CIS Region Equity Markets: Weekly Overview

January 23 – January 29, 2012

2a Republikas square, Riga, Latvia, LV-1010 Antons Lubenko Igor Lahtadir, CFA Lidiya Mudra Tel. +371 67010345, Fax +371 67010253 Financial Markets Broker Equity Analyst: CIS Equity Analyst: www.citadele.lv [email protected] [email protected] [email protected] Regulator – FCMC, www.fktk.lv

Another week of solid returns for CIS equity markets

In Russia retail sales surge 9.5% y/y in December, industrial production growth slows down to 2.5% y/y

Kazakh banking sector loan portfolio expands 15.7% y/y in December

Petropavlosk releases strong operational update for 4Q2011

MMK posts satisfactory output results for 4Q2011

Dragon oil meets production guidance for 2011

Dniproenergo announces 51% y/y surge in net income for 2011

Stakhaniv Railcar reports mixed 2011 results

MHP intends to increase output by 2.6-4% y/y in 2012

Last seven days brought a period of solid returns of CIS equity markets, as all major region stock indices finished in the positive territory for another sequential week. Russian RTS Index surged by 4.6% over the period, thereby leaving behind global emerging market peers, as MSCI EM Index rose by 2.2%. Meanwhile, MICEX index gained modest 1.1% over the week, despite appreciating rouble. Central Asian region exhibited another five days of solid returns, as Rencasia Index rose by 4.5%. Elsewhere, Ukrainian UX Index managed to edge up by 2.3% on the back of stable USD/UAH exchange rate and appreciation of local equities. Within the commodities universe, Brent oil advanced by 1.5% and base metals LMEX Index jumped by 4.2%. Precious metals also delivered, as gold rose by 4.3% and silver gained 5.4%.

Macro news

Russia

On Thursday The Federal State Statistics Service released a series of data for the Russian economy in December. According to the report, retail sales jumped 20.1% m/m in December, what is not surprising considering seasonal factors. More interesting fact is that retail sales surged 9.5% in y/y terms, what is the highest increase since October 2008 and what brought full 2011 figure to +7.2%. At the same time, real wages growth decelerated from 7% y/y in November to 4.9% y/y in December; while on a full year basis real wages grew by 3.5%. By contrast, industrial production figures were less upbeat, demonstrating modest 0.1% seasonally adjusted expansion in m/m terms, or growth deceleration from 3.9% y/y to 2.5% y/y in December. In our view, the reported data looks mixed: rise in retail sales is strong, but industrial production statistics came somewhat below consensus estimates.

Central Asia Last week the National Bank of Kazakhstan posted December’s statistics of the country’s banking sector. Loan portfolio added 2.5% over the month, bringing y/y figure to 15.7%. The breakdown also illustrates that retail segment contributed 1.4% m/m growth (or 10.9% y/y) and corporate portfolio edged up by 2.9%, corresponding to 17.5% expansion in y/y terms. On the deposits side, retail customer accounts added 4.1% m/m (or +22.8% y/y), but corporate deposits dropped by 0.7% m/m, however surging by 10% in y/y terms. In our

CIS Region Equity Markets: Weekly Overview 1 view, the reported figures look encouraging in terms of loan growth. However, the continuing rise of deposit inflows and still high levels of NPLs may negatively influence profitability of the sector.

Corporate news

Energy

Last Monday Dragon Oil, independent oil and gas company with primary operations in Turkmenistan, released trading update for 2011. According to the announcement, in 2011 Dragon Oil achieved 30% increase in average daily production rate to 61,500 barrels of oil per day and put 13 new development wells into production. In addition, year-end oil and condensate reserves increased by 41 mn barrels to 658 mn barrels and total CAPEX on infrastructure and drilling amounted to USD 351 mn. The company met its production guidance for 2011, hence we believe that the reported results are positive for Dragon oil.

Metals & Mining On Thursday Petropavlosk, one of Russia’s top three gold producers, released operating results for 4Q2011. According to the announcement, the company reached output of 183k in 2011 (or 630k for full 2011), what represents a 10% and 20% drop in y/y and m/m terms, respectively. At the same time, the company reported that total cash costs in 2H2011 were marginally higher than in 1H2011 due to a substantial increase in the proportion of alluvial production. Total gold sold during 2011 was 676k oz, a 51% increase compared to 2010, as a result of high production levels in Q4 2010. During the current year the company targets output in the region of 680k oz, an increase of 11% compared to 2011. In our view, the reported results significantly exceeded consensus estimates and outlook for 2012 looks upbeat too, what should be positive for Petropavlosk.

On Friday Magnitogorsk Iron and Steel Works (MMK) released its operational update for 4Q2011 and for 12 months 2011. According to the publication, crude steel output dropped by 2% q/q to 3,109k tonnes, what implies a 7 % rise in y/y. Crude steel product output recorded a similar pattern, as it declined by 3% m/m in Q4 to 2,859k tonnes, but advanced by 7% in 2011. A small disappointment came from shrinking share of High Valued-Added products (HVA) which dropped by 2% to 36% in the last quarter. The average price of finished steel product from MMK in 2011 was USD 757 per tonne, what represents a 21% increase y/y due to higher demand for steel coming from major steel-consuming industries including auto making, construction sector, pipe making. At the same time, production of coking coal concentrate grew by 4% q/q to 849k tonnes and consumption of own iron ore reached 1,145k tonnes in Q4 (-6% q/q). In our view, the reported results are satisfactory, generally coming in line with management’s targets.

Last week several Russian media reported that core shareholders of Poyus Gold and Polymetal could be discussing a possibility of the merger. No details of the deal were disclosed, however. Despite the news were not officially announced, market participants believed that there is no smoke without fire and elevated prices of both securities. We note that should the deal take place, the combined company would be among top 10 world largest gold producers. Also, in our view, the merger can result in reasonable synergy, since Polyus Gold possesses world class reserves base, while Polymetal can boast with efficient management and primary LSE listing.

Utilities , Ukraine’s largest electricity generating company, announced preliminary 2011 financials posting a 38.8% y/y increase in sales to UAH 8.5 bn and a 51.1% y/y boost in net income to UAH 286 mn. The reported results, however, imply the company suffered a 254 mn loss in 4Q11, which was mainly attributable to an accident at its Zaporizka power plant. Dniproenergo’s electricity production grew by 10.4% y/y in 2011, while its average electricity tariff went up by 25.6% y/y.

Machinery Stakhaniv Railcar released preliminary 2011 financials, reporting a 21% y/y increase in revenues to UAH 3.5 bn in 2011. The company’s pre-tax income amounted to UAH 206m, down 22% y/y. Stakhaniv Railcar produced 6,810 freight railcars last year, 8% less than 2010 record output figure of 7,434 units and 15% below the initial target of 8,000 units. The company attributed this decline in production to a shortage of casting supply in 2H11. Despite reported mixed results, we view the stock as attractive on share price undervaluation compared to its global peers, currently trading at 2012E EV/EBITDA of 2.65 and P/E of 3.61.

Agriculture MHP, Ukraine’s largest poultry producer, reported plans to produce some 390-395ths tonnes of chicken meat in 2012, up 2.6-4% y/y. This would follow the output of 380ths tonnes (+5.6% y/y) the company produced in 2011. According to report, the share of export grew by 5pp y/y last year to 10% of MHP’s total sales. The main export markets were the CIS countries, Libya, Lebanon, Iran, Jordan and Syria. The company also revealed plans to launch its new poultry production complex in the Vinnytsia region in test run mode in 2012.

CIS Region Equity Markets: Weekly Overview 2

Market performance

YTD 1W return YTD return 1W return Best performers Worst performers return (USD) (USD) (USD) (USD) Tethys Petroleum 35.6% 22.9% Petro Matad Ltd -8.7% 33.0% Stahanovskiy Vag 18.6% 18.6% Frontier -3.5% 40.1% Vtb Bank Ojsc 13.0% 28.4% -2.6% -1.5% Centerra Gold In 12.4% 11.7% Kazakhtelecom -0.5% 7.0% Zhaikmunai -Gdr 12.2% 13.4% Chaarat Gold Hol -0.5% -5.6% United Co Ru-Rdr 11.8% 29.8% Azovstal -0.4% 2.1% Southgobi Resour 11.1% 19.4% Stirol Concern -0.4% -9.8% Federal Hydrogen 11.0% 23.3% Eurasian Natural -0.3% 16.1% Sberbank 11.0% 22.1% 0.0% 1.5% Norilsk Nickel 10.8% 25.4% Federal Grid 0.4% 16.5%

Name Last value 1W 1M 3M 1Y YTD

EQUITY MARKETS Russia (MICEX) 1,508.0 1.1% 8.7% -1.2% -13.1% 7.5% Russia (RTS) 1,565.8 4.6% 14.7% -2.8% -17.0% 13.3% Russia second tier (RTS 2) 1,606.0 3.8% 4.8% -8.7% -30.5% 5.2% Russian Depository Receipts (RDX) 1,484.6 3.1% 13.5% 4.2% -12.1% 13.5% Central Asia (RENCASIA) 603.3 4.5% 24.7% 6.6% -23.3% 23.3% Ukraine (UX) 1,471.6 2.3% 2.9% -2.8% -44.3% 0.9% MSCI Emerging Markets 1,016.6 2.2% 11.2% 0.6% -9.7% 10.9% US (S&P 500) 1,316.3 0.1% 4.2% 2.4% 3.1% 4.7% Europe (Euro Stoxx 50) 2,436.6 0.4% 6.3% -1.0% -17.5% 5.2% MSCI World 1,246.0 0.8% 5.8% -0.7% -4.3% 5.4% COMMODITIES Brent (NYMEX) 111.5 1.5% 3.2% 1.4% 12.1% 3.8% Coal (NYMEX) 61.5 3.5% -11.8% -16.6% -18.5% -11.9% Natural Gas (NYMEX) 2.7 14.3% -11.5% -31.7% -38.1% -10.4% Base metals (LME) 3,753.0 4.2% 15.9% 4.8% -11.1% 13.5% Aluminium (LME) 2,266.0 2.2% 13.8% 1.1% -8.3% 12.2% Copper (LME) 8,525.0 3.7% 14.8% 4.3% -10.5% 12.2% Nickel (LME) 21,700.0 6.1% 19.3% 10.2% -18.5% 16.0% Iron ore (SBB) 2.3 0.0% -14.8% -14.8% 10.3% -14.8% Seet billet (LME) 509.3 -0.9% -6.4% -4.4% -15.8% -4.2% Gold 1,739.1 4.3% 12.5% -0.3% 30.1% 11.2% Silver 33.9 5.4% 22.5% -4.0% 21.2% 21.8% Wheat (CBT) 6.5 6.0% 0.3% -4.9% -29.4% -0.8% Sugar (NYBOT) 0.2 -2.7% 3.0% -7.4% -5.8% 3.9% CURENCIES USD/RUB 30.1 -3.8% -6.2% 1.0% 1.1% -6.3% USD/KZT 148.4 0.1% 0.2% 0.6% 1.1% 0.0% USD/UAH 8.0 -0.5% -0.4% 0.0% 0.7% -0.5% EUR/USD 1.3 2.2% 2.0% -6.6% -2.9% 2.0% USD/GBP 0.6 -1.0% -2.0% 2.5% 0.8% -1.2% USD/CAD 1.0 -1.1% -1.8% 1.0% 0.0% -1.9% USD/JPY 76.7 -0.4% -1.2% 1.2% -6.6% -0.3% USD/CHF 0.9 -2.3% -2.9% 5.7% -3.1% -2.7%

All data are from Bloomberg, unless otherwise stated.

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CIS Region Equity Markets: Weekly Overview 3