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Ukraine 2015: Brains, Hands and Grains

This document provides an overview of why respected investors such as David Rubinstein, George Soros, and Richard Branson are bullish about investing in Ukraine despite the challenges it faces. It argues that Ukraine now represents a ground-floor investment opportunity due to reforms that have stabilized the economy, improved transparency, and opened opportunities in sectors like IT, manufacturing, and agriculture. Key reforms include increasing gas prices to market rates, privatizing over 300 state-owned enterprises, cleaning up the banking system, and implementing a pro-European agenda that has strengthened civil society and the rule of law.

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Ukraine 2015: Brains, Hands and Grains A ground-floor investment opportunity at the EU’s frontier July 2015
2 Source: Reuters, Hromadske 2015 “…Next door to Russia there is a complicated place, but also more attractive – it has a much better Finance Minister than anyone you can find in that part of the world… Ukraine is an extremely attractive place to invest and I would look at that place as a place if you want to take some risk and you are investing in dollars, but there aren’t that many people investing in Ukraine, so you’re probably going to buy some things that are going to be relatively inexpensive” - David Rubinstein, Carlyle Group "I stand ready. There are concrete investment ideas, for example in agriculture and infrastructure projects. I would put in $1 billion” - George Soros, Soros Fund Management "Personally, I think that Ukraine is a good place to invest. I'm hopeful that Virgin would start doing business in Ukraine” - Richard Branson, Virgin Group Invest in Ukraine?
Invest in Ukraine? Why would respected, seasoned investors like Rubinstein, Soros or Branson be bullish about investing in Ukraine when the “bears” are much louder and more numerous? 3
Foreword The “bear” perspective on Ukraine is clear. The challenges faced by the country are known and well-documented by analysts and media throughout the world. What is missing though, is a contrarian perspective, which, while recognizing the challenges and risks, also gives a voice to the compelling reasons to consider Ukraine today as an investment destination. To that end, this presentation makes a bullish case for Ukraine. Each crisis opens up opportunities, and the latter is what we have chosen to focus our attention upon. For above all, what we see in 2015 in Ukraine is a historical, ground-floor investment opportunity. 4
Outline 1. The lost decades 2. A ground-floor opportunity now 3. Brains: #1 IT engineering force in CEE 4. Hands: lowest-cost manufacturing platform in Europe 5. Grains: the food basket of the world 6. Entry ticket: a 70% discount to … Greek valuations 5
1. The lost decades How the lack of reforms over 20+ years failed to unleash much of Ukraine’s potential. 6
As USSR collapsed Ukraine had a reasonably good starting point… 7 6.0 0.0 4.0 2.0 7.0 5.0 3.0 1.0 Turkey 4.4 Romania 5.2 Poland 6.0 Brazil 6.7 Ukraine 6.8 Source: World Bank GDP per capita (PPP) in 1990, thousand USD
..but populist, corrupt, incompetent governments resisted reforms 8 Ukraine’s ranking in Ease of Doing Business Source: World Bank, 2010-2012 2011 rank 138 Madagascar 139 Micronesia 140 Bhutan 141 Sierra Leone 142 Syria 143 Ukraine 144 Gambia 145 Cambodia 146 Philippines 147 Bolivia 2012 rank 149 Iran, Islamic Rep. 150 Malawi 151 Mali 152 Tajikistan 153 Algeria 154 Gambia 155 Burkina Faso 156 Liberia 157 Ukraine 158 Bolivia 2010 rank 137 Iran 138 Ecuador 139 West Bank and Gaza 140 Gambia 141 Honduras 142 Ukraine 143 Syria 144 Philippines 145 Cambodia 146 Cape Verde
…which kept foreign investors away… 9 1,379 4,090 5,966 7,109 8,828 11,634 12,942 15,370 18,995 0 5,000 10,000 15,000 20,000 Estonia Czech Romania UkrainePoland LithuaniaSlovakia Hungary Latvia Source: Economist Intelligence Unit Net FDI stock in each country per capita, $
…failing to unleash Ukraine’s true potential 10 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 400 300 200 100 150 50 250 350 450 Ukraine Slovakia Latvia Poland Estonia GDP per capital growth (PPP), indexed scale, 1995=100 Source: World Bank
2. A ground-floor opportunity Why this time is different and what makes us optimistic about Ukrainian economy now. 11
A critical perspective: ground-floor starting point… 12 Economic Stagnation Authoritarian Legacy Conflict Black Sheep of Europe
… all these countries faced major obstacles 10-15 years ago… 13 Philippines pre-Arroyo Georgia pre-Saakashvili Colombia pre-Uribe Slovakia pre-Dzurinda Lost decade, steep GDP decline Vote-rigging president, ousted by popular revolt FARC guerillas in a full-scale war with government Country missing EU accession boat
14 20 15 5 0 10 1990 +17% 20102000 201420051995 +8% Dzurinda Reform Administration Starting point: end of 1990s • Black sheep of Europe • Missing EU accession boat • Limited growth Outcomes: • Top investment destination • Zero to highest automotive output per capita in a few years • Exports drove growth, from $19bn in 2000 to $66bn in 2013 • Fastest growing economy in Europe through 2008 GDP per capita, in ‘000 USD …yet managed to turn into spectacular successes: Slovakia
15 3 2 1 0 4 +14% -6% 201420102005200019951990 Saakashvili Reform Administration Starting point: 2004 • Endemic corruption • Crippling energy blackouts • Economy in shambles Outcomes: • Corruption Perception ranking: #132 to #51 by 2012 (i.e. higher than Czech) • From #98th to #8th in Ease of Doing Business by 2014 • One of the fastest growing economies in the world From laggard to leader: Georgia GDP per capita, in ‘000 USD
16 3 2 0 1 20142010 -1% +9% 1990 2000 20051995 Macapagal- Arroyo Reform Administration GDP per capita, in ‘000 USD Starting point: 2001 • Ruinous Asian crisis • President impeached • Separatist war in the South Outcomes: • Sound national security • GDP CAGR of 5.4% during 2002-2014 • BPO crucial catalyst, built on young, cost-competitive English-speaking generation From laggard to leader: Philippines
17 10 8 6 4 2 0 +13% +6% 201420102005200019951990 Uribe Reform Administration GDP per capita, in ‘000 USD Starting point: 2004 • Failed state, recession • Weak institutions • War vs. FARC guerillas Outcomes: • National security key priority • GDP CAGR 4-5% thru 2014 • FDI <$2bn to >$16bn in 2013 • Exports up 4.3x to $67bn From laggard to leader: Colombia
Can this be also the story of Ukraine in 2015? 18 Kyiv Maidan, 15 December 2013 The Revolution of Dignity marks a paradigm shift in Ukrainian society, politics and inevitably, the economy The active, pro-European civil society – the Maidan generation, intolerant of abuses and relentless in their controlling function, warrants a point of no return for the transformation of the country
A critical mass of active, tech-savvy civil society=relentless scrutiny 19 Percent of population using internet, % Source: Euromonitor, Internetlivestats, BBC, USAID 6 7 1 2 3 4 5 5.7 Russia 4.5 Romania 3.6 Ukraine 3.3 Czech 2.6 Belarus Civil Society Organization Index in 2014, 1-7 scale, lower=stronger civil society +0.1 +0.4 0 -0.2 +0.1 42 38 34 29 23 18 0 10 20 30 40 50 2010 20122008 2014 11 “Throughout this turbulent period, Ukrainian civil society stepped up to the plate, playing a key role in forming the new government’s policy priorities and providing critical services to the public” – USAID, 2015 Improvement vs. 2008 “2014 saw the rise of self-organized public and a strong volunteer movement”
A president elected for the first time by both, East & West in Ukraine 20 Presidential elections 2004: Yushchenko Presidential elections 2010: Yanukovich Presidential elections 2014: Poroshenko For the first time, Ukrainian people did not split along geopolitical or language lines. President Poroshenko won in the outright majority of constituencies
A young, technocrat, pro-business, English speaking government 21 45 46 50 56 58 40 45 50 55 60 13 years Mar-10Dec-07 Dec-12 Dec-14Feb-14 Source: kmu.gov.ua Average age of ministers in Ukrainian Governments (2007-2014) Tymoshenko Azarov Azarov Yatsenyuk Yatsenyuk
Soviet legacy dying off 22 0 32 27 21 65 123 0 50 100 150 20072006 2012 20141998 2002 Source: Central Election Committee Communist representation in Parliament, out of 450 seats The Communist Party, on a declining trend since independence, failed to reach parliament in 2014 altogether – an expression of the generational change in peoples’ values and preferences
A clear pro-European majority, for the first time 23 Source: Razumkov Centre, Democratic Initiatives, Kyiv Post 2002 2004 2006 2008 2010 2012 2014 50% 55% 60% 65% 35% 40% 45% 40% 53% 64% 48% 53% 44% 49% Population support for joining the EU, percent 91% 45% 51% 0% 20% 40% 60% 80% 100% 201420122007 100% Pro-EU parties support in parliament, %
A critical mass of reformers and start of structural reforms 24 Critical mass of reformers Fiscal discipline Deregulation Privatization Free trade Transparency • New pro-business, pro-reform, pro-Europe government • Average age 45, fluent English, Western experience and education • Eliminating intermediaries, open competition for public positions, electronic state tenders, civic society high engagement • 19% budgetary surplus in 1Q15, despite near tripling defense spending; cut energy subsidies costing 10% of GDP, 4x hike in gas tariffs • Licensing for 26 activities abolished, 16 regulations scrapped • Rose 56 positions in Ease of Doing business to #96, key reform KPI • > 300 state owned enterprises to be privatized, years of mismanagement have led to 2.5% of GDP consumed in annual subsidies • Historical free trade agreement (DCFTA) signed with EU, eliminating tariffs and quotas for trade, opening up the largest market in the world
Macro: stabilization package with IMF tempered C/A deficit, UAH rate 25 21.1 26.5 16.2 13.0 11.8 0 5 10 15 20 25 30 Feb ’15 Nov ’14 Aug ’14 May ’14 May ’15 Source: Dragon Capital, minfin.com.ua Hryvnia exchange rate, UAH per USD 0.70.8 -1.3 -0.9 -1.5 -2.3 -8 -6 -4 -2 0 2 4Q132Q13 4Q15F -1.0 -5.0 -6.0 -3.2 2Q15F4Q142Q14 -0.5 -1.5 Current account balance, USD billion
Public finance: fiscally disciplined, despite spike in defense spend 26 Ukrainian state budget, 1Q 2015 UAH mn 2014 2015 YoY, % Revenues 152,050 198,409 30% Tax on income of individuals 22,238 28,676 29% Corporate income tax 18,948 19,447 3% VAT 40,668 58,735 44% Other 70,197 91,552 30% Expenses (154,718) (178,760) 16% Debt service (12,411) (25,721) 107% Military expense (4,393) (11,691) 166% Other (137,914) (141,348) 2% Financing (190) (1,156) 507% Budget deficit/surplus (2,858) 18,493 747% Source: Ministry of Finance of Ukraine Finance Minister Jaresko runs a prudent budget. Ukraine achieved a 19% primary surplus despite a near tripling of defense expenses
Energy: doing away with a ruinous subsidy costing 10% of GDP 27 0.9 2.52.7 4.2 9.7 0 3 6 9 12 UkraineUSACanadaCzechEU-28 -91% Natural gas prices, 2014, $ cents per kWh (pre reform) 3.0 5.8 7.07.4 11.2 0 3 6 9 12 -73% UkraineCzech CanadaUSAGermany GDP $ produced from 1 kg of oil equivalent Source: Eurostat, World Bank Unprecedentedly, the new government had the courage to push through a near 4x hike in gas tariffs, to be followed by increases to full market parity, ending 20+ years of ruinous subsidies
Energy: gas reform, cut reliance on Russia, boost production 28 Imports vs. local production, BCM Sources of gas import, % 92% 74% 37% 26% 63% 8% 100% 80% 60% 40% 20% 0% 5M 20152013 2014 11 22 22 23 8 48 28 20 9 33 0 10 20 30 40 50 60 2013 50 5M15 17 2014 43 2012 55 2011 59 EU RussiaOwn production*Gas import * includes gas usage from reserves (up to 6% of consumption) Source: Naftogaz of Ukraine, Ukrstat
Privatization: shaking-off the inefficient state-owned enterprises 29 State-owned companies contribution, % GDP Source: Ministry of Economic Development and Trade of Ukraine -3.0% -2.0% -1.0% 0.0% 1.0% -2.5% 0.2% Subsidies Dividends The Ministry of Economy announced a bold privatization agenda to address the systemic inefficiencies of the state owned enterprises Over 1,800 SOEs generated in 2014 a net loss of UAH 115 billion and consuming subsidies of 2.5% of GDP Analysis shows a potential income of at least UAH 60 billion Privatization program aims to divest over 300 state enterprises in the first phase As a first step, data about the top-100 SOEs has been made public, including financial statements
Banking: cleaning up the sector, shutting down “pocket banks” 30 Number of banks where temporary administration or liquidation was initiated 13 22 7 6 5 0 6 12 18 24 2Q151Q154Q143Q142Q14 Source: National Bank of Ukraine, DGF The government has to resolve insolvent banks through recapitalization and liquidation Since early 2014, over 50 banks out of 180 have closed their doors, as the NBU has increased capital requirements and committed to ridding the system of “pocket banks” Structural impediments in the system are being addressed, preventing a wide-spread practice of channeling excessive lending to insiders The adoption of the law on strengthening bank owner responsibility, as demanded by the IMF, should improve corporate governance and bring more transparency to the sector, again lowering the burden on the state to save failing banks
Deregulation: ease of doing business a key KPI for government 31 50 100 150 200 2015 96 2014 112 2013 137 2012 152 Source: World Bank, Ministry of Economic Development and Trade of Ukraine Ukraine’s ranking in Ease of Doing Business, inversed scale An ambitious deregulation program has been launched, with over 70 initiatives, from scrapping a quarantine certificate for grain transportation, to liberalizing the land market, to simplifying the immigration rules for expats Licensing for 26 business activities has been abolished and 16 regulations scrapped The Ministry of Economy estimates the program to generate between $2.4 - $3.3 billion in savings for the business community and dramatically improve Ukraine’s standing in the World Bank’s Ease of Doing Business Rating
In summary: Ukraine offers a true ground-floor opportunity • Largest country within Europe • 45 million population, 99.7% literacy • 70% live in urban areas • #1 black-soil bank in the world • 93% of country open for business Too big to ignore • 3x-10x consumption gap vs. peers in basic categories, from e-commerce to pharma • 10x-100x+ consumption gap in select categories ie. life insurance, parcel delivery • GDP growth expected to restore in 2016 Huge catch-up to peers • $156 average manufacturing salary • 2 truck days away from EU • Free trade area with over 730m consumers • Leading global positions in Agro & IT Europe’s most cost-competitive platform • Liquidity crunch as no lending • Median EV/EBITDA only 4.3x, 50-60% discount to Poland, Bulgaria, Turkey • Median P/E only 4.6x, ~70% discount to Greece Bargain valuations Sources: 1) Ukrstat 2) CIA 3) Euromonitor consumer statistics, Datamonitor 4) IMF, the Economist 5) www.worldatlas.com 6) Capital IQ 32
Export champions – the growth engine and safest bet on UA economy Lviv 400km from Warsaw, 900km from Berlin Manufacturing wages $1.2 / hour, 2x lower than China 60% devaluation boosting cost competitiveness 6.5% exports CAGR between 2009-2014 Exports only 49% of GDP vs 61% for CEE peers Per capita exports of $1,540 still 3x lower than Poland Share of EU exports from 20% to 35% in 5 years 0% duty on most EU exports 20x growth in IT exports in 10 years Sources: 1) Ukrstat, NBU 2) EU DCFTA text 3) World Bank, the Economist 4) China Statistical Yearbook 5) www.worldatlas.com 33
Brains, Hands and Grains: three lasting, competitive advantages 1. Brains 2. Hands 3. Grains The #1 IT engineering force in CEE Lowest-cost manufacturing platform in Europe Largest black-soil bank in the world Sustainable competitive advantages in IT, Manufacturing, Agriculture to drive an exports-fueled rebound 34
3. Brains: #1 CEE IT engineering force 35
Top math and science education, starting with primary school 36 China 1 US 2 Ukraine 6 Romania 11 Netherlands 13 Germany 16 Czech Republic 32 India 39 France 45 Belgium 59 Source: International Mathematical Olympiad, Eurostat, Ukrstat 2014 Results at the International Math Olympiad, global rank 10% 4% 2% 8% 6% 0% 4.4% Romania 4.9% Ukraine 5.1% Bulgaria 6.3% 6.8% Latvia 9.8% Poland Hungary Lithuania 3.9% Share of math, science and computing graduates, %
Strong technical education ensures high quality of students… 37 United Kingdom 1 Hungary 9 Ukraine 13 Belgium 15 United States 26 Poland 32 Italy 38 Romania 48 India 56 Philippines 115 Source: goodcountry.org, Universitas 21 Good Country Index: Science and Technology parameters reported to GDP, rank US 1 UK 8 Germany 14 Hungary 30 Poland 32 Ukraine 41 Romania 42 Indonesia 48 Turkey 49 India 50 Universitas 21, university research quality, rank
…and feeds abundant technical talent into the market 38 Engineering graduates per annum in European countries, thousand students 39 48 56 66 71 75 93 105 130 20 40 60 80 100 120 140 RomaniaItalySpainPolandUKTurkeyGermanyFranceUkraine Source: World Economic Forum, Forbes, 2014, IVC, www.business-standard.com
Programmer salaries among the most competitive in the world 39 Average programmer salary, comparable skills, thousand USD per annum Source: Stackoverflow, 2014 26 38 43 6263 686869 77 90 0 20 40 60 80 100 -71% South Africa IrelandNew Zealand IsraelCanadaUKAustraliaUnited States UkraineChina
Largest IT outsourcing force in CEE & among top ones globally 40 Kharkiv 6.7% Kyiv 6.6% Lviv 3.4% Zaporizhya 3.1% Omsk 3.1% Moscow 2.8% Minsk 2.7% Novosibirsk 2.6% Bucharest 2.5% Belgrade 2.3% Source: dou.ua, Elance 3% Macedonia 3% Croatia 2% Moldova 7% Other 7%Poland 4% Belarus 4% Bulgaria Serbia 8% 21% 33% Ukraine Russia 9% Romania Top CEE countries by IT freelance outsourcing, % Top CEE cities by IT freelance outsourcing, % Ukraine is the #1 IT outsourcing country in CEE, by a wide margin; #3 by freelance outsourcing in the world after US, India
As result, IT outsourcing grew at 30%+ annually for over 10 years 41 Total size of the IT outsourcing market, USD million Source: Ukrainian Hi-Tech Initiative, Symphony-solutions 2,379 2,000 1,400 1,100 874 697 530544 390 250 165110 0 500 1,000 1,500 2,000 2,500 +32% 201420132012201120102009200820072006200520042003
Beats growth in global IT outsourcing by a wide margin 42 437 368 257 202 161 128 97 144141 123121112107 111 0 100 200 300 400 500 2007 2008 2009 2010 2011 2012 2013 2014 Growth in Ukrainian IT outsourcing sales vs. the global market, indexed (2007=100) Source: Ukrainian Hi-Tech Initiative, Symphony-solutions, Gartner Global IT outsourcing Ukrainian IT outsourcing
43 Source: Ukrainian Hi-Tech Initiative, Symphony-solutions, Gartner, Ukrstat Outsourcing emerged as the #2 export service, tripled share 18% 27% 12% 12% 64% 44% 17% 6% 0% 20% 40% 60% 80% 100% Business services 100% Other IT outsourcing Transportation 2007 2014 Breakdown of Ukrainian service exports, 2007-2014 Already the #1 exports category to United States
Over 100 global companies located software R&D in Ukraine 44 North America Europe Asia Samsung alone has over 1,000 engineers working on things like computer vision, information security, artificial intelligence, natural language processing (NLP), human computer interaction (HCI), computational intelligence and more
Ukraine has among the lowest living expenses in the world 45 India 125 Pakistan 123 Ukraine 117 Philippines 112 Romania 105 Hungary 97 Poland 96 China 58 United States 21 Switzerland 1 Source: numbeo.com Cost of living, including rent, global ranking (lower = cheaper) One bedroom rent, month 250 Intercity train Kyiv-Lviv (500km) 14 Two courses in fancy restaurant 12 Dry-clean suit 10 Theater ticket 5 Haircut 4 Taxi trip 3 A bowl of borscht 2 Tomatoes, 1kg 1 Milk, 1L 0.5 Prices of selected items in Kyiv, USD
The beer and burgers are the cheapest in the world too :) 46 Source: Wall Street Journal, The Economist Big Mac Index – February 2015 7,0 6,0 5,0 4,0 3,0 2,0 1,0 0,0 Kyiv 1.7 Dehli 1.8 Berlin 2.6 London 4.5 New York 5.2 Hong Kong 6.2 Geneva 6.3 7,0 3,0 6,0 5,0 0,0 4,0 2,0 1,0 8,0 1.2 1.9 UkraineIndia 3.7 Philipp.Germany 4.3 US 4.8 Switzer. 7.5 Average price of a 330ml beer, USD Price of a Big Mac, USD
Large, young, urban population 47 Source: Ukrstat 729766 9931,017 1,451 2,868 0 500 1,000 1,500 2,000 2,500 3,000 Kharkiv LvivZaporizhyaKyiv Odessa Dnipropetrovsk • 70% urban population, concentrated mainly in and around large cities • 2.6 million student population with 640,000 graduates each year Select Ukrainian cities by population, thousand people
And all this in a progressive, cosmopolitan, European country 48
Tech talent + cheap living + global outlook = thriving tech ecosystem 49 IT outsourcing is one of the perennial growth hope stories for Ukraine, drawing its inspiration from the Soviet tradition of science teaching, and the country’s plethora of scientific institutes that used to churn out rocket scientists. Under market conditions, the schools have switched to producing programmers – an estimated 16,000 new IT specialists graduate each year The huge IT outsourcing sector feeds increasing number of risk-taking tech talent, with a cosmopolitan outlook, willing to strike on their own and launch globally-focused tech startups. The low costs of living and progressive big-city culture, further add to a thriving tech ecosystem
Increasing number of tech UA companies dominate global niches 50 A common theme for all these companies: profitable, self-sustaining business models, compensating the shortage of venture capital available Leading app maker for mobile enterprise productivity Leading one-stop-shop provider of online payment solutions Top-5 global jobs aggregator Cloud based grammar and spelling solutions provider Top-5 global stock photos and videos marketplace Cloud based CRM solutions provider
A top-10 global, ‘Big’, developing internet market 51 Source: KPCB, Mary Meeker - 2015 Internet Trends #9 developing BIG internet market in the world as per Internet Trends by KPCB, with penetration at 42% and 23% growth in 2014
52 1,837 2,000 1,600 1,043 680 443409 331 0 500 1,000 1,500 2,000 20142013201220112010200920082007 E-commerce sales in Ukraine 2007-2014, USD million Source: Euromonitor, Horizon Capital estimates 28% Drop in 2014 driven by large Hrivnya devaluation. Growth in national currency continued to be very strong E-commerce posted 5.5x growth for the last 7 years…
…growing at much faster pace than global market… 53 415 451 361 235 153 100 246 206 177 143 100 0 100 200 300 400 500 2009 2010 2011 2012 2013 2014 119 Ukrainian vs. Global e-commerce sales evolution, indexed growth (2009=100) Source: eMarketer, Euromonitor, Horizon Capital estimates Global e-commerce Ukrainian e-commerce
…and with plenty of upside ahead to catch up with peers 54 Source: internetlivestats.com, Euromonitor 20% 40% 60% 80% 100% 0% 20% 40% 60% 80% 100% Germany UK Ukraine France Netherlands Sweden Italy Poland Spain % of internet users shopping online %ofinternetusersintotalpopulation Only ~20% of Ukrainian internet users shop online (share doubled over 2 years) Percent of online shoppers = 3x lower vs Poland, Italy; 4x vs UK, Germany Share of ecommerce in total retail is just above 2%, 3-6x lower vs Western Europe E-commerce incidence and internet penetration, %
“Brains”: recap • Good education, a strong math and science legacy • Feeding abundant tech talent to the market – largest IT engineering force in CEE • Which led to a thriving IT outsourcing business, up 20x during last decade • Tech talent increasingly turning to startups, beyond outsourcing = increasing numbers of global software champions from Ukraine 55
4. Hands: lowest-cost manufacturing platform in Europe 56
Plenty of industries remain very dependent on labor cost 57 Source: icrier.org for Emerging Markets, India example 0.30.30.30.30.40.4 0.40.40.4 0.5 0.60.6 0.9 1.0 0.0 0.2 0.4 0.6 0.8 1.0 FootwearStructural metal prod. BicyclesKnit fabrics Pasta, noodles Luggage Animal feeds Apparel Sporting goods Jewelry Refractory ceramic Toys General purpose machinery Furniture Workers per unit of gross fixed capital stock in manufacturing
Unbeatable cost advantage, further enhanced by UAH devaluation 58 Source: U.S. Bureau of Labor Statistics, International Labor Comparisons, Statista, Ukrstat, 2014 1.22.1 8.3 11.311.9 19.4 26.8 35.7 0 5 10 15 20 25 30 35 40 US PolandSlo vakia UkraineChinaCzechGreeceSpain 7.9 10.010.510.5 12.6 19.2 0 5 10 15 20 UkraineUSAPolandCzech Republic Slo vakia Germany Hourly wages in manufacturing industry in select countries, USD Electricity prices for industrial enterprises, USD cent / kWh
Ideally positioned to be a manufacturing and trading platform 59 Source: www.worldatlas.com, www.travelmath.com Kilometers distance to select cities from Lviv Flight hours to select cities from Kyiv LvivWarsaw 390 Budapest 570 Berlin 930 Milan 1,560 London 1,990 KyivIstanbul 2 Berlin 2 London 3 NYC 10 Beijing 9 Dubai 5 In a world of tighter supply chains, faster product innovation cycles, Ukraine has a real chance to emerge as a manufacturing and trading hub at the frontier of EU, Middle East and Asia. A case in point, Western Ukraine emerged as home to a vibrant automotive spare-parts manufacturing cluster
60 Source: Kyiv Post, HCA Light manufacturing Machinery & Equipment “The production of Ukrainian workers can compete with the European level in terms of quality. There's a new, highly-educated generation of creative people who want to see their country strong. I'm an optimist” - Dietmar Kung, Hugo Boss Proven by top global brands who localized production in Ukraine
61 Source: Ukrstat Exports to EU rising strongly, marking fundamental shift in trade 38 35 38 34 34 27 27 2630 32 48 38 35 40 15 20 25 30 35 40 45 50 18 2008 2009 2010 2011 2012 2013 2014 1Q 2015 2007 Other countriesEuropeRussia & CIS Exports split by destination, % Moving away from over-reliance on Russian market as exports to Europe grow. Signing of the DCFTA with the EU is expected to further accelerate the trend
“Hands”: recap • Demand for labor remains high, as many industries are still very labor intensive • Ukraine enjoys a very attractive location, at the intersection of the EU, Middle East, Asia • Signing of historical EU DCFTA to further boost attractiveness • The manufacturing labor costs are very competitive, even compared to China • Cost, advantageous FTAs and proximity to large markets position Ukraine as ideal manufacturing and trading platform 62
5. Grains: the food basket for the world 63
Global demand for agricultural products to keep increasing 64 1,000 3,000 2,500 2,000 1,500 500 0 2024 2,740 516 1,440 784 2020 2,610 486 1,371 2,442 2015 753 451 1,280 711 2010 2,192 396 1,135 661 2005 1,953 327 1,005 621 2000 1,750 272 888 591 1995 1,500 211 840 448 OilseedsWheat Coarse grains Source: OECD Global demand, 1995-2024F, million tons
Ukraine: already an agro-powerhouse, share of global market rising 65 Source: OECD 1% 0% 2% 4% 6% 8% 10% 12% 14% 1995 0% 2% 2%1% 2% 7% 3% 2% 2005 3% 2015 3% 2000 13% 5%6% 2010 6% OilseedsCoarse grainsWheat Ukraine’s share of global exports by commodity, %
World’s leading positions in a number of markets 66 Source: Ministry of Agricultural Policy and Food #1 in sunflower oil #2 in grains #3 in corn #4 in barley #6 in wheat #7 in soybean #8 in poultry
Signing the historical EU DCFTA set to accelerate growth 67 Source: Dragon Capital, Institute of Economic Research and Political Consultations Item Quota, tons % of quota used Wheat 950,000 100% Corn 400,000 100% Tomatoes 10,000 100% Juice 10,000 100% Cereal groats, meal and pellets and cereal grains 6,300 100% Honey 5,000 100% Barley 250,000 5% Poultry 36,000 41% Sugar 20,070 3% Bran, sharps and other residues 16,000 12% EU quotas for export of Ukrainian agro products, 2014 Industry Old Tarrif New Tarrif Agriculture, forestry 12.7% 0.3% Fisheries 12.1% 1.3% Extraction of fuel energy resources 9.2% 0.0% Extraction of other resources 22.0% 0.4% Chemical production 9.2% 0.0% Rubber and plastic goods 7.5% 0.0% Leather and leather goods 4.9% 0.0% Textile and furs 4.3% 0.0% Production of non-mineral goods 4.1% 0.0% Auto vehicles 4.1% 0.0% EU import tariffs on Ukrainian produce
A lasting competitive advantage: the most fertile soils in the world 68 Source: Harmonized World Soil Database Chornozem Podzoluvisol Greyzem Phaeozem Leptosol Cambisol Kastanozem Arenosol Water bodies Gleysol Fluvisol Map of Ukraine’s soils About 1/3 of world’s most fertile – chornozem soils – are in Ukraine
Yet the productivity upside potential remains very significant 69 Source: USDA 6 8 2 4 12 10 0 8 9 9 SwitzerlandCanada 11 USA Ukraine 6 Argentina -45% Corn yields in select countries, tons per ha Yields set to rise as farms keep investing in modern technology and methodologies – opening up significant investment opportunities and upside
Leading UA companies show the productivity jump is real 70 Source: USDA, Companies fillings 10 0 2 8 12 6 4 Average Ukraine 6 Astarta, Ukraine 7 Argentina 8 MHP, Ukraine 9 Switzerland 9 Canada 9 USA 11 6 Yields, tons per ha
In-country logistics benefit from closer port infrastructure 71 Average distance to port, selected countries, kilometers 300 900 950 1,500 0 300 600 900 1,200 1,500 1,800 USAArgentinaBrazil Ukraine Source: HCA estimates
Favorable location provides additional cost advantage 72 Source: Sea Rates 10 15 0 5 20 BrazilArgentinaUkraine UAEIndiaChina Spain EgyptNetherlands Average distance to key markets, thousand kilometers
Thriving agricultural exports to EU, Asia, CIS and Middle East 73 Source: Ministry of Agricultural Policy and Food EU: $5.0 bn. CIS: $2.6 bn. Asia: $6.6 bn.Africa: $5.0 bn.
Local agro-champions operate larger farms than global peers 74 Source: Eurostat, Agricultural Council of America, FAO, Oxford Farming Conference 150 300 450 0 250 5915 GermanyFranceCzech Republic 18 Argentina USABrazil (Central/East) 90 Ukraine 6 50 Brazil (South) Russia 450 Average farm size, ha
As result, fertile soils + better logistics + scale = cost advantage 75 Source: Ministry of Agricultural Policy and Food, USDA, GRDC 123 149 169 210 0 30 60 90 120 150 180 210 240 Australia UkraineCanadaEU Wheat 79 118 140 153 0 30 60 90 120 150 180 210 240 ArgentinaUSABrazil Ukraine Corn Cost of production, USD per ton
Sustainable cost advantage = higher profit pool 76 Source: Capital IQ 3% 13% 15% 6% 13% 23% 2% 10% 6%6% 1% 7%8% 5% 9% 32% 6% 24% 36% 0% 10% 20% 30% 40% Atria 6% Cherkizovo 11% 20% MHP, UA 25% 32% 9% EnsuikoDhampur 7% Astarta, UA 19% Kernel, UA China Agri Golden Agri 2014 2012 2013Vegetable oilSugarMeat EBITDA margin by agro-sector, %
Prone to harvest fluctuations in the long run 77 Source: FAOSTAT 0 10,000 20,000 30,000 40,000 20 30 40 50 60 70 2012201120102009200820072006200520042003 Total Harvest, mn tons Total Grain Revenue, USD mn Grain revenue, USD mn (left axis); Grain harvest, mn tons (right axis)
Industry moves up the value chain, further increasing margins 78 Source: HCA Farming Grain trading Value-added agri Agri infrastructure Valueadd Grains -> Poultry and Eggs -> Farm Equipment example Cost advantage in grains enabled growth of eggs and poultry producers, which rely on grains for a large portion of costs. Companies like MHP, Ovostar, Avangard have achieved global leading positions in these market segments. Further up the value chain, a thriving poultry and eggs industry, enabled growth of farm-equipment manufacturers e.g. Texna, which subsequently turned into global export champions, leveraging their Ukraine base.
“Grains”: recap • Global demand for food keeps rising • Ukraine is home to 1/3 of the most fertile soils on earth • Soils, location and scale warrant a lasting cost advantage for Ukrainian producers • The room for upside is still large, as further technologization will keep pushing the yields up • As the industry matures, it moves up the value chain, boosts profits, creating a thriving agricultural cluster 79
6. Entry ticket: a near 70% discount to … Greek valuations 80
Historically low valuations 81 4.3 5.5 6.5 7.2 8.2 9.7 10.7 0 3 6 9 12 RomaniaGreecePolandBulgariaTurkey Kazakhstan -60% Ukraine Source: Capital IQ, 10 July-2015 Median EV/EBITDA multiple for selected countries
82 Source: Capital IQ, 10 July-2015 4.6 10.2 11.0 13.714.1 14.8 15.7 0 2 4 6 8 10 12 14 16 18 Turkey Bulgaria GreecePoland -67% UkraineRomaniaKazakhstan Historically low valuations: near 70% discount to Greek companies Median P/E multiple for selected countries
Final recap • The Revolution of Dignity led to a paradigm shift in Ukrainian society, politics and inevitably – the economy • Young, technocratic government leading a bold, structural reforms agenda • Uncompromising, active, tech-savvy civil society warrants the change is lasting = point of no return • Sustainable competitive advantages in IT, Manufacturing, Agriculture open up attractive investment opportunities • Valuations are at historical lows = an ideal time to seize on the potential upside 83
About – Horizon Capital Horizon Capital is a private equity fund manager that originates and manages investments in mid-cap companies with high growth and profit potential in Ukraine and the near region. Learn more at www.horizoncapital.com.ua 84
Contact – Horizon Capital Lenna Koszarny Founding Partner and CEO lkoszarny@horizoncapital.com.ua Vasile Tofan Partner vtofan@horizoncapital.com.ua 85
Thank you! Igor Kotsyuba Olexander Matvienko Roman Cherepakha Vadym Trembovetsky 86
Disclosure The attached presentation of Horizon Capital does not constitute an offer to sell or a solicitation of an offer to purchase an interest in any Horizon Capital private equity fund or sponsored investment. Certain economic and market information contained herein has been obtained from published sources prepared by other parties. While such sources are believed to be reliable, none of Horizon Capital or its affiliates assumes any responsibility for such information. Recipient should make its own investigations and evaluations of the information contained herein. Recipient is cautioned not to place undue reliance on any forward-looking statements, and Horizon Capital assumes no obligation to update any forward-looking statements as a result of new information, subsequent events or any other circumstances. Such statements speak only as of the date that they were originally made. While presenting the opportunity for monetary gain, an investment in Ukraine will involve a high degree of risk and is suitable only for investors that have no immediate need for liquidity of the amount invested and can withstand a loss of their entire investment. 87
www.horizoncapital.com.ua/groundfloor-opportunity 88

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Ukraine 2015: Brains, Hands and Grains

  • 1.
    Ukraine 2015: Brains, Handsand Grains A ground-floor investment opportunity at the EU’s frontier July 2015
  • 2.
    2 Source: Reuters, Hromadske2015 “…Next door to Russia there is a complicated place, but also more attractive – it has a much better Finance Minister than anyone you can find in that part of the world… Ukraine is an extremely attractive place to invest and I would look at that place as a place if you want to take some risk and you are investing in dollars, but there aren’t that many people investing in Ukraine, so you’re probably going to buy some things that are going to be relatively inexpensive” - David Rubinstein, Carlyle Group "I stand ready. There are concrete investment ideas, for example in agriculture and infrastructure projects. I would put in $1 billion” - George Soros, Soros Fund Management "Personally, I think that Ukraine is a good place to invest. I'm hopeful that Virgin would start doing business in Ukraine” - Richard Branson, Virgin Group Invest in Ukraine?
  • 3.
    Invest in Ukraine? Whywould respected, seasoned investors like Rubinstein, Soros or Branson be bullish about investing in Ukraine when the “bears” are much louder and more numerous? 3
  • 4.
    Foreword The “bear” perspectiveon Ukraine is clear. The challenges faced by the country are known and well-documented by analysts and media throughout the world. What is missing though, is a contrarian perspective, which, while recognizing the challenges and risks, also gives a voice to the compelling reasons to consider Ukraine today as an investment destination. To that end, this presentation makes a bullish case for Ukraine. Each crisis opens up opportunities, and the latter is what we have chosen to focus our attention upon. For above all, what we see in 2015 in Ukraine is a historical, ground-floor investment opportunity. 4
  • 5.
    Outline 1. The lostdecades 2. A ground-floor opportunity now 3. Brains: #1 IT engineering force in CEE 4. Hands: lowest-cost manufacturing platform in Europe 5. Grains: the food basket of the world 6. Entry ticket: a 70% discount to … Greek valuations 5
  • 6.
    1. The lostdecades How the lack of reforms over 20+ years failed to unleash much of Ukraine’s potential. 6
  • 7.
    As USSR collapsedUkraine had a reasonably good starting point… 7 6.0 0.0 4.0 2.0 7.0 5.0 3.0 1.0 Turkey 4.4 Romania 5.2 Poland 6.0 Brazil 6.7 Ukraine 6.8 Source: World Bank GDP per capita (PPP) in 1990, thousand USD
  • 8.
    ..but populist, corrupt,incompetent governments resisted reforms 8 Ukraine’s ranking in Ease of Doing Business Source: World Bank, 2010-2012 2011 rank 138 Madagascar 139 Micronesia 140 Bhutan 141 Sierra Leone 142 Syria 143 Ukraine 144 Gambia 145 Cambodia 146 Philippines 147 Bolivia 2012 rank 149 Iran, Islamic Rep. 150 Malawi 151 Mali 152 Tajikistan 153 Algeria 154 Gambia 155 Burkina Faso 156 Liberia 157 Ukraine 158 Bolivia 2010 rank 137 Iran 138 Ecuador 139 West Bank and Gaza 140 Gambia 141 Honduras 142 Ukraine 143 Syria 144 Philippines 145 Cambodia 146 Cape Verde
  • 9.
    …which kept foreigninvestors away… 9 1,379 4,090 5,966 7,109 8,828 11,634 12,942 15,370 18,995 0 5,000 10,000 15,000 20,000 Estonia Czech Romania UkrainePoland LithuaniaSlovakia Hungary Latvia Source: Economist Intelligence Unit Net FDI stock in each country per capita, $
  • 10.
    …failing to unleashUkraine’s true potential 10 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 400 300 200 100 150 50 250 350 450 Ukraine Slovakia Latvia Poland Estonia GDP per capital growth (PPP), indexed scale, 1995=100 Source: World Bank
  • 11.
    2. A ground-flooropportunity Why this time is different and what makes us optimistic about Ukrainian economy now. 11
  • 12.
    A critical perspective:ground-floor starting point… 12 Economic Stagnation Authoritarian Legacy Conflict Black Sheep of Europe
  • 13.
    … all thesecountries faced major obstacles 10-15 years ago… 13 Philippines pre-Arroyo Georgia pre-Saakashvili Colombia pre-Uribe Slovakia pre-Dzurinda Lost decade, steep GDP decline Vote-rigging president, ousted by popular revolt FARC guerillas in a full-scale war with government Country missing EU accession boat
  • 14.
    14 20 15 5 0 10 1990 +17% 20102000 201420051995 +8% Dzurinda Reform Administration Starting point:end of 1990s • Black sheep of Europe • Missing EU accession boat • Limited growth Outcomes: • Top investment destination • Zero to highest automotive output per capita in a few years • Exports drove growth, from $19bn in 2000 to $66bn in 2013 • Fastest growing economy in Europe through 2008 GDP per capita, in ‘000 USD …yet managed to turn into spectacular successes: Slovakia
  • 15.
    15 3 2 1 0 4 +14% -6% 201420102005200019951990 Saakashvili Reform Administration Starting point: 2004 •Endemic corruption • Crippling energy blackouts • Economy in shambles Outcomes: • Corruption Perception ranking: #132 to #51 by 2012 (i.e. higher than Czech) • From #98th to #8th in Ease of Doing Business by 2014 • One of the fastest growing economies in the world From laggard to leader: Georgia GDP per capita, in ‘000 USD
  • 16.
    16 3 2 0 1 20142010 -1% +9% 1990 2000 20051995 Macapagal- ArroyoReform Administration GDP per capita, in ‘000 USD Starting point: 2001 • Ruinous Asian crisis • President impeached • Separatist war in the South Outcomes: • Sound national security • GDP CAGR of 5.4% during 2002-2014 • BPO crucial catalyst, built on young, cost-competitive English-speaking generation From laggard to leader: Philippines
  • 17.
    17 10 8 6 4 2 0 +13% +6% 201420102005200019951990 Uribe Reform Administration GDP percapita, in ‘000 USD Starting point: 2004 • Failed state, recession • Weak institutions • War vs. FARC guerillas Outcomes: • National security key priority • GDP CAGR 4-5% thru 2014 • FDI <$2bn to >$16bn in 2013 • Exports up 4.3x to $67bn From laggard to leader: Colombia
  • 18.
    Can this bealso the story of Ukraine in 2015? 18 Kyiv Maidan, 15 December 2013 The Revolution of Dignity marks a paradigm shift in Ukrainian society, politics and inevitably, the economy The active, pro-European civil society – the Maidan generation, intolerant of abuses and relentless in their controlling function, warrants a point of no return for the transformation of the country
  • 19.
    A critical massof active, tech-savvy civil society=relentless scrutiny 19 Percent of population using internet, % Source: Euromonitor, Internetlivestats, BBC, USAID 6 7 1 2 3 4 5 5.7 Russia 4.5 Romania 3.6 Ukraine 3.3 Czech 2.6 Belarus Civil Society Organization Index in 2014, 1-7 scale, lower=stronger civil society +0.1 +0.4 0 -0.2 +0.1 42 38 34 29 23 18 0 10 20 30 40 50 2010 20122008 2014 11 “Throughout this turbulent period, Ukrainian civil society stepped up to the plate, playing a key role in forming the new government’s policy priorities and providing critical services to the public” – USAID, 2015 Improvement vs. 2008 “2014 saw the rise of self-organized public and a strong volunteer movement”
  • 20.
    A president electedfor the first time by both, East & West in Ukraine 20 Presidential elections 2004: Yushchenko Presidential elections 2010: Yanukovich Presidential elections 2014: Poroshenko For the first time, Ukrainian people did not split along geopolitical or language lines. President Poroshenko won in the outright majority of constituencies
  • 21.
    A young, technocrat,pro-business, English speaking government 21 45 46 50 56 58 40 45 50 55 60 13 years Mar-10Dec-07 Dec-12 Dec-14Feb-14 Source: kmu.gov.ua Average age of ministers in Ukrainian Governments (2007-2014) Tymoshenko Azarov Azarov Yatsenyuk Yatsenyuk
  • 22.
    Soviet legacy dyingoff 22 0 32 27 21 65 123 0 50 100 150 20072006 2012 20141998 2002 Source: Central Election Committee Communist representation in Parliament, out of 450 seats The Communist Party, on a declining trend since independence, failed to reach parliament in 2014 altogether – an expression of the generational change in peoples’ values and preferences
  • 23.
    A clear pro-Europeanmajority, for the first time 23 Source: Razumkov Centre, Democratic Initiatives, Kyiv Post 2002 2004 2006 2008 2010 2012 2014 50% 55% 60% 65% 35% 40% 45% 40% 53% 64% 48% 53% 44% 49% Population support for joining the EU, percent 91% 45% 51% 0% 20% 40% 60% 80% 100% 201420122007 100% Pro-EU parties support in parliament, %
  • 24.
    A critical massof reformers and start of structural reforms 24 Critical mass of reformers Fiscal discipline Deregulation Privatization Free trade Transparency • New pro-business, pro-reform, pro-Europe government • Average age 45, fluent English, Western experience and education • Eliminating intermediaries, open competition for public positions, electronic state tenders, civic society high engagement • 19% budgetary surplus in 1Q15, despite near tripling defense spending; cut energy subsidies costing 10% of GDP, 4x hike in gas tariffs • Licensing for 26 activities abolished, 16 regulations scrapped • Rose 56 positions in Ease of Doing business to #96, key reform KPI • > 300 state owned enterprises to be privatized, years of mismanagement have led to 2.5% of GDP consumed in annual subsidies • Historical free trade agreement (DCFTA) signed with EU, eliminating tariffs and quotas for trade, opening up the largest market in the world
  • 25.
    Macro: stabilization packagewith IMF tempered C/A deficit, UAH rate 25 21.1 26.5 16.2 13.0 11.8 0 5 10 15 20 25 30 Feb ’15 Nov ’14 Aug ’14 May ’14 May ’15 Source: Dragon Capital, minfin.com.ua Hryvnia exchange rate, UAH per USD 0.70.8 -1.3 -0.9 -1.5 -2.3 -8 -6 -4 -2 0 2 4Q132Q13 4Q15F -1.0 -5.0 -6.0 -3.2 2Q15F4Q142Q14 -0.5 -1.5 Current account balance, USD billion
  • 26.
    Public finance: fiscallydisciplined, despite spike in defense spend 26 Ukrainian state budget, 1Q 2015 UAH mn 2014 2015 YoY, % Revenues 152,050 198,409 30% Tax on income of individuals 22,238 28,676 29% Corporate income tax 18,948 19,447 3% VAT 40,668 58,735 44% Other 70,197 91,552 30% Expenses (154,718) (178,760) 16% Debt service (12,411) (25,721) 107% Military expense (4,393) (11,691) 166% Other (137,914) (141,348) 2% Financing (190) (1,156) 507% Budget deficit/surplus (2,858) 18,493 747% Source: Ministry of Finance of Ukraine Finance Minister Jaresko runs a prudent budget. Ukraine achieved a 19% primary surplus despite a near tripling of defense expenses
  • 27.
    Energy: doing awaywith a ruinous subsidy costing 10% of GDP 27 0.9 2.52.7 4.2 9.7 0 3 6 9 12 UkraineUSACanadaCzechEU-28 -91% Natural gas prices, 2014, $ cents per kWh (pre reform) 3.0 5.8 7.07.4 11.2 0 3 6 9 12 -73% UkraineCzech CanadaUSAGermany GDP $ produced from 1 kg of oil equivalent Source: Eurostat, World Bank Unprecedentedly, the new government had the courage to push through a near 4x hike in gas tariffs, to be followed by increases to full market parity, ending 20+ years of ruinous subsidies
  • 28.
    Energy: gas reform,cut reliance on Russia, boost production 28 Imports vs. local production, BCM Sources of gas import, % 92% 74% 37% 26% 63% 8% 100% 80% 60% 40% 20% 0% 5M 20152013 2014 11 22 22 23 8 48 28 20 9 33 0 10 20 30 40 50 60 2013 50 5M15 17 2014 43 2012 55 2011 59 EU RussiaOwn production*Gas import * includes gas usage from reserves (up to 6% of consumption) Source: Naftogaz of Ukraine, Ukrstat
  • 29.
    Privatization: shaking-off theinefficient state-owned enterprises 29 State-owned companies contribution, % GDP Source: Ministry of Economic Development and Trade of Ukraine -3.0% -2.0% -1.0% 0.0% 1.0% -2.5% 0.2% Subsidies Dividends The Ministry of Economy announced a bold privatization agenda to address the systemic inefficiencies of the state owned enterprises Over 1,800 SOEs generated in 2014 a net loss of UAH 115 billion and consuming subsidies of 2.5% of GDP Analysis shows a potential income of at least UAH 60 billion Privatization program aims to divest over 300 state enterprises in the first phase As a first step, data about the top-100 SOEs has been made public, including financial statements
  • 30.
    Banking: cleaning upthe sector, shutting down “pocket banks” 30 Number of banks where temporary administration or liquidation was initiated 13 22 7 6 5 0 6 12 18 24 2Q151Q154Q143Q142Q14 Source: National Bank of Ukraine, DGF The government has to resolve insolvent banks through recapitalization and liquidation Since early 2014, over 50 banks out of 180 have closed their doors, as the NBU has increased capital requirements and committed to ridding the system of “pocket banks” Structural impediments in the system are being addressed, preventing a wide-spread practice of channeling excessive lending to insiders The adoption of the law on strengthening bank owner responsibility, as demanded by the IMF, should improve corporate governance and bring more transparency to the sector, again lowering the burden on the state to save failing banks
  • 31.
    Deregulation: ease ofdoing business a key KPI for government 31 50 100 150 200 2015 96 2014 112 2013 137 2012 152 Source: World Bank, Ministry of Economic Development and Trade of Ukraine Ukraine’s ranking in Ease of Doing Business, inversed scale An ambitious deregulation program has been launched, with over 70 initiatives, from scrapping a quarantine certificate for grain transportation, to liberalizing the land market, to simplifying the immigration rules for expats Licensing for 26 business activities has been abolished and 16 regulations scrapped The Ministry of Economy estimates the program to generate between $2.4 - $3.3 billion in savings for the business community and dramatically improve Ukraine’s standing in the World Bank’s Ease of Doing Business Rating
  • 32.
    In summary: Ukraineoffers a true ground-floor opportunity • Largest country within Europe • 45 million population, 99.7% literacy • 70% live in urban areas • #1 black-soil bank in the world • 93% of country open for business Too big to ignore • 3x-10x consumption gap vs. peers in basic categories, from e-commerce to pharma • 10x-100x+ consumption gap in select categories ie. life insurance, parcel delivery • GDP growth expected to restore in 2016 Huge catch-up to peers • $156 average manufacturing salary • 2 truck days away from EU • Free trade area with over 730m consumers • Leading global positions in Agro & IT Europe’s most cost-competitive platform • Liquidity crunch as no lending • Median EV/EBITDA only 4.3x, 50-60% discount to Poland, Bulgaria, Turkey • Median P/E only 4.6x, ~70% discount to Greece Bargain valuations Sources: 1) Ukrstat 2) CIA 3) Euromonitor consumer statistics, Datamonitor 4) IMF, the Economist 5) www.worldatlas.com 6) Capital IQ 32
  • 33.
    Export champions –the growth engine and safest bet on UA economy Lviv 400km from Warsaw, 900km from Berlin Manufacturing wages $1.2 / hour, 2x lower than China 60% devaluation boosting cost competitiveness 6.5% exports CAGR between 2009-2014 Exports only 49% of GDP vs 61% for CEE peers Per capita exports of $1,540 still 3x lower than Poland Share of EU exports from 20% to 35% in 5 years 0% duty on most EU exports 20x growth in IT exports in 10 years Sources: 1) Ukrstat, NBU 2) EU DCFTA text 3) World Bank, the Economist 4) China Statistical Yearbook 5) www.worldatlas.com 33
  • 34.
    Brains, Hands andGrains: three lasting, competitive advantages 1. Brains 2. Hands 3. Grains The #1 IT engineering force in CEE Lowest-cost manufacturing platform in Europe Largest black-soil bank in the world Sustainable competitive advantages in IT, Manufacturing, Agriculture to drive an exports-fueled rebound 34
  • 35.
    3. Brains: #1CEE IT engineering force 35
  • 36.
    Top math andscience education, starting with primary school 36 China 1 US 2 Ukraine 6 Romania 11 Netherlands 13 Germany 16 Czech Republic 32 India 39 France 45 Belgium 59 Source: International Mathematical Olympiad, Eurostat, Ukrstat 2014 Results at the International Math Olympiad, global rank 10% 4% 2% 8% 6% 0% 4.4% Romania 4.9% Ukraine 5.1% Bulgaria 6.3% 6.8% Latvia 9.8% Poland Hungary Lithuania 3.9% Share of math, science and computing graduates, %
  • 37.
    Strong technical educationensures high quality of students… 37 United Kingdom 1 Hungary 9 Ukraine 13 Belgium 15 United States 26 Poland 32 Italy 38 Romania 48 India 56 Philippines 115 Source: goodcountry.org, Universitas 21 Good Country Index: Science and Technology parameters reported to GDP, rank US 1 UK 8 Germany 14 Hungary 30 Poland 32 Ukraine 41 Romania 42 Indonesia 48 Turkey 49 India 50 Universitas 21, university research quality, rank
  • 38.
    …and feeds abundanttechnical talent into the market 38 Engineering graduates per annum in European countries, thousand students 39 48 56 66 71 75 93 105 130 20 40 60 80 100 120 140 RomaniaItalySpainPolandUKTurkeyGermanyFranceUkraine Source: World Economic Forum, Forbes, 2014, IVC, www.business-standard.com
  • 39.
    Programmer salaries amongthe most competitive in the world 39 Average programmer salary, comparable skills, thousand USD per annum Source: Stackoverflow, 2014 26 38 43 6263 686869 77 90 0 20 40 60 80 100 -71% South Africa IrelandNew Zealand IsraelCanadaUKAustraliaUnited States UkraineChina
  • 40.
    Largest IT outsourcingforce in CEE & among top ones globally 40 Kharkiv 6.7% Kyiv 6.6% Lviv 3.4% Zaporizhya 3.1% Omsk 3.1% Moscow 2.8% Minsk 2.7% Novosibirsk 2.6% Bucharest 2.5% Belgrade 2.3% Source: dou.ua, Elance 3% Macedonia 3% Croatia 2% Moldova 7% Other 7%Poland 4% Belarus 4% Bulgaria Serbia 8% 21% 33% Ukraine Russia 9% Romania Top CEE countries by IT freelance outsourcing, % Top CEE cities by IT freelance outsourcing, % Ukraine is the #1 IT outsourcing country in CEE, by a wide margin; #3 by freelance outsourcing in the world after US, India
  • 41.
    As result, IToutsourcing grew at 30%+ annually for over 10 years 41 Total size of the IT outsourcing market, USD million Source: Ukrainian Hi-Tech Initiative, Symphony-solutions 2,379 2,000 1,400 1,100 874 697 530544 390 250 165110 0 500 1,000 1,500 2,000 2,500 +32% 201420132012201120102009200820072006200520042003
  • 42.
    Beats growth inglobal IT outsourcing by a wide margin 42 437 368 257 202 161 128 97 144141 123121112107 111 0 100 200 300 400 500 2007 2008 2009 2010 2011 2012 2013 2014 Growth in Ukrainian IT outsourcing sales vs. the global market, indexed (2007=100) Source: Ukrainian Hi-Tech Initiative, Symphony-solutions, Gartner Global IT outsourcing Ukrainian IT outsourcing
  • 43.
    43 Source: Ukrainian Hi-TechInitiative, Symphony-solutions, Gartner, Ukrstat Outsourcing emerged as the #2 export service, tripled share 18% 27% 12% 12% 64% 44% 17% 6% 0% 20% 40% 60% 80% 100% Business services 100% Other IT outsourcing Transportation 2007 2014 Breakdown of Ukrainian service exports, 2007-2014 Already the #1 exports category to United States
  • 44.
    Over 100 globalcompanies located software R&D in Ukraine 44 North America Europe Asia Samsung alone has over 1,000 engineers working on things like computer vision, information security, artificial intelligence, natural language processing (NLP), human computer interaction (HCI), computational intelligence and more
  • 45.
    Ukraine has amongthe lowest living expenses in the world 45 India 125 Pakistan 123 Ukraine 117 Philippines 112 Romania 105 Hungary 97 Poland 96 China 58 United States 21 Switzerland 1 Source: numbeo.com Cost of living, including rent, global ranking (lower = cheaper) One bedroom rent, month 250 Intercity train Kyiv-Lviv (500km) 14 Two courses in fancy restaurant 12 Dry-clean suit 10 Theater ticket 5 Haircut 4 Taxi trip 3 A bowl of borscht 2 Tomatoes, 1kg 1 Milk, 1L 0.5 Prices of selected items in Kyiv, USD
  • 46.
    The beer andburgers are the cheapest in the world too :) 46 Source: Wall Street Journal, The Economist Big Mac Index – February 2015 7,0 6,0 5,0 4,0 3,0 2,0 1,0 0,0 Kyiv 1.7 Dehli 1.8 Berlin 2.6 London 4.5 New York 5.2 Hong Kong 6.2 Geneva 6.3 7,0 3,0 6,0 5,0 0,0 4,0 2,0 1,0 8,0 1.2 1.9 UkraineIndia 3.7 Philipp.Germany 4.3 US 4.8 Switzer. 7.5 Average price of a 330ml beer, USD Price of a Big Mac, USD
  • 47.
    Large, young, urbanpopulation 47 Source: Ukrstat 729766 9931,017 1,451 2,868 0 500 1,000 1,500 2,000 2,500 3,000 Kharkiv LvivZaporizhyaKyiv Odessa Dnipropetrovsk • 70% urban population, concentrated mainly in and around large cities • 2.6 million student population with 640,000 graduates each year Select Ukrainian cities by population, thousand people
  • 48.
    And all thisin a progressive, cosmopolitan, European country 48
  • 49.
    Tech talent +cheap living + global outlook = thriving tech ecosystem 49 IT outsourcing is one of the perennial growth hope stories for Ukraine, drawing its inspiration from the Soviet tradition of science teaching, and the country’s plethora of scientific institutes that used to churn out rocket scientists. Under market conditions, the schools have switched to producing programmers – an estimated 16,000 new IT specialists graduate each year The huge IT outsourcing sector feeds increasing number of risk-taking tech talent, with a cosmopolitan outlook, willing to strike on their own and launch globally-focused tech startups. The low costs of living and progressive big-city culture, further add to a thriving tech ecosystem
  • 50.
    Increasing number oftech UA companies dominate global niches 50 A common theme for all these companies: profitable, self-sustaining business models, compensating the shortage of venture capital available Leading app maker for mobile enterprise productivity Leading one-stop-shop provider of online payment solutions Top-5 global jobs aggregator Cloud based grammar and spelling solutions provider Top-5 global stock photos and videos marketplace Cloud based CRM solutions provider
  • 51.
    A top-10 global,‘Big’, developing internet market 51 Source: KPCB, Mary Meeker - 2015 Internet Trends #9 developing BIG internet market in the world as per Internet Trends by KPCB, with penetration at 42% and 23% growth in 2014
  • 52.
    52 1,837 2,000 1,600 1,043 680 443409 331 0 500 1,000 1,500 2,000 20142013201220112010200920082007 E-commerce sales inUkraine 2007-2014, USD million Source: Euromonitor, Horizon Capital estimates 28% Drop in 2014 driven by large Hrivnya devaluation. Growth in national currency continued to be very strong E-commerce posted 5.5x growth for the last 7 years…
  • 53.
    …growing at muchfaster pace than global market… 53 415 451 361 235 153 100 246 206 177 143 100 0 100 200 300 400 500 2009 2010 2011 2012 2013 2014 119 Ukrainian vs. Global e-commerce sales evolution, indexed growth (2009=100) Source: eMarketer, Euromonitor, Horizon Capital estimates Global e-commerce Ukrainian e-commerce
  • 54.
    …and with plentyof upside ahead to catch up with peers 54 Source: internetlivestats.com, Euromonitor 20% 40% 60% 80% 100% 0% 20% 40% 60% 80% 100% Germany UK Ukraine France Netherlands Sweden Italy Poland Spain % of internet users shopping online %ofinternetusersintotalpopulation Only ~20% of Ukrainian internet users shop online (share doubled over 2 years) Percent of online shoppers = 3x lower vs Poland, Italy; 4x vs UK, Germany Share of ecommerce in total retail is just above 2%, 3-6x lower vs Western Europe E-commerce incidence and internet penetration, %
  • 55.
    “Brains”: recap • Goodeducation, a strong math and science legacy • Feeding abundant tech talent to the market – largest IT engineering force in CEE • Which led to a thriving IT outsourcing business, up 20x during last decade • Tech talent increasingly turning to startups, beyond outsourcing = increasing numbers of global software champions from Ukraine 55
  • 56.
  • 57.
    Plenty of industriesremain very dependent on labor cost 57 Source: icrier.org for Emerging Markets, India example 0.30.30.30.30.40.4 0.40.40.4 0.5 0.60.6 0.9 1.0 0.0 0.2 0.4 0.6 0.8 1.0 FootwearStructural metal prod. BicyclesKnit fabrics Pasta, noodles Luggage Animal feeds Apparel Sporting goods Jewelry Refractory ceramic Toys General purpose machinery Furniture Workers per unit of gross fixed capital stock in manufacturing
  • 58.
    Unbeatable cost advantage,further enhanced by UAH devaluation 58 Source: U.S. Bureau of Labor Statistics, International Labor Comparisons, Statista, Ukrstat, 2014 1.22.1 8.3 11.311.9 19.4 26.8 35.7 0 5 10 15 20 25 30 35 40 US PolandSlo vakia UkraineChinaCzechGreeceSpain 7.9 10.010.510.5 12.6 19.2 0 5 10 15 20 UkraineUSAPolandCzech Republic Slo vakia Germany Hourly wages in manufacturing industry in select countries, USD Electricity prices for industrial enterprises, USD cent / kWh
  • 59.
    Ideally positioned tobe a manufacturing and trading platform 59 Source: www.worldatlas.com, www.travelmath.com Kilometers distance to select cities from Lviv Flight hours to select cities from Kyiv LvivWarsaw 390 Budapest 570 Berlin 930 Milan 1,560 London 1,990 KyivIstanbul 2 Berlin 2 London 3 NYC 10 Beijing 9 Dubai 5 In a world of tighter supply chains, faster product innovation cycles, Ukraine has a real chance to emerge as a manufacturing and trading hub at the frontier of EU, Middle East and Asia. A case in point, Western Ukraine emerged as home to a vibrant automotive spare-parts manufacturing cluster
  • 60.
    60 Source: Kyiv Post,HCA Light manufacturing Machinery & Equipment “The production of Ukrainian workers can compete with the European level in terms of quality. There's a new, highly-educated generation of creative people who want to see their country strong. I'm an optimist” - Dietmar Kung, Hugo Boss Proven by top global brands who localized production in Ukraine
  • 61.
    61 Source: Ukrstat Exports toEU rising strongly, marking fundamental shift in trade 38 35 38 34 34 27 27 2630 32 48 38 35 40 15 20 25 30 35 40 45 50 18 2008 2009 2010 2011 2012 2013 2014 1Q 2015 2007 Other countriesEuropeRussia & CIS Exports split by destination, % Moving away from over-reliance on Russian market as exports to Europe grow. Signing of the DCFTA with the EU is expected to further accelerate the trend
  • 62.
    “Hands”: recap • Demandfor labor remains high, as many industries are still very labor intensive • Ukraine enjoys a very attractive location, at the intersection of the EU, Middle East, Asia • Signing of historical EU DCFTA to further boost attractiveness • The manufacturing labor costs are very competitive, even compared to China • Cost, advantageous FTAs and proximity to large markets position Ukraine as ideal manufacturing and trading platform 62
  • 63.
    5. Grains: thefood basket for the world 63
  • 64.
    Global demand foragricultural products to keep increasing 64 1,000 3,000 2,500 2,000 1,500 500 0 2024 2,740 516 1,440 784 2020 2,610 486 1,371 2,442 2015 753 451 1,280 711 2010 2,192 396 1,135 661 2005 1,953 327 1,005 621 2000 1,750 272 888 591 1995 1,500 211 840 448 OilseedsWheat Coarse grains Source: OECD Global demand, 1995-2024F, million tons
  • 65.
    Ukraine: already anagro-powerhouse, share of global market rising 65 Source: OECD 1% 0% 2% 4% 6% 8% 10% 12% 14% 1995 0% 2% 2%1% 2% 7% 3% 2% 2005 3% 2015 3% 2000 13% 5%6% 2010 6% OilseedsCoarse grainsWheat Ukraine’s share of global exports by commodity, %
  • 66.
    World’s leading positionsin a number of markets 66 Source: Ministry of Agricultural Policy and Food #1 in sunflower oil #2 in grains #3 in corn #4 in barley #6 in wheat #7 in soybean #8 in poultry
  • 67.
    Signing the historicalEU DCFTA set to accelerate growth 67 Source: Dragon Capital, Institute of Economic Research and Political Consultations Item Quota, tons % of quota used Wheat 950,000 100% Corn 400,000 100% Tomatoes 10,000 100% Juice 10,000 100% Cereal groats, meal and pellets and cereal grains 6,300 100% Honey 5,000 100% Barley 250,000 5% Poultry 36,000 41% Sugar 20,070 3% Bran, sharps and other residues 16,000 12% EU quotas for export of Ukrainian agro products, 2014 Industry Old Tarrif New Tarrif Agriculture, forestry 12.7% 0.3% Fisheries 12.1% 1.3% Extraction of fuel energy resources 9.2% 0.0% Extraction of other resources 22.0% 0.4% Chemical production 9.2% 0.0% Rubber and plastic goods 7.5% 0.0% Leather and leather goods 4.9% 0.0% Textile and furs 4.3% 0.0% Production of non-mineral goods 4.1% 0.0% Auto vehicles 4.1% 0.0% EU import tariffs on Ukrainian produce
  • 68.
    A lasting competitiveadvantage: the most fertile soils in the world 68 Source: Harmonized World Soil Database Chornozem Podzoluvisol Greyzem Phaeozem Leptosol Cambisol Kastanozem Arenosol Water bodies Gleysol Fluvisol Map of Ukraine’s soils About 1/3 of world’s most fertile – chornozem soils – are in Ukraine
  • 69.
    Yet the productivityupside potential remains very significant 69 Source: USDA 6 8 2 4 12 10 0 8 9 9 SwitzerlandCanada 11 USA Ukraine 6 Argentina -45% Corn yields in select countries, tons per ha Yields set to rise as farms keep investing in modern technology and methodologies – opening up significant investment opportunities and upside
  • 70.
    Leading UA companiesshow the productivity jump is real 70 Source: USDA, Companies fillings 10 0 2 8 12 6 4 Average Ukraine 6 Astarta, Ukraine 7 Argentina 8 MHP, Ukraine 9 Switzerland 9 Canada 9 USA 11 6 Yields, tons per ha
  • 71.
    In-country logistics benefitfrom closer port infrastructure 71 Average distance to port, selected countries, kilometers 300 900 950 1,500 0 300 600 900 1,200 1,500 1,800 USAArgentinaBrazil Ukraine Source: HCA estimates
  • 72.
    Favorable location providesadditional cost advantage 72 Source: Sea Rates 10 15 0 5 20 BrazilArgentinaUkraine UAEIndiaChina Spain EgyptNetherlands Average distance to key markets, thousand kilometers
  • 73.
    Thriving agricultural exportsto EU, Asia, CIS and Middle East 73 Source: Ministry of Agricultural Policy and Food EU: $5.0 bn. CIS: $2.6 bn. Asia: $6.6 bn.Africa: $5.0 bn.
  • 74.
    Local agro-champions operatelarger farms than global peers 74 Source: Eurostat, Agricultural Council of America, FAO, Oxford Farming Conference 150 300 450 0 250 5915 GermanyFranceCzech Republic 18 Argentina USABrazil (Central/East) 90 Ukraine 6 50 Brazil (South) Russia 450 Average farm size, ha
  • 75.
    As result, fertilesoils + better logistics + scale = cost advantage 75 Source: Ministry of Agricultural Policy and Food, USDA, GRDC 123 149 169 210 0 30 60 90 120 150 180 210 240 Australia UkraineCanadaEU Wheat 79 118 140 153 0 30 60 90 120 150 180 210 240 ArgentinaUSABrazil Ukraine Corn Cost of production, USD per ton
  • 76.
    Sustainable cost advantage= higher profit pool 76 Source: Capital IQ 3% 13% 15% 6% 13% 23% 2% 10% 6%6% 1% 7%8% 5% 9% 32% 6% 24% 36% 0% 10% 20% 30% 40% Atria 6% Cherkizovo 11% 20% MHP, UA 25% 32% 9% EnsuikoDhampur 7% Astarta, UA 19% Kernel, UA China Agri Golden Agri 2014 2012 2013Vegetable oilSugarMeat EBITDA margin by agro-sector, %
  • 77.
    Prone to harvestfluctuations in the long run 77 Source: FAOSTAT 0 10,000 20,000 30,000 40,000 20 30 40 50 60 70 2012201120102009200820072006200520042003 Total Harvest, mn tons Total Grain Revenue, USD mn Grain revenue, USD mn (left axis); Grain harvest, mn tons (right axis)
  • 78.
    Industry moves upthe value chain, further increasing margins 78 Source: HCA Farming Grain trading Value-added agri Agri infrastructure Valueadd Grains -> Poultry and Eggs -> Farm Equipment example Cost advantage in grains enabled growth of eggs and poultry producers, which rely on grains for a large portion of costs. Companies like MHP, Ovostar, Avangard have achieved global leading positions in these market segments. Further up the value chain, a thriving poultry and eggs industry, enabled growth of farm-equipment manufacturers e.g. Texna, which subsequently turned into global export champions, leveraging their Ukraine base.
  • 79.
    “Grains”: recap • Globaldemand for food keeps rising • Ukraine is home to 1/3 of the most fertile soils on earth • Soils, location and scale warrant a lasting cost advantage for Ukrainian producers • The room for upside is still large, as further technologization will keep pushing the yields up • As the industry matures, it moves up the value chain, boosts profits, creating a thriving agricultural cluster 79
  • 80.
    6. Entry ticket:a near 70% discount to … Greek valuations 80
  • 81.
    Historically low valuations 81 4.3 5.5 6.5 7.2 8.2 9.7 10.7 0 3 6 9 12 RomaniaGreecePolandBulgariaTurkeyKazakhstan -60% Ukraine Source: Capital IQ, 10 July-2015 Median EV/EBITDA multiple for selected countries
  • 82.
    82 Source: Capital IQ,10 July-2015 4.6 10.2 11.0 13.714.1 14.8 15.7 0 2 4 6 8 10 12 14 16 18 Turkey Bulgaria GreecePoland -67% UkraineRomaniaKazakhstan Historically low valuations: near 70% discount to Greek companies Median P/E multiple for selected countries
  • 83.
    Final recap • TheRevolution of Dignity led to a paradigm shift in Ukrainian society, politics and inevitably – the economy • Young, technocratic government leading a bold, structural reforms agenda • Uncompromising, active, tech-savvy civil society warrants the change is lasting = point of no return • Sustainable competitive advantages in IT, Manufacturing, Agriculture open up attractive investment opportunities • Valuations are at historical lows = an ideal time to seize on the potential upside 83
  • 84.
    About – HorizonCapital Horizon Capital is a private equity fund manager that originates and manages investments in mid-cap companies with high growth and profit potential in Ukraine and the near region. Learn more at www.horizoncapital.com.ua 84
  • 85.
    Contact – HorizonCapital Lenna Koszarny Founding Partner and CEO lkoszarny@horizoncapital.com.ua Vasile Tofan Partner vtofan@horizoncapital.com.ua 85
  • 86.
    Thank you! Igor Kotsyuba OlexanderMatvienko Roman Cherepakha Vadym Trembovetsky 86
  • 87.
    Disclosure The attached presentationof Horizon Capital does not constitute an offer to sell or a solicitation of an offer to purchase an interest in any Horizon Capital private equity fund or sponsored investment. Certain economic and market information contained herein has been obtained from published sources prepared by other parties. While such sources are believed to be reliable, none of Horizon Capital or its affiliates assumes any responsibility for such information. Recipient should make its own investigations and evaluations of the information contained herein. Recipient is cautioned not to place undue reliance on any forward-looking statements, and Horizon Capital assumes no obligation to update any forward-looking statements as a result of new information, subsequent events or any other circumstances. Such statements speak only as of the date that they were originally made. While presenting the opportunity for monetary gain, an investment in Ukraine will involve a high degree of risk and is suitable only for investors that have no immediate need for liquidity of the amount invested and can withstand a loss of their entire investment. 87
  • 88.