CFA Institute Research Challenge Hosted in Bucharest

CFA Institute Research Challenge Hosted in Bucharest Faculty of Finance, Banking, Insurance and Stock Exchange Academy of Economic Studies Bucharest Faculty of Finance, Insurance, Banking and Stock Exchange

Valuation Date: 31.12.2018 Recommendation: SELL Stock Exchange: Bucharest Current Price: RON 21 Target Price: RON 18.4 Sector: Finance and Insurance Ticker: BVB Downside: -12.4% Industry: Securities and Commodities Exchange

Key Figures The Bucharest Stock Exchange (BVB) is the only securities market operator in Romania. It Annual Dividend (RON) 1.69 was re-established in 1995 after the fall of the communist regime and went public on its own Regular market in 2010. 52w Low (RON) 20.9 52w High (RON) 30.0 INVESTMENT SUMMARY We issue a SELL recommendation with a 12 month target price of RON 18.4, representing a Avg. daily vol. (3 6,834 12.4% downside from its December 31st, 2018 closing price of RON 21. Our valuation is months) based on a dividend discount model which we cross-checked with a relative valuation Number of shares (mln) 8.04 approach. Equity Value (RON mln) 147.96 INVESTMENT HIGHLIGHTS Unpredictable fiscal and economic policies curb investors’ appetite. The government’s Free float (%) 100 announced decision to impose additional levies on banks and energy companies, which LTM P/E 16.6x represent roughly 60% of the stock exchange capitalization, impose heavier capital requirements on pension fund managers and allow for early withdrawal of contributors, led to a 11.21% drop of the main index of the stock exchange in one day. Even if such Investors’ Structure measures would not be fully implemented as initially announced, such sudden fiscal policy changes create mistrust for investors in the local economy who might adopt more of a 8.79% “wait-and-see” approach instead of active investing and trading which means lower 10.39% revenues for the stock exchange. The big jump to emerging market status will come later rather than sooner. It is clear that without being upgraded to emerging secondary market, the development prospects of the 50.09% local securities exchanges are almost non-existent. The upgrade is on the other hand dependent on having a solid number of significant IPOs. Although BVB estimates that this 30.73% would happen in 2019, no major IPOs are forecasted in the current period and given the rather unfriendly investor climate created by the latest fiscal and economic changes, we do Retail Pension funds not see the liquidity increase this year. Therefore, we estimate that only if the CCP project Investment funds Non-residents becomes operational and generates some revenues (i.e. in 2021) the market liquidity might rise to a sufficient level in order for BVB to be promoted to emerging market. At the same time, such upgrade would not bring immediate significant turnover increase from the supply side, i.e. increasing the number of issuers should develop as well. With 6 IPOs in the Valuation main inputs last 3 years vs. 27 on the Warsaw Stock Exchange in 2017 alone, the local capital market Beta 0.88 operator still needs to find the right levers for attracting new issuers. CoE 10.50% Central Counterparty project profitability will be capped by the limited development of Transactions growth rate 5.5% the overall local capital market. Considering the lack of sophisticated investors and low No IPOs (2019-2013) 10 liquidity of the local market (i.e. more than 10 times lower than the Warsaw Stock Start of derivatives market 2020 Exchange), our analysis shows that the CCP project is not sustainable at this stage. Emerging market upgrade Moreover, we estimate that the CCP implementation will be delayed as BVB needs to find year 2021 a second investor in the project as they will only contribute with RON 47 mln (approx. EUR 10 mln).

Key Financials RON mln 2016 2017 2018 2019E 2020E 2021E 2022E 2023E

Revenues 31.6 38.1 39.8 41.0 41.5 45.2 52.5 55.1 BVB stock price evolution (Jan 2016- EBIT (%) 19% 24% 22% 21% 19% 14% 23% 23% Dec 2018) EPS 1.0 1.5 1.3 1.4 0.8 1.1 2.0 2.2 37 Rev. g% 2.4% 20.5% 4.7% 2.9% 1.4% 8.9% 16.1% 5.0%

17 1/4/2016 7/4/2016 1/4/2017 7/4/2017 1/4/2018 7/4/2018 2 This report was made by Bucharest Academy of Economic Studies students with the sole purpose of taking part in the CFA Research Challenge Figure 1: Trading value by asset (2018) BUSINESS DESCRIPTION Background. Established in 1995, Bursa de Valori Bucuresti (BVB) is, since 2017, the only 2% securities exchange in Romania following its acquisition of the former derivatives 16% exchange, SIBEX, whose activity was discontinued and subsequently merged into BVB. With a total market capitalization of listed companies of approx. EUR 32 bln, it is the third largest securities exchange in the CEE region. Currently listed as a frontier market by MSCI and FTSE Russell, it has the prospect of being upgraded to an emerging market when the 84% liquidity criterion is met. Although a moving target, due to the specificities of the activity, the needed liquidity level of 15% in market capitalization is estimated to be reached by 2019. Shares and Units Bonds Structured Products Market features. The stock exchange offers a trading venue for asset classes such as Source: BVB Group equities, bonds, fund units, indices, certificates and warrants. BVB operates two markets, the Regular market (Premium and Standard) for mature companies and AeRO for SMEs Figure 2: Structure of revenues (2018) and start-ups. BVB has several subsidiaries operating in the post-trading, registry and 1% other services such as the management of the Investors’ Compensation Fund. The 13% company also provides data vending services and owns the Corporate Governance Institute, the latter not being included in the consolidated figures. Revenue structure. The largest revenue source for the company is from trading fees, TOTAL REVENUES accounting for approx. 60% of the company’s revenues, while post-trading services 26% RON 39.82 mln 60% ensure a stable share of 26% of revenues, with the balance completed by registry and other services. With 84% of total trading value, equities account for most of trading revenues which have risen with the number of IPOs and shows that continuing listings will lift volumes and thus revenues. Indices. BVB calculates 8 indices, the most significant one being the BET which currently Trading Post-trading Registry FCI&other comprises the 15 most traded stocks, with the exception of financial investment companies (SIFs), on the Regular Market. The main index (BET) is concentrated around Source: BVB Group Financial Statements energy and banking stocks. Figure 3: Evolution of BET INDEX in 2018 Historical growth sources. BVB developed mostly through new IPOs and bond issuances. The most significant listings have been those of State-Owned Enterprises (SOEs), namely 9500 energy companies Electrica, Nuclearelectrica and Romgaz, which drove up volumes, thus bringing closer the prospect of an upgrade to an emerging market status. Private home- 8500 grown companies, such as telecom operator Digi, hospital operator Medlife and fast-food 7500 franchisee Sphera Group, have also chosen to publicly offer shares. Another source of growth has been the rise in corporate bond issuances. Ten bond issuances took place in 6500 the last 2 years, proving that BVB can be an alternative to bank financing. More recently, another reason for BVB’s attractiveness has been the high dividend yield, which in the Source: Reuters case of some issuers went up to 23%. This is mostly due to a Ministry of Finance policy which demands that state majority-owned companies (SOEs) distribute at least 90% of Figure 4: Management their net profit to the shareholders. BVB ran various educational programs to enhance the Board of Directors demand side as well. However, it might be difficult to quantify the effect of such initiatives on the short-term, given the limited prospects for new major IPOs of SOEs to boost Lucian - Claudiu Anghel Gabriel Marica supply. Valerian Ionescu Octavian Molnar Strategy. With only eight local private medium-sized companies having announced their Robert-Cosmin Pana Otto Naegeli intention to list on the AeRo market, BVB is focusing on alternative ways of increasing the Claudia Gabriela Ionescu Dan-Viorel Paul supply of products and services. Thus, they are planning to expand the business by Radu Hanga creating a Central Counterparty (CCP) in 2019 to enable derivatives trading in stocks, FX, indices and power, but also to provide clearing services to the energy market operator Executive Officers (OPCOM) for the centralized bilateral contracts, market-continuous trading, which is Adrian Tanase basically an anonymous forward power market. The CCP project received the approval of Marius-Alin Barbu Virgil Stroia BVB’s shareholders, provided that an additional external equity participation of approx. Source: BVB Group EUR 6 mln is attracted while BVB will contribute with EUR 10 mln in equity. Should the CCP project be timely and properly implemented, it would become partially operational in Figure 5: Structure of Shareholders early 2020. Although in its early stage, the CCP in itself is not expected to be profitable, it 2% could bring additional revenues of up to EUR 3 mln in 2024 and EUR 5 mln by 2029. 17% CORPORATE GOVERNANCE 12% BVB is headquartered in Bucharest and has been listed on its own Regulated market since 69% the 8th of June 2010. The company has a share capital of RON 80,492,460 with a nominal share value of RON 10. By law, no investor is allowed to own more than 20% of the stock market operator. The company has a dual management structure with a Board of Romanian Institutional Investors Governors, led by a President and a Vice-President and which includes 9 non-executive Foreign Institutional Investors directors, five of which are independent, appointed for a term of four years. The board Romanian Private Individuals Foreign Private Individuals appoints the group’s CEO and Deputy CEO for a mandate of a similar length. Source: BVB Group 3 This report was made by Bucharest Academy of Economic Studies students with the sole purpose of taking part in the CFA Research Challenge The Board of Governors is led by Lucian Anghel since 2012, nominally an independent Figure 6: Romania Country Rating director, a well-known figure in the local capital market community and former chief- economist of BCR, Romania’s largest bank in terms of assets. The CEO is Adrian Tanase, Foreign Currency CFA, former CIO of NN Investment Partners, the manager of the country’s largest Pillar 2 Long-Term IDR BBB- private pension fund. He was appointed in 2017, replacing Ludwik Sobolewski, the former Short-Term IDR F3 CEO of Warsaw Stock Exchange, brought with high hopes of upgrading the stock market Local Currency to an emerging market status, but which failed to materialize. Long-Term IDR BBB- Corporate social responsibility. Every year, BVB is a strategic partner in organizing Short-Term IDR F3 Investment School, an education program led by a local NGO designed for passionate Country Ceiling BBB+ students interested in how to invest in local and global financial markets or who want to Outlooks build a career in the financial sector. Long-Term Foreign-Currency IDR Stable Long-Term Local Currency IDR Stable INDUSTRY OVERVIEW Macroeconomics. In November 2018, Fitch affirmed Romania's 'BBB-'/Stable sovereign Source: Fitch Report on Romania rating. The main drivers were related to moderate levels of government debt and GDP per Figure 7: Households Financial Assets in 2017 capita and human development indicators that are above ‘BBB’ category peers. Risks of the Romanian economy overheating have declined somewhat as the pace of GDP growth 1% has slowed since 2017 as the National Bank of Romania has tightened monetary policy 9% and headline inflation has started to fall. However, in light of the emergency ordinance 114/2018 and the release of 2019 budget, there could be a risk of having a reassessment of this rating. Being just above the investment grade limit may be less attractive for 25% 39% investors as most of them would choose sound economies with higher ratings. Thus, and with the potential upgrade of the Bucharest Stock Exchange at the level of secondary emerging market, the number of investors should increase, which would lead 26% to higher turnover and revenues for the company. Romania is facing a busy election calendar over the next two years, with European elections in May 2019, presidential elections in November/December 2019, local Deposit & Currency elections in May/June 2020 and parliamentary elections in November/December 2020. Equity & Investment Fund Units We estimate that the periods around these dates may create more volatility in the local capital market, which may create an unfortunate framework for investing at BVB. Others Households. At household level, Romania faces a passive saving behavior as most of the Insurance & private pensions population chooses to keep almost 39% of their financial assets in deposits and cash and only 30% in equity, fund units and debt securities. Moreover, according to a survey we Other equity ran, the general opinion (51.2% of respondents) regarding the evolution of BVB, in the light of the latest political developments, is that it will continue to be stable, close to its bln Unlisted shares current position while 29.4% of respondents estimated a decrease of the stock market. Fund units Compulsory Private Pension Funds (Pillar II). At the end of June 2018, the seven pension EUR EUR funds (Pillar II) active on the local market had stock investments of around RON 7.1 bln on Listed shares the Bucharest Stock Exchange (4.3% of the total market capitalization of the Romanian stock market) ensuring approx. 15-20% of the market turnover. However, currently the 0 5 10 15 20 newly adopted Emergency Ordinance 114 could negatively impact the private pension Source: Eurostat funds sector as it imposes new mandatory capital requirements for managers and turns Figure 8: IPO Value (2016 – 2018) the contribution of participants optional. It is not yet clear how the provisions of the Emergency Ordinance 114 would be implemented or if it will remain in place as there is EUR 207 mln an intense lobbying from the market to withdraw these envisaged changes. Improvement of the BVB liquidity. Bucharest Stock Exchange has attracted in the past EUR 62 mln years only six local companies in IPOs. However, there has been an increase of tender EUR 50.5 mln offers, takeover bids and secondary public offers which boosted the liquidity on both the regular and AeRO markets. For 2019 it is estimated to see new local companies from the EUR 40 mln private sector listed on BSE (E-Infra, Doripesco, Safetech, iHunt Technology and Centrul European de Despăgubiri). In addition, there are ongoing discussions regarding the listing EUR 2 mln of Hidroelectrica and Aeroporturi Bucuresti. However, it is unclear when the listing of EUR 1.5 mln these SOEs could occur as the Ministry of Economy keeps postponing the decision to list them. BVB has also improved lately the liquidity in the fixed income market as it attracted Source: BVB Group every year new corporate bonds issuances. For 2019, the market supply of bonds is expected to increase with the listings of debt issued by Bittnet Systems, Idea Bank and Figure 9: Main bond issuance in 2019 Elefant Online. We estimate an increase in the trades of bonds as the high coupon rates will attract more investors. According to the latest press release, Bittnet Systems and EUR 5 mln 8.5% Elefant Online will offer an interest rate of 9% and Idea Bank 8.5% (the bond issuance being in EUR). However, the percentage of bonds turnover in total is not very high so the RON 9.7 mln 9% boost resulted from these issuances will not yield a substantially increase of BVB revenues. RON 7.6 mln 9%

Source: Team Assessment 4 This report was made by Bucharest Academy of Economic Studies students with the sole purpose of taking part in the CFA Research Challenge Figure 10: Market capitalization (domestic issuers) COMPETITIVE POSITIONING BVB has a monopoly position in Romania, as it is the only market operator, after the 140 (PL) acquisition and subsequent absorption of SIBEX, the local derivatives exchange. However, BVB directly competes in attracting investors with all the regional stock exchanges in the 120 CEE as well as Greece. Regional Level

100 Market Capitalization. BVB is a medium-sized company compared to the other stock exchanges in the region. A significant jump in the market capitalization was due to the

bln listing of the Austrian financial group, Erste Group AG, on the regular market. Also, the 80 launch of the alternative market was a successful step in the development of the stock

EUR EUR exchange and well received by SMEs. The declared aim of the current BVB management is (GR) to further develop the market in order to get closer to the capitalization of the Warsaw 60 Stock Exchange. Offer and Turnover. The asset classes currently traded on the BVB are shares, rights, 40 (CZ) (CR) bonds, units and structured products. The bond market registered a relatively strong (BG) increase in the last few years due to 10 new issues, mostly corporate, which took place in 2017 and 2018 (totaling EUR 2.40 bln). Compared to the main stock exchanges from the 20 region, BVB lacks a derivatives and commodities market which partly explains the lower (HU) turnover. Starting 2019, BVB shareholders approved the launch of the derivatives market which is expected to roughly double the turnover but only in 2029. Currently, 85 0 (RO) companies are listed on the regular market and 307 on the alternative AeRo. Out of these Source: Team Assessment (SL) companies, 13 listings on the main market represent almost 90% of total turnover. BVB faces a concentration of the investors preference around particular companies and Figure 11: Liabilities structure sectors. Even though this is similar to the situation of more developed securities of non-financial corporations exchanges such as the Warsaw Stock Exchange where 90% of its turnover is covered by 30 companies, the concentration risk is higher in the case of BVB. A/P Products level 25% EQUITY As mentioned before, BVB is the operator in the market of financial instruments. Looking 42% at the specifics of the traded products, we analyzed the market of substitute products for LOANS savings/investments, in the case of households and financing in the case of companies. 33% Listing versus Bank Loan. Romanian companies tend to finance most of their business through bank loans (33%) and supplier finance (25%). During 2017 and 2018, the new bank loans to non-financial companies summed RON 215 bln, over 15 times more than Source: Eurostat the amount attracted through IPOs and bond issuances. One of the main reasons for the Figure 12: Structure of investors low incentive to become a listed company are the requirements post-IPO regarding the disclosure of financial statements and company overview. In addition to this, the period of 9% Non-residents time needed for a listing and all related expenses make the company management 10% choose to finance through bank loans as it is easier to obtain and the requirements are Investment Funds less restrictive. Pension Funds Dividends and coupons versus deposit interest. According to the survey we have run, 50% 31% Retail only 12% of the respondents have a trading account at BVB, the rest of 88% preferring other savings products, mostly deposits. Even though the dividend yield of BVB-listed Team Assessment companies has high values (7.88% DivY in 2018), the risk associated with investing in shares make people reluctant. Other reasons for the low incentive of Romanian Figure 13: Total Revenues and Growth Rate individuals regarding BVB are the frequent regulatory changes which create sharp changes in the capital market as it has been seen in December 2018, the high trading fees, 60 40% unaffordable starting amounts asked by brokers and the poor investment supply. 20% 40 0% FINANCIAL ANALYSIS 20 -20% Slightly fluctuating historical revenues. Even though BVB reported in FY18 a 4.7% YoY increase in operating revenue to RON 39.83 mln, if we look at the 5 year CAGR of approx. 0 -40%

0.1%, BVB showed no growth over a longer period. Moreover, the CAGR for trading

202… 202…

201… revenues is actually negative (-2%) and the consistent 16.9% 5 year CAGR in post-trading

2017 2014 2015 2016 2018 2022E 2020E revenues due to the pick-up in value of custodian agents’ portfolios, was not sufficient to Team Assessment allow for revenue growth, given the shrinking number of financial intermediaries and Figure 14: EBIT and Operating margin custodian agents on the Romanian capital market. It appears that the measures taken by 15 30% BVB to develop the local capital market such as the extension of the trading schedule to align with those of European and leading global stock exchanges, fees haircuts and 10 20% investments to develop the market and IT infrastructure, will bear fruits on a longer 5 10% period than initially expected. We estimate revenues to continue to increase although at 0 0% slower rates for the next two years while the growth rate should accelerate once BVB

becomes a secondary emerging market and the listing of one of the largest state-owned

2015 2016 2017 2018

2014 companies, Hidroelectrica, takes place.

2020E 2022E

2019 E 2019 E 2021 E 2023 Team Assessment 5 This report was made by Bucharest Academy of Economic Studies students with the sole purpose of taking part in the CFA Research Challenge The main driver of the revenue increase are the trading revenues, which account for Figure 15: Financial income/net income approx. 60% of revenues, while the others (post-trading, registry and interest revenues 96% from the investors’ compensation fund) will have similar weights in total revenues to the 81% historical averages. We estimated the trading revenues for the next five years by 72% 42% forecasting a growth rate for each investor category, in which we incorporated various 44% macroeconomic trends and considered the current investor structure of BVB to remain 40% 39% 35% 41% 21% stable. Besides this, we incorporated three other new milestone events which would bring additional revenues, namely new IPOs, including Hidroelectrica, increased trading due to promotion of BVB to secondary emerging market and implementation of the CCP project in 2020. Stable cost structure. With a 1.7% 5 year CAGR, the cost structure of BVB has been Team Assessment characterized by stability, slight deviations being recorded in periods with legislative changes in the labor code. The main cost category is related to labor, accounting for Figure 16: Net income 0.89 0.41 roughly 55% of all operating expenses. In FY18, BVB reported some one-off operating expenditures of RON 0.98 mln (2.4x in third party costs as compared to the previous year) related to consulting services required to set up the CCP. For the forecasted period, we

estimate costs to remain relatively stable and they would increase only when BVB reaches ln

m the emerging market status as this will require additional staffing.

RON Decreasing operating margins. The uneven increase between operating revenues and

14.10 6.60 7.76 11.83 10.42 11.60 11.67 11.22 15.91 16.86 expenditures has led to an operating income of RON 8.87 mln, slightly declining by 4% YoY. Historically, the operating margin started to pick up since the big drop in 2015 to (5.4) (2.7) reach a high of 24% in 2017 and then slightly decrease in 2018 mainly due to a one-off expense item, as otherwise it would have been 25%. We estimate it to remain at around

22% for the coming years with a small increase in 2022 when we estimate Hidroelectrica

2017 2014 2015 2016 2018

2020E 2022E

2021 E 2021 E 2023 2019 E 2019 will be listed, coupled with increased trading due to the emerging market status to boost Net income Net income from CCP trading revenues. Financial result is a strong contributor to the bottom line. BVB’s financial income consists Team Assessment mainly in financial placements. In FY2018, financial income has contributed in proportion of 29% to income before taxes. In FY2018 it increased by 44% to RON 3.6 mln, boosted mainly by the normalization process of interest rates, having a positive effect on gross Figure 17: Return on Asset and Return on Equity income. However, gross income presented a decrease on account of unusual income 14% recorded in 2017 following the merger by absorption of SIBEX. Due to the normalization 12% 13% process of monetary policy globally and the fact that the company will not have interest charges, we are expecting an increase of financial income. 10% 10% Historical consistent net profit. Although slightly volatile historically, the company 7% 8% 9% 9% 6% produced consistent net profit. Due to the implementation of the CCP, it should be 6% 5% eroded by the losses of the first years of operations of the CCP but should pick-up once 6% 6% 4% 5% 5% 3% the top-line improves and CCP starts to produce profits. 4% 2% Solid net debt position in preparation for CCP implementation. In 2018, Bucharest Stock Exchange had zero debt and a cash position of RON 55.47 mln, up by 17% YoY. The cash position amounts to 33% of the market capitalization recorded at the end of FY18, most of the cash build-up will be used for the implementation of the CCP. Furthermore, in FY18 ROE ROA BVB’s balance sheet was in good health, with Asset/Equity ratio of 178%, in line with Team Assessment ratios from previous years and current ratio of 1.48, a drop with 18.6% compared with previous year. For the estimated period, we are projecting no financial debt. Figure 18: Cash generation and CAPEX Varying capital efficiency. Although the 8.5% Return on Equity ratio (as of FY18) is above 30 60% the 7.6% peers’ average, it degraded during last year by 4.4 percentage points. Both ROE 41.9% 44.9% and ROA should drop in the first years of the CCP but we estimate to recover afterwards. 33.1% 40% 33.7% 19.4% Erratic cash generation and low CAPEX. Although cash generation has started to pick-up 10 20% in the last years, it should again decline as it will be used for the CCP. CAPEX is mainly related to the IT infrastructure and it has been relatively stable with no significant changes 0% estimated for the forecast period. 3.5% 9.1% -10 18.… -20% VALUATION The target price for BVB was set at RON 18.4 per share implying a 12.4% downside -40% -30 potential. The main valuation method used was discounted dividend model (DDM) and -60% the results were cross-checked for reasonability with the relative valuation results. Both -55.5% -68.9% methods yielded similar price ranges as presented in the graph on the next page. Given -50 -80% the low comparability of capital markets selected as the most appropriate peer group for BVB and the high dispersion of the relative valuation results by using different multiples (P/E, P/S and P/B), the target price was set based on DDM result.

Dividend Discount Method general assumptions. DDM valuation was based upon

2014 2015 2016 2017 2018 2022E

2020E historical and projected financial and operational information from BVB reports as well as

2019 E 2019 2021 E 2021 E 2023 upon specific market information. Cash generation CAPEX Cash to sales (%) 6 This report was made by Bucharest Academy of Economic Studies students with the sole purpose of taking part in the CFA Research Challenge Team Assessment The forecast period is FY2019 - FY2023 allowing BVB to reach a stable stage of its operations. We have also considered a terminal year (TY) forecast for which normalized Figure 19: Target Price Range indicators were estimated in order to reflect their sustainable level. In order to obtain a relevant historical comparison basis, we analyzed the financial statements of BVB for the BVB Stok Price Range period 2014-2018. The financial forecasts are prepared in RON in nominal terms (including 18.4 >> Target Price 21 >> Current Price inflation), therefore the cost of equity (CoE) used in the DDM is also expressed in nominal terms. BVB equity value was estimated by discounting projected dividends/ injection of capital. A 16% statutory income tax rate was applied for the forecast period and was Relative valuation assumed to approximate BVB effective tax rate. In estimating the discount factor we assumed that dividends/capital injections accrue over the year and we use the mid-year convention. For prudential reasons, given the cyclical evolution of capital markets, we assume a perpetuity growth rate of 2% p.a., lower than the inflation forecasted by EIU for DDM valuation 2023 (3.4%). Dividend Discount Method specific assumptions. The forecast of BVB revenues was

14.0 15.0 16.0 17.0 18.0 19.0 20.0 21.0 22.0 based on further developments as presented by the company’s management. Among Team Assessment expected advancements in BVB operations are the launch of the CCP and derivative market, increased number of IPOs, emerging market status, and increase of market velocity and liquidity. Figure 20: Cost of Equity Our analysis indicates that the launch of CCP will not add value for BVB at the current Discount Rate Estimation (CoE) stage of market development (Appendix 4). The projected CAGR of transactions value from existing financial instruments will be around 5.5% (Base case scenario) which Metric Value translates in an average daily turnover of approx. RON 75 mln (EUR 15.8 mln), a 30% βA (Beta asset) 0.88 increase of the current level but still aprox. 12 times lower than the EUR 194 mln daily turnover on the Warsaw Stock Exchange. This increase in transactions value for the D/E 0% existing market was based on investors’ transactions structure (i.e. retail, pension funds, investment funds and non-residents) and estimated growth rate of capital inflows from Income tax 16% each category of investors. The pension funds projected transactions value and how it was estimated are presented in Appendix 8. In case of retail investors we have considered βE (Beta equity) 0.88 the forecasted nominal growth of personal disposable income, for investment funds the transactions value was projected in line with GDP growth rate and for non-residents, Rf 4.76% transactions’ value was projected in line with net direct investment flows growth rate. MRPE 6.50% However, a low market liquidity might not allow for an adequate penetration grade of KE, Cost of Equity 10.50% future derivative instruments to be issued when the CCP will be launched, thus CCP business case could be unsustainable. Team Assessment We opted to present separately in the DDM the net contribution of the CCP to BVB’s bottom line weighted with BVB estimated shareholding of 63% in CCP as well as the Figure 21: Main valuation inputs additional synergies that are estimated to be achieved by BVB once the CCP is functional. We considered the base case presented by BVB but with one year lag (Fig. 21) in the Input Data Base Case actual implementation given that we believe finding a second investor for the CCP would Growth rate transactions value on be a rather lengthy process considering the rather questionable feasibility of the CCP on a 5.5% BVB stand-alone basis. The sustainable net income from CCP and BVB synergies estimated for terminal year of forecast (TY) were estimated based on business plan communicated by BVB Market Velocity 9.3% the company adjusted for a lower degree of penetration of the derivatives market. Average commission for spot 0.16% Given the economic turmoil caused at the end of last year by the GEO 114 which caused a market (% in transactions value) severe depression of Bucharest Stock Exchange, we believe that BVB’s declared expectations of reaching emerging market status in 2019 is rather optimistic. Even if the Number of IPOs (2019-2023) 10 current fiscal changes will not actually be fully implemented, the uncertainty created in the local economic environment will make investors weary. Therefore, in the base case Emerging market status - year 2021 scenario we considered that BVB could become an emerging market (EM) in 2021. By gaining emerging market status we expect that BVB will experience an increase of Start of derivative market - year 2020 market capitalization and transactions value by attracting the interest of new other TY Net income from launching CCP 2,440 investments funds, by gaining access to a sizeable pool of financial resources, alongside TY Net income from synergies with with attracting new international IPOs. This increase was estimated based on information 3,293 CCP available for other capital markets that became emergent like Saudi Arabia or Poland. Market Capitalisation increase However, given the high concentration of capital market (a large part of transactions 5,400,000 from IPOs value is linked with few blue-chips intensively traded, mainly in energy and banking Market capitalization increase from sector) we do not expect a high increase of market capitalization from gaining EM status 3,411,374 the emerging market status (e.g. GPW had an increase of approx. 30% of market capitalization from EM status in 2008). Team Assessment

7 This report was made by Bucharest Academy of Economic Studies students with the sole purpose of taking part in the CFA Research Challenge Figure 22: Peers’ comparison

EBIT The expected increase of transactions value is unimportant given the insufficient Company ROE margin number of significant IPOs. For the next five years, we are expecting a number of 10 new listings, including Hidroelectrica, the largest state-owned power producer in Zagrebacka Burza DD -12.6% -6.0% Romania, whose listing has been rumored for several years but always postponed. Bulgarska fondova 43.8% 28.3% However, with the exception of Hidroelectrica, most of the other IPOs should take place borsa Sofia on the alternative market which means that their impact on overall BVB liquidity and GPW 48.1% 22.6% revenues would be limited. Bolsas Y Mercados Given the level of operating costs BVB has to cover, its operating margin is lower than Espanoles Sociedad the peers’ median. The expected increase in revenues from gaining emerging market 62.9% 31.6% Holding De Mercados status and new IPOs will be cancelled out by the proportional increase in salaries costs. Y Sistemas Financieros BVB dividend capacity was estimated based on excess/deficit own funds. An important Hellenic Exchanges 17.9% 2.8% outflow that should be covered by BVB with capital injection is the capital requirement for launching the CCP, representing EUR 10 mln. For the remaining part of the forecast Euronext 53.8% 40.6% period the dividend payments were estimated with a payout ratio of 90%. Relative valuation. In order to estimate the market value of the BVB equity we applied Median 45.9% 25.5% the relative valuation based on a group of 6 listed comparable stock exchanges mainly Bursa de Valori 22.3% 9.3% from the CEE region. Given the markets’ structural differences and high discrepancies in Bucuresti (BVB) terms of profitability, velocity and liquidity we opted to estimate the BVB equity value Difference to Median -23.7% -16.2% by using three multiples: P/E, P/S, P/B (Appendix 16). The resulting value of 19.2 RON is Team Assessment close to our DDM target price.

Figure 23: Relative Valuation Summary Relative valuation P/S P/E P/B Summary

st Peer 1 quartile 4.59 10.68 1.90 Estimated value of a BVB share 22.7 13.5 28.4 Weights 30% 50% 20% Market value of BVB Shares (RON) 19.2 Team Assessment

8 This report was made by Bucharest Academy of Economic Studies students with the sole purpose of taking part in the CFA Research Challenge SENSITIVITY ANALYSIS & MONTE CARLO SIMULATION Figure 24: Risk Profile Sensitivity analysis was run on DDM results in order to identify the most important factors with impact on estimated stock price. As presented in the diagram aside among the key factors with an important impact on BVB stock price are: average commission for spot market (% in transactions value), transactions value growth rate, the contribution to the TY net income from CCP and BVB Synergies with CCP. Based on the inputs we have used for each scenario and by considering the most relevant factors for BVB future evolution we have run a Monte Carlo simulation in order to identify the risk profile of the investment in BVB stock prices. We simulated the level of the following factors: average commission (% in transactions value), market velocity, transactions value annual growth rate, increase of market capitalization from gaining EM status, increase of TY net income from CCP launch and synergies. For each key factor to be simulated we have estimated the average and standard deviation of the distribution function. Thus, the estimation was based on the data used for each scenario and the probabilities associated with the considered scenarios (25% More than 80% cumulative probability of for Best Case and Worst Case scenarios, respectively 50% for Base Case scenario). prices below the current price 21 RON as The resulting cumulative distribution function indicates that simulated BVB stock prices at 31 Dec. 2018 are in line with the Sell are falling with more than 80% cumulative probability below the current spot price at outlook. 31st December 2018. This is in line with the Sell overlook yielded by our analysis. Team Assessment Furthermore, the simulated prices are distributed with a higher frequency in the interval RON 15.5 and RON 21 with a cumulative probability of 80%, leading as well to a sell recommendation Figure 25: Monte Carlo Simulation INVESTMENT RISKS Political and regulatory Adverse changes in tax policies. Politically-driven changes in the tax policies can negatively impact both listed companies and investors, as well as the overall economic environment. For instance, the publication at the end of 2018 of some information about an emergency government ordinance (e.g. Emergency Ordinance 114) which would impose additional levies on banks and energy companies, some of the main issuers on BVB, caused the BET index to fall by about 11.21%, thus destroying all the value created by BVB over the year. Another example is the provision of the fiscal code that came into force in 2018, which obliges investors to pay additional social duties for revenues exceeding a certain annual limit, in addition to the payment of tax for dividends and capital gains. Risk of nationalization of private pension funds. Private pension funds are among the most important market players, accounting for approximately 15% of the traded volumes. Any change in the level of contribution for Pillar II, the compulsory private Simulated stock prices are falling in the pension fund, limits and/or any prudential regulations regarding the trading activity of interval 15.4 and 21 RON with a 80% the pension funds may have a significant impact on BVB revenues. One example is the cumulative probability, which encompass fact that, starting in 2019, the contribution for Pillar II might become optional, meaning that participants could possibly make an early withdrawal of their funds, while the DDM and relative valuation results. additional capital requirements and lower management fees would be imposed to fund Team Assessment managers. Should all changes become effective, it could translate into lower volumes and fall of returns as fund managers would need to liquidate all or part of their assets. Macroeconomic and financial Economic cycle risk. The stock exchange is usually regarded as the bellwether of the Figure 26: Risk Matrix national economy. Since Romania has a small and open economy, it depends to a substantial extent on the economic conditions in the European Union and world-wide, but also on other states with which it is commercially linked. Considering that some of the EU's developed countries and the US are starting to show declining economic growth lately, it is likely that these events will also be reflected in Romania's economy in the near future, which would impact the trading activity of BVB. This will be reflected in a growth of unemployment rate together with a decrease of level of salaries. The negative effect of these factors may impact investments of both retail sector, as the disposable income for savings may decrease and of pension funds as contributions received are related to the level of wages. Risk of market volatility. The Romanian capital market is less developed than other stock exchanges, thus being very sensitive to the events that influence the capital markets in the major financial centers of the world. Thus, a shift in the investment Team Assessment appetite of international investors may contaminate the Romanian stock market as well (e.g. Brexit). 9 This report was made by Bucharest Academy of Economic Studies students with the sole purpose of taking part in the CFA Research Challenge Exchange rate risk. This risk is due to the fact that in the portfolio of BVB's financial assets there is also a significant amount of shares and bonds of the companies that operate and are listed on other stock exchanges outside Romania. Consequently, any depreciation of Figure 27: Inflation Rate (2016 – 2018) the currency as a result of monetary policy or other macroeconomic factors could result in a decrease in the available capital held by the BVB. At the same time, this risk is also 6 important for foreign investors who buy shares on BVB, so any depreciation of the 4 national currency could mean for them a decrease in the real yield denominated in hard 2 currency. 0 Risk of rising inflation. Real yields earned by investors by trading on BVB depend -2 significantly on the level of inflation. It is known that foreign investors choose to trade at -4 BVB compared to more developed markets because of higher expected returns. But even

if these returns are achieved, in an economic context of rising inflation rate, the real yield

Jul'17 Jul'18

Jul'16 may be relatively much lower. An increase in the inflation rate would also increase

Jan '16 Jan '17 Jan '18 Jan

Oct '16 Oct '17 Oct '18 Oct

Apr'17 Apr'18 Apr'16 interest rates, meaning that alternative investment opportunities may become more Inflation rate in Romania attractive. Bearing this in mind, the liquidity on the BVB could decrease, together with a Inflation rate in European Union decrease in the level of registered revenues. Structural Risks Source: National Bank of Romania Demographic risk. The decreasing birth rate coupled with continuing and growing immigration could mean in the long run, on one hand, a lower number of retail investors and on the other hand, less contributors to the private pension funds. Both effects could translate into lower trading volumes for BVB. Figure 28: Exchange rate (2018 – 2019) Lack of financial education. Investing in shares, bonds or other financial instruments on BVB requires a certain level of financial education. Currently, Romania is consistently 4.8 4.3 ranked among the EU countries with the lowest level of financial education. In order to improve this situation, BVB is running various educational programs for retail investors 4.8 4.2 such as Fluent in Finance. 4.7 4.1 4.0 Business Risks 4.7 3.9 Sector concentration of listed companies. Companies listed on BVB come largely from a 4.6 3.8 fairly limited range of sectors, namely financial intermediation, extractive industry, oil 4.6 3.7 processing as well as the production and supply of electricity and energy, most of them 4.5 3.6 being also highly regulated industries. Thus, any structural or regulatory change in these Jan Mar May Jul Sep Nov Jan sectors can reduce the profitability of listed companies. For example, an announced '18 '18 '18 '18 '18 '18 '19 additional levy for energy companies meant that the BET-NG composite index of energy companies fell 9.93% in a single day. EUR/RON USD/RON Operational and cybernetic risks. The BVB activity is carried out with the help of a computer platform, where all the sales and purchase orders are centralized. Thus, any Source: National Bank of Romania technological issue or human error with the platform's software could disrupt the trading activity of the market participants, reducing both the operational revenues and the confidence level of the investors in the activity of BVB. Besides the risk of a technical malfunction there may be the risk of a cyber-attack on the BVB platform. Such a risk is likely to be fairly low, but its effects may have a very strong impact on the activity, profitability and credibility of the BVB. Innovative competitive products. With the advancement of technology and globalization, other high risk-high return products such peer-to-peer lending platforms, micro-loans, crowd-funding platforms and not the least cryptocurrencies are starting to appear. Although they are currently in an incipient stage, they could start to attract investors, especially from the millennial generation.

10 This report was made by Bucharest Academy of Economic Studies students with the sole purpose of taking part in the CFA Research Challenge APPENDIX 1 CAPITAL MARKET OVERVIEW (1) MAIN MARKET (2009 – 2018)

V Market Capitalization 40

30 V

0 '09 '10 '11 '12 '13 '14 '15 '16 '17 '18 V Trading value Volume

3 18 15 2.5 12 bln 2 9 Shares bln 6 EUR EUR 1.5 3 0 1 '09 '10 '11 '12 '13 '14 '15 '16 '17 '18 '09 '10 '11 '12 '13 '14 '15 '16 '17 '18

1 8 0.8 6 Bonds bln 0.6 4

EUR EUR 0.4

0.2 2 bln 0 0 '09 '10 '11 '12 '13 '14 '15 '16 '17 '18 '09 '10 '11 '12 '13 '14 '15 '16 '17 '18 6 800

Units 4 600 mln 400

EUR EUR 2 200

thousands 0 0 '09 '10 '11 '12 '13 '14 '15 '16 '17 '18 '09 '10 '11 '12 '13 '14 '15 '16 '17 '18 100

160 80

mln 60 Structured 120 mln 40

Products EUR 80 20

40 0 '11 '12 '13 '14 '15 '16 '17 '18 '11 '12 '13 '14 '15 '16 '17 '18

11 This report was made by Bucharest Academy of Economic Studies students with the sole purpose of taking part in the CFA Research Challenge APPENDIX 2 CAPITAL MARKET OVERVIEW (2) PERFORMANCE BY SECTOR

Electricity, gas, steam & Professional, air conditioning supply scientific & technical activities Other

4% Transportation & 5% Storage 6%

Manufacturing 10% MK CAP EUR 30.5 bln Financial & Mining & Insurance quarrying 18% 54%

Professional, Electricity, gas, steam & scientific & air conditioning supply technical activities

Transportation & 3% Other Storage 3% Manufacturing 3% 7% Turnover Mining & 19% EUR 2.4 bln quarrying 62% Financial & Insurance

12 This report was made by Bucharest Academy of Economic Studies students with the sole purpose of taking part in the CFA Research Challenge APPENDIX 3 CAPITAL MARKET OVERVIEW (3) INDEX EVOLUTION 2018

9500

8500

7500

6500 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec BET 13000 44000

12000 40000

11000 36000

10000 32000 Jan FebMar Apr May Jun Jul Aug Sep Oct Nov Dec Jan FebMar AprMay Jun Jul Aug Sep Oct Nov Dec BET-TR BET-FI 900 1400

800 1300 1200 700 1100

600 1000 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan FebMar AprMay Jun Jul Aug Sep Oct Nov Dec BET-XT BET-PLUS

800 1200

700 1100

600 1000

500 900 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan FebMar Apr May Jun Jul Aug Sep Oct Nov Dec BET-NG BET-XT-T

1900 20000 18500 1700 17000 1500 15500 1300 14000 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan FebMar AprMay Jun Jul Aug Sep Oct Nov Dec BET-BK ROTX 13 This report was made by Bucharest Academy of Economic Studies students with the sole purpose of taking part in the CFA Research Challenge APPENDIX 4 BUSINESS STRATEGY BVB GROUP STRUCTURE

CENTRAL COUNTERPARTY PROJECT The project for the establishment of a central counterparty (CCP) was approved by the company’s shareholders in January 2019. The investment necessary to set-up the CCP, which should function as a distinct legal entity, is of EUR 16 mln out of which EUR 10 mln would be contributed by the BVB group while the balance of EUR 6 mln by third party investors, most likely by OPCOM, the operator of the Romanian power and gas exchange. This means that BVB should own 63% of this newly created entity. It is estimated that the CCP will become operational in 2020 providing, in a first stage, clearing services for a segment of the OPCOM power contracts forward market while in a second stage it should provide services enabling the set-up of power futures, stock futures and FX futures. Besides the revenues of CCP, BVB estimates some synergies with the existing activity, as trading in derivatives should also boost the market of the supporting assets. Although BVB presented 2 digits IRRs in business of the CCP, we have run a simulating starting from their 5 year base assumptions, after which we estimated a terminal value using the Gordon-Shapiro method and, for simplicity, the same Cost of Equity and terminal value that we used in the discounted dividend model for the valuation of BVB itself.

The conclusion of our analysis was that, even if the synergies, the CCP project does not seem to create value for investors in the base case presented by BVB.

Terminal CCP IRR calculation without synergies (RON th) 2020 2021 2022 2023 2024 2025 Value Operating Revenues CCP - 4,617 10,372 11,723 13,375 14,901 Net income (8,637) (4,317) 655 1,425 2,279 3,320 BVB Investment (47,021) FCFEE @ 63% of net income (BVB's share) (52,419) (2,698) 409 891 1,424 2,075 24,901 IRR -10.3% CoE 10.5% Premium/ Discount over CoE -20.8%

Terminal CCP IRR calculation with synergies (RON th) 2020 2021 2022 2023 2024 2025 Value Additional revenues for BVB generated by the CCP (2,351) (1,569) 606 1,960 3,430 net of tax FCFEE @ 63% of net income (BVB's share) (52,419) (2,698) 409 891 1,424 2,075 FCFEE including synergies (52,419) (5,049) (1,159) 1,496 3,385 5,506 66,067 IRR 4.8% CoE 10.5% Premium/ Discount over CoE -5.7%

14 This report was made by Bucharest Academy of Economic Studies students with the sole purpose of taking part in the CFA Research Challenge APPENDIX 5 GOVERNANCE ASSESSMENT

Score Commitment to Corporate Governance 3/4 Does the company have a corporate governance code, polities or procedures? Does the company have a code of ethics? Does the company have a designated officer responsible for ensuring compliance with the corporate governance and ethics code? Does the Board of Directors approve the annual calendar of corporate events? Score Structure and Functioning of the Board of Directors 3/4 Are there a majority of independent members in the Board of Directors? Does the company have Boards Committees, are this transparent with this type of data? Directors are appointed on the basis of a clear job description, which identifies the required directors background and expertise? Does the Board of Directors conduct self-evaluations or other reviews of its effectiveness, are this information transparent for the shareholders and public? Score Control of processes 4/4 Does the company have an Internal Audit Committee? The representative of this committee is independent? Does the company have a risk management system? Is the company’s external audit in line with International Standards on Auditing? Score Transparency and disclosure 3/3 Are the financial statements prepared in keeping with internationally recognized accounting standards?

Does the company disclose major transactions, related party transactions, off-balance sheet activities and other events? Does the company have a written information disclosure policy that seeks to make all material information fully, timely and equally available to all stakeholders? Score Rights of minority shareholders 2/3 Do minority shareholders have any mechanisms to nominate members of the Board of Directors (cumulative voting, block voting)? The company never been subject to investigation into its treatment of shareholders.

Are there any minority shareholders protection mechanisms in place?

83.3% ACHIEVEMENT – VERY GOOD 15/18

Corporate Governance Items Points Max Point % Achievement score Verdict Commitment to Corporate Governance 3 4 75% 100%-90% Excellent Structure and Functioning of the Board of Directors 3 4 75% 90%-80% Very Good Control of processes 4 4 100% 80%-70% Good Transparency and disclosure 3 3 100% Source:70% Team-60% analysis usingSatisfactory the DFI’s WorkingRights of Group minority on shareholdersCorporate Governance from the IFC Corporate2 Governance3 66.60% Methodology Total score 15 18 83.3%

15 This report was made by Bucharest Academy of Economic Studies students with the sole purpose of taking part in the CFA Research Challenge APPENDIX 6 SWOT ANALYSIS

• Launch of central counterparty (CCP) in 2019 to enable the trade of derivatives • Partnership with the national energy market operator in setting up the CCP in for providing clearing services to OPCOM • Lack of diverse investment opportunities in • Monopolistic position on the Romanian both shares and bonds, with most market companies being exposed to the financial • Attractive alternative for companies from and energy sectors the region looking to list from countries • Low market liquidity with some less active with very small capital markets (e.g. shares trading only on a monthly basis Moldova) • Poor financial education of Romanians and • Link to one of the fastest-growing EU mistrust of the stockmarket that prevents economies, that has a high growth the creation of a strong retail community potential due to the need to catch up with • Entrepreneurs reluctant on listing their Western Europe businesses on the stock exchange. • Some of the highest dividend yields in the world that attract investor interest S W

O T

• Upgrade to an Emerging Market status by MSCI and FTSE Russell • New regulations affecting Pillar 2 pension • Continued privatisation of government- funds that threatens the disappearance of owned enterprises which will improve an investor that holds 10% of listed shares investment offerings and increase market on the Bucharest market. liquidity • New taxes imposed on banks and energy • Development of bonds market which lead firms that deplete their cash reserves and to diversifying the offer for investors and limit their ability to pay dividends, a driver increasing the operators’ revenues for market demand. • The closing of the macroeconomic cycle • Continued anti-business rhetoric by the makes it more attractive for companies to government that makes investors less switch from bank loans to the bond market. willing to invest in Romania. • Continued market reforms, including the • Government dependence on dividends legalisation of short-selling that could from unlisted state companies that could increase market volume. slow down the privatisation process

16 This report was made by Bucharest Academy of Economic Studies students with the sole purpose of taking part in the CFA Research Challenge APPENDIX 7 REVENUE ASSUMPTIONS

For retail the growth rate is a result of the increase of disposable income, due to favorable trend of average gross wages and a stable evolution of consumer prices. As regards investments funds, given that a significant portion of investment funds’ accounts are owned by retail investors and not by legal persons, we considered that the growth is driven by the positive evolution of disposable income. As for non-resident investors, we directly linked their interest in investing and transacting on BVB to the economic growth of Romania which remains one of the highest of the European Union as well to the level of foreign direct investments in Romania.

Indicators used in the growth rate estimation (retail, non-resident, funds) 2018 2019E 2020E 2021E 2022E 2023E GDP (% real change pa) 4.3% 3.8% 3.7% 3.8% 3.6% 3.2% Real personal disposable income (% change pa) 3.1% 2.3% 2.1% 3.5% 3.3% 3.4% Consumer prices (% change pa; end-period) 3.9% 3.0% 3.3% 3.5% 3.4% 3.4% Net direct investment flows (bln USD) 5.6 6.2 5.9 6.2 6.8 6.8 Source: The Economist For pension funds, the resulting growth rate is function of the current age structure of private pension funds’ taxpayers, the age structure of potential contributors that will enter into labor force and thus into the private pension system as well the migration’s effect on active population and future increases of in gross average wage. 9.7% 5.1% 10.7% 2019 2020 2021 2022 2023 6.9% 7.1% 7.4% 0.0% Resulting 0.6% 8.3% 7.1% 7.3% 6.8% weighted -4.8% 6.8% 8.7% 1.0% 6.1% 8.4% 3.5% 10.2% 2.9% average 7.1% 7.8% growth rate 6.9% 5.5% 7.1% 6.8% -2.3% 5.4% 2018 2019 E 2020E 2021 E 2022E 2023 E

Retail Pension funds Investment funds Non-residents We then applied the resulting weighted average growth rate to the 2018 total transaction value on BVB of approx. RON 14 bln, considering the additional transaction value from new IPOs and gaining the emerging market status to which we applied the an average commission value. in RON th 2018 2019 E 2020 E 2021 E 2022 E 2023 E Total Transaction Value on BVB (w/o extra IPOs, emerging, derivative market) 13,996,671 15,214,381 15,366,525 16,303,883 17,673,409 18,291,979 Transaction value from IPOs 0 100,440 100,440 100,440 1,402,440 1,402,440 Transaction value increase from emerging market status 0 0 0 628,055 1,080,003 1,542,429 Average commission on spot market 0.171% 0.161% 0.161% 0.161% 0.161% 0.161% Percentage of revenues from Post trading services in Trading services 42% 42% 42% 42% 42% 42% Percentage of revenues from registry services in Trading services 22% 19% 19% 19% 19% 19% Growth rate of state bonds yields used in estimating FCI revenues 0% 19% 14% 0% 5% 3% Increase of no. employees with emerging status 0 0 0 20 0 0 Average monthly salary (including taxes) 0 14 14 15 15 16 No. existing employees 0 101 101 121 121 121 Turnover per employee 0 150,637 152,144 134,743 146,061 151,173

Revenues from trading services 23,932 24,657 24,902 27,422 32,451 34,191 Revenues from post-trading services 10,113 10,322 10,425 11,480 13,585 14,313 Revenues from registry service 5,257 5,378 5,499 5,620 5,740 5,861 Revenues from FCI 523 622 709 709 741 763 Total operating revenues 39,825 40,978 41,534 45,230 52,518 55,129

17 This report was made by Bucharest Academy of Economic Studies students with the sole purpose of taking part in the CFA Research Challenge APPENDIX 8 PENSION FUNDS ESTIMATION (1)

In order to estimate the value of future trading made by pension funds on BVB, we assessed the age structure of pension funds participants as well as the current age structure of the population with the purpose of estimating future net inflows generated by contributions received from participants as per the following methodology:

• Using historical contributors’ age structure of Private Pension Funds, we divided all contributors into age groups.

• We assumed that the Romanian labor market has structural gaps, even if the unemployment rate is at historical lows, this performance comes due to an intensified emigration flow registered in the last few years and is not an effect of economic performance. Therefore, we assumed that Romania had the capacity to provide jobs for 45% of total population.

• We analyzed the actual age structure of Romanian population in order to estimate the number of people that will join into the labor market.

• Using the assumption of a constant contribution fee of 3.75% (the current level), constant increase in wages thanks to expansionary policy implemented by Romanian Government, exemption of construction employees from paying private pension contribution for the next 10 years and assuming that emigration flow will continue in the next period, we estimated net inflows which will be collected by pension funds using an average weight of participants with paid contributions in all participants of 55% of the net inflows which will be collected by pension funds. Meanwhile, in 2017, the difference between potential contributors to pension funds and the number of contributors reported by Financial Supervisory Authority (FSA) was of roughly 950,000 people, in other words almost 80% from potential contributors are already contributors.

• We have eliminated the cash outflows resulting from the opportunity to take early retirement, using a constant value of RON 50 mln.

• Finally, to estimate pension funds’ trading value on each asset class traded on BVB, we used the private pension funds investments portfolio structure from first half of 2018, as reported to the FSA.

STEP 1: Estimate population age structure

8000 7000 6000 5000 4000 3000 2000 1000 0 15-19 20-24 25-29 30-34 35-39 40-44 45-49 50-54 55-59 60 61 62 63 64 Over 65

2018 2019 E 2020 E 2021 E 2022 E 2023 E

18 This report was made by Bucharest Academy of Economic Studies students with the sole purpose of taking part in the CFA Research Challenge APPENDIX 9 PENSION FUNDS ESTIMATION (2)

STEP 2: Compute net inflows

All Participants in the Private Pension Fund (th people) 7,226 7,243 7,260 7,276 7,293 7,310

Participants with paid contributions (th people) 3,974 3,633 3,592 3,551 3,510 3,469 Participants with paid contributions - emigration effect (th people) 3,933 3,592 3,551 3,510 3,469 3,428

Employees in construction sector 300 - - - - - (excluded according to EO 114/2018) (th people) ------Average weight of participant with contributions in all 55% - - - - - participants

Average gross salary estimated 4,352 4,900 5,341 5,795 6,259 6,760 Contribution Fee 3.8% 3.8% 3.8% 3.8% 3.8% 3.8%

Contribution received by Pension Funds (th RON) 7,702,642 7,921,033 8,535,179 9,153,528 9,770,099 10,426,737

Early retirees (th people) 50,000.00 50,000.00 50,000.00 50,000.00 50,000.00 50,000.00 Net inflows (RON th) 7,652,642 7,871,033 8,485,179 9,103,528 9,720,099 10,376,737

STEP 3: Weight net inflows with asset allocation STEP 3: Compute traded value

ASSET ALLOCATION OF PENSION FUNDS TRADED VALUE BY PENSION FUNDS

10,000 20% 16% 2% 8,000

1% 6,000

60% 4,000

2,000

Equity Corporate bonds 0 Governmental bonds Municipal bonds 2018 2019 E 2020 E 2021 E 2022 E 2023 E Other (non BVB instruments) Shares Corporate Bonds Governmental Bonds Municipal Bonds

Source: Financial Supervision Authority Source: Team Assessment 19 This report was made by Bucharest Academy of Economic Studies students with the sole purpose of taking part in the CFA Research Challenge APPENDIX 10 REGIONAL COMPETITION (1)

Market Cap (domestic) EUR 134.74 bln Market Cap (total) EUR 262.63 bln Main Market 356 companies Parallel Market 106 companies

Market Cap (domestic) EUR 43.18 bln Market Cap (total) EUR 54.28 bln Regulated Market 185 companies Alternative Market 12 companies

Market Cap (domestic) EUR 25.23 bln Market Cap (total) EUR 25.23 bln Prompt Market: 32 companies

Market Cap (domestic) EUR 23.63 bln Market Cap (total) EUR 826.54 bln Prime Market 11 companies Parallel Market 6 companies Free Market 32 companies Start Market

Market Cap (domestic) EUR 19.82 bln Market Cap (total) EUR 32.25 bln Main Market 85 companies AeRO Market 307 companies

Market Cap (domestic) EUR 17.91 bln Market Cap (total) EUR 19.91 bln Prime Market 4 companies Official Market 13 companies Regular Market 26 companies

Market Cap (domestic) EUR 13.12 bln Market Cap (total) EUR 13.12 bln Main Market 66 companies Alternative Market 154 companies

Market Cap (domestic) EUR 6.35 bln Market Cap (total): EUR 6.35 bln Prime Market 9 companies Standard Market 20 companies

20 This report was made by Bucharest Academy of Economic Studies students with the sole purpose of taking part in the CFA Research Challenge APPENDIX 11 REGIONAL COMPETITION (2)

Cash Market Trading value Derivatives Market

Equity EUR 49.714,45 mln Structured certificates EUR 207,12 mln ETF EUR 35,28 mln Investment certificates EUR 17.28 mln Rights to shares EUR 5,42 mln Pre-emptive rights EUR 41,25 K Structured bonds EUR 12,19 K

Equity EUR 14,612.93 mln ETF EUR 9.46 mln Bonds EUR 138.41 mln Warrants EUR 0.94 mln

Equity EUR 8,773.08 mln UCITs EUR 17.02 mln Certificates and warrants EUR 297.09 mln Mortgage bonds EUR 189.36 mln ETF EUR 2.42 mln Corporate bonds EUR 0.58 mln Compensation notes EUR 0.25 mln

Equity EUR 5.541,52 mln Corporate bonds EUR 360.36 mln Structured products EUR 5.15 mln Investment Funds Units EUR 1.67 mln

Equity EUR 2.502,95 mln Bonds EUR 473.32 mln Structured products EUR 71.94 mln Fund Units EUR 2.04 mln

Equity EUR 213.04 mln Bonds EUR 92.61 mln

Equity EUR 197.43 mln SPV EUR 28.57 mln Bonds EUR 26.41 mln Government Securities EUR 24.80 mln Compensatory Instruments EUR 2.87 mln ETF EUR 1.02 mln Subscription Rights EUR 0.14 mln

Equity EUR 337.32 mln

21 This report was made by Bucharest Academy of Economic Studies students with the sole purpose of taking part in the CFA Research Challenge APPENDIX 12 INDEPENDENT SURVEY

As part of our analysis, we developed a survey to obtain the opinion of retail investors regarding the risks, the opportunities and their perspective of Bucharest Stock Exchange activity to understand the factors behind their decisions.

have a trading 12.2% account on BVB DEPOSITS CASH & CURRENCY INVESTMENT UNITS 87.8% REAL ESTATE prefer to keep their savings in other instruments The most frequent reasons OULOOK OF BVB for not investing on BVB are:

HIGH VOLATILITY AND RISKS 51% 29.4% FREQUENT REGULATORY CHANGES stable decrease of HIGH STARTING AMOUNTS evolution the stock market FEW INVESTMENT OPTIONS HIGH TRADING FEES LOW FINANCIAL CONSULTING

Sample of survey: 245 respondents Age range: 18 – 50 Income range: 2.000 – 10.000 RON

22 This report was made by Bucharest Academy of Economic Studies students with the sole purpose of taking part in the CFA Research Challenge APPENDIX 13 FINANCIAL STATEMENTS

Income Statement (th RON) 2014 2015 2016 2017 2018 2019 E 2020E 2021 E 2022E 2023 E Revenues form trading services 26,539 17,409 19,433 23,345 23,932 24,657 24,902 27,422 32,451 34,191 Revenues form post-trading services 4,628 8,330 8,119 9,700 10,113 10,322 10,425 11,480 13,585 14,313 Revenues from registry service 8,478 4,579 3,591 3,991 5,257 5,378 5,499 5,620 5,740 5,861 Revenues from FCI 0 516 435 1,019 523 622 709 709 741 763 Total operating revenues 39,645 30,834 31,578 38,055 39,825 40,978 41,534 45,230 52,518 55,129

Total operating expenses (28,515) (27,614) (25,533) (28,818) (30,954) (32,282) (33,700) (38,775) (40,503) (42,304)

EBIT (Operating profit) 11,130 3,220 6,045 9,237 8,872 8,696 7,834 6,455 12,015 12,826

Financial income (excl.dividends) 5,632 4,742 3,039 2,502 3,607 5,079 6,031 6,877 6,877 7,195 Earning before tax 16,762 7,962 9,084 11,739 12,479 13,775 13,865 13,332 18,892 20,020 Income tax (2,660) (1,360) (1,322) 95 (2,055) (2,178) (2,192) (2,108) (2,987) (3,165) Net income 14,102 6,602 7,762 11,834 10,424 11,597 11,673 11,225 15,905 16,855 Net income from CCP @ 63% - (5,398) (2,698) 409 891

Balance Sheet (th RON) 2014 2015 2016 2017 2018 2019 E 2020E 2021 E 2022E 2023 E Current Assets 85,456 98,343 89,870 142,156 139,277 160,607 135,447 151,302 164,584 175,289 Non-current assets 68,794 81,260 83,136 60,750 75,338 75,286 122,123 121,809 121,363 120,787 PPE 5,500 6,478 6,281 8,050 7,900 7,879 7,806 7,680 7,502 7,271 LT Financial Assets (net) 61,770 73,419 74,996 49,398 64,081 64,081 111,102 111,102 111,102 111,102 Intangible Assets (net) 1,524 1,363 1,859 3,302 3,357 3,326 3,215 3,027 2,760 2,414 Total assets 154,250 179,603 173,006 203,236 214,615 235,892 257,569 273,109 285,946 296,075 Total current liabilities 40,642 70,289 64,971 78,236 94,177 103,883 114,331 124,452 134,736 144,957 Total non-current liabilities 12,989 12,530 10,373 10,696 - 11,200 10,756 10,884 10,947 10,862 Total liabilities 53,631 82,819 75,344 88,932 94,177 115,083 125,087 135,336 145,683 155,819 Total Equity 100,620 96,784 97,662 114,304 120,439 120,809 132,482 137,773 140,263 140,256 Total Equity and liabilities 154,251 179,603 173,006 203,236 214,615 235,892 257,569 273,109 285,946 296,075

Cash-Flow Statement (th RON) 2014 2015 2016 2017 2018 2019 E 2020E 2021 E 2022E 2023 E

Net Income 14,083 6,601 7,761 14,686 10,196 11,597 11,673 11,225 15,905 16,855 Depreciation & other adjustments 1,035 1,486 1,742 1,760 2,278 2,409 2,540 2,671 2,802 2,933 Deferred Taxes 0 0 0 (330) 0 Other Non-Cash Items (1,529) (1,325) (2,668) (2,554) (848) Changes in Working Capital (5,264) 32,258 (2,077) (324) (2,953) 825 (35) (273) (537) (192) Cash from Operating Activities 8,325 39,020 4,758 9,085 8,673 14,831 14,179 13,622 18,171 19,596

Capital Expenditures (2,292) (2,302) (2,040) (3,442) (1,881) (2,357) (2,357) (2,357) (2,357) (2,357) Other Investing Cash Flow Items 4,271 (41,989) 7,873 15,857 24,907 12,564 (40,450) 14,997 7,812 9,793 Cash from Investing Activities 1,979 (44,291) 5,833 12,415 23,026 10,208 (42,806) 12,640 5,455 7,437

Share capital release to minority shareholders(8,928) (11,239) (7,330) (863) (440) 0 0 0 0 0 Dividends Paid 0 (588) (385) (7,032) (13,593) (11,227) 0 (5,934) (13,415) (16,863) Issuance (Retirement) of Stock, Net 0 0 0 (1,008) (998) 0 0 0 0 0 Cash from Financing Activities (8,928) (11,827) (7,715) (8,903) (15,031) (11,227) 0 (5,934) (13,415) (16,863)

Net Change in Cash 1,376 (17,098) 2,876 12,597 16,668 13,812 (28,628) 20,329 10,211 10,170 Net Cash - Beginning Balance 18,875 20,251 3,153 6,029 18,626 35,294 49,106 20,478 40,806 51,017 Net Cash - Ending Balance 20,251 3,153 6,029 18,626 35,294 49,106 20,478 40,806 51,017 61,187

23 This report was made by Bucharest Academy of Economic Studies students with the sole purpose of taking part in the CFA Research Challenge APPENDIX 14 RATIOS ANALYSIS

Income Statement 2014 2015 2016 2017 2018 2019 E 2020E 2021 E 2022E 2023 E Revenues form trading services 67% 56% 62% 61% 60% 60% 60% 61% 62% 62% Revenues form post-trading services 12% 27% 26% 25% 25% 25% 25% 25% 26% 26% Revenues from registry service 21% 15% 11% 10% 13% 13% 13% 12% 11% 11% Revenues from FCI 0% 2% 1% 3% 1% 2% 2% 2% 1% 1% Total operating revenues 100% 100% 100% 100% 100% 100% 100% 100% 100% 100%

Total operating expenses -72% -90% -81% -76% -78% -79% -81% -86% -77% -77%

EBIT (Operating profit) 28% 10% 19% 24% 22% 21% 19% 14% 23% 23%

Financial income (excl.dividends) 14% 15% 10% 7% 9% 12% 15% 15% 13% 13% Net income 36% 21% 25% 31% 26% 28% 28% 25% 30% 31%

Balance Sheet 2014 2015 2016 2017 2018 2019 E 2020E 2021 E 2022E 2023 E Current Assets 55% 55% 52% 70% 65% 68% 53% 55% 58% 59% Non-current assets 45% 45% 48% 30% 35% 32% 47% 45% 42% 41% PPE 4% 4% 4% 4% 4% 3% 3% 3% 3% 2% LT Financial Assets (net) 40% 41% 43% 24% 30% 27% 43% 41% 39% 38% Intangible Assets (net) 1% 1% 1% 2% 2% 1% 1% 1% 1% 1% Accrued&Deffered Items 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% Total assets 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% Total current liabilities 26% 39% 38% 38% 44% 44% 44% 46% 47% 49% Total non-current liabilities 8% 7% 6% 5% 0% 5% 4% 4% 4% 4% Total liabilities 35% 46% 44% 44% 44% 49% 49% 50% 51% 53% Total Equity 65% 54% 56% 56% 56% 51% 51% 50% 49% 47% Total Equity and liabilities 100% 100% 100% 100% 100% 100% 100% 100% 100% 100%

24 This report was made by Bucharest Academy of Economic Studies students with the sole purpose of taking part in the CFA Research Challenge APPENDIX 15 VALUATION MODEL DISCOUNT DIVIDEND MODEL VALUATION

DDM Valuation - Base Case RON Thousand 2019 2020 2021 2022 2023 TY Net Income/(Net Loss) 11,597 11,673 11,225 15,905 16,855 17,192 Net income from CCP - (5,398) (2,698) 409 891 1,525 Synergies from CCP net of tax - - (1,975) (1,318) 606 3,293 Change in NWC 825 (35) (273) (537) (192) (195) Depreciation 2,409 2,540 2,671 2,802 2,933 2,933 Capex (2,357) (2,357) (2,357) (2,357) (2,357) (2,933) Free cash flow to equity 12,474 6,424 6,593 14,906 18,736 21,815 Outflow from required capital from CCp - (47,021) - - - - Projected dividends/ injection of capital 11,227 (40,597) 5,934 13,415 16,863 19,634 Discount period (mid year convention) 0.5 1.5 2.5 3.5 4.5 Discount factor 0.951 0.861 0.779 0.705 0.638 Discounted Dividends 10,680 (34,950) 4,623 9,459 10,760 PV of Dividends 572 Terminal Value 230,983 PV of Terminal Value 147,390 Equity value 147,962 No. shares 8,049,250 Market value of BVB Shares (RON) 18.4 Cost of equity (CoE) 10.50% Growth rate in perpetuity 2.00% Payout ratio 90% Cost of equity (CoE) was estimated in nominal terms (including inflation) based on the “Capital Asset Pricing Model” (CAPM) In the estimation of the CAPM model parameters we have taken into consideration a comparable peer group (CEE listed capital markets). Beta equity and D/E was retrieved form the all-peer group, as displayed in the table below. Beta asset was estimated by using Hamada formula: Beta asset = Beta equity / (1+ (1 - Effective tax rate) * D/E). Market risk premium of 6.5% is estimated for Romanian capital market by using data from Damodaran data base. The risk-free rate is estimated based on ECB long-term interest rate statistics as published as at 31 December 2018 for Romanian bonds denominated in Lei.

D/E, βE, βA for peers (5y monthly data) Company Net Beta equity Effective Beta asset Debt/Equity tax rate Bursa De Valori Bucharest 0.0% 69% 14% 0.69 Zagrebacka Burza DD 0.0% 0.82 12% 0.82 Bulgarska fondova borsa Sofia 0.0% 1.07 4% 1.07 GPW 0.0% 0.90 17% 0.90 Bolsas Y Mercados Espanoles Sociedad Holding De Mercados Y Sistemas 0.0% 0.78 27% 0.78 Financieros Hellenic Exchanges 0.0% 1.11 41% 1.11 Euronext 2.7% 0.90 28% 0.88 Median 0% 0.90 17% 0.88 Average 0% 0.89 20% 0.89 25 This report was made by Bucharest Academy of Economic Studies students with the sole purpose of taking part in the CFA Research Challenge APPENDIX 16 RELATIVE VALUATION

In order to estimate the market value of the BVB equity we applied the relative valuation based on a group of 6 listed comparable stock exchanges from CEE. Given the markets’ structural differences and high discrepancies in terms of profitability, velocity and liquidity we opted to estimate the BVB equity value by using three multiples: P/E, P/S, P/B. The results were weighted by considering the importance of multiples’ underlying financials in substantiating the investment decision. In applying relative valuation we assumed a direct correlation between the company’s profitability and equity value. BVB has its profitability margins at the level of 1st quartile compared to its peers, with the prospect of maintaining them at this level over the next years based on recent financial results and further evolution of the market. Based on these parameters, the multiples applicable to BVB are estimated at the peer group’s 1st quartile values. In order to determine a range for each multiple, we considered the 1st quartile plus/minus 0.10 * standard deviation which results in a reasonable narrow interval for each multiple. The multiples were applied to BVB financials at 31 December 2018. The estimated value of BVB equity and stock price are presented in the table below.

Relative valuation as at 31 December 2018 RON Thousand Price to Price to Price to Sales (P/S) Earnings Book (P/B) (P/E) Multiples Selected multiple 1st quartile 4.59 10.68 1.90

BVB financials LTM 31 December 2018 Lei million BV of equity 120,440 Net Sales 39,830 Net Income 10,196 Equity estimation EUR mn EV (Net debt)/ Net cash as at Valuation Date Equity value 182,625 108,879 228,963 No. shares 8,049,250 Estimated value of a BVB share 22.7 13.5 28.4 Weights 30% 50% 20% Market value of BVB Shares (RON) 19.2 Estimated upper value (RON) 21.4 Estimated lower value (RON) 17.2

26 This report was made by Bucharest Academy of Economic Studies students with the sole purpose of taking part in the CFA Research Challenge APPENDIX 17 PEER GROUP ANALYSIS

27 This report was made by Bucharest Academy of Economic Studies students with the sole purpose of taking part in the CFA Research Challenge APPENDIX 18 – SENSITIVITY ANALYSIS

Key factors Market value of Key Factors Scenarios variability (%) BVB Shares Base Case 0.00% 18.4 Average commission for 15.3 spot market (% in Worst Case -0.01% transactions value) Best Case 0.01% 21.5 Base Case 0.00% 18.4 17.5 Transactions value Worst Case -0.50% growth rate Best Case 0.50% 19.3 Base Case 0.00% 18.4 Purcentage of annual transactions value in total Worst Case -0.50% 18.1 market capitalization Best Case 0.50% 18.7 Base Case 0.00% 18.4 Annual transactions value 17.6 increase from emerging Worst Case -25.00% market status Best Case 25.00% 19.1

Base Case 0.00% 18.4 17.7 Annual transactions value Worst Case -25.00% increase from IPOs Best Case 25.00% 19.1 Base Case 0.00% 18.4 Worst Case 0.50% 17.0 Cost of Equity Best Case -0.50% 19.9 Base Case 0.00% 18.4 Worst Case -0.50% 17.3 Perpetuity growth rate Best Case 0.50% 19.6 Base Case 0.00% 18.4 Worst Case -5.00% 17.1 Dividend payout ratio Best Case 5.00% 19.6 Base Case 0.00% 18.4 17.4 TY Net Income and Worst Case -25.00% Synergies from CCP Best Case 25.00% 19.4

BVB Stock Price - Senzitivity

Analysis18.4 >> DDM Base TY NI and Synergies from CCP >>

17.4 19.4 Payout ratio >>

17.1 19.6 TY g >> 17 19.6 CoE >> 17 19.9 Transactions growth from EM >> 17.7 19.1 Transactions growth from IPOs >> 17.6 19.1 Market Velocity >> 18.1 18.7 Transactions growth rate >> 17.5 19.3

Avg. commission >> 15.3 21.5

28 This report was made by Bucharest Academy of Economic Studies students with the sole purpose of taking part in the CFA Research Challenge APPENDIX 19 RISK MATRIX

29 This report was made by Bucharest Academy of Economic Studies students with the sole purpose of taking part in the CFA Research Challenge APPENDIX 20 ENDNOTES

Data sources

. www.aaf.ro/, Fund Managers Association . www.apapr.ro/, Romania’s Private Pension Funds Association . www.asfromania.ro/, Financial Supervisory Authority . www.bnro.ro, National Bank of Romania . www.bse.hu/, Budapest Stock Exchange . https://bse-sofia.bg/, Bulgarian Stock Exchange . www.bvb.ro, Bucharest Stock Exchange . www.corporatefinanceinstitute.com/, Corporate Finance Institute . www.ec.europa.eu/eurostat, Eurostat . www.ecb.europa.eu, European Central Bank . www.efama.org, European Fund and Asset Management Association . www.eiu.com, Economist Intelligence Unit . www.fitchratings.com, Fitch Rating . www.fond-fci.ro/, The Investors Compensation Fund . www.gpw.pl/, Warsaw Stock Exchange . www.gss.unicreditgroup.eu/markets/, . http://www.helex.gr/, Athens Stock Exchange . www.ifc.org, International Finance Corporation, World Bank Group . www.insse.ro, National Institute of Statistics . www.pages.stern.nyu.edu/~adamodar/, Damodaran online – data base . https://www.pse.cz/, Prague Stock Exchange . www.roclear.ro/, Central Depository . www.schroders.com, . www.thomsonreuters.com, Thompson Reuters Database . www.zf.ro/, . https://www.zse.hr/, Zagreb Stock Exchange

Articles and Publications

 Capital markets in 2025 The future of equity capital markets, www.pwc.com  Country Report Romania 2018, European Commission, https://ec.europa.eu/  IPO Watch Europe Q3 2018, www.pwc.com  Kamal A. El-Wassal, 2013, The Development of Stock Markets: In Search of a Theory, International Journal of Economics and Financial Issues Vol. 3, No. 3

30 This report was made by Bucharest Academy of Economic Studies students with the sole purpose of taking part in the CFA Research Challenge APPENDIX 21 GLOSSARY OF TERMS

BVB, BSE – Bucharest Stock Exchange CAGR – Compound Annual Growth Rate CEE – Central and Eastern Europe CoE – Cost of equity DDM – Dividend discount model EM – Emerging Market ETF – Exchange Traded Fund EU – European Union FCI – Investors Compensation Fund FX – Foreign Exchange IPO – Initial Public Offering OPCOM – Romanian gas and electricity market operator. P/B – Price to Book Ratio P/E – Price to Earnings Ratio P/S – Price to Sales Ratio ROA – Return on Assets ROE – Return on Equity SME – Small and Medium Enterprises SOE – State Owned Company

Aero – It is the market segment primarily intended for small and medium-sized enterprises that can’t meet the requirements of the regulated market, for these companies the capital and liquidity levels are lower

BET – Bucharest Exchange Trading is the first index created by BVB, which is a reference of the national capital market evolution. It is composed of the most traded 15 companies on the regulated market.

In addition to BET at BVB there are another 8 indices including: BET-BK (Benchmark Index) BET-TR (Total Return) BET-FI (Investment Fund) BET-NG (Energy and related) BET-XT (Extended Index) BET-XT-TR (Extended Total Return) BET-Plus; ROTX

CCP – Central Counterparty represents the forerunner project that BVB has to do for the purpose of trading derivative instruments on the Romanian capital market.

Regular Market – It is the market segment of BVB intended for companies with a minimum capital of EUR 1 mln, with a minimum free float of 25%.

SIBEX – Sibiu Stock Exchange, represents the first Romanian derivatives exchange. The most important traded products on this exchange was: Stock Futures, Index Futures, Commodities Futures and Currency Futures. SIF – Financial Investment Company, this is a closed-end investment fund with a diversified investment policy that is traded on the BVB. There are 5 Financial Investment Companies in Romania, termed conditionally by the five regions of the country: SIF Banat-Crisana; SIF Moldova; SIF Transilvania; SIF Muntenia si SIF Oltenia.

31 This report was made by Bucharest Academy of Economic Studies students with the sole purpose of taking part in the CFA Research Challenge