Russian Property
Too early to come back: we cut estimates; raise AFID
to OW and OPIN to N, downgrade LSR to UW
Property
Elena JouronovaAC
(7-495) 967-3888
elena.jouronova@jpmorgan.com
J.P. Morgan Bank International LLC
See page 52 for analyst certification and important disclosures, including non-US analyst disclosures.
J.P. Morgan does and seeks to do business with companies covered in its research reports. As a result, 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.
Property stocks vs. RTS YTD perform.
-50% 0% 50%
AFID
LSR
Sector av g
RTS
HALS
PIK
OPIN
Source: Bloomberg
Moscow property prices
$/sq m
2,000
3,000
4,000
5,000
6,000
7,000
Jan-06 Jan-07 Jan-08 Jan-09
Source: IRN, Bloomberg
Moscow Class A office rents
$/sq m
500
700
900
1,100
1,300
1,500
1Q07 1Q08 1Q09E 1Q10E
Pessimistic Base
Source: Cushman&Wakefield
• We downgrade PTs for Russian property companies on the back of
more conservative macro assumptions for ’09 and a change in valuation
methodology. We believe 2009 will be a challenging year for the sector
as the Russian economy contracts (JPMe GDP down 1%) and liquidity
tightens further. Despite the sell-off in 2H08 the risk-reward balance for
property stocks remains unfavorable, in our view.
• Tough times ahead. We expect developers to post a 60-70% EPS
decline in ’09. Our base case assumptions call for a 30-50% decline in
dollar property prices and rents, 30% vacancy rates for new commercial
space and 20% cost of debt. Combined ’09 debt maturities of the names
we cover are estimated at $1.7 bn while we expect them to have close to
zero or negative free cash flow. This makes the companies heavily
dependent on loan extensions amidst a deepening liquidity freeze. State
support may or may not come given Russia’s rapidly worsening
financing background and political risks.
• Proposed investment strategy – stay defensive. We believe that any
enthusiasm around the sector following the large sell off in 2H08 is
unjustified from a fundamental standpoint and recommend staying out of
the names that are problematic from the leverage perspective (PIK, LSR,
Sistema-Hals). We favor more defensive companies with healthy balance
sheets (AFI Development, Open Investments) that seem better positioned
to weather the current liquidity crisis, in our view. Key risks to our PTs
and ratings are associated with debt refinancing and property price
correction in ’09.
• Light at the end of the tunnel? Reduction in the cost of debt and
property price stabilization are the much-needed catalysts for a recovery
in the property sector, which, judging by the past, could be dramatic.
Although a highly speculative investment, Russian property stocks may
offer attractive returns provided the country’s fundamentals improve and
funding issues subside – not our base case scenario for 1H09.

Table of Contents
Investment case........................................................................3
Property market outlook in ’09................................................5
New valuation approach ........................................................11
Picking stocks to wait out the storm ....................................12
What’s the right time to return to the sector?......................15
AFI Development ....................................................................17
Investment case....................................................................18
Valuation................................................................................19
Risks ......................................................................................20
Balance sheet analysis.........................................................21
Cash flows and financing needs .........................................23
AFI Development: Summary financials...............................24
Open Investments ..................................................................25
Investment case....................................................................26
Valuation................................................................................27
Risks ......................................................................................28
Balance sheet analysis.........................................................29
Cash flows and financing needs .........................................31
Shareholder structure ..........................................................32
Open Investments: Summary financials.............................33
PIK ...........................................................................................34
PIK: Summary financials......................................................35
LSR ..........................................................................................36
Investment case....................................................................37
Valuation................................................................................38
Risks ......................................................................................39
Balance sheet analysis.........................................................40
Cash flows and financing needs .........................................42
LSR: Summary financials.....................................................44
Sistema-Hals...........................................................................45
Investment case....................................................................46
Valuation................................................................................47
Risks ......................................................................................47
Balance sheet analysis.........................................................48
Cash flows and financing needs .........................................50
Sistema-Hals: Summary financials .....................................51