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. Last Updated: 07/27/2016

Automakers Promise Long-Term Share Mileage




Despite the recent crash, Russia's automotive sector has


outperformed the market, and observers say the industry promises more strong growth. Sujata Rao reports.


Driving a Russian-made car may not be an exhilarating experience, but the sector's stocks could provide a great ride if economic recovery stays on track.


"This year was good for the car industry until crisis struck," said Konstantin Kontor, head of research at Rinaco Plus, referring to the fall of the Russian market in late October. "But now is a good time to buy as one can get a really good price on certain stocks."


Kontor said the sector has yet to attract strong investor interest. Companies such as AvtoVAZ, UralAZ and KamAZ carry large tax arrears on their books, and there is still uncertainty surrounding share ownership in two of Russia's biggest producers, AvtoVAZ and KamAZ.


But there are positive signs on the horizon for companies that make cars, trucks and buses:


...Foreign carmakers have inaugurated multimillion dollar joint ventures with Russian manufacturers. Although it provides more competition for domestic manufacturers, it also gives them the chance to produce higher-quality cars, obtain know-how and more fully utilize their huge work forces.


...Although vehicle manufacturers account for more than 2 percent of Russia's gross domestic product, they make up just 1 percent of the market's capitalization. Analysts place target values of some shares at 50 to 300 percent above current values.


...Auto ownership levels in Russia are 15 percent of U.S. levels and half of Eastern European levels. Although car production fell 40 percent between 1990 and 1997, it has began growing again.


"The Russian car market will double by 2000, because of greater replacement sales, macroeconomic recovery and an improving operating environment," said Oleg Pavlov, an auto industry analyst with the Brunswick Warburg brokerage.


Analysts say investors who buy and hold could realize healthy returns on Russian automotive-industry shares. "Russian automotive producers are still traded at a deep discount to their international peers on earnings- and sales-based multiples," Rye, Man & Gor Securities wrote in a recent report.


Some of the discount can be attributed to a lack of transparency in the sector.


"Investors have a difficult time understanding the companies' financials," said Patricia Isayeva, an auto sector analyst with United City Bank. "For instance, car makers have to shoulder enormous social costs like building housing for their employees and secondly, many of them still use the Russian accounting system."


The discount will decrease as operating conditions improve, she said.


Here are some of industry highlights:


GAZ. Analysts are unanimously bullish on Nizhny Novgorod-based Gorkovsky Avtomobilny Zavod, producer of Volga sedans and GAZelle light commercial vehicles.


"GAZ has displayed the ability to adjust to market conditions and demand by putting out the GAZelle and improved Volga model," said Yekaterina Botvinnova, auto analyst at Skate financial information agency. Its good financial position and lack of debt makes GAZ more attractive than its counterparts, she added.


The appointment of former Nizhny Novgorod governor Boris Nemtsov to the post of first deputy prime minister may further sweeten GAZ's fortunes. Last week in Sweden, Nemtsov signed a deal with Volvo to begin production in Russia, and GAZ was listed as a top contender for a production deal.


Currently, GAZelle has 62 percent of the light-truck market and Volga sedans represent 14 percent of domestic car sales. Last September GAZ and Italian carmaker Fiat announced $850 million in investments for a joint venture to produce Fiat's Palio and Siena models.


GAZ shares rose from $36 a share in March to $106 on Friday. Analysts assign a $190 target price to the shares of GAZ, which is expecting $180 million to $190 million in net profits this year.


AvtoVAZ. Market-watchers are divided on the prospects of Russia's largest automaker, AvtoVAZ, which recently handed a controlling stake to the government as collateral for the enterprise's $1.2 billion in tax debts and fines.


AvtoVAZ's problems do not stop there. It is inefficient and overstaffed, spending 150 man hours to produce a car, in comparison with 20 at Toyota. The plant has long been held in the grip of a profit-sucking dealership network. Furthermore, AvtoVAZ's popular Zhiguli model is likely to run into heavy competition when Russian-assembled Kia, Fiat, Skoda and Daewoo cars hit the market.


On the other hand, AvtoVAZ's huge capacity -- almost 800,000 cars a year -- and its rumored joint venture with Adam Opel, General Motors' German subsidiary, are considered bright spots.


James Fenkner, the head of research at CentreInvest, said that despite its problems AvtoVAZ represents an excellent investment.


"AvtoVAZ is the biggest company in Russia in terms of sales," he said. "I am certain the shares will appreciate at least three times within the year."


But Yerlan Syzdykov, an auto analyst at Renaissance Capital, said there is a danger of a share dilution when shares are issued to the government.


PAZ. Analysts point to the Pavlovo Bus Plant as a good investment.


PAZ's strengths include its contacts with municipalities throughout the former Soviet Union, its progressive management and a recent joint-venture deal with German bus- and truckmaker MAN.


Syzdykov said recent market turmoil has driven PAZ shares to attractive buy levels. Although PAZ shares are currently trading at $42 each, Syzdykov predicted a target price of $70 within the next 14 months.


KamAZ. The Kamsky Avtomobilny Zavod exemplifies the dashed hopes of Russia's auto sector in recent years. The Tatarstan-based truckmaker has not lived up to predictions of a rise in share prices and is likely to be demoted from the RTS 1 index of highly liquid shares.


Recently, it looked like KamAZ had everything going for it: a virtual monopoly on heavy truck production in Russia, enormous production capacities, virtually new Japanese equipment and the strong support of the Tatar government, which helped restructure its debts.


But shortages of working capital plague KamAZ and it will continue to stay in the red this year with a 17 percent drop in output over 1996. In theory, KamAZ should be poised for prosperity when trade and freight transport pick up, analysts said. Botvinnova rated KamAZ a "speculative and very long-term buy" based on its market position.


But CentreInvest Group analyst Alexei Labovsky recommended avoiding KamAZ at present, saying the company is reportedly planning a dilutionary share issue. Kontor of Rinaco Plus recommended avoiding KamAZ, saying that only "very good news" could change his mind.


UralAZ. This small maker of super-heavy trucks, jeeps and pickups, based near Chelyabinsk, will be the success story of the coming months if the company can advantageously settle its $300 million in debts, said CentreInvest's Labovsky.


The company has a joint venture with Italian Iveco and German Deutsche KDX.


"UralAZ is a buy for the short and long term," Labovsky said, predicting a target price of $2.50 to $3.00. The stocks are trading at about $1 now.


A number of the above auto enterprises have announced plans to issue American Depository receipts, but none of these programs have yet been launched. GAZ, which looked set to be the first to issue an ADR, has delayed plans amid recent market turmoil.


Analysts are quick to point out that the auto sector represents basically a long-term investment.


"It's definitely a less liquid investment and if you do put your money here, you have to place your faith in the future of structural reforms," Pavlov said. "It is not for people who are convinced Russians will never build competitive cars."