presentation - guenter faschang, vontobel asset management - vilnius, lithuania - march 22, 2002

1Vontobel Asset Management AG

Eastern European Equities

Günter Faschang, CFA

[email protected]

22.3.2002


Eastern European Equities – Introduction

New Team since July 2001 in Vienna

Successful investment approach and track record

Professional customer oriented environment at Vontobel

Cooperation with Vontobel Zürich, New York, Vienna

EUR 140 mn under management in 5 funds and mandates

Dr. Vontobel strongly committed to Eastern Europe


Investment Analysis - Overview

Investment Approach

Macroeconomic Analysis

Sector Rotation

Balance Sheet Analysis

Valuation

Chart reading

Japanese Candlesticks

Market Indicators

Technical Indicators

Behavioral Finance


Eastern European Equities – Investment Approach Mixed Top Down / Bottom up approach

Country selection still important for emerging markets

Primary company analysis – models for 100 companies

Long-term valuation but short-term trade timing

Fund turnover 1-1.5 times per year

Risk limits and diversification

No active currency management with derivatives

No market timing

Minimum liquidity requirement

Performance monitoring and control


Mainly for Russia

For the fund’s performance the importance of each area changes with market conditions

Mainly for the EU-candidates

For all stocks (ca. 100)

Stock analysis takes by far the biggest share of our working time

Eastern European Equities – Investment ApproachCountry allocation

a) Inflation versus GDP (model)b) Currency analysis (model)c) Economic structure (FDI, restruct., dereg., taxation,...)d) Valuatione) Bond yields vs. earnings yieldsf) Global scenariosg) Others (chart, sentiment, money flows, behavioral fin.)

Sector allocation

a) Sector rotation - economic cycleb) Competitive environment (market entry barriers)c) Growth - margins

Stock analysis

a) Latest news, earnings releases, research reportsb) Quality of the firm (owners, management, products,...)c) Growth, margins, valuation, risk (model)d) Risk analysis (country, sector, stock)e) DCF (model)f) Expected news flowg) Technical Analysis (order timing)

Broker Selection (Research, Execution, Settlement)


Market Timing – Equities vs. Bonds / Defensive vs. Cyclical Investment strategy depends on economic cycle

Overweight cyclical equities when end of recession nears

Overweight bonds and defensive stocks when the end of a boom nears

Difficulty is of course to forecast economic cycle

Leading Indicators

Inflation versus GDP Model

Behavioral Finance – Sentiment Indicators

Technical Analysis


Market Indicators

Purchasing manager index

Factory orders

“Leading Indicators”

FAZ Frühindikator

IFO Business Climate

CRB Futures Index

Consumer Confidence

Yield Curve

Term Spread, Default Spread


• Macroeconomic Country Allocation mainly for Russia versus the EU entry countries • Forecast of major influential factors for

inflation and GDP-growth – one quarter into the future • Determination and forecast of the future events that will have a major impact on the economy and the stock market• Scoring Model is useful in order to screen all important factors – not to forget important things • Quantitative Scoring Model is the basis for qualitative decision (equal weight of scores is too rigid to base a decision purely on it)

Eastern European Equities - Top Down: Inflation vs. GDP Model

Inflation vs. GDP Model - RussiaPositive = 1 / neutral = 0 / negative = -1

Low inflation 0,3 High GDP growth 0,3Employment / Wages -1 Consumption 0,5Raw material prices 1 Employment / Wages 1Import prices 1 Consumer confidence 0Local consumer sentiment 0 Stock exchange 1Global consumer demand 1 ST interest rates 0Productivity gains / Technology 1 LT interest rates 1ST interest rates 0 Loans, Margins 0LT interest rates 0 Investment 0,5Precious metals prices 1 ST interest rates 0Natural Monopoly prices -1 LT interest rates 1

neutral Sentiment 1

Global economy 0

Future events: Government 0,0Oil, metals prices -1 Targets 0Breaking up monopolies, UES 1 Economic cycle:

Privatization 1 Automatic shifts 0

Less bureaucracy, slim state 0 Export-Import -0,5Political stability, law and order 1 Currency 0FDI -1 Local GDP growth -1Ruble stability -1 Foreign GDP growth 0

neutral 0,0 Competitive situation -1positiv


Currency Analysis

Currency has a huge influence on performance (bonds and equities)

Economic cycle and interest rate spread are major determinants

Economic structure and efficiency are long-term determinants

For emerging markets currency analysis is even more important

Economic crisis and currency crash used to be the best entry points

Exit before such a crash is most critical in emerging markets

Currency scoring model to estimate probability of a crash


Eastern European Equities – Currency Scoring ModelCurrency analysis is part of our Top Down approach

• Our model indicates, which currencies have the highest risk of depreciation or devaluation• The factors influencing the currency

have been weighted according to their importance (this is the result of a study of approx. 20 currency devaluations)• The model gives us important inputs for the country and stock selection

08 01 02

Weig

htin

g

Hu

ng

ary

Po

land

Czech

Rep

.

Ru

ssia

Tu

rkey

PPP 8 -1 -2 -1 -1 0Current Account vs. FDI 7 0 -1 0 -1 1Budget Deficit 6 0 -1 -1 -1 -1ST Interest Rates 5 -1 -2 0 0 0Currency Reserves 4 0 0 0 0 0Monetary Policy Obj. 3 1 1 0 -1 -1GDP 2 1 0 1 1 0Soft Facts 1 2 0 1 2 -1

Weighted Sum -6 -36 -11 -20 -3Sum 2 -5 0 -1 -2Downside over 1 year: 0% -15% -5% -20% -40%


Sector Selection

Sector rotation most important aspect

Country or sector selection can be dominant

Market entry barriers should be high

Growth but no over-investment

Country & Sector matrix is useful

Like for stocks we look at growth, margins, risk and valuation


Process of writing a company research report

Information gathering

Macro analysis

Sector analysis

Financial statements analysis

Financial ratios

Share price driving factors

Company visit

Financial forecast

Valuation ratios, DCF

Research report


Eastern European Equities – Bottom Up: Key Elements Select medium-term winners

Know the companies, build proprietary models.

Qualitative evaluation

Valuation with ratios and DCF


Eastern European Equities – Bottom Up: Factors

Qualitative factors

• Owners, Management

• Investments: LT earnings, no over-investment in sector

• Products: demand, innovation vs. cost leadership or niche

• Competition: Market entry barriers, pricing power

• Risk evaluation

• Government regulation

Quantitative factors

• Growth: Sales, Investments

• Profitability: Operating and net margins, ROE

• Risk: Sales and profit stability, capital structure, size, liquidity

• Valuation: Ratios (P/E, P/S, P/BV, P/CF), Discounted Cash Flow (Focus: capital costs)


Cash Flow Statement

Profit/Loss+ Depreciation+/- Changes in long-term Accruals and Provisions= Cash Flow from the Result+/- Change in Inventories+/- Change in Receivables+/- Change in Liabilities(= Change in Working Capital)= Cash Flow from Operation- Additions to Fixed Assets+ Proceeds from Sales of Fixed Assets= Cash Flow from Investments+ Issue of Shares+ Increase in long-term Debt= Cash Flow from FinancingChange in Cash (Control)


Ratios Definition

Internal LiquidityCash Ratio (Cash+Marketable Securities)/Current LiabilitiesQuick Ratio (Cash+Marketable Securities+Receivables)/Current LiabilitiesCurrent Ratio Current Assets/Current LiabilitiesReceivables Turnover Net Annual Sales/Average ReceivablesAverage Collection Period 365/Annual Receivables TurnoverWorking Capital/Sales Working Capital***/SalesInterest Coverage EBIT/Interest ExpensePayables Turnover Sales/Average Trade PayablesPayables Payment Period 365/Payables Turnover

Operation PerformanceTotal Asset Turnover Net Sales/Average Total Net Assets*Fixed Asset Turnover Net Sales/Average Net Fixed AssetsInventory Turnover Sales or Cost of Goods Sold/Average InventoryAv. Invent. Processing Period 365/Inventory TurnoverWorking Capital Turnover Sales/Average Working CapitalEquity Turnover Net Sales/Average EquitySales/Employee Net Sales/Number of Employees


ProfitabilityGross Profit Margin Gross Profit/Net SalesOperating Profit Margin Operating Profit/Net SalesNet Profit Margin Net Income/Net SalesReturn on Total Capital (Net Income+Interest Expense)/Average Total Capital****Return on Total Equity Net Income/Average Total EquityReturn on Owners Equity (Net Income-Preferred Dividend)/Average Common EquityROCE EBIT/(Total equity+LT Debt)

Financial RiskBusiness Risk Standard Deviation of Operating Earnings/Mean Operating EarningsSales Volatility Standard Deviation of Sales/Mean Operating Earnings

Operating Leverage Sum(1-N) of (Change in Operating Earnings/Change in Sales)/N

Debt/Equity Ratio Total Liabilities/Total EquityLT Debt/LT Capital Total Long-Term Debt/Total Long-Term CapitalTotal Debt/Total Capital Total Debt/Total CapitalEquity Ratio Equity/Total AssetsNet Gearing Total Debt-Cash/EquityFixed Charge Coverage Income Before Interest, Taxes, and Lease Payments/

/Debt Interest+Lease Payments+(Preferred Dividend/(1-Tax Rate))Cash Flow/Interest Expense Cash Flow**/Interest ExpenseCash Flow/Long-term Debt Cash Flow/Book Value of Long-Term DebtCash Flow/Total Debt Cash Flow/Total Debt


Growth AnalysisRetention Rate 1-(Dividends declared/Operating Income after Taxes)Total Assets/Equity Total Assets/Equity

External Market LiquidityMarket capitalization Number of Shares Outstanding*SharepriceNumber of Security Owners Number of Security OwnersFree Float in Percent Percent of owners holding less than a 10% stakeFree Floating Marketcap. Percent of market capitalization that classifies as free floatNumber of Shares traded Number of Shares traded

Cash Conversion Cycle: Receiveables Days + Inventory Processing Days - Payables Payment Period


Eastern European Equities – Bottom Up: Earnings Model

Earnings model for approx. 100 companies:

• Updated with analysts forecasts + own judgement

• Focus on long-term fundamental growth and margins

• Focus on cyclical earnings movements and valuation extremes

• Advantage of comparison of a big number of companiesMOLHUF P/E 99 P/E 00 P/E 01 P/E 02 P/E 03CAIB&Erste&CSFB 14,7 25,8 52,2 6,7 5,5Updated: 23 11 01 P/S 99 P/S 00 P/S 01 P/S 02 P/S 03

0,7 0,5 0,5 0,5 0,4

Price: 5.340,0 5.340,0 5.340,0 5.340,0 5.340,0Revenues: 742.648.000.000 1.025.000.000.000 1.080.000.000.000 1.120.000.000.000 1.180.000.000.000Revenue growth: n.a. 38,0% 5,4% 3,7% 5,4%Net margin: 5% 2,0% 0,9% 7,0% 8,0%Net profit: 35.417.000.000 20.240.000.000 10.000.000.000 78.400.000.000 94.400.000.000No. of shares: 97.800.000 97.800.000 97.800.000 97.800.000 97.800.000EPS: 362,14 206,95 102,25 801,64 965,24EPS growth: n.a. -43% -51% 684% 20%Mcap: 522.252.000.000 522.252.000.000 522.252.000.000 522.252.000.000 522.252.000.000


Eastern European Equities – Bottom Up: Risk Score

Risk Risk: high...5, low...0 fair P/E 03eCompany Ctry P/E 03e CEE? (15...0) Country Company Stock risk adjusted Discount

Aeroflot RU 3,5 CEE 10,0 4,0 3,0 3,0 7,5 115%Agora PL 20,7 CEE 3,5 1,5 1,0 1,0 12,6 -39%

Antenna Hungaria HU 10,7 CEE 8,0 1,0 3,0 4,0 9,1 -15%BorsodChem HU 3,7 CEE 9,0 1,0 5,0 3,0 8,3 122%

BRE PL 5,9 CEE 5,5 1,5 2,0 2,0 11,0 86%Budimex PL 4,1 CEE 8,5 1,5 4,0 3,0 8,7 109%

• Long-term valuation versus risk for approx. 100 companies:

• Risk-score is given to each company

• Fair P/E relative to risk is compared to actual P/E.


Eastern European Equities – Bottom Up: Risk Score

Fair P/E for Risk

0,0

2,0

4,0

6,0

8,0

10,0

12,0

14,0

0,0 5,0 10,0 15,0 20,0 25,0 30,0 35,0

P/E

Ris

k sc

ore

The higher the risk the lower the P/E should be


Valuation Ratios:EPS Net Profit/Number of sharesCE/S (Net Profit+Depreciation)/Number of sharesBV/S Total equity/Number of sharesDiv./S Dividend/Number of sharesEnterprise Value EV = Market Cap. + Interest bearing liabilities - CashDividend yield Dividend per share/PriceP/E Price/EPSP/CE = P/CF Price/CE per shareP/BV Price/Book value per shareP/S Marketcap./SalesP/EBIT Marketcap./EBITP/EBITDA Marketcap./EBITDAEV/S Enterprise value/SalesEV/EBIT Enterprise value/EBITEV/EBITDA Enterprise value/EBITDAEV or P/Assets or Capacities For example: Oil reserves, production*Net assets = Gross assets - depreciation on f ixed assets

**Free Cash Flow

*** Working Capital = Current Assets - Current Liabilities


Kety Salomon, ML, CSFB, Erste

19 10 01

in mn 2001e 2002e 2003e 2004e 2005e 2006e

Tax rate 35,0% 35,0% 35,0% 35,0% 35,0% 35,0%

Total debt 60,0

2001e 2002e 2003e 2004e 2005e 2006eEBIT 74,0 76,0 82,1 88,6 95,7 103,4EBIT*(1-tax rate) 48,1 49,4 53,4 57,6 62,2 67,2Depreciation and amortisation 25,0 30,0 33,0 36,3 39,9 43,9EBITDA tax adjusted 73,1 79,4 86,4 93,9 102,2 111,1Total capital expenditure -28,7 -33,8 -37,1 -40,7 -44,7 -49,1Change in w orking capital -1,9 -1,9 -2,1 -2,2 -2,4 -2,6Free cash flows to the firm 42,6 43,7 47,2 51,0 55,0 59,5

DCF-Model (RUR) 2000 2001e 2002e 2003e 2004e 2005e 2006e

Number of shares (mn) 10,5 10,50 10,50 10,50 10,50 10,50 10,50Risk-free rate (LT bond yield) 0,08 0,08 0,08 0,08 0,08 0,08Beta 1,30 1,30 1,30 1,30 1,30 1,30Expected equity market return 0,16 0,16 0,16 0,16 0,16 0,16Cost of equity 0,18 0,18 0,18 0,18 0,18 0,18Equity ratio 0,63 0,63 0,63 0,63 0,63 0,63Cost of debt 0,09 0,09 0,09 0,09 0,09 0,09

WACC 0,149 0,149 0,149 0,149 0,149 0,149

Fair Value (per share) WACC11,9% 12,9% 13,9% 14,9% 15,9% 16,9% 17,9%

1,0% 49 46 44 42 41 40 392,0% 52 48 45 43 42 41 403,0% 55 51 47 45 43 42 41

Perpetuity growth rate 4,0% 59 54 50 47 45 43 425,0% 64 57 53 49 46 44 436,0% 71 62 56 52 48 46 447,0% 81 69 61 55 51 48 46

• DCF for all companies covered

• Focus on meaningful WACC (Country risk and Beta are determined fundamentally)

Eastern European Equities – Bottom Up: DCF Model


Risk Risk: high...5, low...0 fair P/E 03eCompany Ctry P/E 03e CEE? (15...0) Country Company Stock risk adjusted Discount Beta R(M)

Aeroflot RU 3,5 CEE 10,0 4,0 3,0 3,0 7,5 115% 1,6 16,6Agora PL 20,7 CEE 3,5 1,5 1,0 1,0 12,6 -39% 1,1 13,1

Antenna Hungaria HU 10,7 CEE 8,0 1,0 3,0 4,0 9,1 -15% 1,7 12,4BorsodChem HU 3,7 CEE 9,0 1,0 5,0 3,0 8,3 122% 1,8 12,4

BRE PL 5,9 CEE 5,5 1,5 2,0 2,0 11,0 86% 1,3 13,1Budimex PL 4,1 CEE 8,5 1,5 4,0 3,0 8,7 109% 1,7 13,1

• Beta is determined fundamentally.

• Country risk is determined fundamentally

Eastern European Equities – Risk Evaluation


Chart reading

Reasons for trends (macro, market participants, self-fulfilling prophecies, psychology)

Rising tops and bottoms

Trend lines, support and resistance

Price target

Stop loss

Trend confirmation (triangle, flag, rectangle, pennant)

Trend reversal (double top, head and shoulders, …)

Japanese Candlesticks (hammer, shooting star, baerish engulfing, morning star, …)


Market Indicators – Contrary Opinion

Advisor’s sentiment

Short ratios

Turnover AMEX – NYSE

Customer’s margin

Put / Call ratio

Fund flows


Technical Indicators

Trading volume (Volume oscillator, Volume rate of change, …)

Trend lines (Fibonacci, …)

Moving averages (MACD, Bollinger Bands…)

Cycles (Cycle finder, Fourier analysis, …)

Oscillators (Stochastics, RSI, Momentum, …)

Volatility (Standard deviation, …)

Stop-loss (Parabolic Stop and Reverse, …)


Moving Average Convergence Divergence


Stochastics Indicator


Behavioral Finance

Loss aversion (Stop loss, good companies versus good stocks)

Reference thinking (Buying price)

Mental accounts (Diversification)

Overconfidence (Euphoria, contrary opinion)

“Crash” versus “Momentum” - Investors


Eastern European Equities – Timing of Trades

24 31 07 14 21 28 05 12 19 26 02 12 19 26 03 10 18 25 02 10 17 24 31 07Aug 01 Sep 01 Okt 01 Nov 01 Dez 01 Jän 02

PriceUSD

0.21

0.22

0.23

0.24

0.25

0.26

0.27

0.28

0.29

0.31

0.32

0.33

0.34

0.35

0.3

QSNGS.RTS, Last Trade, Candle04.02.2002 0.3240 0.3265 0.3230 0.3265

Long Term Fair Value

Sell at least part of position (anticipate bad news)

Buy Decision: News Flow& Technical Analysis

Good News

Sell (bad news)

Sell (Technical Analysis) e. g. insider trading


EE Equities – Country Allocation (%)

0

5

10

1520

25

30

35

40

Russi

a

Polan

d

Hung

aryCzec

h

Croati

a

Slova

kia

Balti

cs

Othe

rs

Slove

nia

Fund (%) BM (%)


EE Equities – Sector Allocation (%)

0,0

5,0

10,0

15,0

20,0

25,0

30,0

Bank

s

Oil&Ga

s

Telec

om

Pharm

a

Utilitie

s

Metals

Constr.

IT&M

edia

Automot

.

Tourism

Fund (%) BM (%)


Eastern European Equities – Investment Monitoring We rely on performance attribution analysis – country, currency and

sector allocation as well as stock selection are monitored at least monthly. Our price database allows a performance attribution output at any time for flexible periods of time

The internal performance measurement is done by a separate group – independent from the fund manager. For performance evaluation of our group both benchmark and peer group outperformance are equally important

We have quarterly meetings, in which the attribution is reviewed with the top management and the portfolio strategy is discussed in detail

Since we took over the fund in July 2001 we have been able to beat the benchmark by 1.9%. Since the beginning of 2001 the fund is now +14% up and lies 2.3% above the benchmark.


Eastern European Equities – Curriculum Vitae

Günter Faschang, CFAAssistant Vice President

Master Degree in International Business and Economics, joint study program of University of Innsbruck, Austria and University of Gainesville, USA

As a student, Günter Faschang started his career in the financial sector at Creditanstalt BV, Vienna, as a currency analyst (1994). He developed econometrical currency forecast models and a warning system for currency depreciations in emerging markets. He then spent two years as a stockbroker on the Frankfurt stock exchange where he learned the methods of technical analysis (1995-96). He also gained trading experience and successfully completed his exams on spot and forward trading.

For three years, Günter Faschang was chief strategist and an oil sector analyst for East European stocks at Erste Bank in Vienna, during which time he was working on country and sector allocation as well as company analyses and valuation models (1997-1999). He was also responsible for the Eastern European research team.

Mr. Faschang has been working successfully as a fund manager for almost two years. He joined Vontobel Asset Management as Head of Eastern European Equity on 1 July, 2001. Mr. Faschang and his team are domiciled at Bank Vontobel Oesterreich in Vienna and report directly to Zurich.

presentation - guenter faschang, vontobel asset management - vilnius, lithuania - march 22, 2002

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