October 2010 No.49, Volume 5

ran nvestment TURQUOISE Monthly October 2010 Volume 5, No 49 PARTNERS

THIS MONTH

Market Overview 2 The Tehran Stock Exchange had a positive yet volatile month. Pro[t taking after the strong rallies of the past few months, uncertainties surrounding the subsidies removal plan and \uctuations in the global prices of commodities were assessed as the main reasons for the market volatility.

Turquoise Iran Equity Investments 4 This section provides data and charts on the performance of Turquoise Iran Equity Investments Class A for the month of September.

Country Overview 5 The unveiling of the Cyrus Charter of Human Rights and Ahmadinejad’s speech at the UN General Assembly will be discussed in this section.

Economy 6 Iran’s cement industry, Pasargad Bank’s inclusion on the Banker’s list and Iran’s foreign exchange market will be covered in this section.

Iran Investment Monthly is produced by Turquoise Partners, No. 17 East Gord Alley, Turquoise Partners. Distributed electroni- Bidar St., Fayyazi (Fereshteh) Ave.

cally by exclusive subscription. Tel : +98 21 220 35 830 Fax : +98 21 220 49 260 Chief Editor: Ramin Rabii Email : [email protected] Consulting Editor: Eddie Kerman To \nd out more about Turquoise Partners, Authors: Shervin Shahriari visit our website at: Ali Mashayekhi www.turquoisepartners.com. The Cyrus Charter of Human Rights © 2010 All rights reserved Iran Investment Monthly, Volume 5, No. 49 different fromthatofpreviousmonths. Trade volumeswereconsiderablylowerandtherewassigni reached 67%asattheendofSeptember. However, thedynamicofmarket,inSeptemberwasvery month. 2010hasbeenanexceptionalyearforthe TSE andtheyeartodateperformanceofmainindex In September, the Tehran StockExchange(TSE)hadapositiveperformancefortheninthconsecutive Market Overview volatility inthepricesofseverallarge stocks.Secondly, the listed onthe TSE. As aresult, sensitive toglobalpricesofcrudeoilandcommodities,becausetherearemanycommodityrelatedcompanies There wereanumberofreasonsforthisbehaviour. Firstly, theIranianequitymarkethasbecomeincreasingly volatility inthemarketprices. of theirholdingsinordertorealisepro falls inSeptember. Historically, inearlySeptember, investmentcompaniesliquidate asubstantialamount The banking sector indexgained 7.5%invalue overthe courseofthe month. expected tohave anydirectimpacton banks. banking sectorisalsoviewed asapotentialhedgeagainsttheremoval ofsubsidies,astheplanisnot banks. This createdagreatdealofinvestorexcitement andledtopriceralliesthroughoutthesector. The withdraw $7.2billionof foreign reservesandtorepaysomeofitsoutstanding debttotherecentlyprivatised In September, themarketwasin owned bankshavealsobeenaffected toadegree. turn, hasreducedtheirearnings. The stateownedbankshavesuffered themostfromthis,althoughprivately two years. This hasresultedinbanksbecomingmorecautiousregardstotheir lendingactivities. This, in extent, hamperedthegrowthinbankearnings.In addition,thevolumeofbaddebtshasrisenoverpast in termsofpro For anumberofyears,thebankingsectorhasbeen amongthebestperformingsectorsofIranianeconomy Banks 4.3% oftheirvalue. energy subsidiesonthesteel sector. SharesofMobarakeh Steel,thelargest listedsteelmanufacturer, lost reversed inSeptember. Inaddition,investorsbecamemoreconcernedabouttheimpactofremoval price declines. The positivetrendoftheprice steelproductsontheIranianMercantileExchange(IME) market’s mainindex.Sharesofzincandleadproducersalsoperformedwell.However, steelstockssuffered capitalisation, wasthebestperformingcompanyinthissectorandhadbiggestpositiveimpact onthe price, theNationalIranianCopperIndustriesCo.(NICIC),secondlargest listedcompanybymarket the market,althoughperformanceofcompaniesinthissectorwasmixed. With a19%gaininshare The priceincreasesinthemetalssectorwasoneofmainreasonsforpositiveperformance of Metals Some ofthekeyeventsandsectorsmarketwillbeanalysedbelow: opportunistic investorscanalsoexploitthenumerousshorter-term opportunitiesthat themarketpresents. may beasensiblestrategygiventhecurrentuncertaintiessurroundingmarket,analystsbelieve that It isevidentthatmanyinvestorsarenowpursuingmoredefensivestrategiesinthemarket. While this various industrieshaveresultedininvestorcaution. in theautumn.However, thedetailsofplanarestillunknownanduncertaintiesaboutitsimpacton in turn,pushespricesdown. Thirdly, theplanforremovalofsubsidiesisnowverylikelytocommence [ t growth.However, theslowdownineconomicgrowthoverpasttwoyearshas,tosome \ uctuations inglobalpricesoverthecourseofmonthcausedconsiderable \ uenced byuncon [ ts priortotheiryearend. This tendstocreatesellingpressure,and [ rmed newsregardingapotential governmentalplanto [ nancial yearendformostinvestmentcompanies 2 [ cant Market Overview 3

Engineering Services The engineering services sector was the worst performing sector over the course of September, with the sector index losing 12.3% of its value. Companies in this sector had posted some of the strongest gains since the beginning of the year, such that the sector index was up over 100% prior to September. There were two main reasons for this strong performance. Firstly, there had been frequent rumours within the market about companies in this sector winning lucrative contracts. In particular, Iran Marine Industries (SADRA) was reported on various occasions to have been awarded contracts worth $7 billion in the South Pars oil and gas [eld project. However, the news was dismissed by the company itself. Secondly, bidding wars for strategic blocks of shares in several companies, such as Iran Power Plant Projects Management Co. (MAPNA), drove up the prices.

In the view of analysts, most shares in this sector were signi[cantly overvalued and steep price corrections were expected.

Latest Developments on the Iranian OTC Market On 15th September, a 10% stake in Parsian E-Commerce was successfully sold on the Iranian Over-The- Counter (OTC) market. The market capitalisation at IPO was $116 million and the price/earnings ratio was 7.5. Parsian E-Commerce is a subsidiary of Parsian Bank, Iran’s largest privately-owned bank (excluding the recent privatisations), and it provides card and electronic payment services to Parsian Bank and its customers. Its net pro[t for the existing [nancial year is estimated to be $16 million.

This offering attracted huge investor interest, such that by the end of September, the share price was up 61% from its IPO. Given the sharp growth in the electronic banking and payment sector in Iran, analysts are bullish about the pro[tability prospects of Parsian E-Commerce.

Overall, the TSE had a positive but volatile month in September, with the TSE All-Share Index gaining 4% in value in Rial terms. However, the Euro exchange rate against the Rial appreciated 4.8%, since the Rial is pegged to the US Dollar. Trade volumes stood at $2.3 billion, although over 50% of the volume was related to block trades.

Performance of TSE All-Share Index (September 2010)

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TSE All-Share Index Iran Investment Monthly, Volume 5, No. 49 Turquoise IranEquityInvestments returns, withgreaterdiversi on the Tehran StockExchange(TSE)andotherIranian-basedsecurities. The goalistoprovidesuperior in theworld. Turquoise combinesinternationalexperiencewithlocalexpertiseininvestingequitieslisted investing intheconsumerandcommoditypotentialofIran,onemostundervaluedemerging markets Investment Objective– Partners pleasevisitourwebsiteat:www.turquoisepartners.com 20 74930412oremaileddie.kerman@turquoisepartners.com.Formoreinformationabout Turquoise For subscriptionandfurtherinformationonourinvestmentproductspleasecontactEddieKerman on(+44) re-based to 100 01 June2009 Launch Date British Virgin Islands Vehicle Domicile 100 105 110 115 120 125 130 135 140 145 150 Class A Class A Performance(Euro)- As at30

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Minimum Investment 1.2 % 1.2 NAV =144.9 Portfolio Return 44.9 % 44.9 % 35.3 % 12.5 - 1.7 %- 1.7 Currency €100,000 Euro (€) 4 Country Overview 5

The unveiling ceremony of the Cyrus Charter and Ahmadinejad’s speech at the UN General Assembly will be discussed in this edition of Country Overview.

In September, the Cyrus Charter of Human Rights was brought into Iran by the Cultural Heritage Organisation of Iran. This was on a 4 month loan from the British Museum, where the piece is permanently kept. The Cyrus Charter is a clay cylinder, which was discovered in Babylon in 1879 by an Assyrian-British archaeologist during an excavation sponsored by the British Museum. The British Museum has estimated that the piece was created in 530-539 BC. The text which appears on the cylinder is a declaration in old Persian in the name of the Achaemenid king Cyrus the Great. The Cyrus Charter has been described as the [rst charter of human rights. The UN keeps a replica of the Charter in its headquarters in New York. Passages in the text have been interpreted as expressing Cyrus’s respect for humanity, religious tolerance and freedom.

The Cyrus Charter was unveiled during a ceremony, which was attended by President Ahmadinejad. During a speech, he described the Charter as a personi[cation of human values and cultural heritage for all humanity. Ahmadinejad emphasised that the Cyrus Charter proves that the Iranian nation has always exempli[ed justice and human values throughout history. The President and his Chief of Staff, Mashaei, described Cyrus as the king of the world and his ideas as those of the prophets. During the ceremony and in the presence of 60 foreign delegates, Ahmadinejad put a Chaf[yeh (a type of scarf which is a symbolic part of the uniform of the Basij militia and the military in general) around the neck of a man dressed as Cyrus the Great.

Ahmadinejad’s remarks and actions during the ceremony resulted in widespread criticism among clerics and hardliners. His comments were deemed as nationalistic and disrespectful to Islam. Ahmadinejad and Mashaei were accused of promoting monarchy and a new brand of religious nationalism. However, Ahmadinejad defended his remarks by saying that Cyrus the Great and his empire had core policies that, like the Islamic Republic, were based on justice and spirituality. He asserted that his comments were neither nationalistic nor in favour of monarchy.

The Cyrus Charter and Achaemenidian creations such as Persepolis (located near the city of Shiraz) are thought to be symbolic of Iranian cultural heritage and the ancient Persian Empire. These are things that many Iranians take great pride in. Since the Islamic Revolution, nationalism in Iran has not been looked upon favourably, especially by the clerics. Experts suspect that Ahmadinejad and Mashaei’s remarks are an attempt to expand their support base for Mashaei’s campaign, because Mashaei is thought to be a candidate for the next Presidential election.

In September, President Ahmadinejad attended the 65th Annual UN General Assembly in New York. Since taking of[ce in 2005, Ahmadinejad has given a controversial speech at every annual UN meeting. This year was no different. During his speech, he stated that there was widespread support for a theory that the US government was involved in organising the September 11 attacks on the US. He added that the attacks were orchestrated as an opportunity for reversing the decline in the US economy and tightening the US grip on the Middle East. This resulted in US and several other Western diplomats walking out of the meeting. There Volume 5, No. 49 Volume

was also a great deal of criticism of his remarks and his speech was described by the US President, Obama, as “offensive” and “hateful”. Some experts are of the view that Ahmadinejad’s comments may weaken the prospects for further negotiations between Iran and the US over Iran’s nuclear programme. Nevertheless, both sides expressed their readiness to negotiate during the General Assembly.

Domestically, there was huge support for Ahmadinejad’s comments by the hardliners and the pro-government

Iran Investment Monthly, media. This came at a time when Ahmadinejad was under heavy criticism from the hardliners and the clerics for his so-called “nationalistic” remarks and also several of his other domestic policies. There is speculation that his comments regarding the September 11 attacks were mainly aimed at deterring some of the domestic tension and criticisms aimed at his administration. Iran Investment Monthly, Volume 5, No. 49 Economy In theIraniancalendaryear1388(whichendedon20 on the Tehran StockExchange. producers withmarketsharesof8%,7%and6%respectively. Currently, 28cementcompaniesarelisted Fars &KhouzestanGroupisIran’s largest producerofcement. Abyek, Tehran andSepahanarealsomajor at 62milliontonnes. There arecurrently57activeproductionunitsinIran. With amarketshareof24%, Iran hasoccurredoverthepastdecade. As ofMarch2010,Iran’s totalnominalproductioncapacitystood 300 kilogramsin1984.However, therealgrowthinbothconsumptionandalsoproductionofcement the realestateconstructionsector. Percapitaconsumptionofcementwentfrom30kilogramsin1961to city ofRey, near Tehran. However, itwasnotuntilthe1960’s thatcementreallyestablisheditsplacein The cementindustryinIrandatesbackto1933,whenthe Iran’s CementIndustry development fortheindustrybecause, participants, thegovernmentliberalisedpriceofcementin2008. This wasviewedasamajorpositive several newproductionunitswerebuiltacrossthecountry. After severalyearsoflobbyingfromindustry than whatthegovernmenthadsetassalepriceformanufacturers. Also, tosatisfythegrowingdemand, policy. This ledtothecreationofablackmarketandpricesonthiswere,occasions,3timeshigher receive certainallocationsdependingupontheirconstructionpermitanditalsointroducedastringent pricing cement quicklysurpassedsupply. Subsequently, thegovernmentrationedcementsothatdeveloperswould From 2002onwards,Iranexperiencedamassiveboominrealestateconstruction. As aresult,demandfor and 1.6%oftheworld’s cementconsumption. showing anincreaseof108%fromadecadeago.Iranconstitutes1.8%theworld’s cementproduction tonnes, anincreaseof118% fromadecadeago. This makesIranthe8 world and2 were abletobene 2008 andthroughout2009,thecementmarketwasfacedwithexcesssupply. Companiesclosetotheborder same time,thepropertybubbleinIranburstandconstructionactivityfellsharply. Consequently, inlate secondly, cementmanufacturerswereabletoraisetheirsalepricebyanaverageof30%.However, atthe and inef cement sector. Productionof cementisveryenergy-intensive andmostproduction linesinIranareoutdated Currently, thegovernmental planfortheremovalofenergy subsidiesisviewedasthebiggestriskfor compete be usedforthetransportationofgoods,particularly cement.However, IranianexporterstoIraqhave to announced planstobuildanewrailwayinthe south-west ofIrantotheIraqicityBasra,whichwill allowed forthepromotionofsigni Mehr Housingprojectisnowbeingpursuedintensely bythegovernment. This year, thegovernmenthas The latesthousingdataindicatesarecoveryinthe realestateconstructionmarket.Inaddition,thenationwide kilometres. Forthisreason,thelattergroupofmanufacturerswereforcedtoreducetheirproduction. costs ofcementinIran.Itisestimatedthattransporting1tonnewouldcostonaverage$8 per100 However, companieslocatedinthecentralregionsdidnothavethisadvantage, duetothehightransportation exporting theirexcessproduction.Exportswentfrom200,000tonnesin2008to5.6million in2009. listed in thetop1,000 banksin the world. Among these,the rankingofPasargad Bank isparticularly notable. In thelatestlist ofleading Pasargad Bank ontheBanker’s List of olderplantswilleventually havetoupgradetheiroperationsorterminate theirproduction. [ [ cient. As aresult,the cement industryisexpectedtobeamongtheworst hitbytheplan. A number ercely withotherexporterssuchas Turkey. nd intheMiddleEast,after Turkey. Also, consumptionstoodat47million tonnesin1388, [ t fromtherealestateboominneighbouringmarkets,suchasIraqand Turkmenistan, by [ nancial institutions published by the Banker magazine, 13 Iranian banks have been nancial institutions publishedbytheBanker magazine,13Iranian bankshavebeen [ cant investmentsinfacilitatingexports.Recently, thegovernment [ rstly, itbroughtmoretransparencytothepricinginmarketand, th March2010),totalproductionstoodat52million [ rst cementproductionplantwasbuiltinthe th largest producerofcementinthe 6 Iran Investment Monthly, Volume 5, No. 49 Economy The BankerhasrankedPasargad 25 $10.5 billionofdeposits. Currently, ithasasharecapitalof$770million,234branchesacrossthe countryandhasattractedover Pasargad Bankstartedoperationsin2006.Sincethen,ithasexperiencedtremendousgrowthitsbusiness. In the Iran’s Foreign ExchangeMarket of thelistIranianBanks. and also“capitaladequacyratio”.Overall,theBankerhasrankedPasargad 435 in itsnetpro of earningsgrowth.Inthe Unsurprisingly, themarketexchangerateswentupsigni in themarketquicklyandtriggeredapanicpurchasingofpapercurrenciesbymanyordinary Iranians. when anumberofinternationalmoneytransfersfromIranandviatheUAEwereblocked. The newsspread Various reasonshavebeensuggestedbyexpertsforthisevent.However, itappearstohavebeenstarted of unprecedented riseindemandforhardcurrencypaperandmarketpricesjumpedsigni at a20%premiumtotheCentralBank’s of gold coins.Finallyafter5days,theCentralBank due totherecentUNSecurityCouncilandEuropeanUnionsanctions,CentralBankfaceddif The CentralBankwaswidelycriticisedforitslateinterventioninthemarket.Someexpertsbelieve that and marketpricesfellbacktolevelsslightlyabovethosepriortheturmoil. foreign reserves,butitisreportedlybecomingmoredif in obtainingsuf strongly opposedthisviewandhasmaintaineditstightgripontheexchangerates. is hurtingexportsanddomesticproduction,thatadevaluationoftheRialneeded. The governmenthas Many expertsargue thatinthehighly appears tobepeggedtheUSDollarandhasdepreciatedonaverageby5%perannumagainst Dollar. For thepastdecade,CentralBankhastightlycontrolledforeignexchangeratesinIran. The Rial [ cial exchangerates. [ nal weekofSeptember, theforeignexchangemarketinIranwentintoturmoil. There wasan [ t beforetax.Pasargad leadsthelistofIranianbanks,bothinterms“returnonretailassets” [ cient currencypapertostabilisethemarket.Iranisestimatedhaveover$70billionof [ nancial yearendedMarch2010,Pasargad enjoyeda44%year-on-year growth th intheworldtermsof“performancesoundness”,whichisanindication \ ationary environmentofIran,theexistingpolicyCentralBank [ cial rate.Similarpricerisesandactivitywereseeningold \ ooded themarketwithpapercurrenciesandgoldcoins, [ [ cult fortheCentralBanktomobiliseitsreserves. cantly, toapointwheretheUSDollarwastrading th intheworldandattop [ cantly abovethe [ culties 7 Iran Investment Monthly, Volume 5, No. 49 Iran Investment Monthly Investment Iran Turquoise isaboutiqueinvestment About Turquoise This publicationdoesnotprovideindividuallytailoredinvestmentadviceandmaymatchthe and inaccuracy. [ is madetoensurethatthefactswepublisharecorrect.However, wedo notrepresentthatallfactsand The analysisprovidedbythispublicationisbasedoninformationthatweconsiderreliableandevery effort an offer tobuyanyspeci This materialisforinformationpurposesonlyanddoesnotconstituteanoffer tosell,norasolicitationof Disclaimer only orthroughanonlinerequestsentto:[email protected] worked closelyorhavebeenincontactwith Turquoise Partners.Subscriptiontothisnewsletterisbyreferral Tehran StockExchangeaswellintroducingnew cipients updatedonthelatestmacroeconomicdevelopmentsinIran,providinganin-depthanalysisof potential investors. ates consent of Turquoise Partners. mechanical, photocopies, recordingorbyanyinformationstorageretrieval systemwithoutpriorwritten No partofthisnewsletter maybereproducedortransmittedinanyform orbyanymeanselectronic, Copyright Notice future success. all investors. The valueofaninvestmentcangodownaswellup.Pastperformance isnoguaranteeof circumstances ofsomeitsrecipients. The securitiesdiscussedinthispublicationmaynotbesuitablefor Iranian market.Havingaquali Turquoise tobene Turquoise publishesthiselectronicnewsletter, gures arecompleteandaccurate;therefore,wecannotbeheldlegallyresponsibleforerrors,emissions [ nancial productsandoffers [ t fromcouplinglocalknowledgeandpresencewithglobalexpertise. [ isdistributedexclusivelyamongstIrananalystsandpotentialinvestorswhohave c shares. [ ed anddiversemanagementteambasedbothinEuropeIranenables [ nancial servicestoselectclientsandinvestorswhoareinterestedinthe [ rm basedinIranwithof Iran Investment Monthly Investment Iran [ nancial productsandprivateequityopportunitiesto [ ces in Tehran andLondon. Turquoise cre- , withtheaimofkeepingitsre- [ nancial 8