Строительство

A local court in the Donetsk Region has declared the Doncement company to be bankrupt. The court has initiated the process for the company’s liquidation.

Our view: While obviously terrible for Doncement and the Heidelbergcement Group with which it is affiliated, we also view this as a negative sign for other local cement producers in Ukraine. On the other hand, this may also be viewed as positive as far as the competition on the cement market will become less tough.

The decreased demand for cement, caused by a drop in work in the construction sector, has led to a critical situation for cement producers in Ukraine and this may be the factor that led to the court’s subsequent declaration of its bankruptcy. It is possible that the company might have significant debts and a lack of long-term contracts. We believe that Doncement won’t be liquidated and that key cement groups may acquire the Doncement plant.

On the other hand, we caution blindly embracing this news as fact at this point and anticipate that the situation will likely be clarified in the near future, since no statement has been made by Doncement or Heidelbergcement on this subject. Until this point, Doncement was considered to be among the three top cement producers in Ukraine, along with Ivano-Frankivskcement [IVFC UZ, U/R] and Volyn-Cement [VOLC UZ, BUY], both of which belong to the Dyckerhoff Zement group (Germany).

The Ivano-Frankivskcement company [IVFC UZ, N/R] has signed an agreement for the sale of its greenhouse gases quotas to the European Bank for Reconstruction and Development and the European Investment Bank.

Our view: We view this news as POSITIVE for IVFC in terms of bringing a liquidity inflow to the company. The result of this agreement is based on the company’s initiative of switching from the wet to dry method of cement production, which allows the company to discharge twice fewer greenhouse gases in its production process, while actually offering twice more cement. Based on our assumptions, we think that IVFC will receive about EUR 6 mln for the sale of the plant’s quotas of 600 thsd equivalents of CO2. Plus we think this is a positive signal for IVFC in terms of receiving a loan from the EBRD with attractive rates. We have seen such examples with Astarta – a Ukrainian agricultural holding that recently received USD 3 mln for their CO2 quotas and confirmation of receipt of an additional loan from the EBRD.

Ivano-Frankivskcement is among the top three Ukrainian cement producers and belongs to the Dyckerhoff Zement group (Germany), along with Volyn-Cement [VOLC UZ, BUY] – one of the other three top producing cement and slate producing companies in Ukraine.

While we are currently reviewing the prospects of Ivano-Frankivskcement, Sokrat puts forward a favorable forecast in terms of the future development of Volyn-Cement. While assuming VOLC’s output will stay at the same level as in 2007, we expect that the company's financial results in 2H2009 will still be high. We recommend BUYing shares in Volyn-Cement, with a target price of USD 11.20 and an upside of 127% (as of Nov. 1).

For a better understanding of the construction materials market in Ukraine, see our November 4 flash note “Volyn-Cement: Fortified Enough to Withstand Crisis” and our 22-page company overview “Volyn-Cement: from Wet to Dry” of July 14, 2008. For more information, please contact the Head of International Sales, Constantine Lisnychyy at +38 050 310 0819, lisnychyy@sokrat.kiev.ua

According to data released by the State Statistics Committee of Ukraine, cement production fell by 18.6% to 957,000 metric tons in November 2008, compared with the production level achieved in November 2007. In the same period, slate production in Ukraine dropped by 15.4% to roughly 49 mln tiles. For the purposes of this calculation, slate includes corrugated plates, slate and other asbestos cement products.

In November, the production of cement and slate in Ukraine fell by 25.8% MoM and 23.2% MoM, respectively.

In January-November cement production rose by 3.2% to 14.452 mln metric tons, compared to January-November 2007. Slate production slid by 1.2%, with the total output figure being 575 mln tiles.

As reported last month by Sokrat, cement production had fallen in October 2008 by 10.1% to 1.291 mln metric tons, compared with production levels in October 2007. At the same time, slate production increased by 2.2% YoY to reach 633 mln tiles.

In 2007, production of cement rose by 9.1%, as compared with the same period of 2006, to 14.989 mln tons. In terms of slate, 2007 saw a 15.4% reduction in output YoY, bringing the production level to 633 mln tiles.

Over 15 enterprises produce cement in Ukraine, and their total annual capacity is more than 20 million tons.

Our view: This news is NEGATIVE for Ukraine’s cement producers, since this represents a definite signal of decreasing local demand for Ukrainian production in the short-term and even mid-term. We see a significant decrease in construction works in 4Q2008. The lowering demand for real estate on the primary market has resultantly led to a decrease in construction materials output.

We also expect construction activity to be low in 2009. The only positive signs for the construction sector in Ukraine for 2009 are the preparations that will take place for Euro 2012, which involves the construction of roads and stadiums. We suppose that cement output will decrease in 4Q2008 but that annual results YoY will be higher.

This drop in output is bad for Ukrainian cement producers in general and particularly, for Ukraine’s three largest producers. Ivano-Frankivskcement [IVFC UZ, U/R], Volyn-Cement [VOLC UZ, BUY], and Doncement, which is part of the Heidelbergcement group. In terms of slate, the three largest producers are IVFC, VOLC, and the Balcem Plant, which is controlled by the Eurocement Group but is not listed on the PFTS at this time.

While we are currently reviewing the prospects of Ivano-Frankivskcement and the Balcem Company, Sokrat puts forward a favorable forecast in terms of the future development of Volyn-Cement. While we assume that VOLC’s output will stay at the same level as in 2007, we expect that the company's financial results in 2H2009 will still be high. We recommend BUYing shares in Volyn-Cement, with a target price of USD 11.20 and an upside of 127% (as of Nov. 1).

For a better understanding of the construction materials market in Ukraine, see our November 4 flash note “Volyn-Cement: Fortified Enough to Withstand Crisis” and our 22-page company overview “Volyn-Cement: from Wet to Dry” of July 14, 2008. For more information, please contact the Head of International Sales, Constantine Lisnychyy at +38 050 310 0819, lisnychyy@sokrat.kiev.ua

On Friday, Ukraine’s Parliament passed the law “About reducing the influence of the world financial crisis on the construction sector in Ukraine” during its first reading.

This law underlines that construction projects with 70% of compliance will be completed. The Ministry of Economy and the Ministry of Construction and Regional Development will undertake to estimate the cost of construction.

This legislation also implies the creation of a government support program that would provide loans worth up to 30% of the construction cost for potential real estate buyers.

Our view: The adoption of this legislation is POSITIVE for construction companies, as far as they will be able to complete their existing projects and potentially even start new ones. The effectiveness of these measures’ implementation will define the future trends regarding market prices for real estate in Ukraine.

Shareholders of the Kramatorsk “Pushka” Cement Plant [KRCS UZ, U/R] have added another issue – to not increase the company’s statutory fund – to the agenda for the upcoming EGM.

The Kramatorsk “Pushka” Cement Plant is a member of the ‘Eurocement Group Ukraine’ and affiliate of the Eurocement Group Holding, whose other Ukrainian affiliate is the Balcem Plant. Taken together, Eurocement Ukraine’s plants are among the top producers of cement in Ukraine, with its main competitors being Ivano-Frankivskcement [IVFC UZ, U/R], Volyn-Cement [VOLC UZ, BUY], and Doncement, which belongs to the Heidelbergcement Group holding.

Our view: We view this as positive for minority shareholders. The Head of the Corporate Relations Department of the Kramatorsk “Pushka” Cement Plant told us that the additional share issuance faced problems in terms of restrictions by the stock market state commission.

We think that this additional share issuance was mainly done in order to squeeze minority holders, as has occurred in Russia in the case with Ulyanovskcement.

For a better understanding of the construction market in Ukraine, see our November 4 flash note “Volyn-Cement: Fortified Enough to Withstand Crisis” and our 22-page company overview “Volyn-Cement: from Wet to Dry” of July 14, 2008. For more information, please contact the Head of International Sales, Constantine Lisnychyy at +38 050 310 0819, lisnychyy@sokrat.kiev.ua

Cement output in November constituted 957 thsd metric tons, which is 18.6% less that in November 2007 and 26% less that in October 2008. The 11-month aggregated output constitutes 14.5 mln metric tons, while the 10-month growth rate was 5.2% YoY.

Our view: We see a significant decrease in construction works in 4Q2008. The lowering demand for real estate on the primary market has resultantly led to a decrease in construction materials output.

We also expect construction activity to be low in 2009. The only positive signs for the construction sector in Ukraine for 2009 are the preparations that will take place for Euro 2012, which involves the construction of roads and stadiums. Even considering the significant decrease in construction works, we expect the 2008 aggregated figures to be 4-5% higher than they were in 2007.

Ukraine’s Cabinet of Ministers has approved procedures for allocating money from the Stabilization Fund as loans for completing the construction of housing financed through mortgage loans.

Money from the Stabilization Fund will be used to finance the completion of housing that has reached at least 50% completion.

The resolution stipulates that money is to be allocated from the Stabilization Fund on the condition that it will be repaid and that applications for the provision of loans from the fund are to be submitted to the Cabinet of Ministers.

The Ministry of Regional Development and Construction will keep a register of decisions on the allocation of money from the Stabilization Fund and submit monthly reports to the Finance Ministry on the allocation of money from the fund.

Our view: We view this as POSITIVE for construction companies, as they will be able to complete their respective existing projects. This will prevent real estate prices from an otherwise significant drop. Today, about 80% of construction projects are frozen in Kyiv. The lack of demand for real estate has caused a market price decrease, especially for projects that have achieved a completion rate of less than 50%.

In November 2008, prices for real estate in Kyiv dropped by 5-20%, depending on the area. The prices in Ukraine’s regions have decreased as well, by 5-10%. We also expect other anti-crisis measures to be implemented in the construction sector. The effectiveness of these measures’ implementation will define future trends regarding market prices for real estate.

The Cabinet of Ministers has allocated UAH 30 mln to the Executive Committee of the Zaporizhya City Council from the 2008 national budget for the construction of bridges as part of a highway across the Dnieper River.

In total, the 2008 national budget envisages the allocation of UAH 350 mln for the construction of bridges.

"These last UAH 30 million will be used to pay for works that have been done already," the press service quoted Ivan Sukhomlin, the Head of the municipal Department for Capital Construction as saying.

The construction of the bridges started in October 2004. The Zaporizhya City Council plans to complete the highway’s construction over the Dnieper by 2010.

Our view: The fact that some funds have been transferred to end the process of this bridge construction project is POSITIVE and will provide some of the much-needed liquidity that is today strongly required for construction companies in Ukraine.

This transfer of funds will directly affect both the Zaporizhya City Council, as well as the Open Joint-Stock Company Mostobud [MTBD UZ, BUY] , which is the main service provider for this construction contract and for whom this news is particularly POSITIVE.

This is the last required transfer for this project from the 2008 national budget; however, it was delayed. According to the President’s press service, the cost of constructing these bridges has risen from UAH 1.9 bln to UAH 4.8-5.2 bln due to lack of financing for these works. As a result, the Zaporizhia City Council predicts the suspension of works from 2009 due to shortfall of funding. This will also likely impact on the ability of Mostobud to timely complete its contract responsibilities and consequently, further drive up the costs associated with this project.

Mostobud holds a dominant market position in Ukrainian bridge construction, with a market share above 80% and has also recently taken up other construction activities that are more profitable than bridge construction. Pre-Euro 2012 projects will boost the company’s net sales by 80%, implying a CAGR of 37%. Mostobud’s order volume will be enhanced by USD 3.4 bln over the next five years, increasing the company’s net sales and net margin. After 2012, we expect sales to slow down before a growth at 2% CAGR until 2018, supported by planned expansion abroad.

As far as the crisis is strongly affecting the construction sector in terms of freezing existing projects and limiting the commencement of new ones, we are putting MTBD shares under review. We will keep investors informed about the developments regarding this company as they unfold.

For an in-depth analysis of Mostobud, see our 8-page report “Mostobud – the winner of Euro 2012” of June 5, 2008. For more information, please contact the Head of International Sales, Constantine Lisnychyy at +38 050 310 0819, lisnychyy@sokrat.kiev.ua

The Ministry of Regional Development and Construction is planning to implement mandatory protection for cement producers from gas and electricity price increases. This mandatory protection is made in order to protect the real estate market from an increase in the prices of construction materials.

Along with this gas price increase protection, the Ministry of Regional Development and Construction is planning to develop a project aimed at increasing the number of excavation sites used in order to produce construction materials. The procedure to obtain a license for the usage of such pits are going to be eased.

A number of agreements between real estate companies, construction material manufacturers and the state were signed in order to prevent the construction and real estate market from collapse.

In October 2008, cement output decreased by 10.1% YoY, down to the level of 1.291 mln metric tons.

Our view:We believe that if the measures for establishing a gas price ceiling for local cement producers will be implemented, this could really improve the current situation on the cement and real estate market. Moreover, cement producers and real estate developers agreed to decrease profit margins to 15%.

Currently the state and large construction market companies are looking to cooperate in order to protect the market. Earlier, the real estate market was boosted by mortgage loans. Now, mortgage interest rates have significantly skyrocketed from 15.7% (Apr 2008) to an average of 23.2% in UAH and from 11.7% to 17.5% in USD. One-third of construction projects in Kyiv have subsequently been frozen. Companies are looking to refinance those projects having a high level of readiness (with most of the work already having been completed). Banks are, at this point, not helping out with respect to the lack of liquidity.

The gas price remains critical under the current conditions. Energy expenses account for 60% of cement costs. We expect that the gas price could rise from the current 179.5 to 280-300 or even 400 in a worst-case scenario. In that case, cement manufacturers would be forced to increase cement prices. We think this mandatory protection will be included in anti-crisis measures in the draft law on the construction sector. But the question still remains – who will pay for the gap in gas prices?

We think that if the stabilization fund is to be created and will be described in the anti-crisis measures, the Ukrainian Government may use this fund in order to cover the difference in the gas price gap and to refinance current construction projects demonstrating a high level of readiness.

On October 23, shareholders of the Eurocement Group Ukraine (Kyiv) will gather for an Extraordinary General Meeting, at which participants will consider the sale of more than 50% of the company’s property.

The meeting of Eurocement Group Ukraine, originally scheduled for November 24, has been bumped up by nearly an entire month. According to Interfax-Ukraine, publicly-released company reports had earlier indicated that a number of issues up for discussion were listed on the agendas for Balcem’s EGM, originally scheduled for December 21, and the EGM for the Kramatorsk ‘Pushka’ Cement Plant, originally scheduled for December 22.

The Eurocement Group Ukraine includes the OJSC Balcem, based in the Kharkiv Region, and the OSJC Kramatorsk ‘Pushka’ Cement Plant [KRCS UZ, U/R], which is based in the Donetsk Region. While KRCS stock is regularly traded on the PFTS, the Balcem’s stock is not currently listed, as it was removed from the PFTS listing in 2006; however, recent market rumors say that the stock might be relisted on the PFTS in the near future.

Other topics up for discussion at that time include renaming the post of director and changing the company`s business address, according to a statement the company had issued to Interfax-Ukraine. Apparently, the meeting’s agenda also includes the approval of changes to the company`s statute, as well as providing powers to the Directors’ Generals of the respective companies to sign agreements.

The joint production capacities of the Balcem Company and Kramatorsk “Pushka” are 5 mln metric tons of cement per annum. The Eurocement Group Ukraine ranks third among domestic producers of cement in Ukraine.

The Eurocement Group Ukraine commenced operation in June 2005. It is a subsidiary of the Russian holding OJSC Eurocement Group, which produces and sells cement and unites 16 enterprises in Russia, Ukraine, and Uzbekistan. It has an annual total output capacity of 35 mln metric tons, making it the region’s biggest producer with a 40 percent share of the Russian cement market. Earlier in 2008, the Cyprus-based Galaks Holdings Limited bought the controlling stake in the OJSC Eurocement Group Ukraine. The current ownership of the two comprising companies are broken down as follows: 99.17% Galaks, 0.83% freefloat (for Balcem); and 92.86% Galaks, 7.14% freefloat (for Kramatorsk ‘Pushka’). It is unclear who controls Galaks Holding Limited.

Our view:We view this as NEGATIVE for minority shareholders. We have been trying to obtain any comments from the Eurocement Group’s central office in Moscow. The Head of the company’s Press Center, Elena Rudovska, strongly refused to comment on the possible asset stripping of over 50% of the company’s assets.

The Eurocement Group has performed a lot of minority shareholder squeezes in Russia and we believe that it might also happen in Ukraine. Moreover, the agenda for this approaching EGM indicates that the General Director of the Company will be authorized to sign a number of connected Agreements for a sum that exceeds 50% of the Company`s property, in addition to Specifications, Transfer-Acceptance Acts and Additional Agreements that grant him the right to individually define the order and term of cash settlements on behalf of the Company.

Watch out for our upcoming report on the JSC Balcem and the Kramatorsk “Pushka” Cement Plant. For a better understanding of the construction market in Ukraine, see our November 4 flash note “Volyn-Cement: Fortified Enough to Withstand Crisis” and our 22-page company overview “Volyn-Cement: from Wet to Dry” of July 14, 2008.