimate, Kopeyka’s business value is more than RUR34 bn (about $1.1 bn) or about 12 in terms of 2009 EV/EBITDA (X5 Retail Group trades at 15.7 2009 EV/EBITDA).

3. Gazprom’s (GAZP) board approves changes to 2010 investment program. NEUTRAL

* Investment program is increased by 13%, neutral. The investment program was increased by 13% from the level approved in November 2009 to RUR 905.3 bn (around $30 bn). In production segment, Gazprom’s priority for 2010 is development of Bovanenkovo and Shtokman fields, in transportation – construction of pipelines under East gas program (Sakhalin-Khabarovsk, etc.), as well as Nord Stream and South Stream. According to Vedomosti, Gazprom forecasts non-CIS exports at 140-145 bcm, unchanged from the 2009 level, – this is in line with Gazprom’s previous guidance at 1Q10 results conference call. The recovery in gas production this year (in January-August, Gazprom’s gas output increased by 16% y-o-y) and favorable domestic gas prices (regulated gas tariff for industrial consumers set at $76/mcm for 2010) should support the company’s financials this year.

4. Veropharm’s (VRPH RU) 2Q10 and1H10 IFRS results: margins soared well above the expectations! POSITIVE

* Positive surprise in margins at all-time highs. Yesterday Veropharm reported its unaudited 1H10 IFRS results, which came well above our and market consensus estimates in terms of margins. The company’s 2Q10 revenue increased by 23% y-o-y in ruble terms (vs. only 5% y-o-y growth in 1Q10, when the company acknowledged the underproduction of several categories of drugs due to the lack of ingredients as a result of ingredients suppliers’ problems). Thus, 1H10 sales growth totaled 16% y-o-y, which is above the overall market growth of 4%). Veropharm’s 2Q10 gross margin soared to 73.6% (vs. our conservative forecast of 70%) on considerable margins expansion in all segments and further increase in share of high-margin prescription drugs sales (amounted 75% of total sales in 2Q10 at the expense of decreased share of lower-margin traditional drugs and adhesive bandages sales). Thus, Veropharm gross margin peaked to 73.3% in 1H10, hitting all-time high. 2Q10 SG&A expenses returned back to normal level and totaled 33.5% of sales after they shot up to 55% in 1Q10. 2Q10 EBITDA margin jumped to 42% that helped 1H10 EBITDA margin to improve to 34.3% (vs. 33% in 1H09). Veropharm’s net margin increased to 27.3% in 1H10 that demonstrates 34% y-o-y growth in the company’s EPS (in dollar terms).

* We maintain our BUY recommendation for the stock with end-2010 target price at $47 per share, which implies more than 25% of upside potential. Veropharm relative valuation in comparison with its EM peers implies almost a 40% discount on the basis of 2010E EV/EBITDA.

5. Gazprom’ s entity filed a lawsuit against the offshore of IES Holding. NEUTRAL

* Lawsuit as a tool. Structure of Gazprom (GAZP) sued at law on RUR16.877 bn to affiliated with the IES Holding Offshore Berezville Investment Ltd, which owns a 11.29% stake in Volga TGK-7 (VTGK), Interfax reported. The reason for filing a claim is not specified. According to the source of Interfax, Gazprom may claim a part of the stake in TGK-7, which IES Holding acquired from RAO UES at the time of restructuring. Currently, IES, according to unofficial sources, owns about 48 -50% of the generation company, and Gazprom has a minority interest. A source familiar with the negotiations between Gazprom and IES on TGK-7, told Interfax that the parties agreed on their positions when filing a claim.

* There are two possible beneficiaries. Earlier, Gazprom has repeatedly stated that the company may be of interest of controlling TGK-7. IES is ready to keep its stake in the generation company, while until now it has not planned to include it in the consolidation scheme of generation assets. In addition to the structures of Gazprom's, Inter RAO UES expressed its interest to TGC-7 and is likely pasta receive a 30% stake in the generation company, which is on the balance of FGC.

* Waiting for changes. We believe that the news is neutral for TGK-7’s stock performance, and in our view, in the medium term we may expect changes in TGK-7 shareholder structure. However, it is premature to make any conclusions about the prospects of such events for minority shareholders, in our view, because the changes may be as a consequence of a sale or an assets swap between the parties, not involving cash participation.


TRADING ACTIVITY:

We churned a good chunk in PIK Group yesterday, enough to say we digested daily MICEX volume in the paper. We traded quarter bil of URSI, Western accounts were hunting for TNK-BP, we traded almost a mil shares, BID OVER in 3 mil shares for today. Also, moving up the tier ladder :), we worked Western bids in Gazprom, RosNeft and SpermBank Prefs – as UK brokers call it :)


Good end to trading week to you!
 

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Morning comment - 13.09.2010

Good morning! Guess where the largest open interest on VIX options was? Sept $45 calls! That clearly shows some investors were betting on the gauge to double the current level by this week's expiration! On Friday, about 145,000 calls traded in VIX options, which are priced off of VIX futures, versus 46,000 puts. Futures on VIX are pricing in a three-month gain of 31 percent and contracts based on swings in Europe and emerging-market equities have risen to near records, data compiled by Bloomberg show.

Complete and utter pessimism. BUT - five of the seven times the VIX gap widened this much, S&P rose 11 percent on average in the next six months. One exception was May 2008, two months after Bear Stearns collapsed and before a 40percent drop - we all surely remember that :( Best time to purchase stocks is when pessimism is at its high, even more importantly; strong corporate results and forecasts for the biggest surge in corporate profits in two decades are set to buoy equities.

To be frank I have rarely seen such a nice bundle of extreme fear and strong micro - nice for global equities. Even the slightest whimsical improvement in macro (like evidence of strengthening domestic spending in China or positive perception of Basel III meetings on European bank capital reform or even Greek PM's comments at the weekend) is poised to "float all boats" in the equity harbour :)



THINGS TO WATCH: Banks first and foremost on the back of capital reforms. Also, tomorrow's inflation data, with a rise expected up to 3.2 per cent being the consensus expectation, is a potential pivot event for the week so volumes could remain relatively light ahead of this.


CORPORATE NEWS

(for details see our Daily note at <http://www.tkbc.ru/eng/research/research/
stock_analysis/> http://www.tkbc.ru/eng/research/research/stock_analysis/ or in
Bloomberg at {TKBC <GO>})

* GAZ Group (GAZA) launches its own cash-for-clunkers program. POSITIVE

* Mikhail Prokhorov to get control over Open Investments (OPIN RU). NEUTRAL

* General Prosecutor's Office of Russia has checked Norilsk Nickel (GMKN) AGM.
NEUTRAL

* TMK (TMKS) posted strong 1H10 financials. POSITIVE

* X5 Retail Group (FIVE) continues to seek new CFO. NEUTRAL

* FAS approved Wimm-Bill-Dann (WBDF) application to acquire two regional milk
producers. POSITIVE

* Magnit's (MGNT LI) 8M10 trading update: spectacular traffic growth in
discounters. POSITIVE

* Holding MRSK (MRKH) expects a partial transition to RAB from 1 October.
POSITIVE


TRADING ACTIVITY:

We churned 700K DRs of Gazprom on Friday, we worked large INTERNATIONAL buy orders in ROSN - in upto 5 mil shares - I am BID OVER into London open today. We saw 2 Western sellers in Protek (PRTK RU), they were clearly rolling their exposure into Magnit. In utilities we were sellers of OGK 1,2, buyers of No 6, buyers in size in MRSK Volga. In telecoms we were looking to buy Centre (ESMO RU) and Yug (KUBN RU) and sell Sibir (ENCO RU). In Real Estate, we worked big selling orders in local PIK (PIKK RU), upto 1 mil shares, the guy was about 3% above market, and we were also sellers in local HALS.


Good week ahead to you!
 

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Morning comment - 14.09.2010

Good morning! Straight to the bacon - Stocks Rally on Basel bank reform, China growth and corporate deals. First 2 boiling down to removing investors’ fears about CRAP MACRO – the last one showing GREAT MICRO.

I will not spend time here on the corporate deals that we all know – the likes of HP and Hertz. What I find interesting is EMs starting to acquire targets in developed world. We mentioned before (see Bloomberg link {NSN L7PD933PWT1C <GO>}) that deflationary environment in G7 is not a fear, it is a reality. What can possibly stave it off? One thing – EMs where you can still get double-digit returns. EMs have all the capacity to help out developed nations not just on the front of liquidity, but also deflation. Deflation in developed nations and inflation in EMs? Isn’t that counter-intuitive? But that seems to be the world we are living in. "Get the money now just in case rates are headed up in 2011" seems to be the corporate mantra in Sao Paolo and Rio. That is giving Brazilian companies plenty of cash to invest and is fueling a boom in acquisitions by Brazil's companies. Recent news that an investment group backed by Brazilian money, 3G Capital, will acquire Burger King for $3.2 billion is just one more sign of that trend.


CORPORATE NEWS:

(for details see our Daily note at http://www.tkbc.ru/eng/research/research/stock_analysis/ or in Bloomberg at {TKBC <GO>})


* NCSP’s (NCSP LI) cargo turnover slightly decreased over 8M10. NEUTRAL. The cargo turnover declined in August.

* OGK-4 (OGKD) posted solid 1H10 IFRS results. POSITIVE. Market liberalization and efficiency – key factors for financial improvement. OGK-4 is still out top-pick.

* RusHydro (HYDR) plans to issue additional 1.86 bn shares. NEUTRAL. We believe that the news is neutral for the stock performance due to the small volume of issue. We reiterate our BUY recommendation on RusHydro’s shares with the target price of $0.0717/share, which implies a 34% upside potential.

· Bank St Petersburg’s (STBK) 2Q10 IFRS results – less conservative than expected. POSITIVE. 2Q10 financials – better than the trend.

· Mechel (MTL) raised the $2 bn pre-export facility. POSITIVE. We recommend to HOLD Mechel’s common shares and ADRs with the fair price of $29.5.

· Bashneft’s (BANE) 2Q10 IFRS results: leaving room for some questions. NEUTRAL.

· Severstal (SVST LI) to purchase 43% of Crew Gold within next 2 days. POSITIVE. We recommend to HOLD Severstal with the fair price of $15.5/GDR.

* NPO Saturn (satr) to increase charter capital by 4.2 times and to sell the stakes in PAO Inkar (inka) and UMPO (UFMO). New share issue’s placement price is by 2.6 times higher than the market one.

· X5 Retail Group (FIVE LI) is ready for early refinancing of $1.1 bn syndicated loan. POSITIVE.


TRADING COMMENT:

We were sellers in Gazprom and buyers in VTB – both in good sizes. Were looking to buy OGK-4 and local Magnit. We crossed up a few chunks in ROSN with Western accounts on the buying end of the stick. In banking sector’s less liquids we worked several axes in usual suspects – VZRZ and STBK.


Good trading to you!
 

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Morning comment - 20.09.2010

Good morning! Some silly - but may be not that silly after all - statistics. When a Democrat occupied the White House and Republicans controlled Congress, the Dow Jones Industrial Average advanced an average of 9.6 percent a year, courtesy of Ned Davis research firm. Not just the impressive number but also the fact that stocks historically have performed best in such a political set-up.

Now health-care. I mentioned in our comment from August 23 "Markets vs. Economy" (see e.g. Bloomberg link {NSN L7LFFK3PWT1C <GO>}) that companies are also slow to hire because they are still unclear on how much health-care reform is going to cost per employee. If that is cleared up favourably - it will be a massive burden off hiring shoulder! And the lack of job growth is the most ominous macro hurdle for currently very strong micro. With a power shift in November favouring GOP investors will have to try to determine whether a Republican Congress will reverse the health-care overhaul passed this year. Obama will certainly veto any attempt to repeal it. my opinion, If indeed GOP gets enough votes to pass a bill attempting to repeal the health-care legislation, but would lack the votes to override a presidential veto, this MAY just add to uncertainty putting a lid on the job growth.

Good and bad - as always :) It is tempting to drum up importance of tax-cut extension delay and slumping consumer sentiment on the back of that - but do not forget - 1) tax in the UK e.g. is already hiked up and it is hardly preventing FTSE from taking part in this rally; and 2) market treated as a non-event UofM consumer sentiment reading dropping to a one-year low of 66.6 on Friday. More on taxes in tomorrow's note.


CORPORATE NEWS:

(for details see our Daily note at <http://www.tkbc.ru/eng/research/research/stock_analysis/> http://www.tkbc.ru/eng/research/research/stock_analysis/ or in Bloomberg at {TKBC <GO>})

* Polyus Gold (PLZL) 1H10 financial results. NEGATIVE

* Raspadskaya (RASP) 1H10 cash costs up by 44%. NEUTRAL We recommend to BUY Raspadskaya with the fair price of $8.5/share.

* Norilsk Nickel (GMKN) 2011 capex is estimated at $3 bn in 2011 increase by 50% y-o-y. NEUTRAL

* Ministry of Finance opposes tax breaks for Rosneft's (ROSN) Vankor. NEGATIVE Special export duty introduced for East Siberia.

* Standard crude oil export duty formula at Urals price above $25/bbl, $/bbl = [Urals price - 25] x 0.65 + 4

* Special crude oil export duty formula for East Siberian greenfields, $/bbl = [Urals price - 50] x 0.45

* Lukoil (LKOH) will be bidding for Trebs and Titov alone. NEUTRAL Lukoil's competitive advantage - infrastructure in Timan-Pechora. The company plans to participate alone in the auction of two major fields Trebs and Titov holding roughly 1 bbl of C1+C2 crude oil reserves.

* Lukoil (LKOH) to decide on ConocoPhillips' option this week. NEUTRAL

* Ammofos (ammo) increased production of mineral fertilizers over 8M10 by 8% y-o-y.


TRADING COMMENT:

On Friday we started the day with buy-orders in Gazprom, Lukoil, Norilsk Nickel, Surgut and DRs of Novorossyisk Sea Port (NCSP) where we crossed half of it with natural sellers; since the very opening we also had been working orders to sell Rosneft, Sberbank, VTB, Transneft prefs. Later on turned buyers in AFK Sistema locals and regional telecoms (where we crossed ~200 mln of URSI, 750k NNSI, 2,5 mln SPTL, 1 mln ESMO, 100k in RTKMp, 200k of ESPK, though ended the day still with 100k of ESPK left to sell). Today is the cut-off date for URSI, NNSI, ESMO - holders of these stocks will be paid 9m 2010 dividends - keep in mind that today all they trade ex-div OTC. In utilities sector we crossed 25 mln in Hydro, 250 mln in Inter RAO, 100 mln in OGK-1, 10 mln in MRSK Volga, 80 mln in Federal Grid Co, 10 mln in OGK-4 and 200k in Bashkir Energo, remain buyer in Suek-Kuzbass - quite a lot of activity in comparison to previous days in utilities. At the end of the day had some small sellers in Russian Vodka producer Synergy (SYNG), Rosinter and Bank S. Petersburg prefs, Kalina, Ulyan Auto.


Good start to the week to you!
 

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Morning comment - 21.09.2010

Good morning! National Bureau of Economic Research announced yesterday that the recession that began in December 2007 ended in June 2009 making it the longest recession since World War II. With all due respect – if you believe that, you should be selling now! :) We mentioned before (see e.g. Bloomberg link {NSN L7LFFK3PWT1C <GO>}) that IN MANY WAYS we are still DEEP in the recession, and it is strong micro / corporate earnings that point to the near end of this recession. I mentioned some peculiar market reaction to UofM on Friday - market treated as a non-event UofM consumer sentiment reading dropping to a one-year low of 66.6 on the back of tax-cut uncertainty in the US!!

Many view this as writing on the wall that this is it for the recession and things will only get better from here. As always – markets are the first to run ahead of the economy. This is perhaps the REAL reason for my bullishness here.


CORPORATE NEWS:

(for details see our Daily note at http://www.tkbc.ru/eng/research/research/stock_analysis/ or in Bloomberg at {TKBC <GO>})

- Far East Telecom (ESPK) 1H10 IFRS: strong on top line. NEUTRAL For the cheapest entry into the enlarged Rostelecom we advice to purchase commons in CenterTelecom (ESMO – UR) and prefs in South Telecom (KUBNP – UR) and North-West Telecom (SPTLP – UR).

- Polymetal (PMTL): new acquisitions in the Far East. POSITIVE

- LSR Group (LSRG LI) 1H10 IFRS results preview. NEUTRAL We maintain our BUY recommendation on the stock. Our end-2010 target price for LSR Group is $11.4/GDR and $57.0/share per share.

- Arbitration court of Perm region vetoed additional share issue of Chusovoy Metallurgical Works (CHMZ).


TRADING ACTIVITY:

The first half of the day yesterday was unusually dull – although we traded 400k of Gazprom, 55k of Norilsk Nickel, 250k of ROSN – here we were buyers; sold 75k of Lukoil on exchange. Later on close to the noon sellers came in Sberbank, Transneft prefs. In mid & small caps we had a bit more activity: crossed 300k in AFLT, 2 mln KZRU, 70k of Bank St. Pete prefs (STBKPA RU), 150k of Protek (PRTK RU); in telecoms sector continued to be buyers – crossed 65 mln of Uralsvyaz (URSI RU) (international buyers, local seller), crossed 20 mln of Siberia Telecom (ENCO RU) between domestic accounts, kept on buying Center Tel (ESMO RU), Volga Tel (NNSI RU), South Tel (KUBN RU) and North-West Tel (SPTL RU). In utilities sector we had mostly clients’ activity in wholesale generation companies – we buyers in OGK-1, OGK-4, OGK-6, Mosenergo (MSNG RU), MRSK Center (MRKC RU), and sellers in OGK-2, OGK-5, Inter RAO, Federal Grid, MRSK Urals (MRKU).


Good trading to you!
 

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Morning comment - 23.09.2010

Good morning!

We commented before (e.g. see Bloomberg link {NSN L7PD933PWT1C <GO>}) that in many ways we live in an entirely new set-up, with essentially a deflationary environment in G7 and an inflationary one in EMs. Yesterday's price action on the back of speculation the Federal Reserve will put more cash into the economy was quite peculiar in that respect. Stocks retreated in the UK and US while rallying in EMs. MSCI Emerging Markets Index jumped to a two-year high with developing nation currencies rallied against the dollar. Of course the shining star was the EM with the strongest micro and macro stories - Brasil.

I like the way Fed calls this deflationary environment - "slowing inflation and sluggish growth" :). On a serious note, Fed positioning itself for expanding a near-record $2.3 trillion balance sheet as soon as November means 2 positive things for equities: 1) liquidity; and 2) willingness of central bankers to do more.


TRADING ACTIVITY:

Most of our yesterday's trades came from our domestic accounts - we were better sellers in the first half of the day and turned more positive in the 2nd. Big local players kept on increasing exposure to GAZP, ROSN, NVTK, TRNFp; though being sellers of Lukoil in line in the morning clients turned bullish on the rumors that the company may buy out 2-3% of it's shares from ConocoPhillips; the stock gained 3,1% for the day + we saw derivatives desk buying the stock at market for hedging their long delta, big international accounts were loading their portfolios with LKOH aggressively. We crossed 10 mln in OGKE, 40 mln in HYDR, 150k in STBKP, 200k in MTSS, 250 mln in TGKE, 100k in ESPK, 150k in NNSI. At the end of the day buyers came with bids for preferred shares of regional telecoms - no serious natural supply is seen there.


CORPORATE NEWS:

(for details see our Daily note at <http://www.tkbc.ru/eng/research/research/stock_analysis/> http://www.tkbc.ru/eng/research/research/stock_analysis/ or in Bloomberg at {TKBC <GO>})

- Dixy Group (DIXY) 8M10 sales: strong, but still below the full-year guidance. POSITIVE Out target price at $10.3 per share implies HOLD recommendation. Dixy's shares are now traded with about 40% discount to Magnit and X5 Retail Group (based on 2010E EV/EBITDA).

- State plans to invest RUR670 mn into Micron's (mkro) charter capital in 2011-2013.

- Severstal (SVST LI) new acquisition before gold segment IPO? POSITIVE

- Successful VTO for Comstar-UTS minorities brings merger with MTS closer. NEUTRAL

- MTS (MBT) and VimpelCom Ltd (VIP ) to cut roaming fees in CIS. NEGATIVE


Good trading to you!
 

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Morning comment - 27.09.2010

Good morning! I entirely second Schroder's Buxton not just in his bullishness (I agree with his 20% target by end of 2011 but think we will get there quicker) but, much more importantly with his rationale for being bullish. As we mentioned in our comment from 23 August (see Bloomberg link {NSN L7LFFK3PWT1C <GO>}), corporate cash flows are good but executives are still very cautious and companies are not spending money. Result - quite obvious: CRAP job situation, actually much worse than many think, in many ways worst since WWII, in ALL ways worst since Reagan and Maggie. Way out of this kabudal? With M&A picking up, capital expenditure and job creation will have to start picking up too.

Buxton reckons that equity markets and US and UK corporates are already pricing in a harsh double dip recession. I will re-phrase it. They are not pricing in a double dip, what they are really pricing in is one of the harshest recessions that we are STILL DEEPLY in. You cannot double dip into what you have not got out yet!

And this is why equities are at such attractive valuations. It is indeed an amazing juncture in the market with all the mosaic bits laying into a massive pointer NORTH. Including extreme degrees of pessimism that I will dwell upon separately.


TRADING ACTIVITY:

On Friday we were better buyers in the second half of the day in blue chips; international accounts started to be more active - in telecoms (still see careful buyers on dips), utilities (very selective approach here); local clients were getting rid of several names of illiquid stuff to relocate to other stories.

Sberbank (SBER RU) Traded 1.75mn; lcl seller, int buyer
Rosneft (ROSN RU) Traded 600k; lcl buyer
Gazprom (GAZP RU) Traded 1.5mn; lcl sellers
VTB Bank (VTBR RU) Traded 1.7b; lcl seller
Volgatelekom (NNSI RU) Crossed 350k; lcl seller
OGK-2 (OGKB RU) Traded 20mn; lcl seller, int buyer
MRSK Northen Caucasus (MRKK RU) Traded 150k; lcl buyer
MRSK Holding (MRKH RU) Crossed 6mn; int seller
Hydro (HYDR RU) Traded 45mn; lcl buyer
Transneft Pf (TRNFpRU) Traded 5.6k; lcl buyer
Severstal (CHMF RU) Traded 230k; lcl seller
Ashinsky Met Plant (AMEZ RU) Crossed 750k; lcl seller
Protek (PRTK RU) Traded 130k; lcl
Vyborg Shipyard (VSSZpRU) Crossed 2.3k; lcl buyer, int seller


CORPORATE NEWS:

(for details see our Daily note at <http://www.tkbc.ru/eng/research/research/stock_analysis/> http://www.tkbc.ru/eng/research/research/stock_analysis/ or in Bloomberg at {TKBC <GO>})

1. Uncertainty over the transition to RAB for MRSK still exists. NEGATIVE RAB is stalled. There is still uncertainty over a period of transition to RAB-tariffs for distribution companies, preliminary scheduled on 1 July, Interfax reported citing the head of MRSK Holding Nikolay Shvets. According to him, all the information and data that companies were required to submit to the regional tariff services were prepared and sent. Earlier, it was assumed that some companies could move to a new regulatory system on 1 October. But, according to N. Shvets, to this deadline will not be met. Speaking about the possible timing of the decision to move to RAB, the head of MRSK Holding said the decision is not being made within the holding. Answering the question about the RAB-transition from 2011 by MRSKs, which were expected to make it on 1 July, Shvets said that they must do it in accordance with the governmental order, because all the necessary documents have been prepared, but he expressed no certainty over the transition.

2. Creating value in the sector is under question. We regard the increased uncertainty over the transition to RAB for grid companies as negative news for their stock performance. In our view, the delay of the transition period to the RAB and the increased uncertainty over the details (uncertainty over the initial RAB-parameters) indicate that there is no clear position, and, in our opinion, significantly increase the risk of unpleasant decisions for investors. We believe that one of the way-outs may be the introduction of tariff indexations for a number of MRSKs, primarily for MRSK of North Caucasus. It is likely that the companies with low investment needs also will move to long-term regulation by means of tariff indexation. However, we do not rule out a full transition to RAB-regulation of a number of MRSK, for example, MRSK of Center. In the case of the introduction of RAB-transition, there is a high probability that the parameters of regulation, such as regulatory asset base and rates of return, would be underestimated under the policy of tariff growth limitation, which was approved at the governmental level.

3. VimpelCom Ltd (VIP), Far East Telecom (ESPK) among bidders for New Telephone Company. POSITIVE. Acquisition of NTC will strengthen positions of VimpelCom Ltd and Rostelecom. We reiterate our But recommendation for VimpelCom Ltd, with the target price of $29/ADR and recommend entering the capital of Rostelecom via the most liquid inter-regional telecoms.

4. FAS didn't approve Wimm-Bill-Dann's (WBD US) price agreement with raw milk producers. NEUTRAL

5. Lukoil (LKOH) exercises the ConocoPhillips' option. POSITIVE Lukoil and a group of investors led by UniCredit buys 5% of Lukoil' shares from ConocoPhillips.

Good start to the week to you!
 

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Morning comment - 27.09.2010

Good morning! I will refer to our note from 25 August this year (see e.g. Bloomberg link {NSN L7PD743PWT1C <GO>} ) where we mentioned that we live in a set-up bizarre to many - essentially deflationary environment in G7 and inflation in EMs. We noted that vibrant EMs where you can still get double-digit returns just depositing your money, at least in countries like Russia and Brasil, may prove pivotal in staving off deflation globally.

What caught my eye in this regard is recent comment by Jupiter's financials star Philip Gibbs who thinks that equities looks attractive but that the asset class's current cheap valuations have not come about in the traditional way. In a speech to Jupiter's private clients in London he referred to "an artificial recovery in the West" that has been bought with massive government debt, deficit financing and ridiculously low interest rates. The main question in Gibbs's opinion now is: when will inflation return?

And here come the main bit which I cannot but fully second - structural things such as demand for resources in emerging markets AND demand for infrastructure in EMs on the back of that demand for resources. G7 wants the very resources that most of the West is not producing-except for Australia and Canada.

The low growth and low interest rate environment in the West is making it CRUCIAL for investors to access the continuing growth of EMs. Gibbs believes - and I am entirely on the same page - that it would take "something very dramatic in the West for emerging market growth rates to be interrupted".


RUSSIA: The biggest bang on the wire this morning was of course sacking of Moscow's mayor, Yuri Luzhkov. Of course this move will be drummed up by many as "muscle-flexing" in a fight against "corruption". What is notable here however, is that according to Forbes who recently published the list of richest "SELF-MADE" female tycoons Mr. Luzhkov's wife Elena Baturina is at No.3 at $ 2.9 bil with her Inteko, right in between Rosalia mera who founded Zara and Doris Fisher who co-founded Gap. Unlike the latter 2 females who made their gazillions in clothing/retail, Mr Luzhkov's family is heavily focused on construction and Real Estate. I'd expect some "structural" changes in those sectors in Russia :)


TRADING ACTIVITY:

Yesterday clients' activity was more modest than usual - we traded mostly blue chips in the first half of the day and less liquid names after lunch time till the closing. We were selling GAZP, VTBR, SNGS, SBER with careful discretion on-exchange for local accounts, while international clients were sellers in HYDR.

Gazprom (GAZP RU) Traded 1.1mn; lcl seller
VTB Bank (VTBR RU) Traded 950mn; lcl seller
Surgut (SNGS RU) Traded 3.2mn; int seller
Sberbank (SBER RU) Traded 1.2mn; lcl seller, int buyer
Hydro (HYDR RU) Traded 23mn; int seller
OGK-6 (OGKF RU) Traded 17mn; lcl seller
Severstal (CHMF RU) Traded 120k; lcl buyer
Synergy (SYNG RU) Crossed 7k; lcl seller
Nizhnekamskneftehim (NKNC RU) Crossed 560k; lcl seller
Buryatzoloto (BRZL RU) Crossed 18k; lcl seller, int buyer
MRSK Northen Caucasus (MRKK RU) Traded 140k; lcl buyer
Vyborg Shipyard (VSSZpRU) Crossed 2.7k; lcl seller
Uralkuz (URKZ RU) Crossed 1.7k; lcl seller
Moscow Oil Pf (MNPZpRU) Crossed 1.2k; lcl seller
Chitaoblgaz (CHOG RU) Crossed 710; lcl seller


CORPORATE NEWS:

(for details see our Daily note at <http://www.tkbc.ru/eng/research/research/stock_analysis/> http://www.tkbc.ru/eng/research/research/stock_analysis/ or in Bloomberg at {TKBC <GO>})

1. TNK-BP Holding (TNBP) consolidates retail assets. NEUTRAL - TNK-BP Holding consolidates BP-branded retail business in Moscow and Moscow region. TNK-BP Holding is the process of consolidating Russian assets.

2. FGC (FEES) expects the five-year RAB-parameters to be approved in mid-October. NEUTRAL - RAB-parameters are the key factor. FGC - RAB-pioneer and our favorite.

3. OGK-3 (OGKC) posted gloomy 1H10 IFRS financials. NEGATIVE - OGK-3 is the outsider in wholesale thermal generation sector.

4. Severstal (SVST LI) intends to sell its US steel assets till 22 October. POSITIVE - There are five potential bidders. So far, Severstal share and GDR price has approached our target of $15.5/GDR. We recommend a HOLD the stock.

5. Novolipetsk Steel (NLMK) launched transformer steel facility. POSITIVE - Recommendation HOLD reiterated.


Good EM trading to you! :)
 

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Morning comment - 04.10.2010

Good morning! We commented many times (see e.g. {NSN L7LFFK3PWT1C <GO>}) on the biggest dichotomy that we are currently facing – call it good micro vs. crap macro – or – good corporate earnings vs. economy’s inability to0 improve the job market. The jobless rate probably rose in September for a second month as the year-old U.S. “recovery” failed to generate enough jobs to keep up with a growing labor force, economists said before a report on October 8. Unemployment climbed to 9.7 percent from 9.6 percent in August, according to the median estimate of 62 economists surveyed by Bloomberg News ahead of an Oct. 8 report from the Labor Department. The data may also show companies added 77,000 workers to payrolls, and total hiring stagnated amid cuts in government staffing as the decennial census wound down.

More to that, economists surveyed by Bloomberg project unemployment will average at least 9 percent through 2011. Also, a reading as projected means the jobless rate would have equaled or exceed 9.5 percent for 14 consecutive months, surpassing the 13-month period from mid 1982 to mid 1983 as the longest span of elevated joblessness since monthly records began in 1948.

Forget about double DIP, STILL DEEP in the recession – that is where we are.

Yet markets keep on clocking points up, basing on the notions that 1) economy bottomed out in this recession as good earnings pave way to more hiring and spending; 2) pessimism also bottomed out in the latest sell-off in the market (see e.g. our morning comment from 30 August {NSN L9JPZO3PWT1C <GO>}); and 3) central bankers are here to “catch you if you fall”. Federal Reserve policy makers are now debating how to deploy tools for more unconventional easing as two top officials indicated action may be needed to lower unemployment – Dudley’s and Bernarke’s comments late last week obviously indicate that the outlook has weakened enough for action. With almost no extra room to lower rates, central bankers will most likely have to do additional securities purchases – as the way to ease further. Dudley said that $500 billion of purchases, for example, would add as much stimulus as reducing the Fed’s benchmark 0.5%.

In any case, FOMC meets on 2-3 November, giving members time to digest reports on September employment, retail sales and inflation. Another round of quantitative easing? Cool, the only thing left to fight over is how they do it. Whatever they do, in our opinion markets are pricing in both extreme “crappiness” of our macro situation AND central bankers’ resolve. Making equities valued cheaply – as long as corporate earnings do not disappoint. And they do not look as if they’d do :)



TRADING ACTIVITY:

On Friday most of our clients’ trades were in the 2nd half of the day cause many were waiting for macro data release. Sberbank once again demonstrated it’s strength – short covering was seen in this high-beta stock. Blue chips on average were well bid across the board after lunch, non-aggressive orders were being executed at careful discretion. Gazprom started to take off close to the bell. Last week we started to see strong demand coming back into utilities sector. Gazprom (GAZP RU) Traded 1.8mn, lcl buyer; Sberbank (SBER RU) Traded 1.8mn, int seller; Lukoil (LKOH RU) Traded 34k, lcl buyer; Rosneft (ROSN RU) Traded 470k, lcl buyer; Mosenergo (MSNG RU) Traded 4.2mn, lcl buyer; Raspadskaya (RASP RU) Traded 210k, lcl seller; MRSK Northen Caucasus (MRKK RU) Traded 70k; lcl buyer; MRSK Ural (MRKU RU) Crossed 15mn, int buyer; MRKH Hold (MRKH RU) Traded 690k, lcl buyer; Federal Grid (FEES RU) Traded 83mn, int seller; TGK-6 (TGKF RU) Traded 1.3bn, int buyer; TGK-13 (TGKM RU) Traded 74mn, lcl buyer; OGK-6 (OGKF RU) Traded 28mn, int buyer; SibTel (ENCO RU) Traded 4.1mn, lcl buyer; Protek (PRTK RU) Traded 47k, lcl seller; UzhuralNikel (UNKL RU) Crossed 670, lcl seller;


CORPORATE NEWS:

(for details see our Daily note at http://www.tkbc.ru/eng/research/research/stock_analysis/ or in Bloomberg at {TKBC <GO>})

- Lukoil (LKOH) is changing hands. POSITIVE Redruth Investments buys notes convertible to Lukoil’s shares. Change in shareholders should support the stock performance
- Quadra (TGKD) prepares to transition to RAB-regulation of heat energy market. POSITIVE
- Mechel (MTL US): 2Q10 financials preview. NEUTRAL
- BoD of VimpelCom Ltd (VIP) to consider a purchase of Orascom and Wind today. NEUTRAL
- Aeroflot and UTair demonstrated decline of operating result in August. NEUTRAL

Good start to the week to you! :)
 

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Happy 2011 and 2nd decade of the Millennium to you!

Good morning and good start to the New Year – and the new decade! The market is rising on spillover from the best December in nearly 20 years; let us not forget we are still – even after the latest rally – rising from a rather low base. Exactly 10 years ago, when we had just seen in the new Millennium, S&P closed at – guess where? 1455.22! It was a stormy 10 years by all means, it was the first decade since WWII when just pure index-tracking – in developed economies - would fetch you a net loss, even in nominal numbers, say nothing about real dollars.

Different story in all major EMs, where the past decade was a major break-through. Still, as the past couple of years showed, the same mantra applies to all, developed and emerging alike – this is not a time for MACRO index-tracking, this is a time for careful MICRO-story picking. For Russia – please find our Strategy for 2011 attached. My personal top picks among Russia’s micro-stories are Norilsk DRs (MNOD), Vsmpo-Avisma (VSMO) and Chelyabinsk Pipes (CHEP).

Happy 2011 and 2nd decade of the Millennium to you! :clap:
 

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Why I am bullish on 2011?

Let us dissect yesterday's news reel asunder for a second:

1) Jobs. We mentioned a gazillion times last year (see e.g. Bloomberg link {NSN L7LFFK3PWT1C <GO>} from 23 August 2010) that we were in the worst jobs situation since Ronald and Maggie, meaning essentially that we were still scraping off the bottoms of the recession. We also emphasized that only a VISIBLY improving jobs situation can justify Mr. Market Hopeful's latest rally. Well - we just received a VERY VISIBLE endorsement that it is improving. U.S. companies boosted payrolls last month by the most since at least Dec 2000 back till which historical data was made available for ADP National Employment Report - see chart attached. Unless my vision is somehow deluded, we just printed the highest reading for that index in the past 10 years!

2) ARM and CSR. As an ex-trader who traded ARM all way down after the demise of NASDAQ, I am of course overjoyed to see it print the highest price since Feb 2001. Jokes aside, both chip-makers supplying iPhone and Nokia's Oyj respectively propelled next to 8% up yesterday. In ARM's case it means investors have appetite for a stock trading at 150 P/E!!! Atheros deal is cool, but the real McCoy is that investing in "gadget"-makers (running on ARM's and CSR's chips) is seen to be a sure play as both corporates and individuals, domestically and worldwide alike, are seen HAVING money and WILLING to spend it on "gadgets" well above the essential level of a bread basket.

3) Atheros deal. Qualcomm, the world's largest maker of mobile-phone chips, agreed to buy Atheros for about $3.2 billion in cash, broadening its lineup of Wi-Fi networking technology. Just another M&A deal going to show that corporates' coffers are galore with monies - willingly spent on M&A.


Schroder's Richard Buxton's benchmark target of 7,000 for 2011 may bloody well be an undershoot :)

Point I want to make here is that we are not talking of NASDAQ flying to 5K from 4K in 1999 - even 4K was a debauchery. We are taking off from a very low base, as - in many ways - we are just trying to get our head above the bottom of the worst recession since Hoover and Al Capone. Afraid of bubble ready to burst? Be more afraid of the air inside of the bubble just starting to get heated! :)

Good trading to you!
 

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Jobs situation - ripe to turn around from deep bottom? Morning comment - 14.01.20

Good morning! And Happy Orthodox New Year to all those who, alongside Russian and Serbian Orthodox Churches, celebrate the New Year today by old-style Julian calendar! :)

Markets were bombastic recently, with FTSE and DAX seeming to have resolved “psychological” figures of 6K and 7K to the upside, CAC ready to storm 4K, and MICEX posting its biggest gain since July 6! Jingle bells all round :) But let us take a look where we are really.

In the attached charts I am enclosing – courtesy of St Louis Fed and Bureau of Labor Statistics:

  1. Change in the Unemployment Rate in the current and previous major recessions;
  2. Civilian Employment-Population Ratio since late 1940-ies;
  3. Change in Employment-Population Ratio in the current and previous major recessions;
  4. Ratio of nonfarm payrolls to the nonfarm payrolls at the start of recession – also for current and previous recessions.

Wherever you look – complete and utter SHAMBLES in jobs situation. Double dip? You cannot dip again to where you have not got out from – the bottom of the worst and most prolonged recession since WWII. Most disturbing thing is that NONE of the above indicators have improved since Summer 2010 – despite all the efforts by central bankers and abundance of money ready to be spent in the market. More to that, recent drop in unemployment (to 9.4%) had very little to do with newly created jobs. Instead, it was primarily due to 260,000 workers dropping out of the labour force. As a result, the labour force has shrunk by 246,000 from the pre-crisis 2007 level (The U.S. labor force average growth rate is supposed to be around 0.8% per year from 2000 to 2050, courtesy of Joel Kotkin, a scholar on urban development). Furthermore, not only the number of discouraged workers over job prospects hit a record high (since 1994, the earliest year the data is available) of just over 1.3 million --more than the number of jobs added in 2010--but the labor participation rate also plunged to a 25-year low of 64.3%!!

To add more pain, the average number of weeks people remain unemployed also has risen to 34.2 weeks in December 2010 vs. 33.9 weeks in November, with 6.4 million jobless people classified as long-term unemployed, i.e. without a job for 27+ weeks. All these suggest there is a large number of frustrated workers who left the labour pool but unaccounted for in the unemployment rate calculation. That means the all inclusive jobless rate could easily be 11% or more, instead of the 9.4%!


Not just gloom and doom. LASTING gloom and doom, lasting more than any other previous recession.

However we may be at a unique juncture in current economy situation. When you toss a yo-yo towards the floor, its position – however low it might be – is not that relevant, what is important is its MOMENTUM, that is whether the yo-yo keeps on falling down, stalls or reverses back up. And recent ASTONISHING ADP National Employment Report (see our previous comment on Bloomberg under {NSN LELC2A3PWT1D <GO>}, see also chart attached) – which clearly reversed from negative to positive readings, posting the highest POSITIVE number since at least December 2000!) - is a compelling reason to believe the yo-yo is ready to bounce back from its low.


Are you thinking what I am thinking? :) If this is indeed the case, we are in for a VISIBLE TURN-AROUND in jobs situation in 2011, and that will drive equity markets crazy. Junctures of such reversal variety happen once in a blue moon – and the FEAR to miss this unique train, with cash galore in the market acting as petrol spilt on fire, will send the equities shuttle to the Moon!

Good trading to you!
 

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Rosneft, TNK-BP and CHEP - quick comment.

Good morning! It is hardly a secret that about 20% of strategic assets of BP Plc is stashed with TNK-BP, and now we have another MEGA manifestation of global importance of Russia to BP. BP’s drive to extract billions of barrels of petroleum from above the Arctic Circle (which may hold as much as 100 billion barrels of oil and gas) is a clear counter to Petrobras & Friends who will definitely go far beyond Carioca in their shelf exploration. To fend that off BP is willing to go far, as far as going to bed with a state-owned producer. BP is willing to do that despite potentially hurting its reputation in the US – it is quite clear that this acquisition will almost certainly complicate the politics of levying and collecting damages from BP.

Given the US aspect of the deal, I will stay away from putting a positive tag on BP share price. HOWEVER, for RosNeft and TNK-BP this deal puts a hard wooden floor for future price action. Buying their shares is a virtually risk-free deal.

On a separate note, our trading idea in CHEP from 29 December 2010 (see below) is playing down to the T. $ 3.50 (roughly RUR 105) is a natural target there going into the IPO.


--------------------------------------------------------------------------------

Sent: Wednesday, December 29, 2010 5:52 PM
Subject: Idea 3 to kick-off 2011 in style - BUY Chelyabinsk Pipe Works CHEP into IPO of CTPZ
Importance: High

Idea 3 to kick-off 2011 in style – BUY Chelyabinsk Pipe Works CHEP into IPO of CTPZ:

I mentioned on 3 December (see below and notes attached) that fundamentally our target price for CHEP is $ 3.0 or roughly 93 RUR – but given the political importance of the forthcoming IPO of CTPZ which will put the production of both conventional and large diameter pipes under one roof – investors will HAVE to have the new stock in their portfolios and that will drive the share price to the sky going into the IPO. CHEP’s share price on 3 December was 60 RUR, it is 82 RUR today.

I re-iterate my STRONG BUY view on CHEP anywhere below 90 RUR, seeing 100-120 RUR price range going into the IPO in 2011.
 

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TransContainer and MRSK. Initiation of Coverage.

1. We initiate coverage of TransContainer:

We recommend to BUY the stocks and GDRs with 12M target price at $120 and $12.0 respectively, which means 24% and 22% upside potential from the current market level. The company placed its shares on the market in November 2010, and the stocks performed well since that time posting 21% (22.5% for GDRs) growth. We expect investor’s interest to the transportation stocks will remain high in the coming years. Currently company’s GDRs are traded with EV/EBITDA 2011E 7.1 and P/E 2011E 16.5 that is 32% discount and 1% premium to its EM peers. Solid growth profile, strong market drivers and support from the state determine favorable prospects of the company and will increase demand for the shares in the future. The main risks related to this investment idea come from a side of market growth and possible changes in tariff regulation. Corporate events in the transportation segment will boost investors’ interest to the traded stocks



2. We initiate coverage of Russian companies in the distribution network sector with a positive outlook on its prospects:

We expect a significant improvement in the fundamental attractiveness of the sector as a result of a large-scale transition to RAB-regulation. Our recommendation for large companies included in MRSK Holding – BUY. Preferred shares of the MRSK Holding itself appear to us to be a general, diversified instrument for investing in the distribution network sector, and we recommend BUYing them as a way to even out the risk of the separate regional companies.

Valuation. We valued all MRSK Holding companies using DCF based on approved RAB regulation and long-term tariff indexation parameters taken from MRSK Holding statements. We valued MRSK Holding shares using DCF models for the separate MRSK, as well as using the total asset valuation method.

Our favourites – MRSK of Center (MRKC), MOESK (MSRS) and MRSK of South (MRKY) shares which, in our opinion, provide both fundamental attractiveness and liquidity.
 

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