Ukrainian Coal Machinery
Market Research Report

Ukrainian Coal Machinery Market Research Report

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