0. Russia-2011: Narrowing the EM gap
21 April 2017
Russia-2011: Narrowing the EM gap
March 2011
All prices are those current at the end of the previous trading session unless otherwise indicated. Prices are sourced from local exchanges via Reuters, Bloomberg and other vendors. Data is sourced from Deutsche Bank and subject companies. Deutsche Bank does and seeks to do business with companies covered in its research reports. Thus, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. DISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED IN APPENDIX 1. MICA(P) 007/05/2010

1. I. Global factors: economy and equities1 1

2. Sovereign debt problems in the medium term
The US and many other advanced economies appear to be on unsustainable fiscal trajectories, with projected increases in debt-to-GDP ratios over the next 30 years driven by a combination of unfavorable initial conditions (debt and deficit levels), prospective substantial increases in age-related spending growth, and unfavorable interest rate-to-GDP differentials. Even with a freeze in age-related spending as a share of GDP, the debt ratios in many countries, including the US, would rise under current policies. 2

3. US Equity Outlook: buy on growth
Our RTS Index target of is in line with our S&P 500 end-2011 target and the current beta of 1.2x vs the US equity market
Our US equity strategists expect S&P500 at 1,550 (16.4x P/E) by the end-2011, +20% upside from current levels
Sales increasingly the driver of strong earnings growth 3

4. Economy and oil
A 20% increase in oil prices should still leave US economic expansion in place with growth rates above consensus
US equities are negatively correlated with oil prices. While oil prices go up and S&P goes down, Russia’s potential from rising oil price gains is limited
Once MENA risks subside, oil prices will go down, S&P will go up – in such cases Russia comes under selling pressure given its susceptibility to the oil price factor, but the rising global markets provide a cushion and limit Russia’s declines notably.
OPEC is ready to to compensate any oil supply shortages from Lybia and Algeria, while Gazprom is already compensating Italy its lost gas supplies from Lybia 4

5. Inflation in EM Asia and interest rates
There is a strong concern that the inflation in EM Asia (China in particular), will lead the monetary authorities to raise rates, which will put pressure on commodities and, eventually, Russian equities
However, inflation in the EM Asia is largely driven by (global) food prices, while core inflation is not a major concern. Monetary policy will not be effective in combating food prices
History suggests we should not expect much of a policy response at all to higher inflation 5

6. II. Global factors: commodities and FX6 6

7. Oil vs the dollar
Source: Bloomberg Finance LP, Deutsche Bank Global Markets Research
Historically, oil prices are strongly correlated with USD. A devaluation of USD is associated with stronger nominal oil prices, and vice versa.
However, throughout the 2010 wave of USD appreciation the oil price decoupled and remained relatively stable 7

8. Euro: signs of life most recently
Source: Bloomberg Finance LP, Deutsche Bank Global Markets Research
With the exacerbation of sovereign debt risks in Europe, EUR dropped below 1.2…
… however it peaked above 1.4 in late 2010, which was followed by a slide down to 1.3 due to new concerns of sovereign debt risks in Europe
DB forecasts EUR rate at 1.3 at end-2011 8

9. III. Russia‘s economy 9 9

10. GDP growth: coming out of crisis
Source: Rosstat, Deutsche Bank Global Markets Research
Russia posted one of the largest GDP declines during crisis and economy is increasingly recovering since 2Q09
By 2Q10 Russia has formally exited from crisis, posting 2 quarters of growth slightly slowing down in Q3. The most recent estimates made by Rosstat suggest a 4% real GDP growth in 2010, which is in line with our projections and implies a 4.9% real growth in Q4 2010
We project GDP growth at 5.4% in 2011 and 5.5% in 2012 10

11. Economic indicators: recovery driven by consumption
Source: Rosstat, Deutsche Bank Global Markets Research
By the beginning of 2010 all key economic indicators returned into YoY positive zone
By the end of 2010 the recovery shifted from consumption to investment, but we continue to see consumption as a major driver of economic growth
Agriculture contributed largely to the 3Q 2010 slowdown 11

12. A consumer driven recovery
Deutsche Bank
A consumer driven recovery
Lower inflation
Rouble appreciation, particularly versus the Euro
A saving reservoir preserved in the course of the gradual devaluation
Rapid decline in unemployment
Budget spending prioritizes the social sphere and hence household consumption
Interaction of political and economic cycle to continue to favor current outlays
Cash-for-clunkers program extended
Lower interest rates and a recovery in consumer lending
Regulated tariff increases for households contained
The return of the migrants from the near abroad 12

13. Unemployment and hidden unemployment
Source: Rosstat, Deutsche Bank Global Markets Research
Unemployment dropped notably throughout 2010 bottoming at 6.7% in October
Most recently, it started a seasonal rise reaching 7.6% in January
Unemployment statistics in Russia does not take into account the actual amount of idle workforce – those working part-time or on admin leave
During the crisis the share of part-time workers and those on admin leave peaked to 1.5% and 0.8% of employed, respectively 13

14. Russian exports and imports growth, % YoY
Both exports and imports have recovered as well, with growth in imports outpacing the growth in exports starting from 2H 2010
Source: Rosstat, Ministry of economy, Deutsche Bank Global Markets Research 14

15. Current account vs budget deficit, % GDP, 2009
Source: IMF 15

16. S&P ratings vs CDS spreads, bp, 2009
Deutsche Bank
S&P ratings vs CDS spreads, bp, 2009
Source: Standard & Poor’s, Bloomberg Finance LP, Deutsche Bank Global Markets Research 16

17. External debt, USD bn
Source: CBR, Deutsche Bank Global Markets Research
Corporate external debt remains a risk factor for Russia…
… with state debt starting to rise as well on the back of the fiscal deficits 17

18. Debt repayment schedule, USD bn
Source: CBR, Deutsche Bank Global Markets Research 18

19. Non-oil budget deficit at nearly 15% of GDP in 2009
Source: Economic Expert Group, Deutsche Bank Global Markets Research 19

20. Government assets for sale
Source: Vedomosti, Bloomberg Finance LP, Deutsche Bank Global Markets Research
Government plans to step up privatization in the coming 3-5 years
Government plans to extract up to USD50bn from the sale of assets
Proceeds are expected to be used for financing the budget deficit 20

21. Reserve Fund and National-Well-Being Fund
At the peak the size of the two oil funds amounted to USD220bn
Currently funds were reduced to around USD120 bn
Source: Ministry of Finance of the Russian Federation, Deutsche Bank Global Markets Research
Finance Minister Alexei Kudrin recently stated that Russia will pursue a policy of preserving the Reserve fund
At the start of 2010 the government planned to finance the budget deficit by means of the Reserve fund reducing it to about USD10bn over the year, but due to more favourable conditions than initially projected, the Fund ended 2010 at about USD25bn (USD15bn was spent to finance the budget deficit in December) 21

22. Pro-cyclical fiscal policy22

23. The new electoral cycle starts in 2011
Source: Economic Expert Group, Deutsche Bank Global Markets Research 23

24. Expenditures on key international infrastructure projects, RUR bn
Sochi 2014 is the key project for Russia in the medium term
Another infrastructural “hot spot” is the Far East (one of the most depressed regions in Russia currently)
Source: Russian Authorities, Deutsche Bank Global Markets Research 24

25. CBR reserves recovered by USD100bn already
Source: CBR, Deutsche Bank Global Markets Research
CBR reserves recovered by more than USD110bn since the bottom of the crisis peaking above USD500bn…
…Due to recent euro weakness the reserves dynamics was not strong in the second half of 2010, but we expect them to continue their recovery 25

26. Foreign direct investment into Russia
Source: CBR, Deutsche Bank Global Markets Research 26

27. Net capital inflows, $ bn vs RTS Index
Source: Bloomberg Finance L. P., CBR, Deutsche Bank Global Markets Research
Q showed an unexpected amount of capital flight from Russia (an outflow of almost USD23bn
The outflow came despite favourable oil prices (USD83.5/bbl on average for Brent) and did not stop the RTS Index from gaining 17% over the quarter 27

28. Inflation in Russia is a monetary phenomenon
Source: CBR, Rosstat, Deutsche Bank Global Markets Research 28

29. Liquidity and interest rates
Source: CBR, Deutsche Bank Global Markets Research
Low Interbank interest rates are coming on the back of excess liquidity in the system
Starting from the first quarter of 2009 they declined towards the current value of 2-3%
Most recently the CBR raised credit and deposit rates effective from 28 February 29

30. Inflation vs refinancing rate: bottoming out
After 13.3% in 2008, Russian inflation dropped to 5.5% YoY as of July 2010
Since 1Q09 CBR reduced the refinancing rate from 13% to 7.75%
Inflation started to recover reaching 9.6% YoY by the end of January 2011….
Most recently the CBR raised refinancing rate by 25 bp to 8%, and deposit rate by 50bp to 3%
Source: CBR, Rosstat, Deutsche Bank Global Markets Research 30

31. Loans growth, pp
Source: CBR, Deutsche Bank Global Markets Research
Before the crisis, lending to both corporates and households was steadily expanding
During the crisis lending to households contracted while the corporate sector was flat 31

32. Capacity utilization rates are recovering
Capacity utilization is currently below its pre-crisis level albeit breaking through the moving average as well as the 9-year average on the upside 32

33. Basket/Rouble exchange rate and Urals price, USD/bbl
Source: CBR, Deutsche Bank Global Markets Research
The recent strength in oil prices suggests further rouble appreciation
One of the factors of the rouble weakness, which is now gone, was the weak euro
We forecast USD/rouble rate at 28.0 at end-2010 and 27.8 at end-2011 (31.8 and 30.9 for the basket) 33

34. Politics: Margin of support for Putin, Medvedev remains stable
According to the recent polls the popularity ratings of Putin and Medvedev remain around 70%
The gap between leaders this year approached its all-time low of 1pp in October but broadened in the most recent polls 34

35. Politics: elections to support the equity market
It is common for the Russian equity market, as well as the US equity market, to reveal strong trends before the presidential elections
Given that 2012 elections are scheduled to take place in 1Q, we expect this factor to be one of the driver for the equities already in 2H11
Source: Bloomberg Finance LP, Deutsche Bank Global Markets Research 35

36. Politics: stronger rouble coming from the electoral cycle
Two previous electoral cycles were characterized by rouble’s appreciation vs the US dollar
We expect the electoral cycle to be one of the positive factors for the rouble
Source: Bloomberg Finance LP, Deutsche Bank Global Markets Research 36

37. Russia’s diarchy in the making
Medvedev as President:
Liberal credentials, no ties with the hardliners
Loyalty to Putin
Looks to forging ties with Europe
Putin as Russia’s Prime Minister:
The most popular Prime Minister in Russia’s history
Has a keen interest in the pursuit of the Asian model
Looks at Asia as a promising venue for expanding energy supplies/cooperation
Considers Asia as a counterbalance to Europe/West 37

38. Number of bureaucrats
Source: Rosstat, Deutsche Bank Global Markets Research
Number of bureaucrats was rising at a pace of 4.5% per year throughout …
… and stays now at all-time-high levels 38

39. Doing Business in Russia
The World bank and IFC made joint project on evaluating easiness of doing business in Russia
In 2011 vs 2010 doing business became more difficult with the major deterioration in registering property and closing a business
Survey comprises 183 countries
Source: World Bank, IFC, Deutsche Bank Global Markets Research 39 39

40. Best and worst regions to do business in Russia
Variations across cities show potential to learn from the existing local best practices
Source: World Bank, IFC, Deutsche Bank Global Markets Research 40 40

41. IV. Russia‘s market: current issues41 41

42. Russian market vs other assets YTD performance
Russian equities outperformed the international equity markets, Brent and Nickel showed the best performance in 2011
Source: Bloomberg Finance LP, Deutsche Bank Global Markets Research 42

43. Russian market 2011 sectoral performance
Oil & gas was the best sector YTD in Russia
Consumer goods & were flat after an impressive 83% gain in 2010
Electric utilities show marginally negative returns despite the upside potential seen in the names
Source: Bloomberg Finance LP, Deutsche Bank Global Markets Research
Key sector drivers:
Oil & gas, metals & mining: Strong commodity prices
Consumer goods & retail: Rising consumer confidence
Industrials, metals & mining: Economic recovery in manufacturing and construction
Electric utilities: Power market liberalization
Telecoms: Strong growth in regional telecoms ahead of Svyazinvest restructuring 43

44. Russian exporters: relative performance to market
Oil & gas has been underperforming the RTS Index for two consecutive years
At the same time, the second major exporting sector (metals & mining) has been outperforming the RTS Index during this period
Source: Bloomberg Finance LP, Deutsche Bank Global Markets Research 44

45. Large caps catching up
MICEX Index Large Cap / Small Cap ratio is revealing 1.5+ year downward trend…
… which continued following 3-months of recovery of large caps vs small caps in Q
The recent stock market rally narrowed the gap, but did not close it
Source: Bloomberg Finance LP, Deutsche Bank Global Markets Research
Drivers for a catch-up play in blue chips in 2011:
30-35pp gap in the large-small cap performance
Continuing flow of funds into Russia 45

46. Russia’s 2011 performance vs EM countries
Source: Bloomberg Finance LP, Deutsche Bank Global Markets Research
After catching up with the the EM in late 2010, Russia is the top-2 performing market in 2011.
We see further scope for Russia’s catch-up vs EM given longer-term past underperformance 46

47. Russia’s performance relative to MSCI EM
Source: Bloomberg Finance LP, Deutsche Bank Global Markets Research
Until the end of April Russia’s market was outperforming EM by 5-7pp on a YTD horizon
May-June sell-off pushed Russia back to 4pp YTD underperformance vs EM with a return to tie in the end of July followed by Russia lagging EM by 7pp
Due to the year-end rally, Russia managed to catch up with EM by the end of 2010
In 2011 Russia performs stronger that the EM mainly due to high oil prices 47

48. RTS Index drivers
Source: Bloomberg Finance LP, Deutsche Bank Global Markets Research
The correlation of the RTS Index vs global factors stays around its historical highs:
76% vs S&P500, proving US market being the key driver for the Russia’s equities
72% vs oil prices – up from 61% on average in 2010
63% vs the rouble rate
Another important factor, the euro rate, is becoming less important (40% correlation) for the Russian equities 48

49. Seasonality in RTS Index
March-April are among the seasonally strongest months for the Russian equity market
The RTS Index showed strong returns in January despite its seasonally weak nature on the basis of strong oil prices and the QE2 effect
February, a seasonally stronger month, showed weaker returns due to the Chinese monetary tightening and the global contraction in risk-appetite
Source: Bloomberg Finance LP, Deutsche Bank Global Markets Research 49

50. V. Russia‘s equities and valuation50 50

51. The discount of Russia’s P/E to EM
Russia historically trades with a 33% long-term average discount to EM
In most cases the discount fluctuates within 1S.D. from the LT average
Currently the discount is below average - this creates room for Russia to further outperform EM
Source: Bloomberg Finance LP, Deutsche Bank Global Markets Research 51

52. Relative valuation of Russia vs other countries
On a 12M forward-looking P/E basis Russia is one of the cheapest markets in the EM space - trades at 6.9x (8.1x without Gazprom), while EM at 10.3 and BRIC at 9.9x
Russia’s 2011E-2012E eps growth rate (23%; 25% without Gazprom) is larger than the GEM average (21%)
Source: Bloomberg Finance LP, Deutsche Bank Global Markets Research 52

53. Valuation dichotomy between sectors
Source: Bloomberg Finance LP, Deutsche Bank Global Markets Research
Recovery was not the same for different sectors
Retail trades around pre-crisis multiples
Oil & gas names, especially Gazprom, are trading well below
The recent strong performance of energy names vs consumer stocks narrowed the valuation premium of the latter, but there is still scope for outperformance for oil & gas vs retail 53

54. Relative valuation of Russian sectors vs GEM
While Russian Energy is undervalued, that cannot be said about consumer stocks
Source: Bloomberg Finance LP, Deutsche Bank Global Markets Research 54

55. RTS Index end-2011 Target of 2,300
Source: Bloomberg Finance LP, Deutsche Bank Global Markets Research
For the end of this year our new RTS target is 2,300
The closing rally of 2010 as well as the opening rally of 2011 support our projections 55

56. MSCI Index rebalancing
The MSCI Russia Index currently has 29 constituents
Buying the stocks to be included into MSCI Russia (and selling those to be excluded) before the official announcement might lead to significant returns
Another trading strategy is to sell (buy) the stocks mistakenly taken by the market as inclusion (exclusion) targets
Therefore, it is important to be able to predict the changes MSCI is going to make
Trading opportunities still exist after the announcement, because index funds will be rebalanced only after the changes take effect (typically 2-3 weeks later)
In May, we might see Rusal and Holding MRSK included and OGK-4 excluded from the MSCI Russia Index 56

57. Russia’s dividend plays (1/2)
Dividend yield gap between Russia and EM is narrowing, but still substantial (30%)
Dividend factor will be one of the key market drivers in the next several months and may feature safer plays amidst the increased volatility in global markets
Q1 is the best time to invest in dividend stocks – seasonal patterns suggest the biggest outperformance vs the market in Q1 57

58. Russia’s dividend plays (2/2)
Other features pointing on good investment opportunities: fundamental upside, liquidity, presence of pref shares, large cap status and growth
Basket: Sberbank Rusal, Evraz, Gazprom, LUKoil, MMK, MTS, Norilsk Nickel, Surgutneftegaz, Tatneft, TNK-BP, X5, Bashneft, Gazpromneft, Kazmunai Gas 58

59. Key drivers of our year-end target
Our positive view on Russian equities is reinforced by the following factors:
(i) Weak relative performance: While performing in line in 2010 and stronger than EM in 2011 so far, the Russian equity market still underperforms EM on longer horizons, given heavier losses during the crisis
(ii) Cheap valuation: Russia trades at a 7.4x 12M forward P/E, which is one of the cheapest in the EM space. At the same time, Russia offers a E EPS CAGR of 43%, which is the largest in EM;
(iii) Strong performance of global markets: Our US strategists believe in strong 2011 performance of the US market, which would be driven by both economic and corporate recovery. Deutsche Bank’s S&P year-end target of 1,550 offers 20% upside potential – fully in line with our 2011 RTS target of 2,300 given the current beta of 1.2x
(iv) Further mitigation of risks regarding the situation in Europe, and recovery of the European currency;
(v) Russia enters the electoral cycle, which will support the rouble and the equity market
We recommend focusing on blue chip names, which have been substantially underperforming second-tier names for more than 2 years.
In terms of sectors, we highlight oil & gas and financials – the weakest performers of 2010 which, in our opinion, have scope for catch-up with the market 59

60. Drivers at the macro level:
Fiscal spending to boost consumption
High oil prices: Deutsche Bank projects USD97/bbl for Brent in 2011 and USD98/bbl in 2012 with oil recently peaking above USD100/bbl
Rouble appreciation
Greater capital inflows/ investor interest, FDI
Recovery in construction
WTO accession
Sovereign issuance and credit rating upgrades
Monetary policy targeting positive real interest rates
Lending growth
Increase in dividend payouts
Privatization, M&A and IPOs picking up
Administrative reforms
The return of the Russian investor base
Increased use of RDRs by Russian corporates 60

61. Risks:
Unstable tax regime (unified social tax, export duties on oil products)
Domestic political risks
Greater pressure from domestic opposition generating hardline pressures that may harm investment climate
Potential terrorist risks in the Caucasus
Significant changes in the Kremlin (Putin deciding to step down)
Political elite becoming too “defensive” with the onset of a new electoral cycle
Risks for the global economy
Further mounting of the European sovereign debt crisis
Negative effects for capital inflows into Russia, given strong investment and trade links with EU
High corporate debt burden
Excessive fiscal spending renders Russia more sensitive to oil price fluctuations
Corporate governance still a problem: corporate conflicts in Norilsk Nickel, treatment of minorities in MTS/Comstar deal
Further increase in inflation 61

62. Assumptions of our RTS Target
We target the RFR for Russian equities at 5.5%,ERP at 6% and CoE at 11.5%
A 1pp move in ROE leads to around a points change in our RTS target
Source: Bloomberg Finance LP, Deutsche Bank Global Markets Research 62

63. VI. Top picks 63 63

64. Top picks by sectors Oil & gas: gas – Gazprom; oil – Rosneft, LUKoil
Metals & Mining: Norilsk Nickel and Polymetal
Real Estate: PIK, LSR
Banks: Sberbank
Telecoms: MTS
Consumer goods & Retail: Pharmstandard, X5 Retail Group, Dixy
Source: Deutsche Bank Global Markets Research estimates 64 64

65. Oil – Rosneft and LUKoil
Rosneft offers a good combination of attractive valuation and production growth
Rosneft underperformed LUKoil by 15pp in 2010, outperformed by 7pp in 2011
LUKoil, in turn, stayed flat in 2011 while the RTS Index added 23% (added 25% while RTS gained 11% in 2011)
LUKoil is trading at extremely cheap valuations –4x 2011 P/E
DB is above consensus for 2011E earnings given our high oil price projection of USD101/bbl

66. Taxation – current issues and newsflow
Export duties and mineral extraction taxes account for 65-70% of costs
The average marginal tax rate for Russian VICs is ~75%:
~90% in the crude exports segment
~55% in the refined product exports segment
~45% in the sales of domestic refined products segment
Tax concessions:
Differentiation of the mineral extraction tax: tax discounts of up to 70% for fields with more than 80% depletion (in effect from 1 January 2007)
Tax holidays of years or until cumulative production reaches 25m tonnes for new fields in Eastern Siberia (in effect from 1 January 2009)
Export duty holidays for oil exports from East Siberia fields; we incorporate holidays for 1H10 only, reduced export duty from 2H10E
Single export duty for heavy and light products at 60% level in 2013:
LUKoil is one of the main potential beneficiaries
Smaller effect on Rosneft as it is behind in refinery upgrades
Introduction of Excess Profit Tax (EPT)/supplementary tax:
First proposal by end of 1Q11
Likely to be applied to new projects
Likely to come into effect in

67. Taxation – recent proposals
upstream vs. downstream
The government may shift the tax burden from the upstream to downstream, making upstream projects more attractive. Today, taxes in the downstream are smaller than those in the upstream.
The maximum rate of crude oil export duty may fall from 65% to 60%. This would positively impact net-backs in crude oil exports and domestic crude oil sales.
Simultaneously, export duties on refined products may increase to 66% of crude oil export duties from the currently approved 60% level.
We assume Russian oil companies would find more upstream projects value-accretive and make a bigger number of positive FIDs as a result of the tax changes.
The bigger upstream tax base is to compensate for the potential losses in the Russian budget that may be incurred as a result of the reduction in the crude oil export duty rate.
For the new fields, the Russian government's consultants have proposed a supplementary tax rather than a windfall tax. The proposed rate is 27%.
In the UK, a supplementary tax represents a 10% hike in the basic corporation tax. Thus, where UK CT is 30%, the tax increased to 40% in the 1990s and to 50% in 2006.
Offsetting this are more generous capital allowances, and there are exemptions and incentives to drill and develop.
Along the same lines, in Russia, a 27% hike in the basic CT of 20% would equal 47%. At USD70/bbl it is now 65%, at USD80/bbl 68% and at USD90/bbl 70%.
We are unable to assess the impact on the Russian oil sector as the scale of capital allowances, exemptions and incentives is unclear.

68. Natural Gas - Gazprom
Gazprom trades at 4.1x 12M forward P/E – one of the cheapest stocks in the Russian equity space and much lower than its LT average P/E of 7.5x
Gazprom underperformed the market notably – by 19pp in 2010

69. Near-term gas sector issues
Production: slow production recovery this year as European demand continues to stagnate, the market is oversupplied.
European supplies: European customers have largely accepted Gazprom’s take-or-pay terms but they have been modified as a result of recent price and volume concessions.
Gas market liberalisation: the government plans full-scale liberalisation on the basis of European export net-back parity in 2014.
Taxes: Finance Ministry proposed an increase in the mineral extraction tax (MET) for gas companies which is in effect from 1 January 2011.
Gas deal with China:
A gas deal with China is more likely today than at any time in the recent past:
Chinese government forecasts that gas demand will increase at 12% p.a. in the next decade
China cannot ignore the vast energy resources just next door
Geographical diversification should allow Gazprom to reduce its exposure to Europe
Gazprom expects a final deal with China to close in the middle of 2011
We forecast first deliveries of Russian gas to China in E
We estimate that a successful project would involve the development of Kovykta field
Future gas exports to China could add USD /share to our current Gazprom valuation

70. Summary: domestic gas market liberalisation
Pre-liberalisation environment
European gas prices peaked at nearly USD500/mcm in 4Q08, and should decline to our mid- cycle price (real) of USD /mcm
We apply a 15% discount to the European contracted gas price level to reflect expanding spot market sales and a spot price discount to the oil-linked price
European customers will continue to subsidise Gazprom’s domestic customers and investment programme in the next several years
Gazprom’s focus on the exports market will enable independent gas producers to rapidly build Russian domestic market share
Post-liberalisation environment
Equal net-backs for domestic (excluding households) and export deliveries
No difference to gas producers where they sell their gas
Domestic customers provide a fairer chunk of cash flow to Gazprom
Independent gas producers start to benefit from market share build-up

71. Base Metals – Norilsk Nickel
Deutsche Bank is bullish on metal prices – both base and PGM
Historically, Norilsk closely follows it’s commodity basket (R2 at 80%)
Main drivers – Copper and Palladium
Attractive valuation – Norilsk is trading at a discount to peers
An increasing share of PGM revenues would boost Norilsk’s fair value – PGM companies generally trade on higher valuations than diversified miners
Source: Bloomberg Finance LP, Deutsche Bank Global Markets Research
Source: Deutsche Bank Global Markets Research estimates
4/21/2017
2010 DB Blue template

72. Precious Metals – Polymetal
Deutsche Bank is bullish on gold and silver as well as copper
We project the prices to peak in 2012
Attractive valuation – Polymetal is trading at a discount to peers on 2012E earnings
At the same time, the growth profile looks strong
Source: Deutsche Bank Global Markets Research
Source: Deutsche Bank Global Markets Research estimates
4/21/2017
2010 DB Blue template

73. Real Estate – PIK and LSR
Continue to be positive on the sector
Signs of pick up in physical real estate market
Stocks trade ex-’solvency risk’, declining risk premiums priced-in; however,
Valuation upside remains on further re-valuation of land banks; P/NAV discounts still meaningful. Prefer residential, quality retail as least oversupplied segments and construction materials as exposure to recovery in construction
PIK
A play on demand recovery for mass market residential property; best leverage to recovery in consumer demand for cheap housing
Restructuring is nearly complete
Additional financing from Sberbank now available (RUR12.75bn)
New projects have commenced: over 3.0m sqm of projects are open for pre-sales
Triggers: restructuring of Nomos Bank debt and de-leveraging through SPO, leading to lower financial costs, discount rates and higher asset valuation
LSR
A play on demand recovery for mass market residential property and construction materials that we expect to lead the recovery; exposure to state contracts (USD700m+)
Construction materials: poor performance in 1Q10, stabilization in 2Q10-3Q10, expect recovery in 4Q10
yr CAGR of 27% in sales and 60% in EBITDA on increased capacity utilization
Land bank - mostly residential developments - represents future upside; regional diversification with a flurry of new contracts in Moscow and region
SPO in April adds financial stability and provides acquisition currency

74. Banks - Sberbank
Credit growth has returned with a strong dynamics in recent months…
Credit costs in 2011/12 will depend on growth, write-offs and write-back potential
Sberbank has the strongest coverage and cash flows and hence the potential for lowest credit costs
VTB trades at the same 1.5x norm 2012E P/B despite:
Structurally lower ROE due to wholesale funding and focus on low-margin loans
Lower quality earnings due to high dependence on IB and trading gains
Inferior asset quality
Why does VTB trade on the same P/B and what is going to change it?
Only DR that offers exposure to Russian banks - DR listing of SBER planned for 1H11
Higher beta due to IB and upside in non-core assets - IB acquisition by Sberbank (1H11)
Acquisition and re-leveraging potential Disappointing earnings momentum in the upturn
page 74

75. Sberbank’s beta vs the RTS Index now bigger than Gazprom’s and Rosneft’s
Source: Bloomberg Finance LP, Deutsche Bank Global Markets Research
While previously oil & gas names, such as Gazprom and Rosneft were high-beta liquid plays on Russia…
… now Sberbank seems to take their place in this role 75
page 75

76. Sberbank also caught up with Gazprom in terms of trading volumes (mn dollars, annual)
Source: Bloomberg Finance LP, Deutsche Bank Global Markets Research
In , Gazprom was an unchallenged leader in terms of trading volumes (we look at combined volumes at Russian exchanges + international listings)
… now Sberbank has almost caught up with Gazprom, and heavily outperforms Rosneft 76
page 76

77. Recent trends in Russian mobiles
21 April 2017
Recent trends in Russian mobiles
The big picture
Mobile revenues closely track household consumption
Healthy non-voice growth driven by modem and smartphone sales, rollout of 3G networks, content
Voice recovering on macro
Headlines on roaming only confirm that regulation remains softer than elsewhere
MTS drivers:
Expected appreciation of the Rouble
Revenue CAGR of about 12% - notably higher than EM peers’
7-19% valuation discount to peers (on F EV/EBITDA and PER) despite better fundamentals
Source: Deutsche Bank, Rosstat, Company data
Source: Deutsche Bank, Company data 77
4/21/ :14:09 AM
2010 DB Blue template 77

78. Pharmaceuticals – Pharmstandard - a leading domestic pharmaceutical company
PHST is the second largest player with a 4% market share and an undisputed leader in the domestic market with 18.4% of the market positioned to benefit from domestic growth
We expect the company to increase its market share through acquisitions of smaller players
We expect pharma market to grow by 6-10% in the next three years
Improvement in the macro environment: rising GDP, rising incomes and rising social spending
Increase in government spending on the Russian Health System
Introduction of the medication insurance program
Increase in average per capita consumption for medications
page 78
page 78

79. CG& Retail - X5 to gain from recovery
DCF-derived TP is USD51.8 per GDR – 10% upside potential for the stock. Buy
We expect X5 to open:
300 new stores in 2010
335 discounters in the most popular format
25 supermarkets and 10 hypermarkets pa in
We estimate:
Selling space to increase by 18% yoy in 2011 and by 19% in 2012
LFL sales growth is 10% for 2011 and 12% for 2012
Capex increase following aggressive rollout:
Capex in USD913m, 2012-USD1.206m
Net Debt/EBITDA level – 1.5x in 2011, 1.4x in 2012 (without M&A)
Successful M&A experience - Acquisition of Kopeyka - Value accretive
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80. CG & Retail - Dixy proves the importance of logistics in this business
DCF-derived TP is USD 15.9 per share – 26% upside potential to the current price of 12.4
Dixy trying to catch up pace with market leaders-we expect DIXY to open:
140 new stores in 2011, 174 pa in
We estimate:
The selling space to increase by 21% yoy in
Sales to increase by 30% in 2011 and by 32% in 2012
Capex to increase to USD110m in 2011 and USD184m in 2012
NET Debt/EBITDA is below 2x- acceptable level
Dixy’s goal is to decrease shrinkage level to % of sales in – positive for EBITDA margin in 4Q10
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81. Statements of risk for following the recommendations (1/4)
Dixy (DIXY.RTS, TP USD 15.90, price 12.80, rating: Buy) Issues: Dixy is a smaller and, in our view, more risky company than X5 and Magnit. However, we believe 1Q10 showed that the company is turning around its operating performance thanks to the improvements to its logistics operations executed in Our DCF derived target price implies substantial upside potential to Dixy's current share price therefore we recommend Buy. Evaluation: In our DCF valuation we use the following assumptions: We use terminal growth of 3% as we believe Dixy will not outpace its market growth. To derive the cost of equity, we use a risk-free rate of 6% and an equity premium of 6% for all the companies under coverage. We use beta of 1.1 for Dixy due to to its lower liquidity. We use a debt/equity ratio of 30% for a company such as Dixy which is quite leveraged. Risks:The main industry risks include, but are not limited to, declining consumer confidence, increasing unemployment and potential entry into the market of international players. Among the company-specific risks, we highlight the management execution risk.
Gazprom (GAZP.RTS, TP USD 8.40, price 6.58, rating: Buy) Issues: We rate Gazprom, the world's largest gas company, Buy, reflecting the considerable upside potential implied by our target price. Gazprom's major operating challenge to date has been how to replace declining production. The company has announced plans to make a substantial increase in its capital expenditures, the majority of which would be spent on developing remote production areas on the Yamal peninsula. Furthermore, the discussion about increasing gas sector taxes seems to have lost momentum, and we do not think there will be any negative newsflow hanging over the market. In addition, Gazprom looks set to benefit fully from the upcoming liberalisation of the gas market. Evaluation: Our 12-month target price is derived on the basis of DCF valuation. We use APT-based discounted cash flow valuation because we believe it provides a superior tool for estimating company-specific risks compared with the CAPM model. It also enables us to account for a much wider range of fundamental factors than comparable multiples valuation, which often fails to account for differences in capex plans, capital structure and growth rates. The key assumptions of our DCF model are an RWACC of 14.3% (RROE of 15.5%, including a standard equity risk premium of 7.5% [3.0% is idiosyncratic, which accounts for a high risk of volatility in cashflow due to changes in prices and tax rates in the Russian gas sector], a liquidity risk premium of 0.0%, and a corporate governance risk premium of 2.0%) and a long-term nominal growth rate of 2% - a function of the expected increases in the prices of gas, crude oil and refined products, inflation and the availability of proved, probable, and possible reserves in the company's portfolio beyond our forecast horizon ( E). Risks: The key downside risks for Gazprom are: lower-than-expected energy prices, a deeper-than-expected negative impact of the economic downturn on natural gas demand, the cancellation of the proposed full-scale liberalisation of the domestic gas market and the government's decision to raise taxes more than is currently reflected in our discount rate for Gazprom. An additional downside risk is that the major infrastructure or development projects are not being implemented as planned or delayed indefinitely owing to political, environmental, technological or other reasons.
LUKOIL (LKOH.RTS, TP USD 82.00, price 64.50, rating: Buy) Issues: LUKoil is Russia's second-largest oil company in terms of reserves and production. We believe that owing to its recent heavy investment in greenfield operations, the company will be able to maintain growth rates above the Russian average. On the financial front, a healthy balance between upstream and downstream segments makes LUKoil one of the most profitable oil companies in Russia. LUKoil also enjoys the most comprehensive international exposure of all Russian oil companies, which brings its status closer to that of international peers. LUKoil stands out as one of the most likely of the oil companies to benefit from the expansion of the unregulated Russian gas sector. We rate LUKoil Buy; the company enjoys strong fundamentals and we believe that its shares are currently undervalued.
Evaluation: Our 12-month target price is derived on the basis of DCF valuation. We use APT-based discounted cash flow valuation as we believe it provides a superior tool for estimating company-specific risks compared with the CAPM model. It also enables us to account for a much wider range of fundamental factors than comparable multiples valuation, which often fails to account for differences in capex plans, capital structure and growth rates. The key assumptions of our DCF model are an RWACC of 13.2% (RROE of 13.5%, including a standard equity risk premium of 6.0% [2.5% is idiosyncratic, which accounts for a high risk of volatility in the Russian oil companies' cashflow due to changes in commodity prices and RUR/USD exchange rate], a liquidity risk premium of 0%, and a corporate governance risk premium of 1.5%) and a long-term nominal growth rate of 2% - a function of expected increases in the prices of crude and refined products, inflation, and the availability of proved, probable, and possible reserves in the companies' portfolios beyond our forecast horizon ( E). Risks: We highlight the downside risks associated with commodity prices, cost inflation, and, more important, the execution of long-term investment projects. We continue to believe that LUKoil's management is one of the most professional in the sector but it will now have to devise strategies to overcome the recent negative operating trends.
X5 Retail Group Ltd (PJPq.L, TP USD 51.80, price 47.00, rating: Buy) Issues: We expect the Russian food retail market to continue to grow by double digits, as rising disposable income and 6-7% inflation pa should spur a 16% CAGR in household consumption over E. X5 is the largest retailer in Russia with a 4.5% market share. It is a multi-format retailer and generates 80% of its revenues in two of Russia's most powerful - from an economic point of view - cities, Moscow and St.Petersburg. Therefore, we remain positive on X5 as these two cities will recover first, in our view. We recommend to Buy the stock because our DCF derived target price implies substantial upside potential from current price. Evaluation: Using DCF methodology, we derived a target price using the following assumptions: We use terminal growth of 3.5% for the market's fastest grower such as X5, as we believe it will continue to surpass market growth. To derive the cost of equity, we use a risk-free rate of 6% and an equity premium of 6%. Our beta for X5 is 0.9 since food retail is a low beta, defensive sector and we do not make any liquidity adjustments for it. We use a debt/equity ratio of 30% for X5 as it has significant Debt burden. Risks:The main risks include, but are not limited to, declining consumer confidence, increasing unemployment and potential entrance in the market of international players such as WalMart. Among the company-specific risks we name competition. Unlike Magnit, X5 competes mainly with other national players. Since X5 operates mainly in St.Petersburg and Moscow, it competes mostly with other national chains. In our view, it is tougher to compete with the national chains than with local ones because federal players have greater power over suppliers than national ones. . 81 81

82. Statements of risk for following the recommendations (2/4)
LSR (LSRGq.L, TP USD 12.80, price 9.75, rating: Buy) Issues: LSR has been a favorite real estate stock for the market that has so far focused on financial stability and, ultimately, survival among real estate names. In the current environment, we believe LSR offers good exposure to state expenditure on both infrastructure and social housing through its tenders with the Ministry of Defense and the St. Petersburg administration, while medium term, LSR should be a beneficiary not only of demand revival for residential real estate but also construction materials, which we expect to lead a recovery in the construction sector beginning in With more capital coming from the company's SPO, LSR will be well positioned to capitalize on recovery in demand for residential housing. Geographical diversification of sales away from the company's base in St. Petersburg (LSR is already present in Yekaterinburg and has recently signed a number of deals in Moscow and Moscow region), vertical integration with pre-fab manufacturing facilities and building materials as well as prudent financial management will be key to success. We continue to see upside in the company's share price as land bank gets developed and the currently implied by the share price discount to market value of the land bank narrows. Thus we rate the shares a Buy. Evaluation: Our valuation of LSR Group is based on SOTP approach. We value LSR's yielding properties, residential and office properties already constructed and currently under development, DSKs and building materials businesses using DCF with a WACC of 12.3% (13.3% CoE, 11.5% cost of debt and 25% debt-to-equity target ratio; we use a 3% terminal growth rate for building materials, reflecting long-term GDP trends) while we base our valuation for land bank on the last available DTZ valuation, assigning a 20-40% discount to projects yet to be developed. We adjust the resulting valuation of LSR's assets by net debt, minorities and NPV of corporate overhead costs to arrive at YE10e NAV of USD12.8, which is also our 12-month target price for GDRs. We set our 12-month TP for local shares at a historical 20% discount to GDRs at RUB1,459/share and prefer more liquid GDRs. Risks: The company largely faces industry-related risks, including exposure to GDP recovery, consumption growth and demand for real estate, price fluctuations, FX (rouble-related) as well as credit availability from the banks. In addition to these, completion of projects, including commissioning of over 40 development projects and of a cement plant in Slantsy, that meaningfully varies from our expectations could negatively affect our valuation of the company
MTS ADR (MBT.N, TP USD 28.00, price 20.65, rating: Buy) Issues: MTS has made significant changes to its business model, evolving into an integrated player. Having acquired Comstar, it gained access to the leading fixed broadband player in Moscow and plans to use it as a platform for a rollout of a fixed broadband business in the regions. MTS is developing its own fully-fledged retail distribution chain and we believe it is making good progress in terms of improving its handset selection and its online content platform. We estimate MTS' revenues to grow by % yoy revenue in F (in USD terms) on recovery of voice usage due to improving macroeconomic situation and continued robust growth of non-voice revenues driven by increasing internet and smartphone penetration. However, we expect MTS' EBITDA margin to decline to 44% in 2010F from 49% in 2008 due to MTS' active development of its own retail business. We believe that MTS' growth profile and valuation multiples look attractive compared to many peers. We continue to expect significant total shareholder return over the next 12 months: Buy. Evaluation: Our target price is based on DCF methodology, in line with the approach across our European telecoms coverage. We model MTS in USD, as this is the company's reporting currency. We use an RFR of 6%, CoE of 13.5%, CoD of 7% and a WACC of 11%. We use the projected balance sheet capital structure and a terminal growth rate of 1% to reflect the industry's mature market growth profile after the terminal period. Risks: In addition to a deteriorating macroeconomic situation and regulatory risks, as well as intensifying competition, which are typical risk factors for the industry, we see the following company-specific risks: poor execution of the retail strategy; corporate governance risks related to Sistema (asset sales); integration issues with Comstar; M&A risks.
Pharmstandard (PHSTq.L, TP USD 32.10, price 29.10, rating: Buy) Issues: Pharmstandard is a leading domestic pharmaceutical manufacturer with a portfolio of best-selling brands and an efficient sales force. In addition, as Russia's largest domestic pharmaceutical producer, the company enjoys preferential treatment from a friendly government aiming to increase domestic producers' share in overall market sales. The key market drivers for the medium to long term are: increased government spending on the health system; further development of the program for additional provision of medication (DLO); introduction of a medication insurance program; and increased per capita consumption of medications amid a consumer recovery and slowing inflation. Overall, we see revenue CAGR of 20%. Our target price implies attractive upside potential for both GDRs and local-listed shares. Hence we rate these as Buys. Evaluation: We use DCF methodology to derive our target price, as the comparison universe has limitations in the EMEA pharmaceutical sector as the group is narrow and diverse. In addition, the Indian sub-segment commands a notably different valuation from the EMEA group. We use a terminal growth rate of 4.0% as it is one of the market leaders. To derive the cost of equity, we use a risk-free rate of 7.5% and an equity premium of 6%. Our beta for Pharmstandard is 1 because pharmaceutical is a low-beta defensive sector but its liquidity is lower than that of other major consumer companies. We use a debt-to-equity ratio of 5% as the company is almost debt-free. Together with an after-tax cost of debt of 10% and COE of 13.5%, we arrive at WACC of 13.a2%. Risks: The key downside risks include rouble depreciation (effectively all revenues are in roubles with a large portion of costs (up to 80%) denominated in hard currency), a slower-than-expected recovery in Russian consumption and adverse government intervention in the sector. 82 82

83. Statements of risk for following the recommendations (3/4)
PIK (PKGPq.L, TP USD 7.50, price 4.38, rating: Buy) Issues: We continue to see upside in PIK shares as the company offers the best leverage to recovery in consumer demand for cheap housing, first evidence of which we saw in 4Q09. We expect the trend to continue, and expect it to translate into an increase in cash collections by PIK. Recovery in demand should also allow the company to commence new projects this year after receiving additional financing from Sberbank that will provide cash flow over period. We continue to see PIK largely as a play on volumes (as opposed to prices), but geography of its on-going and planned projects (Moscow and Moscow region) may offer additional upside if prices react positively to anticipated supply/demand imbalance as inventory of completed housing is depleted and new construction takes time to hit the market with additional supply. Given the above and the substantial upside based upon our price target we rate the shares a Buy. Evaluation: We value PIK via SOTP approach based on DCF analysis of the actual cash flows from core construction and development business, and net book value of the remaining assets and liabilities not captured elsewhere in the above mentioned analysis. We discount cash flows and terminal value at 13.8%. Our WACC reflects RROE of 14.0% (based on 6.5% sovereign RFR, 7.0% standard equity risk premium and 1.0% premium for corporate governance risk) and 16.5% cost of debt and target debt/capital ratio of 25%. We do not include the valuation of land bank in this approach as we assume it will be used to build and sell property in the interim forecasting period and beyond. We arrive at NAV estimate of USD7.5/share at YE10, which is also our 12-month TP. Risks: One of the major risks for PIK remains restructuring of Nomos Bank debt. Since the company does not have an ability to pay this debt in full at the moment, failure to reach an agreement with the bank will put PIK's faith in jeopardy once again. We are inclined to believe that Nafta-Moskva-friendly Nomos Bank will be willing to restructure company's debt, removing such a risk. Other risks are largely industry-specific: slower-than-forecasted recovery in GDP, consumption growth and demand for real estate, a more-than-anticipated decline in prices as well as lack of credit markets recovery (both corporate and consumer).
Rosneft (ROSN.RTS, TP USD 9.80, price 8.10, rating: Buy) Issues: We rate Rosneft a Buy. The company combines substantial reserves with rapid production growth, implying fast monetisation of assets. Rosneft has been demonstrating some of the lowest unit costs in the industry and a highly efficient capital expenditure. The company acquired Yukos' assets and has integrated them successfully. We forecast Rosneft to increase production by nearly 5% in 2010 y-o-y, which is well above the industry average. Sizeable benefits stemming from export duty holidays in East Siberia should enable Rosneft to grow its EBITDA considerably in Evaluation: Our 12-month target price is derived on the basis of DCF valuation. We use APT-based discounted cash flow valuation as we believe it provides a superior tool for estimating company-specific risks compared with the CAPM model. It also enables us to account for a much wider range of fundamental factors than comparable multiples valuation, which often fails to account for differences in capex plans, capital structure and growth rates. The key assumptions of our DCF model are an RWACC of 12.6% (RROE of 13.5%, including a standard equity risk premium of 6.0% [2.5% is idiosyncratic, which accounts for a high risk of volatility in the Russian oil companies' cash flows due to changes in commodity prices and RUR/USD exchange rate], a liquidity risk premium of 0%, and a corporate governance risk premium of 1.5%) and a long-term nominal growth rate of 4% - a function of expected increases in the prices of crude and refined products, inflation, and the availability of proved, probable, and possible reserves in the company's portfolio beyond our forecast horizon ( E). Risks: Downside risks for Rosneft include lower-than-expected oil prices, failure to negotiate access to Gazprom's pipelines, dry-hole drilling at prospective resource areas and Yukos-related litigation. We also note the execution risk the company faces: Rosneft's management might be unable to deliver on its targets or successfully implement its planned investment projects.
Sberbank (SBER.RTS, TP USD 5.30, price 3.66, rating: Buy) Issues: We rate Sberbank a Buy. Accelerating economic growth, spurred by strong commodity prices, SME growth and mass-adoption of standard retail banking products like mortgages and CCs should propel 20% annual sector growth. Sberbank's dominant market shares (20-50%), unrivalled distribution power through its network of 20,000 branches and an underutilized captive client base are unique assets to capitalize on this market opportunity. Additional impetus to earnings growth should come from efficiency gains. Evaluation: We value CEEMEA banks using a two-stage Gordon Growth Model that bases the target price on discounted terminal value, and adds back the value of discounted interim dividends. For Sberbank we assume a mid-cycle ROE of 23%, cost of equity of 13.0%, and terminal growth of 5%. The cost of equity is derived from a 6.5% RFR, a 6.5% ERP and a beta of 1.0. Our USD5.3 PT implies a 2012E normalized P/BV of 2.0x and a 2012E normalized PE of 11.8x. Risks: The main downside risks for Sberbank are declining commodity prices, which would result in a slowdown in economic growth and cause renewed asset quality deterioration. Another risk is continued margin pressure which may arise from, amongst others, a slowdown in credit demand, even fiercer competition from bond market conditions, a significant increase in demand for FX loans and / or monetary tightening. A weakening of the ruble would cause investors to favor Russian exporters and could adversely affect the share price performance of Sberbank. The main company specific risks include, but are not limited to, execution on the business transformation, poor cost control and potential integration issues of an acquisition in IB. 83 83

84. Statements of risk for following the recommendations (4/4)
Norilsk Nickel (GMKN.RTS, TP USD , price , rating: Buy) Issues: Norilsk Nickel is the global cost leader in the nickel industry and looks likely to retain its leadership because of its unique ore body where nickel and copper are combined with platinum group metals. As the largest and lowest-cost producer of nickel in the world, Norilsk should benefit from what we expect to be strong nickel prices in 2011 and We also see potential for a longer-term shift of the industry supply curve, as low-cost and low-risk sources of nickel are gradually replaced by more expensive. Norilsk is also the largest palladium producer in the world. We expect palladium to perform as a result of what we see as an ongoing substitution of platinum by palladium and growing autocat demand, waning Russian stockpiles and supply constraints. Norilsk's PGM production offers, in our view, a diversfication into more defensive metals and could attract a premium to Norilsk's valuation. Norilsk has, in our view, a strong balance sheet and strong cash flows. At the same time, Norilsk offers no near-term and only remote long-term growth. It also carries company specific risks related to a shareholder conflict, government involvement, social commitments and environmental challenges. On balance though, we believe the market does not fully appreciate the potential of Norilsk's resources: Buy. Evaluation: We value Norilsk using a DCF with a terminal growth period. Our DCF model is based on a WACC of 11.2% (with a cost of equity of 12.6%, a pre-tax cost of debt 7% and a 25% long-term D/E) and a terminal growth rate of 3%. Our terminal growth rate captures the longer-term cash flow opportunities of Norilsk's unique ore body and also the growth potential of expansion plans beyond our explicit forecasting period, like the project underway in the Chita region. Our DCF yields a 12-month target price of USD300/share, which on our current earnings forecasts implies target multiples of 4.9x 2011E EBITDA and 7.5x 2011E net income. On a flat price scenario, the implied target multiples grow to 5.9x and 9.3x, which is in line with the peer group's long-term historical average. Risks: Commodity prices represent the largest downside risk for our valuation of Norilsk Nickel. Rouble appreciation also represents a materal risk for Norilsk Nickel given its rouble cost base and dollar revenues. Due to a longstanding shareholder conflict and lack of transparency, Norilsk has significant corporate governance risks. We also note that Norilsk, as a mono-employer, has special social commitments and is subject to government interference and involvement. Like many mining companies, Norilsk faces risks related to export duties, although these have recently been reduced by the announcement of new levels. There are also cash flow and sentiment risks related to the company's environmental program.
Polymetal (PMTLq.L, TP USD 22.50, price 17.50, rating: Buy) Issues: With 2009 output of 17.3 moz of silver and 311koz of gold, Polymetal is the largest silver and one of the top five gold producers in Russia. The company is a leading growth story in the Russian metals and mining universe. We expect Polymetal to grow its gold equivalent (on metal price forecast) production by 25% CAGR from 770koz in 2010 to 1,480koz 2012, doubling production before output plateaus on the current project pipeline. Polymetal is run by a management team with a strong execution skills and a proven track record in both organic project execution and M&A. With the company's strategic focus shifting more and more toward the gold part of its business, we estimate that gold will contribute 70% to Polymetal's consolidated revenue in 2015, up from 54% in We are bullish on the outlook for gold and silver, expecting gold prices to reach USD2,000/oz in 2012 and for the gold:silver ratio to come down to 40 in 2012 with higher-beta silver outperforming as industrial demand conincides with growing financial investment. Evaluation: "We value Polymetal based on a sum-of-the-parts DCF models of individual mining projects. We apply a dollar nominal WACC of 8.8% based on a targeted capital structure of 75% equity and 25% debt. We estimate cost of equity at 9.6% using levered beta of 0.6x (the historical average for the stock), an equity risk premium of 6% and a risk-free rate of 6%. We assume a nominal interest rate of 8% and a tax rate of 21%. We apply a 1.8x exit multiple, in line with the benchmark P/NPV multiple for DB's South African gold universe. Our $22.5 target price implies 8.3x 2011E EBITDA and 11.7x 2011E net earnings multiples, which is in line with the company's historical averages of 8.6x and 13.6x and compares favourably to peers. While we believe that Polymetal's growth profile may warrant a premium, we note that the company will need to extend its reserve base to support production longer-term and that its silver exposure makes Polymetal more cyclical than pure play gold stocks." Risk: Major risks to our forecasts and valuation are silver and gold prices, as well as Russian macroeconomic factors such as rouble appreciation and inflation. Management risks are concentrated around the company's ability to deliver on the development of the Amursk processing hub as well as its ability to integrate other newly acquired fields. Other risks include any changes in fiscal regime and/or mining legislations. We also highlight the risk of the potential share overhang, should Polymetal decide to place part or all of its treasury stake. The latter would however also improve liquidity, which we would welcome, and reduce the company's financial leverage, which we however view as manageable on current forecasts. 84 84

85. 21 April 2017
Appendix 1 Important Disclosures Additional Information Available upon Request
For disclosures pertaining to recommendations or estimates made on securities other than the primary subject of this research, please see the most recently published company report or visit our global disclosure look-up page on our website at 85
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86. 21 April 2017
Special Disclosures Analyst Certification The views expressed in this report accurately reflect the personal views of the undersigned lead analyst(s) about the subject. In addition, the undersigned lead analyst(s) has not and will not receive any compensation for providing a specific recommendation or view in this report. 86
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87. Equity Rating Dispersion and Banking Relationships
21 April 2017
Buy: Based on a current 12-month view of total shareholder return (TSR = percentage change in share price from current price to projected target price plus projected dividend yield), we recommend that investors buy the stock.
Sell: Based on a current 12-month view of total shareholder return, we recommend that investors sell the stock.
Hold: We take a neutral view on the stock 12 months out and, based on this time horizon, do not recommend either a Buy or Sell.
Notes:
1. Newly issued research recommendations and target prices always supersede previously published research.
2. Ratings definitions prior to 27 January, 2007 were:
Buy: Expected total return (including dividends) of 10% or more over a 12-month period
Hold: Expected total return (including dividends) between -10% and 10% over a 12-month period
Sell: Expected total return (including dividends) of -10% or worse over a 12-month period
Equity Rating Key
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88. 21 April 2017
Regulatory Disclosures 1. Important Additional Conflict Disclosures Aside from within this report, important conflict disclosures can also be found at under the “Disclosures Lookup” and “Legal” tabs. Investors are strongly encouraged to review this information before investing Short-Term Trade Ideas Deutsche Bank equity research analysts sometimes have shorter-term trade ideas (known as SOLAR ideas) that are consistent or inconsistent with Deutsche Bank’s existing longer term ratings. These trade ideas can be found at the SOLAR link at Country-Specific Disclosures Australia: This research, and any access to it, is intended only for “wholesale clients” within the meaning of the Australian Corporations Act. EU countries: Disclosures relating to our obligations under MiFiD can be found at Japan: Disclosures under the Financial Instruments and Exchange Law: Company name – Deutsche Securities Inc. Registration number – Registered as a financial instruments dealer by the Head of the Kanto Local Finance Bureau (Kinsho) No Member of associations: JSDA, The Financial Futures Association of Japan. Commissions and risks involved in stock transactions – for stock transactions, we charge stock commissions and consumption tax by multiplying the transaction amount by the commission rate agreed with each customer. Stock transactions can lead to losses as a result of share price fluctuations and other factors. Transactions in foreign stocks can lead to additional losses stemming from foreign exchange fluctuations. New Zealand: This research is not intended for, and should not be given to, “members of the public” within the meaning of the New Zealand Securities Market Act Russia: This information, interpretation and opinions submitted herein are not in the context of, and do not constitute, any appraisal or evaluation activity requiring a license in the Russian Federation. 88
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89. Global Disclaimer
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