Ukrainian Coal Machinery

After showing its first signs of recovery since the 1990s over the last three years, the Ukrainian coal machinery sector risks a sharp slowdown. While in 2003-2007, the industry's domestic state and private customers almost tripled expenditures on coal mining equipment, they too will succumb to the slumping tide of the economy: we forecast Ukrainian real GDP growth to fall to 5.3% in 2008 and -1% in 2009

Although short-term concerns are mounting, we see fundamental drivers for the domestic coal industry in the next 5-10 years: (1) Ukraine's strong need to cut its gas dependence on Russia to improve energy security; (2) and rising Ukrainian demand for coking coal from steelmakers, backed by rebounding demand for steel. Ukrainian steel producers, over the last month, have been confirming expansion programs, though they acknowledge 1-2 year delays

We value four public companies in the market - Dongirmash, Druzhkivka Machinery, Svitlo Shakhtarya, Yasynuvatsky Machinery, - using DCF model and peer valuation. When assigning target price recommendations, we took into account P&L quality, liquidity and parent group support.

• Investment thesis
• Industry summary
• SHORT-TERM RISKS
• SHORT-TERM government action
• LONG-TERM OPPORTUNITIES
  • Valuation summary
  • Market overview
  • Short-term industry concerns
  • Growth constrained by economic weakness
  • Metallurgy: Large customer faces problems
  • Political turmoil adds more risks
  • Government offers assistance to coal industry
  • Long-term outlook: sector will recover
  • Government upgraded coal extraction targets
• ENERGY coal: Key to ukraines energy independence
• COKING COAL: DEMAND OUTPACEs SUPPLY
  • Expenditures on mining equipment must double to support at least current extraction
  • SCM started consolidation of MB
  • Needed steps for SCM to complete UMBH
  • UMBH: A holding with both vertical and horizontal integration
• Company profiles
  • Druzhkivka Machinery
  • Monopoly producer of roof supports in Ukraine, SCMs preferred coal machinery asset
  • Modernization program
• Key forecasts
  • Svitlo Shakhtarya
  • Ukrainian scraping conveyors monopoly
  • Domestic operations: outlook
  • Highest profitability among Ukrainian coal machinery producers
• Key forecasts
  • Yasynuvatsky Machinery
  • Largest Ukrainian coal machinery exporter
  • Acquisition target
  • Forecast revisions
  • Dongirmash
  • Most diversified producer in the sector
• Appendices
  • Appendix A: Comparative valuation
  • Appendix B: Key peer financials
  • Appendix C: Our view on sector development: two phases
  • Appendix D: Private vs. state owned mines: A historical comparison
  • Appendix E: P&L quality is low
  • Appendix F: Stock market monitor
• Analyst certification
• Investment ratings
• CHARTS
  • Druzhkivka Machinery
  • Svitlo Shakhtarya
  • Yasynuvatsky Machinery
  • Dongirmash
  • Real GDP growth, %
  • Equipment expenditures by Ukr. mines, breakdown by driver, USD mn
  • Planned coal extraction in Ukraine, mln mt
  • Yearly average gas price at Ukrainian-Russian border, USD/mcm
  • Steam coal demand from Ukrainian generation companies, mln mt
  • Coking coal demand in Ukraine, mln mt
  • Ukrainian coal extraction in 1985-2007, mln mt
  • Coal mines' average equipment expenditures, USD/mt of coal extracted
  • SCM coal machinery asset structure
  • Coal machinery assets sit atop SCM's energy & steel business chain
  • Sales structure, 2007
  • Revenues, USD mln
  • Profitability
  • Sales structure, 2007
  • Revenues, USD mln
  • Profitability
  • Sales structure
  • by country
  • Production output, USD mln
  • CapEx of Ukrainian coal mines, USD mln
  • Ukrainian producers' market share, %
  • Ukrainian state vs. private mines' equipment expenditures, USD/mt of coal extracted
  • Coal machinery sector EBITDA margins, 1H08
• TABLES
  • Production, units
  • Druzhkivka Machinery DCF output, UAH mln, as of November
  • Income Statement Summary, USD mln
  • Balance Sheet Summary, USD mln
  • Production output, units
  • Svitlo Shakhtarya DCF output, UAH mln, as of November
  • Income Statement Summary, USD mln
  • Balance Sheet Summary, USD mln
  • Roadheader production
  • Forecast revisions. Sales
  • Forecast revisions. Profitability
  • Yasynuvatsky Machinery DCF output, UAH mln, as of November
  • Income Statement Summary, USD mln
  • Balance Sheet Summary, USD mln
  • Income Statement Summary, USD mln
  • Balance Sheet Summary, USD mln
  • Summary of two phases before and after mine privatizations
  • Ukrainian mines profile
  • Ukrainian coal machinery financials
  • Ukrainian coal machinery expenses, common size