Emerging Europe Investment

Opportunities

2017

Karoll Financial GroupMission

“Our goal is to create accessible vehicles, tools and processes in helping global investors harness the exciting potential of Emerging Europe.”

Stanimir KarolevFounder and Chairman,

Karoll Financial Group

Karoll Financial Group

Karoll Brokerage

Karoll Capital Management

Advance Terrafund

Advance Equity

Karoll Investment

Leader by number of transactions on BSE for 15 years in a row30% market share of of all transactions

Pioneered the first mutual fund in the country (2004)Strategic partner of Schroders for the local markets

Largest farm land REIT in the countryIFC (World Bank) - key stakeholder

First Private Equity fund in Bulgaria

Executed the first IPO in Bulgaria (2004)

25 EXCITING YEARS OF SUCCESS | TEAM OF 200 EXPERTS

Karoll Financial Group Product Offering

Bulgarian Capital Market

International Capital Markets

Brokerage

Wealth Management• Advance Invest• Advance Eastern

Europe• Advance Emerging

Europe Opportunities• Advance Global

Trends• Advance

Conservative Fund• Separately Managed

Accounts

Institutional Mandates• Emerging Europe

Opportunities (Eastern Europe)

• Central Europe• Balkan• Thematic equity• Mixed

Asset Management

IPO & SPO Activities

M&A Restructuring

Investment Banking

Real Estate

ADVANCE TerraFund

REIT

Private Equity

ADVANCE Equity

Holding

Karoll Capital Management OverviewUnique heritage in Emerging Europe

Founded in Sofia in 2003, our roots are truly in Emerging EuropeIndependent and skilled Eastern Europe-based team with long tenurePart of Karoll Financial Group with support of 200 professionals + 70 local offices

Steady business growth on solid reputationAUM ~ USD 250 mln. Assets split in various mutual funds, real estate investment trusts, wealth mgt & mandatesManages 5 UCITS funds and multiple private accounts

Crisp focus on Emerging EuropeHelping clients harness the potential of Emerging EuropeDeep understanding of the cultures and dynamics of our marketsOn-the-ground research coverage of strategically important holdings

Partnership with top international namesLocal representative of Schroder Investment Management, UKPartners with IFC (World Bank), European institutions and global playersCheverny Capital – our Canadian representative

Our Unique Value Proposition“Emerging Europe is a unique investment theme with strong upside potential and low correlation to the developed world. It is a truly overlooked opportunity!

We pick out high-growth sectors in a high-growth region.

We generate alpha in the region while helping global investors overcome local barriers.”

Daniel GanevManaging Director,

Karoll Capital Management

Independent

Flexible

Entrepreneurial

Deep understandin

g of local markets

Karoll Capital’s Investment Committee Seasoned investment team with long tenure and unique combination of skills:Daniel Ganev, MBA, Managing Director

15+ yrs of experience in in fund management, financial products development and marketing, business development in emerging markets

Nadia Nedelcheva, CFA, Head of Portfolio Management 15+ yrs of experience in portfolio management, research, valuations and modeling in

Central & Eastern Europe (CEE)

Alexander Nikolov, Portfolio Manager 18+ yrs of experience in portfolio management, financial analysis, technical analysis on

the US, European and CEE market

Katerina Atanassova, Portfolio Manager 15+ yrs of experience in portfolio management, technical analysis and trading on the

global developed and emerging markets

Georgi Georgiev, Portfolio Manager 13+ yrs of experience in research, fundamental analysis, valuations, portfolio

management and trading in the global emerging markets and USA

Karoll Capital’s Analytical SupportOur Sofia-based analysts have easy access to regional companies in search of investment opportunities:

Dimitrios Latitaris, Investment Analyst 4+ yrs of experience in research, investment

banking, fundamental analysis, valuations in Central & Eastern Europe

Georgi Raykov, Investment Analyst 3+ yrs of experience in research, fundamental

analysis, valuations in Central & Eastern Europe

International Partners and Clients

Karoll Capital’s Investment Process – the 4 S’sScreen

The process starts with our on-the-ground analyst team screening the landscape in search of investment opportunities in Emerging Europe. We apply filters in terms of liquidity (time needed to enter/exit investment), market cap, transparency, corporate governance, etc. As a result, our investment universe comprises around 500 stocks out of some 3 000 listed companies in Central and Eastern Europe. Our major advantage is the freedom to deviate from local indices based on our views. This gives us flexibility in our investment choice, regularly leading to superior results and outperformance of benchmarks and peers. Using proprietary analytical tools and exchange with local contacts, we seek to pinpoint stocks that are trading at a discount or that are in a position to undergo some fundamental change. Examples of such events are turnaround situations, management changes, financial results surprises, etc.

StudyThe generation of investment ideas leads to the next step -- a thorough in-depth analysis conducted in house. Because of market inefficiencies we believe Emerging Europe is abundant with mispriced assets. In estimating the true value of a stock we study the firm’s business model and its ability to realize returns greater than the cost of capital, the shareholder structure and management capabilities, sector dynamics and overall market position. We strive to find companies with improving profitability margins and low debt levels that are traded at a discount to peers. On-site visits and regular contact with company representatives are a key part of research as well. In addition to employing valuation methods, we also consider investor psychology, liquidity and order flows. The outcome of the investment assessment is the analyst proposal to the investment committee, which summarizes the case, the rationale behind it, potential upside and associated triggers, as well as the risks involved. 

ShapeKaroll Capital’s 4-member investment committee, supported by our analyst team, examines the selected investment proposals in view of portfolio construction. In the case of managed accounts / mandates the decision is collective. Convening each month, the committee decides on position weight changes and/or liquidations. At each stage, compliance with regulatory guidelines and client-tailored requirements are factored in.

ScrutinizeFinally, the investment portfolio is monitored with all different positions being systematically scrutinized. The investment team applies in-house processes and practices enabling it to adequately react to the different triggers causing distortions to the investment case. As part of the process our analysts and portfolio managers follow up with the companies’ management, screen the sector competitors and general business/political environment. Conducting attribution and risk management analysis on the portfolio holdings is essential. Any resulting concerns related to the investment case prompt reviews of the rationale behind the decision to add / hold/ reduce the stock as a portfolio component.

Our Investment Universe3,000+ listed companies in CEE

Investment Universe – 1,500750500250

Survivors

150

Selection Filters:

Sector Outlook & Company Competitiveness

Mkt cap & Liquidity

Corp Governance & Transparency

Financial Strength

In-house Valuation

Karoll Capital’s Investment Process

In-house valuation Our PMs and analysts use the following valuation methods:- Peers comparison - Discounted cash flows model

Financial strength - Earnings: earnings cyclicality, recurring earnings, forecast sales and earnings - Analyze profitability, Leverage and funding, Debt service, Liquidity, Asset quality

Sector outlook and competitiveness- Identify key growth drivers and themes, assess sustainable competitiveness

Corporate governance and transparency- Study and evaluate board composition, executive remuneration, communication with shareholders, provided access to documents

Market cap and liquidity filter- For more liquid markets: up to 3 days for entry/exit- For less liquid markets: up to 7 days for entry/exit- Free-float > 25%

We aim to achieve sound risk-adjusted performance

We define risk indicators/limits regarding market risk, liquidity risk,

exposure to a single issuer, to less liquid stocks/markets, etc.

Risk management is executed on a day-to-day

basis by portfolio managers who assess risk

at each level of the investment life-cycle investment selection,

portfolio construction and portfolio monitoring

The risk management department supports the investment process by

implementing and monitoring the policy and

procedures for risk identification constantly

monitors risk factors/indicators, performs

contribution analysis and risk assessment

The risk management department prepares a monthly report for the

Board, as well as notifies portfolio managers immediately upon

approaching of critical levels of key risk

indicatorsRisk Management

Investment team meetings

Weekly meetings- PMs and analysts interact and exchange ideas

Monthly meetings

- Portfolio reviews of mutual funds / managed accounts, contribution analysis- Overview of market development -> modify portfolios if necessary

Quarterly meetings- In-depth analysis of investment portfolios- Strategic asset allocation decisions

Ad-hoc meetings- In the event of a trigger from the in-house surveillance system

Karoll Capital Management Investment Capabilities & Results

Main strategies offered to institutional investors: Emerging Europe Opportunities (Eastern Europe), Central Europe, Balkan, Thematic, as well as mixed strategies based on specific mandate

Karoll Capital’s Investment Committee aims to construct for our institutional clients

Individually Managed Accounts / Mandates portfolios designed to take advantage of the L.T. trends as well as hot opportunities in the market

Strategies results vs. benchmarks, as of 31.01.2017 YTD 1 year

3 years, annualized

5 years,annualized Volatility Beta Alpha

MSCI EFM Europe +CIS -0.48% 27.26% -1.72% -4.13% 23.04%    MSCI EFM Europe +CIS ex RU 2.54% 6.13% -5.22% -4.61% 19.21%    Emerging Europe Opportunities (Eastern Europe) 2.16% 20.53% 1.30% 2.63% 12.89% 0.70 2.08%Central Europe strategy 5.33% 20.77% -0.63% 0.73% 11.10% 0.70 2.60%Balkan strategy 7.44% 25.95% 3.10% 4.75% 10.83% 0.58 5.54%

Emerging Europe High-growth Exporters strategy 6.22% 32.69% 25.12% n.a 12.14% 0.26 18.61%

Emerging Europe OpportunitiesStrategy at a Glance

Invests in the stock markets of Emerging Europe (Central & Eastern Europe, the Baltics, Balkans)

Provides access to a robustly growing region, achieves better performance vs. benchmarks

Invests in regional large-cap, but also small & mid-cap fast growing companies, benchmark agnostic

Managed by a seasoned team with long tenure, based on the ground, with profound understanding of local markets

10+ years track record of strategy

Karoll Capital’sEmerging Europe Opportunities Strategy

Investment theme: invests across the stock markets of Emerging Europe (Central & Eastern Europe, the Baltics, Balkans)

Investment style: blended (value and growth), stock-picking, bottom up combined with top down and sector views

Target: to achieve higher return than the market at lower risk

Market cap: regional large cap, but also small & mid cap

Portfolio components: 70-100 positions

Low portfolio turnover and limited volatility

Offering format: Separately Managed Account

Minimum size of investment: €0.250 mln.

Fees: up to 1.5% on assets p.a. +15% performance fee, high-watermark

Highly-experienced team with long tenure & excellent understanding of local markets

Launch: October, 2006

Outperformance of Strategy vs. benchmark

Strategy vs. Benchmark,performance,

as of 31.01.2017 1 month YTD 1 year3 years

annualized 5 years,

annualized

 Annualized

(since inception) Volatility Beta Alpha

MSCI EFM Europe +CIS -0.48% -0.48% 27.26% -1.72% -4.13% -4.12% 23.04%Emerging Europe

Opportunities Strategy 2.16% 2.16% 20.53% 1.30% 2.63% -2.19% 12.89% 0.7 2.08%

04.10.2006 04.10.2008 04.10.2010 04.10.2012 04.10.2014 04.10.2016 30

50

70

90

110

130

150

Strategy

Benchmark

Emerging Europe Opportunities Strategy

Geographic breakdown (31.01.2017) Sector breakdown

Top 5 positions % of portfolio Country Sector

GMK Norliski Nikel 3% Russia MetalsX5 Retail Group 2.4% Russia Retail

RICHTER GEDEON 2.2% Hungary HealthcareKRUK S.A. 2.1% Poland FinancialOTP BANK 2.1% Hungary Banks

24.0%

18.2%

10.0%9.1%

7.0%

6.6%

4.0%

3.6%

3.2%

3.0%

2.9%

2.5% 5.8%

RussiaPolandHungaryCzech RepublicTurkeyRomaniaBulgariaCroatiaSerbiaBalticsUkraineAustriaCash

12.4%

10.9%

6.4%

6.2%

5.4%4.6%4.7%

4.2%

4.6%

3.8%

3.2%

2.7%

25.0%Oil and gas

Banks

Metals

Retail

IT

Conglomerates

Healthcare

Agriculture

Industrial

Transportation

Utilities

Precious metals

Other

Emerging Europe High-Growth Exporters Karoll Capital’s highest alpha generating strategy

Investment theme: to invest in high-growth industrial, outsourcing and ICT companies benefiting from low labor costs, highly skilled workforce and lowest taxes in a fast-growing region with strategic location

Investment style: growth, benchmark agnostic, bottom-up

Market cap: small and mid cap.

Concentrated portfolio: 20-30 positions

Low portfolio turnover (<20%) and limited volatility

Offering format: Managed Account

Minimum size of investment: EUR 0.25 mln.

Fees: up to 1.5% on assets p.a. +15% performance fee, high-watermark

Highly-experienced team with long tenure and excellent understanding of local markets

Launch: April, 2013

Solid outperformance of Thematic Strategy

vs. benchmark

Strategy vs. Benchmark,performance,

as of 31.12.2016 1 month YTD 1 yearSince

inception

 Annualized

(since inception) Volatility Beta Alpha

MSCI EFM Europe +CIS 9.33% 24.58% 24.58% -17.90% -5.15% 23.04%Thematic strategy

(Emerging Europe High-Growth Exporters) 4.61% 22.06% 22.06% 100.35% 20.01% 12.21% 0.26 17.31%

4/5/2013 4/5/2014 4/5/2015 4/5/20160

50

100

150

200

250

MSCI EFM Europe +CIS Strategy

Emerging Europe High-Growth Exporters

Geographic breakdown (31.12.2016) Sector breakdown

Top 5 positions % of portfolio Country Sector

CD Projekt 8.26% Poland IT Services & Consulting Uniwheels AG 6.75% Poland Automotive supplies

GMK Noril'skiy nikel' PAO 6.19% Russia Metals and miningNovolipetsk Steel PAO 5.73% Russia Metals and miningFabryki Mebli Forte SA 5.01% Poland Furniture

Poland43.12%

Russia23.03%

Turkey14.61%

Romania7.37%

Hungary4.15%

Bulgaria3.41%

Czech 2.40%

Ukraine1.91%

IT services and consulting

24.41%

Basic materials19.83%

Chemical9.24%

Household ap-pliances8.90%

Machinery8.66%

Wood products Furniture

8.63%

Pharmaceutical6.95%

Automotive supplies6.75%

Auto&Multi Utility Vehicles4.72%

Agriculture1.91%

Accessing investment opportunities in Emerging Europe is often obstructed by various challenges related to language barriers, cultural differences and transparency issues.To help our institutional clients make the most of what the region has to offer we provide a number of analytical tools:

quarterly strategy report & flash reports individual sector and stock reports upon requestmonthly performance statements, attribution analysesconference calls and discussions with investment committee memberson-site client visits upon request

 

Analytical Support for Institutional Clients

Karoll Capital’s UCITS Funds Advance Mutual Funds Family

Stock selection in Bulgaria & Romania

Stock selection in Eastern Europe

Stock selection in Central Europe

Local deposits, fixed income, repo-agreements

Flexible global multi-asset fund

Emerging Europe – the Overlooked Opportunity

While Central & Eastern Europe is a diverse region, it offers appreciable scale:350+ mln combined population

USD 4+ trln GDP (1/3 of euro-

zone total)3,000+ listed

companiesUSD 1+ trln

total market cap

Emerging Europe buoyant region converging with the rest of

Europe incubator for thriving companiesincreasingly participating in European & global supply chains vast number of companies shifting production here

Emerging Europe among the fastest growing regions

Source: IMF October 2016 outlook

  2014 20152016e 2017f 2018f 2019f 2020f 2021fWorld 3.4% 3.2% 3.1% 3.4% 3.6% 3.7% 3.7% 3.8%Advanced economies 1.9% 2.1% 1.6% 1.8% 1.8% 1.8% 1.7% 1.7%Euro area 1.1% 2.0% 1.7% 1.5% 1.6% 1.5% 1.5% 1.5%European Union 1.6% 2.3% 1.9% 1.7% 1.8% 1.8% 1.8% 1.7%Emerging market and developing economies 4.6% 4.0% 4.2% 4.6% 4.8% 5.0% 5.1% 5.1%Commonwealth of Independent States 1.1% -2.8% -0.3% 1.4% 1.7% 2.1% 2.2% 2.4%Emerging and developing Asia 6.8% 6.6% 6.5% 6.3% 6.3% 6.4% 6.4% 6.4%Emerging and developing Europe 2.8% 3.6% 3.3% 3.1% 3.2% 3.1% 3.2% 3.2%Latin America and the Caribbean 1.0% 0.0% -0.6% 1.6% 2.1% 2.6% 2.7% 2.7%Middle East and North Africa 2.6% 2.1% 3.2% 3.2% 3.4% 3.6% 3.7% 3.6%Sub-Saharan Africa 5.1% 3.4% 1.4% 2.9% 3.6% 4.2% 4.3% 4.2%

Emerging Europe now a major production & services hub

CEE countries have become major automotive producers 26% of motor vehicles in Europe are produced here

Local suppliers steadily moving up the value chain

CEE is Europe’s Silicon Valley IT sector rapidly increasing its share of GDP with fast growing number of employees

Booming outsourcing sector CEE countries in top 20 ranking for Business Process Outsourcing

Emerging Europe growing much faster than developed

Europe

GDP growth (%)

-6.0%

-4.0%

-2.0%

0.0%

2.0%

4.0%

6.0%

8.0%

Euro area

Emerging and developing Europe

Source: IMF April 2016 outlook

Emerging Europe growing at a much faster pace vs. developed Europe: +3.5% on avg b/n 2005 and 2015 vs. +0.8% for euro-area

Trend expected to persist in the following years

GDP growth (%)

Solid performance of regional economies continued in 2016

Russi

aEst

onia

Latvia

Ukraine

Euro-z

one av

erage

Hungar

yCro

atiaSer

bia

Lithuan

ia

Czech

Republi

c

Bulga

riaPol

andTur

key

Roman

ia

-2.0%

-1.0%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

-0.6%

0.5%0.8%1.3%1.6%1.8%2.0%2.0%2.1%

2.6%3.0%3.1%3.1%

5.9%GDP growth Q2'16 y-o-y

Most regional economies are growing at a faster pace compared to the euro-zone average thanks to robust domestic consumption growth

Romania posted the highest GDP growth rate in the EU in Q2 2016

Recession in Russia is easing as it experienced the slowest contraction in Q2 2016 since it started to contract at the beginning of 2015

Ukraine bottomed out and returned to modest positive growth in Q1 with GDP figures accelerating in Q2

Source: Eurostat, National statistics institutes

Low levels of GDP p.c. = solid catch-up potential

GDP per capita (EUR), 2015

Source: Eurostat, IMF

Rising but still very low levels of GDP per capita: b/n 6 - 51% of euro-zone average

Euro areaCzech Republic

EstoniaLithuania

LatviaHungary

PolandCroatiaTurkeyRussia

RomaniaBulgaria

SerbiaUkraine

0 5,000 10,000 15,000 20,000 25,000 30,000 35,000

Compelling opportunities in Emerging Europe

Strategic location of the region ideally situated for building trade links between Western Europe, Middle East and Asia. Infrastructure has significantly improved in the past years with major investments planned in the mid term

region now deeply integrated with pan-European transport corridors

Most countries are current or future members of EU, OECD and NATO major changes in their economies and business environment. Some have already adopted the Euro. Legal, regulatory and business conditions have marked solid improvement; regulatory framework synchronized following EU accession.

CEE boasts well-educated and relatively inexpensive workforce

labor force with tertiary education steadily increasing. Wages on the rise, but still far below EU average.

Favorable tax regimes significantly lower tax rates (e.g. 10% corporate income tax in Bulgaria)

Stable economies with low level of government debt

Government debt/GDP, 2015

Source: Eurostat, IMF

Government debt in CEE at low levels: below 50% of GDP on average for the region vs. 91% for euro-zone

Euro areaCroatiaUkraine

SerbiaHungary

PolandLithuania

Czech RepublicRomania

LatviaTurkey

BulgariaRussia

Estonia

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

91%

87%80%

77%75%

51%43%

41%38%

36%

33%27%

18%10%

Emerging Europe boasts favorable tax regimes

Corporate tax rates

FranceUSA

BrazilMexico

IndiaGermany

ChinaIndonesia

Slovak RepublicCroatiaRussiaTurkeyEstonia

HungaryPoland

Czech RepublicUkraine

RomaniaSerbiaLatvia

LithuaniaBulgaria

0% 10% 20% 30% 40% 50% 60%55%

35%34%

30%30%30%

25%25%

22%20%20%20%20%

19%19%19%

18%16%

15%15%15%

10% Corporate and other taxes much lower in Central & Eastern Europe vs. developed world and major manufacturing hubs

Most regional states provide tax incentives and additional stimulus to attract foreign investors

Emerging Europeboasts highly educated & qualified workforce

Europ

ean U

nion

Eston

ia

Lithua

niaLat

viaPo

land

Bulgari

a

Hunga

ry

Czech R

epub

lic

Slovak

ia

Roman

ia0.0

5.0

10.0

15.0

20.0

25.0

30.0

35.0

40.0

17.1

24.1

35.3

15.1

9.2

15.111.7

9.57.5

26.5

33.1 32.7

27.824.3 23.9

20.9 19.7 18.614.7

20002015

People with tertiary education (% of population)

Share of people with tertiary education in CEE steadily on the rise

Source: Eurostat

Labor costs significantly below those in the developed world

Labor costs per hour (EUR), 2015

While convergence has been driving wages in CEE higher, they are still far below European averages

Min wages range b/n €194 in Bulgaria and €425 in Turkey, compared to €1,473 in Germany and €1,500 in UK

Source: Eurostat

NorwayDenmarkBelgiumSweden

LuxembourgFrance

NetherlandsFinlandAustria

GermanyIreland

Euro zone averageItaly

United KingdomSpain

SloveniaCyprus

PortugalMalta

EstoniaSlovakia

Czech RepublicCroatiaPoland

HungaryLatvia

LithuaniaRomaniaBulgaria

0.0 10.0 20.0 30.0 40.0 50.0 60.051.2

41.339.1

37.436.2

35.134.1

33.032.432.2

30.029.7

28.125.7

21.215.815.6

13.213.0

10.310.09.99.6

8.67.57.16.8

5.04.1

High growth of employment in science & tech

Human resources in science and technology (% of active population) Science & tech

play an increasing role with R&D expenditures rising fast

The Czech Republic, Estonia, Hungary, Lithuania now spending over 1% of GDP on R&D

While this figure is still low compared to EU average of 2%, it is rapidly rising Source: Eurostat

EU

Estonia

Lithuan

iaLat

via

Poland

Czech Republic

Hungary

Bulgaria

Croatia

Slova

kia

Romania

0%

5%

10%

15%

20%

25%

30%

35%

27% 25%24%

22% 21%

30%

24%

21% 21%

25%

17%

32%30% 30%

28% 29%31%

28%

24%26%

24%

19%

20052015

Emerging Europe enjoys solid FDI flows

Services were the main recipient of FDI flows in the transition period driven by extensive privatization processes + market seeking and supply cost optimization

Banking systems and telecom operators now mostly in the hands of foreign investors, primarily from EU

FDI in manufacturing have been concentrated in: automotive sector, transport equipment, electrical equipment, food, chemicals & metals

Source: UNCTAD

Emerging Europeabundant resources provided by EUSince these countries became EU members, EU co-financing has become an essential factor for their development EU Structural and Cohesion Funds accounted for 11.3 - 25% of annual GDP in 2007-2013, fostering regional cohesion Large part of EU SCF financed major infrastructure projects, but also environment projects, renewable energy, SMEs, education & health, information society, increasing the adaptability of workers and enterprises, strengthening of institutional capacity

  PolandCzech Republic Hungary Romania Slovakia Lithuania BulgariaLatvia Slovenia Estonia Croatia

EU funds, 2007-2013 (EUR, bln.) 67.19 26.3 24.92 19.18 11.65 6.77 6.67 4.54 4.1 3.4 1EU funds/GDP (%) 17.2% 17.6% 25.4% 13.4% 16.2% 19.6% 16.7% 19.4% 11.6% 18.5% 2.3%

Total: €175.7 bln = 16.2% of GDP on average

EU cohesion policy 2014-2020 to provide further boost to regional

competitiveness

0

10

20

30

40

50

60

70

8077.6

32.828.6

23 22 21.921.519.215.915.5 14 11.88.6

7.6 6.8 4.5 3.63.1 2.3 2.1 1.51.4 1.21.2 0.7 0.7 0.6 0.1

EU cohesion policy 2014-2020, allocation by country (EUR bln)

CEE to receive over 50% of EU 2014-2020 Cohesion Policy = more than €190 bln

EU 2014-2020 Cohesion Policy targets: R&D, ICT sector, sustainable transport, SMEs, renewable energy & energy efficiency, environment, employment and education

Competitiveness of local economies steadily on the rise

Country Rank, 2006

Rank, 2016

Change of position

 Estonia 18 16 2 Lithuania 22 20 2 Poland 56 25 31 Slovenia 42 29 13 Slovakia 32 29 3 Czech Republic 59 36 23 Romania 62 37 25 Mexico 58 38 20 Bulgaria 48 38 10 Hungary 46 42 4 Thailand 23 49 -26 Russia 95 51 44 Turkey 60 55 5 Croatia 115 65 50 Vietnam 75 78 -3 China 89 90 -1 Serbia 78 91 -13 Indonesia 114 114 0 India 116 130 -14

Competitiveness of local economies has registered rapid advance as measured by the Ease of Doing Business Ranking by the World Bank

Most CEE countries are in top 50

5 countries hold a position in top 30

Rising role in European value chains

Polan

dRuss

ia

Czech R

epub

lic

Hunga

ryTu

rkey

Roman

ia

Bulgari

a

Lithu

ania

Ukraine

Eston

iaSe

rbia

Croatia

Latvi

a0.0

20.0

40.0

60.0

80.0

100.0

120.0

140.0

160.0

56.7

114.0

54.041.6 36.2

15.85.7 6.2 8.7 4.8 1.2 4.5 3.2

141.6135.7

119.1

72.461.6

40.2

14.9 14.1 12.8 8.7 7.9 7.7 7.5

20052015

Export of Emerging Europe countries to EU (EUR bln)

Export of CEE countries to EU have jumped by more than 80% b/n 2005 - 2015

Share in total EU imports now above 37% (2005: 29.8%) and significantly lower before that

Most countries export over 50% of production to EU

  2015Czech Republic 83.4%Hungary 81.4%Poland 79.2%Estonia 75.2%Romania 73.7%Latvia 69.5%Croatia 65.9%Bulgaria 64.2%Serbia 63.7%Lithuania 61.3%Turkey 44.5%Russia 44.4%Ukraine 24.2%

Share of export to the EU in total export (2015)

Source: Eurostat, KCM calculations

Eastern Europebecoming a major manufacturing hub for

multinationals For 15 years the regions has seen massive inflows of foreign investors

Following the GFC there is a clear trend of Emerging Europe establishing itself as a major manufacturing hub

Much lower production costs – labor, office rentals, electricity, taxes and other incentives many multinationals shifting production to Eastern Europe

Location becoming more important – proximity, both in geographical and cultural terms, favors Eastern Europe over Asia and Latin America

EU membership and accession make trading much easier

NEARSHORING gaining popularity

Emerging Europe vs. Asia

Eastern Europe increasingly recognizing the importance of quality as a differentiator to low-cost Asian producers

Wages have been growing robustly in Asia in the past years with wage gap b/n Eastern Europe and Asia narrowing; wages in China have more than tripled in the past decade

Realizing the trend of nearshoring, even Asian companies are investing in the region

Emerging Europe now moving up the value chain from low-cost manufacturing centers, regional economies now facing the challenge to become innovative knowledge-based economies

Rather than viewing the CEE region as a cheap production base, multinationals increasingly consider it to be a source of expertise.

The trend will continue and a deep supplier base will emerge here as local companies become integrated into global supply chains.

Production gains in CEE have come from better management rather than from growing population and capital investment (the Asian case).

Automotive sector in CEE

Assessing the potential of the region, Western European and Asian companies invested in local automakers and established new companies. Fiat acquired Poland’s FSM in 1992; Volkswagen took over Škoda in the Czech Republic in 1991; and Renault bought Dacia in Romania in 1998. Audi, Opel, and Suzuki all opened plants in Hungary; Peugeot, Toyota, and Hyundai established operations in the Czech Republic; and Peugeot Citroën invested in Slovakia. Renault, Toyota, Hyundai, Honda, Ford and Fiat all have production facilities in Turkey. Russia is the top producer in the whole CEE region with sizable production by Hyundai, Renault, Volkswagen, Nissan, General Motors and others.

Along with the automakers came automotive parts suppliers, creating automotive clusters across the region. The factory of Audi in Hungary is now the biggest car engines producer in the world.

Nearly 2/3 of automotive exports go to EU‑15 markets, and 60% of sales are concentrated in Germany, the UK, and France

Booming car production in CEE

0

200,000

400,000

600,000

800,000

1,000,000

1,200,000

1,400,0001,354,504

879,452

602,237

218,349

613,200

152,015 194,802

14,179

1,384,3991,358,7961,303,603

1,000,001

660,603

495,370387,177

83,630

20052015

Motor vehicles production in CEE (units)

Car production rose nearly 70% from 2005 to 2015, with Slovakia, Czech Republic and Hungary more than doubling production

Renault now with over 35% of total production in CEESource: International Organization of Motor Vehicle

Manufacturers

Eastern Europe – the new Silicon Valley

The human assets of the region make it a major player in technological innovation Forbes consistently ranks CEE at the top of the world in educational achievement in math, science & technology.

In 2013, 16 out of the 24 finalists of Google's annual Code Jam programming competition were from Central and Eastern Europe

Solid growth of number of employees in ICT sector (Estonia: +128% in the past 10 years, Romania: +120%, Bulgaria: +84%).

Many significant tech businesses have started in CEE:- Skype founded by Estonians, acquired by Microsoft for $8.5 bln - Whatsapp founded by Ukrainian, acquired by Facebook for $19 bln - Prezi launched in Hungary as online tool for creating presentations- Major cyber security companies - AVG Technologies, Avast and ESET, in

the Czech Republic and Slovakia

Abundant EU funding supports start-ups from the tech sector

48

Emerging Europe stock markets lagging behind

7/1/20056/1/2006

5/1/20074/1/2008

3/1/20092/1/2010

1/1/2011

12/1/2011

11/1/2012

10/1/20139/1/2014

8/1/20157/1/2016

0.000

50.000

100.000

150.000

200.000

250.000

300.000

ACWI EFM EUROPE + CIS EM ASIA EM LATIN AMERICA EUROPE NORTH AMERICA

Performance of MSCI EFM Europe+CIS, EUR as of 31.12.20163M 15.46%

YTD 24.4%1Y 24.40%

3Y, annualized

-3.91%

5Y, annualized

-1.52%

10Y, annualized

-5.43%

since 2007 peak

-49.7%

Emerging Europeattractive valuation ratios across the

region

Source: Reuters

P/E ratios, ttm

Emerging Europe P/E ratios by country (ttm)

50

Source: Thompson Reuters, KCM calculations

Compelling reasons to invest in CEE

-CEE turning into major manufacturing hub -> rising role in global value chains (over 50% of exports to EU)

-Major global companies shift production here -> solid FDIs in automotive sector, transport equipment, electrical equipment, food, chemicals & metals

-CEE turning into the new Silicon Valley due to highly qualified IT specialists-Booming outsourcing sector -> CEE countries in top 20 for Business Process Outsourcing.

-Buoyant region with appreciable scale converging with the West-Growing much faster than developed Europe

-Among lowest taxes in the world-Low labor costs –> 27% of euro-zone average

-Well-educated & highly qualified workforce-Abundant EU funding boosts competitiveness-Geographic & cultural proximity to the West

-Greater focus on quality vs. low cost Asian producers

Why invest in Emerging Europe nowSolid catch-up potential based on lagging performance in recent yearsImproving sentiment towards emerging markets as a whole has sparked uptrendAttractive valuation ratios with multiples lower than peers and historic averagesLow market penetration = solid catch-up potential Improving liquidity

Take advantage of the Emerging Europe opportunities with Karoll Capital’s flagship strategies: >>> Emerging Europe Opportunities >>> Emerging Europe High-Growth Exporters

Contact us at:

Daniel Ganev, MBAManaging Director,Karoll Capital Management

E-mail: ganevd@karoll.bgTel: +359 2 400 8 382

Nadia Nedelcheva, CFAHead of Portfolio Management,Karoll Capital Management

E-mail: nnedelcheva@karoll.bgTel: +359 2 400 8 386

Headquarters Sofia 1 Zlatovrah Str., Sofia 1164, Bulgaria | (+359 2) / 4008 382 | kcm@karoll.bg www.karollcapital.bg

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