Vontobel Asset Management AG

Eastern European Equities

Gnter Faschang, CFA
+43-1-5137640-561 guenter.faschang@vontobel.at 22.3.2002

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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 Zrich, New York,

Vienna

EUR 140 mn under management in 5 funds and

mandates

Dr. Vontobel strongly committed to Eastern Europe

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Investment Analysis - Overview

Investment Approach Macroeconomic Analysis Sector Rotation Balance Sheet Analysis Valuation Chart reading Japanese Candlesticks Market Indicators Technical Indicators Behavioral Finance

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Mixed Top Down / Bottom up approach

Eastern European Equities Investment 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

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Eastern European Equities Investment Country Approach allocation Mainly for Russia
a) Inflation versus GDP (model) b) Currency analysis (model) c) Economic structure (FDI, restruct., dereg., taxation,...) d) Valuation e) Bond yields vs. earnings yields f) Global scenarios g) Others (chart, sentiment, money flows, behavioral fin.) Sector allocation a) Sector rotation - economic cycle b) Competitive environment (market entry barriers) c) Growth - margins

For the funds performance the importance of each area changes with market conditions Mainly for the EUcandidates For all stocks (ca. 100) Stock analysis takes by far the biggest share of our working time

Stock analysis a) Latest news, earnings releases, research reports b) 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 flow g) Technical Analysis (order timing)

Broker Selection (Research, Execution, Settlement)

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Investment strategy depends on economic cycle

Market Timing Equities vs. Bonds / Defensive vs. Cyclical

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

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Market Indicators
Purchasing manager index Factory orders Leading Indicators FAZ Frhindikator IFO Business Climate CRB Futures Index Consumer Confidence Yield Curve Term Spread, Default Spread

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

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)
Inflation vs. GDP Model - Russia
Low inflation
Employment / Wages Raw material prices Import prices Local consumer sentiment Global consumer demand Productivity gains / Technology ST interest rates LT interest rates Precious metals prices Natural Monopoly prices neutral Future events: Oil, metals prices Breaking up monopolies, UES Privatization Less bureaucracy, slim state Political stability, law and order FDI Ruble stability neutral Positive = 1 / neutral = 0 / negative = -1

0,3
-1 1 1 0 1 1 0 0 1 -1

High GDP growth

Consumption Employment / Wages Consumer confidence Stock exchange ST interest rates LT interest rates Loans, Margins Investment ST interest rates LT interest rates Sentiment Global economy Government Targets Economic cycle: Automatic shifts Export-Import Currency Local GDP growth Foreign GDP growth Competitive situation positiv

0,3
0,5 1 0 1 0 1 0 0,5 0 1 1 0 0,0 0 0 -0,5 0 -1 0 -1

-1 1 1 0 1 -1 -1 0,0

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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

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Eastern European Equities Currency Scoring Model analysis is part of Currency

Czech Rep. Weighting

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
PPP Current Account vs. FDI Budget Deficit ST Interest Rates Currency Reserves Monetary Policy Obj. GDP Soft Facts Weighted Sum Sum Downside over 1 year:

Hungary
-1 0 0 -1 0 1 1 2

Poland

Turkey

Russia

8 7 6 5 4 3 2 1

-2 -1 -1 -2 0 1 0 0

-1 0 -1 0 0 0 1 1

-1 -1 -1 0 0 -1 1 2

0 1 -1 0 0 -1 0 -1

-6 -36 -11 2 -5 0 0% -15% -5%

-20 -3 -1 -2 -20% -40%

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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

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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

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Eastern European Equities Bottom Up: Key Elements

Select medium-term winners

Know the companies, build proprietary models. Qualitative evaluation Valuation with ratios and DCF

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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)

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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 Financing Change in Cash (Control)

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Ratios
Internal Liquidity Cash Ratio Quick Ratio Current Ratio Receivables Turnover Average Collection Period Working Capital/Sales Interest Coverage Payables Turnover Payables Payment Period Operation Performance Total Asset Turnover Fixed Asset Turnover Inventory Turnover Av. Invent. Processing Period Working Capital Turnover Equity Turnover Sales/Employee

Definition
(Cash+Marketable Securities)/Current Liabilities (Cash+Marketable Securities+Receivables)/Current Liabilities Current Assets/Current Liabilities Net Annual Sales/Average Receivables 365/Annual Receivables Turnover Working Capital***/Sales EBIT/Interest Expense Sales/Average Trade Payables 365/Payables Turnover Net Sales/Average Total Net Assets* Net Sales/Average Net Fixed Assets Sales or Cost of Goods Sold/Average Inventory 365/Inventory Turnover Sales/Average Working Capital Net Sales/Average Equity Net Sales/Number of Employees

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Profitability Gross Profit Margin Operating Profit Margin Net Profit Margin Return on Total Capital Return on Total Equity Return on Owners Equity ROCE Financial Risk Business Risk Sales Volatility Operating Leverage Debt/Equity Ratio LT Debt/LT Capital Total Debt/Total Capital Equity Ratio Net Gearing Fixed Charge Coverage Cash Flow/Interest Expense Cash Flow/Long-term Debt Cash Flow/Total Debt

17

Gross Profit/Net Sales Operating Profit/Net Sales Net Income/Net Sales (Net Income+Interest Expense)/Average Total Capital**** Net Income/Average Total Equity (Net Income-Preferred Dividend)/Average Common Equity EBIT/(Total equity+LT Debt) Standard Deviation of Operating Earnings/Mean Operating Earnings Standard Deviation of Sales/Mean Operating Earnings Sum(1-N) of (Change in Operating Earnings/Change in Sales)/N Total Liabilities/Total Equity Total Long-Term Debt/Total Long-Term Capital Total Debt/Total Capital Equity/Total Assets Total Debt-Cash/Equity Income Before Interest, Taxes, and Lease Payments/ /Debt Interest+Lease Payments+(Preferred Dividend/(1-Tax Rate)) Cash Flow**/Interest Expense Cash Flow/Book Value of Long-Term Debt Cash Flow/Total Debt

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Growth Analysis Retention Rate Total Assets/Equity External Market Liquidity Market capitalization Number of Security Owners Free Float in Percent Free Floating Marketcap. Number of Shares traded Cash Conversion Cycle:

1-(Dividends declared/Operating Income after Taxes) Total Assets/Equity Number of Shares Outstanding*Shareprice Number of Security Owners Percent of owners holding less than a 10% stake Percent of market capitalization that classifies as free float Number of Shares traded Receiveables Days + Inventory Processing Days - Payables Payment Period

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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
MOL Advantage of comparison of a big number of companies HUF CAIB&Erste&CSFB Updated: 23 11 01 P/E 99 14,7 P/S 99 0,7 P/E 00 25,8 P/S 00 0,5 P/E 01 52,2 P/S 01 0,5 P/E 02 6,7 P/S 02 0,5 P/E 03 5,5 P/S 03 0,4

Price: Revenues: Revenue growth: Net margin: Net profit: No. of shares: EPS: EPS growth: Mcap:

5.340,0 5.340,0 5.340,0 5.340,0 5.340,0 742.648.000.000 1.025.000.000.000 1.080.000.000.000 1.120.000.000.000 1.180.000.000.000 n.a. 38,0% 5,4% 3,7% 5,4% 5% 2,0% 0,9% 7,0% 8,0% 35.417.000.000 20.240.000.000 10.000.000.000 78.400.000.000 94.400.000.000 97.800.000 97.800.000 97.800.000 97.800.000 97.800.000 362,14 206,95 102,25 801,64 965,24 n.a. -43% -51% 684% 20% 522.252.000.000 522.252.000.000 522.252.000.000 522.252.000.000 522.252.000.000

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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

Company Aeroflot Agora Antenna Hungaria BorsodChem BRE Budimex

Ctry RU PL HU HU PL PL

P/E 03e 3,5 20,7 10,7 3,7 5,9 4,1

Risk Risk: high...5, low...0 fair P/E 03e CEE? (15...0) Country Company Stock risk adjusted Discount CEE 10,0 4,0 3,0 3,0 7,5 115% CEE 3,5 1,5 1,0 1,0 12,6 -39% CEE 8,0 1,0 3,0 4,0 9,1 -15% CEE 9,0 1,0 5,0 3,0 8,3 122% CEE 5,5 1,5 2,0 2,0 11,0 86% CEE 8,5 1,5 4,0 3,0 8,7 109%

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Eastern European Equities Bottom Up: Risk Score

Fair P/E for Risk
14,0

12,0

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

10,0

Risk score

8,0

6,0

4,0

2,0

0,0 0,0 5,0 10,0 15,0 P/E 20,0 25,0 30,0 35,0

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Valuation Ratios: EPS CE/S BV/S Div./S Enterprise Value Dividend yield P/E P/CE = P/CF P/BV P/S P/EBIT P/EBITDA EV/S EV/EBIT EV/EBITDA EV or P/Assets or Capacities
**Free Cash Flow *** Working Capital = Current Assets - Current Liabilities

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Net Profit/Number of shares (Net Profit+Depreciation)/Number of shares Total equity/Number of shares Dividend/Number of shares EV = Market Cap. + Interest bearing liabilities - Cash Dividend per share/Price Price/EPS Price/CE per share Price/Book value per share Marketcap./Sales Marketcap./EBIT Marketcap./EBITDA Enterprise value/Sales Enterprise value/EBIT Enterprise value/EBITDA For example: Oil reserves, production

*Net assets = Gross assets - depreciation on fixed assets

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Eastern European Equities Bottom Up: DCF Model

Kety
19 10 01
Salomon, ML, CSFB, Erste

DCF for all companies covered Focus on meaningful WACC (Country risk and Beta are determined fundamentally)

in mn Tax rate Total debt

2001e 35,0% 60,0 2001e 74,0 48,1 25,0 73,1 -28,7 -1,9 42,6

2002e 35,0%

2003e 35,0%

2004e 35,0%

2005e 35,0%

2006e 35,0%

EBIT EBIT*(1-tax rate) Depreciation and amortisation EBITDA tax adjusted Total capital expenditure Change in w orking capital Free cash flow s to the firm

2002e 76,0 49,4 30,0 79,4 -33,8 -1,9 43,7

2003e 82,1 53,4 33,0 86,4 -37,1 -2,1 47,2

2004e 88,6 57,6 36,3 93,9 -40,7 -2,2 51,0

2005e 95,7 62,2 39,9 102,2 -44,7 -2,4 55,0

2006e 103,4 67,2 43,9 111,1 -49,1 -2,6 59,5

DCF-Model (RUR) Number of shares (mn) Risk-free rate (LT bond yield) Beta Expected equity market return Cost of equity Equity ratio Cost of debt WACC

2000 10,5

2001e 10,50 0,08 1,30 0,16 0,18 0,63 0,09 0,149

2002e 10,50 0,08 1,30 0,16 0,18 0,63 0,09 0,149

2003e 10,50 0,08 1,30 0,16 0,18 0,63 0,09 0,149

2004e 10,50 0,08 1,30 0,16 0,18 0,63 0,09 0,149

2005e 10,50 0,08 1,30 0,16 0,18 0,63 0,09 0,149

2006e 10,50 0,08 1,30 0,16 0,18 0,63 0,09 0,149

Perpetuity grow th rate

Fair Value (per share) 11,9% 12,9% 1,0% 49 46 2,0% 52 48 3,0% 55 51 4,0% 59 54 5,0% 64 57 6,0% 71 62 7,0% 81 69

13,9% 44 45 47 50 53 56 61

WACC 14,9% 42 43 45 47 49 52 55

15,9% 41 42 43 45 46 48 51

16,9% 40 41 42 43 44 46 48

17,9% 39 40 41 42 43 44 46

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Eastern European Equities Risk Evaluation

Beta is determined fundamentally. Country risk is determined fundamentally

Company Aeroflot Agora Antenna Hungaria BorsodChem BRE Budimex

Ctry RU PL HU HU PL PL

P/E 03e 3,5 20,7 10,7 3,7 5,9 4,1

Risk Risk: high...5, low...0 fair P/E 03e CEE? (15...0) Country Company Stock risk adjusted Discount CEE 10,0 4,0 3,0 3,0 7,5 115% CEE 3,5 1,5 1,0 1,0 12,6 -39% CEE 8,0 1,0 3,0 4,0 9,1 -15% CEE 9,0 1,0 5,0 3,0 8,3 122% CEE 5,5 1,5 2,0 2,0 11,0 86% CEE 8,5 1,5 4,0 3,0 8,7 109%

Beta 1,6 1,1 1,7 1,8 1,3 1,7

R(M ) 16,6 13,1 12,4 12,4 13,1 13,1

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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, )

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Market Indicators Contrary Opinion

Advisors sentiment Short ratios Turnover AMEX NYSE Customers margin Put / Call ratio Fund flows

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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, )

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Moving Average Convergence Divergence

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Stochastics Indicator

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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

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Eastern European Equities Timing of Trades

QSNGS.RTS, Last Trade, Candle 04.02.2002 0.3240 0.3265 0.3230 0.3265

Sell (bad news) Sell at least part of position (anticipate bad news) Goo d New s

Price USD 0.35 0.34 0.33 0.32 0.31 0.3 0.29 0.28 0.27 0.26 0.25 0.24

Sell (Technical Analysis) e. g. insider trading

Long Term Fair Value

24 31 Aug 01

07

14 21 Sep 01

28

05

12 19 Okt 01

26

02

Buy Decision: News Flow & Technical 18 12 19 26 03 10 Nov 01 Dez 01 Analysis

0.23 0.22 0.21 25 02 10 17 Jn 02 24 31 07

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EE Equities Country Allocation (%)

40 35 30 25 20 15 10 5 0
Slo va kia Cr oa tia Ot he rs Cz ec h Ru ss ia cs Slo ve ni a Po lan d Hu ng ar y Ba lti

Fund (%)

BM (%)

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EE Equities Sector Allocation (%)

30,0 25,0 20,0 15,0 10,0 5,0 0,0
Ba nk s Oi l& Ga s Te lec om Co ns tr. IT &M ed ia Au to m ot . To ur ism Ph ar m a Ut ili tie s Me ta ls

Fund (%)

BM (%)

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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

Eastern European Equities Investment Monitoring

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.

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Eastern European Equities Curriculum Vitae

Gnter Faschang, CFA
Assistant 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, Gnter 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, Gnter 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.