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Current Value Last Week 1m 3m YTD 52 Weeks
Change, %
403.25 -1.34 -0.51 -2.65 -8.14 -6 -9
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The Most Influential RENCASIA Constituents
Ticker Company Influence, pts
Leading Movers
KMG LI Equity KazMunaiGas Exploration Production JSC +2.99
CG CN Equity Centerra Gold Inc +2.10
KAZ LN Equity Kazakhmys PLC +1.30
HSBK LI Equity Halyk Savings Bank of Kazakhstan JSC +0.67
DGO LN Equity Dragon Oil PLC +0.11
Lagging Movers
EXI LN Equity Exillon Energy PLC -0.30
975 HK Equity Mongolian Mining Corp -2.31
Index Movers
Composition of RENCASIA
Number Ticker Company Industry MktCap, $mn Weight in Index
1 276 HK Equity Mongolia Energy Corp Ltd 1309 197.87 1.88
2 975 HK Equity Mongolian Mining Corp 1309 387.18 2.68
3 CG CN Equity Centerra Gold Inc   1,161.81 12.55
4 DGO LN Equity Dragon Oil PLC 1308 4,922.45 23.89
5 EXI LN Equity Exillon Energy PLC   431.37 4.44
6 HSBK LI Equity Halyk Savings Bank of Kazakhstan JSC 1340 3,129.90 11.57
7 KAZ LN Equity Kazakhmys PLC 1315 1,931.48 7.82
8 KCEL LI Equity KCell JSC 1286 2,900.00 11.65
9 KMG LI Equity KazMunaiGas Exploration Production JSC 1308 7,381.63 22.78
10 STCM LN Equity Steppe Cement Ltd 1313 135.54 0.74
Recently Reports
September 11, 2014
EMEA banks: Sector trends and key calls
0 Pages
PDF file 621 KB
In this EMEA sector note, we focus on key sector/macro trends and our latest in-country bank-specific calls over absolute relative country calls. A genuine struggle for value is the only unifying theme. Our top short-term trading calls are: Overweight (OW) MOEX, Alior, Yapi Kredi and FirstRand; Underweight (UW) VTB, OTP, Akbank and Standard Bank.
August 26, 2014
Kazakhstan: Halyk Bank - Strong 1H14, another EPS and TP upgrade
3 Pages
PDF file 483 KB

Halyk Bank has delivered a strong 1H14, and we have upped our 2014/2015 EPS forecasts for the second time this year. Much of the benefits are asset-quality related, but most underlying trends look robust to us – BUY, TP $13.6/GDR (previously $12.4).

YtD 2014 has been good to Halyk Bank as it has delivered back-to-back strong sets of quarterly numbers. Margins remain robust at 5.6% (Halyk's numbers), and the 1Q14 currency devaluation and sector instability has been good for Halyk’s pricing power and market share/positioning. Asset quality has been the main driver of bottom-line outperformance vs expectations with 1H14 cost of risk at 0.15%, the key drivers of which being write backs from NPLs in Russia and Kazakhstan. Cost growth has also remained in check YtD (4.7% YoY for 1H14) and cost/income is down to 31.2%. RoAE and RoAA for 1H14 were impressive (but unsustainable, we think) at 32.1% and 4.7%, respectively. Credit growth has been muted by NPL removals and subdued 1H demand post the 1Q tenge devaluation.

June 17, 2014
Kazakhstan: Halyk Bank - Strong start to 2014, EPS and TP upgrade
3 Pages
PDF file 410 KB

Just back from Almaty, and following on from a strong set of 1Q14 results, we upgrade our earnings and TP for Halyk Bank: TP $12.4 (prev. $10.3), BUY maintained.

April 11, 2014
Crude Times: A week in Moscow
30 Pages
PDF file 706 KB
• We have spent the last week meeting Russian oil & gas corporates after travelling for almost a month around three continents. Interestingly enough, the "crisis mentality" is stronger inside Russia than when looking at the situation from the outside. There is much more talk and concern over possible sanctions and "crisis scenarios" around future Russia-EU/US relations. However, we have not identified any fundamental issues that could change our positive stance on the sector given its record-low valuations and improving FCF and RoICs profile. The biggest risk we continue to see relates to the slowdown of the domestic economy, which may push the government to keep gas tariffs frozen for more than just a year. This partially explains our recent downgrade of Gazprom from Buy to HOLD, and our relative preference for Novatek, which derives most of its growth from liquids projects. Theoretically, the government may also try to regulate domestic refined product prices by pushing margins down, which may negatively affect downstream heavy oil companies such as Bashneft and Gazprom Neft.
April 4, 2014
Crude Times: More barrels for a metre?
30 Pages
PDF file 1.72 MB
  • Russia produced 10.51Mb/d in March which is the 12th consecutive month of growth (1.3%). This comes at a time when the drilling market is undergoing a structural change with top-line growth materially slowing, while the share of complex horizontal wells is rising rapidly. If Russia can produce more oil with a fewer number of wells this could reduce the capital intensity of the business and boost sector returns which have been on a downward trend recently. Less clear is the question on what this shift in growth and mix of the drilling market means for the service providers. We think the second point is a positive development for the OFS providers, but the market is yet to be convinced.
  • We also note that drilling intensity is a very seasonal indicator with activity slowing down in the winter period artificially boosting the production per metre ratio. As such it is too early to say whether qualitative changes have started to contribute to the efficiency of Russian oil companies. In fact, the longer-term trend has been heading south implying a gradual deterioration of operations.
  • The most worrying trend we are currently observing is the slowdown of production at Rosneft which has also been cutting drilling activity the most among the large oil producers in Russia. Crude output at Rosneft excluding TNK-BP assets dropped -0.7% in March and remained essentially flat YtD (-0.1%). Granted that looking at production at just Rosneft’s legacy assets without taking into account the TNK-BP performance may be partially deceiving as we think Rosneft management is looking at a group portfolio and may prioritise new projects at TNK-BP relative to some marginal legacy projects of ‘old’ Rosneft.
  • Another positive side of Rosneft’s operations is a significant improvement in drilling efficiency at Yugansk which surged to a four-year high at the same time as Lukoil’s efficiency has been gradually declining (see chart). Again, seasonal factors can be quite distorting and we think more time has to pass before a definite answer can be given. For now we see a likely scenario that before companies find the optimal approach to drilling they run the risk of losing certain production.
April 1, 2014
Kazakhstan: Halyk Bank - Upgrading to BUY on share price weakness; clear value but lacking catalysts
3 Pages
PDF file 461 KB

Upgrading to BUY, TP $10.8/GDR; lacking near-term catalysts. While there were few surprises for us in Halyk’s underlying 2013 performance, the share price has been hit severely twice this year: first, after the 16% tenge devaluation in February, and more recently during the Russia-Ukraine conflict in March. That said, fundamentals-wise, little has changed for us in the name and given the 30% implied upside potential to our slightly revised TP of $10.8/GDR, we now rate Halyk BUY (previously Hold, TP $10.3/GDR). That said, we struggle to find natural near-term catalysts for the stock.

Tenge devaluation: Immaterial impact on the business so far. 1Q has been a volatile period in Kazakhstan, first with the currency devaluation, followed swiftly by a retail deposit run at a number of top-10 banks (Kaspi Bank, Bank CenterCredit and Alliance Bank). While it has been a difficult environment for all, on the liability side, Halyk has been a clear beneficiary being the safest bank in town, in our view, as deposit inflows and pricing power are clearly in its favour. In terms of asset quality, the tenge value of FX corporate loans increased (retail lending is in tenge only); however, NPL coverage levels did not change as provisions are built in the lending currency. Overall, management claimed 1Q14 is business as usual at Halyk Bank with no fluctuations in the cost of risk run-rate, and underlying credit demand has held up so far, while pointing out that the devaluation had a positive impact on the profit of the pension fund business in 1Q14.

March 28, 2014
Crude Times: Select observations
30 Pages
PDF file 1.60 MB

We have spent the past three weeks on the road, meeting more than 60 investors across three continents and discussing various topics in the oil industry. As a result, this week's publication of our regular Crude Times product does not follow the standard format. We bring the reader's attention to a number of interesting developments that can be tracked from following the updated data in this report.

March 14, 2014
Crude Times: In crisis mode
30 Pages
PDF file 840 KB

We have spent this week in London, meeting about 20 UK investors. With red screens on most of these days, our conversations were structured accordingly. Surprisingly, we have observed no panic, and have even noted some tentative interest in looking at some of the worst-hit Russian oil names. Whether this means a further correction ahead (using contrarian logic) remains in question.

Surgutneftegas and Lukoil are the two companies that the majority of investors we met see as the best defensive plays in the current environment, with the former trading at the value of its cash holding (and paying over a 10% dividend yield on its preferred shares); and the latter trading on 4x P/E, which is not too far from its valuation level during the 2008-2009 crisis, and offering a 6% dividend yield with a commitment to continue growing this at 15% in the future. We see some short-term risk for Lukoil coming from Iraq, as the political situation there remains highly uncertain, with acts of violence becoming the norm as the country heads into elections. However, with risked capex mostly spent and the overall NPV of the project at c. $0.5bn, we expect little fundamental impact on the company's valuation.

We were also surprised that few investors we met were expecting much downside risk for Gazprom: this could be due to the company trading on 2.2x PE and the share price reaching its lows of 2009. It is somewhat convenient to find bearish arguments for Gazprom related to the Ukraine crisis possibly affecting exports and forcing the company to agree on less favourable gas export terms with its Chinese counterparties later this year. Expanding exports into Europe in the future will be a harder, and possibly more expensive strategy now, in our view, with additional risks coming from the anti-trust investigation and possible fines.

In general, we note that with the possibility of sanctions on Russian oil & gas companies being low and with valuations close to 2009 lows (whether on an absolute or relative basis), we see increased risk premiums as the main driver behind the recent correction. This is in stark contrast with the previous crisis, which was accompanied by a 70% collapse in the oil price, and with most stocks trading at record highs going into that crisis. Strong oil and a weak rouble is a supportive macro environment. The only risks we see for the sector relate to the possibility of a higher fiscal take if the Russian budget weakens as a result of economic recession and/or large-scale financial aid to Crimea. We would also expect more pressure to keep domestic fuel prices relatively low as a way to support the economy. However, we doubt this would erode $60bn of value which has already been lost since the beginning of this year alone.

March 7, 2014
Crude Times: Ukraine: The view from Houston
31 Pages
PDF file 838 KB

The situation regarding Ukraine has been the dominant theme this week, not just in global politics but also in the financial markets – for obvious reasons. Below, we summarise the key points on the subject expressed during the recent IHS CERA energy week in Houston, in which over 2,000 energy leaders participated.

The majority of participants at the event appeared to be trying to second-guess Russia’s ultimate agenda in the situation – particularly with regard to Crimea – as this will likely determine how far Russia goes and the likely responses of the US and EU. The consensus view was that one of Russia’s motivations is to more actively participate in restoring Ukraine’s political system, and not be left out. Widely expressed was the notion that the best way to de-escalate the crisis is to engage Russia in dialogue, not isolate it. That said, we also heard the view that using the threat of military action as a negotiating tactic would reduce the opportunity for Russia to influence the situation, turning Ukrainians against their eastern neighbour – especially as the EU and the US are discussing financial aid for Ukraine.

In general, most CEOs of the leading energy companies, particularly in Europe, share the view that any sanctions against Russia will be a double-edge sword with losses for the global economy and especially Europe probably even outweighing losses for Russia in the short term. Most saw any sanctions in the energy space as unlikely. Dependence on Russian energy, particularly the import of gas, which accounts for a third of total gas consumption in Europe (half of it going through Ukraine), was cited as the biggest concern. The CEO of ENI, Paolo Scaroni, mentioned that so far he saw no change in gas deliveries from Russia and he doubts they will change, but in a low-probability scenario he estimates that the EU could live through without Russian gas delivered via Ukraine until next winter as demand is seasonally falling and inventory levels are at historic highs.

The need to review the EU energy policy was mentioned many times not only because of the situation in Ukraine but also in relation to global competitiveness especially with the US which enjoys roughly 50% lower energy costs than the EU. A few options have been put forward but most seem unlikely in the near term. They include developing shale gas at home, the review of nuclear plans, possible expansion of US LNG exports, expansion of gas infrastructure as well as storage facilities, particularly for power.

For Russia, we see three likely consequences. First, the importance of South Stream will be as high as ever to avoid transit risks but equally the EU opposition to it will be just as strong. Second, more exports from Russia to China of both gas and oil and possible various financial deals is more likely now. The long-awaited gas deal with China is probably more likely now with Gazprom perhaps willing to move closer to the Chinese position on the gas price (we expect $10/mbtu as the mid-point in price negotiations). Third, expansion of LNG projects is also likely which would allow it to pursue more flexible export strategies and take advantage of continuous arbitrage in various markets.

Events ahead. 10-11 March: Offshore production and technology summit in London with global oil majors among participants; 13-14 March: LNG Congress Russia 2014 to be held in Moscow; 14 March: IEA Oil Market Report; and record date for Novatek AGM which is to be held on 18 April.

March 3, 2014
Kazakh banking: Feedback from Almaty trip
5 Pages
PDF file 401 KB
  • Tenge devaluation the talk of the town: During our trip to Almaty talk of the recent currency devaluation was constant and the National Bank of Kazakhstan’s (NBK) move was truly a surprise to most with much confusion as to why it was necessary and the extent of the move. It has had a clear impact on general confidence and benefits exporters over the domestic economy. Inflation is coming with salary raises (10% rule) and price upticks on imported inflation are the order of the day. Some commentators are stating we could see a double-digit inflation YoY print by April. The NBK communicated that its move was driven by regional competitiveness (Russia) and the lack of luxury from a reserves standpoint to go about it in a gradual manner.
  • A deposit run – we haven’t seen one of these in while and we were a week late for this one. The NBK laid the grounds for instability with the tenge devaluation and when an unjustifiable SMS attack on three banks (Bank CenterCredit, Alliance Bank and Kaspi Bank) questioning their viability went viral, Kazakhstan experienced a short, sharp deposit run. The banks in question delivered cash to their clients until it petered out, as these events always do, and deposits have now stabilised and turned net positive this week at these institutions. But the experience was real, and the banks, the NBK and the broader authorities stood up to the stress test.
  • The Russians are coming, the foreigners are leaving: With HSBC exiting the market (it announced its sale to Halyk Bank last week), Citibank is effectively the last international bank, of note, standing, with RBS openly in exit mode. At the same time, Sberbank is now a well-established top-five banking player here, and Russian banks were actively involved in the HSBC tender. With VTB, Alfa-bank and Promsvyazbank also present from the Russian side, we see Halyk’s purchase of HSBC as much a defensive move as a strategic one. No FSU country wants Russian (state) banks dominating their banking system.
  • Sberbank and Kaspi made the most of the window: The largest bank in Kazakhstan will soon be the merged entity of Kazkommertsbank and BTA Bank and a large part of that story will continue to be a workout exercise. Halyk remains a predictable, conservative banking play. The biggest-impact players since our last visit are Sberbank, mainly corporate and working its balance sheet, and Bank Kaspi, all retail, truly the most impressive innovative bank in town, in our view.
  • NBK meeting positives: The NBK are comfortable with consumer leverage, while looking to slow the pace of unsecured consumer growth to 30% in 2014 through a number of measures. On asset quality, it does seem to us that the NBK will pass legislation to allow banks net off fully provisioned NPLs with no tax implication allowing optically high Kazakh bank NPLs to come down this year.
  • Less optimistic for the sector in 2014E than we hoped to be: Once again we probably get a strong GDP print for Kazakhstan in 2014, but the domestic economy, confidence and inflation should all be less positive. Retail lending growth should continue to be the credit-book driver, while pricing and margins should remain robust. The fallout from the recent tenge devaluation is a moderate impact on sector capital, and downside risk, in both cost lines and asset quality – on the positive front, banks’ FX line should benefit from the volatility.
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