Machinery

Stakhaniv Railcar Works, a member of the AutoKrAZ holding and is controlled by the Finance & Credit Group, is the largest Ukrai nian producer of gondolas and hoppers, previously the railcars that were most ‘in demand’. Despite the fact that the Company has suffered a lot in the past year, recent news about the Company led us to review our models of and opinion about SVGZ`s valuation.

Motor Sich is the only Ukrainian company and one of the world’s largest companies engaged in the development, production, testing and repair of modern aviation engines. The main driver of the company’s net revenue growth is the expected significant increase in helicopter and aircraft production in Russia, as well as the growth in demand for this equipment in other developing countries with which Russia has historically maintained close relationships. Despite Russian authorities’ announcement about starting-up the serial production of helicopter and missile engines in Russian plants, we are skeptical about the timely realization of these plans. We see the most probable and advantageous way for both parties is close cooperation in engine production.

The Ukrainian new car market is demonstrating a drop in sales for the second month in a row. The main reason is a decrease in the dispersal of auto loans since May 2008. We downgrade our forecast for the sector’s market growth for 2008 to 14%; however, we retain our estimates for LUAZ car production at the 90 thsd level. The current liquidity crunch that has already reached Ukraine has led us to increase the WACC in the DCF model. Also taking into account details of an additional share issuance of a 33% stake, which is expected this autumn, we downgrade our 12M Target Price for LUAZ to USD 0.284 per share (USD 0.31 before additional share issuance) and retain our recommendation to BUY shares in the Bogdan Automobile Plant.

The Bogdan Automobile Plant [LUAZ] is one of the largest auto producers in Ukraine. LUAZ assembles Russian VAZ, South Korean Hyundai and KIA brand cars, which hold strong positions in the market based on 2007 sales. The company also produces buses and trucks. Bogdan is carrying out an active strategy for market gaining and will benefit from the sales growth of new cars in Ukraine.

We initiate our coverage of the Ukrainian railway sector in aims of highlight the most promising investment picks for the year 2008. We analyze the demand and supply of freight and passenger railcars in the CIS based on Ukraine, Russia and Kazakhstan since they maintain 90% of the railway rolling stock in the region. According to our estimations, all covered companies have a great upside potential.

State owned Turboatom is one of the largest CIS producers of turbines for hydro, thermal and nuclear power plants. Capacity utilization was calculated as being 65% in 2007 while amortization of fixed assets reached by our estimation 50%. Therefore for further growth and successful participation in international tenders TATM needs large investments in production facilities' modernization. The arrival of strategic investors in TATM - Russian Power Machines for instance - would provide the company with such investments and stable growth in its orders. This would certainly drive up the value of the stock. However privatization attempts of the state’s stake have not yet been successful and remain uncertain since the company is considered by many to be of strategic importance to the state.

Kharkiv Machine Building Plant Svitlo Shakhtarya is one of the largest CIS producers of scrape conveyors used in coal mining.

The stock of Donetskgirmash [DGRM UZ] has long remained a rather promising pick in the market due to its noticeably lower than the industry’s average EV/Sales and P/Sales ratios. However, for the last two years the negative profitability has been inevitably reported by the company at the year-end: USD 3.5 mln net loss in 2006 was followed by the USD 7.2 mln net loss in 2007.

Azovzagalmash [AZGM], a leading producer of carriages within the Azovmash holding, showed an impressive performance in 2007, having increased its net sales 52% YoY. AZGM produced 6,045 freight carriages during the year and while total carriage-building products constituted 87% of the company’s output. The company plans to increase its production in 2008 by another 24% YoY, which is a higher number than the one expected for MZVM’s 2008 production growth rate. We believe AZGM is going to remain a leading carriage building asset for Azovmash, which should be capable of fulfilling the holding’s strategic plans of preserving and extending its share in the Russian market.

Mariupol Heavy Machinery [MZVM], a member of the Azovmash holding, specializes in producing boxcars, gondola cars, tank cars, open rail cars and hoppers, as well as miscellaneous heavy machinery equipment. In 2007, the company went through the restructuring of its product mix, determined to take advantage of the growing demand for carriage-building products in Russia. The percentage of the carriage building-products put out by MZVM in 2007 grew 1.6x YoY, with, 84% of MZVM’s total output going to export in 2007, with Russia as the company’s major customer. In 2007, 60% of the total product mix constituted newly developed products, such as automobile carriers, new models of crane equipment, special-purpose cars, etc. Nevertheless, the 2007 net sales growth dynamics were disappointing, with slightly more than 3.4% YoY growth reported by the company.