Machinery

As compared to our previous report on Druzhkivka Machinery [DRMZ UZ], dated Dec. 20, 2007, this present update strives to incorporate a broader set of the company’s peers for comparative valuation and a more accurate and extended DCF model. Druzhkivka Machinery, a leading producer of mining equipment in the CIS, is steadily picking up the pace in its sales volumes, and boasts a strong improvement in its financials. Our previous target price for DRMZ was USD 1.97, with DRMZ then being traded at USD 0.99 per share. DRMZ is now traded at 1.22 USD per share and is maintaining a stable upward trend in line with our expectations. Our recalculated target price is set at USD 1.82 per share, which still leaves a 49% upside for DRMZ’s stock. We reiterate our BUY recommendation for DRMZ.

Motor Sich [MSICH], the sole Ukrainian manufacturer of engines for helicopters and jet airplanes, has demonstrated an impressive improvement of its financials by posting a 6.2% YoY net income increase, according to preliminary 2007 financials. In terms of its production potential, the company is also in quite good shape. However, one of the risks today remains the vague perspective of the Russian market, on which Motor Sich has a long history of supplying its helicopter engines. Motor Sich’s stock displayed spectacular growth in 2007, with the market positively reacting to the company’s improving financials and the latest achievements in engine building developments, and while its profitability potential is still not depleted, investors tend to slightly overreact to any news related to the company’s Russian markets.

The Ukrainian auto market is booming: last year, sales increased 40%. UkrAVTO Corporation is a major Ukrainian auto player with a 40-50% market share. Both the sales and the production of new cars are set to increase significantly in 2007. UkrAVTO wants to attract substantial investments, and has initiated a substantial cleanup effort. We think that in due time the company would consolidate its financials with those of its numerous subsidiaries and affiliates. The most important subsidiary to consolidate is ZAZ, the core production segment company. We assemble the finances of UkrAVTO and ZAZ and evaluate the result.