Construction, Manufacturing, Retail Distribution
Director of Equity Financing, FINAM Investment Company, Moscow
Many foreign investors are now interested in buying equity in Russian companies, and many do invest. To spur further action and facilitate sound decisions, I have produced a small research effort that I think may be of some interest to potential investors in Russia. My research is based on official statistical data provided by Russia's Federal State Statistics Service. I have identified the most successful industries and summarized their recent performance in a table (click on the extended post to view this and the rest of the story).
The first line represents the accumulated data for all industrial sectors in Russia in terms of earnings (you may adjust Russian ruble data into U.S. dollars with an average exchange rate of $1USD = 26 RUR). Additionally, in the first line there are numbers representing the average percentages of profitable and unprofitable companies for all sectors.
When looking at 2006 numbers:
- The best performing sector was railway transportation: although the earnings numbers were not so impressive, all the other figures demonstrated good potential;
- Russia's booming construction industry is the second most profitable sector with manufacturing not far behind.
- Railway transportation continues to show extremely impressive growth with manufacturing still the second most profitable sector.
1. Processing of non-metallic minerals
2. Metallurgical production and production of prefabricated metalware
3. Production of machines and hardware
4. Production of rubber and plastics
5. Production of electrical equipment, electronics and optical machines
6. Woodworking and production of wood items
7. Production of leather, leather items and footwear
8. Production of food products including alcohol, soft drinks and tobacco
9. Chemical production
Here are some news items from the last few weeks which might provide more examples supporting the official statistics.
The big boys - the underwriters for a JSC Russian Railways bond issue in December 2004 included J.P Morgan, ABN Amro, Deutsche Bank, Soyuz Bank and Gazprom Bank
Russian Railroads - Moving More Freight Faster
- Private rail carriers are developing at extremely fast pace -- now they own more than 30% of cars
- The state-owned monopoly Russian Railways is finalizing the establishment of its First Freight Company. The First Freight Company will issue an IPO in 2009; at that time its market cap should be around $ 3 -- 3.5 billion.
- This summer Russian Railways is planning to sell 20% of its railway car repair yards, and private carriers are going to establish their own repair facilities
Consumer Metals Manufacturing
- The UK-based company Rexam one of the world's leading manufacturers of aluminum cans, is buying Rostar, a Russian beverage can maker for $301.5 million (Rosar is a sister company of Rusal, which is the largest producer of aluminium in the world)
Expanding Retail Distribution Networks in Russia
- Last week Russia's RosBusinessConsulting reported that Wal-Mart is engaged in major discussions with the MacroMir development company to facilitate Wal-Mart's entry in Russia. If it entered the Russian marketplace, the world's largest retailer would likely face stiff competition from incumbent retailers like Mega and Ramstore, as well as the possible entry of French retail giant Carrefour.
The Hotel Red Hills and the House of Music on the Moscow River
Construction - Building the New Russia from the Ground Up
In a report on emerging markets published on June 28, 2007, Merrill Lynch predicted that Russia will spend $195 billion on infrastructure in the next three years. President Putin's globally televised pledge to spend $12 billion on new infrastructure for the 2014 Winter Olympics in Sochi represents just the tip of the iceberg.
The key focus of Russian infrastructure spending will be to improve the energy distribution network (i.e. pipelines, electric power plants and transmission lines) in order to ensure a steady stream of commodity revenues. A major component of the government's infrastructure agenda is the IPO for Gazprom's biggest customer, the state-owned electric utility Unified Energy Systems. In the next few years gradually privatizing electricity distribution on the demand side is expected to create more opportunities to raise prices, thereby freeing up more energy for export on the supply side. Of course, rapidly growing cities like Moscow and St. Petersburg also need new power plants to keep the lights and servers on as they grow into global hubs of finance and trade.
An increasingly important segment of infrastructure spending is closely tied to real estate development in Russia. Russian real estate, especially Moscow, is experiencing one of the greatest booms in modern history. The biggest beneficiaries of this real estate boom are companies specializing in engineering, property management, construction and building materials. The latest example is the ST-Region investment and construction company, which recently announced plans for an IPO on the London Stock Exchange in 2008 with the goal of raising $ 1 billion.
According to Merrill Lynch analysts: "Earnings momentum is excellent. The consensus expects earnings in the EEMEA (Emerging Europe Middle East Africa) industrials space to accelerate from 18% in '07 to 25% in '08". This opinion is consistent with the views of Ruchir Sharma, director of emerging markets for Morgan Stanley, who recently wrote that many of Russia's domestic-demand driven industries are more profitable than their counterparts in China and India.
In conclusion, while Russia's oil and gas sector continues to create most of the headlines in the Western business media, informed investors are already seeking higher returns in railways, transportation, construction, telecommunications, and other distributive industries. These are the growth sectors I personally recommend to foreign investors looking for both value and growth.
You can read the original post at Vladimir Kuznetsov's blog, Equity Financing in Russia. The views expressed in this post and on his blog are the personal opinions of Vladimir Kuznetsov, and are reproduced here solely for educational purposes. To read more Russia Blog posts about Russian capital markets, click on the finance section or type www.russiablog.org/finance in your web browser.