Ran Nvestment TURQUOISE Monthly February 2008 Volume 2, No

ran nvestment TURQUOISE Monthly February 2008 Volume 2, No. 17 PARTNERS

THIS MONTH

Market Overview 2 The Tehran Stock Exchange (TSE) performed very well during the month of January amid bearish global markets. This followed a strong performance in December. The TSE’s main indices witnessed record growth during this month. This section provides a brief examination of the market along with an analysis of some of the main sectors.

Turquoise Iran Equity Fund 4 The Turquoise Fund also experienced a positive month during January with new investments being made to the Fund and the Net Asset Value growing by nearly 4%. Some private and institutional investors from Europe and Asia entered the Fund this month.

Country Overview 6 The main topics of discussion in this section are the elections for the eighth Majlis (Parliament) in Iran which are scheduled for 14 March 2008, as well as the visit of the IAEA Chief, Mohamed ElBaradei, to Iran to ﬁnalise a working plan to resolve the outstanding issues between the two parties.

Economy 8 The topics discussed in this edition of the Economy page include the ﬁnalization of an Oil and Gas exploration deal with Italy, the Sino-Iranian banking relationship and the gas deal between Iran and the United Arab Emirates.

Iran Investment Monthly is produced by Turquoise Fund, Second floor, Mottahari Turquoise Partners. Distributed electroni- Street, No.248, Tehran, Iran cally by exclusive subscription. T: +98 21 88 30 40 79, F: +98 21 88 82 68 36 Email: [email protected] Editor: Ramin Rabii To find out more about Turquoise Partners, visit our website at: © 2008 All rights reserved www.turquoisepartners.com. Further information and detailed analysis of reports in this publication Palace of Saheb-gharaniyeh – Shemiran, North of Tehran – Tehran Province Tehran – Tehran Palace of Saheb-gharaniyeh – Shemiran, North can be purchased directly from Turquoise Tehran office. Iran Investment Monthly, Volume 2, No. 17 During thismonth,the TSE PriceIndex(TEPIX)exceededthepsychologicallysigni International Atomic Energy Agency (IAEA)continuedtodrivethemarketupwardformostofJanuary. Holiday period. The UnitedStatesNationalIntelligenceEstimateandIran’s increasedco-operationwiththe The upbeatsentimentwasbroughtaboutbytherelativelycalmpoliticalenvironmentoverChristmas In January2008,the Tehran StockExchange(TSE)continueditspositivetrendfromthemonthofDecember. Market Overview the in asound the marketwillsettleanddemand-drivenprice most companiesachievedpositivegainsinJanuary, mostanalystsbelieve that theshort-termexcitementin indicating thelackofcorrelationbetween Tehran StockExchangeandotherglobalmarkets. Although stocks intopositiveterritoryoverJanuary. Meanwhile,globalmarketswereexperiencingsell-offs, onceagain amongst analysts.Strongdemandfrombuyerscontinuedtodominatethemarket,pushingpriceofmany In thethirdweekofJanuary, theUNSecurityCouncil’s their fairvalues. Companies withinthissectorcanbedividedintotwosub-sectors. The In January, theautomanufacturingsectorwashighestperformingforsecondconsecutivemonth. Auto Manufacturing: Some keysectorsofthemarketareanalysedinmoredetailbelow: endorsement ofthenewresolutionbyUNSecurityCouncilislikelytobeaslowprocess. crystallise amonginvestors. Analysts expectthis uncertaintytocontinueduringthemonthofFebruary, asthe losing itspositivemomentumandremaining on anewdraftresolutionforthirdroundofsanctionsagainstIran. The Tehran marketreactedtothisnewsby Industrial Group(thelargest automotivemanufacturerintheMiddleEast),itssubsidiariesandaf companies. This groupofcompaniesiscurrentlyfacing signi risk. The secondsub-sector, SaipaGroupandaf large debtliabilitiestobanks. Consequently, investorsinthissub-sectorareexposedtoarelativelyhigherprice the IranianautomotiveindustrythatParliamentpublishedinNovember, dif Analysts forecastadecliningtrendinrevenuesthissectoroverthenextfewyears.Inananalytical reportof market saturationwereidenti be consideredthatnextyear’s forecastofin However, recentpricehikeshave, toagreatextent,helpedthemachievemorerealisticvalue.Itmustalso companies withinthissectorwereperceivedasundervalued duetogovernmentimposedpricingregulations. of thecementpricebygovernmentaccelerated thegrowthinmarketvalues.Historically, sharesofthe This sectorwasthesecondhighestgainerinmarket inJanuary. Speculation aroundapossibleliberalisation Cement: growth insharepricesisnotsustainable. in viewoftheP/Eratioforthissectorgrowingfrom2.5to3.1lessthanamonth,isthatcurrent levelof sector untilthepriceliberalisation planshaveof cement. Forthesereasons,manyanalystsbelieve thatthereisnologicaljusti of pricerestrictionswill haveasigni then tradedatvaluesofup to$80pertonneinunof set bythegovernmentfor manufacturersiscurrently$40foreachtonneof cement;however, thiscement is cement inthe country, anypriceliberalisation plansseemunlikely atpresent. circulate inthe marketeveryfewmonths. However, sincethegovernment itselfisthelargest consumerof fi fth timeinthelastfewyears,enhancinginvestorcon fi nancial position and with real growth potential will continue to rise, while the rest will decline to nancial positionandwithrealgrowthpotentialwillcontinuetorise,whiletherestdecline fi ed astwokeychallengesfacedbythisindustry. The generalmarketconsensus, fi cant positiveimpacton this sector. Rumoursaboutsucharemoval fl fl ation maynotbere at for the rest of the month, as a degree of uncertainty began to at fortherestofmonth,asadegreeuncertaintybeganto fi fi liated companies, is in a considerably stronger position. liated companies,isinaconsiderablystrongerposition. cially beencon fi fl cial markets. Therefore, itisunsurprising thattheremoval uctuations will decrease. Only stocks of those companies uctuations willdecrease.Onlystocksofthosecompanies fi ve permanentmembers,alongwithGermany, agreed fi dence and creating a more bullish market view dence andcreatingamorebullishmarketview fi cant structural and governance issues, and has cant structuralandgovernanceissues,has fi fl rmed bythegovernment. The priceceiling ected in the government-imposed price of ected inthegovernment-imposedpriceof fi rst sub-sector consists of Iran Khodro rst sub-sectorconsistsofIranKhodro fi fi culties in the sales process and culties inthesalesprocessand cation for investment in this cation forinvestmentinthis fi cant 10,000 level for cant 10,000levelfor fi 2 liated liated Market Overview 3

Banks and Leasing Companies: Many market analysts are of the opinion that this sector is about to experience a signiﬁcant price hike, resulting in higher earnings multiples and price target predictions. The Eghtesad Novin Bank (EN Bank) is currently leading the sector, as its net proﬁt for this year is forecasted to grow by 25%. This institution recently received a prestigious international award from The Banker magazine.

Analysts expect the real possibility of increased profitability and share price growth for banks in the next Iranian calendar year, especially given the signs that the Central Bank and the government are softening their positions on the need to impose decreased interest rates on the banks. Should interest rates remain stable, leasing companies are also expected to enjoy enhanced profitability, although on a smaller scale. Currently, non-bank leasing institutions are offering finance facilities at a rate of 17%, in comparison with a government- imposed rate of 13% offered by the banks.

Zinc and Lead: In early January, shares of companies within this sector experienced a price increase. However, the gains are thought to be the result of speculative trades rather than any analytical rationale. The prices of Zinc and Lead have experienced sizeable falls this year. Based on current global prices, the forecasted revenues of companies within this sector are expected to be at least 40% lower at year-end. With some analysts speculating on further decreases in metal commodity prices next year, revenues are likely to decrease even further in the following year. Despite the recent gains, analysts expect a fall in the share prices of the companies in this sector. The structural collapse of parts of the Angouran mine, the largest Zinc mine in the Middle East, last year and the severe weather conditions this winter, have disrupted production in this sector. These factors could further hit the producers’ revenues.

Petrochemicals During January, the unusually cold weather and the shortage of gas supplies in residential areas resulted in the reduction or disconnection of natural gas supplies to some of the petrochemical companies in Southern Iran. Consequently, production was brought to a halt. Also, the scheduled January Initial Public Offering of Fanavaran Petrochemical Company, a state-owned methanol-producer, has been delayed for a few weeks. This is due to the uncertainties raised from disruptions in the supply of natural gas. This would be the ﬁrst oil-related offering by the Ministry of Petroleum as part of the government’s recent privatisation scheme.

Overall, January witnessed further growth in the Tehran Stock Exchange, with the Dividend and Price Index (TEDPIX) gaining 7.3% in value. Total trade volume this month stood at $562 million, a similar amount to the ﬁgures for December. The following chart demonstrates the movement of the two main market indices during January.

Performance of TSE Indices (Jan 2008) 10400 37500 10300 37000 10200 36500

Volume 2, No. 17 Volume 10100 36000 10000 35500 9900 35000 TEPIX

9800 TEDPIX 34500 9700 9600 34000 9500 33500 Iran Investment Monthly, 9400 33000 1 January 2008 10 January 2008 19 January 2008 28 January 2008 TSE Price Index (TEPIX) TSE Price and Dividend Index (TEDPIX) Iran Investment Monthly, Volume 2, No. 17 Turquoise IranEquityFund greater diversi Tehran StockExchange(TSE)andotherIranian-basedsecurities,therebyprovidingsuperiorreturns,with world. Turquoise combinesinternationalexperiencewithlocalexpertiseininvestingequitieslistedonthe in theconsumerandcommoditypotentialofIran,onemostunder-valued emerging markets inthe Investment Objective The performancetablealsodisplaysthehistoricalofFundoveralongertimeframe. the Emerging MarketindexinUSD,aswelltheoverallperformanceofFundEuroandGBP. The chartsbelowillustratetheperformanceofFundagainstboth TEDPIX inlocalcurrencyandalso investors fromSwitzerland,theUK,andKorea. A numberofnewinvestorsenteredintothe Turquoise Fundthismonth,includingprivateandinstitutional by 7.3%overthecourseofmonth. the TSE Price Index(TEPIX)risingby5.8%andthe TSE PriceandDividendIndex(TEDPIX)increasing the monthofJanuarytoreach150.27. The mainmarketindicesalsowitnessedstrongperformances,with Monthly Report re-based to 100 100 104 108 112 116 120 124 128 132 136 140 144 148 152 156

05/0

Turquoise Fund 6

ﬁ 16/07/06 cation andlowervolatility. The basecurrencyoftheFundisIranianRial. – The Net Asset Value (NAV) ofthe Turquoise Fundgrewbyapproximately3.8%during Turquoise Iran Equity Iran Fund Turquoise

Turquoise Portfolio vs. TSE Price & Div Index (TEDPIX) Index Div & TSE Price vs. Portfolio Turquoise TEDPIX 01

– The Turquoise EquityFundseekssuperiorlong-termcapitalgrowthbyinvesting

/ 09/0

18/10/06

4.17% 2.64% 2/0

OV 6

20/01/07 Inception) (Since

24/04/0

Dec07 7 0.53% 1.31%

10/06/0

TSE Price & Div. Index Div. & Price TSE /07/07

/ 09/0

7.32% 3.78% Jan08 29/10/07

/ 12/0

7 31/01/08

4 1

3/0 8 Turquoise Iran Equity Fund 5

Performance

Period Fund Return

Last 3 Months 2.37 %

Last 6 Months 16.03 %

Last 12 Months 17.41 %

Since Inception 50.21 % (30 May 06)

Turquoise Performance vs. Turquoise Performance in MSCI Emerging Markets US Dollar (US$)

188 155 180 150 172 145 164 140 re-based to 100 156 re-based to 100 135 148 130 140 132 125 124 120 116 115 108 110 100 105 92 100 84 95 30/5/06 28/8/06 26/11/06 24/2/07 25/5/07 23/8/07 21/11/07 19/2/08 19/5/08 30/5/06 28/8/06 26/11/06 24/2/07 25/5/07 23/8/07 21/11/07 19/2/08

Turquoise M SCI Emerging Markets

Turquoise Performance in Turquoise Performance in Euro (€) British Pound Sterling (£) Volume 2, No. 17 Volume

140 150 135 145 130 140 135 re-based to 100 125 re-based to 100 130 120 125 115 120 110 115 110 Iran Investment Monthly, 105 105 100 100 95 95 30/5/06 28/8/06 26/11/06 24/2/07 25/5/07 23/8/07 21/11/07 19/2/08 19/5/08 30/5/06 28/8/06 26/11/06 24/2/07 25/5/07 23/8/07 21/11/07 19/2/08 19/5/08 Iran Investment Monthly, Volume 2, No. 17 Country Overview by theGuardianCouncil.20%morehavebeendisquali Reports showthatasoftheendJanuary, some70%oftheregisteredcandidateshavebeenapproved million. Organisation forCivilRegistration(NOCR),thenumberofeligiblevoterswouldbeapproximately43 voting ageforthiselectionhasincreasedfrom15to18yearsold,andaccordingIran’s National parliamentary seatsinordertorepresenttheminorities.Underarecentlyapprovedlaw, theminimum religious minoritiesinIran,comprisingofChristians,JewsandZoroastrians.Ofthese17,5willgain registered fortheelectionsof290-seatParliament. There werealso17candidatesfromtherecognized place on14 Elections fortheeighthParliamentofIslamicRepublicIran,alsocalledMajlis,areduetotake to IranoftheDirectorGeneralInternational Atomic Energy Agency (IAEA). This editionofCountryOverviewwillfocusontheforthcomingparliamentaryelectionsinIranandvisit unresolved questions regardingthecountry’s pastnuclear activities. They addedthatIranwould respond of collaboration betweenthe twosidesinordertoresolvetheoutstandingissues. Followingthevisit,Iranian safeguards, supervision and inspectionofIran’s nuclearprogramme. The second wastopromotefurther The Ahmadinejad. met anumberofseniorIranian and theDirectorforExternalRelationsPolicy Co-ordinationoftheIAEA.Duringhistwodayvisit,he uncon The vettingofregisteredcandidatesconsistsatwo-stagedprocess.Inthe change inthecomingweeks. Tehran on11 Mohamed ElBaradei,theDirectorGeneralof International Atomic Energy Agency (IAEA), visited for competition. after theGuardianCouncildisquali previous Majliswasheldbythereformists. The conservatives easilywoncontrolofthecurrentMajlis, is controlledbyacoalitionofmoderateconservativesandfundamentalistswhilethemajority inthe of thePresidentknownasfundamentalistsorneo-conservatives.Itisworthnotingthatcurrent Majlis Speaker Karubi)andmoderateconservatives(headedbyMayorof Tehran Ghalibaf)versusthesupporters (headed byex-PresidentKhatami),centristsRafsanjaniandex-Parliament President Ahmadinejad’s policies.Ineffect, therealcontestin thiselectionwouldbebetweenreformists Ahmadinejad’s government,manyanalysts view thiselectionasavoteofcon Although theGuardianCouncilhasdisquali Constitution tomakethe by theSupremeLeaderandsixlegalexpertselectedParliament.Ithasstatutorypowers under the can commencetheirpubliccampaign. The GuardianCouncil isabodyconsistingofsixclericsselected Approved candidateswillthenbereferredtotheGuardianCouncil,andiftheirapprovalisendorsed, they the NOCR,Of clearances andreferencesfromanumberofsources. These sourcesincludetheMinistryofIntelligence, eligibility andsuitabilityofrelevantcandidates. They willdothisbyconductingchecksandobtaining Councils oflocaldistricts,allwhomhavebeenapprovedbytheGuardianCouncil,willassess the fi cials announced thatthereisnowamutually agreedtimeframe forIrantorespond alloftheIAEA’s fi fi rst objectiveofthisvisit wastocontinuediscussingwaysaccelerate theimplementationof rmed. The vetting processwilltakemoretimeandthe th th March2008.Morethan7,000candidates,includingapproximately600women,havebeen Januaryforthesixthtime.Hewasaccompaniedby theDeputyDirectorGeneralforSafeguards fi ce oftheNationalProsecutorandInternationalPoliceOrganisation (INTERPOL). fi nal callonwhocanrunforparliamentaryandpresidentialelectionsinIran. fi cials including Ayatollah Khamenei,theSupremeLeader, andPresident fi ed mostofthereformistcandidatesandconsequently leftlittleroom fi ed manyreformistcandidatesandopponentsofPresident fi ed, whilethestatusofremaining10%is fi nal numberofeligiblecandidatesmaywell fi rst stage,Supervisory fi dence fororagainst 6 Iran Investment Monthly, Volume 2, No. 17 Country Overview where furtherinformationanddocumentationwererequiredtoprovideclari that whileIranhadsatisfactorilyansweredsomeofthequestionsposedbyIAEA,thereremainedareas to allquestionswithin40daysoftheagreement.ElBaradeihadpreviouslynotedinhisNovemberreport, Many analystsviewthisoutcomeasanothersigni Agency’s negotiationswithIran. ElBaradei isexpectedtoreporttheIAEA’s BoardofGovernorsinearlyMarchontheoutcome resisting ordelayingapprovalofanyfurthersanctionsuntiltheIAEA’s talkswithIranhave concluded. well assomeofthenon-permanentmembersUNSecurityCouncil,withadditionalarguments for dampened US-ledinternationalpressureonIran. This newdevelopmentwillprovideChinaandRussia,as “High Con National IntelligenceEstimate(NIE),releasedbytheUnitedStatesinNovember, whichconcludedwith fi dence” thatIranhadnotbeenpursuingnuclearweaponssince2003,alreadysubstantially fi cant steptowardsresolvingIran’s nuclearissue. The fi cation. 7 Iran Investment Monthly, Volume 2, No. 17 Economy signi will involvegeologicalandseismicstudiesaswellthedrillingofexploratorywells.Inevent waters andcoversanareaof8,500squarekilometres. The projectistobecompletedinfouryears,and signed a$107millioncontractforexplorationintheDayyerblock. This blockissituatedinPersianGulf be recoveredfromtherevenuesgeneratedby without anyfurthertenders. All oftheexplorationcostsandalsopotentialdevelopmentswillthen will automaticallybegrantedrightstonegotiateadevelopmentandproductioncontractwiththeNIOC On the9 Iran andItalySignOilExplorationDeal 2007. NIOCof Dayyer isoneof17blocksthatwasputtointernationaltenderbytheNIOCin Vienna, Austria, inFebruary the Italiancompany. deposits arefoundorextractionprovesuneconomical,theexplorationproject’s totalcosts willbeborneby Following theannualmeetingofIran-ChinaChamberCommercein Tehran, aseniorIranianof Iran’s BankingRelationshipwith China $2 billionrespectively. December 2007,IransignedtwomajoroilandgasdealswithMalaysiaChinaworth$16billion and countries toreducetheirbusinesstieswithIran,followingthedisputeoverIran’s nuclearprogramme.In the nearfuture. The DayyerblockexplorationcontractcomesdespiteUSpressureonEuropeanand Asian be mountingUSpressureoninternationalbanksand to offer creditfacilitiestoIraniantradersoverthepastfewmonths. The reasonforthisisbelievedto reported thatanumberofChinesebankshavereducedbusinesswithIranianandalso refused trade withChinahasexpandedrapidly, increasingfromjust$1billion actions willadverselyimpacttheeconomictiesandcommercialtradebetweentwocountries. Iran’s of ties withIranianbanksforaslongthecountryrefusestohaltitsuraniumenrichmentprogram. Iranian a lossofaround $44billionover25years ifitgoesaheadwith the price agreement isnowcontestedby Iran. According toIran’s State Audit Agency, thecountry wouldsuffer pricing mechanismsofthe naturalgasexports. As aresultofrisingfuel pricesglobally, theoriginal to commenceinmid-2006. However, thishasbeen delayedduetoongoingtalksanddisagreements overthe of naturalgasfromIran to thePersianGulfstate. According to the contract,deliveryofgaswasdue Iran’s gasexportsto the UAE. A contractwassignedbetweenthetwo partiesin2001fora25-yearsupply Tehran attheendofthis monthtocontinuethelong-runningnegotiationsoverpricingmechanismof The ExecutiveManagementteamoftheUAE private energy company, CrescentPetroleum,arrivedin Iran andtheUAE’s GasDeal on Central Asia, theMiddleEastandLatin America. foreign investmentthroughtheIFICisexpected to increaseoverthenextfewyears,withaparticularfocus Iranian holdingsandinvestmentsabroad,through useofexcessdomesticresources. The government’s total incorporated in1998bytheMinistryofEconomy and Finance,withtheobjectiveofmanagingexpanding including Brazil,Germany, Egypt,Jordan,South Africa, United Arab Emirates,and Armenia. The IFICwas Company (IFIC)tostandatapproximately$1.5billion. This amounthasbeeninvestedin16countries The Iraniangovernment’s totalinvestmentin other economieswasreportedbytheIranForeignInvestment Foreign InvestmentbyIran 2007, makingChinaIran’s largest tradingpartner. fi cials andthebusinesselitehaveexpressedconcernsoverthismovebyChinesebanks,notingthat these fi cant discoveryofoilandgasdepositsintheblockthatareeconomicallyfeasibletorecover, Edison th ofJanuary, theNational IranianOilCompany(NIOC)andItaly’s utilitycompany, Edison, fi cials alsoexpectfurtherexplorationcontractsforsomeoftheotherblockstobesignedin fi eld ona“buy-back”scheme.However, ifnorecoverable fi nancial institutionstocutorreducetheirbusiness fi xed pricemechanism. fi ve yearsagotoover$20billionin 8 fi fi xed cial Iran Investment Monthly, Volume 2, No. 17 Economy surplus isexpectedtogrow$21.6billionbytheendofcurrentIraniancalendaryear(21 According toareportpublishedbytheEconomistIntelligenceUnit(EIU)inJanuary, Iran’s currentaccount Iran’s Current Account Surplus This isanincreaseofalmost$1billionfromlastyear’s the thirdlargest supplierofcrudeoiltoJapan,afterSaudi Arabia andtheUAE. Iran’s crudeoilexportstoJapanalsoincreasedbyanaverageof16,000barrelsperdayin2007,makingIran Japan reached$14billionin2007. This representeda16%increaseincomparisontothepreviousyear. According todatareleasedbytheJapaneseMinistryofFinance,totalvaluetradebetweenIranand Iran’s Trade with Japan falling to$17.8billionin2010. report predictsthatthesurpluswillreach$21.7billionin2009,highestlevelforpastdecade,before fi gure, andisequivalentto8.4%oftheGDP. This st March). 9 Iran Investment Monthly, Volume 2, No. 17 This publicationdoesnotprovideindividuallytailoredinvestmentadviceandmaymatchthe and inaccuracy. fi is madetoensurethatthefactswepublisharecorrect.However, we donotrepresentthatallfactsand 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 Iran Investment Monthly Investment Iran ates Turquoise isaboutiqueinvestmentbankbasedinIranwithof About Turquoise potential investors. consent of Turquoise Partners. mechanical, photocopies, recordingorbyanyinformationstorageretrieval systemwithoutpriorwritten No partofthisnewsletter maybereproducedortransmittedinanyform orbyanymeanselectronic, Copyright Notice future success. all investors. The valueofaninvestmentcangodownaswell asup.Pastperformanceisnoguaranteeof circumstances ofsomeitsrecipients. The securitiesdiscussedinthispublicationmaynotbesuitablefor Iranian market.Havingaquali Turquoise tobene Turquoise publishesthiselectronicnewsletter, gures arecompleteandaccurate;therefore,wecannotbeheldlegallyresponsibleforerrors,emissions fi nancial productsandoffers fi t fromcouplinglocalknowledgeandpresencewithglobalexpertise. fi isdistributedexclusivelyamongstIrananalystsandpotentialinvestorswhohave c shares. fi ed anddiversemanagementteambasedbothinEuropeIranenables fi nancial servicestoselectclientsandinvestorswhoareinterestedinthe Iran Investment Monthly Investment Iran fi nancial productsandprivateequityopportunitiesto fi ces in Tehran andLondon. Turquoise cre- , withtheaimofkeepingitsre- fi nancial 10