Business Monitor International

1
(No Transcript)
2
Reaching Out To Emerging Markets Do The
Opportunities Warrant The Business
Risk? Wednesday 7th March 2007
Terry Alexander Head of Capital Markets and
Country Risk Nick Jotischky Head of Industry
Research Matt Brooks Head of Energy
Research Lyndsey Anderson Head of Food Drink
Research Business Monitor International
3
Opportunities Are Out There

• The opportunities do warrant the business risk
• Growing importance of EM in the global economy
• Dramatic increase in EM forex reserves

A Growing Share BRICs Percentage of Global GDP
A Growing Share BRICs Share of Global Forex
Reserves
4
Frontier Economies Making An Entrance
The Worlds Fastest Growing Economies Real GDP
Growth, chg y-o-y

• Fastest growing economies in 2008
• Only two are BRICs economies
• Emerging EM economies are fast playing catch up

5
Investment Having An Impact
Capital Investment Counts Real GDP Growth and
Capital Formation ( chg y-o-y)

• Gross fixed capital formation (GFCF) is driving
  growth.
• Economies which grew by more than 8.0 in 2005
  experienced average levels of GFCF over 2000-2005
  in excess of 8.0, and averaging 22.8.

6
Infrastructure Is key

• Investment in infrastructure and productive goods
  is fundamental to driving economic growth in
  industrialising countries.
• High levels of GFCF are associated with strong
  growth in most of these fastest growing
  economies.

7
The Return Of Volatility

• China sell-off triggers global markets
  volatility, as reflected by VIX index.
• Index spikes significantly during financial
  market and economic turbulence
• VIX has moved from all-time lows to a nine-month
  high amidst current equity market declines.

8
Riding The Coat-tails of the US

• As US equities rise so do EM bond prices
• Higher US stocks reflects a buoyant US economy,
  important for EM
• Correlation of VIX index to rally in emerging
  markets assets over past four years

9
Weaker emerging markets growth ahead?

• Are equity declines a precursor to slower US and
  Chinese growth?
• If so, this would hit commodity prices and by
  consequence, EM assets and EM economic
  performance.
• Risks outlined in BMI special report of January
  2007 - Caveat Emptor

10
Unwinding of Speculative Positions

• BMI conclusion slight slowdown in Chinese growth
  and soft landing for US economy will not derail
  EM economic activity
• Current market moves are more of an unwinding of
  speculative excesses than a sign of severe global
  economic downturn

11
No Real Change In Fundamentals

• A re-pricing of the convergence trade
• Improved fundamentals assisted by globalisation
• The rapid growth of globalisation has allowed for
  an improvement of the growth dynamics of many
  emerging countries predominantly China

12
EM Governments Capitalising on Good Times
An Impressive Turnaround Brazil Public External
Debt ( of GDP)

• At the same time, EM governments have become more
  fiscally astute
• They have become more proactive with regards to
  debt management

13
The Perfect Balance

• Strong growth in EM economies has been
  accompanied by low inflation
• This has been due not only to the China effect,
  but also to inflation-targeting by EM central
  banks, allowing for lower interest rates across
  EM

Selected Emerging Markets CPI, chg y-o-y
14
Favourable Global Conditions

• Commodities can fall further from current levels,
  but still high historically, acting as a positive
  influence on emerging economies

CRB Commodity Index, 2000-2007
15
Reduced Vulnerabilities

• External positions, fiscal dynamics and forex
  reserve levels have improved dramatically
• Floating currencies except in the Middle East
  and rapidly developing capital markets should
  also cushion future problems

Selected EMs Forex Reserves (USbn)
16
Rewards In The Ratings

• This has caused rating agencies to up their
  credit ratings towards EM.
• This in turn has fuelled increased investment
  into EM, both FDI and portfolio, improving
  capital accounts

17
Medium-term Positives

• But overall, significant improvement to
  underlying EM macro fundamentals
• Despite headwinds, much greater participation of
  EM in global economy going forward

EM Private Equity/Venture Capital Fundraising
(USmn)
18
Food For Thought

• In US terms, the income of the middle 60 of
  earners will rise by 93 in China, 89 in Russia,
  55 in India and by 16 in Brazil by 2010.
• Huge implications for consumer goods, banking and
  insurance industries, property and commodities.

Average Disposable Income of Middle 60 of
Population in BRICs, US
Average Disposable Income of Middle 60 of
Population in China, US
19
Global Emerging Telecommunications Markets Nick
Jotischky
20
Global Telecommunications Markets - The BMI Angle
Global Telecommunications Markets - The BMI Angle
BMI Telecommunications Coverage Why the Emerging
Markets Bias?
Source Business Monitor International Forecasts
21
Global Telecommunications Markets - The Need For
Mobile Telephony
Mobile Telephony As An Aid To Emerging Markets
Development

• Universal Access
• 2.7bn global mobile subscribers - Where is the
  next billion coming from?
• Mobile networks cover 80 of world population by
  2010 this will be 90
• Global mobile penetration of 40 - in most
  African countries, this is below 10
• Mobile Substitution - fixed line telephony is an
  irrelevance in many Asian/African countries
• Growth of m-commerce
• About 10 of Philippine mobile subscribers make
  financial transactions via mobile handset
• Birth of m-banking services (India, Kenya)
  providing opportunities for banks and operators
• Micro finance Projects
• 260,000 Village operators in 50,000 villages in
  Bangladesh - GrameenPhone Village Project

22
High-Growth Telecommunications Markets - Low
Penetrations
Key Investor Opportunities Asia Still Offers
Greatest Potential
23
High-Growth Telecommunications Markets - Mobile
Substitution
The Factors Behind Growth and Why it is Set to
Continue

• Rise in Consumer Interest
• In rural areas of India or Uganda, voice becomes
  the killer app
• Rise of Non-Voice services - SMS, m-Commerce,
  mobile broadband services
• Government Investment Programmes
• USO Funds originally launched for fixed line
  telephony switched to mobile
• National Plans to raise penetration levels in
  mobile telephony
• Pakistan governments approach to inward
  investment
• The Impact Of Competition
• Introduction of Mobile Number Portability Schemes
  giving consumers more flexibility
• Aggressive promotional strategies (Philippines,
  Thailand, Indonesia) on prepaid service
• Raises service levels in climate where only those
  who invest survive (Pakistan, Bangladesh)

24
Asia Telecommunications Markets - A New Wave Of
Investor
Growing Significance Of The Regional Carrier,
Domestic Vendor and Equity Funds

• The Regional Powerhouse
• SingTel/Telekom Malaysia Diversifying from
  saturated domestic markets
• Telenor/Warid Telecom Investors in regional
  pockets
• Vodafone/Altimo The Partnership Makers
• The Domestic Manufacturer
• Huawei/ZTE Low cost infrastructure and handset
  manufacturers - Developed markets next?
• Nokia/Motorola Transferring RD bases to China
  and India
• The Equity Fund
• Equity Funds Warburg Pincus success from Bharti
  - Providence, ChrysCapital, GLG acquire Idea

25
High Growth Markets - Where Is The Risk? (1)
BMI Monitors Market Opportunities Through
Business Environment Rankings
26
High Growth Markets - Where Is The Risk? (2)
Emerging Market Telecoms Investment Potential No
Pain, No Gain

• Political/Economic Risk
• Thailand AIS still suffering from impact of coup
• Consumer Affordability
• South Asia Is there room for anything more than
  ultra low-cost handsets
• Operator Profits Effects of low ARPU
• Ownership Limits
• SE Asia (Thailand/Malaysia) Is there the
  possibility for majority ownership?
• Regulator Independence/Impact
• Vietnam/Thailand State-run regulator and weak
  regulator dominated by government

27
High-Growth Markets - Is There Life After Mobile
Voice?
Connecting A New Generation of Mobile Technologies

• Growth of Non-Voice Services
• S-E Asia Where penetration is around the 40
  mark, non-voice services bringing in 20 of
  revenues
• 3G Mobile Telephony Licensing Rounds
• 3G Mobile Telephony a failure in Western Europe
  but pockets of resistance in Asia
• Japan/Korea factor is spreading Early signs are
  good in Malaysia and Indonesia
• India/Pakistan/Vietnam What are the chances for
  3G replacement?
• The China Conundrum
• The promise billions of dollars of contracts up
  for offer before Olympic Games
• The reality No news on 3G licensing - will
  TD-SCDMA standard miss its own launch party?

28
Global Telecommunications Forecasts - The BMI
View
A Slowdown in Growth Emerging Technologies and
New Market Opportunities

• Broadband Migration
• Operators increasingly using broadband revenues
  to offset fading fixed line revenues (SE Asia)
• Birth of Mobile broadband services - WiMAX
  auctions
• High-Speed Data Services - Restoring ARPU
• New Market Opportunities
• Slowdown in China, saturation in SE Asia and
  limited growth in Vietnam, Pakistan Where next?
• FSU Central Asia Liberalisation encouraging
  new investment opportunities
• Africa The great unknown? Potential investors
  could learn from Celtel experience

29

• Middle East Infrastructure Opportunities Risks
• Matthew Brooks

30
Context Oil Prices
The New Paradigm Oil Prices, OPEC Basket, US/bbl

• OPEC basket to average US45/bbl to 2011
• Sustained - Asia and MEA led - demand growth.
• Non-OPEC output to rise slowly.
• Structural shift in industry cost base due to
  strong EP activity especially in marginal
  areas.

Source Reuters
31
Gulf Economies The Windfall
The Changing Picture Aggregate Gulf Economic Data

• Rapid (6) economic growth
• Gulf nominal GDP doubled 1998-2006. 50 rise to
  2011
• Gulf economy now roughly equivalent to Russian
  and Spain
• Strong intra-regional capital flows
• Rising imports of capital goods

Source BMI
32
Infrastructure The Existing Deficit
Gradual Electricity Growth Power Generation

• Electricity generation up 49 1998-2005
• Dubai power demand rising at 15 pa
• Kuwait brownout/blackouts in 2006/7
• IMF estimates US700bn projects pending
• Potable water, electricity, transport

Source BP Statistical Review of World Energy,
June 2006
33
Diversification The Key Challenge
Leading The Pack Economic Diversification

• Energy sector investment oil gas (LNG)
  capacity expansion
• Downstream refining, Gas-to-Liquids, chemicals
• Non-energy
• Energy Intensive petrochems (SABIC), industry
• Non-Energy Intensive - tourism, finance expansion

34
Infrastructure Selection of Projects
35
Managing The Boom

• Availability and cost of raw materials
• Limited spare capacity within construction
  industry no. of companies/trained workers
• Evolution of contract structure
• Partial privatisation of service provision
• Synergistic evolution of regional banking sector

Pushing Up Costs Capital Investment, of GDP
Source IMF, National Statistical Agencies
36
Future Risks

• Short Term
• Profit margins and project cancellation.
• Long Term
• Oil prices
• An Iraqi peace dividend?
• Higher global interest rates?
• True diversification
• Darwinian expansion three financial hubs

Structural, or Cyclical? Oil Price Index (2000
100)
Source IMF
37
The Beer Industry and The Commonwealth Of
Independent States Lyndsey Anderson
38
The Missed Opportunity?

• Russia 9th largest alcohol market, 13th largest
  beer market
• Double-digit annual growth to 2005, now tapering
  off
• 6 companies control 89 of the market
• FDI Heineken paid US560mn for brewer with 4.5
  market share

39
The Missed Opportunity?
The Option Of Late Entry?

• Is it worth it?
• Premiumisation
• Culture for Consumption
• Dynamism
• Russian beer on the road
• The Siberia option
• No
• Consolidation cost of acquisitions
• Wealthiest cities saturated
• Distribution challenges
• Regulatory interference

40
The Closing Window
Ukraine

• Double-digit value and volume sales growth over
  review period
• Standard-priced, local beers dominate
• Beer Industry houses around 100 players
• Four companies dominate
• 2 MNCs InBev, BBN
• 2 Locals Obolon, Sarmat

41
The Closing Window?
Ukraine Opportunities And Risks

• Is it worth it?
• Double-digit growth to 2011, followed by
  premiumisation
• Independents remain
• Dynamism
• Fast-growing middle class
• If you move fast
• Consolidation underway
• Regulations likely

42
The Next Big Thing?
Kazakhstan?

• Opportunities
• Regions best-performing economy
• Government commitment to diversification
• Strong multinational presence has led to
  establishment of industry best practices
• Risks
• History of state intervention
• Large Muslim population, restricts potential
  audience

43
The Next Big Thing?
Moldova?

• Opportunities
• Culture for Consumption
• Historic growth of 20 annually, set to continue
  at 11
• Multinational investment aided industry dynamism
• Risks
• Efes domination, controls 70 of the market
• Spiralling inflation
• Low disposable incomes
• Small population

Source BMI Research, Trade Press
44
The Next Big Thing?
Belarus

• Fragmented beer industry
• Minimal multinational involvement
• Small industry, which struggles for price
  competitiveness
• Ban on cheaper, higher-quality Russian imports
  now removed
• BBH, SABMiller, Efes and Heineken all thought to
  be interested

45
The Next Big Thing?
Belarus

• Opportunities
• Government targeting foreign direct investment
• Fragmented industry, acquisition targets
  available
• High single-digit annual growth
• Fashionable among females
• Strict counterfeiting laws
• Risks
• State intervention
• Local industry threatened by cheap Russian
  exports

46
With Greater Opportunity, Comes Greater Risk

• Opportunities
• For the most part, immature markets
• Existing interest, even where quality is low
• Energy-dependent governments seeking
  diversification
• Common economic space simplifies taxation,
  customs issues
• Risks
• Poor infrastructure
• State interference in business
• Limited premiumisation opportunities
• Inflation threatens affordability
• Border disputes create some security issues and
  tensions

47
(No Transcript)