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ASIAN CAPITAL PARTNERS GROUP June 2000 IRAN ASIAN CAPITAL PARTNERS GROUP Asian Capital Partners (HK) Limited 17th Floor Hugh Peyman 8 Queens Road Central, Hong Kong Philip Bowring Telephone: (852) 2826 9500 Facsimile: (852) 2845 8828 Andrew Hall IRAN: Entering a New Era June 2000 Table of Contents Investment Case : 30 Positive Factors ................................................................... 2 Iran by the Numbers ................................................................................................... 7 Overview : Entering a New Era ................................................................................ 8 Where are We in the Process? .................................................................................. 8 Forces for Change ................................................................................................... 11 Why Reform Can Succeed ...................................................................................... 13 Stock Market Opportunities ................................................................................... 15 Assessing Iran’s Potential ....................................................................................... 19 The Tehran Stock Exchange .................................................................................. 49 Companies ................................................................................................................ 52 Iran Khodro ................................................................................................................. 53 Mojtameh Petroshimi Arak : Arak Petrochemical ....................................................... 64 Sherkate Toseye Sanayeh Behshahr : TSB ............................................................... 70 Sherkate Lavazeme Khanegi Pars : Pars Home Appliances ..................................... 77 Sherkate Nasaji Borojerd : Borojerd ........................................................................... 85 Sherkate Shisheh Ghazvin : Ghazvin Glass .............................................................. 93 Doodeh-E Sanati Pars .............................................................................................. 101 Dashte Morghab ....................................................................................................... 108 2 IRAN: Entering a New Era June 2000 Investment Case : 30 Positive Factors • Returning to "normality" in concepts and systems as well as in economic and political relationships. • GDP growth could double to 6% from 2-3% average of last five years. • Reform about to make significant difference to • World's third largest oil reserves, second economy and stock market: most difficult largest gas reserves. initial steps already taken. • • Strategic economic and geo-political location: Widely accepted that There Is No Alternative to economic reform. at heart of 70% of the world's oil reserves. • Ideologically pro-private sector: state • 65 mn population is a real market and a significant country: has 200 mn strong ownership an accident of history. Part of private sector untouched by the revolution. hinterland. • Unified exchange rate probable within 2 • Higher oil prices turning budget into surplus, helping correct major problem. years. • • Trade liberalisation and interest in joining Major comparative advantage in fruit and vegetable production as well as tourism WTO. • • Long commercial tradition: international Growing work force, declining dependency accounting standards. • A functioning democracy has represented the • Strongly developed concept of private property desire for change in the 1997 presidential and 2000 legislative elections. • A Private sector can build on the real successes of the last 20 years – infrastructure • Reformists have captured the presidency and (roads, water, housing, telecommunications), legislature. mass education, agriculture and now a falling birth rate. • External relationships good again with Gulf states, European Union and Japan. • Foreign debt only $11 bn. • Complete end of Iran's isolation expected within two years as the US Embargo is likely to lapse in mid-2001. • Baby Boomers (over 60% of population is under 30 years old) will drive household formation and economic growth, as in East • Stock market valuations very attractive. Most Asia in the 1970s and 1980s, benefitting companies sell on 3-6X earnings and yield 10- housing, construction and consumer 30%; many have 25-35% EPS growth if re- industries. forms accelerate. • Labour cost relative to skills is very low. • Market capitalisation $4.5 bn, similar to Korea and Taiwan when they first opened to foreign • Low per capita consumption of many products investment in the early 1980s. and raw materials - promises significant catch- up potential. • Market broadly representative of the whole economy: about 300 listed companies. • A classic shortage economy that has underinvested for many years providing • Attractive collection of dominant companies industries from autos to glass and textiles to and emerging growth companies. fridges and freezers with instant domestic demand to meet capacity expansion, ensuring • Stock market has functioned continuously profitable returns on investment. since 1969. Left intact by the revolution. 3 IRAN: Entering a New Era June 2000 However there are still negatives : • Institutional resistance to economic and social liberalisation. • Some political intimidation and opposition to change. • Over-dependence on oil and gas means erratic revenues, savings and foreign exchange. • Banking, fiscal, pricing system reform only just begun • No unified exchange rate. • Weakness of small/medium business sector long deprived of capital. • Shortage of private savings limits privatisation scope. • US hostility undermines Iran’s engagement with world commerce. Currency Forces equally poised The future of the rial is the proverbial $64,000 question for investors. The worst case is that above average inflation could depress the rate by up to 50% over the next five years. However positive moves in both politics and economics could equally well stabilise the rial if inflation and the deficit are brought under control – as we expect. Considering that the currency collapsed sharply from 5,000 to over 9,000 in 1998 and early 1999, the rial in the medium term could even have room to appreciate, especially if oil prices remain firm. Equity yields offset On balance, investors can best use a range of 7,000 – 10,000 to the US dollar in much or all of their calculations. High equity yields of 10-30% offset most or all of any likely rial currency declines depreciation. The case for Iran is not dependent oil prices – but they do help. The underlying changes in economics, politics and foreign relations would be compelling even with oil at $15 a barrel. 4 IRAN: Entering a New Era June 2000 A Selection of Stocks Although the market may seem to be dominated by investment companies, the Tehran Stock Exchange does have a good range of interesting companies by the standards of smaller emerging markets. We have selected a cross-section of companies which illustrate the breadth of the market, the growth rates, the prospects, the valuations and the background against which Iranian listed companies operate. By any measure the valuations are cheap. They seem particularly cheap as: • economic liberalisation accelerates • political reform becomes entrenched • inflation heads to single digits • discipline returns to government spending and budget surplus returns • currency stabilises in the medium-term: could even appreciate • oil prices remain higher longer then expected • US sanctions expire Earnings and Valuations EPS (Rials) PE % % Financial Year 1997/8 1998/9 1999/2000E change 2000/1E change 1997/8 1998/9 1999/2000E 2000/1E Iran Khodro 694 628 624 (0.6) 792 26.9 6.0 6.6 6.6 5.2 Arak 227 182 712 291.2 838 17.7 18.9 23.6 6.0 5.1 TSB 1,053 1,149 1,198 4.3 1,438 20.0 3.7 3.4 3.2 2.7 Pars Home 499 824 685 16.7 766 11.8 8.4 5.1 6.1 5.5 Borajerd 350 455 277 (39.1) 702 153.4 6.9 5.3 8.7 3.4 Ghazvin 1,462 1,524 2,476 62.5 3,122 26.1 3.6 3.4 2.1 1.7 Sanati Pars 555 1,531 1,560 1.9 1,643 5.3 13.1 4.7 4.6 4.4 Dashte Morghab 174 210 360 71.4 663 84.1 8.0 6.6 3.9 2.1 Yield % Market Cap $ Mn Financial Year 1997/8 1998/9 1999/2000E 2000/1E Iran Khodro 12.1 12.1 12.1 12.1 346.0 Arak 3.9 5.4 13.3 15.6 316.0 TSB 23.2 23.2 25.5 28.1 156.7 Pars Home 10.3 11.3 9.4 10.5 56.7 Borajerd 11.1 8.3 10.1 25.7 20.7 Ghazvin 13.5 24.9 23.6 29.7 18.4 Sanati Pars 7.7 17.9 18.3 19.3 10.9 Dashte Morghab - - - - 5.2 5 IRAN: Entering a New Era June 2000 A quick snap shot reveals the following attractive features: Iran Khodro With 74% of the local car market, Iran Khodro will expand capacity four-fold over the next 6–7 years to a very economic size. Demand already is estimated at double annual output meaning that initial capacity expansion will all be absorbed. Iran has only three million cars in a population of 65 million people. This dominant player, with foreign technology partners, sells on 5.2X current earnings and yields 12.1%. Arak Petrochemical Enjoys both support and protection from the government and financial discipline from investor Bank Melli. Earnings will nearly treble as exports are now recognised at the market exchange rate. Constant expansion is planned, subject to market and funding: sells on 5.1X March 2001 and yields 15.6%. TSB A major consumer play with 51% of the processed edible oil market. Strong brands and well positioned as market expands under