Rus Telecoms Report 2012 Otkritiye

EQUITY | Russia Telecom 1 February 2011
Research analysts Alexander Vengranovich alexander.vengranovich@otkritie.com+ 7 (495) 2131830
UPDATE
Russian Telecoms 2012

Expecting recovery
Sector ratings
Company MTS VimpelCom Rostelecom Sistema Rating BUY BUY SELL BUY TP $22.8 $14 RUB117 $33.9 upside/ downside 36% 33% -21% 74%
Sources: Bloomberg, Otkritie Capital estimates
Telecoms 2011 performance

VimpelCom Sistema
We expect the Russian telecom sector to rebound in 2012. This follows in the wake of its underperformance of all major indices in 2011, mainly due to margins erosion and questionable M&A activity. This year we are very positive on mobile telecoms (MTS and VimpelCom), where we expect margins to start recovering, and we still dislike Rostelecom, which should continue facing sluggish top-line growth. MTS is our top pick among Russian telecoms, which also benefits Sistema, a direct exposure to MTS. Sistema core assets growth is also expected to be combined with further value accretive acquisitions of assets in agriculture and petrochemicals.
Data services to drive top-line growth. We expect Russias telecom sector to benefit from data services growth in 2012. We believe that a significant portion of the investment that is considered prerequisite to capture this growth has already been made, hence going forward the operators will need to invest less in the development of 3G data networks. Margins turnaround for mobile operators. We expect a reversal of the negative trends of declining EBITDA margins among the Russian mobile operators. Margin growth should be fuelled by an increasing share of data revenue, completion of the rollout of monobrand retail networks, and a focus on a strategy of increasing ARPU from existing customers rather than acquiring new ones. Dividend stories to remain the same. Mobile operators remain high dividend payers. We expect MTS and VimpelCom to pay out dividend yields of 6% and 8% in 2012, respectively, while Rostelecom is expected to spend most of its operating cash flow on capex and M&A. We anticipate Rostelecoms dividend yield at 1.8%. Sistemas dividend yield is expected to be limited by extensive M&A activity, we project only 1% dividend yield for the company. MTS is our top pick amongst Russian telecoms, while Rostelecom is our least preferred stock in the sector. We continue to prefer MTS thanks to its high dividend yield, low leverage, and clear growth story. Sistema should also benefit as a direct exposure to MTS. We still like VimpelCom, but the stock has high leverage, lacks short-term positive triggers, and consists of too many moving parts that could limit its short-term upside. Rostelecoms major revenue source is fixed-line voice, which is projected to decrease at 2% CAGR in the next 5 years. The acquisition of Skylink provides the necessary 3G licenses for development of mobile business, though we think the major risks lie in its execution strategy. The new Rostelecom was recently combined from 9 separate companies and we think that in 2012 its management will struggle to effect significant changes within the company.
MTS
RTS Index Rostelecom -40% -30% -20% -10% 0%
Sources: Otkritie Capital estimates
Telecoms YtD performance

Rostelecom VimpelCom RTS Index MTS Sistema
0%
5%
10%
15%
20%
Figure 1. Valuation table

Name MTS VimpelCom Rostelecom Sistema 2011E 11.0 7.7 11.8 9.3 P/E 2012E 8.9 6.4 11.7 17.9 2013E 7.5 5.8 10.9 13.2 2011E 4.6 4.3 5.1 1.9 EV/EBITDA 2012E 4.3 3.7 4.5 1.9 2013E 3.8 3.4 4.6 1.5 2011E 1.9 1.7 2.0 0.3 EV/Sales 2012E 1.7 1.5 1.8 0.3 2013E 1.6 1.3 1.7 0.2
Important disclosures are found at the Disclosures Appendix. This investment research is produced by Otkritie Securities Ltd, authorised and regulated by the Financial Services Authority (FSA), and has been prepared by non-US research analysts who are not FINRA registered/qualified as research analysts.
Russian telecoms 2012 | UPDATE | Russia | 1 February 2011
Table of Contents
Russian Telecoms peer comparison .......................................................... 3 Russian telecom market update ................................................................. 4
Mobile communications .................................................................................. 4 Broadband Internet ......................................................................................... 6 Capex ............................................................................................................. 8 Retail chains ................................................................................................... 9
MTS .............................................................................................................. 11
Valuation ....................................................................................................... 12 Appendix: Financial forecasts ....................................................................... 13
Sistema ........................................................................................................ 14
Rostelecom ................................................................................................. 18
VimpelCom .................................................................................................. 21
Disclosures appendix ................................................................................ 24
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Russian Telecoms peer comparison

Figure 2. Peers valuation
Ticker Eastern Europe peers SPTT CP Equity MTEL HB Equity TPS PW Equity South East Asia 941 hk Equity 762 HK Equity ST SP Equity AXIATA MK Equity BHARTI IN Equity RCOM IN Equity South Africa TKG SJ Equity MTN SJ Equity VOD SJ Equity Middle East CEL IT Equity PTNR IT Equity Tcell ti Equity orte ey Equity ETISALAT UH Equity TTKOM TI Equity QTEL QD Equity EM peers TEF SM Equity Tel2b ss Equity DTE GR Equity FTE FP Equity BT/A LN Equity VOD LN equity TIT IM Equity TEL NO Equity BELG BB Equity PTC PL Equity T US Equity VZ US Equity DM peers Name TELEFONICA CZECH REPUBLIC AS MAGYAR TELEKOM TELECOMMUNICA TELEKOMUNIKACJA POLSKA SA CHINA MOBILE CHINA UNICOM HONG KONG SINGAPORE TELECOM AXIATA GROUP BERHAD BHARTI AIRTEL RELIANCE COMMUNICATIONS TELKOM MTN GROUP VODACOM GROUP CELLCOM ISRAEL PARTNER COMMUNICATIONS TURKCELL ILETISIM HIZMET ORASCOM TELECOM HOLDING EMIRATES TELECOM CORPORATION TURK TELEKOMUNIKASYON QATAR TELECOM Telefonica TELE 2 DEUTSCHE TELEKOM FRANCE TELECOM BT VODAFONE TELECOM ITALIA TELENOR BELGACOM PORTUGAL TELECOM AT&T VERIZON COMMUNICATIONS 2011E 14.9 15.1 13.4 16.3 29.3 12.7 62.1 13.0 14.9 21.4 15.3 11.9 10.0 12.0 13.7 9.8 5.9 5.8 17.6 7.0 10.7 13.2 9.6 15.2 9.7 12.1 11.3 7.3 9.1 10.8 5.9 13.6 10.5 7.3 12.4 15.0 10.4 P/E 2012E 15.9 14.8 11.9 20.9 19.1 12.4 32.8 12.0 13.4 14.9 10.4 10.5 8.8 10.5 12.4 8.2 7.1 6.4 11.0 8.0 10.1 10.2 8.8 12.5 8.6 10.7 12.4 7.7 8.5 10.4 6.0 11.3 11.1 7.1 11.7 13.4 9.9 2013E 14.2 14.7 9.7 18.3 14.5 11.9 20.5 11.0 12.2 11.5 8.0 9.6 7.6 9.6 11.5 8.1 7.4 6.6 10.3 6.5 9.3 9.8 8.4 10.8 8.3 9.5 11.5 7.9 8.1 10.0 5.9 9.4 11.4 6.5 11.3 12.1 9.3 2011E 4.9 5.7 4.4 4.6 7.0 5.4 6.2 9.4 6.1 8.4 6.8 4.7 2.6 4.6 6.9 4.3 3.0 3.7 6.2 4.2 4.3 6.1 3.3 5.4 5.4 5.6 4.3 4.1 4.2 8.0 3.9 5.8 5.0 2.4 5.5 4.0 4.8 EV/EBITDA 2012E 5.3 6.3 4.4 5.2 6.6 5.2 5.4 9.2 5.8 6.9 6.1 4.4 2.5 4.2 6.4 4.3 3.2 4.1 5.6 4.2 4.1 5.9 3.2 5.1 5.0 5.0 4.5 4.3 4.1 8.1 3.9 5.3 5.1 2.2 5.3 3.7 4.7 2013E 5.1 5.9 4.3 5.2 6.2 5.0 4.6 9.2 5.5 6.0 5.6 4.1 2.4 4.0 6.0 4.2 3.3 4.0 5.3 4.1 3.9 5.6 3.1 4.9 4.9 4.6 4.5 4.4 4.1 7.9 3.9 4.9 5.2 2.2 5.2 3.6 4.6 2011E 1.9 2.3 1.5 1.8 2.5 2.6 2.0 2.9 2.8 2.9 2.2 1.7 0.7 2.1 2.4 1.4 1.0 1.1 2.0 1.9 2.1 2.6 1.6 2.0 1.8 1.5 1.4 1.4 1.3 2.5 1.6 1.8 1.5 0.9 1.8 1.3 1.6 EV/Sales 2012E 1.9 2.4 1.5 1.9 2.3 2.4 1.7 2.9 2.6 2.6 2.0 1.6 0.7 1.8 2.2 1.4 1.0 1.2 1.8 1.9 2.0 2.5 1.5 1.9 1.8 1.4 1.4 1.4 1.3 2.5 1.6 1.7 1.5 0.8 1.8 1.3 1.5 2013E 2.0 2.4 1.6 1.9 2.2 2.3 1.5 2.8 2.4 2.3 1.9 1.5 0.7 1.7 2.1 1.3 1.0 1.2 1.7 1.8 1.9 2.4 1.4 1.8 1.8 1.4 1.4 1.4 1.3 2.5 1.6 1.6 1.5 0.8 1.8 1.2 1.5
Sources: Otkritie Capital estimates, Bloomberg
Figure 3. Russian Telecoms valuation comparison

Name MBT US Equity Current multiples vs EM Peers vs DM Peers vs VimpelCom vs Rostelecom VIP US Equity Current multiples vs EM Peers vs DM Peers vs MTS vs Rostelecom RTKM rx equity Current multiples vs EM Peers vs DM Peers vs MTS vs VimpelCom MTS 11.0 -28% 6% 43% -6% VimpelCom 7.7 -50% -26% -30% -35% Rostelecom 11.8 -23% 13% 6% 53% 11.7 -6% 18% 32% 82% 10.9 1% 17% 46% 89% 5.1 -6% 5% 10% 18% 4.5 -12% -4% 6% 21% 4.6 -5% 0% 20% 37% 2.0 -1% 28% 7% 17% 1.8 -7% 16% 2% 21% 1.7 -8% 12% 8% 28% 6.4 -48% -35% -28% -45% 5.8 -47% -38% -23% -47% 4.3 -20% -11% -6% -15% 3.7 -27% -21% -13% -18% 3.4 -31% -27% -12% -27% 1.7 -16% 9% -8% -14% 1.5 -23% -4% -16% -17% 1.3 -28% -12% -16% -22% 8.9 -29% -10% 38% -24% 7.5 -31% -20% 30% -31% 4.6 -14% -5% 7% -9% 4.3 -17% -9% 15% -6% 3.8 -21% -17% 14% -17% 1.9 -8% 19% 9% -7% 1.7 -9% 14% 18% -2% 1.6 -15% 4% 18% -7% 2011E P/E 2012E 2013E 2011E EV/EBITDA 2012E 2013E 2011E EV/Sales 2012E 2013E
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Russian telecom market update

Mobile communications
Competition to diminish further. Both MTS and VimpelCom have moved their focus away from the acquisition of new subscribers, while Megafon continues to concentrate on bolstering its leadership in the acquisition of new subscribers for the past 4 months. We expect the competition to diminish further in 2012, especially since in 3Q11 both VimpelCom and MTS began to focus on increasing ARPUs from existing subscribers.
Figure 4. Russia mobile subscribers, mn
Figure 5. Russia mobile subscribers QoQ dynamics, %

10% 8%
6%
75 70 65
4%
60 55 50 1Q10 2Q10 MTS

Sources: AC&M
2% 0% 1Q10 -2% 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 Nov-11
3Q10
4Q10
1Q11
2Q11
3Q11
Nov-11
-4%
VimpelCom
MegaFon
Sources: AC&M
MTS
VimpelCom
MegaFon
EBITDA margins for mobile operators to see slow recovery in 2012. Competition had a negative effect on EBITDA margins in 2011, and its deceleration in terms of the rational behaviour of market players should positively affect the EBITDA margins of mobile operators in 2012. The initial impact was already seen in the 3Q11 financials of MTS.
Figure 6. Russia mobile EBITDA margin quarterly dynamics

55% 50% 45%
Figure 7. Russia mobile EBITDA margin annual forecast

54% 52% 50% 48% 46%
40%
44%
35% 30%
42% 40% 2008 MTS 2009 2010 VimpelCom 2011E Megafon 2012E
1Q10
2Q10
MTS
3Q10
4Q10
1Q11
2Q11
Megafon
3Q11
VimpelCom
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We believe that the increase in EBITDA margins will come from 2 factors: 1. Selling expenses. As the EBITDA margin is substantially driven by the operator activity designed to acquire new subscribers, we expect that the trend of shifting focus away from the acquisition of new subscribers should positively impact EBITDA margins. Moreover, during 2011 mobile operators moved to deferred dealer compensation schemes as another way to decrease marketing expenses (based on the principle of revenuesharing). This implies no upfront payment for the acquisition of subscribers. In addition, in order to decrease subscriber acquisition costs the operators developed their own retail networks in 2011. 2. Value-added services (VAS) share in revenues. The share of VAS in mobile revenues is the major driver of improving profitability for mobile operators. Value-added services have EBITDA margins in the 70-80% range, so the operators are focusing on increasing its share in revenues. Data usage growth is the primary driver of the VAS share increase. The market grew 50% YoY in 2011, though we think that growth will decelerate to single digits in 2012 according to MTS management guidance. Meanwhile, messaging revenue is sliding on the back of user migration to Internet messengers such as Skype, ICQ, and Mail Agent. We expect this trend to continue, but do not think this will lead to substantial decrease in messaging revenues and will be compensated by accelerated growth in other VAS. Content revenue is also falling due to the improved popularity of mobile internet, which is a cheaper option for customers vis-a-vis other multimedia content.
Figure 8. Russia VAS revenues by segment, RUBmn

25,000
20,000
15,000
10,000
5,000
1Q10
2Q10 Messaging
3Q10
4Q10 Content
1Q11 Data
2Q11 Other
3Q11
Sources: AC&M, Otkritie Capital estimates
VAS revenue is highly dependent upon the capacity of the 3G network. Megafon, which invested heavily in 3G rollout in 2010, is the leader in terms of VAS share. In 2011 Megafon continued to be the leader in the number of 3G base stations in Russia, while MTS made substantial progress in 2011 by nearly quadrupling the number of its base stations in operation. VimpelCom is growing slower in this respect, which is confirmed by the lower proportion of VAS share in revenues. We expect that this year Big3 operators will reduce their activity in expansion of 3G networks, the additions of new base stations will be more focused on big cities, where most high-ARPU clients are located.
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Figure 9. VAS share in mobile revenues, %

35%
30% 25%
Figure 10. 3G base stations in Russia

30,000
25,000
20,000
20%
15,000
15% 10% 5% 0% 1Q10 2Q10 MTS 3Q10 4Q10 Vimpelcom 1Q11 2Q11 Megafon 3Q11
10,000 5,000 0
MTS
VimpelCom
2010 2011E
Megafon
Sources: Otkritie Capital estimates, AC&M, Company data
Sources: Otkritie Capital estimates, Company data
Broadband Internet
The number of broadband Internet users in Russia has increased 13%YtD in June 2011 and 51% since the beginning of 2010. The growth came mostly from regions other than Moscow and St. Petersburg, where marketing activities and increased spending on building fiber lines attracted stimulated a shift away from dial-up internet usage to broadband connections.
Figure 11. Russia Broadband users monthly dynamics, mn households

20 18 16
14
12 10 8 6 4 2
Russia
Sources: Otkritie Capital estimates, AC&M
Moscow
St Petersburg
Competition on the broadband market across almost Russias major cities is becoming ever more severe as internet penetration increases. Although there are still areas within Russia with unsaturated demand, the big players focus on the cities with populations exceeding 100,000, which is more economically efficient. The competition in big cities is already tough, which makes it difficult to grow market share without acquiring local competitors. The Russian broadband market is still dominated by Rostelecom, which has more than 7mn households using its services. While MTS and VimpelCom are much smaller, they are rapidly growing their subscriber bases via M&A activity and greenfield projects. There is still a large share of independent providers on the market, the biggest of which is ER-Telecom, which operates in 42 cities in Central, Northwest, Urals, South, and Siberia regions. MTS has the biggest share of the lucrative Moscow market with over 900,000 households subscribed, although VimpelCom and Akado have both been
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present on the market for a long time and have solid portions of it. By contrast, Rostelecom and Megafon entered the market Moscow only in 2011 via acquisitions of NTK and NetbyNet, respectively. The share of local players on St. Petersburg market is almost 44%. The market is dominated by Rostelecom VimpelCom and Megafon have only limited market shares while Megafon has presence at all.
Figure 12. Russia broadband market breakdown by users, 1H11
Figure 13. Moscow broadband market breakdown by users, 1H11
Figure 14. St. Petersburg broadband market breakdown by users, 1H11

Skynet 7% VimpelCom 9%
P&N Telecom 12% MTS 2%
Other 8%
Other 26% AKADO 4% ERTelecom 9% VimpelCom 9% Rostelecom 41%
Rostelecom 7% Megafon 11%
Other 14%
MTS 28%
Rostelecom 45%
MTS 11%
AKADO 20%
VimpelCom 20%
InterZet 17%
We expect M&A activity to remain the main theme for the broadband internet access market in Russia in 2012. We expect Rostelecoms market share to decline over the time since most of the Rostelecom lines are copper lines such lines enable users to have only a limited-speed Internet access. Meanwhile, MTS, VimpelCom, Megafon, and often local providers offer optic fiber lines, which are able to ensure higher speeds. As a measure to stem the migration in that direction Rostelecom needs to acquire local providers in the regions or build new fiber lines. According to the new Rostelecom strategy, the company considers M&A as a preferred path to increase market share in the big cities. But as the Big-3 operators are also highly engaged in competition for regional players, this has effectively increased valuations for the target companies, a process that we already observed in 2011.
Figure 15. Selected deals on the Russian broadband market, 2011

Byuer Rostelecom Megafon MTS MTS Target NTK NetByNet Altair TVT Stake 71.8% 100% 100% 100% price $1,325mn $270mn $23mn $162.9mn Valuation multiple 8.7x 2010 EV/EBITDA 6.8x 2010 EV/EBITDA 9.3x 2010 EV/EBITDA 10.5x 2010 EV/EBITDA Subscribers 215,000 broadband. 3.2mn Pay-TV 245,000 20,000 600,000 broadband, 500,000 Pay-TV Region Moscow Moscow Tula Tatarstan Date Feb-11 Jun-11 Aug-11 Oct-11
Sources: Otkritie Capital estimates, Company data
Some potential deals were already discussed in the media. Kommersant reported in October 2011 that CNT, which has approximately 200,000 broadband subscribers in Moscow (6% share) and operates under the Qwerty brand, could be acquired by Rostelecom. CNT is 51% owned by Svyazinvest. The media has also reported that Rostelecom is in negotiations to acquire Gorcom, another Moscow broadband provider. According to AC&M consulting, Gorcom has 78,000 subscribers and 2% of Moscows broadband market. 100% of the company is owned by Oleg Zaporozhec. If Rostelecom manages to close these 2 deals its share of the Moscow market could reach 15%. Considering the price per subscriber paid by Megafon for the same size business of NetbyNet, together Qwerty and Gorcom could be valued at around $300mn. Megafons attempt to acquire Akado (20% of the Moscow market, 686,000 subscribers) continues. The shareholders of both companies are still in the process of negotiating a final deal parameters. Meanwhile, FAS has approved a request by MTS to acquire 100% of Skynet (7% market share in St. Petersburg, 75,000 subscribers).
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Capex
We expect a gradual decrease in the capex/revenue ratio for mobile operators in 2012. We use the ratio of capex to revenue in order to compare capex efficiency and the activity of operators. After high spending on 3G base stations for mobile operators in 4Q10, we observed more balanced capex during 9M11, as the bulk of the increase in the number of 3G base stations is over, we expect a gradual decrease in the capex/revenue ratio for operators in 2012. Both MTS and VimpelCom guide for a gradual decrease in the capex/revenue ratio in 2012. VimpelCom targets for that ratio to drop to 15% by 2014. Megafon expects some slowdown of the capex/revenue ratio in 2012, from already the highest level of more than 30% in 2011. Megafons Board of Directors has approved RUB64bn of spending in 2012, which represents 27% of its RUB237bn 2012 revenue guidance. For Rostelecom we expect a substantial increase in capex in 2012 on the back of its newly-acquired elections broadcasting project (to be finished by March 2012). We4 estimated this project to bear an equipment cost of around RUB20bn (a figure that comprises 6% of Rostelecom 2012E revenue).
Figure 16. Capex/revenue quarterly dynamics, %

70% 60% 50% 40% 30%
Figure 17. Capex/revenue annual dynamics, %

35%
30%
25% 20% 15% 10%
20%
10% 0% 1Q10 MTS 2Q10 3Q10 4Q10 VimpelCom 1Q11 2Q11 Megafon 3Q11 4Q11E Rostelecom
5%
0% 2008 MTS 2009 VimpelCom 2010 2011E Megafon 2012E Rostelecom
We do not incorporate 4G network rollout expenditures in our models due to the lack of clarity regarding the timing and cost of the 4G licenses. We expect that auctions for 4G frequencies could be delayed beyond the initially set time horizon of 1Q12. As the March 2012 presidential elections approach, the probability of a delay rises owing to uncertainty surrounding the identity of a possible new Minister of Telecommunications in the event that Igor Schegolev is replaced in the new Cabinet. The current state position assumes that as a result of the auctions the Big-4 operators should obtain equal parts of the spectrum suitable for 4G rollout in Russia. This is based on a September 2011 decision of the State Comission on Wireless Frequences to distribute 4 equal parts of the spectrum. The Commission fixed the range of 791-862MHz, 2.5-2.7GHz and 2.3-2.4GHz as available for 4G rollout. According to the Commissions resolution the first 4 st parts of 791-862MHz frequency range will be distributed at the 1 stage of the st auction, while in the future the winners of the 1 stage will get frequencies in 2.5-2.7GHz range for free. The main difficulty is that the range of frequencies designated for the auctions is currently occupied by the Ministry of Defense, which requires additional conversion costs to be incurred by the winners. The cost estimates of the conversion of the full range of the spectrum vary from $2bn to $3bn.
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Rostelecom could benefit if the auctions are delayed. Before the auctions are held, some operators could already start providing 4G services since they already have the necessary licenses. Skartel (Yota brand) has a part of the 2.52.7GHz range, while Osnova Telecom and Rostelecom have the right to build a 4G network based on 2.3-2.4GHz frequencies (Rostelecom has licenses for 39 regions). Another option to avoid total frequency conversion is the introduction of technological neutrality which could bolster faster 4G rollout and enable operators to create network unions. Technological neutrality is the ability to use any frequencies that are suitable for the provision of telecom services. This is the chief prerequisite for joint use of base stations by operators, as it would allow a base station to operate using different frequencies simultaneously. Technological neutrality is mainly supported by Tele2 and regional players, since it would enable them to build 4G networks on existing frequencies. Until now, the Ministry of Telecommunications has been reluctant to consider any proposals in this respect.
Retail chains
In 2011 mobile operators took a big step forward in rolling out branded retail chains. Owning a retail chain is another way to increase margins, as this decreases dealer and payment commissions and allows better access to clients, which helps to hasten the impact of marketing initiatives. MTS has the biggest operational retail chain, which comprises more than 2,200 stores. Theoretically Rostelecom has the biggest chain (3,000 stores), but many are old-fashioned and inefficient (only selling 2-3 mobile phones a month in some stores). The fact that the stores are not separated from the core business makes it almost impossible for management to track their performance. Only once they are transformed into a special subsidiary is it clear which negative effect on the financials they may have.
Figure 18. Russia mobile retail networks, # of stores

6,000
5,000
4,000
3,000
2,000
1,000
0 Euroset MTS Megafon Own

Sources: Otkritie Capital estimates, company data, Kommersant
Rostelecom Franchise
VimpelCom
Svyaznoy
The higher number of monobrand stores leads to a higher proportion of MTS sales generated through its own network.
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Figure 19. New revenue generation breakdown by type of distribution channel

120%
100%
30%
80%
38%
60%
20% 32%
40% 50% 30% 0% MTS Own network National dealers VimpelCom Regional dealers & street retail
20%
Sources: Otkritie Capital estimates, company data
We expect to see some increase for MTS and VimpelCom in terms of the number of monobrand stores in 2012. These operators will focus more on improving existing networks, which we think should have a minor positive effect on their financials. Rostelecom is expected to modernize its retail network, which could mean some additional SG&A expenses that are currently not included in our model.
Otkritie Capital
10
Research analysts Alexander Vengranovich alexander.vengranovich@otkritie.com +7 (495) 213 1830
UPDATE
MTS
Top pick among Russian telecoms
BUY
Ticker Target price, $ Last price of ADRs, $ Upside Number of ADRs, mn Market cap, $mn Net debt, $mn EV, $mn Free float 52-week min, $ 52-week max, $
MBT US 22.8 16.7 36% 1,008.5 16,882 6,360 23,243 47% 11.9 21.5
We reiterate our BUY rating with a new target price of $22.8 for MTS, which still remains our top pick among Russian telecoms. MTS, which is a leader on the Russian mobile market, is wellpositioned to grasp the cream of the data revenue growth. The stock is a low leverage company, which pays high dividends and trades at 17% discount to EM peers on 2012E EV/EBITDA multiple.
Solid 3Q11 results may signal EBITDA margin turnaround. We think that MTS 3Q11 results, posted in November 2011, could be a first sign of a margin turnaround for the company. The improvement in EBITDA margin was mainly attributable to a reduction of Sales and marketing costs, which was a result of reduced subscriber acquisition activity. Top line improvement came mostly from increased ARPU, which continues to benefit from a rising share of VAS in MTS revenues. Comfortable leverage. Net debt/EBITDA has declined from 1.2 to 1.1 QoQ in 3Q11. This level compares to 1.4 for Rostelecom and 2.6 for VimpelCom. The management confirms its intention to keep the leverage at the current level in 2012. Dividend yield projected at 7%. The company paid 78% of its net income for 2010 as dividend in June 2011, which assumed $1.07/ADR. This year we expect MTS to pay the same dividend for 2011, which leads to a 6% dividend yield. MGTS acquisition synergies could represent upside. We think the negative effect of MGTS acquisition is already priced in, but we could see additional upside coming from synergies. MTS estimates the deal would bring synergies of RUB14bn, which we currently do not incorporate in our model. Value dilutive M&A risks cannot be ruled out. Though MTS management claims that no cross border M&A activity is planned for 2012, we think MTS could still enter in some big M&A deal, like VimpelCom did in 2011. Sistema management announced several times that MTS should become a global player with >200mn clients; these plans were also followed by media speculations regarding the potential sale of SSTL (Sistemas Indian telecom asset) to MTS, which in fact would be negatively taken by the market, especially considering the loss-making profile of SSTL. Catalysts. Along with the 4G auctions results, which will be released in 1H12, we think that the closest catalyst for the company will be its 4Q11 US GAAP results, slated for 7 March 2012 we think these should show a substantial YoY improvement on both the top and bottom lines. Progress in the rollout of the fibre network in Moscow in 2012 will be also a very important catalyst for the company.
Share price performance

120
110 100 90 80 70
60
Aug-11
May-11
Sep-11
Jan-11
Jun-11
Feb-11
Mar-11
Jul-11
MTS (Rebased)
RTS (Rebased)
Sources: Bloomberg
Figure 20. Key metrics ($mn)

Revenues EBITDA EBIT Net Income Net Debt EPS, $ CEPS, $ BVPS, $ DPS, $ 2011E 12,492 4,998 2,625 1,529 6,360 1.52 3.87 3.54 1.06 2012E 13,011 5,365 3,023 1,905 5,879 1.89 4.21 4.37 1.32 2013E 14,034 5,838 3,452 2,258 5,281 2.24 4.60 5.29 1.57 2014E 15,153 6,395 3,819 2,565 4,366 2.54 5.10 6.26 1.78
Dec-11
Oct-11
Apr-11
Nov-11
Figure 21. Valuation

P/E EV/EBITDA EV/Sales P/BV
EBITDA margin Net margin Revenue growth EPS growth Div Yield
2011E 11.0 4.7 1.9 4.7

40.0% 12.2% 11% 11% 6%
2012E 8.9 4.2 1.7 3.8

41.2% 14.6% 4% 25% 8%
2013E 7.5 3.8 1.6 3.2

41.6% 16.1% 8% 19% 9%
2014E 6.6 3.3 1.4 2.7

42.2% 16.9% 8% 14% 11%
Otkritie Capital
11
MTS | UPDATE | Russia | 1 February 2011
Valuation
Figure 22. MTS DCF Valuation, $mn
2011E Revenue EBITDA EBITDA Margin EBIT EBIT Margin Unlevered PBT * Tax Rate effective cash basis Unlevered Tax Investment CF (Capex)/Sales Other Cash Adj. (inc. Working Capital) Unlevered, Adj. Free Cash Flow Discount Factor Present Value of FCF $mn Value of Cash Flows Value from Perpetuity Adjustments Implied Equity Value Current Market Value Upside
2012E 13,011 5,365 41.2% 3,023 23.2% 3,023 26% -773 -2,602 20.0% -108 1,883 0.88 1,664
2013E 14,034 5,838 41.6% 3,452 24.6% 3,452 26% -882 -2,666 19.0% -61 2,228 0.78 1,740
2014E 15,153 6,395 42.2% 3,819 25.2% 3,819 26% -976 -2,576 17.0% -84 2,759 0.69 1,904
2015E 16,245 7,050 43.4% 4,288 26.4% 4,288 26% -1,096 -2,437 15.0% -130 3,387 0.61 2,066
2016E 17,293 7,527 43.5% 4,587 26.5% 4,587 26% -1,172 -2,075 12.0% -91 4,189 0.54 2,257
2017E 18,309 7,983 43.6% 4,871 26.6% 4,871 26% -1,245 -2,197 12.0% -100 4,441 0.48 2,115
2018E 19,407 8,479 43.7% 5,180 26.7% 5,180 26% -1,324 -2,329 12.0% -113 4,714 0.42 1,984
2019E 20,506 8,971 43.8% 5,485 26.8% 5,485 26% -1,402 -2,461 12.0% -124 4,985 0.37 1,854
12,492 4,998 40.0% 2,625 21.0% 2,625 26% -671 -3,362 26.9% 53 1,018 0.00 0 $/share 15.5 13.9 -6.5 22.8 16.7
15,584 13,970 -6,549 23,004 16882 36.3%
Figure 23. MTS peers comparison

P/E Name MBT US Equity Current multiples vs EM Peers vs DM Peers vs VimpelCom vs Rostelecom
EV/EBITDA 2013E 7.5 -31% -20% 30% -31% 2011E 4.6 -14% -5% 7% -9% 2012E 4.3 -17% -9% 15% -6% 2013E 3.8 -21% -17% 14% -17% 2011E 1.9 -8% 19% 9% -7%
EV/Sales 2012E 1.7 -9% 14% 18% -2% 2013E 1.6 -15% 4% 18% -7%
2011E 11.0 -28% 6% 43% -6%
2012E 8.9 -29% -10% 38% -24%
MTS
Otkritie Capital
12
MTS | UPDATE | Russia | 1 February 2011
Appendix: Financial forecasts

$mn unless otherwise stated
Profitability
56% 54% 52% 50% 48% 46% 44% 42% 40% 38% 36% 6,400 6,200 6,000 5,800 5,600 5,400 5,200 5,000 4,800 4,600 4,400
2009 Income Statement Revenues Depreciation EBITDA Operating profit (EBIT) Net Interest expense Non-op. expenses Pretax Profit Taxes Minority interest Net Profit Cash Flow Statement Net Change in work. cap. Provisions and write-offs Other Operating cashflow Capex Disposals (Acquisitions) Investing cashflow Equity Debt Financing cashflow Net Change in Cash Balance sheet Cash & equivalents Current Assets PP&E Goodwill and other Total Assets Current Liabilities S-T Debt L-T Debt Other L-T Liabilities Shareholders Funds Total Liabilities & Equity Net Debt Margins and profitability EBIT Margin EBITDA Margin Net Margin ROE ROA ROIC Momentum Revenue growth EBITDA growth EPS growth Liquidity and solvency Cash Ratio Current Ratio Interest Coverage Debt/Equity Debt/Total assets Net debt / EBITDA Valuation P/E P/CE P/BV EV/Sales EV/EBITDA Dividend yield, (ords) Dividend yield, (prefs) Per Share Data EPS - stock 1 DPS, ords DPS, prefs BVPS - stock 1 9,867 1,844 4,491 2,647 467 (589) 1,504 505 (20) 1,019 (397) 589 3,035 (1,800) (56) (1,856) 131 131 1,310 2,736 1,666 11,057 306 15,764 2,257 0 6,327 1,103 3,345 13,031 3,591 26.8% 45.5% 10.3% 30.5% 6.5% 19.7% -4% -13% -47% 1.2 0.7 5.7 1.9 0.4 0.8 6.3 2.2 1.9 2.1 4.6 15.5% 2.65 2.60 8.70
2010E 11,293 2,000 4,873 2,872 693 24 2,066 517 168 1,381 (48) (24) 3,477 (2,647) 465 (2,182) (3,036) (3,036) (1,741) 1,261 1,463 11,361 392 14,478 2,398 0 7,150 1,119 3,125 13,792 5,888 25.4% 43.1% 12.2% 44.2% 9.5% 21.2% 14% 9% -48% 0.5 0.6 4.1 2.3 0.5 1.2 12.2 5.0 5.4 2.0 4.7 6.4% 1.37 1.07 3.10
2011E 12,492 2,374 4,998 2,625 551 0 2,074 530 15 1,529 53 0 3,970 (2,998) (364) (3,362) 280 280 888 2,149 1,571 12,350 481 16,552 2,648 0 8,510 1,134 3,574 15,865 6,360 21.0% 40.0% 12.2% 42.8% 9.2% 17.9% 11% 3% 11% 0.8 0.6 4.8 2.4 0.5 1.3 11.0 4.3 4.7 1.9 4.7 6.3% 1.52 1.06 3.54
2012E 13,011 2,342 5,365 3,023 444 0 2,579 659 15 1,905 (108) 0 4,154 (2,602) 0 (2,602) (3,270) (3,270) (1,718) 431 1,568 12,610 569 15,179 2,625 0 6,310 1,149 4,408 14,492 5,879 23.2% 41.2% 14.6% 43.2% 12.6% 20.0% 4% 7% 25% 0.2 0.6 6.8 1.4 0.4 1.1 8.9 4.0 3.8 1.7 4.2 7.9% 1.89 1.32 4.37
2013E 14,034 2,386 5,838 3,452 399 0 3,053 780 15 2,258 (61) 0 4,598 (2,666) 0 (2,666) (1,833) (1,833) 98 529 1,646 12,891 660 15,725 2,732 0 5,810 1,164 5,333 15,039 5,281 24.6% 41.6% 16.1% 42.3% 14.4% 22.2% 8% 9% 19% 0.2 0.6 8.7 1.1 0.4 0.9 7.5 3.6 3.2 1.6 3.8 9.4% 2.24 1.57 5.29
2014E 15,153 2,576 6,395 3,819 354 0 3,465 885 15 2,565 (84) 0 5,072 (2,576) 0 (2,576) (1,681) (1,681) 815 1,344 1,737 12,891 752 16,724 2,832 0 5,710 1,179 6,317 16,038 4,366 25.2% 42.2% 16.9% 40.6% 15.3% 24.3% 8% 10% 14% 0.5 0.6 10.8 0.9 0.3 0.7 6.6 3.3 2.7 1.4 3.3 10.6% 2.54 1.78 6.26
2008 2009 2010E 2011E 2012E 2013E 2014E

EBITDA margin (LHS) EBITDA,$m
Cash flows, $m
6,000 5,000 4,000 3,000 2,000 1,000 0 (1,000) (2,000) (3,000) (4,000)
2008
2009 2010E 2011E 2012E 2013E 2014E

Investing cash flow
Operating cash flow
Momentum, %
30% 20% 10%
0%
0.10 0.20
0.30
0.40 0.50 2008 2009 2010E 2011E 2012E 2013E 2014E
EPS growth
Revenue growth
Valuation
14 12 10
8 6 4 2 0 2008
P/E
2009
2010E 2011E 2012E 2013E 2014E
EV/EBITDA
Source: Company data, Otkritie Capital estimates
Otkritie Capital
13
EQUITY | Russia Telecom 31 January 2012
UPDATE
Sistema
Better upside from MTS and Bashneft
BUY
Ticker Target price, $ Last price of GDRs, $ Upside Number of GDRs, mn Market cap, $mn Net debt, $mn EV, $mn Free float 52-week min, $ 52-week max, $
SSA LI 33.9 19.5 74% 482.5 9,414 11,014 14,094 24% 13.0 30.4
We reiterate our BUY rating on Sistema and increase the target price from $32.5 to $33.9/share, which implies 74% upside from the current share price. The revision was mainly driven by improved fundamentals of Sistemas core assets: MTS and Bashneft. In 2012 more upside could be created by greater M&A activity.
Bashneft outlook implies more upside. We maintain our bullish stance on Bashneft, and we anticipate the stock to benefit from a simplification of the groups internal ownership structure and the acquisition of a proper listing on the unified MICEX-RTS exchange. Although the pace of Bashnefts organic expansion should moderate in 2012, we expect the company to remain active on the M&A front and we do not rule out that it will add more undeveloped oil reserves to its assets portfolio, in addition to the T&T fields. Faster top-line growth and some EBITDA margin recovery for MTS in 2012. We think MTS is well-positioned to grasp most of the data revenue growth, which should have a positive impact on its margins in 2012. This a low leverage company, which is able to pay the highest dividends among its peers. Back on M&A track. In 2012 we expect Sistema to start delivering on its new M&A strategy, which implies a more structured approach to new acquisitions. Sistema announced recently the acquisition of a 50% stake in Nvision Group for $200mn by its IT holding RTI. The remaining 50% will be later swapped for an additional RTI share issue. NVision is one of the countrys largest technology companies and moreover is one of the biggest subcontractors for Rostelecoms e-government project. According to our estimates the company was valued at 2011E EV/EBITDA of 5.7 a 20% discount to the same multiple for IBS Group. We believe that in addition to the cheap price there is also potential synergy effects associated with the merger. We expect that as a result of the full acquisition of NVision, Sistema will retain control over RTI. In Nov-Dec 2011Sistema also acquired 2 farms in Rostov region for ~$25mn. As a result it will control in total 46,900 ha of agricultural land in Rostov region. The acquisition of the farms is in line with Sistemas strategy to expand its presence in agriculture and we expect further agricultural deals to be announced in 2012. Although this sector is new to Sistema, we see upside potential in agricultural deals if proper management is in place. Therefore we think that there is a probability that Sistema will attract a partner to manage these assets. These plans were preliminarily confirmed by the management at the latest analyst meeting in Dec 2011.

140
130 120 110 100 90 80 70 60
50
Aug-11
May-11
Sep-11
Jan-11
Jun-11
Feb-11
Mar-11
Jul-11
Sistema (Rebased)
RTS (Rebased)
Sources: Bloomberg

Revenues EBITDA EBIT Net Income Net Debt EPS, $ CEPS, $ BVPS, $ DPS, $ 2011E 34,701 8,397 6,347 1,002 11,888 2.08 8.11 18.40 0.21 2012E 31,958 7,851 3,960 523 11,014 1.08 11.21 19.28 0.11 2013E 34,732 8,714 4,651 710 8,589 1.47 12.48 20.64 0.15 2014E 37,102 9,735 5,339 897 5,601 1.86 13.62 22.36 0.19
Dec-11
Oct-11
Apr-11
Nov-11

2011E 9.4 1.8 0.4 1.1

24.2% 2.9% 23% 9% 1%
2012E 18.0 1.8 0.4 1.0

24.6% 1.6% -8% -48% 1%
2013E 13.3 1.3 0.3 0.9

25.1% 2.0% 9% 36% 1%
2014E 10.5 0.9 0.2 0.9

26.2% 2.4% 7% 26% 1%
Otkritie Capital
14
Sistema | UPDATE | Russia | 1 February 2011
Valuation
Figure 26. Sistema SOTP valuation
Company Telecoms MTS SSTL Oil & Energy Bashneft Bashkiria Oil & Energy assets Russneft Technology Sitronics RTI NVision Binnopharm Consumer Detskiy Mir MBRD Medsi Intourist SMM Agriculture Sum Of The Parts Valuation Gross SOTP value Intercompany transactions, PV as 2% of Gross SOTP value Net SOTP value Discount due to Sistema's holding structure Discounted Net SOTP value Corporate debt Sistema's SOTP value, adjusted to net corporate debt Target Price/GDR
Ownership
Target Enterprise value, $mn 29,553 653 12,019 809 6,090 756 589 400 63 303 544 203 179 333 25
Adjustments (Net debt+associates), $mn 6,549 653 2,420 42 5,366 641 370 0 63 0 76 120 89 0
Target Value Of Sistema's Stake, $mn 12,192 0 7,352 767 724 71 179 200 0 227 539 127 59 183 25 22,645 (453) 22,192 20.0% 17,754 (1,416) 16,338 33.9
Per Share of Sistema, $ 25.3 0.0 15.2 1.6 1.5 0.1 0.4 0.4 0.0 0.5 1.1 0.3 0.1 0.4 0.1 46.9 (0.9) 46.0 36.8 (2.9)
53% 57% 63% 17-50% 49% 62% 82% 50% 100% 75% 99% 100% 66% 75% 100%
Figure 27. Sistema upside breakdown by drivers, $/share

40 35 30
2.2 2.5 5.9 6.3
2.9 0.9
25
20 15 10 5
33.9 19.4
0
MTS upside Current price Developing assets upside Bashneft upside Corporate debt Intercompany transactions Discount contraction Target price
Sources: Otkritie Capital Estimates
Otkritie Capital
15
-10% 10% 20% 30% 40% 50% 0%
Apr-09 May-09 Jun-09 Jul-09 Aug-09 Sep-09 Oct-09 Nov-09 Dec-09 Jan-10 Feb-10
Otkritie Capital
Mar-10
Apr-10 May-10
Figure 28. Sistema discount to market NAV, %
Jun-10
Jul-10 Aug-10
Sep-10
Oct-10 Nov-10 Dec-10 Jan-11 Feb-11 Mar-11 Apr-11 May-11 Jun-11 Jul-11 Aug-11 Sep-11 Oct-11 Nov-11 Dec-11 Jan-12
Average discount
16

Profitability
40% 38% 36% 34% 32% 30% 28% 26% 24% 22% 20% 10,000 9,500 9,000 8,500 8,000 7,500 7,000 6,500 6,000 5,500 5,000
2009 Income Statement Revenues Depreciation EBITDA Operating profit (EBIT) Net Interest expense Non-op. expenses Pretax Profit Taxes Minority interest Net Profit Cash Flow Statement Net Change in work. cap. Provisions and write-offs Other Operating cashflow Capex Disposals (Acquisitions) Investing cashflow Equity Debt Financing cashflow Net Change in Cash Balance sheet Cash & equivalents Current Assets PP&E Goodwill and other Total Assets Current Liabilities S-T Debt L-T Debt Other L-T Liabilities Shareholders Funds Total Liabilities & Equity Net Debt Margins and profitability EBIT Margin EBITDA Margin Net Margin ROE ROA ROIC Momentum Revenue growth EBITDA growth EPS growth Liquidity and solvency Cash Ratio Current Ratio Interest Coverage Debt/Equity Debt/Total assets Net debt / EBITDA Valuation P/E P/CE P/BV EV/Sales EV/EBITDA Dividend yield, (ords) Dividend yield, (prefs) Per Share Data EPS - stock 1 DPS, ords DPS, prefs BVPS - stock 1 18,750 2,491 6,727 4,237 1,054 (128) 3,055 747 643 1,643 (1,947) 261 3,090 (3,434) (2,636) (6,071) 1,215 7,248 4,380 1,400 4,013 13,678 19,267 9,066 42,011 13,178 3,737 11,204 6,793 42,011 10,928 22.6% 35.9% 8.8% 24.2% 3.9% 13.7% 17% 23% 2,553% 0.3 1.0 4.0 2.2 0.4 1.6 5.7 2.3 1.4 0.8 2.2 3.41 14.08
2010 28,098 2,946 7,309 4,362 1,466 24 2,921 1,089 1,199 919 (474) 147 4,736 (4,180) (410) (4,590) 280 157 (1,015) (868) 3,145 14,576 19,040 10,494 44,109 13,928 3,196 12,207 7,967 44,109 12,258 15.5% 26.0% 3.3% 11.5% 2.1% 12.9% 50% 9% -44% 0.2 1.0 3.0 1.9 0.3 1.7 10.2 2.4 1.2 0.5 2.1 1.90 16.51
2011E 34,701 2,912 8,397 6,347 1,516 0 4,831 1,932 1,896 1,002 894 181 4,989 (4,531) 0 (4,531) 0 500 500 869 4,014 17,073 20,659 10,313 48,044 16,500 3,246 12,657 8,880 48,044 11,888 18.3% 24.2% 2.9% 11.3% 2.1% 18.4% 23% 15% 9% 0.2 1.0 4.2 1.8 0.3 1.4 9.4 2.4 1.1 0.4 1.8 1.1% 2.08 0.21 18.40
2012E 31,958 4,887 7,851 3,960 1,437 0 2,522 1,009 990 523 (468) 167 5,110 (4,135) 0 (4,135) 0 (2,000) (2,000) (1,125) 2,889 15,367 19,906 10,146 45,420 15,353 3,146 10,757 9,303 45,420 11,014 12.4% 24.6% 1.6% 5.6% 1.2% 11.7% -8% -6% -48% 0.2 1.0 2.8 1.5 0.3 1.4 18.0 1.7 1.0 0.4 1.8 0.6% 1.08 0.11 19.28
2013E 34,732 5,311 8,714 4,651 1,227 0 3,424 1,369 1,344 710 473 181 6,676 (4,199) 0 (4,199) 0 (2,000) (2,000) 425 3,313 16,378 18,794 9,965 45,137 16,312 3,046 8,857 9,961 45,137 8,589 13.4% 25.1% 2.0% 7.1% 1.6% 14.6% 9% 11% 36% 0.2 1.0 3.8 1.2 0.3 1.0 13.3 1.6 0.9 0.3 1.3 0.8% 1.47 0.15 20.64
2014E 37,102 5,674 9,735 5,339 1,016 0 4,323 1,729 1,697 897 404 194 7,168 (4,109) 0 (4,109) 0 (2,000) (2,000) 988 4,302 17,868 17,228 9,771 44,868 17,117 2,946 6,957 10,786 44,868 5,601 14.4% 26.2% 2.4% 8.3% 2.0% 18.2% 7% 12% 26% 0.3 1.0 5.3 0.9 0.2 0.6 10.5 1.4 0.9 0.2 0.9 1.0% 1.86 0.19 22.36
2008 2009 2010 2011E 2012E 2013E 2014E

Cash flows, $m
8,000
6,000 4,000 2,000 0 (2,000)
(4,000)
(6,000) (8,000) 2008 2009 2010 2011E 2012E 2013E 2014E
Investing cash flow
Operating cash flow
Momentum, %
3,000% 2,500% 2,000%
1,500%
1,000% 500%
0%
5 2008 2009 2010 2011E 2012E 2013E 2014E
EPS growth
Revenue growth
Valuation
160
140 120 100 80 60
40
20 0
P/E
2008
2009
2010
2011E 2012E 2013E 2014E
EV/EBITDA
Otkritie Capital
17
UPDATE
Rostelecom
Times are changing, but our view remains the same
SELL
Ticker Target price, RUB Last price of common shares, RUB Upside Number of common shares, mn Market cap, $mn Net debt, $mn EV, $mn Free float 52-week min, RUB 52-week max, RUB
RTKM RX 117 146 -20% 2,943.3 14,833 3,991 18,823 31% 127 221
We increase our target price for Rostelecom from RUB110 to RUB117/ordinary share, but still reiterate SELL rating for the stock. Rostelecom is the least preferred stock in our universe. We expect negative dynamics in the companys fixed line business, which is losing customers, who are shifting to mobile communications. Weve seen little progress in Rostelecom mobile operations in 2011 and do not expect a breakthrough in 2012. The company remains a low-dividend payer with 1.7% dividend yield on ordinary shares.
Skylink acquisition provides 3G licenses. Rostelecom has acquired a 100% stake in Skylink in December 2011 for RUB 9.4bn. We expect the company to use Skylink 3G licenses in the regions to enter new regions and attract new customers, though the major risks of that strategy lie on the execution side. As the mobile market is saturated Joint 4G rollout with Skartel not a game changer. Skartel (Yota brand) has only 150 base stations and network rollout implies substantial investments, which are still not included in Rostelecom financial model, therefore we do not expect substantial upside from earlier 4G rollout. B2G services revenue could surprise on the both sides. Rostelecoms project for online broadcasting from election sites will only be partially financed by the state, which is ready to pay only RUB13bn, while the cost of the project is estimated as high as RUB20-30bn. We doubt that the company could find additional uses for infrastructure created, otherwise it would need to recognize a loss of as much as RUB17bn (impairment on the equipment). That could amount to as much as 40% of the companys FY12 net income under US GAAP Svyazinvest-Rostelecom restructuring details to be announced in 2012. In 2012 the decision regarding the second stage of Svyazinvest-Rostelecom restructuring should be announced. While we do not think the deal terms would be beneficial for the minorities, there is still potential upside from that. Overall we do not expect the restructuring to be finished before 2013. Dividend yield is expected to be the lowest among Russian peers. Rostelecoms new dividend policy assumes payment of minimum 20% of net income under US GAAP as dividend for ordinary shares, that means RUB 8.5bn to be paid in 2012, which assumes RUB2.9/share or only 1.7% dividend yield. We estimate preferred shares to earn a 4% dividend yield in 2012. LSE listing could create additional share overhang. The company is expected to obtain LSE listing in February 2012 and we expect that some minority shareholders (e.g. Nafta Moskva) could decide to sell their shares, which could create additional share overhang risk.

140
130 120 110 100 90 80
70
Aug-11
May-11
Sep-11
Jan-11
Jun-11
Feb-11
Mar-11
Jul-11
Rostelecom (Rebased)
RTS (Rebased)
Sources: Bloomberg
Figure 29. Key metrics (RUBmn)

Revenues EBITDA EBIT Net Income Net Debt EPS, RUB CEPS, RUB BVPS, RUB DPS, RUB 2011E 292,108 114,738 60,021 38,841 135,639 12.67 30.52 82.18 2.64 2012E 320,568 126,283 58,565 37,177 121,263 12.13 34.21 91.46 2.53 2013E 325,219 119,534 64,816 41,911 98,625 13.67 31.52 102.34 2.85 2014E 342,938 124,913 70,195 45,985 74,663 15.00 32.85 114.18 3.12
Dec-11
Oct-11
Apr-11
Nov-11

2011E 11.5 5.1 2.0 1.8

39.3% 13.3% 6% 24% 2%
2012E 12.0 4.5 1.8 1.6

39.4% 11.6% 10% -4% 2%
2013E 10.7 4.6 1.7 1.4

36.8% 12.9% 1% 13% 2%
2014E 9.7 4.2 1.5 1.3

36.4% 13.4% 5% 10% 2%
Otkritie Capital
18
VimpelCom | UPDATE | Russia | 1 February 2011
Valuation
Figure 31. Rostelecom DCF Valuation
DCF Revenue EBITDA EBITDA Margin EBIT EBIT Margin tax on EBIT depreciation CAPEX+ Acquisitions Changes in WC FCF discount factor Discounted cash flow RUBmn PV of CF unitl 2020 PV of terminal value Enterprise value Less net debt Less minorities Add associates Equity fair value Current market cap downside
Sources: Otkritie Capital Estimates
2011E 292,108 114,738 39.3% 60,021 20.5% (14,565) 54,718 (92,029) (530) 7,615
2012E 320,568 126,283 39.4% 58,565 18.3% (14,211) 67,718 (83,348) 3,684 32,408 0.89 28,809 RUB/share 74.7 75.5 150.2 -39.7 -4.0 10.5 117.0 148
2013E 325,219 119,534 36.8% 64,816 19.9% (15,728) 54,718 (68,296) 4,030 39,539 0.79 31,245
2014E 342,938 124,913 36.4% 70,195 20.5% (17,033) 54,718 (68,588) 3,011 42,303 0.70 29,716
2015E 358,172 128,903 36.0% 74,185 20.7% (18,002) 54,718 (68,053) 2,841 45,690 0.62 28,531
2016E 373,136 132,990 35.6% 78,272 21.0% (18,993) 54,718 (67,164) 2,724 49,556 0.56 27,508
2017E 388,284 137,791 35.5% 83,073 21.4% (20,158) 54,718 (66,008) 2,494 54,118 0.49 26,704
2018E 405,088 144,136 35.6% 89,418 22.1% (21,698) 54,718 (68,865) 2,362 55,935 0.44 24,536
2019E 423,802 151,847 35.8% 97,129 22.9% (23,569) 54,718 (72,046) 2,375 58,606 0.39 22,852
219,900 222,131 442,032 (116,764) (11,870) 30,848 344,246 434,984 -20.9%
Figure 32. Rostelecom peers comparison

P/E Name RTKM rx equity Current multiples vs EM Peers vs DM Peers vs MTS vs VimpelCom
Sources: Otkritie Capital Estimates, Bloomberg
EV/EBITDA 2013E 10.9 1% 17% 46% 89% 2011E 5.1 -6% 5% 10% 18% 2012E 4.5 -12% -4% 6% 21% 2013E 4.6 -5% 0% 20% 37% 2011E 2.0 -1% 28% 7% 17%
EV/Sales 2012E 1.8 -7% 16% 2% 21% 2013E 1.7 -8% 12% 8% 28%
2011E 11.8 -23% 13% 6% 53%
2012E 11.7 -6% 18% 32% 82%
Rostelecom
Otkritie Capital
19

RUBmn unless otherwise stated
Profitability
44% 42% 155,000 145,000
2009 Income Statement Revenues Depreciation EBITDA Operating profit (EBIT) Net Interest expense Non-op. expenses Pretax Profit Taxes Minority interest Net Profit Cash Flow Statement Net Change in work. cap. Provisions and write-offs Other Operating cashflow Capex Disposals (Acquisitions) Investing cashflow Equity Debt Financing cashflow Net Change in Cash Balance sheet Cash & equivalents Current Assets PP&E Goodwill and other Total Assets Current Liabilities S-T Debt L-T Debt Other L-T Liabilities Shareholders Funds Total Liabilities & Equity Net Debt Margins and profitability EBIT Margin EBITDA Margin Net Margin ROE ROA ROIC Momentum Revenue growth EBITDA growth EPS growth Liquidity and solvency Cash Ratio Current Ratio Interest Coverage Debt/Equity Debt/Total assets Net debt / EBITDA Valuation P/E P/CE P/BV EV/Sales EV/EBITDA Dividend yield, (ords) Dividend yield, (prefs) Per Share Data EPS - stock 1 DPS, ords DPS, prefs BVPS - stock 1 264,645 51,517 101,570 50,053 13,389 36,664 8,074 26,263 (1,435) 86,255 (45,352) (1,816) (47,168) (35,985) 3,102 34,243 65,958 293,497 5,831 404,752 90,165 49,104 67,092 217,411 403,180 97,531 18.9% 38.4% 9.9% 12.1% 6.5% 14.3% 2% 14% -3% 0.4 0.7 3.7 0.5 0.3 1.0 17.0 5.7 2.1 2.1 5.4 8.57 70.91
2010 275,731 51,138 101,419 50,281 9,033 41,248 10,041 31,338 2,393 85,042 (51,845) (30,470) (82,315) (18,763) (16,036) 18,207 53,082 301,068 4,531 435,253 95,509 50,096 87,941 213,107 426,811 136,027 18.2% 36.8% 11.4% 14.7% 7.2% 12.5% 4% -0% 19% 0.2 0.6 5.6 0.6 0.3 1.3 14.3 5.4 2.1 2.1 5.8 0.5% 10.22 0.43 69.51
2011E 292,108 54,718 114,738 60,021 12,572 47,448 12,445 38,841 (530) 93,128 (58,422) (33,607) (92,029) (428) 672 18,879 55,825 338,379 4,531 434,773 96,192 50,096 87,941 251,948 466,865 135,639 20.5% 39.3% 13.3% 15.4% 8.9% 15.0% 6% 13% 24% 0.2 0.6 4.8 0.5 0.3 1.2 11.5 4.8 1.8 2.0 5.1 1.8% 12.67 2.64 82.18
2012E 320,568 67,718 126,283 58,565 12,572 45,993 11,912 37,177 3,684 108,679 (83,348) 0 (83,348) (9,383) 15,948 34,827 75,373 354,009 4,531 429,976 99,970 50,096 87,941 280,411 502,043 121,263 18.3% 39.4% 11.6% 13.3% 8.6% 15.9% 10% 10% -4% 0.3 0.8 4.7 0.5 0.3 1.0 12.0 4.3 1.6 1.8 4.5 1.7% 12.13 2.53 91.46
2013E 325,219 54,718 119,534 64,816 12,572 52,244 13,429 41,911 4,030 100,759 (68,296) 0 (68,296) (8,765) 23,698 58,525 99,659 367,587 4,531 427,231 102,517 50,096 87,941 313,750 539,908 98,625 19.9% 36.8% 12.9% 13.4% 9.8% 19.5% 1% -5% 13% 0.6 1.0 5.2 0.4 0.3 0.8 10.7 4.6 1.4 1.7 4.6 2.0% 13.67 2.85 102.34
2014E 342,938 54,718 124,913 70,195 12,572 57,622 14,734 45,985 3,011 103,814 (68,588) 0 (68,588) (10,118) 25,109 83,633 127,009 381,457 4,531 424,839 105,273 50,096 87,941 350,072 581,127 74,663 20.5% 36.4% 13.4% 13.1% 10.8% 23.8% 5% 4% 10% 0.8 1.2 5.6 0.4 0.3 0.6 9.7 4.4 1.3 1.5 4.2 2.1% 15.00 3.12 114.18
40% 38%
36% 34% 32% 30% 2008 2009 2010 2011E 2012E 2013E 2014E
EBITDA margin (LHS)
135,000 125,000
115,000 105,000 95,000 85,000
EBITDA,RUBm
Cash flows, RUBm

150,000 100,000 50,000
0 (50,000) (100,000) 2008 2009 2010 2011E 2012E 2013E 2014E
Investing cash flow
Operating cash flow
Momentum, %
25%
20%
15% 10% 5%
0%
0.05 2008 2009 2010 2011E 2012E 2013E 2014E
EPS growth
Revenue growth
Valuation
18 16 14 12 10 8 6 4 2 0
2008
P/E
2009
2010
2011E 2012E 2013E 2014E
EV/EBITDA
Otkritie Capital
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UPDATE
VimpelCom
Good prospects, but too many moving parts
BUY
Ticker Target price, $ Last price of common shares, $ Upside Number of common shares, mn Market cap, $mn Net debt, $mn EV, $mn Free float 52-week min, $ 52-week max, $
VIP US 14 10.5 33% 1,628.2 17,129 22,103 39,232 17% 9.16 14.7
We reiterate our BUY rating but decrease our target price for VimpelCom from $22 to $14/share. We see a long-term fundamental upside in VimpelCom stock, though it lacks positive short-term catalysts. Although we like the new strategy, which is focused on balanced growth and improved efficiency, ongoing uncertainty regarding the fate of the shareholder agreement and Djezzy nationalization price could limit growth opportunities for now. VimpelCom is expected to remain a high dividend payer (with a dividend yield of 7.5%) as the company is not planning fast deleveraging in 2012. The stock is cheap trading on 27% discount to EM peers.
We expect the top-line to grow by 4.5% in 2012, while the EBITDA margin should go up to 42%. We expect some margins improvement in Russia operations, mainly on the back of decreasing selling expenses. Most of the top-line growth is expected to come from Asia, Africa and CIS. Dispute between Altimo and Telenor likely to continue in 2012 after the recent acquisition of a 6% voting stake in VimpelCom from Oleg Kiselev by EastOne, which is an investment fund of Viktor Pinchuk. Because EastOne is an independent investment company, the announcement increases Altimos chances of prevailing in its court case against Telenor. Altimo currently holds less than 25% of VimpelCom's voting rights, which effectively means that the VimpelCom shareholder agreement should be terminated if Telenor cannot prove direct links between Altimo and EastOne. After termination of the agreement Altimo will likely initiate elections for a new VimpelCom Board of Directors, which could be done in 6 months after the termination of the shareholders agreement. A new Board of Directors would most likely comprise 3 members each from Altimo, Telenor, and Weather Investments, as well as 3 independent directors (one of who would probably represent EastOne). The new BoD combination implies that Altimo and Weather could jointly have 7 places out of 12 in the BoD, which could make their life easier to push any further M&A deal through. Djezzy valuation would be the key stock driver in 1H12. VimpelCom has entered into a non-binding memorandum regarding the possible sale to the Algerian State of a majority stake in its subsidiary Orascom Telecom Algerie (OTA), which operates under the Djezzy brand. Following signing of the memorandum, the Algerian Ministry of Finance and VimpelCom will undertake a process to agree on the valuation of Djezzy. We expect OTA (Djezzy) valuation range to be announced in Spring 2012, which would be followed by the final price negotiation period, therefore we expect the deal to be closed in late 2012. As a result of the transaction VimpelCom will continue to consolidate OTA in its financial results, but we think the sale could limit OTAs ability to upstream dividends to VimpelCom, which could have a negative effect on the dividend yield after 2012. Dividend yield for 2012 likely to exceed 7.5%. The management guides for an annual dividend of $0.8/ADR for 2011-2014, which translates into a 7.5% dividend yield. The interim dividend for 2011 is expected to be announced in 2Q12.

115
110 105 100 95 90 85 80 75 70
65
Aug-11
May-11
Sep-11
Jan-11
Jun-11
Feb-11
Mar-11
Jul-11
VimpelCom (Rebased)
RTS (Rebased)
Sources: Bloomberg

Revenues EBITDA EBIT Net Income Net Debt EPS, $ CEPS, $ BVPS, $ DPS, $ 2011E 22,996 9,437 4,773 2,042 23,700 1.25 4.12 7.11 0.82 2012E 24,022 10,098 5,346 2,534 22,103 1.56 4.48 7.86 0.93 2013E 25,351 10,657 5,768 2,950 19,868 1.81 4.81 8.73 0.72 2014E 26,860 11,426 6,380 3,553 16,593 2.18 5.28 10.19 0.76
Dec-11
Oct-11
Apr-11
Nov-11

2011E 8.4 4.3 1.8 1.5

41.0% 8.9% 119% -7% 8%
2012E 6.8 3.9 1.6 1.3

42.0% 10.5% 4% 24% 9%
2013E 5.8 3.5 1.5 1.2

42.0% 11.6% 6% 16% 7%
2014E 4.8 3.0 1.3 1.0

42.5% 13.2% 6% 20% 7%
Otkritie Capital
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Valuation
Figure 35. VimpelCom DCF Valuation
2011E Revenue EBITDA EBITDA Margin EBIT EBIT Margin Unlevered PBT Tax Rate effective cash basis Unlevered Tax Investment CF (Capex)/Sales Other Cash Adj. (inc. Working Capital) Unlevered, Adj. Free Cash Flow Discount Factor Present Value of FCF $mn Value of Cash Flows Value from Perpetuity Adjustments Implied Equity Value Adjsted MCAp Upside
ources: Otkritie Capital estimates, Bloomberg
2012E 24,022 10,098 42.0% 5,346 22.3% 5,346 -1,497 -4,374 18.2%
2013E 25,351 10,657 42.0% 5,768 22.8% 5,768 -1,615 -4,056 16.0%
2014E 26,860 11,426 42.5% 6,380 23.8% 6,380 28% -1,787 -4,029 15.0% -265 5,346
2015E 28,370 12,068 42.5% 6,881 24.3% 6,881 28% -1,927 -4,255 15.0% 40 5,926 0.62 3,665
2016E 29,706 12,785 43.0% 7,502 25.3% 7,502 28% -2,101 -4,456 15.0% -74 6,154 0.55 3,376
2017E 30,980 13,333 43.0% 7,979 25.8% 7,979 28% -2,234 -4,647 15.0% -23 6,429 0.43 2,773
2018E 32,289 13,897 43.0% 8,477 26.3% 8,477 28% -2,374 -4,843 15.0% -34 6,646 0.30 2,000
2019E 33,429 14,387 43.0% 8,944 26.8% 8,944 28% -2,504 -5,014 15.0% -66 6,802 0.19 1,266
22,996 9,437 41.0% 4,773 20.8% 4,773 -1,336 -5,769 25.1%
0.00 0 $/share 14.85 14.16 -15.03 14.0 10.5
0.89 3,582
0.79 3,782
0.70 3,728
24,172 23,053 -24,472 22,754 17,129 32.8%
Figure 36. VimpelCom peers comparison

P/E Name VIP US Equity Current multiples vs EM Peers vs DM Peers vs MTS vs Rostelecom
EV/EBITDA 2013E 5.8 -47% -38% -23% -47% 2011E 4.3 -20% -11% -6% -15% 2012E 3.7 -27% -21% -13% -18% 2013E 3.4 -31% -27% -12% -27% 2011E 1.7 -16% 9% -8% -14%
EV/Sales 2012E 1.5 -23% -4% -16% -17% 2013E 1.3 -28% -12% -16% -22%
2011E 7.7 -50% -26% -30% -35%
2012E 6.4 -48% -35% -28% -45%
VimpelCom
Otkritie Capital
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Profitability
54% 52% 50% 48% 46% 44% 42% 40% 38% 36% 13,000 12,000 11,000 10,000 9,000 8,000 7,000 6,000 5,000 4,000
2009 Income Statement Revenues Depreciation EBITDA Operating profit (EBIT) Net Interest expense Non-op. expenses Pretax Profit Taxes Minority interest Net Profit Cash Flow Statement Net Change in work. cap. Provisions and write-offs Other Operating cashflow Capex Disposals (Acquisitions) Investing cashflow Equity Debt Financing cashflow Net Change in Cash Balance sheet Cash & equivalents Current Assets PP&E Goodwill and other Total Assets Current Liabilities S-T Debt L-T Debt Other L-T Liabilities Shareholders Funds Total Liabilities & Equity Net Debt Margins and profitability EBIT Margin EBITDA Margin Net Margin ROE ROA ROIC Momentum Revenue growth EBITDA growth EPS growth Liquidity and solvency Cash Ratio Current Ratio Interest Coverage Debt/Equity Debt/Total assets Net debt / EBITDA Valuation P/E P/CE P/BV EV/Sales EV/EBITDA Dividend yield, (ords) Dividend yield, (prefs) Per Share Data EPS - stock 1 DPS, ords DPS, prefs BVPS - stock 1 8,711 1,694 4,273 2,578 547 479 1,552 435 (4) 1,122 (332) (345) 2,135 (892) (542) (1,433) (1,272) (1,857) (3,129) (2,427) 1,447 1,520 4,121 4,361 14,733 1,601 0 7,353 509 4,509 14,733 5,906 29.6% 49.0% 12.9% 24.9% 7.6% 17.7% -14% -3% 114% 0.9 0.9 4.7 1.6 0.5 1.4 9.6 3.8 2.4 2.6 5.4 5.2% 1.09 0.55 4.40
2010 10,513 2,080 4,932 2,852 484 (42) 2,410 606 48 1,757 1,700 (31) 5,553 (1,757) 410 (1,347) 368 (1,692) (1,323) 2,882 885 1,440 10,599 7,004 19,928 3,222 0 5,661 522 10,671 20,076 4,776 27.1% 46.9% 16.7% 16.5% 8.8% 14.4% 21% 15% 23% 0.3 0.4 5.9 0.5 0.3 1.0 7.8 3.6 1.3 2.1 4.4 8.2% 1.35 0.87 8.19
2011E 22,996 4,664 9,437 4,773 1,659 0 3,114 872 200 2,042 2,462 0 9,368 (4,369) (1,400) (5,769) 6,162 18,339 24,501 28,100 300 3,449 12,928 7,004 23,681 7,693 0 24,000 722 11,583 43,998 23,700 20.8% 41.0% 8.9% 17.6% 8.6% 24.3% 119% 91% -7% 0.0 0.4 2.9 2.1 1.0 2.5 8.4 2.6 1.5 1.8 4.3 7.7% 1.25 0.82 7.11
2012E 24,022 4,752 10,098 5,346 1,549 0 3,797 1,063 200 2,534 (189) 0 7,298 (4,324) (50) (4,374) 912 (1,597) (684) 2,240 300 3,603 12,550 7,004 23,457 7,658 0 22,403 922 12,790 43,773 22,103 22.3% 42.0% 10.5% 19.8% 10.8% 27.6% 4% 7% 24% 0.0 0.5 3.5 1.8 1.0 2.2 6.8 2.4 1.3 1.6 3.9 8.9% 1.56 0.93 7.86
2013E 25,351 4,888 10,657 5,768 1,394 0 4,374 1,225 200 2,950 (176) 0 7,862 (4,056) (50) (4,106) 1,207 (2,235) (1,028) 2,727 300 4,056 11,767 7,004 23,127 7,935 0 20,168 1,122 14,219 43,444 19,868 22.8% 42.0% 11.6% 20.7% 12.8% 31.0% 6% 6% 16% 0.0 0.5 4.1 1.4 0.9 1.9 5.8 2.2 1.2 1.5 3.5 6.9% 1.81 0.72 8.73
2014E 26,860 5,045 11,426 6,380 1,168 0 5,213 1,460 200 3,553 (265) 0 8,534 (4,029) (50) (4,079) 1,429 (3,275) (1,846) 2,609 300 4,566 10,801 7,004 22,671 8,180 0 16,893 1,322 16,592 42,988 16,593 23.8% 42.5% 13.2% 21.4% 15.7% 36.0% 6% 7% 20% 0.0 0.6 5.5 1.0 0.7 1.5 4.8 2.0 1.0 1.3 3.0 7.3% 2.18 0.76 10.19
2008 2009 2010 2011E 2012E 2013E 2014E

Cash flows, $m
10,000 8,000 6,000 4,000 2,000 0 (2,000) (4,000) (6,000) (8,000) (10,000)
2008
2009
2010 2011E 2012E 2013E 2014E

Investing cash flow
Operating cash flow
Momentum, %
120% 100% 80% 60% 40% 20% 0% 0.2 0.4 0.6 0.8
2008
2009
2010 2011E 2012E 2013E 2014E

EPS growth
Revenue growth
Valuation
25 20 15
10 5 0 2008
P/E
2009
2010
2011E 2012E 2013E 2014E
EV/EBITDA
Otkritie Capital
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Disclosures appendix
Analyst certification
The estimates analysts whose names appear on the front cover of investment research reports produced by Otkritie Securities Ltd (the Otkritie Capital research) certify that: i) all of the views expressed in the Otkritie Capital research accurately reflect their personal views about the subject security or issuer, and ii) no part of the research analysts compensation was, is, or will be directly or indirectly related to the specific opinions or views expressed by the research analysts in the Otkritie Capital research. Research analysts compensation is based upon various factors including the total revenues of the group of companies operating under the Otkritie Capital brand name, a portion of which are generated by investment banking activities. If the date of the Otkritie Capital research is not current, the views and contents may not reflect the research analysts current thinking.
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Meaning of target prices and ratings

Target prices represent the research analysts expectation of absolute return on equity (forecast price appreciation derived by the valuation methodology stated at initial time of publication, and dividend yield) within 12 months. A three-tier rating system is used for stocks under coverage, set for each stock at the initial date of publication: Buy: Hold: Sell: target price exceeds the market price by 15% target price is within the range from -15% to +15% of the market price target price exceeds the market price by -15%.
Coverage Policy: Coverage of an issuer is updated as deemed appropriate based on developments with the subject company, sector, and/or market that may have a material impact on the analysts published views or opinions. At times, the expected absolute returns may fall outside of the range used at the time of setting a rating because of price movement and/or volatility. Such interim deviations are permitted and are subject to review by Otkritie Capitals Research Management. Your decision to buy or sell a security should be based upon your personal investment objectives and should be made only after evaluating the securitys expected performance and risk.
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www.otkritie.com Bloomberg: OTKR
RESEARCH
Alexander Burgansky Head of Research
alexander.burgansky@otkritie.com
+7 (495) 213 1825
Equity Research
Vladimir Savov Head of Equity Research vladimir.savov@otkritie.com +7 (495) 213 1826 Strategy Tom Mundy thomas.mundy@otkritie.com +7 (495) 213 1833 Taryn Arthur taryn.arthur@otkritie.com +7 (495) 777 5656 (x4307) Economics Vladimir Tikhomirov vladimir.tikhomirov@otkritie.com +7 (495) 213 1829 Polina Badasen polina.badasen@otkritie.com +7 (495) 777 5656 (x4663) Oil & Gas Alexander Burgansky
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Fixed Income Research

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Rus Telecoms Report 2012 Otkritiye

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EQUITY | Russia Telecom 1 February 2011

Research analysts Alexander Vengranovich alexander.vengranovich@otkritie.com+ 7 (495) 2131830

Russian Telecoms 2012

Sources: Bloomberg, Otkritie Capital estimates

Telecoms 2011 performance

Sources: Otkritie Capital estimates

Telecoms YtD performance

Sources: Otkritie Capital estimates

Figure 1. Valuation table

Sources: Bloomberg, Otkritie Capital estimates

Russian telecoms 2012 | UPDATE | Russia | 1 February 2011

Disclosures appendix ................................................................................ 24

Russian telecoms 2012 | UPDATE | Russia | 1 February 2011

Russian Telecoms peer comparison

Sources: Otkritie Capital estimates, Bloomberg

Figure 3. Russian Telecoms valuation comparison

Sources: Otkritie Capital estimates, Bloomberg

Russian telecoms 2012 | UPDATE | Russia | 1 February 2011

Russian telecom market update

Figure 4. Russia mobile subscribers, mn

Figure 5. Russia mobile subscribers QoQ dynamics, %

60 55 50 1Q10 2Q10 MTS

2% 0% 1Q10 -2% 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 Nov-11

Figure 6. Russia mobile EBITDA margin quarterly dynamics

Figure 7. Russia mobile EBITDA margin annual forecast

Sources: Otkritie Capital estimates

Sources: Otkritie Capital estimates

Russian telecoms 2012 | UPDATE | Russia | 1 February 2011

Figure 8. Russia VAS revenues by segment, RUBmn

Sources: AC&M, Otkritie Capital estimates

Russian telecoms 2012 | UPDATE | Russia | 1 February 2011

Figure 9. VAS share in mobile revenues, %

Figure 10. 3G base stations in Russia

Sources: Otkritie Capital estimates, AC&M, Company data

Sources: Otkritie Capital estimates, Company data

Figure 11. Russia Broadband users monthly dynamics, mn households

Russian telecoms 2012 | UPDATE | Russia | 1 February 2011

Figure 12. Russia broadband market breakdown by users, 1H11

Figure 13. Moscow broadband market breakdown by users, 1H11

Figure 14. St. Petersburg broadband market breakdown by users, 1H11

Other 26% AKADO 4% ERTelecom 9% VimpelCom 9% Rostelecom 41%

Rostelecom 7% Megafon 11%

Sources: Otkritie Capital estimates, AC&M

Sources: Otkritie Capital estimates, AC&M

Sources: Otkritie Capital estimates, AC&M

Figure 15. Selected deals on the Russian broadband market, 2011

Sources: Otkritie Capital estimates, Company data

Russian telecoms 2012 | UPDATE | Russia | 1 February 2011

Figure 16. Capex/revenue quarterly dynamics, %

Figure 17. Capex/revenue annual dynamics, %

Sources: Otkritie Capital estimates

Sources: Otkritie Capital estimates

Russian telecoms 2012 | UPDATE | Russia | 1 February 2011

Figure 18. Russia mobile retail networks, # of stores

0 Euroset MTS Megafon Own

Russian telecoms 2012 | UPDATE | Russia | 1 February 2011

Figure 19. New revenue generation breakdown by type of distribution channel

Sources: Otkritie Capital estimates, company data

EQUITY | Russia Telecom 1 February 2011

Research analysts Alexander Vengranovich alexander.vengranovich@otkritie.com +7 (495) 213 1830

Share price performance

Figure 20. Key metrics ($mn)

Figure 21. Valuation