Ukraine 2008 merchandise balance figure announced
According to a recent note from the State Statistics Committee of Ukraine, the merchandise balance deficit in 2008 has slipped to USD 18.53 bln, which is 63.7% higher than the USD 11.32 bln 2007 merchandise deficit. Triggered by the UAH devaluation, the monthly merchandise balance deficit in December 2008 shrank to USD 0.82 bln against USD 1.79 bln in October, USD 1.64 bln in November and a monthly average of USD 1.54 bln in 2008 overall.
Merchandise exports grew 35.9% YoY to USD 67 bln while imports grew 41.1% YoY, reaching USD 85.53 bln in 2008. Ukrainian exports in December were at the USD 3.95 bln level after having been USD 5.86 bln in October and USD 3.63 bln in November (a USD 5.58 monthly average in 2008). Ukrainian imports fell substantially to USD 4.77 bln in December after having been USD 7.64 bln in October and USD 5.27 bln in November (a USD 7.13 monthly average).
The Russian Federation remained the single largest recipient of Ukrainian exports (USD 15.74 bln, 23.5% of total exports), followed by Turkey (USD 4.63 bln, 6.9%) and Italy (USD 2.91 bln, 4.3%). Russia also remained Ukraine’s largest imports provider (USD 19.41 bln, 22.7%), followed by Germany (USD 7.17 bln, 8.4%) and Turkmenistan (USD 5.63 bln, 6.6%).
Ferrous metallurgy products remained Ukraine’s biggest exports article (USD 26.52 bln, 39.6%), followed by machinery (USD 13.09 bln, 19.5%) and agriculture and food (USD 10.83 bln, 16.1%), while machinery is still the biggest import article (USD 26.69 bln, 31.2%), with products from the chemical and petrochemical industry (USD 11.44 bln, 13.4%) and natural gas imports (USD 9.44 bln, 11.0%) following.

Our view:
We view the contraction of imports in December as a consequence of the depreciating UAH, which fell 56.6% in 4Q08 (58.4% in 2008 overall). At the same time, the falling demand for Ukrainian exports triggered by the price decline on the global steel market did not allow for straightening out the merchandise balance in December. Moreover, we anticipate that pending statistics for the services balance will somewhat close the gap of the overall trade balance to USD 0.4 bln in December. While we view the current level of the UAH’s depreciation as fully sufficient to straighten out the trade balance deficit in 2009, we anticipate 1Q09 to be the most dangerous period for the country’s current account, as Ukraine still faces a low demand for its exports and a record-high imported gas price of USD 360 per thsd cbm. While we anticipate a potential stimulation on the global steel market to somewhat raise Ukrainian steel exports in 2Q09, as well as a drop in gas prices in April to USD 270 thsd per cbm, we expect that the likely delay of the second tranche of the IMF standby credit, coupled with the substantial budget deficit and overall pessimism in the Ukrainian economy, will continue to put pressure on the Ukrainian currency until at least 3Q09.
Sokrat forecasts a trade balance deficit of USD2.2 bln in 2009 and the average USD/UAH exchange rate of 11.0 in 2009 (it is 8.0 at the moment).

Shareholder structure changes at ZPST: pre-sellout?
In several official filings submitted with the regulator in January-February, Zaporizhstal [ZPST UZ, U/R] reported changes in its shareholder structure. Several developments are as follows.
The number of shares owned by Zaporizhstal-RS LLC oscillates insignificantly, between 445 mln (16.85%), on the one hand (in the second half of 2008, as well as on December 2, 2008, January 08, 2009, and February 03, 2009), and 448 mln (16.95%) on the other (December 01, 2008, January 05, 2009, and February 02, 2009). The number of shares owned by Metalurgiynyy Center LLC, an affiliate of the Midland Group, has decreased dramatically, from 445 mln (16.85%) in early 2009, to 362 mln (13.68%) on February 06, to 302 mln (11.44%) on February 09, and most recently to 12 mln (0.47%) on February 10.
According to our estimates, as many as 432 mln shares (16.33%), which have recently changed hands, are now unaccounted for.
Zaporizhstal is the fifth-largest Ukrainian steelmaker (3.94 mln metric tons of crude steel in 2008, which is down 12% YoY). The company is not vertically integrated. Zaporizhstal shares have been traded on the PFTS since May 20, after almost two years of being delisted due to a rough 3.13x minority dilution. As late as the beginning of 2009, the Midland Group used to own about 48% of the company.
As we reported earlier, the two owners of the Midland Group, Alexander Shnaider and Eduard Shifrin, intend to split their assets, and the fate of the Midland’s stake in Zaporizhstal had not been decided, at least publicly, as of late December 2008.

Our view:
We have long emphasized that should Zaporizhstal get a single, new strategic owner with a track of good corporate governance, this will be positive for the minority shareholders.
Good corporate governance in the domain of OJSC Zaporizhstal is something that the present owners lack. Like so many (almost all) Ukrainian OJSCs, Zaporizhstal is part of a larger group, which includes trading houses. The interests of the majority shareholders are aligned with those of the group, not with those of the individual OJSCs that are members of the group, which is detrimental for the minority shareholders of the latter. In a sense, no Ukrainian company has even conducted a true IPO on the PFTS, and not many care to be truly public.
However, a sellout by the Midland Group is not necessary for the Group to split. Furthermore, even if a Midland sellout does happen, this will not guarantee that the second existing strategic shareholder, the Zakhid-Reserv group, will also sell out. Thus, Zaporizhstal is pretty far from being controlled by a benevolent majority shareholder.
We also warn that a dilution that would facilitate movements of shares cannot be ruled out.

Yet another Ukrnafta EGM fails: NEUTRAL
An EGM of Ukrnafta [UNAF UZ, BUY], which was scheduled for today, did not take place because of the absence of the shareholders’ registry. The agenda for the EGM included profits’ distribution for 2006 and 2007, as well as recalling and electing the Supervisory Board, the Revision Board, and the Management Board of the company.
Since the beginning of 2008, six attempts to convene a general meeting have failed at Ukrnafta. The last time the shareholders convened was in 2007, but, at that time, voting on profit distribution for 2006 was postponed.
Ukrnafta, a major Ukrainian oil and gas producer, as well as fuel retailer, is controlled by two strategic shareholders: the Ukrainian state (50%+1 stake) and the Privat Group (42%, controls management).

Our view:
Because we did not expect the meeting to take place, we view this news as NEUTRAL. In our opinion, the shareholders’ conflict at Ukrnafta is unlikely to be resolved until substantial changes, such as privatization and/or breakup, take place at its parent company, Naftohaz of Ukraine.

MTBD faces finance problems for bridge construction: NEGATIVE
The Kyiv-based OJSC Mostobud [MTBD UZ, U/R], Ukraine`s largest bridge construction company and the general contractor in a project to build a massive bridge in Zaporizhya across the Dnieper River, is in talks with the U.S. Sunland Group Corporation regarding the acquisition of a loan to enable the company to complete its existing construction projects.
According to Zaporizhya Mayor Yevhen Kartashov, if the financing of the construction projects is stable and at least UAH 1.2 bln is generated towards this end in 2009, then the planned construction of the bridges currently being constructed in Zaporizhe may be completed within a timeframe of two years.
Negotiations between Mostobud and the Sunland Group Corporation commenced in early 2008. At the time of the intial meetings, the U.S. company expressed its readiness to invest USD 7 bln in the construction projects at an interest rate of 4%.
Mostobud has already invested UAH 55 mln of its own funds in the construction of bridges across the Dnieper River in Zaporizhya.
The UAH 100 mln earmarked in the 2009 national budget would be enough to carry out even three months’ work on this colossal project.

Our view:
We view that it’s extremely important to find additional sources of financing in order to complete the bridge construction. It is most likely that either MTBD will find an investor or the government will be forced to attract additional loans in order to finance the construction.
Currently 300 out of the 800 workers previously employed in this project are now engaged in bridge construction. If the current tempo does not change, the bridge, which currently has a high level of compliance, will become a problematic object.
We believe that the Sunland Group Corporation could provide the required financial resources if it will receive a state guarantee for its repayment. As of today, Sokrat is putting recommendation and target price for Mostobud under review.

Lukhanskteplovoz sales grew by 2.6 times in 2008: POSITIVE
Luhanskteplovoz [LTPL UZ, U/R], one of the largest locomotive producers in Ukraine and the CIS, increased sales in 2008 by 2.6 times YoY to about UAH 1.284 bln. This estimate is based on preliminary data and was released by a company source to Interfax-Ukraine.
This increase in the enterprise’s production and sales is connected to a significant growth in the number of orders placed for diesel locomotives following the arrival of the new owner of a 76% stake in the company, which is the Bryansk Machinery Plant (BMZ), an affiliate of the Russian company Transmashholding in which the Russian Railway (RZD) has a 25% stake.
So far, no detailed information on the company’s results from 2008 has been released, although the company has stated its intention to eventually release such information.
Earlier, towards the end of 2008, LTPL was apparently (and not surprisingly) experiencing complicated financial conditions. In reaction to the challenges posed by this economic downturn, the company adopted a three-day working week in order to optimize its expenses.
Luhanskteplovoz produces mainline and shunting diesel locomotives, diesel and electric trains, trams, and spare parts for railway transport. In 2007, the company increased its net sales income by 20.5% compared to 2006 to UAH 532.72 mln,and reduced its losses to UAH 14.754 mln.

Our view:
This is unquestionably POSITIVE news for Luhanskteplovoz. The company managed to pull through, despite its liquidity problems and resultant lowered output and work regime in 4Q2008. One hold up for the company’s development this year is Ukrzaliznitsya’s unclear plans for 2009 regarding the purchase of new diesel locomotives for state company needs, which is definitely a NEGATIVE development from the perspective of investors.
While the financial crisis looks as if it will continue to affect the company, LTPL may still end up benefitting from future tenders, to be launched by Ukrzaliznytsya (UZ), Russian Railway (RZD) and other state rail companies in the CIS over the next few years. For instance, Ukrzaliznytsya, which includes six national railways, intends to allocate UAH 94.5 bln to develop railway transport in the period 2008-2015. As well, Russian Railway is trying to replace the old locomotives in its fleet (amortization more than 70%) that already require retirement.
We look positively on Luhanskteplovoz because this is a unique company in terms of producing haulage and diesel locomotives in the CIS. Due to the high level (~75%) of locomotives fleet amortization in the CIS and state rail operators’ current demand to replace old fleets, we think that demand for LTPL’s products will increase significantly. We expect that UZ will purchase new locomotives and repair some part of the existing fleet during 2009 based on a loan that UZ recently received from the World Bank and the European Bank for Reconstruction and Development (EBRD) for the modernization of the current rail fleet.
Sokrat currently has Luhanskteplovoz under review and will keep readers up to date as new developments unfold.

Turboatom 2008 results and 2009 expectations: POSITIVE
The Kharkiv-based OJSC Turboatom [TATM UZ, BUY] – the largest turbine manufacturer in Ukraine and one of the largest energy equipment producers in the world – has announced that its net profit for 2008 grew by 19.7% YoY to UAH 41.8 mln. According to the website of the State Property Fund of Ukraine (SPF), the net profits for 2009 are forecasted to reach UAH 45 mln. The SPF, on behalf of the Ukrainian Government, owns a 75.22% stake in Turboatom.
The statement published says that the company’s sales increased by 40.6% to UAH 470 mln in 2008 and that, in 2009, the company plans to increase this level by 15% to reach UAH 540 mln.
In term of the company’s output, 2008 saw a growth of 10% in comparable prices to UAH 401.1 mln. The SPF expects that, in 2009, this figure will climb by 14% to UAH 455 mln. It also claims that the export share for 2008 was 70.5% and its profitability was 41%. Its production in 2008 included one 300,000 kW capacity steam turbine, nine 190,000 kW water turbines, and eight hydraulic locks.
Turboatom anticipates its gross profits for 2008 to grow by 26.7% to UAH 133.2 mln, with gross profits rising to UAH 160 mln in 2009. Company data reveals that, as of early 2009, TATM’s order basket is filled with long-term agreements and is valued at UAH 1.52 bln.
Turboatom has a complete production cycle, including the design, manufacture, installation and maintenance of turbine equipment for all types of power plants.

Our view:
This announcement reflects a POSITIVE announcement for Turboatom, though we suspect some of the figures for 2009 to be inflated to some extent. Nevertheless, the company certainly does have some solid contracts standing behind it, including a cooperation agreement signed in late January with Japan`s Mitsubishi Heavy Industries Ltd., the largest heavy engineering equipment and machinery producer in Japan. While this current deal entails the creation of technical conditions for the production of 600 MW-capacity steam turbines having ultra-super-over-crucial parameters, which were designed by the Japanese company, Turboatom Director-General Victor Subbotin has noted that the company hopes to sign yet another contract with Mitsubishi for the joint production of equipment.
This agreement is undoubtedly POSITIVE for Turboatom. Turboatom is one of the unique companies in Ukraine that develops and produces turbines. We think that a new agreement with new client is advantageous for TATM. The company is trying to diversify its own client base and enter new prospective markets; however, we are witnessing increasing competition on foreign markets. Additionally, low CapEx investments will also have negative impacts on the company’s value in a competitive market. We think that a potential strategic investor from Western Europe or Russia could be a catalyst for company growth in the company’s future privatization.
For our report “Turboatom – large turbine producers in state hands” of July 15, 2008, please contact the Head of International Sales, Constantine Lisnychyy, +38 050 310 0819, lisnychyy@sokrat.kiev.ua

ZAZ records UAH 390.6 mln in losses for 2008: NEGATIVE
The Zaporizhya Car Assembly plant (ZAZ) – the largest producer of cars in Ukraine – issued a statement noting that it recorded losses of UAH 390.576 mln for 2008, according to the Ukrainian News agency.
In 2008, the enterprise`s assets were valued at UAH 5,566.664 mln, with long-term liabilities of UAH 539.456 mln and its current liabilities estimated at UAH 2,831.717 mln.
ZAZ’s accounts receivable amounted to UAH 2,949.225 mln.
In 2007, the Zaporizhya car assembly plant posted net profits of UAH 564 mln, upon having increased its net revenues by 86.3% or UAH 5.999 bln) to UAH 12.951 bln in comparison to the results for 2006.
ZAZ, which is registered as a closed joint stock company, is controlled by the Ukrainian Automobile Association [AVTO UZ, N/R], otherwise known as the UkrAVTO Corporation.

Our view:
We see this data as a clearly NEGATIVE reflector of developments for the Zaporizhya car assembly plant (ZAZ) and its parent company, the UkrAVTO Corporation. While negative, this news is neither surprising nor is it worth singling out the company, as this auto producer is not unique in the setbacks it has faced. We currently see that all auto producers in Ukraine have decreased production output due to the economic crisis, whose impact includes a significant drop in consumer demand and limited access to auto loans for customers. The hryvnia’s sharp depreciation and lifting of import restrictions following Ukraine’s WTO accession have also contributed to undermining the demand for Ukrainian-made autos on the local market. The fourth quarter was dramatic for ZAZ in terms of production output. In November 2008, the company’s output decreased four-fold YoY and 2.7 times MoM. However, based on 9-month results, ZAZ demonstrated 16.7% growth YoY. Globally, the automotive sector is demonstrating only negative tendencies towards cuts in production volumes; however, we see several factors that will support ZAZ in 2009. The company currently has a number of factors in its favor that may help it with respect to output and sales, including a USD 62.5 mln syndicated loan it has received, likely for the modernization of its capacities, the recent strategy of expanding UkrAVTO penetration into new markets, and UkrAVTO’s recently-introduced leasing program, through which one can buy a car at 4.99% per annum interest in hryvnia and independent of involvement of banking institutions. In our view, ZAZ will shift its focus to more affordable car models in their portfolio like Slavuta and Lada. Based on the population’s declining income, we think that car demand will move to cheaper models (the economy segment), which can be produced by ZAZ.

Motor Sich to supply engines for Indian forces: POSITIVE
The Zaporizhya-based Motor Sich [MSICH UZ, BUY] company – the largest producer of aviation jets and gas-turbine units in the CIS – has announced its intention to supply of helicopter engines to Indian forces by the end of 2014. As part of this deal, MSICH will supply engines to its Russian partner, the Kazan Helicopter Plant. According to company officials, this contract was signed in December 2008 and the first engines will be supplied in 2H2009. The contract amount is expected to be USD 660 mln; however, this figure may increase due to a possible increase in the volume associated with this contract.
A 9.7% stake in Motor Sich, which is an open joint-stock company, belongs to Bartens Alliance Ltd. (USA) and 5.7% to the Kyiv-based Finance and Credit Bank, while 61% belongs to management and employees, including a 15% stake owned by Vyacheslav Bohuslayev, the Chairman of Motor Sich’s Board of Directors. About 24% is a free float.

Our view:
We view this news as POSITIVE for Motor Sich. MSICH’S order book for 2009 has grown considerably and its signed agreements will allow the company to retain positive sales growth in 2009, with revenues from the supply of aircraft engines and helicopter engines estimated to be at least USD 450 mln. This new contract is a good step for the company toward stronger cooperation with Russian partners.
We reiterate our BUY recommendation, with USD 182.9 as a fair value per share. For our 27-page November 2008 report “Motor Sich: Facts Support Strong Prospects”, please contact the Head of International Sales, Constantine Lisnychyy at +38 050 310 0819, lisnychyy@sokrat.kiev.ua.