Table of Contents Rpt. 21255179 RUSSIAN ECOMMERCE: AT THE TIPPING POINT 2 - 19 06-Jan-2013 MORGAN STANLEY - HILL-WOOD, EDWARD, ET AL Rpt. 21172912 YANDEX NV 20 - 24 10-Dec-2012 RENAISSANCE CAPITAL (RUSSIA) - FERGUSON, DAVID, ET AL Rpt. 20990586 YANDEX NV 25 - 34 31-Oct-2012 OTKRITIE - VENGRANOVICH, ALEXANDER, ET AL Rpt. 20990750 YANDEX NV 35 - 48 31-Oct-2012 MORGAN STANLEY - HILL-WOOD, EDWARD, ET AL Rpt. 20986606 YANDEX NV 49 - 52 30-Oct-2012 JPMORGAN - GOGOLEV, ALEXEI, ET AL Rpt. 20988742 YANDEX NV 53 - 62 30-Oct-2012 DEUTSCHE BANK RESEARCH - SEMENOV, IGOR, ET AL Rpt. 20976882 URALSIB: THE RUSSIAN INFORMER, 29 OCTOBER 2012 63 - 79 29-Oct-2012 URALSIB - CHERNYSHEV, KONSTANTIN, ET AL Rpt. 20943399 YANDEX NV 80 - 92 24-Oct-2012 DEUTSCHE BANK RESEARCH - SEMENOV, IGOR, ET AL Rpt. 20864279 YANDEX NV 93 - 106 09-Oct-2012 MORGAN STANLEY - HILL-WOOD, EDWARD, ET AL Rpt. 20797687 YANDEX NV 107 - 125 20-Sep-2012 DEUTSCHE BANK RESEARCH - WALMSLEY, LLOYD, ET AL These reports were compiled using a product of Thomson Reuters www.thomsonreuters.com 1 MORGAN STANLEY RESEARCH EUROPE 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.