Happy 5th Birthday, Risk-Reward Morgan Stanley & Co. International Edward Hill-Wood plc+ Triangle! And it works. [email protected] +44 (0)20 7425 9224 Find out why... Morgan Stanley & Co. International Nicholas J Ashworth, CFA plc+ [email protected] +44 (0)20 7425 7770 Morgan Stanley & Co. International Maryia Berasneva January 6, 2013 plc+ [email protected] +44 (0)20 7425 7502 Morgan Stanley & Co. International Liz A Rich Industry View Russian eCommerce plc+ In-Line OOO Morgan Stanley Bank+ Polina Ugryumova, CFA At the Tipping Point

We forecast the Russian eCommerce sector to grow Russian eCommerce: 44% CAGR 2012-14e

35% pa to 2015, reaching 4.5% of retail sales. We Value of eCommerce (RUB bn) profile market leader Ozon as it addresses the 2,500 8.0% barriers of distribution, payments and logistics. 7.0% 2,000 eCommerce’s ability to monetise search traffic is 6.0%

also a key value driver for OW-rated Yandex. 1,500 5.0% 4.0% With 2% retail penetration, eCommerce in Russia 1,000 3.0% 2.0% lags a 6.5% global average as outlined in our Global 500 eCommerce Blue Paper, also published today. 1.0% 0 0.0%

9 1 e e e e 0 1 4 6 8 0 0 12e 15e 17e 19 Our new AlphaWise survey supports our view that 2 2010 2 0 01 0 0 0 2 2013e 2 2 201 2 201 2 2020e 2013 will be a tipping point. Despite several

idiosyncrasies, we found that online consumer behavior Source: Euromonitor, Morgan Stanley Research estimates (e) in Russia tracks in line with most Western markets…with a significant lag. We expect to see more online consumers (48% made 1st online purchase in the last 2 Ozon is the clear eCommerce leader in Russia years), more frequently purchasing a broader range of % of online shoppers who purchased from the retailer in P12M products and increasingly using an online payment 60% platform (80% of Ozon sales are cash on delivery). 50%

40% Yandex (OW, $35 TP) is a key beneficiary of eCommerce growth, which supports our CAGR 25% 30% 2012-15 revenue forecast. It boosts traffic volumes as 20%

our survey shows 87% of online consumers use search 10% engines to research purchases. It also is additive to the 0% low 2% click-though rates as new advertisers compete Ozon.ru Avito.ru Biglion.ru eBay.com Slando.ru KupiVIP.ru through more targeted and relevant advertisements. We Frequent online shoppers Regular online shoppers Infrequent online shoppers also expect Yandex.Money to generate more than 10% of revenues in 2013 as ~40% of commercial searches Source: AlphaWise, Morgan Stanley Research already originate at the platform. There may also be upside from the proliferation of Yandex.money accounts as the JV with Sberbank closes in 1Q13.

We profile clear market leader Ozon, which could Morgan Stanley does and seeks to do business with reach $1bn of sales by 2014, if it were to track our companies covered in Morgan Stanley Research. As a result, investors should be aware that the firm may eCommerce market estimates. Other segment leaders have a conflict of interest that could affect the include Avito (Classifieds), KupiVIP (fashion), Biglion objectivity of Morgan Stanley Research. Investors (Group buying). We see Travel as a key online category. should consider Morgan Stanley Research as only a single factor in making their investment decision. Food retailers are unlikely eCommerce participants, For analyst certification and other important as we do not expect a meaningful migration of groceries disclosures, refer to the Disclosure Section, online. Of Russia’s four listed food retailers, only X5 is located at the end of this report. += Analysts employed by non-U.S. affiliates are not registered with FINRA, may not be making a material push via its ‘E5.RU’ platform. associated persons of the member and may not be subject to NASD/NYSE restrictions on communications with a subject company, public appearances and trading securities held by a research analyst account. 2 MORGAN STANLEY RESEARCH January 6, 2013 Russian eCommerce

Russian eCommerce

EXECUTIVE SUMMARY online payments and quality of products, and sub-optimal postal distribution infrastructure all weigh negatively. • Nascent eCommerce sector approaching tipping point – penetration looks set to increase from 2% to 4.5% of retail Exhibit 1 Russia is underpenetrated relative to global peers sales by 2015.

• Key drivers are increasing broadband penetration and Online/Total Retail Sales --% 2.0% 4.0% 6.0% 8.0% 10.0% 12.0% credit card usage. Distribution remains major barrier to growth. UK 10.2%

• Vibrant local eCommerce ecosystem emerging with US 10.1% classifieds (Avito), payments and key eCommerce verticals such as Fashion (KupiVIP) and Travel (Oktogo). China 5.7%

• Market leader by sales, Ozon, is among the fastest France 5.3% growing private eCommerce companies globally. Germany 4.8% • eCommerce is a key monetization driver for search as it increases clickthrough rates (low at 2%) and attracts new Russia 1.9%

advertisers. Our AlphaWise survey shows 87% of online consumers use search engines to research purchases. Source: Euromonitor, Morgan Stanley Research estimates for Russia Yandex is used by 61% of regular online consumers with …to a global leader 40% of commercial searches starting at Yandex.Market. From this low base, we believe Russia is set to become one of the most dynamic markets globally. In theory, demand for • With Yandex.Market set to exceed 10% of sales in 2013, online commerce in Russia should be higher than average on our estimates, eCommerce is a key driver of our due to the physical constraints on competition and limited forecast 25% revenue CAGR 2012-15 at Yandex (OW product choice that derive from a very low density of Russia’s with $35 target price). 140MM population outside of Moscow and St Petersburg.

Russia on the rise We forecast Russia eCommerce may grow at a 35% CAGR While current levels of eCommerce penetration are low through 2015 to $36B, ~4.5% offline retail sales penetration. relative to the US and Western Europe, we expect Russia to We anticipate further growth in eCommerce penetration to develop into one of the largest and most dynamic eCommerce $72B in 2020, 7% penetration of offline retail sales. Despite markets globally. Significant barriers to entry have enabled this growth, our estimates will still lag developed, Western local Russian eCommerce companies to amass an estimated markets by around a decade. 90% market share. Additionally, we believe Russia’s leading Exhibit 2 search destination site, Yandex, is a key beneficiary of our Russian eCommerce forecast: 44% CAGR 2012-14 forecast 2011-2015 eCommerce CAGR of 35% in Russia. Value of eCommerce (RUB bn) 2,500 8.0% Russia eCommerce: From laggard... 7.0% We forecast Russia eCommerce sales will reach ~$12B in 2,000 6.0% 2012 or 1.9% of the $670B Russia offline retail sales. Relative 5.0% to its global peer group, Russia is currently underpenetrated. 1,500 4.0% Both the US and UK surpassed the 2% eCommerce 1,000 3.0% penetration threshold in 2003 and 2005, respectively. 2.0% Additionally, Russia is also underpenetrated relative to other 500 large emerging markets; both China and Brazil are ~5%. We 1.0% believe Russia’s significantly lower broadband penetration, 0 0.0% 9 0 1 e 6e 7e relatively low household income, low usage of credit cards 18e 19e 200 201 201 020e (many B2C orders are paid ‘cash-on-delivery’), distrust of 2012e 2013e 2014e 2015 201 201 20 20 2 Source: Euromonitor, Morgan Stanley Research estimates (e)

2 3 MORGAN STANLEY RESEARCH January 6, 2013 Russian eCommerce

Moscow and St. Petersburg are unique regions within Russia. • Consumer electronics and books have the highest Despite the two cities representing 15% of the country’s eCommerce penetration and are poised to maintain this population, we estimate they account for ~60% of Russia strength in the future (over 60% of shoppers bought a eCommerce sales due to higher broadband penetration, product from each of these categories online and plan to higher disposable household income and higher population make purchases within these categories online in the density and correspondingly more favorable postal and next 12 months). logistics infrastructure. We estimate the two regions will be able to sustain eCommerce sales growth of 30% through 2020 • Groceries have not migrated online in any meaningful vs. the broader country at 20%. fashion due to issues over distribution, inventory spoilage, and the perceived need to see merchandise before Exhibit 3 purchase. Currently in the US, online grocery sales Online Sales: Regions (ex Moscow and St. account for less than 0.5% of the market. Petersburg) contribute 55% of forecast growth to 2012 …with a lag

We found that Russia exhibits similar barriers to transacting

100% online as the US / UK, specifically: 90% Volga Region 80% Ural Federal 70% Southern Federal • Russians are relatively newer to eCommerce. In our 60% Siberian Federal North-Western survey, 48% of Russians had their first eCommerce 50% Far East 40% Central Federal transaction in the last two years (vs. the US at 10%) and 30% 20% only 16% have been buying products for over six years 10% 0% (vs. 62% in the US). Additionally, ~63% of Russian 2012e 2013e 2014e 2015e 2016e 2017e 2018e 2019e 2020e Internet users bought a physical good online in the past Source: Morgan Stanley Research estimates 12 months vs. 85% in the US.

A similar trajectory to western markets… • The tenure of an average Russian online shopper is three Due to the limited availability of accurate eCommerce industry years (vs. eight years for a US online shopper). statistics, we interviewed several leading, private eCommerce Consistent with what our US colleagues have found, the companies and worked with our AlphaWise Team to survey higher income demographic has been shopping online 1,000 Russian consumers. Our survey included a statistically longer than the lower income demographic; in Russia, significant sample size that is representative of the country’s five years. demographic distribution. Conclusions based on the entire sample have a margin of error of +/-2.5% at a 90% confidence • Fifty-four percent of those who have not purchased online level. While there are plenty of idiosyncrasies, we found that, in the last 12 months cited the need to see and touch at a fundamental level, online consumer behavior in Russia merchandise before purchasing (vs. 38% in the US). We tracks in line with most Western markets. believe this will continue to decline as more commoditized product categories shift online and • An online shopper in Russia is more likely to be female consumers become more accustomed to shopping (64%) and from the 30 to 39 years old (72% vs. 62% for online. 18 to 29 year olds and 66% for 40 to 49 year olds). Online shopping is also significantly more prevalent among • Other friction points for eCommerce include a lack of trust households with higher incomes (household income of in online payment security (27%), product quality (28%) RUB 30K+). The average age of an online shopper (who or the online retailers themselves (27%). Product returns / shopped in the last 12 months) is 44 (vs. 45 in the US). exchanges are also seen as a drawback (29%).

• The rationale for eCommerce usage is familiar: Key Russia has its own idiosyncrasies reasons cited in our survey were lower price (47%), saves We also found key differences in consumer demand in Russia, time (36%), convenience (location, time) (33%) as well as relative to Western markets. We believe these differences are online customer reviews (32%). largely supply side, distribution and / or payment constraint-driven.

3 4 MORGAN STANLEY RESEARCH January 6, 2013 Russian eCommerce

• While convenience of delivery is one of the top reasons the primary method of payment, comprising close to 60% for shopping online in the US, only 19% of Russian online of transactions (per a recent PWC study). shoppers cited it as a benefit. Instead, lack of merchandise selection in-store accounted as a more Exhibit 4 important driver (27% of respondents). Russian consumers favor COD as their method of payment for eCommerce shopping • Differences in consumption by eCommerce category 2009 2012

differ in Russia vs. the US. While both markets show Cash on 59 58 similar levels of online purchasing propensity for athletic Delivery apparel / footwear and books, Russia’s online sales of 49 Web money 49 auto parts, home appliances (both small and large), home

furnishings, home improvement products, personal care 20 Bank card 32 and sporting goods are higher relative to the US. By contrast, clothing and footwear are more popular online 27 Bank transfer 23 categories in the US vs. Russia. Despite this dynamic, clothing and footwear are two of the fastest growing 0 SMS payment 12 categories for Ozon, according to management. 0 Terminal 11

Ample evidence of strong growth potential Our AlphaWise survey and industry checks suggest that Source: PWC, Morgan Stanley Research

Russia eCommerce sales may see an inflection point in the • Russia continues to see expansion of its eCommerce coming two years. We note the following: market. New business growth, access to capital / funding and scale of operations are all on the rise. Aside from • We forecast Russia Internet penetration to grow at a 4% Ozon, we note the rapid growth in reported sales at newer CAGR between 2012-2015. Assuming constant companies such as Avito (classifieds), KupiVIP (fashion population levels, Internet users could reach ~87MM in private sales), Biglion (group buying), Oktogo.ru (online 2015 vs ~53MM in 2012. travel booking), Game Insight (mobile gaming), Lamoda (online fashion direct sales retailer), Wikimart (online • While experimentation is growing, there is substantial marketplace) and AnywayAnyday (online airline tickets). upside from increased frequency of purchase. The average number of online purchases is 10 times per Exhibit 5 annum in Russia vs 15 times in the US. Around 18% eCommerce should sustain strong levels of growth purchased online at least 2-3 times per month, as and reach ~7% of total retail sales by 2020 compared to 28% in the US.

0.16 • One of the key points of friction for broader eCommerce 0.14 penetration is payments. Relatively low access to credit cards and consumer concerns regarding the safety of 0.12 online payments have both been notable hurdles. ~67% 0.1 of surveyed respondents suggested they would purchase 0.08 more online if eCommerce retailers offered other 0.06

payment methods. There is incremental evidence that 0.04 this is changing, however. According to an August 2012 0.02 study by MasterCard, 74% of Russians possessed 0 bankcards as of 2011 with 40% using their bankcards for 2009 2010 2011 2012e 2013e 2014e 2015e 2016e 2017e 2018e 2019e 2020e a retail purchase vs. 27% the previous year. That said, Online/Total retail (%) Online/Non-Food (%) mass-market credit card adoption still appears restricted Source: Company Data, Morgan Stanley Research estimates (e) to specific categories like online travel (there is an

incentive to pre-book printable tickets vs. receiving them in the mail). Elsewhere, cash on delivery (“COD”) remains

4 5 MORGAN STANLEY RESEARCH January 6, 2013 Russian eCommerce

A developed eCommerce ecosystem Exhibit 7 Russia’s leading eCommerce companies have adapted their Use of search engines for online and in-store business models to meet the country-specific headwinds. For purchases example, group-buying market leader Biglion has incorporated both a selective eCommerce and a customer review component to its coupon-based business model. 1 0.8 • Yandex & Search: According to our survey, the vast Do not use a search Looking for product engine for these 0.6 information majority of Russian online shoppers use search engines 0.4 to research product information (87%) and compare 0.2 prices (81%). Yandex leads (56%) Google (38%) as the 0 predominant search engine used prior to consumer Looking for consumer Looking for retailer reviews and ratings information purchases, both online and offline, according to the sample of consumers we surveyed. Looking for coupons, Yandex is especially strong among consumer deals, discount codes, Comparing prices demographics with longer tenure (>5 years) and the etc.

highest household incomes. Furthermore, Yandex is Online purchases In-Store purchases developing search verticals and price comparison sites to drive eCommerce traffic, which accounts for 8% of the Source: AlphaWise, Morgan Stanley Research company’s revenue. Yandex’s Market has grown to 13.4MM unique monthly users with 2.4MM searches • Classifieds: Our surveys suggest that Avito (founded in (1.5% of total) specific to the clothing category. We 2008) is now the leading classified listings site in Russia, estimate that 40% of commercial searches originate at which is typically a “winner takes all” business. Avito’s site Yandex.Market, which has the potential to diversify and generates 30MM monthly users and more than 10MM broaden its relationships with retailers. people listing items for sale on the site. It recently raised We view eCommerce as a key driver of our forecast $75MM in funding, and has said it may diversify its revenue CAGR 25% 2012-15. Not only does it generate business to also include traditional retail and auto/ organic traffic, but it will continue to attract retailers property markets. thereby improving the relevance of the advertisements/ sponsored links and increase the currently low 2% Exhibit 8 clickthrough rate. This supports cost-per-click rates Key Russian eCommerce and other Internet-related (~US$50), which we expect will increase 7-10% through sites to 2015. Service Used by Frequent Russian Shoppers (1x per month) 60% Exhibit 6 55% Yandex benefits disproportionately from 50% eCommerce search in Russia with 61% of traffic 40%

Past 12 30% 25% 22% 22% months Online Regular (1 19% 20% 16% 15% Total shoppers per month) 13% 13% 13% 10% 10% 7% Google 38% 38% 36% 4% 2% Yandex 56% 59% 61% 0%

ru ru m u ru ru ru ru .ru o .r .ru . .ru .ru t. n to. o P o to. k 5 r y. Other 6% 4% 3% i ion. d I .com a E zo v l n V ide n O A pi loto Big u o eBay.c Sla MV azo Sap M Anyda K m Wikima y A ywa Source: AlphaWise, Morgan Stanley Research n Yandexmarket.ru A

Source: AlphaWise, Morgan Stanley Research

5 6 MORGAN STANLEY RESEARCH January 6, 2013 Russian eCommerce

Exhibit 9 credit / debit card usage. However, because Russia has the Ozon is the clear eCommerce leader in Russia, largest Internet audience in Europe, X5 sees a large total according to our survey addressable market for its eCommerce offering. The company

believes it can reach >200K visits to its website per day by the % of online shoppers who purchased from the retailer in P12M 60% end of 2012.

50% …but other retailers appear better positioned 40% Within the consumer electronics category, M.video is a leading retailer in Russia, and the company is focused on 30% growing its eCommerce presence by combining its brick and 20% mortar operations with its online presence. Through 1H12, 10% M.video saw Internet sales of +93% y/y, driven mainly by new traffic (88 of the 93 points of y/y growth) and basket size 0% (making up the remaining +5 percentage points of growth). Ozon.ru Avito.ru Biglion.ru eBay.com Slando.ru KupiVIP.ru That said, eCommerce comprised only 2.6% of M.video’s Frequent online shoppers Regular online shoppers Infrequent online shoppers 2011 consolidated sales, up incrementally from 1.8% in 2010.

Source: .AlphaWise, Morgan Stanley Research Exhibit 10 A quarter of food retail spend is in the Urals, Siberia Food retailers are unlikely eCommerce participants… and Far East regions Delivering fresh produce over long distances without high Region (Food Retail Sales %) 2007 2008 2009 2010 2011 route density is a tough logistical task, not to mention the Central federal district 34.7 33.5 33.7 34.1 34.3 difficulties in attaining economic efficiencies. Of Russia’s four Moscow region 6.1 6.4 6.1 6.2 6.2 publicly traded food retailers, only one, X5, is making a push Moscow 19 17.1 17.3 17.5 17.4 into eCommerce. It has rebranded its online offering as North-Western federal district 9.4 9.2 9.4 9.4 9.3 Saint-Petersburg 4.1 4.1 4.2 4.2 4 “E5.RU”, which launched in 2012 with 400K SKUs. However, Southern federal district 8.5 8.8 8.7 9.1 9 unlike Western food retailers, home delivery is the exception – North-Caucasian federal district 3.8 4 4.6 4.8 5 the majority of orders (around 90%) are classified as ‘Click Volga federal district 17.9 18.4 18.3 18.1 18.1 Urals federal district 10.4 10.8 10.3 10 9.6 and Collect’ orders with payment processed at the time of Siberian federal district 11.5 11.6 10.9 10.6 10.8 pick-up. While courier services are available, they currently Far-Eastern federal district 3.9 3.7 4.1 4 3.9 constitute only a small share of X5’s online sales volume 100 100 100 100 100 Source: RosStat, Morgan Stanley Research (~10%).

Our survey indicates the primary friction point that prohibits greater consumer adoption is the desire of the consumer to check the quality of the produce before purchasing. As previously stated, payment-method is another key issue (for all online retailers), as the consumer still does not trust the safety of online payment system, as well as low penetration of

6 7 MORGAN STANLEY RESEARCH January 6, 2013 Russian eCommerce

Ozon: Market Leader information gap, Ozon management has said it plans to enhance its loyalty program which should increase the level of customer-specific knowledge and enable Ozon to Ozon is by far the largest eCommerce company in Russia. differentiate its customers by segment. With 11M registered users, Ozon is often referred to as the “Russian Amazon.” The company’s 1,700 employees offer Ozon’s growth by product category more than 2.2MM items to a daily audience of 750K unique While books and consumer electronics (which globally is visitors. It is a private company, the key shareholders being traditionally a loss-making category) have been the dominant Baring Vostok Private Equity, Index Ventures, ru-Net Ltd, product categories for Ozon, the company has disclosed Rakuten, Intel Capital, Holtzbrinck, and Cisco. In September higher levels of growth in the apparel / footwear, home goods, 2011, the company raised $100MM, of which 95% was and cosmetics categories. This could be attributable to the invested into Ozon’s four key businesses. consumer’s limited offline merchandise selection in these categories. Ozon increased its exposure to softline goods in Ozon could reach ~$1B of sales by 2014, if it were to track February 2012 when it acquired Sapato.ru, a footwear and our eCommerce market estimates accessories eCommerce specialty retailer. Sapato.ru offers Ozon’s pro forma revenue grew +91% y/y to $232MM in more than 200,000 shoe types from over 200 brands. In 1H2012. If Ozon’s growth trajectory were to track with our addition, Ozon established a separate online travel agency eCommerce category estimates, it could reach $1B of business, OZON.travel, which sells tickets from 500 airlines revenue by 2014. We would expect best-in-class eCommerce and offers bookings for 160,000 hotel rooms. retailers to reach EBITDA margin levels similar to those of Amazon, currently around 5-10%. In our survey, Ozon showed the highest penetration among online shoppers (41% of respondents purchased on the site Ozon is pursuing a strategy to address key friction points within the past 12 months), followed by Avito (21%), and for eCommerce growth in Russia, specifically: Biglion (16%). Ozon was ranked as the favored site by 1 in 4 online shoppers with a large gap to number 2, as the chart 1. Distribution: In the absence of a reliable and trusted shows. national postal system, Ozon has developed a

distribution system that now covers 75% of the country’s Exhibit 11 population through 2,100 pick-up points in 130 cities. The 25% of shoppers view Ozon as favorite place to buy company’s “O-Courier” platform has close to 50% of the online; 41% have purchase at Ozon in the last year points of presence relative to the largest retailers, with a target of 4,000 points of presence by 2014. In some regions, Ozon outsources fulfillment and distribution to 0% 5% 10% 15% 20% 25% 30% Ozon.ru 25% partners such as Euroset. While not a core business, the eBay.com 8% company also offers a fulfillment service to 70 smaller Avito.ru 6% Biglion.ru 5% merchant partners. To facilitate this, Ozon has built a Yandexmarket.ru 3% KupiVIP.ru 3% second warehouse that measures 16,200 SqM that can MVideo.ru 3% Amazon.com 2% store 6-7MM merchandise units. Sapato.ru 2% Molotok.ru 2% Slando.ru 1% 2. Payments: 80% of Ozon’s sales are collected by cash on Wikimart.ru 1% E5.ru 1% delivery. Customers remain resistant to using online 0% AnywayAnyday.r payments. However, Ozon is developing new forms of accepting payments and credit card usage continues to Source: AlphaWise, Morgan Stanley Research The following chart shows the average tenure of an Ozon increase (now over 10%). According to management, customer is four years, compared to less than three years for credit card payment-mix in the travel category has the broader Russia eCommerce market. reached 60%.

3. Information: The lack of credit card usage has limited Ozon’s ability to collect valuable payment data from its customers – a clear disadvantage relative to the level of information Amazon has on its customers. To bridge this

7 8 MORGAN STANLEY RESEARCH January 6, 2013 Russian eCommerce

Exhibit 12 2. Macroconomic conditions. Our conviction in the Ozon is more established relative to the overall secular shift of offline retail sales to online eCommerce category, especially with longer tenured customers sales is high, but Ozon, like any other eCommerce

participant, would be impacted by any adverse change in

40% macroeconomic conditions in Russia. However, Morgan 35% Stanley economists do forecast relatively healthy 10% 30% 25% nominal GDP growth in Russia for 2013 and 9% for 2014. 20% 15% 10% 3. Competition from international players. A potential 5% 0% entry by Amazon into the Russian market could materially Less than a 1-2 years 3-5 years 6-10 years More than 10 increase levels of competition. That said, the barriers to year years Ozon Russian e-Commerce entry are significant, and our channel checks do not

indicate Amazon is preparing to enter the Russian market. Source: AlphaWise, Morgan Stanley Research eBay, however, has established a foothold.

The challenges facing Ozon are common to all Russian 4. While the level of counterfeit and grey market goods is eCommerce companies generally low, this could develop into a more widespread 1. Unexpected regulatory change. There are no current problem for the eCommerce category if not closely plans for meaningful changes to current legislation, regulated by authorities. however, we would anticipate a greater initial focus on sectors such as social networking.

8 9 MORGAN STANLEY RESEARCH January 6, 2013 Russian eCommerce

Risk-Reward Snapshot: Yandex (YNDX.O, Overweight, PT $35.0)

Secular internet growth, continued execution and attractive valuation Why Overweight? $ 70 • Leading position in Russian search (60% share) and overall online 60 $58.00 (+164%) advertising (45% share).

50 • Strong secular growth in Russian Internet driven by rising Internet / 40 broadband penetration, ad budgets $35.00 (+59%) shifting to online. 30 • Strong management team: $ 22.00 executive team is tech-oriented 20 and many members have been $15.00 (-32%) with the company for a decade. 10 • At 11.5x 2013e EV/EBITDA, valuation 0 looks appealing given risk profile. Dec-10 Jun-11 Dec-11 Jun-12 Dec-12 Jun-13 Dec-13 Price Target (Dec-13) Historical Stock Performance Current Stock Price WARNINGDONOTEDIT_RRS4RL~YNDX.O~ Key Value Drivers Source: Thomson Reuters (historical share price data), Morgan Stanley Research estimates • Search market share. Price Target $35 • Search monetization (RPS).

Bull 30x Bull Case Market share climbs, margins expand: Yandex innovates and • Traffic acquisition costs (TAC). executes its way to 75% market share in Russia by 2020 (up from Case C2013e • Revenue per thousand page views $58 EV/EBITDA 65% in 2010). Share gains + high incremental margins drive EBITDA margins to 50% in 2013 and to 55%+ in the long term. (RPM). RUB/USD = 31 • Active advertiser count. Structural Internet growth in Russia, steady margins: Yandex Base 19x Base • Page view growth on owned and Case Case C2013e benefits from strong secular growth in Russian Internet $35 EV/EBITDA advertising, maintains market share, while EBITDA margins climb operated and partner websites. from high 40%s to 47% by 2015. RUB/USD = 31 Potential Catalysts

Market share loss to Google; TAC rises as Yandex competes Bear 10x Bull Case • Share stabilization/ gains vs. Case C2013e in mobile: Google intensifies its focus on Russia. Yandex’s share $15 EV/EBITDA drops to 50% by 2020, EBITDA margin contracts to 38%. Yandex Google. spends aggressively to get distribution on mobile devices. • RUB/USD = 31 Launch of localised search offerings in new geographies. SWOT Analysis • More transparent / ambitious Strengths Weaknesses mobile strategy. 1. Market leader with 60% search share 1. Weaker position in mobile relative to • Financial outperformance in 4q12. 2. Proven economic model with strong revenue Google growth and attractive margins 2. Lack of global scale may lead to lower Potential Risks 3. Strong brand awareness in Russia margin, less ambitious investments • Competitive threat from Google. 4. Solid / experienced management team 3. No social networking presence • Margin declines due to aggressive Opportunities Threats spend on distribution. A. Better monetization of search advertising 1. Competition from Google in desktop • Increased competition for ad B. Deeper monetization of newer markets – search and mobile dollars from social networks. Ukraine, Kazakhstan and Belarus 2. Rising TAC rates • Adverse changes in internet C. Expansion beyond CIS countries 3. Increasing social competition regulation in Russia. 4. Increased govt. regulation in Russia Source: Morgan Stanley Research • Macro and FX risk.

9 10 MORGAN STANLEY RESEARCH January 6, 2013 Russian eCommerce

Yandex: Overweight $35 Target Where could we be wrong? Key risks to our price target are (a) a potential macro related

Exhibit 13 slowdown into 2013 – especially any impact on display Yandex: Summary Quarterly KPIs (10% sales); (b) more limited margin expansion as investment is required to hold market share; and (c) volatility after KPIs 3q11 4q11 1q12 2q12 3q12 4q12e lock-ups expired last November. The Russian economy has Gross Revenue 65% 56% 51% 50% 41% 36% also been historically volatile, with risk of government — O&O 57% 43% 43% 43% 39% 37% involvement. A recent loss of usage market share highlights — Partner 124% 131% 117% 93% 55% 48% — Display 63% 72% 28% 43% 25% 15% the importance of browser distribution agreements. The Net Revenue 59% 50% 45% 45% 39% 35% transition to mobile / social is also one that may favour the TAC deflator -6% -6% -6% -5% -2% -2% platform owners (Google, Apple, etc.). Traffic Share 63% 61% 59% 60% 61% 60% • Bull case $58 valuation: We assume Yandex innovates SERPs 42% 36% 36% 30% 31% 28% its way to 75% Russian market share by 2020 (65% Paid Clicks 68% 65% 61% 62% 35% 29% 2010). Share gains and high incremental margins drive No Advertisers 48% 43% 40% 34% 28% 23% EBITDA margins to 50% in 2013 and to 55% in the long Adj EBITDA 54% 48% 38% 60% 45% 35% term. Adj EBITDA Margin 45.3% 50.8% 40.5% 45.1% 46.5% 50.1% Source: Company Data, Morgan Stanley Research estimates 9e) • Base case $35 target price: Yandex benefits from To value Yandex, we prefer to use a discounted cash flow strong secular growth in Russian Internet advertising, (DCF) methodology, which better incorporates our long-term maintains 60.5% market share, while EBITDA margins view on the company’s growth prospects. We have a climb to 47% by 2015. DCF-based fair value of US$35. It assumes a 10-year • revenue CAGR of 24% / adjusted EBITDA margin expansion Bear case $15 valuation: We assume share losses to to 49%. We apply a discount rate of 12%, which is in line with Google with TAC rising as Yandex competes in Mobile. the rate used for Russian peers. We use a 5.5% terminal We assume Google intensifies its focus in Russia, growth rate as we believe the company will still be growing resulting in Yandex’s share dropping to 50% by 2020. We revenue rapidly in 2020 at the end of our DCF projection assume EBITDA margin contracts to 38% as Yandex period. This results in an equity value of $35 per share. spends aggressively to get distribution on mobile devices.

Exhibit 14 Morgan Stanley is currently acting as financial advisor Yandex: Trading Multiples to Google Inc. ("Google") with respect to its proposed stock dividend, as announced on April 12, 2012. Certain Yandex 2009 2010 2011e 2012e 2013e 2014e Price 22.0 22.0 22.0 22.0 22.0 22.0 aspects of the proposal are subject to approval by Market capitalisation 7,124 7,124 7,124 7,124 7,124 7,124 Google's shareholders. Google has agreed to pay fees Enterprise Value (Y/E debt) 6,446 6,446 6,446 6,446 6,446 6,446 to Morgan Stanley for its financial advice. Please refer EV/ Sales 23.6x 16.5x 10.3x 7.2x 5.4x 4.4x to the notes at the end of the report. EV/ Adj. EBITDA 54.9x 33.5x 22.3x 15.6x 11.5x 9.2x EV/ EBIT 78.2x 42.8x 29.3x 21.4x 16.1x 12.4x Morgan Stanley & Co. Limited (“Morgan Stanley”) is Adjusted fully diluted P/E 97.8x 54.6x 40.4x 27.1x 21.2x 17.2x acting as financial advisor to Yandex N.V. ("Yandex"), in Free cash flow yield (%) 1% 2% 1% 3% 4% 5% relation to the proposed formation of a JV between Dividend Yield 0% 0% 0% 0% 0% 0% Yandex.Money and Sberbank of Russia, as announced Source: Company Data, Morgan Stanley Research estimates (e) on 19th Dec 2012. Yandex has agreed to pay fees to Morgan Stanley for its financial services. Please refer to the notes at the end of the report.

10 11 MORGAN STANLEY RESEARCH January 6, 2013 Russian eCommerce

Exhibit 15 Yandex: Summary income statement, 2009-15E

(RUR m, Except per Share Data) FY2009A FY2010A FY2011A FY2012E FY2013E FY2014E FY2015E Gross Revenue (incl. TAC) 8,729 12,499 20,033 28,724 38,061 47,002 55,567 Advertising 8,466 12,188 19,608 28,054 37,136 45,854 54,154 Payments 201 263 383 535 722 946 1,211 Other 62 48 42 135 203 203 203

Traffic Acquisition Cost 1,305 1,573 2,999 4,818 6,602 8,388 10,126

Net Revenue (excl. TAC) 7,424 10,926 17,034 23,906 31,459 38,615 45,441

Other Costs of Revenue 191 142 176 292 357 400 417 Content and Outsource 131 173 448 654 707 846 889 Total COGS 322 315 624 946 1,064 1,246 1,306 Gross Profit 7,102 10,611 16,410 22,960 30,395 37,369 44,136 Personnel Costs 2,062 2,670 4,280 5,912 7,285 8,526 9,968 Rent and Utilities 835 1,121 1,881 2,550 3,323 4,065 4,779 Other SG&A 448 655 1,012 1,269 1,882 2,287 2,704 Depreciation and Amortization 912 1,181 1,874 3,021 4,316 4,911 5,512 Total Operating Expenses 4,257 5,627 9,047 12,752 16,805 19,789 22,962 Operating Income (before SBC) 2,846 4,983 7,363 10,208 13,590 17,580 21,173

Stock-Based Compensation 208 160 329 574 771 952 1,126 Operating Income (loss) 2,638 4,823 7,034 9,635 12,819 16,628 20,048 ------EBITDA 3,550 6,005 8,908 12,656 17,134 21,539 25,559 Adjusted EBITDA 3,757 6,165 9,237 13,230 17,905 22,491 26,685

Interest Income 67 156 222 902 1,229 790 888 Other Non-Operating Income (23) 24 62 (29) (308) - - Pre-Tax Profit 2,682 5,003 7,318 10,508 13,739 17,418 20,936 Tax Provision 672 1,186 1,545 2,330 3,098 4,102 5,139 Net Income (GAAP) 2,0100 3,817 0 5,773 0 8,178 0 10,6410 13,3160 15,796 0 Net Income (Adjusted) 2,218 3,977 5,719 8,751 11,412 14,268 16,922 Shares Outstanding (GAAP Basic) 303 304 315 328 338 344 351 Shares Outstanding (GAAP Diluted) 308 309 328 337 344 348 351 Period-End Shares 304 304 324 337 340 348 355

EPS (GAAP) 6.52 12.37 17.59 24.24 30.92 38.30 44.99 EPS (Adjusted) 7.20 12.89 17.43 25.94 33.15 41.04 48.19 E = Morgan Stanley Research estimates Source: Company Data, Morgan Stanley Research

11 12 MORGAN STANLEY RESEARCH January 6, 2013 Russian eCommerce

Exhibit 16 Yandex: Cash flows statement, 2008-15E

(RUR m, Except per Share Data) FY2008A FY2009A FY2010A FY2011A FY2012E FY2013E FY2014E FY2015E Net Income 2,432 2,010 3,817 5,773 8,178 10,641 13,316 15,796 Depreciation and Amortization of PPE 570 872 1,147 1,826 2,907 4,125 4,746 5,512 Amortization of acquisition-related intangible assets 30 40 34 48 114 190 165 0 Share-based compensation expense 140 209 160 286 443 771 952 1,126 Deferred income taxes (5) (37) 2 (150) 111 0 0 0 Foreign exchange losses/(gains) (65) 64 (11) (80) 85 0 0 0 Other 0000(170) 0 0 0 Funds from Operations 3,102 3,158 5,149 7,703 11,668 15,728 19,179 22,433 Accounts receivable, net 52 (108) (437) (434) (497) (554) (157) (598) Funds receivable (17) 68 (3) (125) (259) (77) 22 (54) Prepaid expenses and other assets (179) (465) 176 (1,092) (900) (358) (952) (309) Accounts payable and accrued liabilities 114 342 641 1,045 685 589 692 616 Deferred revenue 110 56 166 348 157 336 326 313 Funds payable and amounts due to customers 159 136 271 349 1,438 430 303 101 Change in Net Working Capital 239 29 814 91 624 366 235 68 Cash Flow from Operations 3,341 3,187 5,963 7,794 12,291 16,093 19,414 22,501 Purchase of Property and Equipment (1,337) (987) (2,199) (5,566) (4,579) (6,470) (7,520) (8,335) As a % of Revenue 17.5% 11.3% 17.6% 27.8% 15.9% 17.0% 16.0% 15.0% Acquisitions of businesses, net of cash acquired (118) (232) (235) (735) 0 0 0 0 Investments in term deposits (2,705) (4,128) (5,248) (20,545) (10,777) 0 0 0 Maturities of term deposits 2,727 2,419 3,616 9,052 4,709 0 0 0 Other 0000937000 Net Cash Used in Investing Activities (1,433) (2,928) (4,066) (17,794) (9,710) (6,470) (7,520) (8,335) Dividends paid (456) (160) (906) 0 0 0 0 0 Proceeds from issuance of ordinary shares 0 1 0 11,380 0 0 0 0 Proceeds from exercise of share options 8 34 1 142 405 400 900 900 Repurchase of share options (6) (107) (2) 76 0 0 0 0 Net Cash Provided by Financing Activities (454) (232) (907) 11,598 405 400 900 900 Effect of foreign currency on cash and equivalents 209 120 (24) 1,353 (111) 0 0 0 Inc. (Dec.) in Cash and Cash Equivalents 1,663 147 966 2,951 2,876 10,023 12,793 15,066 Beginning Cash and Cash Equivalents 595 2,258 2,405 3,371 6,322 8,142 18,165 30,958 Cash and Equivalents within assets held for sale 0000(1,056)000 Ending Cash and Cash Equivalents 2,258 2,405 3,371 6,322 8,142 18,165 30,958 46,024 E = Morgan Stanley Research estimates Source: Company data, Morgan Stanley Research

12 13 MORGAN STANLEY RESEARCH January 6, 2013 Russian eCommerce

Morgan Stanley AlphaWiseSM conducts proprietary evidence-based investment research for Morgan Stanley Research analysts. For further information, please contact [email protected]. Other Recent Morgan Stanley Research Based on AlphaWise Asia Pacific December 17, Sean Laaman Cochlear (COH.AX): Survey Our AlphaWise survey of 162 North 2012 2012: CI Market May Slow and American cochlear audiologists and COH May Lose Share. Retain implant surgeons suggests market may UW. grow more slowly than our estimate North America December 17, Katy Huberty Apple, Inc. (AAPL.O): Our AlphaWise survey of over 1,000 US 2012 AlphaWise Survey Highlights consumers indicates that iPhone demand Strong US Demand remain strong, and that iPad share surprisingly resilient and iPad Mini cannibalization concerns overblown North America December 4, Joseph Parkhill Retail, Food and Drug: 2013 Consumers intend to increase spending 2012 Dollar Store Outlook: Intentions within the dollar channel, caution is Are There but Is There $ to Be warranted due to potential increase in Spent? payroll taxes. Our survey indicates that FDO has the largest acceleration in shopping intent next year. We upgrade DLTR as we don’t see any evidence of competitive pressure in our survey. Asia Pacific December 3, Nicholas Australia Chemicals: North Our proprietary AlphaWise survey shows 2012 Robison American explosives market to a modest 2013 recovery in the North remain subdued, with the surprise America explosives market, with an in IS unexpected emerging threat in initiating systems (IS) supply Europe December 3, Penelope Surface Transportation: DSV is our top pick in EU forwarders, 2012 Butcher Trucking Survey: Cost control is following our 2nd annual survey of the king in low growth 2013 trucking market. Despite the headwinds of limited supply growth, a mixed volume/rate outlook, and pressure on driver wages in 2013, DSV’s cost savings program should drive margin improvement North America December 3, David Gober Retail, Hardlines: AlphaWise 3 key findings from our Nov AlphaWise 2012 Pillow Talk Tracker: WSM a survey: 1) WSM showed strength in Winner, JCP a Loser in November Williams-Sonoma and Pottery Barn Survey brands, 2) JCP only retailer where consumers expect to spend less in N3M, 3) consumer are cautious on furnishings spend this holiday season North America December 3, David Gober Williams-Sonoma Inc. Improvement in the Williams-Sonoma 2012 (WSM.N): 2013 to Be a Happy brand in our quarterly AlphaWise survey New Year - Upgrading to OW gives us growing conviction in upside to estimates Please note that all important disclosures including personal holdings disclosures and Morgan Stanley disclosures appear on the Morgan Stanley public website at www.morganstanley.com/researchdisclosures.

13 14 MORGAN STANLEY RESEARCH January 6, 2013 Russian eCommerce

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14 15 MORGAN STANLEY RESEARCH January 6, 2013 Russian eCommerce

Coverage Universe Investment Banking Clients (IBC) % of % of % of Rating Stock Rating Category Count Total Count Total IBC Category Overweight/Buy 1103 37% 436 41% 40% Equal-weight/Hold 1301 44% 497 46% 38% Not-Rated/Hold 108 4% 27 3% 25% Underweight/Sell 478 16% 111 10% 23% Total 2,990 1071

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15 16 MORGAN STANLEY RESEARCH January 6, 2013 Russian eCommerce

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16 17 MORGAN STANLEY RESEARCH January 6, 2013 Russian eCommerce

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17 18 MORGAN STANLEY RESEARCH

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Industry Coverage:EEMEA - Telecoms & Media

Company (Ticker) Rating (as of)Price* (01/02/2013)

Edward Hill-Wood CTC Media (CTCM.O) E (02/03/2012) US$8.1 MTN Group (MTNJ.J) O (10/31/2012) ZAc17,699 Mail.ru Group Ltd (MAILRq.L) O (04/15/2011) US$34.7 Naspers (NPNJn.J) O (01/23/2012) ZAc55,100 Safaricom (SCOM.NR) O (06/08/2012) Kes5.1 Yandex NV (YNDX.O) O (07/05/2011) US$23 Madhvendra Singh, CFA Emirates Telecommunications E (09/05/2012) AED9.1 Corp. (ETEL.AD) Etihad Etisalat (7020.SE) O (03/07/2011) SAR76.75 Maroc Telecom (IAM.CS) E (04/01/2010) MAD106.05 Mobinil (EMOB.CA) E (12/11/2009) EGP145.17 Oman Telecommunications O (09/15/2011) OMR1.46 (Omantel) (OTL.OM) Omani Qatari Telecom Co. E (09/15/2011) OMR.47 (Nawras) (NWRS.OM) Qatar Telecom (QTEL.QA) NA (08/24/2010) QAR104.5 Saudi Telecom Co (7010.SE) O (06/25/2012) SAR43.7 Starcomms Plc (STARCOM.LG) O (08/06/2009) NGN.5 Telecom Egypt (ETEL.CA) O (01/21/2011) EGP14.5 Wataniya (NMTC.KW) O (02/22/2011) KWf2,340 Zain (ZAIN.KW) U (06/23/2011) KWf790 Zain Zambia (CELZ.LZ) E (01/16/2009) Zmk670 Peter Takaendesa Telkom SA (TKGJ.J) O (01/26/2011) ZAc1,693 Vodacom Group (VODJ.J) E (11/25/2011) ZAc12,620 Cesar Tiron Millicom (MICsdb.ST) E (12/06/2012) SKr585 Mobile TeleSystems (MBT.N) O (05/04/2012) US$18.77 Orascom Telecom (ORTEq.L) E (11/26/2009) US$3.26 Telefonica Czech Republic E (07/29/2011) CZK333 (SPTT.PR) Turk Telekomunikasyon A.S. U (11/05/2012) TL7.04 (TTKOM.IS) Turkcell (TKC.N) E (12/14/2011) US$16.2 VimpelCom (VIP.N) E (05/04/2012) US$10.69 Polina Ugryumova, CFA Rostelecom (RTKM.MM) U (10/13/2010) RUB120.4 Sistema (SSAq.L) O (04/07/2011) US$20.4

Stock Ratings are subject to change. Please see latest research for each company. * Historical prices are not split adjusted.

Media Company update Russia Equity Research

10 December 2012

Research Alert Research David Ferguson +7 (495) 641-4189 [email protected]

Nick Robinson +7 (495) 258-7770 x4811 Yandex [email protected] Weekly search share

Report date: 10 December 2012 . Weekly share of Russia internet data released: Today (10 Rating common/pref HOLD/na December), LiveInternet released its Russian internet search engine market Target price (comm), $ 23.8 Target price (pref), $ na

share statistics for 3-9 December. During the week under review, the search Research Alert Research shares of Yandex, Google (not covered) and Mail.ru (BUY, TP $41.4, current Current price (comm), $ 23.0 Current price (pref) na price $31.6) were 60.3%, 26.5% and 8.6%, respectively. MktCap, $mn 7,495 Reuters YNDX.OQ . Yandex maintains strong overall share: Yandex’s share of total Bloomberg YNDX US search was in line with its four-week average of 60.3%, but below its three-month ADRs/GDRs since na average of 60.5%. Google’s share was in line with its four-week and three-month ADRs/GDRs per common share na

Common shares outstanding, mn 325.77 averages, both 26.5%. Mail.ru’s share was broadly in line with its four-week Change from 52-week high: -18.4% average of 8.7% and three-month average of 8.5%. Date of 52-week high: 02/04/2012 Change from 52-week low: 38.3% . Chrome strength balancing Android weakness: Yandex’s share of Date of 52-week low: 19/12/2011 search on the Google Chrome browser continues to go from strength to strength, Web: http://company.yandex.com and reached 49.1% for the period, ahead of its three-month average of 47.8%, Free float 46% Major shareholder Baring Vostok which is itself up over 6 ppts YoY. Google has lost further ground with its share of with shareholding 18% Chrome users now at 36.1%, below its three-month average of 37.2%. Mail.ru’s Average daily traded volume in $mn 33.2

Research Alert Research share stood at 10.8% for the period. Chrome’s share of the overall browser market Share-price performance by installations was 23.2%, now only lagging market-leader Opera by 2.3 ppts. over the last 1 month 8.76% However, in contrast to the success Yandex is seeing on Chrome, Yandex’s share 3 months 1.41% 12 months 15.15% on the Android platform of 33.4% remained below its three-month average of 35.0%; while Google’s share stood at 64.3%, above its three-month average of 62.5%. Data from StatCounter show that for overall mobile search, Yandex’s share fell to 34.4% in November, down from 44.5% in November 2011, while Google’s share rose from 55.0% to 64.1% over the same period. . Yandex.Browser continues to make gains in Russia, having reached 3.1% of the overall browser market since its launch two months ago. We think further user uptake of the Yandex.Browser will be supportive of Yandex’s overall search market share. However, we think Yandex’s relatively weaker position in mobile will likely necessitate further investment spend going forward, which could

Research Alert Research hinder the potential for margin improvement in the medium term. In contrast, we see scope for upgrades to consensus margin estimates for Mail.ru prior to its FY12 results and beyond, hence we think the current premiums at which Yandex trades to Mail (we estimate 21% and 20% on 2012E and 2013E EV/EBITDA, respectively) are difficult to justify.

Summary valuation and financials, $mn (unless otherwise stated) Revenue EBITDA Net income EBITDA margin, % Net debt EV/sales, x EV/EBITDA, x P/E, x 2011 681 313 206 45.9 -723 9.6 20.9 36.4 2012E 932 427 284 45.8 -951 7.0 15.3 26.4 2013E 1,124 502 336 44.6 -1,215 5.8 13.0 22.3 2014E 1,343 587 419 43.7 -1,599 4.9 11.1 17.9 Source: Company data, Renaissance Capital estimates Figure 1: Price performance – 52 weeks Figure 2: Sector stock performance – three months

Research Alert Research YNDX.OQ Relative to MSREN Mail Group $ MSREN 30 140 CTC Media Inc

25 120 Yandex

Naspers 20 100 EPAM Systems 15 80 MSREN % 10 60 Dec Feb Apr Jun Aug Oct Dec -15 -10 -5 0 5 10 15 20 Source: Bloomberg, MSREN Index Source: Bloomberg, MSREN Index

Research Alert Research Hyperlinks to important information accessible at www.rencap.com: Disclosures and Privacy Policy, Terms & Conditions, Disclaimer 20 Renaissance Capital Yandex 10 December 2012

Figure 3: Russia – internet search engines: share of search, %

Yandex Rambler Google Mail.ru 70%

60%

50%

40%

30%

20%

10%

Jul-11 Jul-12

Oct-11 Apr-12 Oct-12

Jun-11 Jan-12 Jun-12

Mar-12

Feb-12

Aug-11 Sep-11 Nov-11 Dec-11 Aug-12 Sep-12 Nov-12 Dec-12 May-12 Source: LiveInternet

Figure 4: Russia – internet search engines: share of search among Chrome users, %

Google Yandex Mail.ru Rambler 60%

50%

40%

30%

20%

10%

Jul-11 Jul-12

Apr-11 Oct-11 Apr-12 Oct-12

Jun-11 Jan-12 Jun-12

Feb-12 Mar-12

Aug-11 Sep-11 Nov-11 Dec-11 Aug-12 Sep-12 Nov-12 May-12 May-11 Source: LiveInternet

Figure 5: Russia – internet browsers: share of users, %

Chrome Opera Firefox Explorer 40% 35% 30% 25% 20% 15% 10% 5%

Jul-12 Jul-12

Apr-12 Apr-12 Apr-12 Oct-12 Oct-12

Jan-12 Jan-12 Jun-12 Jun-12

Mar-12 Mar-12

Feb-12 Feb-12

Aug-12 Aug-12 Sep-12 Sep-12 Sep-12 Nov-12 Nov-12 Dec-12 May-12 May-12 Source: LiveInternet

2 21 Renaissance Capital Yandex 10 December 2012

Figure 6: Russia – mobile internet search share, %

Google Yandex Other 100% 90% 80% 70% 60% 50% 40% 30% 20% 10%

Jul-09 Jul-10 Jul-11 Jul-12

Jan-09 Jan-10 Jan-11 Jan-12

Mar-09 Mar-10 Mar-11 Mar-12

Nov-09 Nov-10 Nov-11 Nov-12

Sep-09 Sep-10 Sep-11 Sep-12

May-10 May-11 May-12 May-09 Source: StatCounter

Figure 7: Russia – share of search among Android users, %

Chrome Opera Firefox Explorer 40% 35% 30% 25% 20% 15% 10% 5%

Jul-12

Apr-12 Oct-12

Jan-12 Jun-12

Feb-12 Mar-12

Nov-12 Dec-12

Aug-12 Sep-12 May-12

Source: LiveInternet

Figure 8: Russia – mobile OS market share, %

Symbian/Series40 Android iOS Sony Ericsson Other 100%

80%

60%

40%

20%

Jul-09 Jul-10 Jul-11 Jul-12

Jan-09 Jan-10 Jan-11 Jan-12

Mar-09 Mar-10 Mar-11 Mar-12

Nov-09 Nov-10 Nov-11 Nov-12

Sep-09 Sep-10 Sep-11 Sep-12

May-10 May-11 May-12 May-09 Source: StatCounter

3 22 Renaissance Capital Yandex 10 December 2012

Figure 9: Yandex apps – download rankings at Android store Yandex Yandex Yandex Yandex Yandex Yandex. Yandex. Yandex. Yandex. Yandex. Yandex. Yandex. Yandex. Yandex. Yandex. Date Opera Opera Traffic Cinema Shell Navigator Maps Weather Metro Search Mail Trains Market Taxi Disk Mini Mobile Widget Guide 18-Jun-12 191 40 27 63 65 196 232 324 466 181 248 220 na na na 24-Jun-12 231 38 25 68 61 126 242 356 478 228 284 206 na na na 02-Jul-12 236 40 23 77 57 189 230 329 na 196 274 192 425 na na 09-Jul-12 229 42 19 81 50 89 193 306 457 156 225 160 na 359 na 16-Jul-12 227 27 22 59 47 97 192 315 388 159 208 149 349 427 na 23-Jul-12 224 32 20 49 54 97 220 311 364 187 246 161 405 na na 30-Jul-12 324 35 25 98 40 236 285 218 331 93 363 272 342 na na 06-Aug-12 417 34 24 63 35 273 329 171 303 68 371 na 293 na na 13-Aug-12 277 9 21 69 33 344 368 184 233 64 379 457 336 na na 20-Aug-12 222 20 15 37 34 180 187 293 347 115 171 193 303 na na 27-Aug-12 207 23 13 37 38 164 180 311 371 132 162 175 295 452 na 02-Aug-12 217 26 15 39 37 160 178 307 372 126 173 163 234 465 na 09-Sep-12 228 28 15 40 35 155 175 338 375 136 180 166 165 476 254 16-Sep-12 210 33 15 38 36 166 192 346 399 149 198 163 242 449 97 23-Sep-12 199 29 14 29 33 170 194 na na 157 198 169 240 na 147 01-Oct-12 209 33 15 38 37 170 193 339 406 155 198 183 9 na 206 07-Oct-12 206 39 15 43 45 168 194 288 388 147 195 191 35 na 208 14-Oct-12 211 30 17 43 44 160 190 284 363 153 194 193 59 na 264 21-Oct-12 217 31 18 44 43 151 193 305 324 143 212 211 66 na 278 28-Oct-12 216 20 17 105 34 261 207 314 342 155 324 499 240 na 287 04-Nov-12 225 20 19 124 36 244 209 259 359 158 361 na 285 na 301 11-Nov-12 232 17 19 164 37 305 212 264 377 170 359 na 293 na 302 18-Nov-12 226 11 16 158 33 277 199 263 306 159 352 na 270 na 335 25-Nov-12 128 17 19 169 30 200 211 277 322 162 317 na 267 476 375 03-Dec-12 147 17 18 148 40 212 218 259 304 169 204 na 263 317 302 09-Dec-12 227 20 15 146 38 195 273 247 277 178 200 na 286 388 350 Source: GooglePlay download rankings of free applications.

Figure 10: Russia - internet portals monthly reach, %

My World Mail.Ru websites Vk.com Odnoklassniki.ru Yandex.ru portal 90.0%

80.0%

70.0%

60.0%

50.0%

40.0%

Jul-12

Oct-11 Apr-12 Oct-12

Jan-12 Jun-12

Feb-12 Mar-12

Nov-11 Dec-11

Aug-11 Sep-11 Aug-12 Sep-12 May-12 Source: TNS

4 23 Renaissance Capital Yandex 10 December 2012

Figure 11: Global internet multiples MktCap, EV/EBITDA, x P/E, x Price, $ $mn 2012E 2013E 2012E 2013E Search & portals Yahoo! 19.2 22,708 11.2 10.3 12.5 17.5 Google 684.2 224,827 9.8 8.3 16.9 14.6 Facebook 27.5 59,544 18.4 13.4 48.2 35.5 Mail Group 31.6 6,616 12.7 10.9 21.7 18.5 Yandex 23.0 7,495 15.3 13.0 26.4 22.3 Baidu 89.4 31,239 14.3 10.9 18.5 14.6 Tencent 32.5 60,220 18.3 14.7 29.7 23.4 Sina 41.9 2,785 163.6 35.0 240.4 58.8 Average (ex. Sina) 14.3 11.6 24.8 20.9 E-commerce Amazon 253.3 114,720 34.3 24.2 132.1 66.9 eBay 51.7 66,951 13.5 11.7 21.8 18.7 Priceline.com 659.1 32,866 15.5 12.6 20.8 16.9 Rakuten 8.3 11,025 10.6 8.9 20.0 16.6 Expedia 59.9 8,128 10.1 8.7 18.4 15.6 TripAdvisor 38.6 5,494 15.7 13.2 25.6 20.4 Netflix 86.0 4,776 29.2 22.3 117.0 80.8 Mercadolibre Inc 74.9 3,306 23.3 18.3 33.7 26.8 ASOS 39.8 3,246 54.5 25.0 92.6 43.8 Ctrip 18.2 2,617 12.6 11.1 17.7 14.6 Groupon 4.7 3,072 6.1 6.5 28.1 20.1 REA Group 18.5 2,430 15.5 13.8 24.8 21.8 Average 20.1 14.7 46.0 30.2 Note: All forecasts are Bloomberg consensus, except Yandex and Mail Group (covered by Renaissance Capital) and Tencent (based on existing Renaissance Capital forecasts for Tencent, as part of our forecasts for Naspers). Latest intraday prices shown. Source: Bloomberg, Renaissance Capital estimates

5 24

EQUITY | Russia Research analysts Media Alexander Vengranovich [email protected] +7 (495) 213-18-30 31 October 2012

DOWNGRADE

Yandex Target price cut and 3Q12 US GAAP results review

BUY We have cut our target price for Yandex from $34 to $29/GDR following the 3Q12 results released yesterday (30 October), to Ticker YNDX US reflect a contraction in peer valuation multiples, and our lower Target price, $ 29.0 Last price of common shares, $ 23.1 EBITDA margin projections for 2012-2015. Although 3Q12 saw a Upside 26% sequential slowdown in context and display advertising growth, Number of common shares, mn 327 the prospects for the text-based advertising segment remain Market cap, $mn 7,550 solid, fuelled by the recent rollout of Yandex.Browser, which Net debt, $mn (573) should help to support the company’s market share going EV, $mn 6,977 forward. Yandex remains our top pick among Russian media Free float 16% companies thanks to its stable, debt-free balance sheet and 52-week min, $ 16.7 52-week max, $ 28.6 sustainable market leadership. We retain our BUY rating. Sources: Bloomberg, Otkritie Capital Research Yandex.Browser: an important step in securing market share in the long term. Yandex recently rolled out its own browser, which, in our view, should definitely attract some audience from the other browsers. It should also help to Share price performance secure its share of the search market in the long term, which is the key driver for 120 context advertising revenue.

110 Mobile partnerships: Apple next? Yandex already provides data for Apple Maps in Russia, which was recently introduced in iOS 6. In our view this is a very 100 important milestone for Yandex in the development of its mobile business. The 90 agreement could signal further cooperation with Apple, especially with tensions between Apple and Google intensifying. Apple smartphones are the 5th most sold 80 smartphones in Russia, but Apple users have above average net worth and tend 70 to consume more mobile content; we therefore expect further partnerships with Apple to have a visible effect on Yandex’s mobile distribution. 60

Display advertising – weak in 2012, but not a game changer for Yandex.

Jul-12

Oct-11 Apr-12 Oct-12

Jan-12 Jun-12

Feb-12 Mar-12

Nov-11 Dec-11

Sep-12 Aug-12 May-12 The slowdown in display advertising growth in 2H12 – due to the backward

YNDX US SPX migration of some advertisers to small TV channels on the back of pricing – has caused us to revise our FY12 display advertising growth forecast, which should Sources: Bloomberg not exceed 25%. Display advertising accounts for only 10% of Yandex revenues

so the effect should be minor. The text-based advertising market remains solid in 3Q12, and we estimate Yandex to continue to grow in line with the market. EBITDA margin revised down. Yandex continues to invest heavily in product marketing and development, which is preventing its EBITDA margin from expanding. Following the 9M12 results we assume that it would be near impossible for Yandex to improve its profitability in FY12. We also assume this trend will continue in the coming years, and thus we have cut our EBITDA margin projections for 2012-15.

Figure 1. Key metrics (RUBmn) Figure 2. Valuation

2012E 2013E 2014E 2015E 2012E 2013E 2014E 2015E Revenues 28,728 37,256 46,635 57,601 P/E 28.7 21.5 16.6 13.0 EBITDA 13,072 16,973 21,442 26,623 EV/EBITDA 16.8 12.3 9.2 6.8 EBIT 10,125 13,133 16,744 21,003 EV/Sales 7.6 5.6 4.2 3.1 Net income 8,248 11,018 14,285 18,201 P/BV 6.4 4.9 3.8 2.9

Net debt (17,971) (27,432) (40,135) (56,264) EBITDA margin 45.5% 45.6% 46.0% 46.2% EPS, RUB 25.20 33.67 43.65 55.62 Net margin 28.7% 29.6% 30.6% 31.6% CEPS, RUB 33.28 44.49 57.09 71.87 Revenue growth 43% 30% 25% 24% BVPS, RUB 113.68 147.34 191.00 246.61 EPS growth 43% 34% 30% 27% DPS, RUB 0.00 0.00 0.00 0.00 Div yield 0% 0% 0% 0%

Sources: Bloomberg, Otkritie Capital estimates Sources: Bloomberg, Otkritie Capital estimates

Important information available at http://research.otkritie.com/ is accessible via hyperlink: Disclosures & Disclaimer. This investment research is produced by Otkritie Securities Ltd, authorised and regulated by the Financial Services Authority (FSA), and has been prepared by non-US research analysts who are not FINRA registered/qualified as research analysts. 25

Yandex | DOWNGRADE | Russia | 31 October 2012

3Q12 US GAAP results review Solid results thanks to growth in context advertising. We view the 3Q12 results as positive. The EBITDA margin expanded both QoQ and YoY, which is even better than our expectations. Management is also narrowing its full-year revenue guidance towards the upper end of the previously-announced range and expects YoY ruble-based revenue growth of 42-45%.

Figure 3. Yandex 3Q12 US GAAP results review

% diff. 3Q12 3Q12 3Q12 3Q11 2Q12 % chg % chg RUBmn Actual vs Actual Otkritie Cons. Actual Actual QoQ YoY Cons. Revenues 7,273 7,288 7,317 5,159 6,801 7% 41% -1% EBITDA 3,334 3,249 3,275 2,323 2,941 13% 44% 2% EBITDA margin 46% 45% 45% 45% 43% 3ppts 1ppt 2% EBITDA, adj. 3,440 3,330 3,275 1,940 2,941 17% 77% 5% Adjusted EBITDA margin 47% 46% 45% 38% 43% 4ppts 10ppts 6% Net income 2,290 2,049 2,144 1,705 1,864 23% 34% 11% Net income margin 31% 28% 29% 33% 27% 4ppts -2ppts 2ppts

Sources Otkritie Capital Research, company data, Bloomberg

Text-based advertising was the key contributor to revenue, while the slowdown in display advertising is even more visible than we expected. Yandex expects the slowdown to continue in 4Q12, while still growing faster than the market.

Figure 4. Yandex 3Q12 revenue review

3Q12 3Q12 3Q11 2Q12 YoY QoQ Actual Otkritie Actual Actual Advertising revenue 7,119 7,140 5,059 6,650 41% 7% Text-based advertising 6,539 6,514 4,595 6,022 42% 9% incl. Yandex websites 5,255 5,273 3768 4,890 39% 7% incl. Yandex ad-network websites 1,284 1,241 827 1,132 55% 13% Display advertising 580 626 464 628 25% -8% Online payments commission 133 133 95 127 40% 5% Other revenues 21 15 5 24 320% -13% Total Revenue 7,273 7,288 5,159 6,801 41% 7%

Sources: Otkritie Capital Research, company data

Text-based advertising growth is driven by growth in both paid clicks volume and cost per click (CPC). Paid clicks growth on Yandex's and its partners' websites decelerated in 3Q12, reflecting the fact that a full year has passed since Yandex launched initiatives on the ad network which significantly boosted the click-through rate (CTR) and the number of clicks. Additionally, the company said that growth during the four previous quarters benefited from initiatives launched in 3Q11 that were targeted at regional advertisers and resulted in many new lower cost clicks on Yandex own search. The average CPC in 3Q12 increased 5% YoY, and 10% QoQ. The reversal of the CPC trend should allay fears of growth at the expense of prices. Yandex management currently expects single digit CPC growth in 2013.

Important information available at http://research.otkritie.com is accessible via hyperlink: Disclosures & Disclaimer.

Otkritie Capital 2 26

Yandex | DOWNGRADE | Russia | 31 October 2012

Figure 5. Paid clicks dynamics

80% 68% 68% 70% 61% 62% 60% 51% 47% 50%

40% 35%

30% 22% 21% 19% 17% 20% 24% 26% 20% 10% 13% 8% 0% 7% 5% -1% -10% -7% -5% -7% -20% 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 Paid clicks YoY growth CPC YoY growth

Sources: company data

3Q12 conference call takeaways Operational comments ▪ Yandex increased its search share on all major browsers and platforms in 3Q12. ▪ 11% of all searches came through mobile devices in 3Q12. The higher the usage of mobile devices for internet purposes, the less the difference with other devices in terms of monetisation. Tablets are close to desktop in terms of monetisation, while the smartphone user is 70% of desktop user monetisation. ▪ In 2013 paid clicks should grow slightly slower than revenue, while CPC should increase at a single digit pace. Partnerships ▪ The relationship with Apple is very important. Yandex hopes for further developments in this relationship, but no update has been provided recently. Markets ▪ The display advertising market is still volatile and Yandex remains cautious about this market. Big budgets have moved to other advertising media. The advertising mix remains stable; e-commerce (15% of revenue) and financial services expanded faster than the market. Display is still seen as a second priority market for Yandex. ▪ Text-based advertising remains solid, therefore Yandex sees no economic slowdown this year in Russia. Yandex is growing more slowly than Mail.ru, which is still a small player on the market and gaining market share. ▪ Yandex will remain mainly a search- and text-based advertising company in 2013. ▪ Yandex.Market is a promising revenue stream in 2013. ▪ Yandex.Money is for sale as e-payment business is complementary to financial institutions, which is not the focus and area of expertise of the company. Yandex.Money is reclassified as held for sale securities in the accounting.

Important information available at http://research.otkritie.com is accessible via hyperlink: Disclosures & Disclaimer.

Otkritie Capital 3 27

Yandex | DOWNGRADE | Russia | 31 October 2012

Profitability ▪ Yandex sees the current EBITDA margin as sustainable. The current level of advertising expense is already seen as high. Cash and Dividends ▪ Current plan is to accumulate cash on the balance sheet, which is more than $780mn as of end 3Q12. No confirmed plans to pay dividends in the near future. Capex ▪ Capex guidance for FY12 is lowered from 18-20% to 15-18% of revenue. In Q3 Yandex opened a data centre in one of the Russian regions. Most of the capex is related to Russia, and Search is the biggest and most capital intensive product. Products update ▪ Yandex.Browser is seen as a strategic development. No serious distribution has been started for Yandex.Browser, which is growing organically. The number of downloads of the browser since 1 October exceeded 1.5mn without advertising support. The launch of the browser doesn’t mean termination of the agreement with the other browsers that use Yandex. Opera Turbo technology has been integrated into Yandex.Browser, which increases the download speed for low speed connections. ▪ Yandex.Maps audience increased by 18% YoY. Traffic Forecast feature introduced for Traffic service, which increased the preciseness of the service. ▪ Yandex.Taxi started monetising in September, though it is still negligibly small. The service is getting good traction from users. ▪ Apparel category added to Yandex.Market, which seems to be the key management focus apart from search. ▪ Yandex brand recognition in Turkey is now 80%. Yandex is already the second most popular search engine in Turkey. ▪ Growth in own network should be in line with growth in the ad network. Conference Call replay ▪ Replay should be available until 6 November, 2012. To access the replay, please dial: US: +1 866 247 4222 Russia/International: +44 (0) 1452 550 000 Passcode: 38529333#

Important information available at http://research.otkritie.com is accessible via hyperlink: Disclosures & Disclaimer.

Otkritie Capital 4 28

Yandex | DOWNGRADE | Russia | 31 October 2012

Valuation Lower target price still represents 26% upside potential. Our target price for Yandex is calculated as a simple average between the DCF and target P/E methods. Our new target price of $29/ADR is a simple average between $37/ADR (based on DCF) and $22/GDR (based on target P/E). Figure 6. Yandex valuation, RUBmn

2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E EBIT 13,133 16,744 21,003 25,413 31,229 37,815 45,060 52,736 tax on EBIT (2,758) (3,349) (4,201) (5,083) (6,246) (7,563) (9,012) (10,547) D&A 2,645 3,540 4,399 5,319 6,497 7,787 9,262 10,923 Capex (5,961) (6,995) (8,640) (10,137) (11,946) (13,947) (16,117) (18,414) Net change in WC 864 1,014 1,248 1,483 1,918 2,344 2,825 3,351 FCF 7,922 10,954 13,809 16,995 21,452 26,436 32,018 38,049 DCF 7,922 9,781 11,009 12,097 13,633 15,001 16,221 17,211 Terminal Growth 5% Value of period 2013-2020 102,875 Terminal Value 258,171 Enterprise Value 361,046 plus net cash 22,263 Equity Value 383,309 fully diluted # shares 336 Equity per share, RUB 1,141 DCF Target price, $/share 37 Target P/E valuation Yandex net income, $mn 8,248 Net income growth, 3 years 30% Target PEG 91% Target P/E 27.4 Target Equity value, RUBbn 225,971 Target P/E value per share, $ 22 Target Price 29 Current price 23 Premium/disc. to current price 27%

Sources: Otkritie Capital estimates

Figure 7. Yandex peer comparison

Mcap, P/E EV/EBITDA EV/Sales Description PEG $mn 2012E 2013E 2014E 2012E 2013E 2014E 2012E 2013E 2014E Portals 68.8 22.2 16.0 31.2 12.0 8.8 3.7 3.1 2.6 1.0 AOL US Portal 3,336 10.8 25.8 25.9 6.5 6.7 6.6 1.1 1.2 1.2 0.5 Interactive corp. US portal 4,404 16.4 12.3 10.1 8.3 6.5 5.8 1.4 1.2 1.1 0.6 Yahoo US Search engine 19,677 10.9 15.4 15.1 9.5 8.8 8.9 3.3 3.2 3.1 1.6 Netease.com China Portal 7,059 11.7 10.4 9.4 8.8 7.6 6.8 4.3 3.7 3.3 0.9 Tencent China portal 63,712 30.0 23.7 19.1 20.5 16.2 13.2 8.7 6.8 5.4 1.2 Sohu China portal 1,470 18.8 11.5 7.6 2.6 2.0 1.6 0.6 0.5 0.5 N/A Sina China portal 3,769 383.2 56.4 25.1 162.0 36.4 18.5 6.2 5.0 3.9 11.0

Search engines 21.8 16.2 13.1 14.8 11.4 9.2 7.7 5.7 4.5 0.9 Google US Search engine 222,318 16.6 14.4 12.1 9.7 8.2 7.0 4.3 3.4 3.0 1.1 Baidu China portal 39,835 27.0 18.1 14.0 19.8 14.6 11.5 11.1 7.9 6.0 0.6 E-commerce 49.6 29.2 21.5 17.3 13.1 10.3 2.3 1.9 1.7 2.0 Amazon US e-commerce 100,774 104.7 57.8 38.9 29.2 20.6 15.0 1.5 1.2 0.9 2.9 Ebay US e-commerce 62,551 20.2 17.4 14.9 12.6 10.9 9.4 4.1 3.6 3.1 1.2 Groupon e-commerce 2,915 23.9 12.4 10.6 10.0 7.7 6.5 1.2 1.0 0.9 N/A

Weighted average 26.8 17.1 13.6 16.4 11.5 9.2 7.0 5.2 4.2 0.9

Yandex 6,738 28.8 21.5 16.6 17.6 12.9 9.6 7.8 5.8 4.3 0.8 Mail.ru Group Russian portal 6,040 23.9 18.8 15.0 17.0 14.7 12.5 9.0 7.6 6.6 0.8 Premium/ (discount) to Portals 75% 30% 14% 88% 62% 34% 141% 109% 79% Premium/ (discount) to Search engines 32% 33% 27% 19% 13% 4% 2% 2% -4% Premium/ (discount) to e-commerce -42% -26% -23% 2% -1% -7% 241% 198% 160% Premium/ (discount) to weighted average peer multiple 7% 26% 22% 7% 12% 4% 11% 10% 4%

Sources: Otkritie Capital Research, Bloomberg

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Yandex | DOWNGRADE | Russia | 31 October 2012

Revenue growth projections remain solid. Thanks to Yandex’s sustainable search market leadership, we expect the company to expand with the market in the coming years. We see only upside risks for Yandex’s search market share, although downside risks could appear in the event that the advertising market grows more slowly than we predict.

Figure 8. Search engines market share, by % of total searches

100%

90%

80%

70%

60%

50%

40%

30%

20%

10%

Jul-10 Jul-11 Jul-12

Jan-10 Jan-11 Jan-12

Mar-12 Mar-10 Mar-11

Nov-10 Nov-11

Sep-10 Sep-11 Sep-12

May-10 May-11 May-12 Yandex Google Search Mail.ru Rambler Other

Sources: Otkritie Capital Research, Liveinternet

EBITDA margin revised downwards. Yandex continued to invest heavily in product marketing and development in 9M12, which prevented its EBITDA margin from growing. In order to sustain its leadership position, it seems that Yandex needs to spend more in all its business segments. We therefore assume this trend will continue in the coming years, which leads us to lower our EBITDA margin projections for the company. From this point forward we do not expect any operating leverage effects and treat all costs as variable.

Figure 9. Yandex financial projections

30,000 60%

25,000 50%

20,000 40%

15,000

30% 10,000

20% 5,000

- 10% 2009 2010 2011 2012E 2013E 2014E 2015E

EBITDA, (lhs) EBITDA margin, % Revenue growth, %

Sources: Otkritie Capital Research, company data

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Otkritie Capital 6 30

Yandex | DOWNGRADE | Russia | 31 October 2012

Appendix: Financial forecasts

RUBmn unless otherwise stated Profitability 2010 2011 2012E 2013E 2014E 2015E Income statement 54% 45,000 Revenues 12,500 20,033 28,728 37,256 46,635 57,601 52% 40,000 Depreciation 1,181 1,874 2,645 3,540 4,399 5,319 50% 35,000 EBITDA 6,004 8,908 13,072 16,973 21,442 26,623 48% 30,000 Operating profit (EBIT) 4,823 7,034 10,125 13,133 16,744 21,003 46% 25,000 Net interest expense 180 222 316 640 1,113 1,748 44% 20,000 Non-op. revenue (expenses) ------42% 15,000 Pretax profit 5,003 7,318 10,441 13,773 17,857 22,752 40% 10,000 Taxes (1,186) (1,545) (2,193) (2,755) (3,571) (4,550) 38% 5,000 Minority interest 0 0 0 0 0 0 36% 0 Net income 3,817 5,773 8,248 11,018 14,285 18,201 2009 2010 2011 2012E 2013E 2014E 2015E Cash flow statement EBITDA margin (LHS) EBITDA,RUBm Net change in work. cap. 814 91 758 864 1,014 1,248 Provisions and write-offs 0 0 0 0 0 0 Other 0 0 0 0 0 0 Cash flows, RUBmn Operating cashflow 5,963 7,794 11,651 15,423 19,698 24,769 Capex (2,199) (5,566) (5,171) (5,961) (6,995) (8,640) 25,000 Disposals (Acquisitions) (1,867) (5,202) 0 0 0 0 20,000 Investing cashflow (4,066) (17,794) (5,171) (5,961) (6,995) (8,640) 15,000 Equity (907) 11,598 0 0 0 0 10,000 Debt ------5,000 Financing cashflow (907) 11,598 0 0 0 0 0 Net change in cash 966 2,951 6,480 9,462 12,703 16,129 (5,000) Balance sheet (10,000) Cash & equivalents 6,732 11,491 17,971 27,432 40,135 56,264 (15,000) Current assets 8,195 14,505 22,293 33,038 47,152 64,930 (20,000) PP&E 2,983 6,973 9,499 11,920 14,517 17,838 2009 2010 2011 2012E 2013E 2014E 2015E Goodwill and other assets 714 1,275 1,275 1,275 1,275 1,275 Operating cash flow Investing cash flow Total assets 12,617 34,076 44,390 57,556 74,266 95,366 Current liabilities 2,937 4,712 6,778 8,925 11,350 14,248 S-T Debt 0 0 0 0 0 0 Momentum L-T Debt 0 0 0 0 0 0 Other L-T liabilities 15 222 222 222 222 222 90% Shareholders funds 9,615 28,953 37,201 48,220 62,505 80,706 80% Total liabilities & equity 12,617 34,076 44,390 57,556 74,266 95,366 70% Net Debt (6,732) (11,491) (17,971) (27,432) (40,135) (56,264) 60% Margins and profitability 50% EBIT margin 38.6% 35.1% 35.2% 35.3% 35.9% 36.5% 40% EBITDA margin 48.0% 44.5% 45.5% 45.6% 46.0% 46.2% 30% Net margin 30.5% 28.8% 28.7% 29.6% 30.6% 31.6% 20% ROE 39.7% 19.9% 22.2% 22.9% 22.9% 22.6% 10% ROA 30.3% 16.9% 18.6% 19.1% 19.2% 19.1% 0% ROIC 130.9% 31.5% 41.2% 49.6% 58.8% 67.6% 2009 2010 2011 2012E 2013E 2014E 2015E Momentum Revenue growth EPS growth Revenue growth 43% 60% 43% 30% 25% 24% EBITDA growth 69% 48% 47% 30% 26% 24% EPS growth 90% 51% 43% 34% 30% 27% Valuation Liquidity and solvency Cash ratio 2.3 2.4 2.7 3.1 3.5 3.9 70 Current ratio 2.8 3.1 3.3 3.7 4.2 4.6 60 Interest coverage 26.8 31.7 32.0 20.5 15.0 12.0 Debt/Equity 0.0 0.0 0.0 0.0 0.0 0.0 50 Debt/Total assets 0.0 0.0 0.0 0.0 0.0 0.0 40 Net debt / EBITDA (1.1) (1.3) (1.4) (1.6) (1.9) (2.1) 30 Valuation 20 P/E nm 41.0 28.7 21.5 16.6 13.0 P/CE 47.4 31.0 21.8 16.3 12.7 10.1 10 P/BV 24.6 8.2 6.4 4.9 3.8 2.9 0 EV/Sales 18.4 11.3 7.6 5.6 4.2 3.1 2009 2010 2011 2012E 2013E 2014E 2015E EV/EBITDA 38.3 25.3 16.8 12.3 9.2 6.8 P/E EV/EBITDA Dividend yield, (ords) 0.4% 0.0% 0.0% 0.0% 0.0% 0.0% Dividend yield, (prefs) ------Per Share Data EPS 11.66 17.64 25.20 33.67 43.65 55.62 DPS, ords 2.77 0.00 0.00 0.00 0.00 0.00 DPS, prefs ------BVPS 29.38 88.47 113.68 147.34 191.00 246.61

Sources: Company data, Otkritie Capital estimates

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Yandex | DOWNGRADE | Russia | 31 October 2012

Disclosures appendix

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www.otkritie.com Bloomberg: OTKR

RESEARCH Alexander Burgansky Head of Research [email protected] +7 (495) 213 1825 Equity Research Fixed Income Research

Vladimir Savov Head of Equity Research [email protected] +7 (495) 213 1826

Strategy Metals & Mining, Fertilizers Sovereign Credit Vladimir Savov Denis Gabrielik Maxim Grebtsov [email protected] [email protected] [email protected] +7 (495) 213 1826 +7 (495) 213 1831 +7 (495) 777 5656 (x114340) Taryn Arthur Utilities [email protected] +7 (495) 777 5656 (x114307) Sergey Beiden [email protected] Economics +7 (495) 213 1835 Vladimir Tikhomirov Telecommunications, Media, [email protected] Technology +7 (495) 213 1829 Alexander Vengranovich Oil & Gas [email protected] Alexander Burgansky +7 (495) 213 1830 [email protected] Consumer, Real Estate +7 (495) 213 1825 Mikhail Terentiev Tatyana Kalachova [email protected] [email protected] +7 (495) 213 1834 +7 (495) 777 5656 (x114717) Yury Rodionov Roman Odarich [email protected] [email protected] +7 (495) 777 5656 (x114486) +7 (495) 777 5656 (x114487) Transportation, Industrials Financial Services Irina Stupachenko Vladimir Savov [email protected] [email protected] +7 (495) 213 1832 +7 (495) 213 1826

MORGAN STANLEY RESEARCH EUROPE

Morgan Stanley & Co. International Edward Hill-Wood plc+ [email protected] +44 (0)20 7425 9224 Cesar Tiron [email protected] +44 (0)20 7425 8846 OOO Morgan Stanley Bank+ Polina Ugryumova, CFA October 31, 2012 [email protected] +7 (495) 287 2310

Stock Rating Yandex NV Overweight

Industry View Another Beat In-Line Key Ratios and Statistics

What's Changed Reuters: YNDX.O Bloomberg: YNDX US Adj. net income, 2012 From Rub8.4bn to R8.8bn, +4% EEMEA - Telecoms & Media / Netherlands Price target US$35.00

Shr price, close (Oct 26, 2012) US$23.07 th Yandex beat our forecasts for the 4 time in a row 52-Week Range US$29.34-16.60 and provided more comfort on the outlook for 2013, Mkt cap, curr (mn) RUB 249,170 in our view. A significant margin beat introduces Net debt (12/12e) (mn)* RUB (14,870) new operational gearing optionality in 2013. With EV, curr (mn)* RUB 237,240 * = GAAP or approximated based on GAAP CAGR EPS 26% 2012-14 we are OW with $35 target. Fiscal Year ending 12/11 12/12e 12/13e 12/14e Yandex exceeded our EBITDA & EPS forecast by 8% Revenue (RUB mn)** 20,033 28,724 38,061 47,002 and 19% as margins unexpectedly grew 200bps yoy. EBITDA (RUB mn)** 9,285 13,344 18,095 22,632 Excluding TAC (which stabilized at 18.8% of text-based EBIT (RUB mn)** 7,363 10,208 13,590 17,603 sales), opex grew 33% yoy, but more importantly 3% EPS (RUB)** 17.43 25.94 33.15 41.09 over 2q which grew 3% over 1q. With limited hiring ModelWare EPS (RUB) 17.59 24.24 30.92 38.35 activity (FTE +4% in the quarter), and given we forecast Prior EPS (RUB)** - 24.96 32.81 41.20 acceleration to +10% in 4q and 28% in 2013, Yandex Consensus EPS (RUB)§ 19.22 25.47 33.81 43.44 may potentially exceed margin expectations. P/E** 36.3 27.9 21.8 17.6 EV/revenue* 10.1 8.2 5.9 4.5 EV/EBITDA** 21.7 17.6 12.4 9.4 As expected Yandex reported a new look mix of 5% EV/EBIT** 27.4 23.0 16.5 12.1 growth in cost per click and lower (+35%) paid click Div per shr (RUB) 0.00 0.00 0.00 0.00 growth. Contrary to previous concerns (from Div yld (%) 0.0 0.0 0.0 0.0 LiveInternet) search volumes held up well (+31% yoy vs FCF yld ratio (%)** 1.1 3.1 3.9 4.7 +30% in 2q) and Yandex market share firmed to 60.5% Net debt (RUB mn)* (11,491) (14,870) (24,893) (37,686) in the quarter. Overall advertiser growth was +28% yoy, Net debt/EBITDA** NM NM NM NM a modest slowdown from 34% in 2q. The key negative RNOA (%)** 220.2 55.5 68.0 78.1 was a slowdown of display advertising to 25% growth, ROE (%)** 59.5 30.2 30.5 29.0 Unless otherwise noted, all metrics are based on Morgan Stanley ModelWare although this was anticipated post Mail.ru results. framework (please see explanation later in this note). ** = Based on consensus methodology § = Consensus data is provided by Thomson Reuters Estimates. Post results we have firmed our view that 2013 is * = GAAP or approximated based on GAAP e = Morgan Stanley Research estimates shaping up as a strong year with +33% revenue

growth and margin growth (to 47%). Mobile monetization is now approaching an encouraging 80% of desktop, although it still only represents 11% of traffic. Morgan Stanley does and seeks to do business with We also see potential for Yandex money to develop into companies covered in Morgan Stanley Research. As a larger online payment platform in its own right, a result, investors should be aware that the firm may depending on the investment partner. have a conflict of interest that could affect the objectivity of Morgan Stanley Research. Investors Rated OW with $35 target - As we expect top quartile should consider Morgan Stanley Research as only a CAGR 26% EPS growth 2012-14, Yandex’s valuation single factor in making their investment decision. quickly drops to 22x P/E (12x EBITDA) in 2013 to 18x For analyst certification and other important (9.7x) in 2014. After exceeding expectations 4 times in a disclosures, refer to the Disclosure Section, located at the end of this report. row, and with the business tracking to plan, we view this += Analysts employed by non-U.S. affiliates are not registered with FINRA, may not be as undemanding. associated persons of the member and may not be subject to NASD/NYSE restrictions on communications with a subject company, public appearances and trading securities held by a research analyst account. 35 MORGAN STANLEY RESEARCH October 31, 2012 Yandex NV

Risk-Reward Snapshot: Yandex (YNDX.O, Overweight, PT $35.0)

Secular internet growth, continued execution and attractive valuation Why Overweight? $70 • Leading position in Russian search (60% share) and overall online 60 $58.00 (+151%) advertising (45% share). • 50 Strong secular growth in Russian Internet driven by rising Internet / 40 broadband penetration, ad budgets $35.00 (+52%) shifting to online. 30 • $ 23.07 Strong management team: executive team is tech-oriented 20 and many members have been $15.00 (-35%) with the company for a decade. 10 • At 13x 2013e EV/EBITDA, valuation

0 is appealing given risk profile. Oct-10 Apr-11 Oct-11 Apr-12 Oct-12 Apr-13 Oct-13 Price Target (Oct-13) Historical Stock Performance Current Stock Price WARNINGDONOTEDIT_RRS4RL~YNDX.O~ Key Value Drivers Source: Thomson Reuters (historical share price data), Morgan Stanley Research estimates • Search market share. Price Target $35 • Search monetization (RPS).

Bull 30x Bull Case Market share climbs, margins expand: Yandex innovates and • Traffic acquisition costs (TAC). executes its way to 75% market share in Russia by 2020 (up from Case C2013e • $58 EV/EBITDA 65% in 2010). Share gains + high incremental margins drive Revenue per thousand page views EBITDA margins to 50% in 2013 and to 55%+ in the long term. (RPM). RUB/USD = 31 • Active advertiser count. Structural Internet growth in Russia, steady margins: Yandex Base 19x Base • Case Case C2013e benefits from strong secular growth in Russian Internet Page view growth on owned and $35 EV/EBITDA advertising, maintains market share, while EBITDA margins climb operated and partner websites. from high 40%s to 47% by 2015. RUB/USD = 31

Potential Catalysts Market share loss to Google; TAC rises as Yandex competes Bear 10x Bull Case • Case C2013e in mobile: Google intensifies its focus on Russia. Yandex’s share Share stabilization/ gains vs. $15 EV/EBITDA drops to 50% by 2020, EBITDA margin contracts to 38%. Yandex Google. spends aggressively to get distribution on mobile devices. RUB/USD = 31 • Launch of localised search offerings in new geographies. SWOT Analysis • More transparent / ambitious Strengths Weaknesses mobile strategy. 1. Market leader with 60% search share 1. Weaker position in mobile relative to • 2. Proven economic model with strong revenue Google Financial outperformance in 2012. growth and attractive margins 2. Lack of global scale may lead to lower Potential Risks 3. Strong brand awareness in Russia margin, less ambitious investments 4. Solid / experienced management team 3. No social networking presence • Competitive threat from Google.

• Margin declines due to aggressive Opportunities Threats spend on distribution. A. Better monetization of search advertising 1. Competition from Google in desktop • B. Deeper monetization of newer markets – search and mobile Increased competition for ad Ukraine, Kazakhstan and Belarus 2. Rising TAC rates dollars from social networks. C. Expansion beyond CIS countries 3. Increasing social competition • Adverse changes in internet 4. Increased govt. regulation in Russia regulation in Russia. Source: Morgan Stanley Research • Macro and FX risk.

2 36 MORGAN STANLEY RESEARCH October 31, 2012 Yandex NV

Investment Summary

Exhibit 1 Where could we be wrong? Yandex: Summary Quarterly KPIs Key risks to our price target are (a) a potential macro related slowdown into 2013 – especially any impact on display KPIs 3q11 4q11 1q12 2q12 3q12 4q12 (10% sales); (b) more limited margin expansion as investment Gross Revenue 65% 56% 51% 50% 41% 36% is required to hold market share; and (c) volatility after — O&O 57% 43% 43% 43% 39% 37% lock-ups expired last November. The Russian economy has — Partner 124% 131% 117% 93% 55% 48% — Display 63% 72% 28% 43% 25% 15% also been historically volatile, with risk of government Net Revenue 59% 50% 45% 45% 39% 35% involvement. A recent loss of usage market share highlights TAC deflator -6% -6% -6% -5% -2% -2% the importance of browser distribution agreements. The Traffic Share 63% 61% 59% 60% 61% 60% transition to mobile / social is also one that may favour the SERPs 42% 36% 36% 30% 31% 28% platform owners (Google, Apple, etc.). Paid Clicks 68% 65% 61% 62% 35% 35% • Bull case $58 valuation: We assume Yandex innovates No Advertisers 48% 43% 40% 34% 28% 23% its way to 75% Russian market share by 2020 (65% Adj EBITDA 54% 48% 38% 60% 45% 35% 2010). Share gains and high incremental margins drive Adj EBITDA Margin 45.3% 50.8% 40.5% 45.1% 47.3% 50.1% EBITDA margins to 50% in 2013 and to 55% in the long Source: Company Data, Morgan Stanley Research estimates term.

• To value Yandex, we prefer to use a discounted cash flow Base case $35 target price: Yandex benefits from (DCF) methodology, which better incorporates our long-term strong secular growth in Russian Internet advertising, view on the company’s growth prospects. We have a maintains 60.5% market share, while EBITDA margins DCF-based fair value of US$35. It assumes a 10-year climb to 47% by 2015. revenue CAGR of 24% / adjusted EBITDA margin expansion • to 49%. We apply a discount rate of 12%, which is in line with Bear case $15 valuation: We assume share losses to the rate used for Russian peers. We use a 5.5% terminal Google with TAC rising as Yandex competes in Mobile. growth rate as we believe the company will still be growing We assume Google intensifies its focus in Russia, revenue rapidly in 2020 at the end of our DCF projection resulting in Yandex’s share dropping to 50% by 2020. We period. This results in an equity value of $35 per share. assume EBITDA margin contracts to 38% as Yandex spends aggressively to get distribution on mobile devices. Exhibit 2 Yandex: Trading Multiples Morgan Stanley is currently acting as financial advisor

Yandex 2009 2010 2011e 2012e 2013e 2014e to Google Inc. ("Google") with respect to its proposed Price 23.1 23.1 23.1 23.1 23.1 23.1 stock dividend, as announced on April 12, 2012. Certain Market capitalisation 7,471 7,471 7,471 7,471 7,471 7,471 aspects of the proposal are subject to approval by Enterprise Value (Y/E debt) 6,793 6,793 6,793 6,793 6,793 6,793 Google's shareholders. Google has agreed to pay fees EV/ Sales 24.9x 17.4x 10.9x 7.6x 5.7x 4.6x to Morgan Stanley for its financial advice. Please refer EV/ Adj. EBITDA 57.8x 35.3x 23.5x 16.4x 12.1x 9.7x to the notes at the end of the report. EV/ EBIT 82.4x 45.1x 30.9x 22.6x 17.0x 13.1x Adjusted fully diluted P/E 102.6x 57.3x 42.4x 28.5x 22.3x 18.0x Free cash flow yield (%) 1% 2% 1% 3% 4% 5% Dividend Yield 0% 0% 0% 0% 0% 0% Source: Company Data, Morgan Stanley Research

3 37 MORGAN STANLEY RESEARCH October 31, 2012 Yandex NV

Exhibit 3 Yandex 3Q’12 Results

RUBm 3Q12 3Q12e vs MSe 3Q11 YoY% 2Q12 QoQ%

Gross Revenue (incl. TAC) 7,273 7,281 -0.1% 5,159 41.0% 6,801 6.9% Advertising 7,119 7,133 -0.2% 5,059 40.7% 6,650 7.1% Payments 133 133 0.0% 95 40.0% 127 4.7% Other 21 15 40.0% 5 320.0% 24 -12.5% Traffic Acquisition Cost 1,231 1,241 -0.8% 818 50.5% 1,141 7.9% Net Revenue (excl. TAC) 6,042 6,040 0.0% 4,341 39.2% 5,660 6.7%

Gross Profit 5,773 5,770 0.0% 4,181 38.1% 5,439 6.1% Depreciation and Amortization 734 767 -4.3% 488 50.4% 696 5.5% Total Operating Expenses 3,124 3,337 -6.4% 2,334 33.8% 3,065 1.9% Operating Income (before SBC) 2,649 2,433 8.9% 1,847 43.4% 2,374 11.6%

Stock-Based Compensation 106 159 -33.4% 66 60.6% 129 -17.8% Operating Income (loss) 2,543 2,274 11.8% 1,781 42.8% 2,245 13.3% EBITDA 3,277 3,041 7.8% 2,269 44.4% 2,941 11.4% Adjusted EBITDA 3,440 3,200 7.5% 2,335 47.3% 3,070 12.0%

Pre-Tax Profit 2,958 2,402 23.1% 2,189 35.1% 2,532 16.8% Tax Provision 667 553 20.7% 484 37.8% 549 21.5% Net Income (GAAP) 2,291 1,850 23.9% 1,705 34.4% 1,983 15.5% Net Income (Adjusted) 2,397 2,009 19.3% 1,388 72.7% 2,112 13.5%

Margins as % of Revenue Gross Margin 79.4% 79.3% 81.0% 80.0% Operating Margin (excl. Stock Comp and Amort.) 36.4% 33.4% 35.8% 34.9% Adj. EBITDA Margin - Gross Revenue 47.3% 44.0% 45.3% 45.1% Adj. EBITDA Margin - Net Revenue 56.9% 53.0% 53.8% 54.2% Pre-Tax Margin 40.7% 33.0% 42.4% 37.2% Net Income Margin (GAAP) 31.5% 25.4% 33.0% 29.2% Net Income Margin (Adjusted) 33.0% 27.6% 26.9% 31.1%

Expense Analysis (as % of Revenue) Traffic Acquisition Cost 16.9% 17.0% 15.9% 16.8% Stock-Based Compensation 1.5% 2.2% 1.3% 1.9% Tax Rate 22.5% 23.0% 22.1% 21.7% Source: Company Data, Morgan Stanley Research e=Morgan Stanley estimates

4 38 MORGAN STANLEY RESEARCH October 31, 2012 Yandex NV

Exhibit 4 Yandex – Summary Forecast Changes RUBm 2012e 2013e 2014e old new % Ch old new % Ch old new % Ch

Gross Revenue (incl. TAC) 28,881 28,724 -0.5% 38,447 38,061 -1.0% 48,592 47,002 -3.3% Advertising 28,217 28,054 -0.6% 37,531 37,136 -1.1% 47,452 45,854 -3.4% Payments 535 535 0.0% 722 722 0.0% 946 946 0.0% Other 129 135 4.7% 194 203 4.7% 194 203 4.7% Traffic Acquisition Cost 4,903 4,818 -1.7% 6,705 6,602 -1.5% 8,823 8,388 -4.9% Net Revenue (excl. TAC) 23,978 23,906 -0.3% 31,741 31,459 -0.9% 39,769 38,615 -2.9%

Gross Profit 22,991 22,960 -0.1% 30,572 30,395 -0.6% 38,330 37,369 -2.5% Personnel Costs 5,807 5,912 1.8% 7,553 7,285 -3.5% 9,060 8,526 -5.9% Rent, Utilities & Other SG&A 4,059 3,819 -5.9% 5,295 5,205 -1.7% 6,614 6,353 -4.0% Depreciation and Amortization 3,000 3,021 0.7% 4,160 4,316 3.7% 4,869 4,887 0.4% Total Operating Expenses 12,867 12,752 -0.9% 17,008 16,805 -1.2% 20,542 19,766 -3.8% Operating Income (before SBC) 10,125 10,208 0.8% 13,565 13,590 0.2% 17,788 17,603 -1.0%

Stock-Based Compensation 629 574 -8.8% 777 771 -0.7% 982 952 -3.0% Operating Income (loss) 9,495 9,635 1.5% 12,788 12,819 0.2% 16,806 16,651 -0.9% EBITDA 12,496 12,656 1.3% 16,948 17,134 1.1% 21,675 21,539 -0.6% Adjusted EBITDA 13,125 13,230 0.8% 17,725 17,905 1.0% 22,656 22,491 -0.7%

Pre-Tax Profit 10,082 10,508 4.2% 13,709 13,739 0.2% 17,623 17,441 -1.0% Tax Provision 2,261 2,330 3.1% 3,153 3,098 -1.7% 4,229 4,107 -2.9% Net Income (GAAP) 7,821 8,178 4.6% 10,556 10,641 0.8% 13,393 13,334 -0.4% Net Income (Adjusted) 8,450 8,751 3.6% 11,332 11,412 0.7% 14,375 14,286 -0.6%

YoY% growth Gross Revenue (incl. TAC) 44% 43% 33% 33% 26% 23% Yandex web-sites 42% 40% 33% 32% 27% 23% Yandex ad network 66% 70% 34% 39% 28% 28% Display 25% 25% 29% 21% 15% 15%

Margins as % of Revenue Gross Margin 79.6% 79.9% 79.5% 79.9% 78.9% 79.5% Operating Margin (excl. Stock Comp and Amort.) 35.1% 35.5% 35.3% 35.7% 36.6% 37.5% Adj. EBITDA Margin - Gross Revenue 45.4% 46.1% 46.1% 47.0% 46.6% 47.9% Adj. EBITDA Margin - Net Revenue 54.7% 55.3% 55.8% 56.9% 57.0% 58.2% Pre-Tax Margin 34.9% 36.6% 35.7% 36.1% 36.3% 37.1% Net Income Margin (GAAP) 27.1% 28.5% 27.5% 28.0% 27.6% 28.4% Net Income Margin (Adjusted) 29.3% 30.5% 29.5% 30.0% 29.6% 30.4%

Expense Analysis (as % of Revenue) Traffic Acquisition Cost 17.0% 16.8% 17.4% 17.3% 18.2% 17.8% Personnel Costs 20.1% 20.6% 19.6% 19.1% 18.6% 18.1% Rent, Utilities & Other SG&A 14.1% 13.3% 13.8% 13.7% 13.6% 13.5% Stock-Based Compensation 2.2% 2.0% 2.0% 2.0% 2.0% 2.0% Tax Rate 22.4% 22.2% 23.0% 22.5% 24.0% 23.5% Source: Company Data, Morgan Stanley Research estimates

5 39 MORGAN STANLEY RESEARCH October 31, 2012 Yandex NV

Exhibit 5 Yandex – Discounted Cash Flow Valuation for Base Case

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

Advertising 7,486 8,466 12,188 19,608 28,054 37,136 45,854 54,154 62,955 72,121 81,526 90,905 99,957 Online payment commissions 130 201 263 383 535 722 946 1,211 1,526 1,892 2,327 2,839 3,436 Other revenues 33 62 48 42 135 203 203 203 203 203 203 203 203 Net Revenue 7,649 8,729 12,499 20,033 28,724 38,061 47,002 55,567 64,683 74,216 84,056 93,947 103,596 % Net Revenue Growth 14% 43% 60% 43% 33% 23% 18% 16% 15% 13% 12% 10% Operating Income 3,084 2,638 4,823 7,034 9,635 12,819 16,651 20,048 23,414 27,157 31,190 35,209 38,705 Plus: Stock-Based Compensation 139 208 160 329 574 771 952 1,126 1,310 1,503 1,703 1,903 2,098 Plus: Amortization of Intangibles 30 40 34 48 114 190 141000000 Plus: Depreciation 570 872 1,147 1,826 2,907 4,125 4,746 5,512 6,374 7,166 7,985 8,969 9,991 EBITDA (1) 3,823 3,758 6,164 9,237 13,230 17,905 22,491 26,685 31,098 35,826 40,877 46,082 50,795 EBITDA as % of Net Revenue 50% 43% 49% 46% 46% 47% 48% 48% 48% 48% 49% 49% 49% Less: Income Tax from Operations (947) (672) (1,186) (1,545) (2,330) (3,098) (4,107) (5,139) (6,040) (7,050) (8,149) (9,263) (10,263) Plus: Tax Benefit from Stock Options Plus: Deferred Tax Cash Taxes from Operations (947) (672) (1,186) (1,545) (2,330) (3,098) (4,107) (5,139) (6,040) (7,050) (8,149) (9,263) (10,263) Cash Taxes as % of EBITDA 25% 18% 19% 17% 18% 17% 18% 19% 19% 20% 20% 20% 20% Capital Expenditures (1,337) (987) (2,199) (5,566) (4,579) (6,470) (7,520) (8,335) (9,056) (9,648) (10,087) (11,274) (12,431) % Y/Y Capex Growth -26% 123% 153% -18% 41% 16% 11% 9% 7% 5% 12% 10% % of Net Revenue 17% 11% 18% 28% 16% 17% 16% 15% 14% 13% 12% 12% 12% Change in Net Working Capital 239 29 814 91 624 366 241 62 569 637 197 69 1,157 Change in NWC as % of Net Revenue 3% 0% 7% 0% 2% 1% 1% 0% 1% 1% 0% 0% 1% Unlevered Free Cash Flow 1,778 2,128 3,593 2,217 6,944 8,702 11,104 13,272 16,572 19,765 22,838 25,615 29,258 % of Net Revenue 23% 24% 29% 11% 24% 23% 24% 24% 26% 27% 27% 27% 28% UFCF as % of EBITDA 47% 57% 58% 24% 52% 49% 49% 50% 53% 55% 56% 56% 58% NPV at 12.0% Hurdle Rate 2,313 6,504 7,316 8,380 8,992 10,078 10,790 11,191 11,268 11,553

Perpetuity Growth Rate / Terminal Value at 12.0% Hurdle Rate Hurdle 5.5% 5.8% 6.0% 6.3% 6.5% Rate Equity Value, US$ m 566,798 593,280 622,215 653,958 688,940 10.4% 14,025 14,584 15,207 15,904 16,691 10.9% 12,669 13,110 13,597 14,135 14,735 Terminal Value / Implied EBITDA Multiple 11.4% 11,546 11,901 12,289 12,715 13,184 11.2x 11.7x 12.2x 12.9x 13.6x 11.9% 10,604 10,894 11,208 11,551 11,925 566,798 593,280 622,215 653,958 688,940 12.4% 9,801 10,041 10,300 10,580 10,883

DCF VALUATION Net Present Value of Cash Flows 88,386 Hurdle Plus: NPV of Terminal Value (6.3% Growth) 232,790 Rate Equity Value per Share, US$ (2) Plus: Cash, Equivalents and Equity Investments 21,701 10.4% 40 42 44 46 48 Less: Debt and Minority Interest 0 Equity Value $B (USD) 10.9% 36 38 39 41 42 Implied Equity Value (RUR) 342,876 $11.4 11.4% 33 34 35 37 38 Fully Diluted Shares Outstanding (MM) 324 Price Target (USD) 11.9% 30 31 32 33 34 Implied Equity Value per Share (1) (RUR) 1,059 $35 12.4% 28 29 30 30 31 Source: Morgan Stanley Research estimates

6 40 MORGAN STANLEY RESEARCH October 31, 2012 Yandex NV

Exhibit 6 Yandex: Quarterly income statement

(RUR m, Except per Share Data) FY2010A FY2011E FY2012E FY2013E 3/10A 6/10A 9/10A 12/10A 3/11A 6/11A 9/11A 12/11E 3/12A 6/12A 9/12A 12/12E 3/13E 6/13E 9/13E 12/13E Gross Revenue (incl. TAC) 2,355 2,888 3,130 4,125 3,894 4,541 5,159 6,439 5,874 6,801 7,273 8,776 7,875 9,011 9,597 11,577 Advertising 2,286 2,816 3,055 4,030 3,801 4,442 5,059 6,306 5,724 6,650 7,119 8,561 7,667 8,804 9,386 11,279 Payments 57 60 65 82 82 91 95 115 114 127 133 161 154 171 180 217 Other 12 12 10 14 11 8 5 18 36 24 21 54 54 36 32 81

Traffic Acquisition Cost 317 353 396 507 538 641 818 1,002 992 1,141 1,231 1,454 1,381 1,549 1,686 1,986

Net Revenue (excl. TAC) 2,038 2,535 2,735 3,618 3,356 3,900 4,341 5,437 4,882 5,660 6,042 7,322 6,494 7,462 7,911 9,591

Other Costs of Revenue 37 36 34 35 39 45 46 45 63 71 87 70 79 90 96 93 Content and Outsource 42 41 41 49 90 104 113 140 147 150 182 176 150 162 163 232 Total COGS 80 76 75 84 129 150 160 185 210 221 269 246 228 252 259 324 Gross Profit 1,959 2,458 2,660 3,534 3,227 3,750 4,181 5,252 4,672 5,439 5,773 7,077 6,266 7,209 7,652 9,267 Personnel Costs 618 613 662 777 858 1,044 1,135 1,243 1,351 1,366 1,527 1,668 1,575 1,802 1,823 2,084 Rent and Utilities 254 253 306 308 435 472 490 483 592 646 655 658 709 766 864 984 Other SG&A 96 144 174 242 214 319 221 258 352 357 208 351 433 478 509 463 Depreciation and Amortization 259 272 307 344 377 427 488 582 661 696 734 930 1,002 1,084 1,096 1,134 Total Operating Expenses 1,227 1,282 1,449 1,670 1,884 2,263 2,334 2,565 2,956 3,065 3,124 3,607 3,719 4,130 4,291 4,665 Operating Income (before SBC) 732 1,177 1,211 1,864 1,342 1,487 1,847 2,687 1,716 2,374 2,649 3,470 2,547 3,079 3,361 4,602

Stock-Based Compensation 33 32 39 56 70 109 66 84 157 129 106 182 168 185 194 224 Operating Income (loss) 699 1,144 1,172 1,808 1,272 1,378 1,781 2,603 1,559 2,245 2,543 3,288 2,379 2,894 3,167 4,379 ------EBITDA 958 1,416 1,479 2,152 1,649 1,805 2,269 3,185 2,220 2,941 3,277 4,218 3,381 3,978 4,263 5,512 Adjusted EBITDA 991 1,448 1,518 2,208 1,719 1,914 2,335 3,269 2,377 3,070 3,383 4,400 3,549 4,164 4,456 5,736

Interest Income 28 39 43 46 34 36 47 105 167 234 268 233 270 288 320 351 Other Non-Operating Income (57) 143 (60) (3) (254) (33) 361 (12) (124) 53 147 (105) (39) (58) (90) (121) Pre-Tax Profit 670 1,326 1,155 1,852 1,052 1,381 2,189 2,696 1,602 2,532 2,958 3,416 2,609 3,124 3,397 4,609 Tax Provision 162 309 273 442 232 256 484 573 344 549 667 770 588 705 766 1,039 Net Income (GAAP) 508 0 1,017 0 882 0 1,410 0 820 0 1,125 0 1,705 0 2,123 0 1,258 0 1,983 0 2,291 0 2,6460 2,021 0 2,420 0 2,631 0 3,569 0 Net Income (Adjusted) 541 1,050 921 1,466 890 1,234 1,388 2,207 1,415 2,112 2,397 2,828 2,189 2,605 2,825 3,793 Shares Outstanding (GAAP Basic) 304 304 304 304 304 312 323 323 324 326 327 336 337 338 339 340 Shares Outstanding (GAAP Diluted) 307 307 307 309 315 325 336 335 335 335 336 337 339 341 342 344 Period-End Shares 304 304 304 304 304 312 323 324 324 335 336 337 337 338 339 340

EPS (GAAP) 1.65 3.31 2.87 4.57 2.60 3.46 5.08 6.34 3.75 5.92 6.82 7.84 5.96 7.10 7.68 10.37 EPS (Adjusted) 1.76 3.41 2.99 4.75 2.82 3.79 4.13 6.59 4.22 6.30 7.14 8.38 6.46 7.64 8.25 11.02 E = Morgan Stanley Research estimates Source: Company data, Morgan Stanley Research

7 41 MORGAN STANLEY RESEARCH October 31, 2012 Yandex NV

Exhibit 7 Yandex: Summary income statement, 2009-15E

Traffic Acquisition Cost 1,305 1,573 2,999 4,818 6,602 8,388 10,126

Net Revenue (excl. TAC) 7,424 10,926 17,034 23,906 31,459 38,615 45,441

Other Costs of Revenue 191 142 176 292 357 400 417 Content and Outsource 131 173 448 654 707 846 889 Total COGS 322 315 624 946 1,064 1,246 1,306 Gross Profit 7,102 10,611 16,410 22,960 30,395 37,369 44,136 Personnel Costs 2,062 2,670 4,280 5,912 7,285 8,526 9,968 Rent and Utilities 835 1,121 1,881 2,550 3,323 4,065 4,779 Other SG&A 448 655 1,012 1,269 1,882 2,287 2,704 Depreciation and Amortization 912 1,181 1,874 3,021 4,316 4,887 5,512 Total Operating Expenses 4,257 5,627 9,047 12,752 16,805 19,766 22,962 Operating Income (before SBC) 2,846 4,983 7,363 10,208 13,590 17,603 21,173

Stock-Based Compensation 208 160 329 574 771 952 1,126 Operating Income (loss) 2,638 4,823 7,034 9,635 12,819 16,651 20,048 ------EBITDA 3,550 6,005 8,908 12,656 17,134 21,539 25,559 Adjusted EBITDA 3,757 6,165 9,237 13,230 17,905 22,491 26,685

Interest Income 67 156 222 902 1,229 790 888 Other Non-Operating Income (23) 24 62 (29) (308) - - Pre-Tax Profit 2,682 5,003 7,318 10,508 13,739 17,441 20,936 Tax Provision 672 1,186 1,545 2,330 3,098 4,107 5,139 Net Income (GAAP) 2,0100 3,817 0 5,773 0 8,178 0 10,6410 13,3340 15,796 0 Net Income (Adjusted) 2,218 3,977 5,719 8,751 11,412 14,286 16,922 Shares Outstanding (GAAP Basic) 303 304 315 328 338 344 351 Shares Outstanding (GAAP Diluted) 308 309 328 337 344 348 351 Period-End Shares 304 304 324 337 340 348 355

EPS (GAAP) 6.52 12.37 17.59 24.24 30.92 38.35 44.99 EPS (Adjusted) 7.20 12.89 17.43 25.94 33.15 41.09 48.19 E = Morgan Stanley Research estimates Source: Company Data, Morgan Stanley Research

8 42 MORGAN STANLEY RESEARCH October 31, 2012 Yandex NV

Exhibit 8 Yandex: Cash flows statement, 2008-15E

(RUR m, Except per Share Data) FY2008A FY2009A FY2010A FY2011A FY2012E FY2013E FY2014E FY2015E Net Income 2,432 2,010 3,817 5,773 8,178 10,641 13,334 15,796 Depreciation and Amortization of PPE 570 872 1,147 1,826 2,907 4,125 4,746 5,512 Amortization of acquisition-related intangible assets 30 40 34 48 114 190 141 0 Share-based compensation expense 140 209 160 286 443 771 952 1,126 Deferred income taxes (5)(37)2(150)111000 Foreign exchange losses/(gains) (65) 64 (11) (80) 85000 Other 0000(170)000 Funds from Operations 3,102 3,158 5,149 7,703 11,668 15,728 19,173 22,433 Accounts receivable, net 52 (108) (437) (434) (497) (554) (157) (598) Funds receivable (17) 68 (3) (125) (259) (77) 22 (54) Prepaid expenses and other assets (179) (465) 176 (1,092) (900) (358) (949) (312) Accounts payable and accrued liabilities 114 342 641 1,045 685 589 695 613 Deferred revenue 110 56 166 348 157 336 326 313 Funds payable and amounts due to customers 159 136 271 349 1,438 430 303 101 Change in Net Working Capital 239 29 814 91 624 366 241 62 Cash Flow from Operations 3,341 3,187 5,963 7,794 12,291 16,093 19,414 22,495 Purchase of Property and Equipment (1,337) (987) (2,199) (5,566) (4,579) (6,470) (7,520) (8,335) As a % of Revenue 17.5% 11.3% 17.6% 27.8% 15.9% 17.0% 16.0% 15.0% Acquisitions of businesses, net of cash acquired(118)(232)(235)(735)0000 Investments in term deposits (2,705) (4,128) (5,248) (20,545) (10,777) 0 0 0 Maturities of term deposits 2,7272,4193,6169,0524,709000 Other 0000937000 Net Cash Used in Investing Activities (1,433) (2,928) (4,066) (17,794) (9,710) (6,470) (7,520) (8,335) Dividends paid (456)(160)(906)00000 Proceeds from issuance of ordinary shares 0 1 0 11,3800000 Proceeds from exercise of share options 8 34 1 142 405 400 900 900 Repurchase of share options (6)(107)(2)760000 Net Cash Provided by Financing Activities (454) (232) (907) 11,598 405 400 900 900 Effect of foreign currency on cash and equivalents 209 120 (24) 1,353 (111) 0 0 0 Inc. (Dec.) in Cash and Cash Equivalents 1,663 147 966 2,951 2,876 10,023 12,794 15,060 Beginning Cash and Cash Equivalents 595 2,258 2,405 3,371 6,322 8,142 18,165 30,958 Cash and Equivalents within assets held for sale 0000(1,056)000 Ending Cash and Cash Equivalents 2,258 2,405 3,371 6,322 8,142 18,165 30,958 46,018 E = Morgan Stanley Research estimates Source: Company data, Morgan Stanley Research

9 43 MORGAN STANLEY RESEARCH October 31, 2012 Yandex NV

Morgan Stanley ModelWare is a proprietary analytic framework that helps clients uncover value, adjusting for distortions and ambiguities created by local accounting regulations. For example, ModelWare EPS adjusts for one-time events, capitalizes operating leases (where their use is significant), and converts inventory from LIFO costing to a FIFO

basis. ModelWare also emphasizes the separation of operating performance of a company from its financing for a more complete view of how a company generates earnings.

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(Nawras), Orascom Telecom, Qatar Telecom, Rostelecom, Saudi Telecom Co, Sistema, Telecom Egypt, Telefonica Czech Republic, Telkom SA, Turk Telekomunikasyon A.S., Turkcell, Vodacom Group, Yandex NV, Zain. Within the last 12 months, Morgan Stanley has received compensation for products and services other than investment banking services from Mail.ru Group Ltd, Millicom, Mobile TeleSystems, MTN Group, Qatar Telecom, Rostelecom, Sistema. Within the last 12 months, Morgan Stanley has provided or is providing investment banking services to, or has an investment banking client relationship with, the following company: CTC Media, Emirates Telecommunications Corp., Etihad Etisalat, Mail.ru Group Ltd, Maroc Telecom, Millicom, Mobile TeleSystems, MTN Group, Naspers, Omani Qatari Telecom Co. (Nawras), Orascom Telecom, Qatar Telecom, Rostelecom, Saudi Telecom Co, Sistema, Telecom Egypt, Telefonica Czech Republic, Telkom SA, Turk Telekomunikasyon A.S., Turkcell, Vodacom Group, Yandex NV, Zain. 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10 44 MORGAN STANLEY RESEARCH October 31, 2012 Yandex NV

Coverage Universe Investment Banking Clients (IBC) % of % of % of Rating Stock Rating Category Count Total Count Total IBC Category Overweight/Buy 1108 37% 450 41% 41% Equal-weight/Hold 1273 43% 500 45% 39% Not-Rated/Hold 106 4% 30 3% 28% Underweight/Sell 470 16% 122 11% 26% Total 2,957 1102

11 45 MORGAN STANLEY RESEARCH October 31, 2012 Yandex NV

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12 46 MORGAN STANLEY RESEARCH October 31, 2012 Yandex NV

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13 47 MORGAN STANLEY RESEARCH

Industry Coverage:EEMEA - Telecoms & Media

Company (Ticker) Rating (as of)Price* (10/26/2012)

Edward Hill-Wood CTC Media (CTCM.O) E (02/03/2012) US$8.77 MTN Group (MTNJ.J) E (03/04/2011) ZAc15,600 Mail.ru Group Ltd (MAILRq.L) O (04/15/2011) US$33.3 Naspers (NPNJn.J) O (01/23/2012) ZAc56,280 Safaricom (SCOM.NR) O (06/08/2012) Kes4.4 Yandex NV (YNDX.O) O (07/05/2011) US$23.07 Madhvendra Singh, CFA Emirates Telecommunications E (09/05/2012) AED9.77 Corp. (ETEL.AD) Etihad Etisalat (7020.SE) O (03/07/2011) SAR72.5 Maroc Telecom (IAM.CS) E (04/01/2010) MAD108.5 Mobinil (EMOB.CA) E (12/11/2009) EGP154.03 Oman Telecommunications O (09/15/2011) OMR1.45 (Omantel) (OTL.OM) Omani Qatari Telecom Co. E (09/15/2011) OMR.49 (Nawras) (NWRS.OM) Qatar Telecom (QTEL.QA) NA (08/24/2010) QAR106 Saudi Telecom Co (7010.SE) O (06/25/2012) SAR41.7 Starcomms Plc (STARCOM.LG) O (08/06/2009) NGN.5 Telecom Egypt (ETEL.CA) O (01/21/2011) EGP13.94 Wataniya (NMTC.KW) O (02/22/2011) KWf2,260 Zain (ZAIN.KW) U (06/23/2011) KWf740 Zain Zambia (CELZ.LZ) E (01/16/2009) Zmk670 Peter Takaendesa Telkom SA (TKGJ.J) O (01/26/2011) ZAc1,805 Vodacom Group (VODJ.J) E (11/25/2011) ZAc10,940 Cesar Tiron Millicom (MICsdb.ST) O (12/06/2010) SKr576 Mobile TeleSystems (MBT.N) O (05/04/2012) US$16.77 Orascom Telecom (ORTEq.L) E (11/26/2009) US$3.05 Telefonica Czech Republic E (07/29/2011) CZK387.8 (SPTTsp.PR) Turk Telekomunikasyon A.S. E (10/12/2010) TL7 (TTKOM.IS) Turkcell (TKC.N) E (12/14/2011) US$14.94 VimpelCom (VIP.N) E (05/04/2012) US$10.71 Polina Ugryumova, CFA Rostelecom (RTKM.MM) U (10/13/2010) RUB122.78 Sistema (SSAq.L) O (04/07/2011) US$18.62

Stock Ratings are subject to change. Please see latest research for each company. * Historical prices are not split adjusted.

48 Russia Equity Research 30 October 2012

Overweight Yandex YNDX, YNDX US 3Q12 results surprise on earnings; New FY12 revenue Price: $23.07 guidance already priced in - ALERT 26 October 2012

Yandex has just published its 3Q12 results, which came in broadly in line on Russian Internet revenue, but ahead of Interfax consensus and JPMe on earnings. Revenue AC grew 41% yoy to RUB7.27 bn (1% below consensus/JPMe) while EBITDA Alexei Gogolev (7-495) 967-1029 expanded 47% yoy to RUB3.44 bn (4/3% ahead of consensus/JPMe). [email protected] EBITDA margin reached 47.3% (up 2pp yoy). Management raised the lower J.P. Morgan Bank International LLC end of the FY12 revenue growth guidance range to 42-45% yoy. Positive surprise on the earnings, but new revenue guidance appears to be priced in.

 Normalization of revenue growth and better profitability. Gross revenues expanded 41% yoy in 3Q12 reaching RUB7.3 bn (vs. 50%/65% Yandex conference call details: yoy growth in 1H12/3Q11). Revenue mix remained broadly unchanged October 30, 2012; during the quarter with just over 72% of gross revenues coming from own 9am Eastern, 1pm UK, 5pm network, 18% from partner revenues with the reset from display and other Moscow; payments. The 3Q12 marks normalization of partner topline growth trends US: +1 631 621 5256 that were boosted, among other things, by partnerships with Rambler and Russia: 8 10 800 23942044 Aport – c55% yoy vs. 105% growth yoy in 1H12 and 128% yoy growth in UK: +44 (0) 1452 555 131 2H11. As we expected, display revenue growth decelerated to 25% yoy during 3Q12 (vs. 35%/63% during 1H12/3Q11) on greater price competition passcode 38529333# from TV channels. EBITDA margin of 47.3% during 3Q12 improved c2pp yoy and qoq. This came on the back of continued reduction of product development expenses to 14.2% (vs. 16.9%/15.4% during 1H12/3Q11).

 Guidance upgraded, priced in. Management increased the lower end of its FY12 RUB revenue guidance to 42-45% yoy (from previous guidance range of 40-45%), with no change to its profitability estimate (broadly flat yoy; roughly within the 46-47% range). This implies roughly 32-41% yoy revenue growth in 4Q12 and c51% EBITDA margin (4pp seasonal growth qoq). With a BBG consensus revenue assumption of c44% RUB yoy growth, the change in management guidance appears to be priced in.

 Shareholder returns appear unlikely. With almost $0.4 bn of cash on the balance sheet at the end of 3Q12 and an estimated c$0.2 bn of FY13 FCF we think Yandex is capable of paying regular dividends. We note however, that large internet names tend to sit on cash piles in case of unexpected M&A transactions. Among the large-cap online universe only Tencent pays a small regular dividend (yield of c0.4% for 2013E). As such, we see short-term shareholder returns from Yandex as unlikely.

Table 1: Yandex 3Q12 results review (RUB mn) 3Q12A 3Q11A yoy 2Q12A qoq 3Q12JPMe Diff Consensus Diff Gross revenue 7,273 5,159 41% 6,801 7% 7,357 -1.1% 7,333 -0.8% Adjusted EBITDA 3,440 2,335 47% 3,070 12% 3,335 3% 3,293 4% EBITDA margin 47.3% 45.3% 2.0pp 45.1% 2.2pp 45.3% 2.0pp 44.9% 2.4pp Net income 2,291 1,705 34% 1,983 16% 2,164 6% 2,130 8% EPS ($) 0.22 0.18 23% 0.20 12% 0.21 6% Source: Company data; J.P. Morgan estimates; Interfax consensus.

See page 2 for analyst certification and important disclosures, including non-US analyst disclosures. J.P. Morgan does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.

www.morganmarkets.com 49 Alexei Gogolev Russia Equity Research (7-495) 967-1029 30 October 2012 [email protected]

Analyst Certification: The research analyst(s) denoted by an “AC” on the cover of this report certifies (or, where multiple research analysts are primarily responsible for this report, the research analyst denoted by an “AC” on the cover or within the document individually certifies, with respect to each security or issuer that the research analyst covers in this research) that: (1) all of the views expressed in this report accurately reflect his or her personal views about any and all of the subject securities or issuers; and (2) no part of any of the research analyst's compensation was, is, or will be directly or indirectly related to the specific recommendations or views expressed by the research analyst(s) in this report. Important Disclosures

 Market Maker: JPMS makes a market in the stock of Yandex.  Market Maker/ Liquidity Provider: J.P. Morgan Securities plc and/or an affiliate is a market maker and/or liquidity provider in Yandex.  Client: J.P. Morgan currently has, or had within the past 12 months, the following company(ies) as clients: Yandex. Company-Specific Disclosures: Important disclosures, including price charts, are available for compendium reports and all J.P. Morgan– covered companies by visiting https://mm.jpmorgan.com/disclosures/company, calling 1-800-477-0406, or emailing [email protected] with your request.

Yandex (YNDX, YNDX US) Price Chart

OW $40.002 60

OW $40.999 OW $43.997 48 Date Rating Share Price Price Target OW $46.001 OW $40 OW $43.996 ($) ($) 03-Aug-11 OW 32.79 46.00 Price($) 36 27-Sep-11 OW 25.54 41.00 31-Oct-11 OW 28.13 40.00 24 01-Mar-12 OW 21.60 40.00 29-Mar-12 OW 25.35 44.00 12 20-Sep-12 OW 24.83 44.00

0 May Aug Dec Mar Jul Nov 11 11 11 12 12 12

Source: Bloomberg and J.P. Morgan; price data adjusted for stock splits and dividends. Initiated coverage Aug 03, 2011.

The chart(s) show J.P. Morgan's continuing coverage of the stocks; the current analysts may or may not have covered it over the entire period. J.P. Morgan ratings or designations: OW = Overweight, N= Neutral, UW = Underweight, NR = Not Rated Explanation of Equity Research Ratings, Designations and Analyst(s) Coverage Universe: J.P. Morgan uses the following rating system: Overweight [Over the next six to twelve months, we expect this stock will outperform the average total return of the stocks in the analyst’s (or the analyst’s team’s) coverage universe.] Neutral [Over the next six to twelve months, we expect this stock will perform in line with the average total return of the stocks in the analyst’s (or the analyst’s team’s) coverage universe.] Underweight [Over the next six to twelve months, we expect this stock will underperform the average total return of the stocks in the analyst’s (or the analyst’s team’s) coverage universe.] Not Rated (NR): J.P. Morgan has removed the rating and, if applicable, the price target, for this stock because of either a lack of a sufficient fundamental basis or for legal, regulatory or policy reasons. The previous rating and, if applicable, the price target, no longer should be relied upon. An NR designation is not a recommendation or a rating. In our Asia (ex-Australia) and U.K. small- and mid-cap equity research, each stock’s expected total return is compared to the expected total return of a benchmark country market index, not to those analysts’ coverage universe. If it does not appear in the Important Disclosures section of this report, the certifying analyst’s coverage universe can be found on J.P. Morgan’s research website, www.morganmarkets.com. Coverage Universe: Gogolev, Alexei M: AFK Sistema (SSAq.L), CTC Media (CTCM), Mail.ru Group (MAILRq.L), Mobile Telesystems (MBT), Rostelecom (RTKM.MM), Rostelecom (Preferred) (RTKM_p.MM), Yandex (YNDX)

2 50 Alexei Gogolev Russia Equity Research (7-495) 967-1029 30 October 2012 [email protected]

J.P. Morgan Equity Research Ratings Distribution, as of September 28, 2012 Overweight Neutral Underweight (buy) (hold) (sell) J.P. Morgan Global Equity Research Coverage 44% 44% 12% IB clients* 52% 46% 34% JPMS Equity Research Coverage 42% 48% 10% IB clients* 69% 61% 53% *Percentage of investment banking clients in each rating category. For purposes only of FINRA/NYSE ratings distribution rules, our Overweight rating falls into a buy rating category; our Neutral rating falls into a hold rating category; and our Underweight rating falls into a sell rating category. Please note that stocks with an NR designation are not included in the table above.

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3 51 Alexei Gogolev Russia Equity Research (7-495) 967-1029 30 October 2012 [email protected]

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4 52 Deutsche Bank Markets Research

Rating Company Date Buy Yandex 30 October 2012 Results North America United States Price at 26 Oct 2012 (USD) 23.07 TMT Price target 31.00 Internet Reuters Bloomberg Exchange Ticker 52-week range 28.62 - 16.66 YNDX.OQ YNDX US NMS YNDX

Strong 3Q top line and margins; Ross Sandler Igor Semenov Research Analyst Research Analyst reiterate buy rating (+1) 415 262-2028 (+7) 495 933-9238 [email protected] [email protected] Maintain buy and price target on strong results

Yandex reported strong 3Q results on the top and bottom line. Revenue came Lloyd Walmsley in 1% above our estimates on higher network results, slightly offset by weaker Research Analyst O&O and display. Margins came in nicely ahead of our estimates. We trim our (+1) 212 250-7063 display estimates but slightly increase our network, resulting in overall [email protected] revenues approximately unchanged and slightly higher profitability in our 2013 estimates. We think investors will welcome these results. We reiterate our Buy rating on Yandex shares and maintain our $31 price target. Conor Irvine Associate Analyst 3Q upside driven by network revs as display and O&O slightly light (+1) 415 617-3246 Yandex reported gross revs of RUR 7.27bn, +41% y/y ahead of our RUR [email protected] 7.22bn, +40% y/y est. Upside was driven by Network revenue, which grew 55% y/y (vs our 40% y/y est.) despite difficult comparisons. O&O search grew 39% y/y, slightly below our +42% y/y est., while Display grew 25% y/y, below Benjamin Abrams our +30% y/y est. but better than some investors feared. Paid clicks grew 35% Research Associate vs. our +41% y/y est., while CPC's increased 5.4% vs. our 0.3% est. Adj. (+1) 212 250-0476 EBITDA of RUR 3.44bn (47.3% margin) beat our RUR 3.32bn est. (45.9% [email protected] margin) and PF EPS came in at RUR 6.64 vs. our RUR 6.26 est., despite a higher tax rate (23.1% PF vs. our 20.5% estimate). Price/price relative Tweaking estimates 50 We now forecast our 4Q Rev/Adj. EBITDA/PF EPS for RUR 8.82bn/RUR 4.41bn/ RUR 8.47, from previous RUR 8.97bn/RUR 4.55bn/RUR 8.82. For 2013, we 40 now estimate Rev/Adj. EBITDA/PF EPS for RUR 38.10bn/RUR 17.85bn/ RUR 30

32.01, from our previous RUR 38.0bn/RUR 17.76bn/RUR 31.81. 20 Maintaining $31 price target 10 Our price target of $31 is based on a blended average of P/E of 30x on 2013E 5/11 11/11 5/12 and 17x 2013E EV/EBITDA. Risks include competition, loss of network Yandex partners, FX risk, political risk, increased investment in R&D and S&M, a S&P 500 INDEX (Rebased) multiple class share structure and emerging market risk. Performance (%) 1m 3m 12m Absolute -1.2 21.4 -10.5 S&P 500 INDEX -1.5 3.8 13.7

Forecasts And Ratios

Year End Dec 31 2011A 2012E 2013E 1Q EPS 3.63 4.49A 6.01 2Q EPS 3.79 6.17A 7.72 3Q EPS 5.27 6.64A 7.71 4Q EPS 6.59 8.47 10.56 FY EPS (RUB) 19.39 25.78 32.01 OLD FY EPS (RUB) 19.39 25.75 31.81 % Change 0.0% 0.1% 0.6% P/E (x) 42.2 28.1 22.6 Revenue (RUBm) 20,033.0 28,769.1 38,097.6 Source: Deutsche Bank estimates, company data

______Deutsche Bank Securities Inc. All prices are those current at the end of the previous trading session unless otherwise indicated. Prices are sourced from local exchanges via Reuters, Bloomberg and other vendors. Data is sourced from Deutsche Bank and subject companies. Deutsche Bank does and seeks to do business with companies covered in its research reports. Thus, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. DISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED IN APPENDIX 1. MICA(P) 072/04/2012. 53 30 October 2012

Internet Yandex

Model updated:30 October 2012 Fiscal year end 31-Dec 2011 2012E 2013E

Running the numbers Financial Summary North America DB EPS (RUB) 19.39 25.78 32.01 Reported EPS (RUB) 19.39 25.78 32.01 United States DPS (RUB) 0.00 0.00 0.00 Internet BVPS (RUB) 88.33 111.16 142.50 Valuation Metrics Yandex Price/Sales (x) 13.4 8.4 6.4 Reuters: YNDX.OQ Bloomberg: YNDX US P/E (DB) (x) 42.2 28.1 22.6

P/E (Reported) (x) 42.2 28.1 22.6 Buy P/BV (x) 7.2 6.5 5.1 Price (26 Oct 12) USD 23.07 FCF yield (%) 0.8 2.4 3.1 Dividend yield (%) 0.0 0.0 0.0 Target Price USD 31.00 EV/Sales 12.3 7.5 5.5 52 Week range USD 16.66 - 28.62 EV/EBITDA 26.7 16.3 11.8 EV/EBIT 33.5 21.2 15.9 Market Cap (m) USDm 7,740 Income Statement (RUBm) EURm 5,964

Sales 20,033 28,769 38,098 Company Profile EBITDA 9,237 13,292 17,851 Yandex operates the leading Internet search engine in EBIT 7,363 10,251 13,276 Russia. In addition to search, the company also offers a Pre-tax profit 7,901 10,938 13,764 range of services including specialized search, Net income 6,356 8,649 10,804 personalized and location-based services, including Yandex.News, Yandex.Market, Yandex.Mail and Cash Flow (RUBm) Yandex.Maps. Cash flow from operations 7,837 10,520 15,278 Net Capex -5,566 -4,763 -7,620 Free cash flow 2,271 5,757 7,659 Equity raised/(bought back) -8 235 0 Price Performance Dividends paid 0 0 0 Net inc/(dec) in borrowings 0 0 0 50 Other investing/financing cash flows 731 -6,156 0 Net cash flow 2,994 -164 7,659 40 Change in working capital 91 -1,186 -101 30 Balance Sheet (RUBm) 20 Cash and cash equivalents 6,322 6,086 13,745 10 Property, plant & equipment 6,973 8,933 11,978 May 11 Nov 11 May 12 Goodwill 1,132 756 756 Other assets 19,649 27,388 28,206 Yandex S&P 500 INDEX (Rebased) Total assets 34,076 43,163 54,684 Margin Trends Debt 0 0 0 Other liabilities 5,123 5,869 6,585 48 Total liabilities 5,123 5,869 6,585 44 Total shareholders' equity 28,953 37,294 48,099 Net debt -6,322 -6,086 -13,745 40 36 Key Company Metrics Sales growth (%) nm 43.6 32.4 32 DB EPS growth (%) na 32.9 24.2 11 12E 13E EBITDA Margin EBIT Margin Payout ratio (%) 0.0 0.0 0.0

EBITDA Margin (%) 46.1 46.2 46.9 Growth & Profitability EBIT Margin (%) 36.8 35.6 34.8 50 27 ROE (%) 22.0 26.1 25.3 26 40 25 Net debt/equity (%) -21.8 -16.3 -28.6 30 24 23 Net interest cover (x) nm nm nm 20 22 10 21 DuPont Analysis 20 0 19 EBIT margin (%) 36.8 35.6 34.8 11 12E 13E x Asset turnover (x) 0.6 0.7 0.8 x Financial cost ratio (x) 1.1 1.1 1.0 Sales growth (LHS) ROE (RHS) x Tax and other effects (x) 0.8 0.8 0.8

= ROA (post tax) (%) 18.7 22.4 22.1 Solvency x Financial leverage (x) 1.2 1.2 1.1 0 = ROE (%) 22.0 26.1 25.3 -5 annual growth (%) na 18.9 -3.1 -10 x NTA/share (avg) (x) 88.3 98.7 126.5 -15 -20 = Reported EPS 19.39 25.78 32.01 -25 annual growth (%) na 32.9 24.2

-30 -35 Source: Company data, Deutsche Bank estimates 11 12E 13E

Net debt/equity (LHS) Net interest cover (RHS)

Ross Sandler +1 415 262-2028 [email protected]

Page 2 Deutsche Bank Securities Inc.

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Summary of 3Q12 results

Figure 1: Summary of Key Metrics and 3Q12 Results (Rubles in mn, unless noted) DB Prior Year Change / Change / Actual Estimate Delta Consensus Quarter Prior Year Prior Quarter Other Key Metrics Paid Click Growth (Y/Y) 35.0% 41.0% -14.6% 68.0% -48.5% -43.5% CPC Growth (Y/Y) 5.4% 0.3% 1821.1% -1.3% -506.8% -176.1%

O&O SERPs (Y/Y) 31.0% 35.0% -11.4% 42.0% -26.2% 3.3% O&O CPTs (Y/Y) 6.5% 3.0% 115.4% 17.7% -63.4% -36.3%

Gross Revenue 7,273 7,224 0.7% 5,159 41.0% 6.9% O&O Sites revenues 5,255 5,339 -1.6% 3,768 39.5% 7.5% Network revenues 1,284 1,158 10.9% 827 55.3% 13.4% Text-based Advertising revenues 6,539 6,497 0.6% 4,595 42.3% 8.6% Display Advertising revenues 580 603 -3.8% 464 25.0% -7.6% Online Payment Commissions 133 124 7.7% 95 40.0% 4.7% Other revenues 21.00 - NM 5 320.0% -12.5% Gross Revenues (Rubels) 7,273 7,224 0.7% 5,159 41.0% 6.9%

Network Syndication TAC 814 746 9.2% 526 54.8% 11.7% TAC rate 63.4% 64.4% 63.6% -0.3% -1.6% Distribution TAC 417 438 -4.8% 292 42.8% 1.2% Total TAC 1,231 1,183 4.0% 818 50.5% 7.9%

Operating Expenses Product Development 975 1,055 -7.6% 751 29.8% -3.1% SG&A 1,020 1,025 -0.5% 786 29.8% 3.9% Total Operating Expense 1,995 2,080 -4.1% 1,537 29.8% 0.4%

EBITDA 3,440 3,317 3.7% 2,335 47.3% 12.1% EBITDA Margins (Gross) 47.3% 45.9% 3.0% 45.3% 204 bps 216 bps

Proforma Operating Profit 2,706 2,517 7.5% 1,847 46.5% 14.0%

Pretax Income 2,900 2,642 9.7% 2,255 28.6% 11.2% Tax Rate 23.1% 20.5% 21.5% 7.8% 11.8%

Proforma EPS (excl. stock comp.) 6.64р.6.26р. 6.0% 5.27р. 25.9% 7.6% GAAP EPS 6.82р.5.92р. 15.3% 5.08р. 34.4% 15.4% Source: Company reports, FactSet, Deutsche Bank estimates

Deutsche Bank Securities Inc. Page 3

55 30 October 2012

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Figure 2: Summary of Estimate Changes (4Q12E, 2013E and 2014E) 4Q12E 2013E 2014E New Est. Old Est. Delta New Est. Old Est. Delta New Est. Old Est. Delta

O&O Sites revenues $6,196 $6,298 -1.6% $28,310 $28,307 0.0% $36,925 $36,920 0.0% Network revenues $1,436 $1,400 2.6% $5,749 $5,558 3.5% $6,784 $6,558 3.5% Text-based Advertising revenues $7,632 $7,698 -0.9% $34,059 $33,865 0.6% $43,709 $43,478 0.5% Display Advertising revenues $1,020 $1,123 -9.2% $3,278 $3,468 -5.5% $4,097 $4,335 -5.5% Online Payment Commissions $150 $150 0.0% $681 $668 1.8% $885 $869 1.8% Other revenues $20 $0 NM $80 $0 NM $96 $0 NM Gross Revenues (Rubels) $8,821 $8,970 -1.7% $38,098 $38,001 0.3% $48,787 $48,682 0.2%

Traffic acquisition costs $1,433 $1,418 1.1% $6,170 $6,044 2.1% $7,726 $7,577 2.0% Cost of revenues $783 $802 -2.5% $3,300 $3,307 -0.2% $4,086 $4,096 -0.3% Total Costs of Revenues $2,216 $2,220 -0.2% $9,470 $9,351 1.3% $11,812 $11,674 1.2% Gross Profit $6,605 $6,750 -2.1% $28,628 $28,650 -0.1% $36,975 $37,008 -0.1% Gross Profit Margins (%) 74.9% 75.2% -37 bps 75.1% 75.4% -25 bps 75.8% 76.0% -23 bps

Operating Expenses Product Development $1,125 $1,125 0.0% $5,580 $5,688 -1.9% $7,365 $7,508 -1.9% Selling, General & Administrative $1,075 $1,075 0.0% $5,198 $5,204 -0.1% $6,653 $6,661 -0.1% Total Operating Expense $2,200 $2,200 0.0% $10,777 $10,892 -1.1% $14,018 $14,169 -1.1%

Adj EBITDA $4,405 $4,550 -3.2% $17,851 $17,758 0.5% $22,957 $22,839 0.5% Adj EBITDA margin 49.9% 50.7% -78 bps 46.9% 46.7% 12 bps 47.1% 46.9% 14 bps

Proforma Operating Profit $3,455 $3,600 -4.0% $13,276 $13,183 0.7% $17,696 $17,578 0.7%

Pretax Income $3,580 $3,725 -3.9% $13,764 $13,671 0.7% $18,160 $18,042 0.7% Income Tax (Benefit) $734 $764 -3.9% $2,959 $2,939 1% $3,995 $3,969 0.7% Tax Rate 20.5% 20.5% 21.5% 21.5% 22.0% 22.0%

Proforma EPS $8.47 $8.82 -3.9% $32.01 $31.81 0.6% $41.67 $41.42 0.6%

Reported EPS [GAAP] $8.10 $8.45 -4.1% $30.23 $30.03 0.7% $39.90 $39.66 0.6% Source: Deutsche Bank estimates

Valuation

Yandex shares currently trade at 23.3x our 2013 pro forma EPS estimate of RUB 32.01 per share, or US$0.99 (assuming a 30.5 RUB/USD FX rate) and 12.0x 2013E EV/EBITDA, discounts to our projections that the company will grow at a 34% 2011–2014 currency neutral revenue CAGR. Our $31 price target is based on a blended average of 30x our 2013 pro forma EPS estimate, 17x 2013E EV/EBITDA, and a target free cash flow yield of 2.5%.

Page 4 Deutsche Bank Securities Inc.

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Figure 3: Valuation Yandex -- Valuation Worksheet ($ in millions, except per share amounts)

Current Price $23.07 30-Oct Diluted Shares Outstanding 335 Current Market Cap 7,734 Less: Cash and Cash Equivalents 703 Less : Other Assets Plus : Debt Adjusted Enterprise Value 7,032

Price to Earnings 2013E 2014E GA A P EPS $0.99 $1.31 GA A P P/E Multiple ( c ur r ent) 23.3x 17.6x Adjusted EPS $1.05 $1.37 Adjusted P/E Multiple (current) 22.0x 16.9x Adjusted P/E/G Multiple (current) 0.9x 0.6x Target Multiple 30.0x 30.0x Implied Stock Price on Forward EPS $31 $41

EV to EBITDA 2013E 2014E Adjusted EBITDA 585 753 Current EV/EBITDA Multiple 12.0x 9.3x Target Multiple 17.0x 17.0x Enterprise Value 9,950 12,796 Plus: YE Cash 1,079 1,407 Less: YE Debt Equity Market Capitalization 11,028 14,203 FY End Projected Sharecount 338 340 Implied Stock Price on Forward EBITDA $33 $42

FCF Yie ld 2013E 2014E FCF per Share $0.74 $0.96 Current FCF Yield 3.2% 4.2% Target Yield 2.5% 2.5% Implied Stock Price on Forward FCF $30 $39

Average $31 Source: Company reports, Deutsche Bank estimates

Risks

Risks include competition, loss of network partners, FX risk, political risk, increased investment in R&D and S&M, a multiple class share structure and emerging market risk.

Deutsche Bank Securities Inc. Page 5

57 30 October 2012 58 Internet Yandex . . . р р % р

. 39.90 . 41.67 . 29.43 р р р 488 464 4,575 5,261 5,198 6,653 5,580 7,365 21.5% 22.0% 10.2% 9.7% 22,957 48,787 14,165 96 . 32.01 . 22.69 . 30.23 р р р 122 9.5% 1,300 1,398 1,519 21.5% 17,851 38,098 10,804 80 . 10.56 .7.08 . 10.03 р р р 5,732 11,398 3,575 20 .7.71 .5.30 .7.26 р р р Conor Irvine 415-617-3246 Ben Abrams Irvine Conor 212.250.0476 4,445 9,528 2,604 20 .7.72 .4.63 .7.30 р р р 4,293 9,210 2,602 20 .6.01 .5.68 .5.63 р р р 687 122 122 122 3,041 925 1,100 1,250 4,035 1,198 1,277 1,326 4,133 1,386 1,358 1,316 10.5% 10.5% 10.5% 10.5% 20.9% 21.5% 21.5% 21.5% 3,381 7,961 2,024 . 25.78 . 14.01 . 24.63 р р р 125 950 1,075 1,125 10.6% 20.5% 13,292 28,769 101 20 8,649 .8.47 .2.69 .8.10 Ross SandlerRoss 1.415.262.2028 Lloyd Walmsley +1.212.250.7063 Igor Semenov 011.7.495.933.9238 р р р 4,405 8,821 20 2,846 .6.64 .1.50 .6.82 р р р 3,440 7,273 21 2,229 .6.17 .6.70 .5.92 р р р 3,070 6,801 24 2,069 .4.49 .3.16 .3.75 р р р 2,377 5,874 1,505 . 19.39 .6.80 . 17.61 р р р 9,237 20,033 6,356 .6.59 .2.95 .6.34 р р р 3,269 6,439 2,207 .5.27 .1.24 .5.08 р р р 2,335 5,159 1,771 .3.79 .2.09 .3.46 р р р 1,914 4,541 1,234 .3.63 .0.45 .2.60 р р р 1,719 3,894 1,144 . 12.89 . 12.37 р р 43.1% 49.3% 44.1% 42.1% 45.3% 50.8% 46.1% 40.5% 45.1% 47.3% 49.9% 46.2% 42.5% 46.6% 46.6% 50.3% 46.9% 47.1% 6,164 12,500 3,977 .7.20 .6.52 р р 336231685183736 294 44 180 34 3 408 93 538 133 235 194 912130 933 201 1,229 280 328 87 440 91 464 95 864 2,096 115 420 388 628 114 580 127 1,020 133 2,648 150 512 524 766 148 725 165 1,274 173 3,278 4,097 194 681 885 986 672 1,186 232 256 484 573 1,545 344 540 671 734 2,289 554 713 713 979 2,959 3,995 5,954 6,653 9,931 3,006 3,513 3,872 4,961 15,352 4,362 5,058 5,435 6,605 21,460 5,965 6,928 7,087 8,648 28,628 36,975 306.9 308.2 308.6 315.2 325.3 335.8 334.9 327.8 335.0 335.2 335.7 336.0 335.5 336.6 337.2 337.8 338.4 337.5 339.9 6,574 7,533 10,960 3,473 4,002 4,595 5,442 17,512 5,304 6,022 6,539 7,632 25,497 7,281 8,258 8,611 9,910 34,059 43,709 3,519 2,891 5,163 1,376 1,490 2,255 2,780 7,901 1,849 2,609 2,900 3,580 10,938 2,578 3,315 3,317 4,554 13,764 18,160 2008A 2009A 2010A 1QA 2QA 3QA 4QA 2011A 1QA 2QA 3QA 4QE 2012E 1QE 2QE 3QE 4QE 2013E 2014E 3,759 8,729 2,219 Adj EBITDA margin EBITDA Adj Depreciation &Amortization 600 912 1,181 377 427 488 582 1,874 661 696 734 Total Operating Expense 2,129 2,894 3,767 1,287 1,599 1,537 1,692 6,115 1,985 1,988 1,995 2,200 8,168 2,584 2,635 2,642 2,916 10,777 14,018 Selling,General & Administrative 1,158 1,335 1,781 596 881 786 881 3,144 958 982 1,020 Sequential GrowthYear/Year GrowthSequential -- Network TAC syndication-- Distribution TAC partners acquisitionTraffic costsCost revenues of Total CostsRevenues of NA-6% NA NA 1,194 80% 76 1,066 17% 1,270 14% 238 14% 921 1,695 1,304 43% 425 2,076 652 25% 294 1,573 65% 2,569 772-9% NA 244 369 538 57% 888 996 16% 272 526 641 65% 1,028 350 7% 292 665 818 56% 1,287 387 21% 1,854 337 1,002 1,478 60%-10% 1,145 469 NA 2,999 657 4,681 51% 16% 335 1,512 476 992 729 50% 1,743 1,682 3% 1,141 412 814 41% 1,838 1,231 20% 520 417 925 37% 2,216 1,433 NANA 602 3,125 508 44% 7,309 4,797 1,672 607 782 36% 1,996 1,287 504 783 2,282 35% 1,455 874 2,512 2,441 1,600 581 31% 997 2,750 1,828 710 1,122 29% 603 9,470 6,170 3,775 827 32% 706 11,812 7,726 4,454 2,395 28% 841 3,272 922 3,300 4,086 Product Development 971 1,559 1,986 691 718 751 811 2,971 1,027 1,006 975 Net IncomeRevenues O&O Sites revenues Network revenuesText-based advertisingDisplay advertisingOnline Payment CommissionsProduct DevelopmentSelling,General & AdministrativeOperating expensesEBITDAProforma OpeartingProfit Proforma EPS 33% 80.0% 25% 22.7% 14.1% 54.6% 14.6% -6.1% 63.0% 15.3% 32% 43.2% 83.1% 54.4% 39.3% -13.1% 45.5% 2.3% 67.1% 33.4% 60.6% 29% 65.4% -11.7% 35.9% 40.3% 38.1% 62.4% 31.7% 57.1% 65.1% 27.4% 57.2% 75.0% 30.2% 62.5% 60.4% 42.2% 27% 68.7% 120.1% 58.7% 118.1% 56.7% 47.6% 64.8% -12.7% 83.3% 55.2% 124.7% -1.7% 39.7% 49.7% 65.8% 34% 73.9% 43.1% 59.6% 56.1% 79.0% 26.0% 87.2% 130.4% 64.0% 33.7% 62.8% 54.2% 56.2% 54.3% 34% 106.3% 52.6% 60.3% 51.5% 62.8% 94.0% 73.5% 38.6% 72.5% 59.8% 76.5% 42.7% 11.2% 40.8% 116.6% 50.8% 32% 45.1% 48.4% 31.8% 31.0% 70.5% 52.7% 60.7% 43.2% 75.2% 49.6% 92.8% 49.8% 47.8% 62.3% 53.0% 39.6% 26% 28.0% 50.5% 11.5% 39.5% 53.5% 48.6% 55.3% 41.0% 27.9% 54.2% 48.9% 40.0% 42.7% 42.3% 29.8% 30% 40.7% 50.5% 40.1% 38.5% 37.0% 59.7% 24.3% 49.9% 30.0% 25.0% 40.2% 22.0% 41.4% 31% 23.8% 29.8% 66.7% 43.6% 46.5% 29.8% 38.3% 34.9% 18.0% 45.6% 28.3% 41.9% 62.7% 38.7% 18.0% 35.5% 28.6% 30.0% 32% 60.4% 30.0% 26.3% 37.3% 25.0% 41.6% 25.9% 39.1% 18.0% 35.4% 39.2% 33.6% 47.3% 30.0% 30% 22.0% 37.1% 30.0% 35.0% 28.5% 35.0% 18.0% 31.0% 43.1% 30.2% 34.8% 30.0% 22.0% 31.7% 30.0% 25% 32.6% 32.9% 35.0% 18.0% 29.2% 34.5% 32.5% 43.9% 30.0% 25.0% 29.8% 30.0% 37.3% 28% 33.8% 35.0% 18.0% 32.4% 18.1% 32.4% 42.2% 30.0% 25.0% 33.6% 507.6% 28.8% 463.7% 25.0% 35.0% 28.1% 28.3% 32.6% 27% 39.8% 30.0% 23.8% 28.3% 16.1% 35.0% 29.5% 31.9% 29.2% 31% 25.0% 24.7% 33.3% 30.1% 30.1% 28% 24.2% 34.3% 30.2% 29% 28.6% YoY Growth 63% 79% 106% 11% 75% 53% 50% 24% 63% 26% 29% 33% 34% 25% 16% 25% 24% 30% Non-TAC COGSNon-TAC % O&O of revs 7.3% 11.0% 9.1% 10.2% 9.8% 10.8% 8.8% 9.8% 10.7% 10.6% 10.1% Gross MarginProduct DevelopmentSelling,General & AdministrativeEBITDAOperating ProfitPretax IncomeTax Rate 15.1% 15.3% 12.7% 77.8% 14.2% 17.9% 76.2% 15.3% 15.9% 42.2% 79.4% 50.0% 19.4% 46% 17.7% 32.6% 77.2% 43.1% 15.2% 15.8% 39.9% 28% 33% 77.4% 49.3% 13.7% 14.6% 34.5% 23.2% 41% 44.1% 75.1% 15.7% 12.6% 32.7% 23.0% 42.1% 77.0% 35% 16.3% 14.8% 35.8% 16.9% 45.3% 76.6% 14.4% 17.5% 33% 41.7% 17.2% 50.8% 74.3% 14.0% 14.8% 36.8% 21.5% 44% 46.1% 74.4% 12.2% 13.4% 29.2% 20.6% 43% 40.5% 74.7% 14.0% 12.8% 34.9% 19.6% 45.1% 74.9% 39% 15.0% 14.4% 37.2% 18.6% 47.3% 74.6% 13.9% 17.4% 31% 39.2% 20.7% 49.9% 74.9% 13.9% 14.7% 35.6% 23.1% 38% 46.2% 75.2% 12.3% 13.8% 30.8% 42.5% 40% 74.4% 13.6% 13.3% 34.7% 46.6% 75.9% 13.6 41% 14.6% 33.5% 46.6% 75.1% 15.1% 38% 38.9% 50.3% 75.8% 34.8% 32% 46.9% 36.3% 47.1% 36% 35% 40% 36% 37% Adj EBITDA 3,825 Gross RevenuesGross (Rubels) 7,649 Net Income FromOperations 2,533 Yandex Figure 4: Income Statement Pretax Income Pretax Proforma Operating Profit(Expense) Income Other 3,225 2,847 4,983 1,342 1,487 1,847 2,687 7,363 1,716 2,374 2,706 3,455 10,251 2,456 3,193 3,195 4,432 13,276 17,696 Gross Profit Operating Expenses Shares Outstanding Proforma EPS 8.25 Free CashFlow perFCF share 3,764 12.20 143 680 418 987 2,228 1,060 2,247 504 904 4,701 1,910 1,561 1,792 2,395 7,659 10,003 Income Statement (RUS Rubels inmillions except per share data) Display Advertising revenues Commissions Payment Online Other revenues O&O Sites revenues Network revenues revenues Advertising Text-based 4,728 1,846 5,800 1,733 9,454 1,506 3,002 471 3,415 3,768 587 4,405 827 14,590 1,037 4,284 2,922 4,890 1,020 5,255 1,132 6,196 1,284 20,625 1,436 6,077 4,872 6,923 1,204 7,095 1,336 8,215 1,515 28,310 36,925 1,695 5,749 6,784 Fiscal yearending December Growth (Y/Y) Income Tax (Benefit) Tax Income Reported EPS [GAAP] 7.92 As a % of Gross Revenue Gross of a% As

Source: Company reports, DeutscheBankestimates

Page 6 Deutsche Bank Securities Inc.

30 October 2012

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Appendix 1

Important Disclosures

Additional information available upon request

Disclosure checklist Company Ticker Recent price* Disclosure Yandex YNDX.OQ 23.07 (USD) 26 Oct 12 1,2,6,7 *Prices are sourced from local exchanges via Reuters, Bloomberg and other vendors. Data is sourced from Deutsche Bank and subject companies

Important Disclosures Required by U.S. Regulators Disclosures marked with an asterisk may also be required by at least one jurisdiction in addition to the United States. See Important Disclosures Required by Non-US Regulators and Explanatory Notes.

1. Within the past year, Deutsche Bank and/or its affiliate(s) has managed or co-managed a public or private offering for this company, for which it received fees.

2. Deutsche Bank and/or its affiliate(s) makes a market in securities issued by this company.

6. Deutsche Bank and/or its affiliate(s) owns one percent or more of any class of common equity securities of this company calculated under computational methods required by US law.

7. Deutsche Bank and/or its affiliate(s) has received compensation from this company for the provision of investment banking or financial advisory services within the past year.

Important Disclosures Required by Non-U.S. Regulators Please also refer to disclosures in the Important Disclosures Required by US Regulators and the Explanatory Notes.

1. Within the past year, Deutsche Bank and/or its affiliate(s) has managed or co-managed a public or private offering for this company, for which it received fees.

2. Deutsche Bank and/or its affiliate(s) makes a market in securities issued by this company.

6. Deutsche Bank and/or its affiliate(s) owns one percent or more of any class of common equity securities of this company calculated under computational methods required by US law.

7. Deutsche Bank and/or its affiliate(s) has received compensation from this company for the provision of investment banking or financial advisory services within the past year.

For disclosures pertaining to recommendations or estimates made on securities other than the primary subject of this research, please see the most recently published company report or visit our global disclosure look-up page on our website at http://gm.db.com/ger/disclosure/Disclosure.eqsr?ricCode=YNDX.OQ

Analyst Certification The views expressed in this report accurately reflect the personal views of the undersigned lead analyst(s) about the subject issuer and the securities of the issuer. In addition, the undersigned lead analyst(s) has not and will not receive any compensation for providing a specific recommendation or view in this report. Ross Sandler/Igor Semenov

Deutsche Bank Securities Inc. Page 7

59 30 October 2012

Internet Yandex

Historical recommendations and target price: Yandex (YNDX.OQ) (as of 10/26/2012)

45.00 Previous Recommendations 2 40.00 Strong Buy 1 Buy 35.00 Market Perform Underperform Not Rated 30.00 4 Suspended Rating 6 25.00 5 Current Recommendations 3 7 20.00 Buy Hold Security Price Security 15.00 Sell Not Rated Suspended Rating 10.00 *New Recommendation Structure

5.00 as of September 9,2002

0.00 May 11 Aug 11 Nov 11 Feb 12 May 12 Aug 12 Date

1. 07/05/2011: Upgrade to Buy, Target Price Change USD40.00 5. 02/23/2012: Buy, Target Price Change USD38.00 2. 07/28/2011: Buy, Target Price Change USD42.00 6. 04/27/2012: Buy, Target Price Change USD34.00 3. 10/03/2011: Buy, Target Price Change USD33.00 7. 07/26/2012: Buy, Target Price Change USD31.00 4. 10/28/2011: Buy, Target Price Change USD37.00

Equity rating key Equity rating dispersion and banking relationships Buy: Based on a current 12- month view of total 450 49 % 49 % share-holder return (TSR = percentage change in 400 share price from current price to projected target price 350 plus pro-jected dividend yield ) , we recommend that 300 250 44 % investors buy the stock. 200 36 % Sell: Based on a current 12-month view of total share- 150 holder return, we recommend that investors sell the 100 50 2 %35 % stock 0 Hold: We take a neutral view on the stock 12-months Buy Hold Sell out and, based on this time horizon, do not recommend either a Buy or Sell. Companies Covered Cos. w/ Banking Relationship Notes: North American Universe 1. Newly issued research recommendations and target prices always supersede previously published research. 2. Ratings definitions prior to 27 January, 2007 were: Buy: Expected total return (including dividends) of 10% or more over a 12-month period Hold: Expected total return (including dividends) between -10% and 10% over a 12- month period Sell: Expected total return (including dividends)

of -10% or worse over a 12-month period

Page 8 Deutsche Bank Securities Inc.

60 30 October 2012

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Regulatory Disclosures 1. Important Additional Conflict Disclosures Aside from within this report, important conflict disclosures can also be found at https://gm.db.com/equities under the "Disclosures Lookup" and "Legal" tabs. Investors are strongly encouraged to review this information before investing. 2. Short-Term Trade Ideas Deutsche Bank equity research analysts sometimes have shorter-term trade ideas (known as SOLAR ideas) that are consistent or inconsistent with Deutsche Bank's existing longer term ratings. These trade ideas can be found at the SOLAR link at http://gm.db.com. 3. Country-Specific Disclosures Australia and New Zealand: This research, and any access to it, is intended only for "wholesale clients" within the meaning of the Australian Corporations Act and New Zealand Financial Advisors Act respectively. Brazil: The views expressed above accurately reflect personal views of the authors about the subject company(ies) and its(their) securities, including in relation to Deutsche Bank. The compensation of the equity research analyst(s) is indirectly affected by revenues deriving from the business and financial transactions of Deutsche Bank. In cases where at least one Brazil based analyst (identified by a phone number starting with +55 country code) has taken part in the preparation of this research report, the Brazil based analyst whose name appears first assumes primary responsibility for its content from a Brazilian regulatory perspective and for its compliance with CVM Instruction # 483. EU countries: Disclosures relating to our obligations under MiFiD can be found at http://www.globalmarkets.db.com/riskdisclosures. Japan: Disclosures under the Financial Instruments and Exchange Law: Company name - Deutsche Securities Inc. Registration number - Registered as a financial instruments dealer by the Head of the Kanto Local Finance Bureau (Kinsho) No. 117. Member of associations: JSDA, Type II Financial Instruments Firms Association, The Financial Futures Association of Japan, Japan Investment Advisers Association. Commissions and risks involved in stock transactions - for stock transactions, we charge stock commissions and consumption tax by multiplying the transaction amount by the commission rate agreed with each customer. Stock transactions can lead to losses as a result of share price fluctuations and other factors. Transactions in foreign stocks can lead to additional losses stemming from foreign exchange fluctuations. "Moody's", "Standard & Poor's", and "Fitch" mentioned in this report are not registered credit rating agencies in Japan unless “Japan” or "Nippon" is specifically designated in the name of the entity. Russia: This information, interpretation and opinions submitted herein are not in the context of, and do not constitute, any appraisal or evaluation activity requiring a license in the Russian Federation.

Deutsche Bank Securities Inc. Page 9

Deutsche Bank Securities Inc.

North American locations

Deutsche Bank Securities Inc. Deutsche Bank Securities Inc. Deutsche Bank Securities Inc. Deutsche Bank Securities Inc. 60 Wall Street One International Place 222 South Riverside Plaza 1735 Market Street New York, NY 10005 12th Floor 30th Floor 24th Floor Tel: (212) 250 2500 Boston, MA 02110 Chicago, IL 60606 Philadelphia, PA 19103 United States of America Tel: (312) 537-3758 Tel: (215) 854 1546 Tel: (1) 617 217 6100 Deutsche Bank Securities Inc. Deutsche Bank Securities Inc. 101 California Street 700 Louisiana Street 46th Floor Houston, TX 77002 San Francisco, CA 94111 Tel: (832) 239-4600 Tel: (415) 617 2800

International locations

Deutsche Bank Securities Inc. Deutsche Bank AG London Deutsche Bank AG Deutsche Bank AG 60 Wall Street 1 Great Winchester Street Große Gallusstraße 10-14 Deutsche Bank Place New York, NY 10005 London EC2N 2EQ 60272 Frankfurt am Main Level 16 United States of America United Kingdom Germany Corner of Hunter & Phillip Streets Tel: (1) 212 250 2500 Tel: (44) 20 7545 8000 Tel: (49) 69 910 00 Sydney, NSW 2000 Australia Tel: (61) 2 8258 1234 Deutsche Bank AG Deutsche Securities Inc. Filiale Hongkong 2-11-1 Nagatacho International Commerce Centre, Sanno Park Tower 1 Austin Road West,Kowloon, Chiyoda-ku, Tokyo 100-6171 Hong Kong Japan Tel: (852) 2203 8888 Tel: (81) 3 5156 6770

Global Disclaimer

The information and opinions in this report were prepared by Deutsche Bank AG or one of its affiliates (collectively "Deutsche Bank"). The information herein is believed to be reliable and has been obtained from public sources believed to be reliable. Deutsche Bank makes no representation as to the accuracy or completeness of such information. Deutsche Bank may engage in securities transactions, on a proprietary basis or otherwise, in a manner inconsistent with the view taken in this research report. In addition, others within Deutsche Bank, including strategists and sales staff, may take a view that is inconsistent with that taken in this research report. Opinions, estimates and projections in this report constitute the current judgement of the author as of the date of this report. They do not necessarily reflect the opinions of Deutsche Bank and are subject to change without notice. Deutsche Bank has no obligation to update, modify or amend this report or to otherwise notify a recipient thereof in the event that any opinion, forecast or estimate set forth herein, changes or subsequently becomes inaccurate. Prices and availability of financial instruments are subject to change without notice. This report is provided for informational purposes only. It is not an offer or a solicitation of an offer to buy or sell any financial instruments or to participate in any particular trading strategy. Target prices are inherently imprecise and a product of the analyst judgement. As a result of Deutsche Bank’s March 2010 acquisition of BHF-Bank AG, a security may be covered by more than one analyst within the Deutsche Bank group. Each of these analysts may use differing methodologies to value the security; as a result, the recommendations may differ and the price targets and estimates of each may vary widely. In August 2009, Deutsche Bank instituted a new policy whereby analysts may choose not to set or maintain a target price of certain issuers under coverage with a Hold rating. In particular, this will typically occur for "Hold" rated stocks having a market cap smaller than most other companies in its sector or region. We believe that such policy will allow us to make best use of our resources. Please visit our website at http://gm.db.com to determine the target price of any stock. The financial instruments discussed in this report may not be suitable for all investors and investors must make their own informed investment decisions. Stock transactions can lead to losses as a result of price fluctuations and other factors. If a financial instrument is denominated in a currency other than an investor's currency, a change in exchange rates may adversely affect the investment. Past performance is not necessarily indicative of future results. Deutsche Bank may with respect to securities covered by this report, sell to or buy from customers on a principal basis, and consider this report in deciding to trade on a proprietary basis. Unless governing law provides otherwise, all transactions should be executed through the Deutsche Bank entity in the investor's home jurisdiction. In the U.S. this report is approved and/or distributed by Deutsche Bank Securities Inc., a member of the NYSE, the NASD, NFA and SIPC. In Germany this report is approved and/or communicated by Deutsche Bank AG Frankfurt authorized by the BaFin. In the United Kingdom this report is approved and/or communicated by Deutsche Bank AG London, a member of the London Stock Exchange and regulated by the Financial Services Authority for the conduct of investment business in the UK and authorized by the BaFin. This report is distributed in Hong Kong by Deutsche Bank AG, Hong Kong Branch, in Korea by Deutsche Securities Korea Co. This report is distributed in Singapore by Deutsche Bank AG, Singapore Branch, and recipients in Singapore of this report are to contact Deutsche Bank AG, Singapore Branch in respect of any matters arising from, or in connection with, this report. Where this report is issued or promulgated in Singapore to a person who is not an accredited investor, expert investor or institutional investor (as defined in the applicable Singapore laws and regulations), Deutsche Bank AG, Singapore Branch accepts legal responsibility to such person for the contents of this report. In Japan this report is approved and/or distributed by Deutsche Securities Inc. The information contained in this report does not constitute the provision of investment advice. In Australia, retail clients should obtain a copy of a Product Disclosure Statement (PDS) relating to any financial product referred to in this report and consider the PDS before making any decision about whether to acquire the product. Deutsche Bank AG Johannesburg is incorporated in the Federal Republic of Germany (Branch Register Number in South Africa: 1998/003298/10). Additional information relative to securities, other financial products or issuers discussed in this report is available upon request. This report may not be reproduced, distributed or published by any person for any purpose without Deutsche Bank's prior written consent. Please cite source when quoting. Copyright © 2012 Deutsche Bank AG

62 Russian Informer

Monday, 29 October, 2012

RTS Index, MICEX Index KEY DRIVERS 1 650 RTS Index MICEX Index MARKET OVERVIEW 1 550 Markets have started the week indecisively as many important positive trends appear to be broken on the downside. S&P500 equity futures are down 0.3%. Brent is trading slightly above $109/bbl 1 450 and gold is up a marginal 0.2%, remaining below $1,715/oz. We expect the Russian market to open flat. page 2 1 350 YANDEX (YNDX US – BUY) 1 250 Yandex will release 3Q12 US GAAP results tomorrow, which should reflect a continuation in the rapid growth of the Russian internet advertising market, and confirm our positive outlook on the 1-Oct 8-Oc t

3-Sep company. Yandex provides the best exposure to the Russian online advertising sector and we reiter- 15-Oct 22-Oct 10-Sep 17-Sep 24-Sep ate our Buy in the name. page 6

Major Indices OTHER NEWS % Change Close Day Wk YTD E.ON RUSSIA (EONR RX – BUY) RTS Index 1 441 (1.1) (3.6) 4.3 E.ON Russia published strong 3Q12 RAS results last week, demonstrating double-digit profit RTS2 Index 1 461 (1.0) (5.3) (4.3) growth. We expect the news to ease pressure on the stock from the conservative 2012 manage- Micex Index 1 434 (0.9) (1.8) 2.2 ment guidance, and we reiterate our Buy recommendation. page 2 S&P 500 1 412 (0.1) (1.5) 12.3 DJI 13 107 0.0 (1.8) 7.3 NORILSK NICKEL (GMKN RX – HOLD) FTSE 100 5 807 0.0 (1.5) 4.2 The company reported neutral 9M12 production results, posted slight growth in nickel production Nikkei 8 933 (1.4) (0.8) 5.6 YoY and a significant QoQ performance improvement in the international division, as promised by management. We do not see any risk to management’s 2012 production guidance. page 3 NASDAQ 2 988 0.1 (0.6) 14.7 Shanghai SE 2 066 (1.7) (2.9) (6.1) SEVERSTAL (SVST LI – BUY) BOVESPA 57 277 0.2 (2.8) 0.9 Severstal reported neutral 3Q12 production results, with sales volumes and prices largely in line with SENSEX 18 625 (0.7) (0.3) 20.5 industry trends. No guidance for 4Q was provided, but we expect a slowdown in steel sales and Trading Volumes lower QoQ prices in 4Q12. page 4 Prev. day MTD YTD DlyAv (1 m) MOBILE SECTOR RTS, $ mln 59.5 856 36 531 43 A draft law on mobile number portability has been agreed with operators and government agencies MI CEX, $ mln 958.0 18 867 269 615 943 and will be reviewed by the government in November. We do not expect the project to cause signifi- ADRs, $ mln 988.3 24 261 324 669 1 213 cant changes to the Big-3’s market positions. page 5 Total, $ bln 2.0 44 631 2 AEROFLOT (AFLT RX – HOLD) URALSIB Sector Indices Aeroflot CEO Vitaly Savelyev said at a meeting with President Vladimir Putin on Friday that Aeroflot will abandon its monopoly position on 34 international routes. We remain cautious on the name Close % Change given the ongoing pressure on margins stemming from increasing competition. We reiterate our USIB PWR 282.7 (1.5) Hold recommendation. page 7 USIB TLC 789.6 (0.9) USIB CG&R 1 295.8 0.5 NEWS IN BRIEF USIB O&G 878.3 (1.5) USIB M&M 660.1 (1.4) PHARMACEUTICAL AND RETAIL USIB FNC 849.0 (0.1) Food retailers may be allowed to sell OTC drugs in their stores. This is on the agenda of the government committee for competition issues. However, it is very unlikely at this point that it will lead to a CBR Currency Rates material amendment to the law. Kommersant % Change

Close Day Wk YTD US D/RUB 3 1.4 8 0.72 2.26 (2.24) EUR/RUB 40.69 0.15 1.19 (2.35) RUB Basket 35.63 0.43 1.71 (2.29)

Commodities Highest Upsides Previous Session’s Winners/Losers, % Cl ose % Change $ Day Week YTD Close, $ TP, $ Up/Dn, % day ch.,% 15 13.1 Brent, $/Bbl 110.77 1.3 (0.4) 3.0 RUGR RX 0.4 2.0 379.7 (1.9) 10 5.6 4.8 4.6 4. 2 Urals, $/Bbl 108.43 1.1 (0.6) 2.5 ARMD RX 7.5 17.0 125.3 1.1 5 WTI, $/Bbl 86.28 0.7 (4.2) (12.7) APTK RX 1.0 2.1 101.3 0.1 0 Nickel, $/Ton 15942 (0.8) (5.6) (14.9) HMSG LI 4.40 8.50 93.2 - (5) Copper, $/Ton 7820 0.1 (2.4) 3.0 RASP RX 2.0 3.7 86.6 (3.0) (10) (9.6) (9.8) Gold, $/oz 1711 (0.1) (0.6) 9.4 POG LN 6.6 12.0 82.3 (1.2) (15) (11. 6) (15.2) Silver, $/oz 32.09 (0.2) 0.0 15.3 EVR LN 3.9 7.0 81.7 2.3 (20) (16. 8) Platinum, $/oz 1545 (1.3) (4.6) 10.3 PIK LI 2.2 4.0 80.7 (4.6) Aluminium, $/ MT 1896 (0.8) (2.6) (5.0) KBTK RX 3.9 7.0 77.8 0.2 MISB RX STSB RX STSB KRSB RX KRSB RZS B RX VDSB RX KROT RX KROT CHE P RX ZMZN RX ZMZN JNOSP RX JNOSP Natural Ga s, $/MMBtu 3.34 (1.2) (2.6) 12.1 NO RD LI 4. 6 8.0 7 3.9 ( 3.2) OMZZP RX Source: MICEX-RTS, Bloomberg, URALSIB estimates

Tel.: +7 (495) 723-7020 | Internet: www.uralsibcap.com | Bloomberg: USIB

URALSIB does, and seeks to do, business with the companies covered in its research reports. Consequently, investors should be aware that URALSIB may have a conflict of interest that could affect the objectivity of this report. This report should not be used as the only single factor governing investment decisions. Disclosures and analyst certifications are located at the end of the body of this report. © URALSIB Capital 2012 63

MARKET OVERVIEW Hurricane Sandy closes US bourses

Positive trends broken; defensives again attractive. Markets have started the week indecisively, as many important positive multi-month trends for global indices appear to be broken on the downside. US GDP, which surprised positively with 2% growth in 3Q12, supported sentiment on Friday, as the main US exchanges closed flat after a volatile session. The RTS index lost 1.1% in a broad-based sell-off, while consumer names showed resilience on the back of Magnit’s very impressive 3Q12 results.

Important news at the end of the week. Today, investors will focus on US personal income and spending data and the Dallas Fed manufacturing index for October. However, the key macro data for the week will be released on Thursday and Friday, as manufacturing surveys will be published throughout the world followed by the US employment report.

Activity weighed down by natural disasters. The US markets will be closed today, with activity likely to remain subdued elsewhere, due to Hurricane Sandy. The fact that losses at Chinese industrial enterprises increased at a slower rate of 1.8% in Sep- tember compared to 3.1% in August is supportive for Asian markets this morning. However, they remain mixed, while S&P500 equity futures are down 0.3%. Brent is trading slightly above $109/bbl and gold is up a marginal 0.2%, remaining below $1,715/oz. We expect the Russian market to open flat.

Slava Smolyaninov, [email protected] Natalia Berezina, [email protected]

UTILITIES

E.ON Russia 3Q12 RAS review: double-digit growth

Boost on top and bottom lines ... E.ON Russia (EONR RX – Buy) published strong 3Q12 RAS results last week, reporting double-digit E.ON Russia Buy profit growth. Operating income was up 33.5 % YoY and 29.5 QoQ EONR RX 52 wk hi, $ 0.092 to RUB5.3 bln ($165 mln), implying a record 27% operating margin. Price, $ 0.08052 wk lo, $ 0.067 Target Price, $ 0.12 Common, mln 63,049 Net profit was up 29.6% YoY and 12.7 QoQ to RUB4.5 bln. The main Up/Dn, % 45 Free float, % 21.0 reasons for the strong 3Q12 results were high wholesale electricity 1 m, % (6) Sh./DR - prices and capacity-tariff indexation starting from July. Despite flat 3 m, % 7 Pref sh, mln - YoY electricity production in 3Q12, sales increased 20% YoY to 6 m, % (10) MC, $ mln 5,065 RUB19.6 bln. 12 m, % 6 EV, $ mln 4,298

… implying some upside from guidance. The results were broadly in 20112012E 2013E P/E 10.27.8 8.5 line with estimates. RAS sales, operating income, and net income EV/EBITDA 5.54.2 4.5 were 3.0-3.3% above our IFRS forecasts in 3Q12, though this is Source: MICEX-RTS, URALSIB estimates probably due to accounting differences. E.ON Russia’s RAS results are usually several percent above the IFRS numbers; for example, 1H12 RAS operating income exceeded the IFRS figure by 6%. We also see some upside from the management’s guidance of RUB28 bln2012 EBITDA, below our forecast and the consensus. Based on the 3Q12 RAS results and assuming no YoY EBITDA growth in 4Q12, the company should earn RUB28.3 bln EBITDA in2012. The actual results should be even better taking into account current electricity prices; the average electricity price in central Russia in October was RUB1,086/MWh, up 14% YoY.

Supportive of our Buy recommendation. We expect the strong 3Q12 RAS results to ease pressure on the stock. We consider the recent sell off in E.ON Russia stock to have been an overreaction to the management’s conservative guidance, and we reiterate our Buy recommendation on the name.

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Record 27% Operating Margin E.ON Russia RAS P&L, RUB bln 3Q11 2Q12 3Q12 QoQ, % YoY, % Sales 16.3 16.3 19.6 19.8 20.0 Operating income 4.0 4.1 5.3 29.5 33.5 Net profit 3.4 4.0 4.5 12.7 29.6 E.ON Russia RAS P&L, $ mln 3Q11 2Q12 3Q12 QoQ, % YoY, % RUB/USD 29.2 31.5 31.9 1.4 9.5 Sales 559 518 612 18.2 9.5 Operating income 135 129 165 27.7 21.9 Net profit 118 125 139 11.2 6.4 ppt, QoQ ppt, YoY Operating margin 24.2 25.0 27.0 2.0 2.7 Net margin 21.1 24.2 22.8 (1.4) 1.7 Source: Company data, URALSIB estimates Matvey Taits, [email protected] Ivan Rubinov, [email protected]

METALS & MINING

Norilsk Nickel 9M12 production results: 2012 production on target

Neutral 9M12 operating results. Norilsk Nickel (GMKN RX – Hold) reported 9M12 operating results, which showed that 1H12 consoli- Norilsk Nickel Hold dated nickel production was up 3% YoY to 223 kt, while the copper GMKN RX 52 wk hi, $ 199.84 Price, $ 152.6452 wk lo, $ 150.72 output decreased 2% YoY to 274 kt, and palladium, as well as plati- Target Price, $ 192 Common, mln 176 num, output remained almost flat YoY at 2,077 koz and at 527 koz. Up/Dn, % 26 Free float, % 21.0 9M12 production at Norilsk Nickel’s Russian facilities was almost un- 1 m, % (3) Sh./DR 1/10 changed YoY. 3 m, % 1 Pref sh, mln - 6 m, % (12) MC, $ mln 26,839 International operations performed better QoQ. Nickel produc- 12 m, % (25) EV, $ mln 27,779 tion at international operations increased 46% QoQ in 3Q12, as a 20112012E 2013E result of the increased loading rate at the Harjavalta nickel refinery in P/E 5.37.0 5.9 Finland. In 2Q12, the performance at Harjavalta was affected by the EV/EBITDA 4.14.7 4.0 delay in third-party material supplies. Management also mentioned Source: MICEX-RTS, URALSIB estimates that operations at Lake Johnston, the Australian operation unit of the group, achieved the designed recovery rates and quality of saleable concentrate. Tati Nickel posted QoQ growth in nickel production thanks to the stable enrichment performance and improved nickel grades. Operations at the international division are stabilizing, as promised by management in 2Q12, as weakness in 2Q12 turned out to be temporary.

No risk for 2012 production target. The company did not provide updated production guidance for 2012 in the latest press- release. The previously announced production target was 295-305kt of nickel (including 235-240 kt at the Russian facilities), 364-370 kt of copper (including 355-360kt for the Russian facilities), 670-685koz of platinum (650-660koz in Russia) and 2,695-2,750 koz of palladium (including 2,600-2,650koz for Russian operations). Based on the reported 9M12 results, we do not see any risk for management’s 2012 guidance; however, we note that Norilsk Nickel could reduce output at its international facilities in the event that the base metals price corrected further. We see the stock performance depending mainly on global market sentiment and the base metals price.

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Almost Flat YoY Production: No Risk for 2012 Guidance Norilsk Nickel 9M12 operating results 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 9M11 9M12 YoY, % 2012E* Production Russian operations Nickel, kt 57 54 63 64 59 56 58 173 173 0 235-240 Copper, kt 90 87 92 95 85 87 93 268 265 (1) 355-360 Platinum, koz 164 183 166 158 156 180 170 513 507 (1) 650-660 Palladium, koz 652 711 659 682 612 706 678 2,022 1,996 (1) 2600-2650 International operations Nickel, kt 14 11 17 15 17 13 19 42 49 16 60-65 Copper, kt 4 4 3 3 4 2 3 11 9 (23) 9-10 Platinum, koz 6 7 6 4 10 6 5 19 20 5 20-25 Palladium, koz 29 33 22 20 37 23 24 84 81 (4) 95-100 Total Nickel, kt 71 65 80 80 76 70 77 215 223 3 295-305 Copper, kt 94 90 95 98 88 90 96 280 274 (2) 364-370 Platinum, koz 170 190 172 162 166 186 175 531 527 (1) 670-685 Palladium, koz 681 744 681 702 649 729 702 2,102 2,077 (1) 2695-2750 Source: Company data * Company guidance

Severstal Neutral 3Q12 trading update; in line with industry trend

Results largely in line with industry trends. Last Friday Severstal (SVST LI – Buy) released generally neutral 3Q12 operating results. Severstal Buy Total crude steel production remained almost flat QoQ at 3.8 Mt, SVST LI 52 wk hi, $ 15.46 while crude steel production at Severstal North America (SNA) de- Price, $ 12.2552 wk lo, $ 10.43 creased 4% QoQ. Total sales of steel products from the Russian steel Target Price, $ 16 Common, mln 835 Up/Dn, % 31 Free float, % 15.0 division grew 6% QoQ, a significant decrease in sales were reported 1 m, % (1) Sh./DR 1 for semi-finished (slab) products (down 58% QoQ to 132 kt) and HR 3 m, % 13 Pref sh, mln - plate (down 8% to 102kt), which was largely expected. However, at 6 m, % (9) MC, $ mln 10,231 the Russian division sales of HRC were up 13% QoQ, CRC – up 20% 12 m, % (14) EV, $ mln 14,732 QoQ, and long products – up 18% QoQ, reflecting seasonally strong 20112012E 2013E demand from the Russian construction sector. Average realized prices P/E 5.08.7 6.0 of steel products from the Russian steel division slightly decreased EV/EBITDA 4.15.6 4.3 QoQ in dollar terms, in line with industry trends. Severstal North Source: Bloomberg, URALSIB estimates America reported an 11% QoQ drop in HRC sales to 581 kt and a 5% decrease in sales prices.

Neutral results for mining. Coking coal concentrate sales grew 5% QoQ at 1.05 Mt, and iron-ore pellet sales were 13% higher QoQ. Coking coal prices decreased 12% QoQ to $123/ton at Vorkutaugol and increased 5% to $143/ton at PBS Coal, which came largely in line with industry price dynamics. Iron-ore prices were 13% lower QoQ at $105/ton for pellets and $77/ton for iron-ore concentrate. In general, the results of Severstal’s mining operations were in line with our expectations. Severstal reported a partial idling of operations at its PBS coal facilities, which led to a 23% QoQ decline in coking coal production at PBS Coal, but should help preserve the EBITDA margin.

We expect a challenging 4Q. Volumes and prices for 3Q12 came largely in line with our forecasts, and relatively strong seasonal demand from the Russian construction sector helped Severstal to maintain strong steel sales. Steel prices decreased QoQ, and we expect revenue to decline in 3Q12. The company did not provide any guidance for 4Q12 production volumes, however, we expect slightly lower QoQ production volumes and prices as the Russian construction season has already ended, and export demand for steel remains weak.

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3Q12 in Line with Industry Trends Severstal 9M12 sales volumes 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 QoQ, % 9M11 9M12 YoY, % Sales volumes, kt Russian operations HRC 1,136 1,145 1,261 1,076 1,233 1,057 1,189 13 3,093 3,108 0 CRC 358 324 367 346 292 319 381 20 1,051 977 (7) Long products 170 197 265 183 133 217 256 18 633 606 (4) Total rolled steel 1,875 1,901 2,220 1,836 1,865 1,829 2,122 16 5,997 5,776 (4) Downstream products 466 476 501 459 395 444 477 7 1,444 1,357 (6) SNA Total rolled steel 883 824 1,079 1,023 1,221 1,196 1,080 (10) 2,786 3,497 26 Mining division (net of intercompany sales) Coking coal concentrate 1,106 870 1,023 995 977 1,002 1,051 5 2,999 3,029 1 Steam coal 666 758 603 727 551 541 527 (3) 2,027 1,620 (20) Iron ore pellets 898 1,128 1,731 1,566 1,201 1,583 1,793 13 3,757 4,577 22 Consolidated steel sales Total rolled steel 2,751 2,724 3,296 2,589 3,036 3,013 3,198 6 8,772 9,207 5 Average prices, $/t SVST Russian steel HRC and HR plate 674 751 749 700 654 640 586 (8) 742 622 (16) SNA Rolled products 852 936 857 822 869 864 817 (5) 877 851 (3) Source: Company data, URALSIB estimates

Valentina Bogomolova, CFA, [email protected]

TELECOMS

Mobile sector Draft law on MNP will be reviewed by the government in November MNP to be introduced in spring 2014. A draft law on Mobile Number Portability (MNP) was agreed with operators and government agencies and will be reviewed by the government in November, Interfax reported on Friday. The implementation of MNP has been tentatively scheduled for March 2014. We believe MNP will not lead to significant changes in the market positions of the Big-3 given the close similarity of tariff plans and network quality by Big-3 operators, and also a lack of 3G licenses by Tele2 Russia.

No excessive costs for operators expected. The draft conditions of MNP are generally favorable for operators. Mobile numbers will be portable only inside one region and subscribers should pay to transfer the mobile number (the cost proposed to be up to RUB100 ($3.2)), although the final conditions have not been set by the government. The one-time costs for MNP roll-out are estimated at RUB0.5 bln ($16 mln), while annual maintenance costs are estimated at RUB300 mln ($10 mln). The money will be transferred from the Universal Services Fund, which is currently financed by mobile operators, which implies that there will be no excessive outlays for operators regarding MNP implementation.

We do not see MNP as a game changer for the industry. We do not expect MNP to significantly change the competitive land- scape of the oversaturated mobile market in Russia, as over 55% of Big-3 subscribers switched to another operator in 2011. Mo- bile operators are fairly valued, and we reiterate our Hold recommendations for VimpelCom and MTS. Rostelecom remains fun- damentally undervalued, offering 35% upside to our target price of $5.4/share. Rostelecom prefs are trading at a 26% discount to commons, and we see prefs as the best play in the sector, as they provide a better dividend yield than commons, and there is a chance they will be converted into commons.

Konstantin Chernyshev, PhD, [email protected] Konstantin Belov, [email protected] Nikolai Dyachkov, [email protected]

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IT & MEDIA

Yandex 3Q12 US GAAP preview: decent top-line growth expected

We expect revenue to grow 43% YoY to RUB7.4 bln. Yandex Yandex Buy (YNDX US – Buy) will release 3Q12 US GAAP results tomorrow, YNDX US 52 wk hi, $ 28.62 which should reflect a continuation of the rapid growth in the Russian Price, $ 23.0752 wk lo, $ 16.66 internet advertising market. The company should demonstrate reve- Target Price, $ 26 Common, mln 326 nue growth that is largely in line with the market. In 3Q11, Yandex Up/Dn, % 13 Free float, % 18.0 consolidated revenue from Rambler’s advertising network and intro- 1 m, % (1) Sh./DR 1 duced new advertising technologies, so 3Q12 will be the first quarter 3 m, % 21 Pref sh, mln - to see organic growth in revenues from its ad network. This will likely 6 m, % (1) MC, $ mln 7,510 result in a lower YoY growth rate, and we expect top-line growth to 12 m, % (11) EV, $ mln 6,826 decelerate from 50% YoY in 2Q12 to 43% YoY, totaling RUB7.4 bln 20112012E 2013E ($230 mln). Adjusted EBITDA should grow 41% YoY to RUB3.3 bln P/E 38.325.5 20.7 EV/EBITDA 22.515.2 12.0 ($103 mln), implying an EBITDA margin of 44.9%, a 0.4 ppt YoY decline, as we forecast the costs of revenues and product develop- Source: Bloomberg, URALSIB estimates ment to grow slightly faster than revenues. We expect net income to reach RUB2.2 bln ($67 mln), implying a 29% net margin. Conference Call Yandex is the best play on the Russian internet market. The re- When: Tuesday, October 30 sults should confirm our positive outlook on Yandex, as we expect Time: 17.00 Moscow, 13.00 London, 09:00 NYC 44.8% YoY revenue growth and a 45.8% EBITDA margin for 2012. Call: US +1 631 621 5256 We will focus on Yandex’s share in mobile searches (stood at only UK +44 (0) 1452 555 131 36% in 2Q12, however, mobile traffic accounts for only 10% of total Russia 8 10 800 2394 2044 searches) as well as cost of revenue dynamics. Yandex provides the Passcode: 38529333# Webcast: best exposure to the Russian online advertising sector, and we reiter- http://ir.yandex.com/eventdetail.cfm?eventid=119637 ate our Buy recommendation. Replay: Available until November 6, 2012 Please see our desk note published on Friday. US +1 866 247 4222 Russia / Int’l +44 (0) 1452 550 000

Passcode: 38529333#

We Expect Revenue to Grow 43% YoY Yandex 3Q12 US GAAP Results, RUB mln 3Q11 2Q12 3Q12E QoQ, % YoY, % Revenues 5,159 6,801 7,355 8.2 42.6 Adjusted EBITDA 2,335 3,015 3,302 9.5 41.4 Adjusted EBITDA margin,% 45.3 44.3 44.9 0.6 ppt (0.4) ppt Net income 1,705 1,983 2,153 8.6 26.3 Net margin, % 33.0 29.2 29.3 0.1 ppt (3.8) ppt Source: Company data, URALSIB estimates Konstantin Chernyshev, PhD, [email protected] Konstantin Belov, [email protected] Nikolai Dyachkov, [email protected]

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TRANSPORT

Aeroflot Company to abandon monopoly on international routes

Aeroflot plans to abandon monopoly position on 34 international routes. In a meeting with President Vladimir Putin on Friday Aeroflot Hold Aeroflot’s (AFLT RX – Hold) CEO Vitaly Savelyev said that the com- AFLT RX 52 wk hi, $ 1.83 pany is ready to abandon its monopoly position on 34 international Price, $ 1.2752 wk lo, $ 1.26 routes, reduce earnings and profitability a little, but also reducing tar- Target Price, $ 1.5 Common, mln 1,040 Up/Dn, % 18 Free float, % 15.3 iffs, according to minutes published on the Kremlin’s website. Dis- 1 m, % (8) Sh./DR - cussing the possibility of creating a national discount carrier, Savelyev 3 m, % (0) Pref sh, mln - mentioned factors unfavorable for a low-cost model in Russia, in par- 6 m, % (21) MC, $ mln 1,317 ticular regulations prohibiting non-refundable tickets and a deficit of 12 m, % (24) EV, $ mln 3,204 pilots. 20112012E 2013E European discounters knocking. De-facto de-monopolization of P/E 2.56.2 4.4 EV/EBITDA 6.45.4 4.3 international routes is under way, with some domestic carriers having been granted permissions to fly international routes. In exchange for Source: MICEX-RTS, URALSIB estimates abandoning its monopoly position on some routes, Aeroflot is likely to request permission for additional flights. Aeroflot is considering launching a discounter on the base of one of its regional companies. Meanwhile, global discounters, in particular Easyjet and Ryanair, are seeking to enter the Russian market.

Competition on international routes to increase. We remain cautious on Aeroflot given the ongoing pressure on margins stemming from increasing competition. The share overhang due to NRC and Rostechonologies’ stakes remains. We reiterate our Hold recommendation.

Denis Vorchik, [email protected]

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COMPANY VALUATIONS / MARKET DATA Monday, October 29, 2012

Valuation table

Sector/ Pr.*** Tgt Up/ MCap Avg Vol*Day P/E EV/ EBITDA % Div P/S P/BV EV/S Ind Ticker Rec AS Company $ $ Dn, % $ Mln $'000 Ch,% 11 12E 13E 14E 11 12E 13E 14E Yld 12 12 12 Val** OIL & GAS Gaz prom GAZP RX Hold 4.85 5.9 22 114 815 165 913 (0.6) I 2.7 3.2 3.1 3.0 2.4 2.9 2.6 2.5 8.5 0.7 0.4 1.0 n/a LUKOIL LKOH RX Buy 60.17 70.0 16 51 178 75 773 (2.0) G 4. 9 4.8 5.5 3.5 3.3 3.3 3.4 2.4 4.2 0.4 0.7 0.4 n/a Rosnef t ROSN RX Buy 7.40 7.7 4 78 451 59 641 0.1 I 6.3 7.8 8.2 7.7 4.5 4.8 4.7 4.3 3.2 0.8 1.1 1.0 n/a Gaz prom Neft SIBN RX Buy 4. 94 6.0 21 23 441 1 037 0.4 I 4. 4 4.4 4.7 4.4 3.4 3.5 3.5 3.3 5.0 0.5 0.8 0.7 n/a TNK-BP Holding TNBP RX Buy 2. 18 3.0 38 32 681 1 974 (1.4) G 3.6 3.8 4.1 3.6 2.6 2.6 2.7 2.4 23.2 0.6 1.2 0.6 n/a Surgutnef tegaz SNGS RX Buy 0. 88 1. 10 24 36 595 24 965 (0.4) R4.34.84.44.9 0.9 0.8 0.8 0.9 3.2 1.5 0.6 0.4 n/a Tatnef t TATN RX Hold 6.39 5.0 (22) 13 929 10 687 (0.9) G 6. 8 6.2 6.7 6.4 4.9 4.7 5.0 4.7 5.0 0.6 1.0 0.8 n/a NOVATEK NVTK LI Buy 112. 00 145.0 29 34 007 47 145 (2.6) I 15.0 12.7 10.8 8.8 11.5 9.9 8.5 7.1 5.1 4.6 3.4 4.9 n/a Bashneft BANE RX Hold 57.28 50.0 (13) 11 166 480 (0.9) I6.76.46.8 6.5 4.7 4.9 5.0 4.8 6.7 0.7 1.7 0.9 n/a UTILITIES RusH ydro HYDR RX Buy 0.025 0.032 26 7 948 16 862 (0.6) I7.9 11.2 7.4 5.0 4.7 6.6 5.0 3.7 n/a 0.8 0.5 1.1 n/a Federal Grid Company FEES RX Buy 0.007 0.009 42 8 225 20 100 (3.6) I4.9 9.4 9.5 8.4 3.2 3.2 2.9 2.7 n/a 1.6 0.3 1.8 n/a Inter RAO UES IRAO RX Buy 0. 0008 0. 0012 42 6 938 4 269 (0.7) I4.612.8 8.0 5.6 3.9 5.0 3.4 2.6 n/a 0.4 0.6 0.3 n/a MRS K Ho ld i ng MRKH RX Hold 0. 06 0. 07 17 2 823 17 808 (1.6) I 3.4 5.3 6.0 5.2 3.6 3.8 3.8 3.4 n/a 0.1 0.3 0.7 n/a TELECOMS Rostelecom RTKM RX Buy 3. 99 5.4 35 12 464 12 379 (1.1) I7.5 7.3 7.0 6.5 4.2 3.9 3.7 3.6 n/a 1.2 1.2 1.6 n/a MTS MBT US Hold 16.77 16.0 (5) 17 327 49 439 (1.4) G 12.0 10.5 8.7 7.5 4.6 4.5 4.3 4.1 n/a 1.3 3.6 1.8 344 Vim pelCom Ltd VI P US Hold 10. 71 12.0 12 17 438 20 971 0.0 I 29.8 17.2 11.1 8.7 5.3 4.3 4.1 3.9 n/a 0.7 1.2 1.7 203 AFK Sistema SSA LI Buy 18.58 27.0 45 8 965 13 646 (4.7) G 41.1 8.0 7.8 7.4 4.5 3.9 3.7 3.6 n/a 0.3 n/a 1.0 n/a METALS & MI NING Norilsk Nickel GMKN RX Hold 152. 64 192.0 26 26 839 43 270 (1.2) I5.37.05.9 5.7 4.1 4.7 4.0 3.9 3.6 2.1 1.4 2.2 n/a Severstal SVST LI Buy 12.25 16.0 31 10 231 16 450 (0.9) I5.08.76.04.9 4.1 5.6 4.3 3.7 2.9 0.7 1.4 1.0 1 Novol i petsk NLMK LI Buy 18.49 22.0 19 11 081 11 940 (2.7) I 8.2 9.3 6.6 5.6 6.4 6.3 4.9 4.3 0.3 0.9 1.0 1.1 1 Mechel MTL US UR 6. 41 UR n/ a 3 056 22 984 (2.6) G 4.2 n/a n/a n/a 5.1 n/a n/a n/a n/a n/a n/a n/a n/a Meche l , pref MTL/ P US UR 2. 33 UR n/ a 3 056 336 (2.5) G 4.2 n/a n/a n/a 5.1 n/a n/a n/a n/a n/a n/a n/a n/a Evraz plc EVR LN Buy 3. 85 7.0825 16113 109 2.3 I 7. 1 12.0 5.4 3.8 4.0 5.0 3.8 3.2 2.1 0.3 0.9 0.7 738 Ma g nitogorsk MK MMK LI Buy 4. 38 7.0603 7661 793(1.5) INeg 58.7 10.5 4.5 6.3 6.0 4.6 3.4 0.0 0.4 0.4 0.8 1 Nor d Gol d NORD LI Buy 4. 60 8.0 74 1 650 93 (3.2) I9.8 5.1 5.8 5.2 3.7 3.0 3.1 2.9 4.9 1.2 0.9 1.5 2 TMK TMKS LI Buy 13.60 17.0 25 2 944 3 423 (2.2) I 7.7 7.3 5.3 4.2 6.5 5.6 5.1 4.7 3.4 0.4 1.5 1.0 2 Ras padskaya RASP RX Buy 1. 98 3.7871 549 3 683 (3.0) I11.411.9 4.6 4.0 5.4 5.7 3.0 2.6 8.4 2.0 1.5 2.1 0 Poly us Gold Int. PGIL LN Hold 3.31 3.5 6 10 036 5 790 (0.9) I 18.0 11.0 12.2 8.6 10.1 7.3 7.8 5.9 2.3 3.5 3.0 3.6 7 Poly metal I nt POLY LN Buy 17.90 18.0 1 6 891 8 065 1.1 G 23.8 10.7 7.5 7.9 13.2 7.6 5.3 5.6 1.9 3.6 3.1 3.8 7 Pet ropavlovsk POG LN Buy 6. 58 12.0 82 1 237 11 716 (1.2) I5.13.64.24.5 4.3 3.4 3.3 3.3 5.8 0.9 0.6 1.6 n/a

FERTILIZERS Uralkali URKA LI Hold 38.7 41.0 6 23 922 70 977 0.6 I 15. 9 13.6 9.4 9.4 10.7 10.1 7.4 7.0 3.1 5.5 2.6 6.1 n/a Phosa gro PHOR LI Hold 13.7 15.0 9 5 116 1 838 (1.8) I7.5 12.1 9.1 10.0 5.3 7.5 5.9 5.9 2.8 1.6 3.2 2.0 n/a Acron AKRN RX Buy 40. 12 61.0 52 1 626 647 0.0 I 2. 6 5.6 4.3 5.5 4.2 5.8 4.7 5.0 3.3 0.8 0.9 1.3 n/a

TRANSPORTATION Aeroflo t AFLT RX Hold 1.27 1.5 18 1 317 1 709 (1.5) I2.5 6.2 4.4 3.8 6.4 5.4 4.3 3.8 3.6 0.2 0.8 0.4 n/a Globaltran s GLTR LI Hold 18.50 23.0 24 3 307 13 632 (1.1) I12.49.98.9 7.8 8.3 6.8 5.7 5.2 3.9 2.2 3.0 3.0 n/a TransContainer TRCN LI Hold 13.00 12.0 (8) 1 779 82 0.0 I 15. 2 11.9 10.7 9.3 8.1 6.2 5.7 5.1 7.8 1.4 2.2 1.7 n/a NCSP Group NCSP LI Hold 6.75 8.0191 733399 0.0 I 13.6 7.0 6.8 5.1 7.5 6.3 5.9 5.5 n/a 1.4 1.5 3.5 n/a Global Ports GLPR LI Buy 12.90 20.0 55 2 021 1 300 3.2 I 15.1 12.2 10.8 9.4 8.0 7.9 7.1 6.4 1.0 3.8 2.0 4.3 n/a

CONSUMER GOODS & RETAIL X5 Retail Group FIVE LI Hold 18.86 20.0 6 5 122 14 988 (0.6) I16.9 14.4 12.6 9.4 7.7 7.1 6.5 5.7 n/a 0.3 2.0 0.5 n/a Ma gnit MGNT LI Bu y 36.64 42.0 15 17 324 30 852 2.2 I 41.4 20.6 16.0 12.7 20.0 11.5 9.2 7.5 2.3 1.2 5.5 1.3 n/a M.Video MVID RX Hold 7.97 9.4 18 1 433 789 (0.2) I12.5 9.6 7.9 6.9 6.0 4.7 3.9 3.4 3.7 0.3 2.7 0.3 n/a Di xy Group DIXY RX Buy 10.97 15.0 37 1 368 167 1.3 I 36.5 25.1 10.3 6.9 8.9 6.4 4.8 3.8 n/a 0.3 1.6 0.4 n/a O'KEY Group OKEY LI Sell 9. 08 5.7 (37) 2 443 1 363 2.0 I 22. 1 18.9 17.3 14.4 10.7 8.7 7.2 5.8 1.1 0.6 4.2 0.7 n/a

BANKS P/BV:

Sberbank SBER RX Buy 2. 94 3.9 33 65 646 310 560 (0.8) I 6.0 5.7 5.1 4.6 1.7 1.3 1.1 0.9 2.5 n/a 1.3 n/a n/a VTB VTBR LI Hold 3. 53 3.9 10 18 331 41 735 1.7 I 6. 1 6.3 5.5 4.7 1.0 0.8 0.7 0.7 3.2 n/a 0.8 n/a n/a Nomos Bank NMOS LI Buy 13.30 16.0 20 2 458 4 751 0.5 I7.05.44.8 4.3 1.3 1.0 0.8 0.7 n/a n/a 1.0 n/a n/a Bank St Petersburg BSPB RX Hold 1.95 2.0 3 720 124 (2.4) I 3.2 14.6 3.7 3.1 0.6 0.5 0.5 0.4 0.2 n/a 0.5 n/a n/a Vozrozhdenie VZRZ RX Buy 18.24 26.0 43 440 105 (0.7) I8.05.53.8 3.1 0.8 0.6 0.6 0.5 0.1 n/a 0.6 n/a n/a Hal y k Bank (Kaz akh) HSBK LI Buy 7. 10 8.5 20 1 934 1 202 (0.1) I8.8 5.0 4.6 3.9 0.9 0.9 0.8 0.6 0.8 n/a 0.9 n/a n/a KKB (Kazakh) KKB LI Hold 2.20 2.8 27 856 132 0.0 I 5.6 4.5 3.3 2.6 0.3 0.3 0.2 0.2 n/a n/a 0.3 n/a n/a

REAL ESTATE LSR LSRG LI Buy 4. 95 7.0412 5502 2871.0I30.8 14.1 12.8 9.3 10.4 8.6 7.2 6.3 9.8 1.3 1.3 1.9 n/a AFI Development AFID LI Hold 0.61 0.4 (43) 639 213 5.2 I 3. 7 239.7 8.8 7.0 55.4 43.3 10.1 8.5 n/a 4 0.3 7.0 n/a PIK Group PIK LI Buy 2. 21 4.0 81 1 092 359.9 (4.6) I 6.7 8.5 7.6 5.1 10.5 8.4 7.1 5.4 n/a 1 9.4 1.3 n/a Etalon Group ETLN LI Buy 5. 85 8.1 38 1 726 2 256.3 (0.3) I6.8 7.9 5.9 4.1 5.8 5.1 3.9 2.7 n/a 2 1.3 1.7 n/a

* Based on 3 month average ** Industry Valuation – Utilities: EV/Capacity ($/kW), Oil&Gas: EV/Res ($/boe), Telecoms: EV/ALIS (Cellulars: EV/Subscriber), Metals: EV/Production ($/t), Fertilizers: EV/Production ($/t), Machinery: EV/Production ($ mln/GW), Helicopters: EV/Production ($ mln/unit). 8 70

Valuation table (Second-Tier Stocks)

Sector/ Price*** Target Up/Dn, MCapP/E EV/EBITDA P/S EV/S Ind Ticker Rec AS* Company $ $ % $ Mln 11 12E 13E 14E 11 12E 13E 14E 12 12 Val**

OIL & GAS Alliance Oil Company AOIL SS Buy 7.70 11.3 47 1 320 I 4.3 4.8 3.5 2.2 4.1 4.0 3.2 2.4 0.5 1.0 n/a Eurasia Drilling EDCL LI Buy 33.40 31. 0 (7) 4 906 G 17.7 20.1 14.8 13.1 8. 8 7.2 6.1 5. 7 1.5 1.5 n/a Integra INTE LI UR 0.68 URn/a125I2.5n/an/an/a4.1n/an/an/an/an/an/a C. A.T. oil O2 C GR B uy 7.35 9.1 24 359 I 38.2 14.2 8.6 6.2 5.6 4.2 3.3 2.9 0.7 0.9 n/a Transneft TRNFP RX Hold 1 963.72 1700.0 (13) 13 946 I 2.1 2.0 2.0 1.9 2.6 2.4 2.4 2.2 0.7 1.2 n/a HMS Grou p HMSG LI Buy 4.40 8.5 93 516 n/a 4.6 4.9 4.1 3.6 4.0 4.1 3.6 3.2 0.5 0.7 n/a UTILITIES OGK-2 OGKB RX Hold 0. 011 0. 015 32 677 I 1987.3 Neg Neg Neg 7. 7 8.2 8.3 8. 2 0.2 0.5 91 E.ON Russia EONR RX Buy 0.080 0.12 45 5 065 I 10.2 7.8 8.5 7.0 5.5 4.2 4.5 3.8 1.9 1.6 420 Enel OGK-5 OGKE RX Buy 0.056 0.07 30 1 971 I 11.7 7.6 7.2 7.0 6.9 5.4 5.2 5.0 0.8 1.2 296 TGK-1 TGKA RX Buy 0.0002 0.0003 44 782 I 5.9 5.2 2.9 2.7 4.5 4.0 3.0 2.9 0.3 0.8 258 TGK-2 TGKB RX NR 0.0001 NR n/a 100 I 4.1 1.7 1.7 0.6 5.1 3.4 3.0 1.9 0.1 0.5 321 Mo sen ergoMSNG RXBuy 0.05 0.07 53 1 789 I 6.0 8.4 7.5 6.9 1.8 2.1 1.9 1.8 0.3 0.3 122 Quadra TGKD RX NR 0.0001 NR n/a 268 I 3.3 2.6 3.6 2.5 2.0 1.6 1.8 1.5 0.2 0.2 108 Kuz bas senergo KZBE RX NR 0.0025 NR n/a 176 I Neg 1.6 0.7 0.7 346.3 2.2 1.2 1.2 0.1 0.5 140 MOESK MSRS RX Hold 0. 039 0. 046 20 1 890 I 3.1 4.8 7.9 7.5 2. 3 2. 6 3. 0 2. 6 0.5 0.8 n/a Lenenergo LSNG RX Hold 0.21 0.22 7 293 I Neg 3.7 5.0 3.3 2.7 3.1 3.5 3.0 0.2 0.8 n/a MRS K No rt h-West MRKZ RX Hold 0.0020 0.0026 27 193 I 7.1 18.2 34.5 6.5 2.4 2.8 2.4 1.9 0.2 0.3 n/a MRSK Center and Volga MRKP RX Buy 0. 005 0. 007 38 579 I 3.8 15.7 7.0 4.9 3. 1 4. 1 3. 4 3. 0 0.3 0.6 n/a MRSK Center MRKC RX Buy 0. 019 0. 025 28 823 I 4.5 8.0 8.4 6.3 2.7 3.0 3.1 2.5 0.4 0.6 n/a MRSK South MRKY RX Hold 0.0016 0.0019 20 80 R 20.2 1.2 1.6 1.8 3.2 2.5 2.8 2.8 0.1 0.7 n/a MRSK Siberia MRKS RX Hold 0.003 0.003 (1) 258 I Neg Neg Neg Neg 3. 0 4.8 3.4 2. 6 0.1 0.2 n/a MRSK Volga MRKV RX Buy 0.0023 0.0032 38 413 I 6.9 5.9 12.0 9.0 2.9 2.4 2.7 2.3 0.2 0.3 n/a MRSK Ural MRKU RX Hold 0. 005 0. 005 3443I4.08.44.8Neg 2. 2 2.2 1.9 3. 5 0.2 0.3 n/a MRSK North-Caucasus MRKK RX Hold 0.83 1.0 26 47 I Neg Neg 3.9 1.4 2.1 2.1 1.5 0.9 0.1 0.3 n/a Bas hkirEnergo BEGY RX Hold 0.66 1.1 62 720 I 6.0 13.3 6.1 7.6 2.4 3.3 2.4 2.6 0.4 0.3 n/a Irkutskenergo IRGZ RX Buy 0.52 0.7 39 2 464 I Neg 6.1 6.6 5.8 3.9 4.1 4.3 3.9 0.9 1.1 n/a

METALS & MINING

KTK KBTK RX Buy 3.94 7.0 78 391 I 5.7 4.7 3.7 3.0 3.5 3.4 2.8 2.4 0.5 0.6 44.49 Kuzbassrazrezugol KZRU RU Hold 0.50 0.3 (40) 3 042 I 7.1 10.0 5.3 4.9 4.3 5.1 3.5 3.3 1.3 1.3 58.34 Highland Gold Mining HGM LN Hold 1.72 2.7 57 559 I 5.4 4.9 5.0 4.7 3.0 2.5 2.3 2.3 1.6 1.3 2.39 High River Gold HRG CN Hold 1.41 1.3 (8) 1 153 G 6.0 6.4 12.4 13.2 3. 1 3.6 4.7 4. 1 2.1 1.8 3.23 FERTILIZERS Do rogobuzh DGBZ RX Buy 0.59 1.00 70 510 I 1.4 3.2 2.4 2.7 3.0 3.7 2.9 3.6 1.0 1.2 n/a Apatit APAT RU Hold 210 205 (2) 1 701 R 12.8 9.3 8.7 8.1 5.9 5.5 5.1 4.8 1.2 1.1 n/a KuibyshevAzot KAZT RX Hold 2.54 2.6 2 491 I 2.7 5.9 5.4 4.8 2.4 4.2 3.9 3.7 0.5 0.7 n/a MACHINERY & ENGINEERING Power Machines SILM RX NR 0.16 NR n/a 1 377 I n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a Kazan Helicopter Plant KHEL RX NR 3.47 NR n/a 534 R n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a Ulan-Ude Aviation Plant UUAZ RX NR 2.54 NRn/a680Rn/an/an/an/an/an/an/an/an/an/an/a Rostvertol RTVL RU NR 0.088 NR n/a 202 R n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a

URANIUM Novosibirsk Chemical NZHK RU UR 2.0 UR n/a 58 R n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a Mashinostroitelny Zavod MASZ RU UR 61.0 UR n/a 85 R n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a Priargunsk Chemical PGHO RU UR 125.0 UR n/a 267 R n/a n/a n/a n/a n/ a n/a n/a n/ a n/a n/a n/a

CONSUMER GOODS & RETAIL

Ru sgrain Holding RUG R RX B uy 0.42 2.0 380 18 I Neg 1.5 0.8 0.4 6.6 3.3 2.3 1.4 0.1 0.5 n/a

PHARMACEUTICALS Pharmstandard PHST LI Hold 14.72 15.0 2 2 037 I 6.8 7.1 8.9 8.2 4.4 4.6 5.5 5.1 1.3 1.1 n/a Veropharm VRPH RX Buy 25.07 35.0 40 251 I 4.1 6.1 5.4 4.6 3.9 3.8 3.4 3.0 1.0 1.1 n/a

Pharmacy Chain 36,6 APTK RX Buy 1.04 2.1 101 110 I Neg Neg Neg 8.5 6.1 7.5 5.4 3.9 0.1 0.5 n/a

* Accounting Standards: G – GAAP, I – IFRS, R – RAS; ** Industry Valuation – Utilities: EV/Capacity ($/kW), Oil&Gas: EV/Res ($/boe), Telecoms: EV/ALIS (Cellulars: EV/Subscriber), Metals: EV/Production ($/t), Fertilizers: EV/Production ($/t), Machinery: EV/Production ($ mln/GW), Helicopters: EV/Production ($ mln/unit). *** MICEX ruble prices are translated into US dollars based on the official CBR RUB/$ rate.

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Valuation table (Second-Tier Stocks) (continued)

Sector/ Price*** Target Up/Dn, MCapP/E EV/EBITDA P/S EV/S Ind Ticker Rec AS* Company $ $ % $ Mln 11 12E 13E 14E 11 12E 13E 14E 12 12 Val** IT IBS Group IBSG GR Buy 23.21 31. 0 34 534 G 13.1 9.1 6.3 5.7 8.6 5. 7 4.3 3. 8 0.5 0.7 n/a ARMADA ARMD RX Buy 7.54 17.0 125 103 I 8.7 7.2 6.0 4.7 3.5 2. 6 2.2 1. 8 0.5 0.3 n/a

MEDIA RBC RBCM RX Hold 0.47 0.60 27 151 I Neg 10.6 4.1 3.0 19.5 9. 3 5.8 4. 7 0.7 1.6 n/a Mail.ru Group MAIL LI Hold 32.70 31.00 (5) 6 837 I 32.8 7.6 24.0 21.2 15. 7 12.5 10.6 9. 4 9.8 6.4 n/a Yandex YNDX US Buy 23.07 26.00 13 7 510 G 38.3 25.5 20.7 16.6 22.5 15.2 12.0 9. 6 7.6 6.9 n/a CTC Media CTCM US Buy 8.77 13.00 48 1 387 G 26.1 8.3 7.2 6.6 5.2 4.6 4.0 3.7 1.6 1.4 n/a

* Accounting Standards: G – GAAP, I – IFRS, R – RAS; ** Industry Valuation – Utilities: EV/Capacity ($/kW), Oil&Gas: EV/Res ($/boe), Telecoms: EV/ALIS (Cellulars: EV/Subscriber), Metals: EV/Production ($/t), Fertilizers: EV/Production ($/t), Machinery: EV/Production ($ mln/GW), Helicopters: EV/Production ($ mln/unit), Transport: EV/RPK ($/pkm). *** MICEX ruble prices are translated into US dollars based on the official CBR RUB/$ rate.

Preferred Shares

Sector/ Bid Ask Last Discount Last Trade 52 Week Avg** D Vol Ticker Rec Company Price*, $ Price*, $ Price*, $ to Ord, % Date Hi, $ Lo, $ (US$'000)

OIL & GAS TNK-BP TNBPP RU n/a 1.70 2.00 1.92 (11.89) 10.23.12 3. 15 1.90 15. 0 Surgutnef tegas SNGSP RX Buy 0.65 0.65 0.65 (26.63) 10.26.12 0. 70 0.45 13 796. 2 Tatnef t TATNP RX n/a 3. 26 3.29 3.26 (48.95) 10.26.12 3. 40 2.37 543. 1 Bas hneft BANEP RX Hold 41.0 41. 4 41.0 (28.49) 10.26.12 45. 2737 32.4481 637. 9 UTILITIES Holding MRSK MRKHP RX Hold 0.036 0.036 0.04 (36.85) 10.26.12 0.07 0.032 173.1

TELECOMS

Rostelecom RTKMP RX Buy 2.96 2.96 2.96 (25.82) 10.26.12 3. 26 2.29 2 422. 9 MACHINERY & ENGINEERING Priargunsk Chemical PGHOP RU UR 80.0 90. 0 82.50 (34.00) 10.19.12 82. 50 33.00 0. 4 Novosibirsk Chemical Concentrates Plant NZHKP RU UR 1.0 1.1 1.12 (44.00) 10.04.12 1. 12 1.00 0. 0 FERTILIZERS Apatit APATp RU Hold 176.0 198.0 188.00 (10.48) 10.22.12 220.00 130.00 5.7 Do r ogobuzh DGBZP RX Buy 0.56 0.56 0.56 (4.90) 10.26.12 0. 63 0.45 44. 0 KuibyshevAzot KAZTP RX Hold 1.54 1.81 1.64 (35.48) 10.26.12 1. 89 1.12 1. 0

BANKS Sberbank SBERP RX Buy 2. 13 2.13 2.13 (27.68) 10.26.12 2. 66 1.77 38 314. 5 Bank "Saint-Petersburg" BSPBP RX Hold 2.06 2.06 2.06 6.09 10.26.12 3.58 2.06 89.4 Vozrozhdeniye VZRZP RX NR 5.50 5.59 5.57 (69.48) 10.26.12 10.55 5.44 4.8

Source: MICEX-RTS * MICEX ruble prices are translated into US dollars based on the official CBR RUB/$ rate. ** Based on 3 month average

10 72

Performance

Performance, Absolute, % Performance, Relative to RTS, % Name Ticker Day 5 Days 20 Days 3 Mon 6 Mon 1 Year Y TD Day 5 Days 20 Days 3 Mon 6 Mon 1 Year Y TD OIL & GAS Alliance Oil Company AOIL SS 0. 4 (1.5) (1. 5) (14.7) (14.5) (41.8) (38.0) 1.5 2. 1 (0.4) (21.5) (6.0) (36.0) (42.3) Bas hneft BANE RX (0. 9) (2.8) (5. 3) 18.5 6.2 0.0 36.7 0.1 0.8 (4.2) 11.7 14.7 0. 0 32. 4 C. A.T. oil O2C GR 0. 3 0.7 (0. 0) 23.9 (7.9) 20.7 28.2 1.3 4.3 1.1 17.1 0.6 26.5 23.9 Eurasia Drilling EDCL LI (2. 8) (4.8) 6. 7 25.6 16.4 40. 2 42. 1 (1.7) (1. 3) 7.8 18.8 24.8 46.0 37.8 Gazprom GAZP RX (0. 6) (3.7) (3. 7) 7.7 (13.4) (16.5) (9. 4) 0.4 (0. 1) (2.7) 0.9 (4.9) (10.7) (13.7) Gazprom Neft SIBN RX 0.4 (2.7) 3. 8 8.5 5.6 17. 6 7. 1 1.4 0. 8 4.9 1.7 14.1 23. 4 2. 8 Integra INTE LI 0. 0 0.0 (43.6) (43.4) (67.7) (62.3) (61.9) 1.1 3.6 (42.5) (50.2) (59.2) (56.5) (66.2) LUKOIL LKOH RX (2. 0) (6.2) (2. 1) 10.8 0.4 3.7 13.3 (0.9) (2. 6) (1.0) 4.0 8.9 9.5 9.0 NOVATEK NVTK LI (2. 6) (10.2) (6. 4) (0.4) (14.5) (19.9) (10.5) (1.5) (6. 6) (5.3) (7.2) (6.0) (14.1) (14.8) Ro sne ft ROSN RX 0.1 6.2 13.1 24.1 5.4 5.2 10.9 1.1 9.8 14.1 17.4 13.9 11.0 6.6 Surgutnef tegaz SNGS RX (0. 4) (4.6) (0. 3) 12.5 (8.1) 4. 3 12. 0 0.7 (1. 0) 0.8 5.7 0.3 10. 1 7. 7 Tatneft TATN RX (0. 9) (3.7) 1. 3 8.9 5.2 27. 2 29. 2 0.1 (0. 1) 2.4 2.2 13.6 33. 0 24. 9 TNK-BP Holding TNBP RX (1. 4) (16.4) (19.4) (7.2) (25.5) (18.4) (15.9) (0.3) (12.8) (18.4) (14.0) (17.0) (12.6) (20.2) HMS Gr ou p HMSG LI 0. 0 (2.2) (6. 4) 1.1 (23.5) 3. 5 (0. 3) 1.1 1.3 (5.3) (5.6) (15.0) 9.3 (4. 6) Transneft TRNFP RX 1.3 0.7 10.3 31.4 1.1 56.4 26.8 2.3 4.2 11.3 24.6 9.6 62.2 22.5

UTILITIES Bas hkirEnergo BEGY RX 2. 8 (8.8) (13.7) (33.5) (27.5) (50.1) (36.8) 3.9 (5. 2) (12.6) (40.2) (19.0) (44.3) (41.1) Federal Grid Company FEES RX (3. 6) (13.0) (10.8) (7.8) (28.7) (27.4) (25.7) (2.6) (9. 5) (9.7) (14.5) (20.2) (21.6) (30.0) Inter RAO UES IRAO RX (0. 7) (2.4) (2. 5) 2.3 (10.8) (32.9) (25.0) 0.3 1.1 (1.4) (4.4) (2.3) (27.1) (29.3) Irkutskenergo IRGZ RX 0. 7 3.6 8. 1 12.7 (12.9) (17.1) 10.3 1.7 7.2 9.2 6.0 (4.4) (11.3) 6.0 Kuz bas senergoKZBE RX(5. 4) (7.0) (34.2) (36.6) (61.6) (71.7) (61.8) (4.4) (3. 5) (33.1) (43.3) (53.1) (65.9) (66.1) LenenergoLSNG RX(2. 1) (8.6) (2. 6) 11.7 (36.1) (49.9) (32.5) (1.0) (5. 0) (1.5) 4.9 (27.6) (44.1) (36.8) MOESK MSRS RX (2. 0) (4.5) 0. 3 (0.8) (15.3) (22.0) (22.3) (1.0) (0. 9) 1.4 (7.6) (6.8) (16.2) (26.6) Mo sener goMSNG RX(1. 9) (0.3) 7. 2 20.5 (25.5) (27.8) (15.7) (0.9) 3. 3 8.3 13.7 (17.0) (22.0) (20.0) MRS K Ce nte r MRKC RX (0. 2) (3.4) (2. 1) 5.6 (26.3) (21.8) 1. 2 0.9 0. 1 (1.0) (1.1) (17.9) (16.0) (3. 1) MRSK Center and Volga MRK P RX (2. 8) (5.5) (5. 8) 0.8 (24.0) (9. 6) 11.2 (1.8) (1. 9) (4.7) (6.0) (15.5) (3.8) 6.9 MRS K Ho ld i ng MRKH RX (1. 6) (9.4) (23.4) 11.5 (37.5) (32.8) (20.1) (0.5) (5. 9) (22.3) 4.7 (29.0) (27.0) (24.4) MRSK Nort h-Caucasus MRKK RX (2. 5) (10.7) (15.1) (8.5) (56.2) (63.9) (48.5) (1.4) (7. 1) (14.0) (15.3) (47.7) (58.1) (52.8) MRS K No rt h- West MRKZ RX 3.1 (0.8) (7. 1) (2.3) (32.5) (36.7) (20.9) 4.2 2.8 (6.0) (9.0) (24.0) (30.9) (25.2) MRSK Siberia MRKS RX (1. 5) (5.3) (6. 1) 8.3 (35.2) (47.1) (18.6) (0.5) (1. 8) (5.0) 1.5 (26.7) (41.3) (22.9) MRSK South MRKY RX 2.4 (4.4) (4. 0) 3.2 (27.4) (42.0) (22.2) 3.5 (0. 9) (2.9) (3.5) (19.0) (36.2) (26.5) MRS K Ur al MRKU RX (0. 1) (0.5) (7. 0) (10.4) (32.6) (26.3) (22.7) 0.9 3. 1 (6.0) (17.2) (24.1) (20.5) (27.0) MRSK Volga MRK V RX (3. 6) (4.0) 0. 7 5.5 (32.9) (27.0) (7. 4) (2.5) (0. 4) 1.8 (1.3) (24.4) (21.2) (11.7) OGK-2 OGKB RX (1. 2) (8.2) (10.2) (11.5) (46.1) (63.5) (51.4) (0.1) (4. 7) (9.1) (18.3) (37.6) (57.7) (55.7) E.ON Russia EONR RX (0. 3) (11.2) (6. 0) 7.0 (10.2) 5. 7 20. 3 0.8 (7. 7) (4.9) 0.2 (1.7) 11.5 16.0 Enel OGK-5 OGKE RX (1. 2) (9.0) (5. 6) 11.8 (21.1) (10.2) (2. 0) (0.1) (5. 4) (4.5) 5.0 (12.7) (4.4) (6. 3) Ru sHydro HYDR RX (0. 6) (7.0) (7. 8) 2.1 (28.6) (33.5) (17.0) 0.5 (3. 5) (6.7) (4.7) (20.1) (27.7) (21.3) TGK-1 TGKA RX (4. 4) (8.8) (6. 5) 11.7 (31.0) (40.0) (30.2) (3.3) (5. 2) (5.4) 4.9 (22.5) (34.2) (34.5) TGK-2 TGKB RX (0. 1) (10.4) (3. 6) 22.1 (20.8) (46.1) (15.3) 1.0 (6. 9) (2.5) 15.3 (12.3) (40.3) (19.6) Quadra TGKD RX (2. 3) (9.1) (7. 3) 1.3 (35.1) (54.8) (39.3) (1.2) (5. 5) (6.3) (5.5) (26.7) (49.0) (43.6) TGK-5 TGKE RX 0. 8 (8.6) (6. 5) 3.0 (39.1) (58.5) (42.0) 1.9 (5. 1) (5.4) (3.8) (30.6) (52.7) (46.3) TGK-6 TGKF RX (2. 3) (9.4) (6. 9) 13.6 (47.1) (58.3) (47.5) (1.3) (5. 9) (5.9) 6.8 (38.7) (52.5) (51.8) TGK-7 VTGK RX 0.8 (6.4) (11.3) 41.6 (24.9) (29.0) (13.7) 1.9 (2. 9) (10.3) 34.8 (16.4) (23.2) (18.0) TGK-9 TGKI RX (2. 1) (12.0) (12.0) 92.2 12.6 (11.9) 1. 9 (1.1) (8. 5) (11.0) 85.4 21.1 (6.1) (2. 4) TGK-10 TGKJ RX 0.8 (1.3) (1. 0) 19.1 (5.7) (16.0) 5. 1 1.9 2. 3 0.1 12.3 2.8 (10.2) 0.8 TGK-14 TGKN RX (1. 0) 3.3 9.3 37.9 (11.1) (31.2) (10.9) 0.0 6.8 10.4 31.2 (2.6) (25.4) (15.2)

METALS & MINING

Evraz plc EVR LN 2.3 (3.8) (0. 5) 12.4 (34.5) 0. 0 (33.6) 3.4 (0. 2) 0.5 5.6 (26.0) 0.0 (37.9) Hi gh River Gold HRG CN (0. 2) 0.0 (2. 1) 2.0 19.9 1. 7 20. 2 0.9 3. 6 (1.0) (4.8) 28.4 7. 5 15.9 Hi ghland Gold Mining HGM LN (1. 8) (6.5) (6. 6) (2.4) (16.8) (43.9) (40.9) (0.7) (2. 9) (5.5) (9.2) (8.4) (38.1) (45.2) KTK KBTK RX 0. 2 2.0 0. 5 (9.2) (29.3) (26.4) (16.6) 1.2 5.6 1.6 (16.0) (20.8) (20.6) (20.9) Kuz bas srazrezugol KZRU RU 0. 0 0.0 7. 0 99.0 77.7 103. 1 150. 0 1.1 3. 6 8.1 92.2 86.1 108. 9 145. 7 Ma gnitogorsk MK MMK LI (1. 5) (3.2) (1. 5) 19.7 (17.9) (33.0) (10.0) (0.4) 0. 3 (0.4) 13.0 (9.4) (27.2) (14.3) Me chel MTL US (2. 6) (8.2) (9. 2) 12.7 (28.1) (50.2) (24.6) (1.5) (4. 6) (8.1) 5.9 (19.7) (44.4) (28.9) No r il sk Ni cke l GMKN RX (1. 2) (2.4) (3. 3) 1.0 (12.1) (25.2) (0. 8) (0.2) 1. 2 (2.3) (5.7) (3.6) (19.4) (5. 1) No vol i petsk NLMK LI (2. 7) (6.9) (6. 1) 13.5 (12.7) (35.3) (5. 9) (1.7) (3. 3) (5.1) 6.7 (4.3) (29.5) (10.2) No r d Gol d NORD LI (3. 2) (8.0) 9. 5 (4.2) (24.0) 0. 0 0. 0 (2.1) (4. 4) 10.6 (10.9) (15.5) 0.0 0.0 Pet ropavlovsk POG LN (1. 2) (7.8) (0. 1) 0.5 (13.4) (45.5) (30.8) (0.1) (4. 2) 0.9 (6.2) (4.9) (39.7) (35.1) Polymetal Int POLY LN 1.1 (4.8) 4. 5 32.0 21.1 0. 0 5. 8 2.1 (1. 2) 5.5 25.2 29.6 0.0 1.5 Polyus Gold Int. PGIL LN (0. 9) (4.1) (4. 6) 3.5 12.1 1.3 10.3 0.1 (0. 5) (3.6) (3.3) 20.6 7. 1 6. 0 Ra spadskaya RASP RX (3. 0) (11.7) (18.8) (20.3) (40.7) (38.2) (35.9) (1.9) (8. 1) (17.7) (27.0) (32.2) (32.4) (40.2) Severstal SVST LI (0. 9) (3.3) (0. 7) 13.3 (9.2) (13.7) 7. 6 0.2 0. 2 0.4 6.6 (0.7) (7.9) 3.3 TMK TMKS LI (2. 2) (10.8) (6. 8) (0.4) 3.7 3.6 51.1 (1.1) (7. 3) (5.8) (7.1) 12.1 9. 4 46. 8

Source: MICEX-RTS, Bloomberg

11 73

Performance (continued)

Performance, Absolute, % Performance, Relative to RTS, % Name Ticker Day 5 Days 20 Days 3 Mon 6 Mon 1 Year Y TD Day 5 Days 20 Days 3 Mon 6 Mon 1 Year Y TD FERTILIZERS Acron AKRN RX 0.0 (6.0) (11.0) (3.0) (12.9) (2. 9) (3. 5) 1.1 (2. 4) (9.9) (9.8) (4.4) 2.9 (7. 8) Do r ogobuzh DGBZ RX 0. 2 (1.4) 1. 7 30.8 3.2 4. 6 9. 4 1.2 2. 1 2.7 24.0 11.7 10.4 5.1 Apatit APAT RU 0. 0 7.1 9.7 (12.5) (23.6) 0. 0 (25.0) 1.1 10.7 10.8 (19.3) (15.2) 5.8 (29.3) KuibyshevAzot KAZT RX 0.2 (2.3) 1. 6 11.8 (13.3) 24.6 27.3 1.2 1.2 2.7 5.1 (4.9) 30.4 23.0 Phosagro PHOR LI (1. 8) (1.4) 3. 4 10.4 36.9 12.8 62.3 (0.7) 2.1 4.5 3.6 45.3 18.6 58.0 Ur a lka l i URKA LI 0. 6 (1.0) (5. 7) (6.1) 4.5 (11.4) 7. 4 1.7 2. 5 (4.6) (12.8) 13.0 (5.6) 3.1

URANIUM Mashinostroitelny Zavod MASZ RU 0.0 0.0 (65.1) (65.1) (65.1) (18.7) (28.2) 1.1 3.6 (64.1) (71.9) (56.7) (12.9) (32.5) Novosibirsk Chemical NZHK RU 0.0 0.0 (60.0) (60.0) (33.3) (63.6) (63.6) 1.1 3.6 (58.9) (66.8) (24.9) (57.8) (67.9) Priargu nsk Ch emi cal PG HO RU 0. 0 0.0 13. 6 13.6 25.0 11.2 (13.8) 1.1 3.6 14.7 6.9 33.5 17.0 (18.1)

MACHINERY & ENGINEERING Kaz an Helicopter Plant KHEL RX 0. 9 0.9 5.3 3.6 0.7 49. 0 8. 1 2.0 4. 5 6.4 (3.2) 9.1 54.8 3.8 Power Machines SILM RX (8. 4) (6.8) (14.3) (19.8) (45.1) (47.4) 2. 5 (7.4) (3. 3) (13.2) (26.5) (36.7) (41.6) (1. 8) Rostvertol RTVL RU 0.0 0.0 6.0 20.5 25.7 32.5 37.5 1.1 3.6 7.1 13.8 34.2 38. 3 33. 2 Ulan-Ude Aviation Plant UUAZ RX (0. 8) (1.1) 0. 2 2.3 (6.0) 49.7 (1. 0) 0.3 2. 4 1.3 (4.5) 2.5 55.5 (5. 3)

BANKS Sberbank SBER RX (0. 8) (3.0) 1. 0 9.7 (6.9) 7. 4 18. 7 0.2 0. 6 2.1 2.9 1.5 13.2 14.4 VTB VTBR LI 1. 7 2.1 4.6 11.3 (17.2) (23.5) (2. 1) 2.7 5. 7 5.7 4.5 (8.8) (17.7) (6. 4) No mos B an k NMOS LI 0. 5 (0.7) 7. 6 18.2 0.0 21. 5 40.0 1.5 2. 8 8.7 11.5 8.5 27.3 35.7 Bank St Petersburg BSPB RX (2. 4) (5.7) (3. 7) 12.8 (17.4) (35.1) (14.1) (1.3) (2. 2) (2.6) 6.1 (8.9) (29.3) (18.4) Voz rozhdenie VZRZ RX (0. 7) (5.9) (8. 2) 12.1 (3.7) (22.9) 7. 4 0.4 (2. 3) (7.1) 5.4 4.8 (17.1) 3.1 Ha l yk Bank HSBK LI (0. 1) (0.4) 5. 0 31.5 7.6 25. 7 46.1 0.9 3. 1 6.0 24.7 16.0 31.5 41.8 Kaz KomBank KKB LI 0.0 (7.6) (15.4) (12.0) (17.0) (31.3) (18.5) 1.1 (4. 0) (14.3) (18.8) (8.5) (25.5) (22.8) TRANSPORTATION Aeroflot AFLT RX (1. 5) (8.0) (7. 7) (0.3) (20.6) (24.3) (19.3) (0.5) (4. 4) (6.6) (7.1) (12.1) (18.5) (23.6) TransContainer TRCN LI 0.0 1.2 4.0 18.2 29.4 58. 5 66.7 1.1 4.7 5.1 11.4 37.8 64.3 62.4 NCS P G ro up NCSP LI 0. 0 (3.6) (1. 0) (7.0) (17.3) (15.5) (9. 9) 1.1 (0. 0) 0.1 (13.8) (8.8) (9.7) (14.2) Global Ports GLPR LI 3. 2 (5.1) (3. 7) 3.2 (11.0) (16.8) (7. 9) 4.3 (1. 6) (2.7) (3.6) (2.6) (11.0) (12.2) Globaltrans GLTR LI (1. 1) (3.0) (9. 8) (1.8) 4.9 27.6 34.5 0.0 0. 6 (8.7) (8.6) 13.4 33.4 30.2 CONSUMER GOODS & RETAIL Balt ika PKBA RX 0. 2 1.0 5. 2 4.7 0.9 46. 2 26. 6 1.3 4. 6 6.2 (2.1) 9.4 52. 0 22. 3 Cherkizovo Group CHE LI 0. 1 0.2 1. 1 9.8 (11.3) (9. 9) 4. 8 1.2 3. 7 2.2 3.0 (2.8) (4.1) 0.5 Di xy Group DIXY RX 1.3 (1.3) 4. 1 3.9 (14.2) 18.6 19.5 2.4 2.3 5.2 (2.9) (5.7) 24.4 15.2 Kalina KLNA RX 0. 9 0.7 7.2 19.6 218.0 381.7 10.2 1.9 4. 3 8.3 12.8 226.5 387.5 5.9 Ma gnit MGNT LI 2. 2 3.6 6. 4 15.9 25.8 55.7 73.2 3.3 7.2 7.5 9.2 34.3 61.5 68.9 M. Vi de o MVID RX (0. 2) (11.6) (3. 9) (0.8) (5.8) 13.5 40.7 0.9 (8. 0) (2.8) (7.6) 2.6 19.3 36.4 Ru sgrain Holding RUGR RX (1. 9) (6.2) (34.0) (45.2) (66.9) (99.8) (75.7) (0.8) (2. 6) (32.9) (52.0) (58.4) (94.0) (80.0) O'KEY Group OKEY LI 2. 0 0.7 (1. 8) 5.6 0.9 48. 6 32.6 3.1 4.2 (0.8) (1.2) 9.4 54. 4 28. 3 X5 Retail Group FIVE LI (0. 6) (0.9) (12.0) (2.5) (24.4) (31.9) (17.4) 0.4 2.6 (10.9) (9.3) (15.9) (26.1) (21.7) REAL ESTATE AFI Development AFID LI 5. 2 5.2 45. 2 35.6 6.8 15. 1 45. 2 6.2 8. 7 46.3 28.8 15.3 20.9 40.9 LSR LSRG LI 1. 0 (2.9) 3. 4 16.0 (7.2) 11.6 46.8 2.1 0.6 4.5 9.2 1.3 17.4 42.5 PIK Group PIK LI (4. 6) (1.4) (4. 0) 0.0 (5.8) (23.1) (10.4) (3.5) 2. 2 (3.0) (6.7) 2.7 (17.3) (14.7) Etalon Group ETLN LI (0. 3) (2.1) (7. 1) (5.6) (10.7) 25.8 24.5 0.7 1. 5 (6.1) (12.4) (2.2) 31.6 20.2

Raven Russia RUS LN 1.0 (1.1) (0. 9) 10.9 7.1 23.6 33.8 2.0 2. 5 0.2 4.2 15.6 29.4 29.5

PHARMACEUTI CALS Pharmacy Chain 36,6 APTK RX 0.1 (6.8) (8. 9) 13.1 (20.7) (39.9) (13.6) 1.1 (3. 2) (7.8) 6.3 (12.2) (34.1) (17.9) Pharmstandard PHST LI (0. 2) 0.2 4.3 1.9 (16.4) (24.1) 4. 4 0.9 3. 8 5.4 (4.9) (7.9) (18.3) 0.1 Veropharm VRPH RX 1. 9 (2.4) (8. 1) 3.7 (11.1) (10.6) (9. 1) 3.0 1. 1 (7.0) (3.1) (2.7) (4.8) (13.4)

TELECOMS Rostelecom RTKM RX (1. 1) (7.2) (7. 2) 15.7 (12.4) (21.3) (16.1) 0.0 (3. 6) (6.1) 8.9 (3.9) (15.5) (20.4) MTS MBT US (1. 4) (3.5) (3. 3) (8.7) (10.2) 17.3 14.2 (0.3) 0. 1 (2.3) (15.4) (1.8) 23.1 9.9 VimpelCom Ltd VIP US 0. 0 (3.4) (7. 1) 29.8 5.6 (5. 8) 13.1 1.1 0.1 (6.0) 23.0 14.1 (0.0) 8.8 AFK Sistema SSA LI (4. 7) (10.2) (13.7) (8.4) (3.7) 7. 6 10.5 (3.6) (6. 7) (12.6) (15.2) 4.7 13.4 6.2

IT ARMADA ARMD RX 1.1 (4.5) (8. 5) 2.6 (27.0) (26.7) (24.5) 2.2 (0. 9) (7.4) (4.2) (18.6) (20.9) (28.8) IBS Group IBSG GR (0. 1) 3.2 4.6 20.7 (15.4) 7. 7 18.1 1.0 6. 8 5.7 14.0 (7.0) 13.5 13.8 MEDIA CTC Me di a CTCM US (0. 1) (6.9) (6. 2) 15.5 (19.6) (25.0) 0. 0 1.0 (3. 3) (5.1) 8.8 (11.1) (19.2) (4. 3) RB C RB CM RX (0. 0) (4.7) (5. 6) 3.9 (34.2) (38.3) 10.8 1.1 (1. 1) (4.5) (2.9) (25.7) (32.5) 6.5 Yandex YNDX US 1.5 3.7 (1. 2) 21.4 (1.3) (10.5) 17.1 2.5 7. 3 (0.1) 14.7 7.2 (4.7) 12.8 Ma i l. ru Gr o up MAIL LI (2. 3) 1.4 (1. 5) 9.0 (23.1) (4. 2) 25.8 (1.3) 5. 0 (0.4) 2.2 (14.6) 1.6 21.5

Source: MICEX-RTS, Bloomberg

12 74

Valuation Forecast 2012

Revenue, EBITDA, Net Profit, Margin, % EBITDA Growth, % Earnings Growth, % Na me Ticker $ Mln $ Mln $ Ml n EBITDA Net 2010 2011 2012E 2010 2011 2012E

OIL & GAS

Gazprom GAZP RX 158 271 54 540 35 404 34 22 31 39 -15 31 34 -18 LUKOIL LKOH RX 131 243 17 869 10 633 14 8 14 12 1 28 15 3 Ro sne ft ROSN RX94 17320 48810 11622114215-66020-19 Gazprom Neft SI BN RX 45 325 8 7685 28719122842-2469-1 TNK-BP Holding TNBP RX55 14413 3638 93324162236-22441-3 Surgutnef tegaz SNGS RX24 85712 8007 05151282137121588-11 Tatneft TATN RX 22 189 3 661 2 298 17 10 -29 38 5 -36 36 10 NOVATEK NVTK LI 7 435 3 6622 6734936467317637018 Bas hneft BANE RX 16 798 3 099 1 653 18 10 139 7 -3 227 2 5

UTILITIES Ru sHydro HYDR RX 9 790 1 668 707 17 7 -17 51 -28 -66 193 -30 Federal Grid Company FEES RX 5 068 2 921 878 58 17 62 50 2 n/ m 176 -47 Int er RAO UES IRAO RX 19 377 990 543 5 3 64 186 -23 n/ m 785 -64 MRS K Ho ld i ng MRKH RX 21 140 3 691 515 17 2 15 15 -4 70 8 -36

TELECOMS Rostelecom RTKM RX 10 829 4 3631 6174015420925533 MTS MBT US13 2815 3131 6454012963375 14 VimpelCom Ltd VI P US 25 239 10 109 1 013 40 4 15 65 24 49 -71 108 AFK Sistema SSA LI 33 348 8 501 1 118 25 3 - - 18 - - 413

METALS & MINING

Norilsk Nickel GMKN RX 12 514 5 926 3 830 47 31 63 -5 -13 17 62 -24 Sev erstal SVST LI 14 246 2 620 1 174 18 8 574 9 -27 n/ m n/m -42 No vol i petsk NLMK LI 12 899 2 3061 18718965014838 -13 Me che l MTL US - - - - - 219 22 -100 760 15 -100 Evraz plc EVR LN 15 321 2 203 429 14 3 322 10 -19 n/ m 25 -41 Ma gnitogorsk MK MMK LI 9 969 1 3176413138-115-9n/mn/m TMK TMKS LI 6 839 1 171 402 17 6 180 13 15 n/ m 270 4 Ra spadskaya RASP RX 785 295 130 38 17 25 5 -6 109 -44 -4 Polyus Gold Int . PGIL LN 2 861 1 426 909 50 32 26 52 39 10 57 63 Polymetal Int POLY LN 1 906 958 642 50 34 71 36 75 160 16 122 Pet ropavlovsk POG LN 1 454 682 340 47 23 -10 177 28 -84 947 41 FERTILIZERS

Uralkali URKA LI 4 320 2 598 1 762 60 41 19 74 6 50 62 17 Acron AKRN RX 2 163 499 292 23 13 58 107 -29 -18 239 -53

TRANSPORTATION Aeroflot AFLT RX 7 763 592 213 8 3 62 -27 18 212 88 -59 Globaltrans GLTR LI 1 482 652 334 44 23 15 19 22 101 50 25 TransContainer TRCN LI 1 228 335 149 27 12 21 85 31 64 284 27 NCS P Gro up NCSP LI 1 202 664 249 55 21 1 29 20 1 -50 96 Global Ports GLPR LI 533 291 165 55 31 57 35 2 66 23 23 CONSUMER GOODS & RETAIL

X5 Retail Group FI VE LI 17 269 1 215 355 7 2 15 34 8 64 11 18 Ma gnit MGNT LI14 4521 6018401162446742125101 M. Video MVID RX 4 754 272 149 6 3 46 43 28 196 57 30 Di xy Group DIXY RX 5 084 305 55 6 1 31 85 38 n/ m 342 46 O'KEY Group OKEY LI 4 083 314 129 8 3 28 9 23 293 25 17 REAL ESTATE LSR LSRG LI 1 938 419 181 22 9 -40 21 21 -60 44 118 AFI Development AFI D LI 170 27 3 16 2 -39 29 28 n/ m 563 -98 PIK Group PIK LI 1 950 293 128 15 7 -14 124 24 n/ m n/m -22

Source: URALSIB estimates

13 75

Valuation Forecast 2012 (Second-Tier)

Revenue, EBITDA, Net Profit, Margin, % EBITDA Growth, % Earnings Growth, % Na me Ticker $ Ml n $ Mln $ Ml n EBITDA Net 2010 2011 2012E 2010 2011 2012E OIL & GAS

Alliance Oil Company AOIL SS 2 867 707 276 25 10 -22 53 5 -31 29 -10 Eurasia Drilling EDCL LI 3 323 714 245 22 7 31 35 22 25 34 -12 Integra INTE LI - - - - - 41 -34 -100 n/ m n/ m -100 C. A.T. oil O2C GR 485 101 25 21 5 19 132120-64168 Transneft TRNFP RX 20 968 10 515 7 115 50 34 16 26 6 8 58 9 HMS Gr ou p HMSG LI 1 005 180 106 18 11 95 62 -4 2 257 116 -6 UTILITIES OGK-2 OGKB RX 3 589 206 Neg 6 - 196 -37 -6 354 -100 n/m E.ON Russia EONR RX 2 699 1 023 648 38 24 65 63 31 92 47 30 Enel OGK-5 OGKE RX 2 395 521 258 22 11 49 10 27 21 39 53 TGK-1 TGKA RX 2 242 453 150 20 7 23 59 12 -19 -38 13 TGK-2 TGKB RX 1 365 208 58 15 4 n/m 47 47 n/m n/m 137 Mo sen er goMSNG RX5 779 738 212 13 4 30 21 -10 459 1 -28 Quadra TGKD RX 1 674 219 99 13 6 11 -3 24 n/ m -20 28 Kuz bas senergo KZBE RX 1 334 282 109 21 8 89 -99 -193n/mn/m MOESK MSRS RX 3 962 1 250 396 32 10 25 16 -12 68 10 -36 Lenenergo LSNG RX 1 227 294 64 24 5 40 -12 -15 95 n/ m n/ m MRS K No rt h- West MRKZ RX 1 130 121 11 11 1 -20 73 -14 n/ m n/ m -61 MRSK Center and Volga MRKP RX 2 042 290 37 14 2 4 94 -23 14 461 -76 MRSK Center MRKC RX 2 340 461 102 20 4 31 22 -11 158 13 -45 MRSK South MRKY RX 896 248 66 28 7 0 42 27 n/m n/m - MRSK Siberia MRKS RX 1 775 81 Neg 5 --43131-38 n/ m n/ m n/ m MRSK Volga MRKV RX 1 705 237 69 14 4 -14 48 23 -55 221 16 MRSK Ural MRKU RX 2 179 2895313241-2742-53 MRSK North-Caucasus MRKK RX 41 7 52 Ne g 12 - - -8 -3 - n/ m n/ m Bas hkirEnergo BEGY RX 1 933 195 52 10 3 -0 8 -27 -3 18 -55 Irkutsk energo IRGZ RX 2 644 702 404 27 15 90 21 -5 -17 n/m n/m

METALS & MINING KTK KBTK RX 787 139 83 18 11 -8 114 4 23 167 21 Kuzbassrazrezugol KZRU RU 2 303 609 305 26 13 7 16 -15 11 16 -28 Hi ghland Gold Mining HGM LN 355 186 114 52 32 122 18 17 52 -15 9 Hi gh River Gold HRG CN 544 275 181 51 33 -19 83 -13 n/m 55 -6 FERTILIZERS Do r ogobuzh DGBZ RX 527 172 144 33 27 39 120 -20 52 313 -55 Apatit APAT RU 1 422 294 157 21 11 17 9 9 -31 -36 39 KuibyshevAzot KAZT RX 998 161 83 16 8 66 131 -42 367 325 -54

MACHINERY & ENGINEERING

Power Machines SILM RX - - - - - 24 -100 - 37 -100 - Kaz an Helicopter Plant KHEL RX - - - - - 169 -100 - 166 -100 - Ulan-Ude Aviation Plant UUAZ RX - - - - - 62 -100 - 88 -100 - Rostvertol RTVL RU - - - - - 118 -100 - 170 -100 -

URANIUM Novosibirsk Chemical NZHK RU ------20-100--13-100 - Ma shi n ostr o it el ny Zavod MASZ RU ------8 -100 - -5 -100 - Priargunsk Chemical PGHO RU - - - - - 73 -100 - 229 -100 -

PHARMACEUTICALS Pharmstandard PHST LI 1 616 394 286 24 18 727-3928-5 Veropharm VRPH RX 242 70 41 29 17 20 30 2 14 53 -32 Pharmacy Chain 36,6 APTK RX 851 62 Neg 7 - 33 33 -19 n/ m n/ m n/ m IT IBS Group IBSG GR 987 113 59 11 6 38 60 51 86 59 44 ARMADA ARMD RX 201 26 14 13 7 769 50 34 - 421

MEDIA RB C RBCM RX 216 37 14 17 7 -79 553 109 n/ m n/ m n/ m Mail.ru Group MAIL LI 697 354 905 51 130 77 137 25 66 170 334 CTC Media CTCM US 882 278 168 32 19 5 12 13 45 -64 216 Source: URALSIB estimates

14 76

CALENDAR Monday, October 29, 2012

2012 October 30 TNK-BP will publish 3Q12 financial results Yandex will report 3Q12 US GAAP results 31 LSR Group will publish 3Q12 operating results Cherkizovo Group will publish 3Q12 operating results November 2 KTK will publish 3Q12 operating results 4 NLMK will publish 3Q12 IFRS results 8 Enel OGK-5 to publish 9M12 IFRS and operating results 14 VimpelCom to report 3Q12 IFRS results 15 Severstal will publish 3Q12 IFRS results Evraz will publish 3Q12 financial results Polyus Gold will publish 3Q12 operating results 20 KTK will publish 3Q12 IFRS results 20 Vozrozhdenie Bank will publish 3Q12 IFRS results 22 Gazprom Energoholding investor day 28 Sberbank will publish 3Q12 IFRS results Cherkizovo will publish 3Q12 IFRS results 29 Rusagro will publish 3Q12financial results Rostelecom will publish 3Q12 IFRS results Rusal will publish 3Q12 financial results 30 OGK-2 to publish 9M12 IFRS results December 7 TGK-1 to publish 9M12 IFRS results 10 Mosenergo to publish 9M12 IFRS results Source: Reuters

15 77

URALSIB Securities Ltd URALSIB Capital LLC Auerbach Grayson & Co. Level 33 Tower 42, 25 Old Broad St, London EC2N 1HQ, UK 8 Efremova Street, Moscow, Russia 119048 25 West 45th Street, 16th Fl., New York, Telephone: +44 (0) 20 7562 8000 Telephone: + 7 (495) 788 0888 New York 10036 Fax +44 (0) 20 7562 8099 Fax: + 7 (495) 705 7010 Tel: +1 (212) 557‐4444, Fax: +1 (212) 557‐9066 Authorised and Regulated by FSA U.S. registered broker‐dealer and Member Firm London Stock Exchange, member of FINRA and SIPC Turquoise Derivatives and Euronext

Disclaimer

The views expressed in this report accurately reflect the personal views of the undersigned lead analyst(s) about the subject. The lead analyst(s) has not and will not receive any compensation for providing a specific recommendation or view in this report. Opinions, estimates and projections in this report constitute the present judgment of the undersigned lead analyst(s) as at the date of the report. They do not necessarily reflect the opinions of URALSIB and are subject to change without notice. Vyacheslav Smolyaninov (Strategy), Alexei Devyatov, (Economy), Alexei Kokin (Oil & Gas), Matvey Taits (Utilities), Konstantin Chernyshev, (Telecoms, IT & Media), Valentina Bogomolova (Metals & Mining), Tigran Hovhannisyan (Consumer Goods & Retail), Marat Ibragimov (Real Estate).

This report is provided for informational purposes only. Under no circumstances is it to be used or considered as an offer or a solicitation of an offer to buy or sell securities.

Information and opinions contained in this report have been compiled by URALSIB from sources believed to be reliable and while all reasonable care has been taken in the preparation of this report, URALSIB makes no representation or warranty, express or implied, to its accuracy or completeness. Neither URALSIB nor its principals, employees, agents or affiliates accept any liability for any direct or consequential loss arising from any use of this report or its contents. Investors should make their own investment decisions using their own independent advisors, as they believe necessary and based upon their specific financial situations and investment objectives when investing. The information is the exclusive property of “URALSIB Capital LLC” and may not be reproduced or distributed without prior written permission.

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16 78

Research +7 (495) 788-0888 Head of Research Konstantin Chernyshev, [email protected]

Deputy Head of Research Head of Fixed Income Research Vyacheslav Smolyaninov, [email protected] Dmitry Dudkin, [email protected] Research Sectors & Staff Strategy Oil & Gas Vyacheslav Smolyaninov, [email protected] Alexei Kokin, [email protected] Stanislav Kondratiev, [email protected] Economy Utilities Alexei Devyatov, PhD, [email protected] Matvey Taits, [email protected] Olga Sterina, [email protected] Ivan Rubinov, CFA, [email protected] Natalia Mayorova, [email protected] Banking Metals & Mining Natalia Berezina, [email protected] Valentina Bogomolova, CFA, [email protected] Market Analysis Telecommunications, IT & Media Vyacheslav Smolyaninov, [email protected] Konstantin Chernyshev, PhD, [email protected] Dmitry Push, [email protected] Konstantin Belov, [email protected] Maxim Nedovesov, [email protected] Nikolai Dyachkov, [email protected] Fixed Income Fertilizers, Transport & Machinery Dmitry Dudkin, CFA, [email protected] Artem Egorenkov, [email protected] Anton Tabakh, PhD, CFA, [email protected] Denis Vorchik, [email protected] Nadezhda Myrsikova, [email protected] Consumer Goods & Retail Olga Sterina, [email protected] Tigran Hovhannisyan, PhD, [email protected] Yuri Golban, [email protected] Alexander Shelestovich, [email protected] Andrei Кulakov, CFA, [email protected] Real Estate Tatiana Dneprovskaya, [email protected] Marat Ibragimov, [email protected]

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17 79 Deutsche Bank Markets Research

Rating Company Date Buy Yandex 23 October 2012 Company Update North America United States Price at 23 Oct 2012 (USD) 22.15 TMT Price target 31.00 Internet Reuters Bloomberg Exchange Ticker 52-week range 28.62 - 16.66 YNDX.OQ YNDX US NMS YNDX

3Q Preview; Core O&O search trends Ross Sandler Igor Semenov Research Analyst Research Analyst intact - Buy (+1) 415 262-2028 (+7) 495 933-9238 [email protected] [email protected] Expect solid 3Q results

We remain comfortable with estimates slightly ahead of consensus for Yandex, Lloyd Walmsley despite a tough comp in network and signs of slower growth in display in Research Analyst September. We expect solid growth in core O&O search revenue to more than (+1) 212 250-7063 offset potential noise in network and display. We maintain our Buy rating and [email protected] $31 price target and view the shares as attractively priced at a 0.9x P/E/G on

2013 and a 0.5x P/E/G on 2014. Conor Irvine wComfortable with our estimates above consensus Associate Analyst Our ests are for 3Q revs of RUB 7,224 (vs Bloomberg consensus of RUR 7,194), (+1) 415 617-3246 up 40% y/y. We expect slight EBITDA margin expansion from to 45.9% in 3Q [email protected] (from 45.3% a year ago and 45.1% in 2Q12) to RUR 3,317 (vs consensus of RUR 3,204). Our PF EPS estimate is RUR 6.26 (consensus is RUR 6.04). While we do not expect Yandex to provide 2013 guidance, we note that CEO Arkady Benjamin Abrams Volozh was recently quoted in the Moscow Times referring to revenue growth Research Associate rates, in loose terms, of around 30% next year, approximately in line with ests. (+1) 212 250-0476 [email protected] Key metrics – O&O rev growth is the key We look for network revenue to decelerate from 93% y/y in 2Q to 40% y/y in 3Q as the company laps (1) the rollout of MatrixNet on the network last Price/price relative September and (2) the addition of Rambler to the network. More importantly, 50 we expect O&O search to grow 41.7% y/y (from 43.2% last quarter). We see paid clicks growing 41% y/y (from 62% last quarter) on tough comps with 40 CPCs flat y/y as the company begins to lap easy compares on CPCs. 30 Deceleration in network / display has limited impact on profitability 20 In light of deceleration in the network and a weaker display ad market in the 10 last month of the quarter, we note that network search revenue net of TAC 5/11 11/11 5/12 represents ~7% of total net revenue, while display represents ~10% of net Yandex revenue. Any incremental slowdown beyond what we have modeled has a S&P 500 INDEX (Rebased) limited impact on overall net revenue and profit growth. Performance (%) 1m 3m 12m Absolute -9.7 19.5 -16.2 Valuation Our price target is $31 based on a P/E of 30x on ‘13E and 17x ‘13E EV/EBITDA, S&P 500 INDEX -3.2 4.6 14.1 a premium warranted in light of above avg 34% rev CAGR from ‘11-‘14E. Risks include competition, loss of network partners, FX risk, political risk, increased investment, and a multiple class share structure. See Valuation and Risk sections for further detail.

Forecasts And Ratios

Year End Dec 31 2011A 2012E 2013E FY EPS (RUB) 19.39 25.75 31.81 P/E (x) 42.2 27.0 21.9 Revenue (RUBm) 20,033.0 28,869.4 38,001.1 Source: Deutsche Bank estimates, company data

1 PF EPS excludes non-cash comp expense

Internet Yandex

Model updated: 16 October 2012 Fiscal year end 31-Dec 2010 2011 2012E 2013E 2014E

Running the numbers Financial Summary North America DB EPS (RUB) 12.89 19.39 25.75 31.81 41.42 Reported EPS (RUB) 12.89 19.39 25.75 31.81 41.42 United States DPS (RUB) 0.00 0.00 0.00 0.00 0.00 Internet BVPS (RUB) 31.16 88.33 113.22 144.39 184.79 Valuation Metrics Yandex Price/Sales (x) nm 13.4 8.1 6.2 4.9 Reuters: YNDX.OQ Bloomberg: YNDX US P/E (DB) (x) na 42.2 27.0 21.9 16.8

P/E (Reported) (x) na 42.2 27.0 21.9 16.8 Buy P/BV (x) 0.0 7.2 6.1 4.8 3.8 Price (23 Oct 12) USD 22.15 FCF yield (%) na 0.8 2.6 3.2 4.2 Dividend yield (%) na 0.0 0.0 0.0 0.0 Target Price USD 31.00 EV/Sales nm 12.3 7.1 5.33.9 52 Week range USD 16.66 - 28.62 EV/EBITDA nm 26.7 15.5 11.28.4 EV/EBIT nm 33.5 20.2 15.110.9 Market Cap (m) USDm 7,430 Income Statement (RUBm) EURm 5,731

Sales 12,500 20,033 28,869 38,00148,682 Company Profile EBITDA 6,164 9,237 13,314 17,75822,839 Yandex operates the leading Internet search engine in EBIT 4,983 7,363 10,207 13,18317,578 Russia. In addition to search, the company also offers a Pre-tax profit 5,163 7,901 10,825 13,671 18,042 range of services including specialized search, Net income 3,977 6,356 8,636 10,732 14,073 personalized and location-based services, including Yandex.News, Yandex.Market, Yandex.Mail and Cash Flow (RUBm) Yandex.Maps. Cash flow from operations 5,963 7,837 10,758 15,197 19,169 Net Capex -2,199 -5,566 -4,702 -7,600 -9,250 Free cash flow 3,764 2,271 6,056 7,597 9,919 Equity raised/(bought back) -2 -8 0 0 0 Price Performance Dividends paid -90600 00 Net inc/(dec) in borrowings 000 00 50 Other investing/financing cash flows -1,890 731 -5,234 0 0 Net cash flow 966 2,994 822 7,597 9,919 40 Change in working capital 814 91 -743 -110 -165 30 Balance Sheet (RUBm) 20 Cash and cash equivalents 3,371 6,322 7,481 15,078 24,997 10 Property, plant & equipment 2,983 6,973 8,603 11,628 15,616 May 11 Nov 11 May 12 Goodwill 662 1,132 1,157 1,1571,157 Other assets 5,601 19,649 26,366 27,192 28,235 Yandex S&P 500 INDEX (Rebased) Total assets 12,617 34,076 43,607 55,055 70,005 Margin Trends Debt 000 00 Other liabilities 3,002 5,123 5,631 6,347 7,225 52 Total liabilities 3,002 5,123 5,631 6,347 7,225 48 Total shareholders' equity 9,615 28,953 37,976 48,708 62,781 44 Net debt -3,371 -6,322 -7,481 -15,078 -24,997 40 Key Company Metrics 36 Sales growth (%) nm 60.3 44.1 31.6 28.1 32 DB EPS growth (%) na 50.5 32.8 23.6 30.2 10 11 12E 13E 14E EBITDA Margin EBIT Margin Payout ratio (%) 0.0 0.0 0.0 0.0 0.0

EBITDA Margin (%) 49.3 46.1 46.1 46.7 46.9 Growth & Profitability EBIT Margin (%) 39.9 36.8 35.4 34.7 36.1 70 50 ROE (%) 41.4 33.0 25.8 24.8 25.2 60 40 50 Net debt/equity (%) -35.1 -21.8 -19.7 -31.0 -39.8 40 30 Net interest cover (x) nm nm nm nm nm 30 20 20 DuPont Analysis 10 10 0 0 EBIT margin (%) 39.9 36.8 35.4 34.7 36.1 10 11 12E 13E 14E x Asset turnover (x) 1.0 0.9 0.7 0.8 0.8 x Financial cost ratio (x) 1.0 1.1 1.1 1.0 1.0 Sales growth (LHS) ROE (RHS) x Tax and other effects (x) 0.8 0.8 0.8 0.8 0.8

= ROA (post tax) (%) 31.5 27.2 22.2 21.8 22.5 Solvency x Financial leverage (x) 1.3 1.2 1.2 1.1 1.1 0 = ROE (%) 41.4 33.0 25.8 24.8 25.2 -10 annual growth (%) na -20.3 -21.7 -4.1 2.0 x NTA/share (avg) (x) 31.2 58.8 99.8 128.5 164.1 -20 -30 = Reported EPS 12.89 19.39 25.75 31.81 41.42 -40 annual growth (%) na 50.5 32.8 23.6 30.2

-50 Source: Company data, Deutsche Bank estimates 10 11 12E 13E 14E

Net debt/equity (LHS) Net interest cover (RHS)

Ross Sandler +1 415 262-2028 [email protected]

Page 2 Deutsche Bank Securities Inc.

81 23 October 2012

Internet Yandex 3Q Preview

Expect continued strength in core O&O search trends

We remain buyers of Yandex shares as we believe business trends remain strong and the growth-adjusted valuation remains compelling. On September 12, we hosted the Yandex management team at our Tech Conference, where the company provided bullish commentary on business trends. In addition, the company has been on a roll with regard to distribution announcements, including powering maps data in iOS in Russia and the rollout of a Yandex browser last month. We believe a deeper relationship with Apple could help allay concerns around competition from Google.

While we do not expect Yandex to provide 2013 guidance, we note that CEO Arkady Volozh was recently quoted in the Moscow Times referring to revenue growth rates, in loose terms, of around 30% next year, approximately in line with our 32% estimate and consensus of 33% y/y (see “Yandex Takes On Google in Emerging Markets”, 10/21/12). We do not take this quote too literally, as the context was in reference to moderating growth rates from the days of 2x revenue growth, but believe this quote is noteworthy nonetheless.

Figure 1: DB estimates versus Consensus (Rubles in millions, unless noted) 3Q12 4Q 2012E 2013E DB Street DB Street DB Street DB Street

Gross Revenues 7,224 7,194 8,970 8,746 28,869 28,761 38,001 38,139 Growth (YoY) 40% 39% 39% 36% 44% 44% 32% 33% Text-based 6,497 7,698 25,521 33,865 Display 603 1,123 2,774 3,468

Operating Expenses 2,080 2,200 8,253 10,892

EBITDA 3,317 3,204 4,550 4,223 13,314 12,930 17,758 17,084 Margin (net) % 45.9% 50.7% 48.3% 46.1% 45.0% 46.7% 44.8% Growth (YoY) 42% 39% 121% 44% 40% 33% 32%

GAAP EPS 5.92 5.86 8.45 8.25 24.57 24.59 30.03 32.26 Proforma EPS (excl. stock comp.) 6.26 6.04 8.82 8.30 25.75 25.06 31.81 33.14 Growth (YoY) 19% 34% 33% 24%

Capex 1,445 1,750 4,702 7,600 Note: Bloomberg consensus for 3Q and 4Q only includes 3 or 4 analyst estimates, depending on the metric, suggesting it may not be an accurate indicator of sentiment on financial expectations. Source: Bloomberg consensus, Deutsche Bank estimates

Key things to look for on the call:

O&O search revenue growth – DBe +41.7% y/y (vs 43.2% y/y in 2Q12) and an update on ad market trends / current expectations around 4Q and 2013

EBITDA margins – DBe 45.9% in 2Q12 (vs 45.1% in 2Q12 and 45.3% in 3Q11) and color on expectations for investment

Impact of new distribution – Yandex browser, iOS, potential other deals?

Paid click growth and CPCs (DBe +41% and +0% y/y, respectively) – we do not focus on these metrics, but many investors do

SERPs growth (DBe +35% y/y)

Trends in display, payments and other businesses

Update on geographical expansion in Turkey and beyond

Deutsche Bank Securities Inc. Page 3

82 23 October 2012

Internet Yandex

Overview of 3Q estimates by segment

We remain comfortable with our estimates, calling for sustained growth in O&O search (Figure 2) and a deceleration in growth in network search on more difficult comparisons (Figure 3). We believe September display trends weakened somewhat, but have already assumed a deceleration in our 3Q estimates to 30% y/y (from 43% y/y in 2Q). We do not see any read-through from Google results for Yandex given limited overlap.

Text-based ad revenue trends likely continue to be solid in key O&O search We look for Yandex O&O revenue growth of 41.7% y/y in 3Q, a slight deceleration from 43.2% growth in 2Q and 42.7% in 1Q results (Figure 1). For network revenues, our estimates are for 40% growth (Figure 2), down from 93% y/y in 2Q, as the company (1) laps the rollout of MatrixNet technology to the network in September, which increased CTRs by 20% in the network and (2) the inclusion of Rambler as a distribution partner (Figure 3), which drove a sharp acceleration in paid click growth a year ago.

Figure 2: Yandex O&O search revenue growth (Y/Y) Figure 3: Yandex network search revenue growth (Y/Y)

80% 140% 125% 130% 67% 117% 70% 120% 57% 57% 60% 100% 93%

50% 43% 43% 43% 42% 43% 80% 69% 40% 60% 30% 38% 40% 35% 40% 20% 20% 10% 0% 0% 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12E 4Q12E 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12E 4Q12E

Source: Company reports, Deutsche Bank Source: Company reports, Deutsche Bank

Network revenue deceleration has limited impact on net revenue growth Network revenue after TAC is The deceleration in network search revenue has a vastly lower impact on profitability only 7% of total revenue after than Yandex O&O revenue in light of the fact that (1) network revenue is only 18% of TAC, thus any deceleration text-based advertising and 16% of total gross revenue, and (2) network revenue carries beyond our forecast has a 64% TAC payments to partner sites, thus represents a mere 7% of net revenue after limited impact on profitability TAC. As such, each 10% y/y growth rate deceleration in the network has an estimated 0.5% impact on total net revenue and 0.7% impact on the y/y net revenue growth.

Figure 4: Impact of 10% y/y deceleration in network revs on total net revenue growth 3Q11 3Q12E Gross revenue (RUR in mns) 5,159 7,224 Total TAC (RUR in mns) 818 1,183 Total net revenue (RUR in mns) 4,341 6,040 Network Revenue (RUR in mns) 827 1,158 Growth (Y/Y) 40% Network as a % of total 16% 16% Network TAC rate 63.6% 64.4% Gross revenue impact of 10% growth 83 Net revenue impact after TAC 29 % of Net Revenue estimate 0.5% Impact of 10% decel on network on total net rev growth 0.7% Source: Deutsche Bank estimates

Page 4 Deutsche Bank Securities Inc.

83 23 October 2012

Internet Yandex

We do not overly focus on the paid click growth or the CPC metric, particularly given the recent CPC declines have occurred in an environment of rising paid click growth. In order to provide answers to investors queries, however, we show our forecast for moderating paid click growth in 3Q (Figure 5) and improving CPCs trends (Figure 6) as the company laps its effort to court regional advertisers through lower pricing, which began in 3Q 2011.

Figure 5: Paid click growth lapping anniversary of new Figure 6: Lapping easy comparisons on CPCs network partner and MatrixNet rollout 80% 10% 68% 8% 8% 65% 70% 61% 62% 60% 51% 5% 47% 3% 50% 41% 38% 0% 40% 0% 30% 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12E 4Q12E 20% -1% -5% 10% -7% -5% 0% -7% 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12E 4Q12E -10% Source: Company reports, Deutsche Bank estimates Source: Company reports, Deutsche Bank estimates

Display revenue saw weakness in September, but we had expected deceleration We forecast display advertising revenue of RUB 603 in 3Q, up 30% y/y, a deceleration Each 10% growth from last quarter’s 43% y/y growth. We have heard from conversations in the industry deceleration in display only that there has been some weakness in display in September, which makes sense in equates to an estimated 0.9% light of this segment’s greater exposure to international brands advertising in Russia impact on the overall y/y and general economic sluggishness, particularly in developed markets, which has growth rate slowed ad budget growth.

Figure 7: Yandex display revenue growth trends (Y/Y) 140% 120% 120% 100% 80% 72% 63% 60% 50% 43% 40% 28% 30% 30% 20% 0% 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12E4Q12E

Source: Company reports, Deutsche Bank estimates

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On October 16, Omnicom (OMC, covered by Matt Chesler) reported results noting strength in Russia (and Turkey) with “double-digit” growth. Mail.ru (MAIL-LON, not covered), on its September 5 call, flagged some weakness in 3Q, mostly due to their own experiments with display advertising positioning to improve user engagement. Mail.ru plans to provide an update on 3Q sales trends on October 25, which may help shed light on trends in the Russian online advertising space.

That said, display revenue, at 8% of gross revenue, does not have a significant influence on Yandex results. For example, for every 10% y/y deceleration in display revenue for Yandex in 3Q versus our estimates, it has a 0.6% impact on total quarterly revenue and 0.9% impact on y/y growth rates for the entire company, by our estimates.

Figure 8: Hypothetical impact of display deceleration on total revenue growth (Y/Y) 3Q11 3Q12E Display revenue (RUR in millions) 464 603 Growth (Y/Y) 30% Total gross revenue (RUR in millions) 5,159 7,224 Growth (Y/Y) 40.0%

3Q12 Display at 20% y/y growth (10% lower than DBe) 557 Implied total revenue (RUR in millions) 7,178 Growth (Y/Y) 39.1% Total growth impact per 10% display deceleration 0.9% Source: Company reports, Deutsche Bank estimates

Operating expenses Our estimates are for 35% y/y growth in operating expenses, approximately in line with 38% y/y growth in 1H but below 2Q growth of 24% y/y, which was somewhat skewed from pull-forward of marketing expense into 1Q 2012.

Browser initiative Yandex recently unveiled its own web browser in Russia based on open source programming and interwoven with Yandex products. Yandex.browser appears to have ~2% market share within weeks of its release (per Liveinternet.ru), although it may include previous beta versions. We view the move primarily as defensive, as the company has seen stable search share in Russia and increasing share even within Google’s Chrome browser. Traction with a Yandex browser could help reduce TAC expense over time and insulate the company from competition with Google.

App store initiative Yandex recently unveiled plans to launch its app store, Yandex.Store, with nearly 40,000 apps expected to be available in late October. The effort includes support for a white labeled option allowing other vendors to brand on top of Yandex.Store technology. Press reports indicate Russian wireless carrier MegaFon plans a version of the Yandex app store. Yandex will take a 30% revenue share of apps on the store. We believe this, on top of its Android skin and relationship with Apple in iOS, helps the company further insulate itself against the threat from Google in mobile.

Power Apple Maps in Russia Apple, with the rollout of iOS 6, has integrated Yandex.Maps technology into its Maps Yandex.Maps integration into product in Russia. Users searching in Apple’s iOS 6 maps for local services in Russia iOS maps could be the see data powered by Yandex, and the “more information” button sends users to beginning of a deeper Yandex.Maps. We believe this could be the beginning of a deeper relationship with relationship with Apple in Apple on the search side, including optional Yandex search in Safari and potentially Russia

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85 23 October 2012

Internet Yandex even default search positioning in Safari in Russia, with potential to penetration Safari both on desktop and in mobile. Apple share in Russia remains small, with iOS representing 5.4% of traffic in October and Apple’s Safari browser representing 8.6% of browser share in Russia, per LiveInternet.ru data.

Traffic Update – Yandex gaining momentum in Turkey

Yandex search share continues to remain stable. Yandex gained market share from the lows of 59.3% share in February 2012 to a healthy 60.5% share in September 2012 (Figure 9). Yandex has also shown a robust growth in market share within the Chrome browser, growing from a 41.8% share as of August 2011 to 47.5% share today, gaining 573 bps, while Google lost 700 bps during the same time frame (Figure 10). Clearly, Yandex has been successful in converting Chrome users to shift to Yandex as a default search.

Figure 9: Yandex monthly share – Jan 2011 - present Figure 10: Yandex search share within Chrome in Russia

Yandex (Left) Google (Right) Google search share within Chrome 66% 28.0% 47.0% Yandex search share within Chrome 65%65% 65%65% 27%27%27% 65% 26% 27.0% 64% 64% 26% 45.0% 64% 26% 26%26% 64% 26% 26% 26.0% 25% 25% 25% 63% 43.0% 63% 25.0% Yandex share stabilizing 41.0% 62% 24% 24.0% 61% 23%23% 61% 61% 61% 61% 22% 61%60%60%61%60% 23.0% 39.0% 22% 60% 22% 22% 60% 60% 21% 59% 22.0% 59% 37.0% 59% 21.0% 8-Jul Jul-12 Jul-11 Jan-12 Jan-11 Dec-11 Apr-12 Apr-11 Jun-12 Jun-11 Feb-12 Feb-11 Nov-11 Mar-12 Mar-11 May-12 May-11 Aug-12 Aug-11 Sep-12 Sep-11 Oct-11 2-Oct 8-Jan 1-Apr 5-Feb 4-Sep 2-Sep 4-Mar 5-Aug 22-Jul 16-Oct 30-Oct 14-Oct 22-Jan 15-Apr 29-Apr 19-Feb 10-Jun 24-Jun 18-Sep 16-Sep 30-Sep 11-Dec 25-Dec 13-Nov 27-Nov 18-Mar 21-Aug 19-Aug 13-May 27-May

Source: Liveinternet.ru, Deutsche Bank Source: Liveinternet.ru, Deutsche Bank

Trends in Turkey appear positive though no scale yet Yandex appears to be gaining search momentum in Turkey, as comScore reported 24% month/month growth in search queries in September data to 30.9mn queries, though it still remains sub 1% share according to Google. We expect management to provide more color on progress on Turkey but to continue to defer any substantial judgments around Turkey until 2013.

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Valuation and Risks

Our price target is $31 based on a blended average of P/E of 30x on ‘13E and 17x ‘13E EV/EBITDA, a premium to the Advertising/Media/Search group’s 25x trading multiple, warranted in light of its above average 34% revenue CAGR from 2011-2014E (vs. 21% for the group in 2013). Yandex trades at a P/E/G ratio of 0.9x on 2013 and 0.5x on 2013. Risks include competition, loss of network partners, FX risk, political risk, increased investment in R&D and S&M, a multiple class share structure and emerging market risk.

Figure 11: Yandex Valuation Worksheet (USD in millions unless noted) Current Price $22.15 23-Oct Diluted Shares Outstanding 335 Current Market Cap 7,426 Less: Cash and Cash Equivalents 703 Less : Other Assets Plus: Debt Adjusted Enterprise Value 6,723 Price to Earnings 2013E 2014E GAAP EPS $0.98 $1.30 GAAP P/E Multiple (current) 22.5x 17.0x Adjusted EPS $1.04 $1.36 Adjusted P/E Multiple (current) 21.2x 16.3x Adjusted P/E/G Multiple (current) 0.9x 0.5x Target Multiple 30.0x 30.0x Implied Stock Price on Forward EPS $31 $41

EV to EBITDA 2013E 2014E Adjusted EBITDA 582 749 Current EV/EBITDA Multiple 11.5x 9.0x Target Multiple 17.0x 17.0x Enterprise Value 9,898 12,730 Plus: YE Cash 1,139 1,464 Less: YE Debt Equity Market Capitalization 11,037 14,194 FY End Projected Sharecount 337 340 Implied Stock Price on Forward EBITDA $33 $42

FCF Yield 2013E 2014E FCF per Share $0.74 $0.96 Current FCF Yield 3.3% 4.3% Target Yield 2.5% 2.5% Implied Stock Price on Forward FCF $30 $38

Average $31 Source: FactSet, Deutsche Bank estimates

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87 23 October 2012 88 Internet Yandex . . . р р р

.41.42 .39.66 .29.20 р р р 22,839 14,073 48,682 - . 31.81 . 30.03 . 22.52 р р р 17,758 10,732 38,001 . 24.57 . 25.75 . 18.06 р р р 13,314 8,636 28,869 60 - .8.45 .8.82 .5.16 р р р 3QE 4QE 2012E 2013E 2014E 4,550 2,961 8,970 - .5.92 .6.26 .3.33 р р р A 2Q 3,317 2,101 7,224 - .5.75 .6.17 .6.54 р р р A 1Q 24 3,070 2,069 6,801 .3.75 .4.49 .3.16 р р р A 2011 2,377 1,505 5,874 . 17.61 . 19.39 .6.80 р р р A 4Q 9,237 6,356 20,033 .6.34 .6.59 .2.95 р р р A 3Q 3,269 2,207 6,439 .5.08 .5.27 .1.24 р р р A 19.4% 15.2% 13.7% 15.7% 16.3% 14.4% 14.2% 12.0% 14.0% 13.7% 13.7% 2Q 2,335 1,771 5,159 .3.46 .3.79 .2.09 р р р A 1Q 1,914 1,234 4,541 .2.60 .3.63 .0.45 р р р A 3,764 143 680 418 987 2,228 1,060 2,192 1,116 1,732 6,056 7,597 9,919 12.20 2010 1,719 1,144 3,894 .12.37 .12.89 р р A 43.1% 49.3% 44.1% 42.1% 45.3% 50.8% 46.1% 40.5% 45.1% 45.9% 50.7% 46.1% 46.7% 46.9% 2009 6,164 3,977 12,500 .6.52 .7.20 р р 33 62 31 6 8 5 18 37 36 A 294986 44 672 180 1,186 34 232 3 256 408 484 573 93 1,545 538 344 133 540 235 542 125 764 125 2,189 618 2,939 488 3,969 464 912130 933 201 1,229 280 328 87 440 91 464 95 864 2,096 115 420 388 628 114 603 127 1,123 124 2,774 150 3,468 514 4,335 668 869 50.0% 43.1% 49.3% 44.1% 42.1% 45.3% 50.8% 46.1% 40.5% 45.1% 45.9% 50.7% 46.1% 46.7% 46.9% 3,825 3,519 2,891 5,163 1,376 1,490 2,255 2,780 7,901 1,849 2,609 2,642 3,725 10,825 13,671 18,042 306.9 308.2 308.6 315.2 325.3 335.8 334.9 327.8 335.0 335.2 335.5 335.8 335.4 337.3 339.7 6,574 7,533 10,960 3,473 4,002 4,595 5,442 17,512 5,304 6,022 6,497 7,698 25,521 33,865 43,478 5,954 6,653 9,931 3,006 3,513 3,872 4,961 15,352 4,362 5,058 5,397 6,750 21,567 28,650 37,008 2008 3,759 2,219 8,729 A A Adj EBITDA margin EBITDA Adj YoY Growth 63% 79% 106% 11% 75% 53% 50% 24% 63% 19% 34% 33% 24% 30% Depreciation & Amortization 600 912 1,181 377 427 488 582 1,874 661 696 800 950 3,107 4,575 5,261 Operating ProfitPretax IncomeTax RateNet IncomeRevenues O&O Sites revenues Network revenuesText-based advertising advertisingDisplay Operating expensesEBITDAProforma EPS 42.2% 46% 32.6% 28% 39.9% 33% 33% 80.0% 23.2% 34.5% 25% 83.1% 41% 22.7% 14.1% 23.0% 32.7% 14.6% -6.1% 35.9% 63.0% 32% 35% 43.2% 62.5% 16.9% 35.8% 45.5% -13.1% 2.3% 30.2% 67.1% 60.4% 65.4% 29% -12.7% 33% 17.2% 41.7% 62.4% 38.1% 31.7% 55.2% 57.1% -1.7% 57.2% 79.0% 21.5% 36.8% 120.1% 27% 58.7% 68.7% 44% 87.2% 56.7% 64.0% 106.3% 64.8% 124.7% 20.6% 29.2% 49.7% 65.8% 62.8% 34% 43% 43.1% 73.5% 11.2% 56.1% 130.4% 19.6% 34.9% 62.8% 54.2% 48.4% 54.3% 31.8% 34% 75.2% 39% 60.3% 94.0% 18.6% 34.8% 72.5% 59.8% 62.3% 42.7% 53.0% 116.6% 53.5% 50.8% 32% 31% 20.7% 40.1% 70.5% 52.7% 54.2% 43.2% 48.9% 92.8% 50.5% 49.8% 20.5% 35.4% 28.0% 50.5% 26% 38% 24.3% 41.7% 49.9% 40.0% 23.8% 40.0% 20.5% 34.7% 42.7% 41.4% 35.3% 30% 43.0% 37% 38.3% 35.0% 62.7% 39.3% 20.2% 36.1% 30.0% 41.5% 30.0% 42.6% 60.4% 61.2% 18.7% 29% 42% 44.1% 21.5% 30.0% 45.7% 35.0% 36.0% 42.1% 18.0% 33.8% 31.6% 33% 22.0% 37% 32.4% 32.7% 513.1% 32.0% 444.9% 39.2% 32.8% 28.1% 25.0% 28.4% 30% 36% 30.1% 44.1% 23.6% 25.0% 28% 33.4% 37% 30.2% 28.6% 29% Sequential GrowthYear/Year GrowthSequential TAC -- Network syndication TAC -- Distribution partnersTraffic acquisitioncosts Cost of revenuesTotal Costs of RevenuesProduct Development GeneralSelling, & Administrative-6% NA NA NA Total Operating Expense 1,194 80% 76 17% 1,066 1,270 14% 238 1,695 14% 921 1,304 425 43% 1,158 2,076 652 25% 294 1,573 1,335 2,569 65% 772 971 2,129-9% 244 NA 369 538 1,781 57% 1,559 888 2,894 996 16% 272 526 641 596 1,986 1,028 3,767 65% 350 6% 292 665 818 1,287 1,287 881 56% 691 387 24% 1,854 337 1,002 1,478 1,599 60% 786 718 469 1,145 2,999 NA NA NA 4,681 1,537 657 51% 881 751 1,512 1,692 476 335 992 729 3,144 50% 811 1,743 6,115 1,682 1,141 412 746 40% 958 2,971 1,826 1,985 1,183 520 438 902 39% 1,027 2,220 1,988 982 1,418 602 3,033 516 1,006 7,302 2,080 44% 1,025 4,734 643 3,648 1,701 1,055 9,351 2,200 1,075 6,044 32% 4,305 2,396 11,674 1,125 802 8,253 4,040 7,577 28% 3,272 10,892 4,213 2,567 5,204 14,169 5,688 3,307 6,661 7,508 4,096 EBITD Non-TAC COGS % of O&O revsGross MarginProduct Development GeneralSelling, & Administrative 7.3% 15.1% 11.0% 15.3% 12.7% 9.1% 77.8% 14.2% 17.9% 10.2% 76.2% 15.3% 15.9% 9.8% 79.4% 17.7% 10.8% 77.2% 15.8% 8.8% 77.4% 14.6% 9.8% 75.1% 12.6% 10.7% 77.0% 14.8% 10.6% 76.6% 17.5% 10.6% 74.3% 14.8% 10.6% 74.4% 14.6% 10.6% 74.7% 12.5% 10.2% 75.2% 14.6% 74.7% 9.7% 15.0% 75.4% 15.4% 76.0% Net Income From Operations 2,533 Gross Revenues (Rubels) 7,649 Adj EBITD Adj Figure 12: Yandex Income Statement in millions, (Rubles unless noted) Reported EPS [GAAP] EPS Reported 7.92 Proforma Operating Profit (Expense) Income Other Pretax Income Income Tax(Benefit) 3,225 2,847 4,983 1,342 1,487 1,847 2,687 7,363 1,716 2,374 2,517 3,600 10,207 13,183 17,578 Shares Outstanding EPSProforma 8.25 Growth (Y/Y) O&O Sites revenues Network revenuesText-based Advertising revenues revenues Advertising Display Online Payment Commissions revenues Other 4,728 1,846 5,800 1,733 9,454 1,506 3,002 471 3,415 3,768 587 4,405 827 14,590 1,037 4,284 2,922 4,890 1,020 5,339 1,132 6,298 1,158 20,811 1,400 28,307 36,920 4,710 5,558 6,558 Gross Profit Expenses Operating Free Cash Flow Cash Free share FCF per As a % of Gross Revenue of Gross % a As

Source: Company reports, DeutscheBankestimates

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Internet Yandex Appendix 1

Important Disclosures

Additional information available upon request

Disclosure checklist Company Ticker Recent price* Disclosure Yandex YNDX.OQ 22.15 (USD) 23 Oct 12 1,2,6,7 *Prices are sourced from local exchanges via Reuters, Bloomberg and other vendors. Data is sourced from Deutsche Bank and subject companies