Macroeconomics Monthly Report - Wirtualna Polskai.wp.pl/a/dibre/rmiesieczne/october2007.pdf · put...

BRE Bank Securities

3 October 2007

Monthly Report BRE Bank Securities BRE Bank Securities

Periodic Report

Monthly Report October 2007

Equity market We maintain that a correction is already behind us. Bullish trends in world markets, in particular emerging markets, add to the attractiveness of Polish stocks while the WIG Index performs relatively poorly. With the expected appreciation of the zloty, this should incite foreign investors to take positions. Capital will start flowing to investment funds again on a more bullish sentiment, and we will see a lot of activity on the market, driven among others by short position closing by traders. Company News Banks. We remain bullish on the bank industry, and expect strong third-quarter earnings. Softer sentiment and lower trading volumes might be a drawback, but, overall, the industry is on a sharp upward curve. Our best bets in the sector are BZ WBK and Kredyt Bank. Gas & Oil. We expect a depreciation in refinery stocks due to a weakening dollar which is eating into invariably strong refining margins. Investors will be betting on a weaker third-quarter showing from PKN Orlen. Telecommunications. Our long-term outlook on telecom stocks remains bleak. In the month ahead, telecoms, and especially TPSA, will probably see a narrowing in the discount at which they trade to the strong European sector. IT. The lead story in September was the merger between Asseco Poland and Prokom Software. The long-awaited revival in public-sector has not happened, and we are afraid that this month’s parliamentary election will put off e-government projects further into the future. Metals As copper supply remains tight due to worker strikes in Peru, while demand from China continues to be strong, prices have shot up over $8,000/t, and show no signs of slowing. We expect upward revisions to the earnings consensus. Construction. Building companies will show strong third-quarter earnings thanks to two factors: higher prices of building services, and a retreat in materials prices from their record 2Q levels. Our top picks in the sector are Polimex, Elektrobudowa, Ulma Construccion Polska, and Erbud. Real-Estate Developers. Real-estate developers report that, after a summer lull, prices started to rise again in September. Profit margins decline from month to month. We expect that developers will offset the slowdown in prices by increasing sales volumes. Ratings. As of the date of this Monthly Report, we are upgrading our investment ratings on Emperia Holding (Hold) and Ulma Construccion Polska (Accumulate), and downgrading BZ WBK (Accumulate), Pekao (Hold), and PKN Orlen (Hold).

BRE Bank Securities does not rule out offering brokerage services to an issuer of securities being the subject of a recommendation. Information concerning a conflict of interest arising in connection with issuing a recommendation (should such a conflict exist) is located on the final page of this report.

Analysts:

Michał Marczak (+48 22) 697 47 38 [email protected] Marta Jeżewska (+48 22) 697 47 37 marta.jeż[email protected]

Krzysztof Radojewski (+48 22) 697 47 01 [email protected]

Kamil Kliszcz (+48 22) 697 47 06 [email protected] Piotr Janik (+48 22) 697 47 40 [email protected] Kacper Żak (+48 22) 697 47 41 [email protected]

Macroeconomic Analyst Janusz Jankowiak

3 October 2007

WIG vs. indices in the region

BRE Bank Securities

Equity Market Macroeconomics

Avg daily trading volume

Average P/E 2008

Average P/E 2007

WIG 61 196 16.8

14.2

PLN 1 652m

40000

45000

50000

55000

60000

65000

70000

2006-09-26 2007-01-22 2007-05-18 2007-09-11

pkt

WIG BUX PX

BRE Bank Securities

3 October 2007 2

Monthly Report BRE Bank Securities

Table of Contents 1. Equity market ........................................................................................ 3 2. Fund Flows ............................................................................................ 5 3. Current ratings by BRE Bank Securities S.A. ........................................ 6 4. Ratings statistics ................................................................................... 7 5. Macroeconomics ................................................................................... 8 6. Financial Sector ..................................................................................... 9

6.1. BPH ............................................................................................ 13 6.2. BZ WBK ...................................................................................... 14 6.3. Handlowy .................................................................................... 15 6.4. ING BSK ..................................................................................... 16 6.5. Kredyt Bank ................................................................................ 17 6.6. Millennium .................................................................................. 18 6.7. Pekao SA ................................................................................... 19 6.8. PKO BP ...................................................................................... 20

7. Gas & Oil, Chemicals .............................................................................. 22 7.1. Lotos ........................................................................................... 23 7.2. PGNiG ........................................................................................ 24 7.3. PKN Orlen .................................................................................. 25 7.4. ZA Puławy .................................................................................. 26

8. Telecommunications .............................................................................. 27 8.1. Netia ........................................................................................... 28 8.2. TP SA ......................................................................................... 29 9. Media ..................................................................................................... 31 9.1. Agora .......................................................................................... 32 9.2. WSiP ........................................................................................... 33 10. IT Sector ................................................................................................ 34 10.1. ABG Spin .................................................................................. 35 10.2. Asseco Poland .......................................................................... 36 10.3. ComArch ................................................................................... 37 10.4. Macrologic ................................................................................ 38 10.5. Prokom Software ...................................................................... 39 10.6. Sygnity ...................................................................................... 40 10.7. Techmex ................................................................................... 41 11. Metals .................................................................................................... 42 11.1. Kęty ........................................................................................... 42 11.2. KGHM ........................................................................................ 43 11.3. Koelner ...................................................................................... 44 12. Construction .......................................................................................... 45 12.1. Budimex ..................................................................................... 48 12.2. Elektrobudowa ........................................................................... 49 12.3. Erbud ......................................................................................... 50 12.4. Polimex Mostostal ...................................................................... 51 12.5. Rafako ....................................................................................... 53 12.6. Ulma Construccion Polska ......................................................... 53 13. Real Estate Developers ......................................................................... 54 13.1. Dom Development ..................................................................... 56 13.2. J.W. Construction ...................................................................... 57 13. Pharmaceutical Manufacturers and Distributors .................................... 58 13.1. Farmacol .................................................................................... 59 13.2. PGF ........................................................................................... 59 13.3. Prosper ...................................................................................... 60 13.4. Torfarm ...................................................................................... 60 14. Retail\Wholesale .................................................................................... 61 14.1. Emperia Holding ........................................................................ 61 14.2. Eurocash ................................................................................... 61 15. Others .................................................................................................... 62 15.1. Kogeneracja .............................................................................. 62 15.2. Mondi ......................................................................................... 62

BRE Bank Securities

3 October 2007 3


Equity market Dismal US housing and job market data are raising concerns among investors worldwide, but especially in Poland. Neither fears about a financial crisis being triggered by the subprime credit crunch and the state of the US economy, nor predictions of a crash from the likes of Alan Greenspan, kept indexes across global stock markets from nearing or breaking the mid-July highs. If it is so bad, why is it so good? Are we seeing something from our part of the world that global fund managers are not? Is that why our WIG is one of the worst performing indexes in the world? We maintain that a correction is already behind us. We elaborated on the global factors that influence world stock markets in our past reports. As other markets remain strong, a weak WIG enhances the attractiveness of Polish equities, and we expect at least short-term foreign capital to invest. Capital will start flowing to investment funds again on a more bullish sentiment, and we will see a lot of activity on the market, driven among others by short position closing by some traders. One month after a surprise cut, the Fed decided to ease the discount rate again by a further 50pts, and, most importantly, to slash the base rate by 50pts, confirming our September predictions that economic growth is the Fed’s main concern, even at the expense of inflation. Macroeconomists say that if the spread between the discount rate and the Fed Funds Rate is sustained, the latter will be cut further (Commerzbank predicts a decline to 4% at the end of 1Q 2008). Such an aggressive easing is a response to a continued slowdown in the US job market (the unemployment rate is up to 5% from 4.6%) on the back of a housing slump and decreasing investments. As the real-estate market stabilizes and financial organizations start lending again (which is already happening), indebted households will also get back on track (restored liquidity). Lower interest expenses and a weak dollar should drive US corporate earnings, especially for exporters. The dollar depreciation is creating inflationary pressure. With risks still present, the climate for stock price hikes will be increasingly better, and, for the first time in a while, investors will once again believe in a soft landing. By easing policy, the Fed put pressure on the ECB, which was preparing for at least one more hike. The appreciation of the euro against the dollar while interest rates rise, is affecting the European economy; decreasing imports of materials are just one sign of an economic cooling. A rate hike would only deepen the imbalance (further strengthening of the euro), and that is why the ECB will most probably leave its key rate at 4%. Against this USA / Europe policy backdrop, the expected hikes by Poland’s Monetary Policy Council (RPP) will lead to an appreciation of the zloty, with an impact on exporter and importer earnings, providing a further incentive for foreign investors interested in Polish assets.

Most emerging market indexes, including the major ones: China, Brazil, and Asia, have broken over the local highs recorded in mid-July which were followed by a downturn in stocks spurred by the subprime credit crunch “announcement.” The Polish WIG index is 10% off the peak, and displays poor performance relative to most emerging market indexes. The main reason in our view is net selling of Polish equities by foreign capital paired with a lack of demand from

80

106

132

158

184

210

01/02/2007 03/22/2007 06/18/2007 09/06/2007

WIG BovespaKospi S&P500Shanghai Composite

Bovespa, Kospi, S&P500, WIG Indexes

Source: Bloomberg

BRE Bank Securities

3 October 2007 4


Polish institutions, and fear gripping retail investors since they got a bitter taste of a bear market, both in the primary and secondary markets. According to EmergingPortfolio.com, GEM funds reported $4 billion inflows in September. At the same time, EMEA funds lost $166 million. For comparison, Asia funds attracted $6 billion, and Latin America received $1.2 billion inflows. Except for EMEA, all emerging-market regions recorded considerable injections of “new” capital which more than offset the outflows recorded in late July/early August. The global situation (Asia and Latin America as the primary destinations) reflects on Poland. With no new foreign money flowing into European emerging markets, Polish investment fund companies (TFI) do not record any gains as the “depositors” are still shaken by the recent downslide. This lack is somewhat remedied by open pension funds (OFE), although it is obvious that some managers are underweight on equities relative to the average. When investment funds do not gather new cash, there is no fuel for growth. In our opinion, with liquidity as low as it is, entry into the Polish market of one or two large foreign investors will set the “local buying machine” in motion. An increase in the WIG index will bring capital back to TFIs (refer to last month’s Monthly Report for more in-depth predictions) - we think PLN 3-4bn inflows are a reasonable estimate. Furthermore, an improved sentiment will probably prompt some OFEs to close short positions. Last but not least, a rally will unlock the individual client funds locked into MidCaps, which were most affected by the downturn. A rising market does not bring about an appreciation in stocks across the board. After July, institutional investors will be much more picky with respect to low liquidity stocks. We can also expect that upward market momentum and improved liquidity will be seen as an opportunity to get rid of weaker stocks. We would advise against companies with large export sales, and firms exposed to rising grain prices. In turn, a strengthening zloty will drive the earnings of clothing, computer, and car-parts importers. These sectors also offer exposure to growing internal demand. We remain bullish on building and bank stocks, as well as certain IT stocks. We remain underweight on media and long-term underweight on telecoms; in the near term (one month), this sector will be recovering from the downslide, and displaying strong performance (TPSA could spike to PLN 23).

BRE Bank Securities

3 October 2007 5


Investment Funds (TFI) Investment funds saw the weakest inflows in August since June 2006, garnering a meager PLN 350 million compared to PLN 5.3 billion a month earlier. Money market funds recorded the largest gains, while equity funds saw 1.2bn outflows. Assets under management declined 2.5% to PLN 137.6bn, following on the heels of stock market falls. Open Pension Funds (OFE) Assets under management of open pension funds (OFEs) shed 0.8% at PLN 136.3bn in August. The equity component shrank 0.2ppts to 36%, and, given that the overall equity portfolio decreased less (-1.4%) than the broad market (WIG down 4.7%), this shrinkage was due to OFEs being overweight in debt and underweight in equities.

Fund Flows

TFI inflows/outflows by “equity component” funds and money market/debt funds

Source: Analizy Online

Emerging Market Funds Investors returned to emerging markets in September, pouring $11.4 billion into EM funds which saw a big improvement from August’s $5.8bn outflows. The inflows were particularly strong in the last week of September ($5.5bn). Asia, mainly China, saw gains over $6 billion, while EMEA funds (including Central Europe) where the only ones that saw outflows (-$0.2bn vs. -$1.0bn in August).

Weekly inflows/outflows for selected emerging market funds

Source: EmergingPortfolio.com

GEM

-3 000

-2 000

-1 000

0

1 000

2 000

3 000

4-01

4-03

4-05

4-07

4-09

4-11

4-01

4-03

4-05

4-07

4-09

mln USD

EMEA

-2 000

-1 500

-1 000

-500

0

500

1 000

4-01

4-03

4-05

4-07

4-09

4-11

4-01

4-03

4-05

4-07

4-09

mln USDmillions of $ millions of $

-2 000

-1 000

0

1 000

2 000

3 000

4 000

5 000

6 000

2006-07-01 2006-10-01 2007-01-01 2007-04-01 2007-07-01

PLN m

Equity, balanced, mixed fundsDebt, money-market, other funds

BRE Bank Securities

3 October 2007 6


Current Ratings by BRE Bank Securities S.A.

Stock Rating Target Price Date Issued

ABG SPIN Accumulate 7.50 2007-08-28 AGORA Hold 52.20 2007-09-05 ASSECO POLAND Buy 85.45 2007-10-02 BPH Accumulate 986.10 2007-09-04 BUDIMEX Hold 121.70 2007-05-29 BZWBK Accumulate 295.40 2007-10-03 COMARCH Reduce 185.80 2007-02-05 DOM DEVELOPMENT Hold 149.90 2007-09-25 ELEKTROBUDOWA Hold 221.50 2007-05-29 EMPERIA HOLDING Hold 134.17 2007-10-03 ERBUD Accumulate 100.00 2007-07-05 EUROCASH Sell 7.38 2007-02-05 FARMACOL Accumulate 62.90 2007-06-25 HANDLOWY Accumulate 127.10 2007-09-04 ING BSK Hold 921.50 2007-09-04 J.W. CONSTRUCTION Accumulate 56.90 2007-09-25 KĘTY Reduce 187.50 2007-07-27 KGHM Hold 119.00 2007-08-01 KOELNER Hold 53.72 2007-09-06 KOGENERACJA under revision 2007-06-06 KREDYT BANK Buy 27.40 2007-09-04 LOTOS Reduce 42.00 2007-08-16 MACROLOGIC Buy 58.43 2007-02-13 MILLENNIUM Accumulate 13.60 2007-09-04 MONDI Reduce 80.00 2006-12-05 NETIA Sell 3.80 2006-09-06 PEKAO Hold 263.50 2007-10-03 PGF under revision 2007-08-01 PGNiG Hold 5.14 2007-09-06 PKN ORLEN Hold 60.50 2007-10-03 PKO BP Hold 55.50 2007-09-04 POLIMEX MOSTOSTAL Accumulate 10.70 2007-09-05 PROKOM SOFTWARE Hold 150.30 2007-02-05 PROSPER Hold 27.00 2007-06-25 RAFAKO Reduce 11.40 2007-05-29 SYGNITY Buy 81.60 2007-08-28 TECHMEX under revision 2007-03-07 TELEKOMUNIKACJA POLSKA Reduce 20.20 2007-07-05 TORFARM Hold 95.3 2007-06-25 ULMA CONSTRUCCION POLSKA Accumulate 320.8 2007-10-03 WSiP Buy 18.1 2007-07-13 ZA PUŁAWY Accumulate 112.27 2007-09-06

BRE Bank Securities

3 October 2007 7


Ratings Issued In the Past Month

All Issuers who are clients of BRE Bank Securities

Statistics Sell Reduce Hold Accumula- Buy Sell Reduce Hold Accumulate Buy

count 2 6 16 10 5 0 2 6 3 2 % of total 5.1% 15.4% 41.0% 25.6% 12.8% 0.0% 15.4% 46.2% 23.1% 15.4%

Stock Rating Old Target Price Date Issued

AGORA Hold Accumulate 52.20 2007-09-05

ASSECO POLAND Buy Reduce 85.45 2007-10-02

BPH Accumulate Accumulate 986.10 2007-09-04

BZWBK Buy Hold 295.40 2007-09-04

DOM DEVELOPMENT Hold 149.90 2007-09-25

EMPERIA HOLDING Reduce Hold 134.17 2007-09-06

HANDLOWY Accumulate Hold 127.10 2007-09-04

ING BSK Hold Hold 921.50 2007-09-04

J.W. CONSTRUCTION Accumulate 56.90 2007-09-25

KOELNER Hold Reduce 53.72 2007-09-06

KREDYT BANK Buy Accumulate 27.40 2007-09-04

MILLENNIUM Accumulate Reduce 13.60 2007-09-04

PEKAO Accumulate Hold 263.50 2007-09-04

PGNiG Hold Accumulate 5.14 2007-09-06

PKO BP Hold Reduce 55.50 2007-09-04 POLIMEX MOSTOSTAL Accumulate Accumulate 10.70 2007-09-20

Ratings changed as of Monthly Report date

Stock Rating Old Target Price Date Issued

BZ WBK Accumulate Buy 295.40 2007-10-03

EMPERIA HOLDING Hold Reduce 134.17 2007-10-03

PEKAO Hold Accumulate 263.50 2007-10-03

PKN ORLEN Hold Accumulate 60.50 2007-10-03

ULMA CONSTRUCCION POLSKA Accumulate Hold 320.80 2007-10-03

Ratings Statistics

BRE Bank Securities

3 October 2007 8


Global factors such as the dollar’s weakness against the euro (at times as weak as 1.50) will be shaping the zloty’s performance going forward. The zloty’s value could reach 2.50 against the dollar and 3.70 against the euro. There might be temporary weakness (down to 2.80 and 3.85 respectively) due to heightened political risk (October elections, followed by government building). The risk will rise again in the second half of next year, when the zloty could depreciate on growing macroeconomic imbalance (public sector, current account deficits). Next year’s government budget deficit is expected to be higher in nominal terms than this year's, and it would be even worse if it were not for an accounting trick whereby some of the gains from our settlements with the EU were carried forward to the next year. This calls into question the soundness of the convergence plan presented to the European Commission to demonstrate compliance with the "Excessive Deficit Procedure." The government is constantly increasing mandatory expenditure. Indexation measures which we strove so hard to eliminate over the past years, are now being restored (social security indexed for inflation, higher base pay), potentially getting public finance in trouble once a seasonal economic slowdown sets in. Warnings have been voiced, and ignored, for months. The monetary policy is shaped by current macroeconomic data, although most investors are inclined to think that the Monetary Policy Council (RPP) is behind the curve, and that returning inflation to target requires further tightening. Granted, the scale of these expectations declined after a good inflation report for August (CPI dropped to 1.5%, all core-inflation indicators were down, with “net inflation” (excl. food and energy prices) as low as 1.2%). The yield curve seems to be more firmly anchored at the long end (due to expectations of a 50bps rate hike in a one-year horizon), than the short end (uncertainty as to the timing of the hikes). The inflation projections slated for October could decide about market performance. If the ECMOD, the National Bank of Poland’s inflation prognostics model, confirms the impact of food and energy prices on this year’s CPI, and the growing significance of rising ULC for 2008-2009 price trends, policy tightening expectations will increase, leading to a steepening of the yield curve along its entire length. GDP at current prices is expected to reach PLN 1252.5bn in 2008 compared to PLN 1156.9bn in 2007, marking a 8.2% increase. At first glance, the basic macroeconomic assumptions used to calculate the budget testify to a prudent, conservative, approach to revenue projections. The projected growth rate does seem a bit too optimistic (~5% would be more realistic than 5.5% for GDP), but the average annual inflation forecast is well undervalued (is: 2.3%, should be: 2.9%), as is salary growth (is: 3.6%, should be: 7%), and employment growth (is: 2%, should be: 4%). In theory, this makes for a potential PLN 4 billion in "extra" revenues. Including revenues posted under “non-refundable receipts from the EU and other sources,” next year’s government revenues are forecasted at PLN 281.8bn compared to this year’s expected PLN 230bn (ca. PLN 16bn more than projected in the Budget Act), marking a ca. 22.6% year-on-year increase, similar to that achieved from 2006 to 2007 – an ambitious goal. Receipts from settlements with the EU show a surprisingly bulky PLN 35.3 billion, implying that the government expects next year’s EU subsidies to be more than double this year’s inflows, and this in the first effective year of the new Financial Perspective, closing the clearance period for the assistance received in the period from 2004 to 2006. As for next year’s expenditures including EU prefinancing, it is estimated at PLN 310.4 billion, 19.7% more than this year. These estimates do not take into account the costs of leveling out retirement benefits calculated under the “old” pension system, estimated at PLN 1.2bn. The solutions adopted by the government in the budget plan, and objective factors such as Poland's contributions to the EU budget and debt service costs, increased the share of mandatory spending in total 2008 expenditure to 70.6% from 65.5% in 2007 (+12.1% in real terms). At the same time, discretionary spending is down 11.7%. If we added to this the additional expenditures proposed by MPs but not included in the budget projections, the share of mandatory spending would rise to 72%.

Macroeconomics

BRE Bank Securities

3 October 2007 9


Financial Sector Pengab up to 41.8 pts Pengab rose 5.3pts to 41.8pts in September, but is still lower than in September a year ago (43.4 pts), marking the four month of a y/y decline. The bank industry is still thriving, and will probably continue to for the rest of the year (the fourth quarter is always the best for banks). The reasons behind the year-on-year weakness in the sentiment index include a growing base, and far-reaching targets. The highest the Pengab was at since January 2004 was 44.1 pts in April. Compared to this, 41.8pts is still a very good result. Moody's: US subprime credit crunch in not affecting Polish bank ratings According to Moody’s, the subprime crisis is having a marginal impact on Polish banks, and no impact on their ratings. The agency points out that banks are increasingly focusing on retail clients and SMEs, which offer great growth opportunities and higher profit margins than corporate loans. But concentration on the Polish market means sustained competition. We agree. Poles are just starting to borrow money to buy homes. Ca. 1 million households do not own homes yet, hence, most loans are for first homes. Contrary to general belief, Polish banks apply sufficiently stringent home lending rules. Strong demand goes hand in hand with a generally strong economy where unemployment decreases and salaries rise. ZBP on home loan collateral According to the President of the Polish Bank Association (ZBP), there is no reason to worry about a subprime loan crisis happening in Poland. He believes that banks are safe thanks to stringent lending requirements concerning downpayment and LTV, and that home loans are well collateralized and controlled, and are financed with deposits. The ZBP reports that the ratio of bad debt to total home loans is 1.7%-1.8% compared to 3.3% three years ago. This improvement is a result of slower lending and application of new risk management methods. We agree with the ZBP that we could not be farther from a loan crisis, among others because we are at the beginning of a run on home loans, which are mostly taken to finance first homes. 2007 mortgage loan sales forecast The ZBP raised its sales forecast from PLN 54bn to PLN 57bn. 1H’07 home-loan sales amounted to PLN 27.6bn (incl. PLN 15bn zloty loans and PLN 12.6bn foreign currency loans), marking a 54.48% increase on a year earlier and a 22.5% increase from December 2006. The number of loans granted was 159,000 (up 16% y/y). An average facility was a little over PLN 180,000. Total mortgage loan debt at the end of June stood at PLN 95.5bn (up 50% y/y). These data are in line with our expectations, although one might have hoped for an even larger home-loan output considering the sales figures reported by banks after two months of 3Q. We are waiting for more information on sales, which, we think, are likely to exceed PLN 60bn. Cash war According to newspapers, banks are competing to lend cash. PKO BP has launched a new cash loan offer, where clients can borrow up to PLN 20,000 without collateral or proof of income from employers. All it takes is a statement of income and an ID. The new product is addressed to low-income clients, including retirees, and will be widely advertised. In turn, BZ WBK raised the financing cap from 15 to 20 salaries, lowered interest rates and the eligible income threshold, and cut the decision time to 5 minutes. ING BSK has also simplified lending procedures recently. The battle for retail customers is on, and cash loans will be the main weapon. Fees are not the main consideration for cash borrowers, who pay more attention to availability and service. Banks are turning toward cash loans because mortgage loans generate low margins. In December 2006, the value of consumer loans (incl. cash loans, installment plans, and car loans) stood at PLN 53bn, and increased to PLN 63bn in July 2007. Experts say that cash loans will rise by 30% annually in the next few years. More ATMs The number of ATMs is expected to increase by 1,000 to 11,000 this year. In Europe, the widest ATM network can be found in the UK (60,600), followed by Spain (close to 58,000), and Germany (53,600). According to RBR, there are currently 342,500 ATMs installed across Europe. Banks are deploying new ATMs with new branches as a way of reducing customer service costs. Banks earn on insurance sales The WSJ writes about the market of bancassurance, pointing out that banks are constantly increasing the fees charged for insurance sales. Insurers agree, saying that, in some cases, the charges reach levels at which the products are no longer profitable to sell. Still, insurance companies want to cooperate with banks, looking to benefit from their large sales networks. Life insurers sell 21% of policies via banks, compared to 11.6% a year ago. Banks are strengthening their positions as insurance distributors, and their role will continue to increase for a while. In the

BRE Bank Securities

3 October 2007 10


future, direct insurance could take over. For now, direct sales are mainly used for car insurance. Soon, as insurers include more advanced products that are currently sold via banks, sales charges will have to go down. For now, insurance sales boost fee income for banks, virtually all of which have distribution agreements with insurance companies. Getin Bank, BRE Bank, and Kredyt Bank are offering policies from members of their fellow subsidiaries, and will not lose this source of income even as direct insurance expands. All in all, we think that insurers will continue to use banks as distribution channels, especially given that most of them are currently expanding their sales networks and increasing coverage. Record year for lease finance The value of leased assets increased 70% y/y to PLN 14.7bn in 1H’07. Car leases have a 62% share in the overall portfolio and are expected to stay high in the periods ahead on strong momentum in the automotive industry. The share of machine and equipment leases is on the rise (up from 25% a year earlier to 27% in 1H’07). Real-estate leases have a small, 8% share, but this following a 300% y/y surge in 1H. An obstacle to lease finance growth are certain tax regulations. We expect the upward trends to continue, with an increasing share of machine and equipment leases. Growth could slow down against an increasing comparable base, and margins could tighten due to fierce competition, but fast-paced volumes will offset this decline. Staff turnover in bank industry Parkiet reports that staff turnover is heaviest between the most aggressive market players. For instance, 687 people left Bank Handlowy by July, i.e. 12% of staff since the end of 2006, GE Money Bank lost 7.7% of staff, and Bank Millennium and ING BSK lost 7.6% of staff. At the same time, banks recorded a nominal increase in headcounts. The three leading banks are not affected by this trend for now. PKO BP has been downsizing for some time (with plans to cut staff by 1500 people a year), and 4.3% of its staff left in 1H, but net churn was only 2% thanks to new employees hired in the period. As for Pekao and BPH, turnover is smaller than a year ago despite the upcoming merger. Banks have to increase costs to hire new people. Aggressive players will lose personnel to competition. Heavy turnover is bound to continue as long as the industry is booming, driving salaries. We are not concerned about the impact of growing labor costs on operating efficiency, as higher salaries mean higher sales, and hence stronger revenues. Further, growing costs are not affecting efficiency ratios. At some point, banks will stop “buying” personnel from competition. Loan securitization The WSJ writes about banks who plan to securitize their loan portfolios. One of them is Millennium, which was going to securitize a PLN 800m lease portfolio in late September, and is considering doing the same with mortgage loans. Kredyt Bank has the same plan. Securitization helps banks retain their CAR at a safe level without increasing capital. It is a transaction whereby a bank sells its receivables to a specialized firm or fund in exchange for a portion of the receivables. Banks have been using securitization to clear their NPL portfolios, but are increasingly considering doing the same with non-loss loans. Millennium revealed plans to that effect during the 2Q’07 earnings announcement, without disclosing the size of the loan portfolio. If the WSJ is right, the bank will see a one-time gain which we did not take into account in our earnings projections for FY2007 or subsequent years. Similarly, we did not take securitization into consideration when making estimates for Kredyt Bank. In the west, securitization is a way of managing operating effectiveness, but, given how borrowers increasingly fall into default, banks might not get equally high prices for their portfolios as they have to date. On the other hand, securitized bad-debt portfolios are not very large compared to other countries. Securitization is no doubt good for effectiveness assuming that a bank can rebuild the portfolio. Lukas Bank wants 4-5 million accounts by 2012 The bank is preparing a strategy of evolving into a more universal financial services provider. To date, Lukas Bank has been known mainly as provider of cash loans, installment plans, and credit cards. Ranked 16th in equity, the bank is the runner up in the number of credit cards right after the leader, PKO BP. The new plan is to establish a stronger presence in savings and insurance sales, and develop own insurance products. Lukas also wants to establish more relationships with retail chains as well as firms with large customer bases, such as Orange. Recently, the bank launched services targeted to SMEs and hopes to increase its share in this market (companies with sales approximating PLN 3m) to 4% next year from ca. 3%. Also on Lukas’s agenda is sales expansion through 50 new branches and 20 credit centers in 2007 and 100 branch openings in 2008. By the end of next year, the sales network will consist of 450 branches and 180 credit centers, double what it is now. All these measures are aimed at acquiring ca. 500,000 new clients a year, meaning that the target client base will count 4.5-5 million compared to 2.3 million now. A move beyond consumer finance will show whether Lukas Bank has a chance of increasing market share. We do not know whether the bank plans to go into mortgage lending, but it would definitely help. The scale of Lukas Bank’s growth plans is comparable with Millennium, Poland’s eighth largest bank in terms of assets and equity, running

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370 branches (as of May 2007) and serving 842,000 clients (as of June 2007), which wants to increase the number of branches to 560 and the client base to 1.2 million by the end of 2009. Given that Lukas Bank has been selling its products through retail chains (installment plans, cash loans, credit cards), it might be hard to transform itself into a universal bank, especially since it will be competing with the largest financial providers in Poland. We suspect that Lukas’s plan is to win clients from competition. DnB NORD to announce three-year strategy in November The bank formed by the merger between DnB NORD and BISE is set to reveal a three-year strategy in November. Plans include increasing the number of branches to 100 by 2010 (from 50 plus 6 regional corporate centers), and launching new products. The new bank will keep the payment processing chain “Monetia” which consists of 200 branches, and plans to launch sales of selected financial products in 2008. These changes are expected to cost PLN 50 million in 2007 and 2008 (new branches, products, computer system). The combined assets of the two banks exceeded PLN 6 billion at the end of August, and are expected to increase to PLN 6.5bn by December. Net income amounted to PLN 12m year to August. Shareholders of both DnB Nord and BISE approved the merger, and are waiting for clearance from bank supervision. The new bank will remain a second-league player. According to a survey conducted at the end of 2006, PLN 6bn assets would rank it 20th (BISE was 27th, and DnB NORD was 31st). But the merged bank could have a stronger positioning in the corporate banking sector. Negotiations for Expander shares GE Investments narrowed down the list of bidders for a 49%) stake in Expander. The acquisition is expected to be finalized in 1Q’08. Meanwhile, Expander plans to open 8-10 new branches this year, and have 60 branches by the end of the year. The financial intermediary currently operates through 48 branches, half of them partner outlets, employing 263 consultants. We are waiting to hear who wins the bidding, and for how much. Loan sales via intermediaries reach PLN 11.6bn in 1H’07 The Central Statistical Office (GUS) reported that financial intermediaries sold PLN 11.6bn-worth of loans in 1H’07, marking a 48% increase y/y. The survey covered 35 agents who sold a total of 2.2 million facilities (17.5% more than a year earlier). The main sales drivers were cash loans (96% y/y), and mortgage loans (62% y/y). The average mortgage loan sold by intermediaries in 1H’07 was PLN 253,000, PLN 53,000 more than in 1H’06. Year to September, the home loan portfolio amounted to PLN 106.3bn, with PLN 5.1bn-worth extended in August, just a little less than in record-breaking July. 1H’07 mortgage loan sales stood at PLN 28bn. There is no data on sales volumes. Financial intermediaries are obviously on an upward momentum. Last year, the leading nine intermediated PLN 11bn-worth of credit facilities, and, this year, they sold the same amount after just six months. Getin Holding: Acquisition of ASK Investments Getin Holding signed an agreement to acquire ASK from Krzysztof Spyra, Jarosław Augustyniak, and Maurycy Kuhn, each selling 110 shares with a par value of EUR 100 (PLN 382.5). The total price paid for a 100% stake was EUR 33,000 (PLN 126.24 thousand). ASK Investments transferred its shareholdings in Noble Bank (15 million shares) to three companies: A. Nagelkerken Holding BV, HP Holding 3 BV, and International Consultancy Strategy Implementation BV, owned by Messrs Maurycy Kuhn, Jarosław Augustyniak, and Krzysztof Spyra respectively. Getin Holding: Getin Bank’s deposits at PLN 8.99bn (Aug’07) This after a PLN 2bn YTD increase. At the end of June, deposits stood at PLN 8.16bn at Getin Bank, and PLN 8.6bn across Getin Holding. Y/Y growth was reported at PLN 0.3bn in 1Q’07, and PLN 1.7bn in 2Q. This fast–paced growth is an effect of an intense advertising campaign in May and June. In September, the bank is starting a campaign to promote its term-deposit products. Getin Bank is committed to growing deposits to gain capital to finance lending, with the help of intense (and successful) advertising. Getin Holding: July/August loan sales at PLN 1.66bn The holding saw a whopping 79% y/y increase in sales, which remain unaffected by seasonal weakness. The largest increase was recorded in consumer loans, the business which offers the largest growth potential for Getin Bank, which reported a staggering 200% y/y increase in sales to PLN 250m. The bank’s CEO stressed that growth in sales of car loans and mortgage loans is achieved without increasing credit risk. Getin Holding has several subsidiaries for which loans sales are a key earnings driver. These include two banks selling their own products, Getin Bank and Metrobank, and financial intermediaries selling third-party facilities. Getin Bank generated PLN 2.8bn from sales of its own products in 1H'07 (PLN 665m from car loans, PLN 1.5bn from mortgage loans, and PLN 654m from cash loans), and Metrobank generated PLN 428m. All in all, “in-house output” amounted to PLN 3.247 billion. In the first half of 2007, average quarterly sales stood at PLN 1.623 billion. In 3Q’07, July and August alone saw a combined PLN 1.66bn,

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and September should traditionally bring even stronger sales, meaning that Getin Bank can look forward to a record quarter. Getin Holding: Acquisitions in Romania, Bulgaria Getin is restructuring its Ukrainian subsidiary Prikarpattya Bank, and looking for new acquisition targets in Romania and Bulgaria. The holding could also change its expansion plans for Russia: instead of looking for an existing bank with a license, it might build its own operations from scratch, and expand sales on the basis of the lease finance subsidiary Carcade. Bulgarian and Romanian acquisitions are in an early planning stage. Getin Holding sees these markets as offering great growth opportunities. As for Russia, organic growth is not going to bring results as fast as an acquisition would. Noble Bank: Mortgage loan sales In 2.5 years, sales of mortgage loans by Metrobank could account for 30%–40% of the group’s total sales (through Open Finance and Metrobank). Metrobank currently sells over PLN 100m-worth of loans a month and hopes to maintain this pace going forward. In 1H’07, the Noble Bank group sold PLN 2.35bn-worth of mortgage loans, of which 18% were its own products. According to the management, sales of in-house products will increase going forward. Sales of own products display faster growth rates than third-party product sales through Open Finance, largely because of a different base. Open Finance has been present on the market for a few years, and is a leading financial intermediary, while Metrobank started to sell its own products toward the end of last year, with success. Noble TFI: over PLN 1bn under management in 10 months The investment fund subsidiary of Noble Bank (76.2%) has garnered PLN 1bn AUM. PLN 640m of these assets are managed by Noble Funds FIO, and PLN 378m are managed by individuals. Noble TFI has been operating for 10 months. Noble Funds TFI posted a PLN 2.8m net income for 1H, and contributed 2.9% of the group’s banking income and 2.7% to net income. Robust growth in AUM could be expected. AUM stood at PLN 726m at the end of June, and soared by almost PLN 300m within three months. Noble Bank: Conquering Ireland Open Finance set up a company in Ireland to acquire clients and market Open Finance products. On June 7th, OF acquired 100,000 shares of the common stock (EUR 1 par value) of “Open Finance Marketing Ireland Limited” with a share capital of EUR 100,000. PLN 384.85 thousand). The company’s task is to reach Poles living in Ireland with Open Finance’s offer. Because it is small, it will not have much impact on Noble’s earnings.

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Analyst: Marta Jeżewska19 Last Recommendation: 2007-09-04(PLN m) 2006 2007F change 2008F change 2009F change Basic data (PLN m)Net interest income 2 175.5 2 238.9 2.9% 2 346.1 4.8% Number of shares (m) 28.7Interest margin 3.5% 3.5% 3.6% MC (current price) 26 720.4Revenue f/banking oper. 3 533.6 3 646.0 3.2% 3 873.0 6.2% Free float 25.3%Operating profit 1 853.8 2 171.2 17.1% 2 195.8 1.1%Gross profit 1 633.6 1 895.1 16.0% 1 898.6 0.2%Net prof it 1 267.8 1 493.7 17.8% 1 491.6 -0.1%

ROE 19.2% 21.1% 20.0% Price change: 1 month 0.4%P/E 21.1 17.9 17.9 Price change: 6 month -9.5%P/BV 3.9 3.7 3.5 Price change: 12 month 12.8%D/PS 30.0 36.2 42.7 42.6 Max (52 w eek) 1 088.0Dyield (%) 3.2 3.9 4.6 4.6 Min (52 w eek) 802.0

Current price: PLN 930.5 Target price: PLN 986.1BPH (Accumulate)

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BPH WIG

Returns on BPH shares are still conditioned on the market valuation of Pekao, and the selling price of the Mini-BPH. At Pekao’s current price (PLN 253.2/share), BPH shareholders could get PLN 835.56 for each share transferred to Pekao. Further, our valuation methodology assumes that BPH shareholders will get PLN 117 per share in a tender offer which we expect GE Money to hold for the shares of Mini-BPH outstanding after it is taken over from UniCredit. This would figure to PLN 952 per share of BPH at the current price level. We have a PLN 263.5 target on Pekao, and rate the stock as an ACCUMULATE. BPH is an ACCUMULATE as well, with a 6% upside potential. Management reshuffle BPH’s supervisory board appointed Messrs Kazimierz Łabno and Carl Normann Voekt to the Management Board. At the same time, retiring VP in charge of operations, information, and services Anton Knett tendered his resignation. GINB sure to allow BPH division There is a general consensus that the General Inspectorate for Bank Supervision (GINB) is going to give a green light to the division of BPH and merger with Pekao. We have not had any doubt about that since April 2006, when, after weeks of negotiating, UniCredit reached an agreement with the Polish government about how to carry out the spin-off. The Commission for Bank Supervision (KNB) is holding its next meeting at October 3rd.

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Analyst: Marta Jeżewska44 Last Recommendation: 2007-10-03(PLN m) 2006 2007F change 2008F change 2009F change Basic data (PLN m)Net interest income 1 034.2 1 248.6 20.7% 1 498.4 20.0% 1 689.0 12.7% Number of shares (m) 73.0Interest margin 3.3% 3.5% 3.7% 3.7% MC (current price) 19 115.6Revenue f/banking oper. 2 365.2 2 933.2 24.0% 3 484.9 18.8% 3 931.4 12.8% Free float 29.5%Operating profit 1 084.1 1 531.7 41.3% 1 895.3 23.7% 2 149.0 13.4%Gross profit 516.3 758.2 46.9% 1 067.0 40.7% 1 254.0 17.5%Net prof it 758.2 1 067.0 40.7% 1 254.0 17.5% 1 389.7 10.8%

ROE 20.7% 25.0% 25.6% 25.2% Price change: 1 month -0.1%P/E 25.2 17.9 15.2 13.8 Price change: 6 month -7.3%P/BV 4.8 4.2 3.7 3.3 Price change: 12 month 31.4%D/PS 6.0 6.0 8.8 10.3 Max (52 w eek) 315.3Dyield (%) 2.3 2.3 3.3 3.9 Min (52 w eek) 192.5

BZ WBK (Accumulate)Current price: PLN 262 Target price: PLN 295.4

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BZ WBK WIG

We continue to have a positive outlook on BZ WBK, but are downgrading it from Buy to ACCUMULATE after a recent rally. The stock still offers a 12.7% upside potential. Because the bank follows a strategy of growth across all business lines, a weakness in one line will not have any impact on long-term growth. BZ WBK trades at a close-to 7% discount to the industry's FY‘07E P/E. Efforts aimed at increasing retail loan sales (mainly cash loans, but also mortgage loans), paired with a strong presence in the corporate segment (corporate loans surged 24% y/y in June), will reinforce the bank’s presence in commercial banking. Revamping the mortgage loan offer BZ WBK has an ambition to increase sales over PLN 800m (the bank sold PLN 806m-worth of loans in 1H), and expand the mortgage loan portfolio at a much faster rate than the 33% recorded at the end of June 2007. January will see big changes in the home loan offering According to the bank, the portfolio will accelerate in 2H compared to 1H. Faster growth in mortgage loans will translate to an increasing number of clients using BZ WBK’s other services. It is hard to predict the impact of relaxed lending procedures on loan sales, which we expect to increase 34% in FY2007. 2H should be better than 1H in this respect thanks to seasonal strength driving sales volumes. Cash loan portfolio to expand at least 50% BZ WBK hopes that its cash loan portfolio will increase at least at the same rate in FY2007 as in FY2006, when it surged 54%. At the end of June, cash loans stood at PLN 1.19bn (+51% y/y). The bank lent cash to 22 thousand borrowers in 1Q, up to 27 thousand in 2Q. Sales are expected to advance with support from external channels such as mobile sales and credit agents, as well as e-banking. BZ WBK launched a new, widely advertised cash loan offer in September. 50% y/y growth is in line with our expectations. The bank is strengthening its presence in the retail lending market (in particular cash loans and mortgage loans), It has plans to open 50 branches and ca. 100 franchise outlets in 2007. BZ WBK is committed to its versatile growth strategy. We are reiterating a positive rating on the bank. BZ WBK to launch private banking in 2008 BZ WBK’s managers think that Polish clients have accumulated enough wealth to qualify for private banking services, and are increasingly reaching for complex financial products and seeking foreign investments. Private banking is an element of the bank’s growth strategy. BZ WBK has not revealed what minimum net worth it will require. A new product lines is a good move. Rising salaries, increasing knowledge about bank services among the general population, and growing savings, will drive demand for private banking services.

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Analyst: Marta Jeżewska12 Last Recommendation: 2007-09-04(PLN m) 2006 2007F change 2008F change 2009F change Basic data (PLN m)Net interest income 1 026.4 1 188.7 15.8% 1 374.2 15.6% 1 543.9 12.3% Number of shares (m) 130.7Interest margin 3.0% 3.1% 3.3% 3.4% MC (current price) 14 503.2Revenue f/banking oper. 2 096.3 2 437.4 16.3% 2 688.7 10.3% 2 951.0 9.8% Free float 25.0%Operating profit 801.8 993.5 23.9% 1 173.7 18.1% 1 361.2 16.0%Gross profit 796.3 832.1 4.5% 1 039.2 24.9% 1 104.4 6.3%Net prof it 657.1 841.8 28.1% 894.6 6.3% 1 037.6 16.0%

ROE 12.3% 15.1% 15.4% 17.0% Price change: 1 month -6.9%P/E 22.1 17.2 16.2 14.0 Price change: 6 month 14.8%P/BV 2.7 2.5 2.4 2.3 Price change: 12 month 64.5%D/PS 3.6 4.1 5.3 5.6 Max (52 w eek) 137.5Dyield (%) 3.2 3.7 4.7 5.0 Min (52 w eek) 67.0

Current price: PLN 111 Target price: PLN 127.1Handlowy (Accumulate)

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Bank Handlowy WIG

Bank Handlowy expands loan volumes both in the retail banking line, and the corporate line, which displays a sustained growth trend, as evidenced by 2Q’07 results. Bank Handlowy is more sensitive to fluctuations in debt yields than other banks. In 2Q, despite an increase in bond yields, the bank did not record any major valuation losses (even though the revaluation reserve showed revaluation charges). We are reiterating the bank as an ACCUMULATE, with advice to switch positions from ING BSK to Bank Handlowy: both banks have strong exposure to corporate clients, and both have just stepped up efforts to acquire more retail accounts, but we believe that Bank Handlowy will be more successful. Citibank launches services dedicated to Poles in the US Citibank North America launched special services for Poles in its US branches, including cheap local transfers. The bank also hired Polish-speaking staff at 5 branches in New York and 9 branches in Chicago, and set up a Polish-speaking hotline and e-banking services. New York and Chicago have a Polish population estimated at 2.6m-2.9m. US is the next country after the UK where Citibank targets immigrants from Poland. And this is just the beginning of a larger plan spanning 15 countries. This is a very smart strategy which will translate into more accounts and stronger sales, both to immigrants and tourist. Extraordinary General Assembly Bank Handlowy called an extraordinary general assembly for November 23rd to vote on some changes in bylaws.

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Analyst: Marta Jeżewska017 Last Recommendation: 2007-09-04

(PLN m) 2006 2007F change 2008F change 2009F change Basic data (PLN m)Net interest income 936.3 1 071.1 14.4% 1 235.9 15.4% 1 399.1 13.2% Number of shares (m) 13.0Interest margin 2.1% 2.0% 2.1% 2.1% MC (current price) 11 962.7Revenue f/banking oper. 1 755.4 2 110.6 20.2% 2 397.9 13.6% 2 658.5 10.9% Free float 18.5%Operating profit 539.6 772.6 43.2% 949.3 22.9% 1 107.7 16.7%Gross profit 705.6 753.3 6.8% 857.2 13.8% 914.9 6.7%Net prof it 591.4 684.4 15.7% 729.7 6.6% 848.4 16.3%

ROE 16.2% 17.5% 17.2% 18.3% Price change: 1 month 0.2%P/E 20.2 17.5 16.4 14.1 Price change: 6 month 18.2%P/BV 3.2 2.9 2.7 2.5 Price change: 12 month 36.2%D/PS 27.5 27.9 32.3 28.0 Max (52 w eek) 1 075.0Dyield (%) 3.0 3.0 3.5 3.0 Min (52 w eek) 670.5

ING BSK (Hold)Current price: PLN 919.5 Target price: PLN 921.5

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ING BSK WIG

ING BSK has a strong positioning in corporate banking, and runs a successful securities brokerage business and investment fund company (a member of ING International), all of which gave a 30% boost to its second-quarter earnings. The momentum in volumes propels operating income before provisions which rose 14% y/y in 2Q’07 and over 21% y/y in 1H’07, in line with our expectations. We revise our CAGR estimates for ING BSK’s operating income before provisions to 43% in FY2007, 23% in FY2008, and 17% in FY2009 We are confident that the bank will meet our earnings expectations, which, we think, are already fully priced in its stock. We are reiterating a HOLD rating. Sale of NPLs ING BSK is going to sell its corporate loss loans with a total nominal value of PLN 827.2m (PLN 676.8m principal, PLN 150.4m interest) in 4Q’07 or 1Q’08. Assuming that the bank sells the NPLs for 10% - 15% of their nominal value, the impact on operating income could range from PLN 83m to PLN 124m (PLN 67-100m to net income). The actual price will depend on the outcomes of the buyer’s audit. ING BSK has provisions recognized against the total of its loss loans. The bank might decide to pay out the whole amount of the subsequent reversals as dividends to shareholders, either in 2008, or 2009. The sale will add PLN 5.2-7.7 per share (0.5% - 0.9% of the current market price), and will not have influence either on the bank’s stock performance, or our target price. Purchase of shares in “Centrum Banku Śląskiego” ING BSK purchased a 40% stake ub Centrum Banku Śląskiego (CBS) for EUR 5mln , i.e. PLN 18.865m (36 716 shares with a par value of PLN 1000). ING BSK has a 100% stake in ING Development, owner of the remaining 60% stake in CBS, meaning that, after the deal is final, the bank will own 100%. Centrum Banku Śląskiego was established in 1998 to build the two office buildings of ING BSK. Management Board reshuffle Mr. Ian B. Clone tendered his resignation as Vice-President of the Management Board effective December 1st for personal reasons. He will be replaced by Mr. Oscar Edward Swan subject to approval by the Commission for Bank Supervision. News without impact on stock performance. Mr. Swan has been with ING BSK since 2004, most recently as Head of Market Risk Management. Previously, he worked in financial market risk management at BZ WBK from 2002, and earlier still, he held a position with ING BSK.

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Analyst: Marta Jeżewska011 Last Recommendation: 2007-09-04(PLN m) 2006 2007F change 2008F change 2009F change Basic data (PLN m)Net interest income 780.0 849.6 8.9% 978.6 15.2% 1 136.9 16.2% Number of shares (m) 271.7Interest margin 3.6% 3.6% 3.8% 4.0% MC (current price) 6 487.2Revenue f/banking oper. 1 202.8 1 330.8 10.6% 1 515.1 13.8% 1 738.1 14.7% Free float 14.5%Operating profit 439.8 442.1 0.5% 557.3 26.1% 714.0 28.1%Gross profit 321.4 460.6 43.3% 443.8 -3.6% 476.4 7.3%Net prof it 468.1 359.5 -23.2% 385.9 7.3% 498.5 29.2%

ROE 24.8% 16.2% 15.6% 18.0% Price change: 1 month 1.6%P/E 13.9 18.0 16.8 13.0 Price change: 6 month 4.3%P/BV 3.1 2.8 2.5 2.2 Price change: 12 month 51.6%D/PS 0.2 0.4 0.5 0.6 Max (52 w eek) 28.0Dyield (%) 0.9 1.5 1.9 2.7 Min (52 w eek) 15.5

Kredyt Bank (Buy)Current price: PLN 23.9 Target price: PLN 27.4

We predict that 3Q will be marked by continued sales growth, with results reflecting Kredyt Bank's strengthening position in mortgage loans, and Żagiel’s success in consumer loans. In 2Q, sales of mortgage loans jumped a whopping 133% from last year to PLN 1.25bn, expanding the portfolio of these loans by 67%. While this result might be hard to repeat, sales could exceed PLN 1bn in 3Q. Our full-year sales forecast for Kredyt Bank is PLN 3.5bn, which might prove underestimated given that the bank reported PLN 1.8bn for 1H. The credit intermediary Żagiel posted PLN 481m in 2Q sales (incl. cash loans, installment plans, and credit cards), 23% more than a year earlier, with the portfolio value rising 21%. The net loan volume increased 30% compared to 2Q’06 (making Kredyt Bank the #3 bank in growth among the eight banks we cover). We continue to have a positive outlook on the bank, and consider it to be the most attractive investment of all small banks listed on the WSE - hence a reiterated BUY rating. Two loans from KBC Bank NV Kredyt Bank signed two loan agreements with KBC Bank NV for EUR 250m each. They are multi-currency facilities (CHF, EUR, or PLN) with a five-year term, to be allocated to working capital. Kredyt Bank is borrowing to support its fast-paced lending business in anticipation of sustained strong demand. Management reshuffle September 30th marks the end of supervisory board member Mr. Andrzej Witkowski’s term as temporary member of the management board. The supervisory board decided that, for now, the four-strong management board will continue its work as it is after Messrs Konrad Kozik and Bohdan Mierzwiński left. Business seems unaffected by these gaps, but we expect them to be filled soon.

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Analyst: Marta Jeżewska16 Last Recommendation: 2007-09-04(PLN m) 2006 2007F change 2008F change 2009F change Basic data (PLN m)Net interest income 650.5 754.1 15.9% 968.2 28.4% 1 185.6 22.5% Number of shares (m) 849.2Interest margin 2.8% 2.7% 2.8% 2.9% MC (current price) 10 529.9Revenue f/banking oper. 1 253.0 1 669.9 33.3% 2 033.4 21.8% 2 404.2 18.2% Free float 34.5%Operating profit 409.4 677.1 65.4% 893.7 32.0% 1 128.4 26.3%Gross profit 709.7 370.7 -47.8% 582.9 57.2% 761.4 30.6%Net prof it 300.8 472.1 57.0% 616.7 30.6% 776.2 25.9%

ROE 13.1% 19.8% 22.3% 23.7% Price change: 1 month -4.4%P/E 35.0 22.3 17.1 13.6 Price change: 6 month 10.6%P/BV 4.8 4.1 3.5 3.0 Price change: 12 month 86.7%D/PS 0.5 0.2 0.2 0.3 Max (52 w eek) 13.9Dyield (%) 4.4 1.4 1.6 2.0 Min (52 w eek) 6.4

Millennium (Accumulate)Current price: PLN 12.4 Target price: PLN 13.6

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Millennium WIG

We remain convinced that Millennium’s full-year net income will chalk up the highest growth from among the eight banks in our coverage universe (FY’06/09 CAGR at 37%). Given that Millennium occupies the number-one spot in loan growth (57% y/y in 2Q), and is strengthening its positioning in the market of investment funds, we are confident that the bank will continue to outperform competition in income growth well beyond FY2009. Furthermore, robust income drives return on equity. Millennium trades at a premium to the sector on its current FY’07E P/E multiple (P/E=22.3, showing a 19.8% premium), which, we think, is fully justified by its robust growth. According to our FY2009 projections for the banks in our coverage universe, Millennium will trade on a FY’09E P/E of 13.6, displaying a 5% discount to the sector. We are reiterating an ACCUMULATE rating. Aiming to maintain sales pace Millennium hopes to maintain sales of mortgage loans at the 1H level, when sales reached PLN 3.632 billion, and the loan portfolio stood at PLN 10.6bn (up a whopping 96% Y/Y). We are not clear in what the Head of the Mortgage Loan Department was referring to when she spoke about “pace”: the growth rate, or nominal sales. We a PLN 4.1bn projection on Millennium’s mortgage sales for 2H’07. If this is achieved, and full-year sales reach PLN 7.7bn, the loan portfolio will have expanded by 71%. But if “pace” means growth rate, Millennium could top our expectations.

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Analyst: Marta Jeżewska016 Last Recommendation: 2007-10-03(PLN m) 2006 2007F change 2008F change 2009F change Basic data (PLN m)Net interest income 2 377.0 2 485.4 4.6% 2 740.9 10.3% 2 942.5 7.4% Number of shares (m) 167.1Interest margin 3.7% 3.5% 3.5% 3.5% MC (current price) 42 310.5Revenue f/banking oper. 4 656.4 5 115.5 9.9% 5 664.8 10.7% 6 184.9 9.2% Free float 43.1%Operating profit 2 335.2 2 605.8 11.6% 3 027.8 16.2% 3 443.8 13.7%Gross profit 1 873.6 2 203.8 17.6% 2 580.2 17.1% 2 995.2 16.1%Net prof it 1 787.5 2 087.7 16.8% 2 423.9 16.1% 2 746.1 13.3%

ROE 20.7% 22.8% 24.7% 26.2% Price change: 1 month 2.2%P/E 23.6 20.3 17.5 15.4 Price change: 6 month -4.7%P/BV 4.8 4.5 4.2 3.9 Price change: 12 month 28.0%D/PS 7.4 9.0 10.5 12.2 Max (52 w eek) 271.7Dyield (%) 2.9 3.6 4.1 4.8 Min (52 w eek) 195.1

Current price: PLN 253.2 Target price: PLN 263.5Pekao (Hold)

We expect the Commission for Bank Supervision (KNB) to give a green light for the division of BPH and its merger with Pekao during its meeting in October. The merger machine was put in motion in April 2006, when UniCredit reached an agreement with the State Treasury. Even with the merger preparations going full swing, Pekao is constantly improving its earnings performance and meeting market expectations. Clients have not been scared away by the media buzz, and we expect them to stay with Pekao even after the merger: Thanks largely to bank supervision’s sluggishness, the bank has had time to prepare for a seamless transition. Other perks for clients include a much wider branch network and free cash withdrawals from BPH ATMs. Pekao’s stock rose 3.6% since our last rating (September 4th), prompting a downgrade from Accumulate to HOLD. Sale of shares in Anica System Pekao’s subsidiary Pekao Fundusz Kapitałowy sold 1.5269 million shares of common stock to Anica System with a par value of PLN 0.2 each (PLN 305.38 thousand in total), representing 33.84% of share capital and 13.49% of votes, to Asseco Poland for a total price approximating PLN 22.6m. The book value of these shares was PLN 4.376m. They had been purchased as a long-term investment. The sale will make a small addition to Pekao’s consolidated 3Q’07 earnings (it was sealed on September 28th), namely, PLN 18.2m will be credited to pre-tax income, and PLN 14.76m to net income. The proceeds account for 2.7% of the bank’s 2Q’07 pre-tax income and net income, and 0.8% of the FY2008 net income .

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Pekao WIG

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Analyst: Marta Jeżewska016 Last Recommendation: 2007-09-04

(PLN m) 2006 2007F change 2008F change 2009F change Basic data (PLN m)Net interest income 3 808.7 4 454.3 16.9% 5 117.5 14.9% 5 920.0 15.7% Number of shares (m) 1 000.0Interest margin 3.9% 4.2% 4.4% 4.5% MC (current price) 56 300.0Revenue f/banking oper. 6 038.9 7 025.5 16.3% 7 964.7 13.4% 9 031.2 13.4% Free float 43.1%Operating profit 2 705.8 3 580.8 32.3% 4 287.2 19.7% 5 156.1 20.3%Gross profit 2 167.0 2 701.5 24.7% 3 324.8 23.1% 3 880.1 16.7%Net prof it 2 149.1 2 617.2 21.8% 3 051.8 16.6% 3 671.1 20.3%

ROE 22.9% 24.0% 24.2% 25.3% Price change: 1 month 2.8%P/E 26.2 21.5 18.4 15.3 Price change: 6 month 15.4%P/BV 5.6 4.8 4.2 3.6 Price change: 12 month 51.1%D/PS 0.8 1.0 1.3 1.5 Max (52 w eek) 59.0Dyield (%) 1.4 1.7 2.3 2.7 Min (52 w eek) 35.8

PKO BP (Hold)Current price: PLN 56.3 Target price: PLN 55.5

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PKO BP WIG

PKO BP’s second-quarter results were a testimonial to its sales strength. Net loans surged 26% y/y, as did assets under management of investment funds (increase in market share from 9.81% at March 2007 to 10.42% at June). These trends continued in 3Q, with PKO TFI recording assets of PLN 15.875bn and an 11.4% market share at the end of August. A booming market is driving sales and revenues. Our current financial projections for the bank are based on its revised long-term financial targets. We believe that the bank can keep net ROE at 25% and C/I ratio around 39%. We are reiterating a HOLD rating. PKO BP / PZU merger a tough nut According to Treasury Minister Wojciech Jasiński, a merger between PZU and PKO BP is a needed, but highly complex undertaking. We agree. Newspapers got to PKO BP / PZU merger plans According to Rzeczpospolita, a plan is in the works for PKO BP to take over PZU. The paper claims that there were two plans. One, later rejected, was to form a new company which would take over both PKO BP and PZU to form a holding company. The other plan, which was accepted according to the paper, is to transfer PZU to PKO BP in two stages. In the first stage, a portion of PZU’s shares will be transferred to PKO BP in exchange for the bank’s new shares. The State Treasury’s interests will increase from 51.5% to 66% max. The number of shares so transferred would depend on PZU’s valuation. PKO BP’s shareholders would have to approve the issue by an 80% majority. In the second stage, the State Treasury will transfer the outstanding interests in PZU in exchange for special bonds issued to PZU. PKO BP would not pay for all the shares, as a portion of the consideration would be offset against Eureko’s claims against the State Treasury (which might be as high as PLN 9bn according to the paper). The success of this plan depends on the State Treasury’s actual rights to dispose of PZU shares. The Treasury claims Eureko has no rights to these shares. A merger between PKO BP and PZU would have two major benefits: it would produce Poland’s largest financial institution comparable to major international players, and provide a huge capital infusion to the State Treasury. Another advantage would be that all risks arising from the Eureko dispute would be transferred from the State Treasury to PKO BP. We are skeptical. The scenario outlined by Rzeczpospolita would expose minority shareholders to considerable risk. When and how long the processes would start is unknown. Minority shareholders could agree to this marriage only if they are convinced that there is something for them to gain. In its early stages, it would certainly generate more complications and risks than benefits. What is more, we are on the verge of early parliamentary elections, and, since the State Treasury is PKO BP’s majority shareholder, if its members are replaced as a result of the election, the bank’s strategy could be changed completely. If the shareholder structure stays intact, the merger scenario could be developed further. PKO BP / PZU merger plans unlawful In their comments to the PKO BP / PZU merger plans, newspapers wrote that a two-stage takeover by PKO BP of the Treasury’s shares in PZU would be illegal. According to the KNF, these shares cannot be contributed in kind, but have to be paid for in cash. In similar cases in the past, the KNF did not allow stock-for-stock transactions when Getin Holding wanted to take over TU Europa. According to the State Treasury, the scenarios outlined by Rzeczpospolita was just one of many. Another problem is the plan’s incompliance with bank regulations, which say that banks can receive non-cash contributions only in the form of real estate or equipment. Furthermore, according to legal experts, the State Treasury could not be relieved of responsibility in the Eureko dispute because Eureko’s claims are subject to international

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agreements between Poland and the Netherlands. The legal details of the merger plan have not been worked out yet, and the information reported by Rzeczpospolita was just a blueprint which is subject to change. The fact is that the State Treasury is facing a challenge of integrating two large institutions, both in need of deep restructuring, while remaining deep in dispute with Eureko. At some point, PKO BP’s shareholders are going to take a vote to approve the merger. Anyway, a marriage between PKO BP and PZU can be seriously considered only after the fall election, and this provided that the current administration is reelected, or that whoever replaces is also in favor of the merger. PKO BP looking for advisor regarding partnership with PZU At the end of July, the State Treasury announced that it was going to work toward building a bank-and-insurance group resting on two pillars: PKO BP and PZU, but did not specify the action plan. Next week, the ministry is going to send out requests for advisory service offers to leading investment banks. In light of today’s revelations by Rzeczpospolita, the advisory could actually concern merger issues. Sales revolution PKO BP is implementing a scheme to improve sales, supported by an incentive plan currently being tested at a number of selected branches. The goal is to grow sales by 30%, expand cross-selling, realign the work organization, and improve the corporate image. The incentive scheme, based on individual performance among the sales force, will be tried in two regions in 4Q, and rolled out throughout all locations in 2008. PKO BP has undertaken a number of measures to improve sales. One of such measures are easy cash loans for non-clients, granted without proof of employment, aimed at increasing revenues through higher interest rates on high-risk loans. We like the bank’s ideas and the management’s efforts to keep the best people. In 1H, PKO BP revealed a new strategy plan for 2007–2012, and, assuming that the recent measures are a part of this plan, they must have been discounted by investors. PLN 3.267bn mortgage loan sales in just two months PKO BP sold PLN 3.267bn-worth of mortgage loans in July and August, marking a whopping 83% increase on the same period a year ago (PLN 1.788bn). 1H’07 sales came close to PLN 8bn (up 65% y/y), and 2Q’07 sales were PLN 4.4bn. The bank is consistently generating growth. If the pace recorded in July/August is sustained in September, the bank will have sold PLN 4.9bn loans (or even more). These are impressive, but expected figures. Sales in 2Q’07 amounted to PLN 4.4bn. PKO BP’s sales are also an indication of a general uptrend in mortgage lending experienced by banks across the board. PLN 1.05bn consumer loan sales in just two months Consumer loan sales in July and August chalked up a 25% increase on a year earlier (PLN 840m). 2Q’07 sales approximated PLN 1.6bn. PKO BP expects sales to grow further on a new offer targeted to the mass customer, especially low-income borrowers and seniors. PKO BP has put much effort in accelerating consumer lending. The new loan products are sure to drive sales, but not faster than market expectations. Our valuation model for the bank is based an a prediction of a 25% y/y increase in consumer loan sales in FY2007. Growth after 2Q stood at 17.9%, including a 7.6% y/y rise in mass lending, and an 84.4% surge in the private banking segment. We are confident that PKO BP will continue to grow its consumer loan business. Credit card sales PKO BP had issued 991.6 thousand credit cards at the end of August, compared to 971.7 thousand at the end of 2Q. The bank says that it will hit the 1 million mark in a matter of weeks by focusing on galvanizing client activity – the number of card transactions rose 30% y/y. At the end of 3Q’06, PKO BP had 737,000 cards in circulation. The number of issuances increased almost 25% from the end of September 2006 to the end of August 2007. The transaction volume increases in line with card issuances, but could generate stronger fee income. Bond offering PKO BP’s management board resolved to make an offering of ten-year bearer bonds callable five years from the issue date, nominated either in zlotys, or in euros. The purpose of this debt offering was not stated. The bonds will be available in Poland only. We can guess that this offering, as well as the recent subordinated loan, are aimed at financing of current operations, especially the lending business.

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Gas & Oil, Chemicals Russians in doubt about new oil pipeline According to press reports, the Russian government has doubts whether it makes sense financially to build an oil pipeline as an alternative to Druzhba, which exports oil from Unecha to Primorsk. Politicians worry that a new pipe would not only strain Russia's diplomatic relations with CEE countries and Germany, but also reinforce exporters of oil from the Caspian Sea. Furthermore, Transneft’s cost estimates for the project are overly optimistic according to some experts. All this confirms our theory that the idea to build an alternative pipeline was purely political, and that it would cause losses for both the exporter and the importers. But it seems that, in the end, financial rationale will win over political considerations. Kazachstan eyes Belarusian refineries The Kazakh prime minister revealed that his country is interested in transporting oil through Belarus, and using local refineries. Two Belarusian refineries are currently working together with Russian oil corporations (Slavneft even has equity interests in Mozyr refinery), and, in light of this, the Kazakh plans could pose a threat to Russian interests in Belarus (Russian oil companies are not welcome there lately). This might be a sign of Kazakhstan joining the race to conquer Eastern European markets, which would practically eliminate the risk of the Russians shutting down the Druzhba pipeline on the one hand, but, on the other hand, Polish refineries would find themselves competing with a strong new rival with good exposure to upstream and huge resources in the next few years. We think that Orlen and Lotos should prepare for such an eventuality. Cooperation would be much better, but the chances of reaching an agreement with KazMunaiGaz are slim at the moment. European Commission’s proposals for the energy industry To increase the safety of the European energy market and facilitate equal competition on the single market, the European Commission put forth certain solutions to prevent foreign corporations such as the Russian Gazprom from taking over control over transmission networks in the EU. Foreign investors would be allowed to take over control only provided that they comply with certain conditions of energy production and transmission. The purpose of these measures is not to increase dependence on such suppliers as Gazprom which provides one-fourth of EU’s gas, and which has material interests in the gas infrastructures of many EU countries. Gazprom warned that these regulations could find their reflection in its selling prices. The Commission’s proposals are in line with earlier declarations by Jose Barroso. They might not enter into force as Germany and France have already expressed their objections (mainly with regard to the plan to separate transmission and production). In our opinion, the Commission’s proposals are reasonable and would help develop a level playing field for everyone, including non-EU investors. Talk of such mechanisms has heated up lately, as energy companies from countries like Russia and Algeria aggressively leverage the advantage of having direct access to resources to demand access to energy distribution markets, while banning EU firms from investing in their own mining industries. The measures protecting against hostile takeovers put forth by the Commission will extent to Polish energy companies. US crude inventories on the decline Crude oil inventories have shrunk almost 10% since July, sending prices to a record high of $83/Bbl. This rally was further supported by a weak dollar which offset the price impact for European and Asian buyers. Hurricane warnings in the Gulf of Mexico were not without significance, causing a dramatic decrease in capacity utilization by US refiners who preventively evacuated their crews from the regions exposed to the storms. Lower CURs led to an unexpected uptick in crude inventories in the past week after weeks of reported depletion. But investors consider this a temporary increase, and expect further depletion in US oil stocks. That said, we project that the upward pressure on crude prices will ease in the month ahead. The end of the hurricane season will eliminate one of the price drivers, and the expected reports on inventory decreases will be offset by concerns over the state of the US economy.

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Analyst: Kamil KliszczLast Recommendation: 2007-08-16

(PLN m) 2006 2007F change 2008F change 2009F change Basic data (PLN m)Revenues 12 810.9 12 525.9 -2.2% 12 036.4 -3.9% 14 841.3 23.3% Number of shares (m) 113.7EBITDA 1 095.7 990.6 -9.6% 953.7 -3.7% 1 305.0 36.8% MC (current price) 5 213.1EBITDA margin 8.6% 7.9% 7.9% 8.8% EV (current price) 5 355.9EBIT 798.3 679.1 -14.9% 480.4 -29.3% 672.6 40.0% Free float 41.2%Net profit 679.9 557.0 -18.1% 372.5 -33.1% 488.1 31.0%

P/E 7.7 9.4 14.0 10.7 Price change: 1 month 2.1%P/CE 5.3 6.0 6.2 4.7 Price change: 6 month 1.1%P/BV 1.0 0.9 0.9 0.8 Price change: 12 month -3.7%EV/EBITDA 4.6 5.3 6.6 5.7 Max (52 w eek) 58.2Dyield (%) 0.0 0.8 0.0 0.0 Min (52 w eek) 38.5

Lotos (Reduce)Current price: PLN 45.9 Target price: PLN 42

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Lotos WIG

In spite of weaker macroeconomic settings in the refining industry (spreads and July margins), we expect Lotos to post similar third-quarter results as last year thanks to a favorable LIFO effect and strong results generated by the exploration business (which will finally show the effects of the over-$15 hike in oil prices unseen in 2Q). Unlike PKN Orlen, Lotos is hedged against USD/PLN exchange risks, which prevented it from incurring losses compared to last year. We are reiterating a REDUCE rating. “10+” Lotos’s management held a press conference yesterday during which they revealed the objectives of the “10+” (former CTUP) upgrade program. CEO Mr. Olechnowicz said that the company was just starting to negotiate financing with banks. Completion of “10+” is scheduled for October 2010 (new crude refining systems are to be connected in spring 2009, after which a few-week maintenance downtime will follow), and is expected to drive net margins by 80% from the current $4.5/Bbl to $8/Bbl. Generally, the “10+” objectives are the same as the CTUP objectives, and are already factored in our valuation model. Motion to dismiss CEO Olechnowicz The Ministry of the State Treasury stated during a press conference that it had sent a letter to the Chairman of Lotos’s supervisory board requesting a vote to dismiss CEO Mr. Paweł Olechnowicz. The Ministry claimed that Lotos’s management board had neglected its supervision responsibilities with respect to subsidiaries, which resulted in 30 million dollars being transferred out of Lotos. In the end, however, the motion was withdrawn, probably due to lack of sufficient support from supervisory board members who seem to stand firmly behind Mr. Olechnowicz. The government obviously can find no loopholes that it could use to oust disloyal board members before the October election. Furthermore, a CEO reshuffle would work to Lotos’s disadvantage at the moment as the company negotiates with lenders to gain financing for its upgrade program - maybe the state treasury took this into account. Support for exploration Henrik Carlsen, a manager with long-standing experience in the exploration industry (he was vice-president of the Norwegian Continental Shelf, and an executive at Statoil where he worked for over 30 years), is going to manage Lotos’s new venture aimed at exploration and mining for oil in the Norwegian shelf. This is a positive development which shows that Lotos has taken steps to galvanize its exploration business. We are looking forward to learning more details. Lotos has already set up a subsidiary in Norway which will be tasked with prospecting and mining for oil in the continental shelf. FY2007 earnings forecast Lotos released its FY2007 earnings guidance, with EBIT pegged at PLN 659m (3% below our PLN 679m estimate), a pre-tax profit target of PLN 834m (10% higher than our PLN 754m estimate) and a net profit target of PLN 634m (14% over our PLN 557m estimate), on revenues projected at PLN 12.8bn (2% over our PLN 12.5bn estimate). With the EBIT target in line with our expectations, we plan revisions in our DCF valuation of Lotos. The differences between the company’s and our pre-tax and net profit forecasts stem from expected strong finance gains which Lotos’s management expects to reach PLN 175m (we project PLN 75m), which would be even more than the robust finance income of PLN 95.8m reported for 1H. These gains will probably be boosted by positive exchange differences and investment revaluations. Lotos’s new strategy announcement is not expected until June 2008.

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(PLN m) 2006 2007F change 2008F change 2009F change Basic data (PLN m)Revenues 15 197.7 16 305.5 7.3% 16 535.5 1.4% 16 395.9 -0.8% Number of shares (m) 5 900.0EBITDA 2 760.7 3 262.1 18.2% 3 156.0 -3.3% 3 106.1 -1.6% MC (current price) 31 270.0EBITDA margin 18.2% 20.0% 19.1% 18.9% EV (current price) 28 912.8EBIT 1 464.6 1 953.4 33.4% 1 816.2 -7.0% 1 720.0 -5.3% Free float 15.3%Net profit 1 323.1 1 773.8 34.1% 1 701.2 -4.1% 1 623.6 -4.6%

P/E 23.6 17.6 Price change: 1 month -0.6%P/CE 11.9 10.1 Price change: 6 month 23.9%P/BV 1.5 1.4 Price change: 12 month 64.2%EV/EBITDA 10.9 8.8 Max (52 w eek) 5.7Dyield (%) 0.7 0.5 5.1 4.9 Min (52 w eek) 3.1

PGNiG (Hold)Current price: PLN 5.3 Target price: PLN 5.14

As a quasi-utility company, PGNiG is trading at a fair price at the moment, but sentiment might rebound in October on good 3Q earnings news. The market is discounting the fact that there will be no gas tariff hikes next year, signaled by management. Any surprises on this front will be to the upside, providing another trigger for speculative buying on PGNiG. Unitization of Skarv / Snadd / Idun deposits PGNiG’s management reported unitization of Skarv and Snadd deposits (in which the company had a 15% share) with the Idun deposit. As a result, PGNiG’s share in the fields fell to 12%. No changes in gas market In an interview for the WSJ, the President of the Energy Regulatory Office (URE) Adam Szafrański said that he did not expect major changes to happen in the Polish gas market any time soon, either when it comes to tariffs, or competition. This statement confirms our predictions that many years will have to pass before we see a truly deregulated market and free gas prices, which would be good for PGNiG. A play on a rapid rebound in PGNiG’s earnings in 1-2 years is not a smart move in light of this information. Finalizing Norwegian deposit deal PGNiG received permission from the Norwegian of Petroleum and Energy to purchase shares in exploration licenses for the Norwegian Continental Shelf, thus fulfilling the last condition for finalizing the deal. No motion to raise tariff prices? PGNiG’s VP Tadeusz Zwierzyński told Reuters that the company would probably not file a request to raise gas tariffs unless there is a rapid hike in the prices of crude oil. This statement might have something to do with the upcoming parliamentary election, although, in any case, PGNiG would have a hard time convincing the Energy Regulatory Office about the need to increase prices (a weak dollar, stellar profits reported and still expected this year).

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PGNiG WIG

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(PLN m) 2006 2007F change 2008F change 2009F change Basic data (PLN m)Revenues 52 867.2 60 388.1 14.2% 67 232.0 11.3% 67 298.1 0.1% Number of shares (m) 427.7EBITDA 4 684.7 5 951.4 27.0% 6 336.9 6.5% 6 486.7 2.4% MC (current price) 24 358.0EBITDA margin 8.9% 9.9% 9.4% 9.6% EV (current price) 34 854.6EBIT 2 576.6 2 916.6 13.2% 3 147.4 7.9% 3 064.8 -2.6% Free float 72.5%Net profit 1 986.0 1 988.8 0.1% 2 217.3 11.5% 2 142.7 -3.4%

P/E 12.3 12.2 11.0 11.4 Price change: 1 month -4.0%P/CE 5.9 4.8 4.5 4.4 Price change: 6 month 17.2%P/BV 1.3 1.2 1.1 1.0 Price change: 12 month 12.4%EV/EBITDA 7.5 5.7 5.4 5.2 Max (52 w eek) 60.0Dyield (%) 0.0 0.0 2.0 2.0 Min (52 w eek) 42.5

PKN Orlen (Hold)Current price: PLN 57 Target price: PLN 60.5

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PKN Orlen WIG

PKN Orlen’s shares could recede in October due to several reasons. First, investors will play on 3Q results which, adjusted for one-offs (LIFO revaluation, Mazeikiu Nafta’s insurance compensation), will probably turn out weaker compared to 3Q’06 and 2Q’07 due to a weak dollar, thin refinery margins recorded in July, and a temporary narrowing of the Urals/Brent spread (which is back to $3.5/Bbl by now), and downtime maintenance at Mazeikiu Nafta and Unipetrol. Furthermore, we expect sentiment in global petroleum markets to soften, reflecting on refiners. In the medium term, PKN Orlen’s value will depend on the USD/PLN exchange rate which keeps hitting new lows. If this downtrend continues, we will be forced to revise our earnings projections for the company. For these reasons, and looking at PKN Orlen’s current market price, we are downgrading it to HOLD. Politics seeping into PKN/Lotos merger plans Recent statements from government officials and the Treasury indicate that the potential merger between Lotos and Orlen is becoming a weapon in the election campaign. MP candidates in the Płock and Gdańsk electoral areas, the home cities of Orlen and Lotos, are coming up with new, economically absurd ideas for the merger, which, we hope, are just campaign gimmicks. We like the idea of the merger, but not if it is done in such a way that Orlen contributes its shares in kind to Lotos, which then gradually increases its interests. In such a scenario, the Treasury would initially gain a ca. 82% stake in Lotos (at the current prices), which it would then dilute to 51% by issuing new shares (for ca. PLN 7.4 billion), and use the capital raised to buy back outstanding Orlen shares (either on the stock exchange, or through Orlen’s new stock offering), after which Lotos would end up owning 57% or 44% of Orlen’s share capital. If there was to be a tender offer, it would either fail to deliver the desired volume, or require paying a considerable premium. The Treasury should not engage in such “financial engineering,” which has nothing to do with creating value for shareholders. Opposition MPs object to Orlen / Lotos merger When presenting his party’s program, Adam Szejnfeld, an opposition MP (representing Platforma Obywatelska) said that his party was opposed to merging Orlen with Lotos. Orlen considering mining projects in Africa OKN Orlen’s CEO Mr. Kownacki said in an interview that the company was looking into mining opportunities in North Africa. VP Mr. Pater reiterated that Mazeikiu Nafta wants to be connected through a product pipeline with the Klaipeda terminal, and plans to acquire an operator in this terminal. Delay in Anwil’s IPO Orlen’s supervisory board did not make a final decision about taking Anwil public during its meeting in September. The board requested more research. We are not sure about the nature of the board’s doubts with regard to the IPO. But, as the agricultural industry starts to gain momentum, maybe it would be smart to wait with the offer to fully capitalize on strong future earnings results. In addition, the current trends observed in equity markets cannot guarantee a steady high price, especially given that the value of Anwil’s IPO could exceed PLN 1bn. Mazeikiu Nafta gets first insurance check Mazeikiu Nafta received the first payment of insurance compensation for fire damage in the amount of PLN 70m. The company was not expecting this money until next year. The total compensation is estimated at $150-180 million. The first $70m installment will be recognized in 3Q income statement.

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ZA Puławy WIG

ZAP’s shareholders finally approved the company’s upgrade plans, and we can include them again in our target price calculations, which we expect to revise back up again to the level from before the dismissal of CEO Mr. Lewicki (~PLN 130 / share). We see additional upside potential in revenues from surplus nitrogen monoxide emissions (estimated at PLN 40m a year between 2008 and 2012), and a rebound in fertilizer prices after a seasonal drop. European prices of urea and ammonium nitrate have already reached levels from the beginning of the year, when fertilizer producers reported record margins. We predict that the agricultural industry will continue on the upward momentum started late last year, with grain prices on a sustained high level, giving more purchasing power to farmers, and reflecting positively on the profit margins of fertilizer producers. We are reiterating an ACCUMULATE rating on ZAP. Shareholders OK major investments ZAP’s supervisory board and shareholders approved major investments including an oxygen-ammonia-urea line (to increase annual urea capacity by 270,000 tons), and the agreement with BASF to reduce nitrogen monoxide emissions. This means that we can take these investments into consideration when calculating ZAP’s value (we decided not to include them based on threats that CEO Lewicki would be dismissed which arose in July). We estimate that the urea capacity upgrade will boost our per-share price target on ZAP from PLN 112.3 to PLN 130. A reduction in nitrogen monoxide emissions could bring in over PLN 40m in extra income in four years which, however, could be affected by volatility in ERU certificates and will therefore not be factored in our valuation model. We are reiterating an ACCUMULATE rating on ZAP. We believe that Mr. Lewicki’s growth strategy will be implemented by the current management.


(PLN m) 2006 2007F change 2008F change 2009F change Basic data (PLN m)Revenues 2 196.2 2 226.9 1.4% 2 277.3 2.3% 2 312.6 1.6% Number of shares (m) 19.1EBITDA 256.9 264.6 3.0% 299.5 13.2% 317.4 6.0% MC (current price) 2 209.7EBITDA margin 11.7% 11.9% 13.2% 13.7% EV (current price) 1 738.3EBIT 157.5 169.0 7.3% 190.6 12.8% 192.5 1.0% Free f loat 38.4%Net profit 133.7 143.1 7.0% 162.2 13.4% 165.6 2.1%

P/E 16.5 15.4 13.6 13.3 Price change: 1 month 8.6%P/CE 9.5 9.3 8.2 7.6 Price change: 6 month 71.1%P/BV 1.7 1.6 1.5 1.4 Price change: 12 month 105.4%EV/EBITDA 7.2 6.8 5.8 5.2 Max (52 w eek) 138.8Dyield (%) 1.7 1.8 2.0 2.2 Min (52 w eek) 54.5

Za Puławy (Accumulate)Current price: PLN 115.6 Target price: PLN 112.27

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Telecommunications Polkomtel leads in UMTS stations According to data compiled by the Office for Electronic Communications (UKE), Polkomtel has the most advanced UMTS network, with Play lagging far behind. According to the report, Polkomtel has 6776 GSM 900 base transceiver stations, 1565 GSM 1800 BTSs, and 1621 UMTS stations, compared to PTC with 4968 GSM 900 stations, 1057 GSM 1800 stations, and 1170 UMTS stations, and Centertel with 2578 GSM 900 stations, 2464 GSM 1800 stations, and 867 UMTS stations. P4 has built 253 UMTS stations, and has a domestic roaming agreement in place with Polkomtel. Play still has huge infrastructure investments to make if it is to meet the frequency requirements. GSM tender, Streżyńska wants to stay GSM 1800 frequency bands will soon be awarded to one or two the following bidders: Centertel, PTC, Polkomtel, CenterNET, TOLPIS, or Inquam Broadband GmbH. In a TV interview, President of the UKE Hanna Streżyńska said that she had no intention of stepping down regardless of election results. Our bets in the GSM tender are either on Centertel, CenterNET (owned by Roman Karkosik), or Inquam (listed on the NASDAQ). UKE modifies PTC / TPSA joint network agreement to comply with RIO The regulator stressed that this decision will increase competition in Poland's telecom market and enable PTC to develop an offer that can compete with TPSA’s retail offer. TPSA has to comply immediately. The market will see the emergence of a new strong player which will bring its offer up to industry standards. So far, PTC has disappointed with its half-hearted activity, especially in broadband access through fixed-line cables. New responsibilities for TPSA? The UKE has started 30-day consultations regarding broadband access agreements, with alternative operators including MNI, PTC, Polkomtel, Długie Rozmowy, and Vectra. The regulator wants to make changes in these agreements to enable these operators to offer broadband access via TPSA lines to customers without active phone lines. According to TPSA, such a change would be illegal. In our opinion, it will be hard to force TPSA to connect non-active users. One of the issues here are the costs of such connections. But the regulator thinks that this is a good way of improving access to Internet services. The case will probably end in court, and the market will feel the impact of the resolution no earlier than in 1.5 years.

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3 October 2007 28


Analyst: Michał MarczakLast Recommendation: 2006-09-06

(PLN m) 2006 2007F change 2008F change 2009F change Basic data (PLN m)Revenues 862.1 971.7 12.7% 1 088.0 12.0% 1 178.3 8.3% Number of shares (m) 389.2EBITDA -68.9 262.0 267.9 2.3% 301.4 12.5% MC (current price) 1 467.3EBITDA margin -8.0% 27.0% 24.6% 25.6% EV (current price) 1 270.3EBIT -341.4 16.8 27.5 63.7% 67.8 146.5% Free float 100.0%Net profit -378.9 -53.1 -86.0% -50.6 -4.6% 4.1

P/E 395.6 Price change: 1 month -5.5%P/CE 8.4 8.5 6.8 Price change: 6 month -7.1%P/BV 0.8 0.7 0.7 0.7 Price change: 12 month -19.2%EV/EBITDA 5.7 5.3 4.4 Max (52 w eek) 5.4Dyield (%) 3.3 2.0 2.0 3.3 Min (52 w eek) 3.7

Netia (Sell)Current price: PLN 3.8 Target price: PLN 3.8

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Netia WIG

Netia is sure to report an even bigger net loss in 2H. Next year, the company will go into debt to finance planned investments. Play also has much to do in the infrastructure department: its 253 UMTS stations are no match to the competition’s 3-4 times larger networks. The mobile subsidiary will not start generating cash inflows until FY2009. We would advise investors to be reasonable and underweight Netia. Sentiment could improve on a growing number of broadband users, driving revenues, but we maintain that this is not enough, and wait to see growth in EBITDA. Netia buys ISP “Akron” Netia’s Wrocław-based subsidiary “Lanet” acquired an internet service provider called “Akron” for PLN 0.8m, increasing Netia’s broadband customer base to 171 thousand. At the date of the transaction, Akron served 1,151 users, and its capacity was enough to cater to 5,000 households. This small acquisition did not impact Netia’s valuation.

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3 October 2007 29



(PLN m) 2006 2007F change 2008F change 2009F change Basic data (PLN m)Revenues 18 625.0 17 871.2 -4.0% 17 892.6 0.1% 17 705.3 -1.0% Number of shares (m) 1 400.0EBITDA 7 856.0 7 289.2 -7.2% 7 360.8 1.0% 7 055.5 -4.1% MC (current price) 30 240.0EBITDA margin 42.2% 40.8% 41.1% 39.8% EV (current price) 37 395.0EBIT 3 367.0 2 986.3 -11.3% 3 246.6 8.7% 3 119.5 -3.9% Free f loat 46.0%Net profit 2 096.0 1 908.6 -8.9% 2 166.8 13.5% 2 060.4 -4.9%

P/E 14.4 15.8 14.0 14.7 Price change: 1 month -0.9%P/CE 4.6 4.9 4.8 5.0 Price change: 6 month -7.9%P/BV 1.7 1.7 1.8 1.8 Price change: 12 month 8.0%EV/EBITDA 4.8 5.0 4.8 4.9 Max (52 w eek) 26.7Dyield (%) 4.6 8.8 7.6 7.9 Min (52 w eek) 19.9

TP SA (Reduce)Current price: PLN 21.6 Target price: PLN 20.2

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TPSA WIG

TPSA is performing weaker than the market, as we predicted. The possibility of the operator’s business being divided into wholesale and retail, the finished share buyback, and deteriorating financial results, will continue to weigh the stock down. One potential price driver could be the strong performance of the European telecom sector, relative to which TPSA is trading at a deepening 15% discount. Our negative rating could be challenged if foreign investors start buying again – foreign capital often follows up on general sentiment instead of looking into particular cases. TPSA division as early as 2H 2008? The Office for Electronic Communications (UKE) is looking into the possibility of dividing TPSA’s business into wholesale and retail. If the Office decides to go ahead with the division, it could make a relevant submission to the European Commission in mid-2008, and the split could take place as early as next year. First, however, the UKE wants to prepare legal guidelines and an assessment of the financial impact of the division on TPSA. UKE expected to approve TPSA’s cost estimates TPSA ordered an assessment of its operating costs from Ernst & Young, hoping to convince the UKE to allow it to raise the wholesale rates applied in interoperator billing. The operator is requesting price hikes ranging from 10% to 250%. According to unofficial sources, the UKE will accept the audit, but not TPSA’s price hike request. In turn, the operator believes that it should be allowed to raise prices automatically upon an independent validation of costs. But the UKE says that the audit was just a supporting measure, and TPSA’s wholesale rates generate profits. To our mind, approval of the audit followed by disproval of the price hikes sends a confusing message, and suggests that the UKE is bending the law. The case will most probably end up in court, and we find that the chances are leaning toward TPSA. We expect a favorable ruling in about a year. Buy-back is over To date, has repurchased 31.22 million of its own shares for an average price of PLN 22.3 a share, marking the end of the buyback program (PLN 700m was earmarked for this purpose), and elimination of a significant demand driver (up to 25% of daily volumes). Watching Disney with TPSA, Orange TPSA reached an agreement with Disney to make Disney movies available to customers via VoD seven days before they are shown on national television. The rental fee per episode is PLN 4-5 or PLN 3 for past season episodes. TPSA plans to have 1000 movies in its VoD library by the end of the year. With over 700 titles, its library is currently the largest in Poland and one of the largest in Europe. The operator also plans to expand VoD coverage from 6 to over 40 cities. The problem with TPSA’s VoD service are constant technical difficulties (jammed network) which make video rental a marketing slogan rather than a legitimate source of revenues. In 3 to 5 years, VoD is expected to bring PLN 100-150m in annual profits. Onet partners with TPSA Instead of launching its own Internet access services, Onet.pl has struck a partnership with TPSA whereby customers can order TPSA’s broadband services via Onet (the orders are then processed by the operator). The services include standard connection speeds plus access to Onet’s paid sites. Onet expects to earn several million zlotys on the deal, and acquire ca. 50,000 subscribers for TPSA. The telecom operator and the portal signed a three-year exclusive partnership agreement covering fixed-line Internet access. As for radio access, Onet’s partner is Play. If Play launches mobile access services, Onet will probably use them to offer its content. This is a good move on TPSA’s part, securing access to prospective new subscribers.

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3 October 2007 30


But it does not solve the operator’s main problem, namely competition which has waged a price war and is slashing Internet rates thanks to low interconnect rates. As for the customer base, TPSA has the broadest access to subscribers through its sales network, and Poland’s second largest Web portal wp.pl. Privatization controversy The Ministry of the state Treasury is investigating several privatization deals, including TPSA’s. Unofficially, the government's interest in the deal was sparked by a report prepared by Antoni Macierewicz, head of military counterintelligence, which includes a list of current officials and journalists who allegedly collaborated with the former communist regime. Any violations the ministry might find will impact the relevant individuals, and should not affect either the operator's ownership structure, or its fundamentals. UKE rejects TPSA’s financing request The Office for Electronic Communications (UKE) decided that TPSA has no grounds to request subsidies the cover net costs of universal services. The operator was not able to prove that provision of universal services is an unprofitable business. TPSA requested PLN 140m. The company pointed out that the UKE made no requests to submit additional documentation, and did not notify any concerns and doubts regarding the request. Again, TPSA will probably sue the regulator, and the ruling should not be expected earlier than in six months’ time. TPSA bets on value-added services, wants to strike alliances with content providers TPSA is going to make decisions regarding its content strategy in the next few months. The operator wants to either enter into partnership agreements, or joint-venture arrangements with content providers within 12 months. CEO Witucki said that the future of the telecommunications market lies in new services and broadband users, as well as more advances services, adding that POTS revenues are falling across the board, and that competition is heating up as a result of regulatory actions. TPSA plans to expand in Internet TV and is considering alternative ways to access content, and thinking about satellite TV. Investors have been hearing about these plans for months. Six month ago, TPSA was hyping its triple-play (live.box) strategy which turned out to be a complete disaster. For the operator to be able to offer advanced multimedia services, it needs to shell out money to increase network throughput. UK’s BT plans to spend 7 billion pounds to upgrade its network to NGN (New Generation Network). TPSA cuts Internet access prices TPSA has launched a new Internet access offer which will remain in effect for seven months, with prices trimmed by an average 20%. This is a response to the aggressive pricing policies of Netia‚ Tele2, and GTS Energis, and a measure to deliver this year’s customer acquisition target (300,000 users in 2H). GTS Energis has reiterated by announcing that it will be launching a new price offer in two-three weeks that will take into account TPSA's slashed prices. We were right in predicting that the Internet market will be getting tougher and tougher, forcing further price cuts. Multimedia, PTC, Polkomtel, and Dialog are expected to launch their own offers in the next few months.

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3 October 2007 31


Media Polskapresse’s new daily gets a title Polskapresse’s new broadsheet newspaper will be called Polska, and its masthead will feature the logo of its content partner, The Times. The paper is based on Polskapresse’s six existing regional dailies, but it will be sold also in other regions. It is set to hit the stands in October, before the parliamentary election. The title is quite controversial. We maintain that Polska is no match for Gazeta Wyborcza when it comes to advertising. New, improved “Puls" to debut in October Puls Television is debuting its new programming formula on October 28th. It is not going to change its name to "Fox Polska” for now. The program lineup is a secret, but it is rumored to include game shows produced by Mastiff Media Polska, and an evening news show reportedly scheduled to be on at 7.30, at the same time as TVP1’s "Wiadomości." Peter Chernin, president and COO of News Corp, said that TV Puls is set o become a “leader among terrestrial channels,” but without specifying when and where exactly it would lead. Late October is the last chance to make a launch before the start of advertising negotiations for 2008. We expect to see TV Puls advertise its new program lineup.

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3 October 2007 32



(PLN m) 2006 2007F change 2008F change 2009F change Basic data (PLN m)Revenues 1 133.7 1 272.1 12.2% 1 344.4 5.7% 1 398.7 4.0% Number of shares (m) 56.8EBITDA 116.5 189.0 62.2% 212.7 12.5% 258.0 21.3% MC (current price) 2 917.3EBITDA margin 10.3% 14.9% 15.8% 18.4% EV (current price) 2 618.3EBIT 39.6 115.3 191.1% 140.5 21.9% 187.1 33.2% Free float 37.0%Net profit 32.0 102.9 221.7% 122.9 19.4% 161.8 31.6%


Agora (Hold)Current price: PLN 51.4 Target price: PLN 52.2

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Agora WIG

Expectations of strong earnings, Gazeta Wyborcza’s unrivaled market position, the advanced Website project, and good free-paper circulation, seem to be reflected in Agora's price. The stock could see more upward movement on a new strategy announcement and acquisition target news early next year. Until then, the shares will stay flat relative to the WIG. We are reiterating a HOLD rating on Agora. 21 volumes of world history available with GW The first volume appeared on September 26th, and could be bought for the special price of PLN 7.50. The following tomes will cost PLN 29.99 PLN plus the per-copy price of Gazeta Wyborcza. World history is bound to be a lucrative supplement, with good effects on 4Q revenues which will display robust growth against a low 4Q’06 base (PLN 25m). Parkiet on a “Ukrainian Gazeta Wyborcza” Parkiet quoted the Ukrainian newspaper Ekonomicheskie Izvestiya which reported that Bank Pekao is going to help Agora “prepare the project." Agora is supposed to have allocated a $10m budget to the new daily. The publisher has denied these rumors, but admits that it has been looking at the Ukrainian market with its 46.7m population. These reports might turn out to be true, although it seems to us that launching a paper without support from a local partner or international experience is a risky venture. We would guess that not definite decisions will be made before the new CEO learns how the company works and develop a new strategy. Strong July sales Average daily sales of Gazeta Wyborcza amounted to 423.8 thousand copies in July, marking a 4% increase y/y. Dziennik sold 181.7 thousand copies, 9.6% fewer than a year earlier. July’s leader was Fakt, with average daily sales of 511.7 thousand copies, 5.4% more than in 2006. Rzeczpospolita recorded a 8.5% plunge in sales. Gazeta Wyborcza might not be the market leader in sales, but we should consider that Fakt is a tabloid with a reader profile that advertisers are not particularly interested in. When it comes to the segment of quality broadsheets, which attract the bulk of advertising budgets, Gazeta Wyborcza has significantly strengthened its positioning lately against the two main rivals, Dziennik and Rzeczpospolita. The July sales figures for Axel Springer’s Dziennik were a big surprise, showing that its circulation fell for the third month in a row.

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WSiP WIG


(PLN m) 2006 2007F change 2008F change 2009F change Basic data (PLN m)Revenues 266.4 253.1 -5.0% 253.1 0.0% 255.7 1.0% Number of shares (m) 31.3EBITDA 30.7 37.3 21.5% 42.1 12.7% 43.2 2.7% MC (current price) 468.8EBITDA margin 11.5% 14.7% 16.6% 16.9% EV (current price) 354.4EBIT 23.2 30.4 31.0% 35.1 15.6% 36.2 3.2% Free float 100.0%Net profit 20.1 28.9 44.2% 33.1 14.2% 34.1 3.1%


WSiP (Buy)Current price: PLN 15 Target price: PLN 18.1

We are reiterating a positive rating on WSiP, for which 3Q is always a peak sales season. We expect that the management will have reason to be pleased with the period’s profit, and the business drummed up for the next three years. The quarter’s results will corroborate our positive outlook on the company’s future, which might even prove overly conservative. 2008 could bring about acquisitions of smaller publishers who were not as successful as WSiP in landing book contracts from schools. WSiP to take over MacEdukacja After the merger, the company will own over 35% of the textbook market. Parkiet claims that Mac Edukacja’s owners are no too thrilled about the idea. A big player like MAC could prove a tough acquisition: a recent nationwide tender held by schools throughout the country gave larger market share to the four leading publishers. In accordance with new regulations, schools signed up for three-year instead of one-year textbook supplies, giving the big players more time to get stronger, and taking away business from the smaller players. That is why we think that WSiP should look for acquisition targets among small-time publishers. A takeover will definitely add value to the company’s business thanks to cost synergies.

BRE Bank Securities

3 October 2007 34


IT Sector September’s leading story was integration of the Polish IT industry. Asseco Poland signed an agreement with Mr. Ryszard Krauze and Prokom Investments to buy a 21.49% stake in Prokom Software, in what is thought to be the biggest merger in the history of our market. Much less exciting was the continued wait for contracts from the public sector. Unfortunately, the upcoming parliamentary election is more than likely to postpone the long-awaited e-government projects until next year.

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Analyst: Piotr JanikLast Recommendation: 2007-08-28

(PLN m) 2006 2007F change 2008F change 2009F change Basic data (PLN m)Revenues 516.1 650.4 26.0% 719.7 10.7% 801.4 11.3% Number of shares (m) 64.4EBITDA 43.9 48.9 11.3% 64.8 32.5% 71.7 10.8% MC (current price) 424.7EBITDA margin 8.5% 7.5% 9.0% 9.0% EV (current price) 402.6EBIT 31.5 39.4 25.0% 54.6 38.6% 60.9 11.4% Free float 42.5%Net profit 27.6 34.0 23.5% 45.3 33.1% 49.9 10.2%

P/E 22.6 18.3 13.8 12.5 Price change: 1 month -4.3%P/CE 15.6 14.3 11.2 10.3 Price change: 6 month -18.3%P/BV 1.9 1.6 1.4 1.3 Price change: 12 month -17.2%EV/EBITDA 13.4 12.8 9.5 8.4 Max (52 w eek) 8.6Dyield (%) 0.6 2.2 2.7 3.6 Min (52 w eek) 6.5

ABG Spin (Accumulate)Current price: PLN 6.6 Target price: PLN 7.5

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ABG Spin WIG

ABG SPIN, the product of a merger between ABG Ster-Projekt and SPIN, is still undergoing restructuring, but, according to the CEO, the company is ready to capitalize on synergies, and willing to take part in the Asseco Poland / Prokom Software merger. For now, the CEO of Asseco Poland ruled out the possibility of a three-way merger, and suggested that ABG SPIN should first join with Comp, and then possibly be incorporated by Asseco Poland. ABG SPIN is feeling the impact of the contact hiatus, but merger synergies will drive profitability, which, combined with favorable seasonal factors, should support stock performance. We are reiterating an ACCUMULATE rating. Contract from a bank ABG SPIN is going to build a server room for Gospodarczy Bank Wielkopolski for a net consideration of PLN 7.65m. The deadline is March 31st, 2008.

* FY2006 earnings adjusted for real-estate sale (PLN 8m) and reversal of a tax allowance (PLN 6m)

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3 October 2007 36



(PLN m) 2006 2007F change 2008F change 2009F change Basic data (PLN m)Revenues 497.7 1 318.0 164.8% 1 604.9 21.8% 1 800.1 12.2% Number of shares (m) 46.4EBITDA 58.0 218.1 276.0% 267.0 22.4% 301.0 12.7% MC (current price) 3 432.4EBITDA margin 11.7% 16.5% 16.6% 16.7% EV (current price) 3 387.3EBIT 45.2 195.4 331.9% 242.5 24.1% 274.1 13.0% Free float 43.1%Net profit 70.5 127.5 80.8% 158.4 24.2% 178.0 12.4%


Asseco Poland (Buy)Current price: PLN 73.9 Target price: PLN 85.45

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Asseco Poland WIG

We are upgrading our rating on Asseco Poland based on the company’s new six-month acquisition plan exceeding PLN 1 billion, and in view of its upcoming merger with Prokom Software. In August, when Asseco’s shares traded at PLN 80.50, we issued a Reduce rating with a PLN 70.3 target (an 8.26% downside), not yet knowing about the company’s acquisition plans, or the merger. In view of the new developments, we are upgrading Asseco Poland to BUY with a raised target price of PLN 85.45 per share. Agreement with Prokom Investments and Ryszard Krauze Asseco Poland is going to buy 21.49% of the shares of Prokom Software from Ryszard Krauze and Prokom Investments for PLN 580m, implying a per-share price of PLN 194.3. At the same time, Prokom Investments undertook to pay off its PLN 183m debt to Prokom Software. The agreement furthermore provides that Asseco Poland’s CEO Adam Góral is to become the CEO of Prokom, and that Asseco Poland will appoint two new members to Prokom’s supervisory board. In a stock-for-assets transaction, Prokom Software will transfer its assets to Asseco Poland in exchange for new shares. After the merger, Asseco Poland will own treasury stock representing 23.8% of its share capital, earmarked for redemption. Acquisition plans Asseco has plans to acquire stakes in IT companies generating a combined net profit of PLN 84m. Financing will be secured either with bank loans (PLN 488m plus PLN 580m for the Prokom Software stake), or with capital raised through a stock offering. Acquisition of shares in Anica System Asseco Poland acquired a 33.84% stake in Anica Systems S.A. for PLN 22.6m. Anica Systems’s FY2006 revenues came in at PLN 41.8m, with a net profit of PLN 6.1m. Assuming that the company generates a PLN 7.1m net profit in FY2007, the 2007E P/E ratio for the transaction is 9.4. Acquisition of Sintagma Asseco Slovakia signed an agreement to acquire a 56.24% Lithuanian integrator Sintagma. The consideration consists of a fixed payment (ca. EUR 3.3m) and a conditional payment (up to EUR 1.0m) which will depend on Sintagma’s net profit for FY2007. German acquisition Asecco Poland’s subsidiary Asseco Germany purchased 490,799 shares of the German company AP Automation + Productivity AG (Karlsruhe). Asseco paid EUR 10m for an 80% stake and took over EUR 1.5m in liabilities. AP-AG Group, which employs 120 people, has a revenue target for the 2006/2007 season (ended in August) of EUR 17m, and a net profit target of EUR 1.4m, on an EBIT margin of 13%. Sale of subsidiary interests Asseco Poland sold 187 shares of Asseco Czech Republic, a subsidiary of Asseco Slovakia for PLN 12.17m. The shares represent a 14.24% stake in the Czech company’s equity. Their book value was PLN 8.65m.

* FY2006 multiples based on earnings adjusted for Asseco Poland stock options (PLN 3.9m), divestment of Mediabank (PLN 4.1m), goodwill write-off on S2Koma (PLN 4.8m), and net profit of the “old” Asseco Poland accounted for by the equity method (PLN 12m); * Excluding the Prokom Software takeover and the planned acquisitions

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(PLN m) 2006 2007F change 2008F change 2009F change Basic data (PLN m)Revenues 455.0 579.0 27.3% 675.7 16.7% 753.5 11.5% Number of shares (m) 7.5EBITDA 57.6 76.5 32.9% 95.0 24.2% 110.0 15.7% MC (current price) 1 443.6EBITDA margin 12.7% 13.2% 14.1% 14.6% EV (current price) 1 414.6EBIT 45.5 63.7 40.0% 81.1 27.3% 95.7 18.0% Free float 56.9%Net profit 50.0 63.7 27.5% 81.7 28.2% 92.8 13.5%


ComArch (Reduce)Current price: PLN 192 Target price: PLN 185.8

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ComArch WIG

ComArch is working on increasing export revenues, meanwhile, its earnings suffer due to a shortage of government contracts. We do not see any short-term upside in ComArch’s stock.

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Macrologic WIG




Macrologic (Buy)Current price: PLN 49 Target price: PLN 58.43

After a recent buyback, Macrologic holds 139.7 thousand treasury shares representing 7.4% of share capital, which will be offered to employees as part of a corporate incentive plan. The fourth quarter is seasonally the best sales period for IT companies. More business, paired with a general dynamic growth of the Polish ERP market (+13.21% y/y) will support Macrologic’s stock in the near term.

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P/E 23.0 16.6 13.9 12.8 Price change: 1 month 1.8%P/CE 16.8 12.2 10.6 10.0 Price change: 6 month -12.3%P/BV 1.5 1.3 1.1 1.0 Price change: 12 month 2.3%EV/EBITDA 14.4 9.3 7.3 5.9 Max (52 w eek) 176.0Dyield (%) 1.1 0.8 1.4 1.6 Min (52 w eek) 119.2

Prokom Software (Hold)Current price: PLN 133 Target price: PLN 150.3

Asseco Poland is taking over Prokom Software’s shares from Ryszard Krauze and Prokom Investments (see page 36 for details). The main factor shaping Prokom’s stock performance in the near term will be the 1.82 share-swap ratio, paired with bullish sentiment to Asseco Poland. ZUS to change IT provider ZUS has plans to change its systems provider in 2010 through a contract tender.

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Prokom Software WIG

* multiples estimated based subsidiary earnings consolidated on a pro-rata basis (Asseco Poland, ABG Ster-Projekt, Spin)

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3 October 2007 40



(PLN m) 2006 2007F change 2008F change 2009F change Basic data (PLN m)Revenues 927.1 1 298.7 40.1% 1 482.4 14.2% 1 609.2 8.5% Number of shares (m) 14.0EBITDA 66.7 -2.9 107.5 163.1 51.7% MC (current price) 740.4EBITDA margin 7.2% -0.2% 7.3% 10.1% EV (current price) 820.5EBIT -13.4 -55.1 312.5% 52.8 104.3 97.4% Free float 39.9%Net profit -22.1 -45.9 107.3% 41.6 85.1 104.3%

P/E 17.8 8.7 Price change: 1 month -14.9%P/CE 12.3 118.5 7.7 5.1 Price change: 6 month -47.5%P/BV 1.3 2.2 2.2 1.9 Price change: 12 month -49.1%EV/EBITDA 13.6 7.8 4.9 Max (52 w eek) 123.5Dyield (%) 1.0 0.0 0.0 2.8 Min (52 w eek) 39.9

Sygnity (Buy)Current price: PLN 52.9 Target price: PLN 81.6

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Sygnity WIG

Sygnity faces an in-depth restructuring, including downsizing and cost-cutbacks which are bound to drive profitability in the future. The company is going to enter into a joint venture with a foreign partner, and take one of its subsidiaries, most probably Aram, public. Sygnity reported that it had partly recognized restructuring costs in 1H accounts, and partly in 3Q financial statements. Cost cuts and discontinuation of unprofitable product lines should enable the company to generate a profit in the fourth quarter. We are reiterating a BUY rating. Restructuring Plan Sygnity’s restructuring plan is expected to bring PLN 75m in annual savings. 80%-90% of this amount will show in FY2008. The restructuring efforts focus on staff, products, organizational structure, and finances. The costs recognized in 1H amounted to PLN 18.5m, plus PLN 9.3m goodwill impairment charges, figuring to a total PLN 27.8m. All in all, Sygnity posted a consolidated net loss of PLN 72.4m in 1H. Third-quarter charges will include goodwill impairment (PLN 9.3m), cash expenses (mainly severance pays amounting to PLN 9.6m), and PLN 7m non-cash charges stemming from impairment of equity investments and product discontinuation. Downsizing will affect 500 of the 3600 employees. As part of the restructuring exercise, Sygnity also plans to divest certain non-core operations which are expected to bring PLN 50m in six months, and take at least one subsidiary public. PLN 4.5m contract Sygnity will implement a system at the Polish SIRENE office (set up to deliver access to the Schengen Information System) for PLN 4,5m. PLN 20m contract Sygnity signed a PLN 20m framework automation agreement with a finance organization. TPSA contract renewal Sygnity signed an annex to its contract with TPSA, increasing the net value cap on orders to PLN 70m from PLN 40m, and extending the effective term to June 30th, 2008. PLN 3m severance pays for Sygnity’s management Sygnity’s spokesman said that former management board members would get approximately PLN 3m in severance pays in 2007 and 2008.

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3 October 2007 41





Techmex (Under Review)Current price: PLN 41.8 Target price: -

Techmex did not report any new contracts in September. The company’s business is hurt by the spending hiatus in the public sector. We do not see any upside in Techmex in the near term.

10

18

26

34

42

50

2006-09-26 2007-01-18 2007-05-14 2007-09-03

Techmex WIG

* multiples estimated based on subsidiary Karen Notebook’s earnings consolidated on a pro-rata basis

BRE Bank Securities

3 October 2007 42





Kęty (Reduce)Current price: PLN 191 Target price: PLN 187.5

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2006-09-26 2007-01-18 2007-05-14 2007-09-03

Kęty WIG

Tables have turned on Kęty. Not long ago, investors were guessing how high the management would raise this year's earnings target; now, it looks like the company might not even deliver the old targets due to losses on hedge transactions and exchange differences. We are reiterating a negative rating on Kęty, and feel increasingly inclined to lower our earnings projections for the current year. Kęty disappoints again Kęty’s preliminary 3Q2007 earnings projections brought another disappointment. Consolidated sales are pegged at PLN 330-340m, ca. 15% more than in the same period a year ago. The Aluminum Systems Segment recorded an over-16% increase in sales, compared to 6%-7% generated by the other two segments. The consolidated 3Q EBIT estimate is PLN 39-40m, and next profit is expected to fall in the range of PLN 26-29m. Net debt is estimated to approximate PLN 350-360m. These figures imply a 3Q net profit of PLN 70m, which means that, to achieve the full-year target of PLN 98m, Kęty will have to generate a record bottom line in 4Q2007 (4Q2006: PLN 19m, 4Q2005: PLN 15m). Meanwhile, investors were hoping for an upward target revision at least to consensus level (PLN 105m). The third-quarter results were weighed down by finance costs, including increasing interest expenses (ca. PLN 4m) and losses incurred on aluminum and currency hedges (a combined PLN 4m).

Metals

BRE Bank Securities

3 October 2007 43



(PLN m) 2006 2007F change 2008F change 2009F change Basic data (PLN m)Revenues 11 669.7 11 645.1 -0.2% 11 658.8 0.1% 9 583.7 -17.8% Number of shares (m) 200.0EBITDA 4 545.5 4 768.0 4.9% 5 080.7 6.6% 3 568.6 -29.8% MC (current price) 25 780.0EBITDA margin 39.0% 40.9% 43.6% 37.2% EV (current price) 27 195.0EBIT 4 201.2 4 387.7 4.4% 4 645.4 5.9% 3 078.3 -33.7% Free float 36.0%Net profit 3 395.1 3 970.9 17.0% 4 135.3 4.1% 2 935.2 -29.0%


KGHM (Hold)Current price: PLN 128.9 Target price: PLN 119

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2006-09-26 2007-01-18 2007-05-14 2007-09-03

KGHM WIG

Copper is trading above $8,000/t, suggesting that our financial forecasts for KGHM will be exceeded despite the zloty’s strength against the dollar. The company’s shares will get a boost from a favorable ruling in the dividend case (October), and the scoop on the partnership with China Minerals Corp regarding joint exploration of Mongolian copper deposits. We are reiterating a HOLD rating at the current price level. China cuts purchases Copper and copper-product imports by China amounted to 92,413 tons in August – their lowest level since November 2006 - marking the fifth month of declining purchases. Even so, copper imports year to August doubled to 1.12m tons. July’s purchases stood at 103,089 tons, compared to a record 208,014 tons reported in March. In spite of weaker demand from China, the price of copper hit $8,000/t, and continues to determine KGHM's stock performance. The drop in imports can be attributed to seasonality (vacation season), but also inventory rebuilding by China’s State Reserve Bureau in 1H after ca. 300,000 tons were liquidated last year. The current seasonal increase in purchases is tapping into reserves. We will get the full picture after October data. PAK at all cost? Deputy treasury minister Dawid Jackiewicz said that the government should regain control over ZE PAK no matter the cost, preferably by encouraging KGHM to invest in the power plant complex. This is a bad idea in our view, but one should not blow it out of proportion: even if KGHM overpays and shells out PLN 0.5bn, it is only 2% of its market cap. Unfavorable court ruling A commercial court in Legnica ruled payment of dividends by KGHM unlawful. According to the court, July’s shareholder resolutions on profit distribution violated the code of commercial companies in that they contained not just mere corrections, but completely new terms of dividend payout. Such new terms included a resolution to allocate ca. PLN 1.1m toward reserve capital, not mentioned during the preceding GA. The ruling is not binding, and KGHM can appeal. Half of the dividends (PLN 1.7bn) have already been paid out. Moreover, shareholders who bought KGHM’s shares on the stock market took into account a 15% drop in their price after the date of record. They can now take KGHM to court for failure to pay dividends. According to legal experts, KGHM, and therefore also its shareholders, have a good chance to win in the court of higher instance. This is a complex issue. It looks like there is no problem with the first payment, and that the second installment will not be paid earlier than after next year’s GA. KGHM partners up with China Minmetals Corp. The two companies are going to jointly mine for copper in Poland, China, and other countries, and explore new deposits in Inner Mongolia Autonomous Region. Since no specifics of the partnership were offered, this information should not impact KGHM’s stock for now, but it will once more details are announced. As for the idea of striking a partnership with the world’s largest copper consumer, it is a great one provided that the cooperation does not just boil down to selling copper from Polish deposits.

BRE Bank Securities

3 October 2007 44


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2006-09-26 2007-01-18 2007-05-14 2007-09-03

Koelner WIG




Koelner (Hold)Current price: PLN 47 Target price: PLN 53.72

Koelner’s stock slumped on weak 2Q earnings results and concerns over share exchange ratio proposals of Koelner and Śrubex. The company might not deliver its full-year profit target due to continuing delays in the establishment of a special economic zone. It looks like we will have to revise our forecasts for the company, which were based on a lower effective tax rate estimate. One thing that could shift investor sentiment to Koelner is a favorable resolution of the dispute with Śrubex’s minority shareholders, which is still not completely out of the question (we expect reports in the next few days). Minorities on the offensive The alliance of Śrubex’s minority shareholders increased its ownership interests to 25%. The alliance is opposed to the exchange ratio proposed for Śrubex’s merger with Koelner, and wants to hold votes to elect new supervisory board members in two or more groups. Shareholders have yet to decide whether they want to allow the merger. Two-thirds majority is required to pass, and Koelner might not be able to achieve this majority, meaning that its exchange ratio proposal will not go through.

BRE Bank Securities

3 October 2007 45


Construction Construction output up 16.4% Y/Y in August According to preliminary estimates, construction output generated by companies employing more than 9 people was 14.6% higher in August 2007 than a year earlier. Stripped of seasonal factors, production was up 16.4% from a year earlier. Companies preparing building sites recorded a whopping 98.1% y/y increase in output. Year to August, output was 27% higher than in the corresponding period of a year ago. Latest data show a sustained seasonally adjusted 15% y/y growth. The surge in site preparations promises continued momentum in the coming months. Energomontaż Południe: Guidance revision Energomontaż Południe revised its FY2007 earnings guidance, with revenues lowered to PLN 248.5m (from PLN 202.3m), pre-tax profit at PLN 16.4m (down from PLN 19m), and net profit target reduced to PLN 12.3m. These forecasts were based on projected dwelling-unit sales in the development in Wrocław at 82%, with the remaining 18% expected to be sold in 1Q 2008 (the housing portion of the development will be completed in 4Q’07). The office part of the development will be finished in 1H 2008.A year-on-year comparison of Energomontaż Południe's standalone results is impossible because the company merged with a real-estate developer in the meantime. But Energomontaż Południe alone apparently generated results well below expectations, which the management explained with higher labor costs and prices of metallurgical products. The revised guidance includes measurable allowances against current operations, but does not take into account the impact of long-term contracts and related potential claims, which could depress FY2008 results. The revision is a sign that Energomontaż Południe is struggling to generate profits on its current contract backlog. Hydrobudowa Włocławek: PLN 50m deals A consortium of “Przedsiębiorstwo PHU Mazur Kazimierz Mazur” (leader) and PBG’s subsidiaries “Infra” and “Hydrobudowa Włocławek” won a contract for storm water drain modernization worth EUR 6.2m (PLN 23.7m). In other good news, a consortium of PBG and Infra landed an sewage system renovation order from the City of Krakow for EUR 6,9m (PLN 26,5m). The contracts account for over 4% of PBG’s consolidated FY2007 revenue forecast. Hydrobudowa Włocławek: Post-merger earnings estimates Hydrobudowa Włocławek released its earnings guidance for FY2007, with net sales pegged at PLN 511m and net profit at PLN 35m. These projections were based on secured and potential contracts for 2007, assuming foreseeable margins. Hydrobudowa Włocławek is currently estimated to be worth PLN 1.5bn, so, these forecasts are not particularly attractive. But we should remember that Hydrobudowa Śląsk itself is still struggling with old unprofitable contracts, but the situation should improve in 2008. The FY2007 projections also include one-offs such as divestment of Mostostal Zabrze and property sales. We expect strong profit growth in FY2008 driven by Hydrobudowa Śląsk’s and Hydrobudowa Włocławek’s new lucrative contracts. Hydrobudowa Włocławek: Executives sell shares Supervisory board chairwoman Małgorzata Wiśniewska sold 113.3 thousand shares of Hydrobudowa Włocławek for PLN 610/share, and a management board member sold 6.7 thousand shares for the same price. Hydrobudowa Włocławek: PLN 118m contract A consortium of Hydrobudowa 9 (60% share), PBG (15%), and Hydrobudowa Włocławek (25%) won a contract to expand sewage treatment facilities in Bydgoszcz for EUR 31.5m (PLN 118m). The contract has a 32-month deadline. The value of Hydrobudowa Włocławek’s contract backlog stands at PLN 1.3bn. Instal Kraków: PLN 9.9m deal Instal Kraków won a EUR 2.6m (PLN 9.9m) contract from LAG GmbH for HVAC systems, with a deadline in September 2008. This is a minor contract accounting for ca. 5% of Instal Kraków consolidated FY2006 revenues. Mostostal Płock: PLN 8m contract Mostostal Płock won a PLN 8m contract from Naftoremont Sp. z o.o for pipeline prefabrication and installation for the Mazeikiu Nafta refinery (Lithuania). The contract accounts for 6% of Mostostal Płock’s revenues for the last four quarters. Mostostal Export: PLN 31.8m deal from Russia Mostostal-Export won a EUR 8.4m (PLN 31.8m) contract from Russia’s "TT-Inwest" Sp. z o.o. for a shopping mall in the Russian city of Ivanov with a 16-month deadline.

BRE Bank Securities

3 October 2007 46


Mostostal Export: PLN 159m deal Mostostal Export signed a contract with a company called Zao "Anta" for office/manufacturing/storage facilities in the Moscow Oblast with a value of EUR 42.2m (PLN 159m), and an 18-month deadline. According to the CEO, Mostostal’s contract backlog is worth PLN 639m. Mostostal Warszawa: PLN 41m contract Mostostal Warszawa won a contract from J.W. Construction for ferroconcrete structures and brick-laying work for the purposes of the “Górczewska Park” project. The net contract value is PLN 41m. Its deadline is set at May 2008. The contract accounts for 3.5% of Mostostal Warszawa’s FY2006 revenues. Mostostal Warszawa: PLN 77m contracts Mostostal Warszawa signed a PLN 18.5m contract for development of the Hoover Square in Warsaw, with a deadline in October 2008. The 98.05% subsidiary Wrobis won a PLN 63m (gross) general contractor contract for an apartment/office building with a 15-month deadline. These two contracts add up to PLN 77m (net), i.e. 4.6% of Mostostal’s consolidated revenues for the last four quarters. Mostostal Warszawa: PLN 70m sewage plant contract Mostostal Warszawa (in consortium with Mostostal S.A., Hansol EME Co.,LTD) won a contract to expand sewage treatment facilities in Bydgoszcz for EUR 18.9m (PLN 70m). This is not the first environmental-engineering project for the company. A consortium led by Hydrobudowa 9 will perform work on the same facilities. Mostostal Warszawa is looking for business opportunities outside of road development and housing. This order shows that it can win with Hydrobudowa Włocławek. Diversification will help generate higher profit margins. But, given its small track record, there is a risk that Mostostal miscalculated the gains. Mostostal Zabrze: PLN 18.5m deal GPBP, a subsidiary of Mostostala Zabrze-Holding, signed a contract with Activ Investment for a housing complex in Katowice for PLN 18.5m. The deadline is February 2009. Mostostal Zabrze: Leszek Juchniewicz named CEO The supervisory board of Mostostal Zabrze-Holding appointed Leszek Juchniewicz to the position of CEO. Mr. Juchniewicz is a former President of the Energy Regulatory Office (URE). PBG: Infra’s PLN 1.6m acquisition PBG’s subsidiary Infra took over a 51.02% stake in "PRIS" Sp. z o.o. (Wrocław) from individual investors for PLN 1.6m. PRIS provides pipeline renovation and monitoring, and trenchless technology services, and will reinforce PBG’s business. The acquisition is a step forward in growing PBG’s renovation business. PRIS employs some 30 people. According to Parkiet, its FY2006 revenues were PLN 12.5m, with net profit at PLN 2m. PBG: New industry investor for KRI S.A. A court increased the share capital of KRI S.A., a company associated with PBG from PLN 53.8m to PLN 126.7m, following an issue of 72.9m “B” shares. Furthermore, an agreement went into force transferring all interests in subsidiary PBG’s PGS Sp. z o.o. to KRI SA (for PLN 6.25m), while KRI SA’s “B” shares were acquired by several foreign investment funds. After the increase, PBG will have an 18.79% stake in KRI SA, which means that the associate is excluded from consolidation as of September 1st. This information is a follow-up to an investment agreement signed on July 31st, 2007, by way of which PBG sold a 55.76% stake in KRI S.A. to Ecopap sp. z o.o. for PLN 30m, thus reducing ownership to 44.24%, and further down to 18.79% after the PLN 72.9m increase in share capital. KRI’s book value as of December 2006 was PLN 38.7m, which means that the 55.76% stake was worth PLN 21.6m, which in turn means that PBG will earn some PLN 8.4m in pre-tax profit on the divestment. The book value of PGS sp. z o.o. os of December 2006 was PLN 3m, and the profit from its sale will approximate PLN 3.25m. KRI deals in distribution of gas fuels, and PGS is a goods carrier. PBG’s combined pre-tax profit from the deals is an estimated PLN 11.7m, recognized in 3Q income statement. We do not know why KRI was sold, but we are guessing to avoid having to inject capital to facilitate further growth. BPG: Gas & Oil Engineering increases share capital Gas & Oil Engineering s.r.o. increased share capital to SKK 261 000, whereby PBG’s ownership interest in the company rose from SKK 102,000 to SKK 163,000 (62.45%). Gas & Oil Engineering is a Slovakian engineering company which PBG bought a few months ago to gain experienced staff.

BRE Bank Securities

3 October 2007 47


PBG owns PRiD PBG purchased shares from other shareholders, and currently owns 100% of PRID. The total acquisition price was PLN 22m. PBG: Road builder acquisition PBG signed a preliminary agreement to purchase shares in a company formed after transformation of a company called "Betpol" sp. j. into a joint-stock company For a 51% stake, PBG will pay PLN 28.6m. A further 19% of the shares will be put up for sale by the end of 2009 for ca. PLN 10.7m. Established in 1990, Betpol focused on road development. PBG expects the new subsidiary to generate PLN 60m revenues and PLN 8m net profit in FY2007. Pol-Aqua: PLN 91.8m contract Pol-Aqua received a general contracting job on a Tesco hypermart in Gdańsk-Chełmie for PLN 91.8m. This is a large job which includes both construction (Pol-Aqua’s specialty), and general contractor work (to be managed by the part of the business taken over from Polnord). The contract accounts for 6.5% of the company’s FY2008 revenue forecast. Pol-Aqua: PLN 47.5m contract Pol-Aqua signed a contract with PKN Orlen to build 106 km of a fuel pipeline running from Ostrów Wielkopolski to Wrocław, including infrastructure. The contract value is PLN 47.5m. Deadline is November 2008. Pipelines are one of Pol-Aqua’s core businesses. The contract accounts for over 3% of our consolidated FY2008 revenue forecast for Pol-Aqua. Pol-Aqua: PLN 39m contract Pol-Aqua signed a contract with Engel Apartamenty Emilii Plater Sp. z o.o. to act as general contractor for a nine-storey apartment building in Warsaw for a consideration of PLN 39m. The deadline is February 2009. The contract accounts for 2.7% of the company's FY2008 revenue target. Prochem: PLN 25.5m contract Prochem won a contract from the Warsaw School of Life Sciences (SGGW) for a lecture hall of the university’s environmental engineering department. The contract value is PLN 25.5m. Deadline is 8 months. Prochem’s general contracting jobs are usually low-risk, and therefore low-margin projects. Prochem: An acquisition Prochem took over a 50% stake in Prochem-RPI for PLN 210,000. Now, Prochem S.A. and Prochem Inwestycje Sp. z o.o. own 100% of Prochem-RPI. Projprzem: Loading platform deal Projprzem and Crawford Group A.B. signed a framework contract for loading platforms. The contract expires on June 30th, 2008, and can be renewed for successive 12-month periods. The company estimates its annual revenues from the contract at PLN 55m. Projprzem’s revenues from sales of steel components amounted to PLN 75m in FY2006, including PLN 57.8m from loading platforms. Projprzem: PLN 56.4m MoA Projprzem signed a memorandum of understanding with a farm food processing company to build a factory for an estimated PLN 56.4m. Once the contract is signed, Projprzem will have 25% of its contract backlog for 2008 filled.

BRE Bank Securities

3 October 2007 48


Analyst: Krzysztof RadojewskiLast Recommendation: 2007-05-29


P/E 454.0 37.3 20.5 10.7 Price change: 1 month -10.2%P/CE 70.5 25.7 16.2 9.4 Price change: 6 month -30.3%P/BV 3.4 3.2 2.9 2.6 Price change: 12 month -6.6%EV/EBITDA 46.3 18.0 11.6 6.6 Max (52 w eek) 178.9Dyield (%) 0.0 0.0 0.9 4.1 Min (52 w eek) 67.5

Budimex (Hold)Current price: PLN 69.3 Target price: PLN 121.7

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57

89

121

153

185

2006-09-26 2007-01-18 2007-05-14 2007-09-03

Budimex WIG

Budimex is still struggling with past mistakes: the much-delayed launch of a new terminal at Warsaw’s Okęcie airport, a terminated contract for a sports hall in Krakow, and a number of unprofitable deals landed in the previous years, all weighing down on earnings. The company’s CEO said in an interview that FY2009 could see an EBIT of PLN 100m, a level much below our expectations, making us inclined to lower earnings projections and valuation. PLN 230.6m contract Subsidiary Budimex Dromex won a road contract from GDDKiA for PLN 230.6m with a deadline in October 2009. This is a material contract accounting for almost 6% of our FY2007 revenue forecast for Budimex. The company is working to improve profitability through new contracts. Contract termination The Municipality of Krakow terminated a sports hall contract with a consortium of Budimex Dromex, Decathlon, and Ferrovial Agroman due to default. The Municipality is going to charge the consortium a penalty in the amount of PLN 20.7m. The consortium rejects all accusations, saying that the Municipality should have proposed to sign an annex to the contract to enable completion of its latest, and one of many ideas for the project . It is hard to expect Budimex to pay for delays caused by the project owner. Still, the company might make an allowance for the contractual penalty. Budimex eyes PLN 100m EBIT in FY2009 According to the CEO, Budimex will probably end the year in the red due to the Okęcie Terminal flop, and completion of some old low-margin contracts. But Mr. Michałkiewicz hopes to see a PLN 100m EBIT reported for FY2009. The outlook on FY2008 is not too optimistic, although it will probably end with a net profit. The CEO says that the Okęcie job continues to weigh on Budimex’s financial position despite the improving profitability of its contract backlog. Its impact can be further aggravated by possible late penalties. As for revenues, the CEO expects 20% growth in FY2007 and FY2008, in line with market trends. Budimex’s 2Q earnings figures reflected the impact of old unprofitable contracts. The company is still deep in its old backlog. We projected that Budimex would post a PLN 118m EBIT in FY2008, and need to revise our financial forecasts for the company. PLN 48.7m road contract Budimex Dromex won a contract from the town of Jaworzno to redevelop national road No. 79 for PLN 48.7. The deadline is April 2009. Budimex’s managers say that new contracts carry better profit margins, but their full impact will not be felt until the company completes the unprofitable jobs taken on in the previous years. PLN 101.1m contract Budimex Dromex signed a contract with BRE.locum Sp. z o.o. to build a housing estate in Warsaw for PLN 101.1m. The deadline is May 2009. The contract accounts for 2.6% of our FY2007 revenue estimate for the Budimex.

BRE Bank Securities

3 October 2007 49





Elektrobudowa (Hold)Current price: PLN 220 Target price: PLN 221.5

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2006-09-26 2007-01-18 2007-05-14 2007-09-03

Elektrobudowa WIG

September’s two leading stories were approval of a new share offering by shareholders, and an upward revision to FY2007 earnings guidance, with a net profit target 25% higher than our estimate. Elektrobudowa is capitalizing on the building boom. We will probably raise our FY2007 forecasts and valuation. SPO, forecast raise Elektrobudowa’s shareholders approved an offering of 527.5 thousand of cum-rights shares. The company also raised its FY2007 earnings targets to PLN 677.1m for revenues and PLN 29.2m for net profit. The new targets are well ahead of the old ones as well as our forecasts, which are PLN 552.4m and PLN 23.2m respectively. Elektrobudowa's new bottom-line target is 25% higher than our estimate, prompting us to make upward revisions to our FY2007 earnings projections and per-share price target. PLN 24.8m contract Elektrobudowa won a PLN 24.8m contract for electric power stations from the Bełchatów lignite mine, with a deadline in June 2008. The contract accounts for 4.4% of our FY2007 consolidated revenue estimate for Elektrobudowa. PLN 8.6m contract Elektrobudowa signed a PLN 8.6m contract with Vattenfall Heat Poland for switching station upgrades at the “Żerań” CHP in Warsaw. Deadline is November 2008. The total value of orders received from Vattenfall Heat Poland in the last 12 months is PLN 30.9m. This is a small contract (1.6% of our consolidated FY2007 revenue forecast) in the most profitable line of business.

BRE Bank Securities

3 October 2007 50


60

72

84

96

108

120

2007-06-18 2007-07-19 2007-08-22 2007-09-24

Erbud WIG


(PLN m) 2006 2007F change 2008F change 2009F change Basic data (PLN m)Revenues 394.7 690.0 74.8% 787.7 14.2% 874.1 11.0% Number of shares (m) 12.6EBITDA 28.2 36.4 28.8% 42.7 17.5% 48.9 14.4% MC (current price) 1 144.0EBITDA margin 7.2% 5.3% 5.4% 5.6% EV (current price) 978.1EBIT 27.2 35.2 29.3% 41.5 17.9% 47.5 14.5% Free f loat 27.0%Net profit 21.3 28.0 31.4% 33.3 19.0% 38.6 15.8%

P/E 43.0 40.8 34.3 29.6 Price change: 1 month 3.4%P/CE 41.1 39.2 33.1 28.6 Price change: 6 monthP/BV 23.0 5.9 5.1 4.3 Price change: 12 monthEV/EBITDA 31.4 26.9 22.2 18.7 Max (52 w eek) 102.8Dyield (%) 0.1 0.0 0.0 0.0 Min (52 w eek) 72.0

Erbud (Accumulate)Current price: PLN 91 Target price: PLN 100

Erbud is filling up its contract backlog for next year, mainly with orders from housing and commercial real-estate developers. We estimate that the backlog is already 37% full. The company completed the acquisition of Budlex, a company which has a portfolio of 110,000 sqm of living space either in progress, or scheduled for the future. There is a delay in the acquisition of a road developer, expected to add more value. PLN 34.5m contract Erbud signed a PLN 34.5m contract with Bouygues Immobilier Polska for a multi-family building called "Villa La Concorde" covering 14,500 sqm of space. This is a standard real-estate development contract accounting for 5% of our consolidated FY2007 revenue forecast for Erbud. PLN 177.6m contract Erbud signed a PLN 177.6m general-contracting contract with Multi Veste Poland 2 with a deadline in November 2008. This is a material contract; in fact, it is Erbud’s biggest deal to date, accounting for 23% of our FY2008 revenue forecast. The previous largest contract was for a shopping mall in Poznań for PLN 150m. PLN 54.5m residential development contract Erbud signed a contract with Canadian Development Group Sp. z o.o. regarding Stage 1 of the latter’s “Osiedle Skoroszewska” residential complex project located in Warsaw for PLN 54.5m. The deadline is June 2009. The contract accounts for 6.8% of our FY2008 consolidated revenue estimate for Erbud. PLN 20.1m shopping mall contract Erbud signed a contract to build a shopping mall called “Galeria Eden” in the town of Łagów in western Poland for PLN 20.1m. The deadline is March 2008. The contract accounts for 2.6% of our FY2008 consolidated revenue estimate for Erbud.

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3 October 2007 51


Analyst: Samer MasriLast Recommendation: 2007-09-05



Polimex Mostostal (Accumulate)Current price: PLN 10.3 Target price: PLN 10.7

In our Sept. 5th Research Update on Polimex, we pointed out three growth drivers: acquisitions, more profitable contracts, and diversification (four business segments). Last month, the company completed two small acquisitions (a real-estate developer for PLN 19.0m, and a power engineering company for PLN 3.5m). Furthermore, Polimex landed three material contracts in three business segments (building, energy engineering, petchem). Contracts from petrochemical customers, landed by Energomontaż Północ and Naftobudowa, generate strong profit margins, and will give a boost to earnings. Based on these considerations, and taking into account the continuing strong demand for building services (including from the public sector), we are reiterating Polimex-Mostostal as an ACCUMULATE. Acquisition of Krakow real-estate developer On September 19th, Polimex-Mostostal’s subsidiary Polimex-Development Kraków Sp. z o.o. took over a 100% stake in BR Development Sp. z o.o. for PLN 19.0m borrowed from the parent company BR Development Sp. z o.o. is a SPV set up to build a residential/retail complex covering 10854 sqm of land. Polimex-Mostostal is going to complete the development. In FY2008, Polimex-Mostostal will generate ca. PLN 150m from real-estate development, accounting for 3.6% of our revenue estimate. Power engineering acquisition On September 21st, Polimex-Mostostal acquired a 100% stake in a company called “Energy and Power Engineering – Zakład Robót Energetycznych Sp. z o. o.” based in Rybnik for PLN 3.5m. The company provides services to the energy industry, in particular boiler and power generation facility maintenance. It is located on the same site as the Rybnik Power Plant which has a 1775 MW capacity installed in eight power units, and is the largest power plant in the Górny Śląsk region, responsible for ca. 7% of Poland’s electricity. PLN 158m contract A consortium of Polimex-Mostostal, "Rystal-Bud" Sp. z o.o., and Mega S.A. won a contract to build a teaching and sports complex in Kleszczów for PLN 158m, with a dedline in July 2009. This is a material contract accounting for 3.8% of our FY2008 revenue forecast. Material contract Energomontaż Północ signed a EUR 3m upgrade contract with AB Mazeikiu Nafta with a deadline in December 2007. The deal is in line with our expectations expressed in the Sept. 5th Research Report on Polimex. There are more orders to be landed from Mazeikiu Nafta, with an estimated combined value of PLN 500m. PLN 18.9m contract from Mazeikiu Nafta Naftobudowa received an order from Mazeikiu Nafta for renovation work for EUR 5m (PLN 18.9m). We expect that this contract, like all orders from MN so far, was signed at a good profit margin. It accounts for over 10% of Naftobudowa’s consolidated revenues for the past four quarters, and will give a boost to earnings. 1:25 share split The National Depository for Securities (KDPW) set the date of 1:25 split for Polimex’s shares for September 20th, 2007. PLN 12.3m deal with Polimex Energomontaż-Północ received a PLN 12.3m order from Polimex-Mostostal as part of the

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upgrades carried out at Koksownia Przyjaźń. The deadline is March 2008. Polimex expects to land another major job soon (a PLN 500m PTA plant). PLN 208.8m order from Żerań Power Plant Vattenfall Heat Polska S.A. selected the offer made by a consortium of Polimex-Mostostal and Siemens Industrial Turbomachinery for a TZ-12 turbine unit for the Żerań Power Plant. Polimex-Mostostal’s share in the consideration is 56.84% (PLN 118.7m gross). Polimex’s energy engineering segment generated revenues of PLN 257.7m in 2Q’07 (vs. PLN 149m in 2Q’06), representing 30% of total revenues (same as in 2006). We estimate that this segment will increase sales by 10% in 2008. The electric power industry has large-scale investment plans, and Polimex will vie for ca. 45% of the resulting contracts (these are projects by the sector of electricity generation estimated at a little over PLN 20 billion in a period from 2008 to 2017). The heat generation sector is going to spend PLN 14 billion in the same period. All in all, there is a PLN 34 billion budget to be tapped. We predict that projects carried out for the energy industry will earn Polimex PLN 6-8bn in revenues in 2008 through 2017. Orders from foreign customers will add about the same to the revenue total.

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Analysts: Krzysztof Radojewski Samer MasriLast Recommendation: 2007-05-29

(PLN m) 2006 2007F change 2008F change 2009F change Basic data (PLN m)Revenues 777.2 1 254.5 61.4% 1 127.3 -10.1% 1 078.0 -4.4% Number of shares (m) 17.4EBITDA 32.0 43.4 35.6% 64.6 48.8% 74.2 14.7% MC (current price) 215.4EBITDA margin 4.1% 3.5% 5.7% 6.9% EV (current price) 146.9EBIT 20.9 29.5 40.7% 52.4 77.8% 57.5 9.7% Free f loat 45.0%Net profit 12.8 19.9 55.8% 37.0 86.0% 41.8 12.9%


Rafako (Reduce)Current price: PLN 12.4 Target price: PLN 11.4

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Rafako’s biggest job is a 858 MW boiler for the Bełchatów Power Plant. We expected this contract to give a big boost to FY2008 and FY2009 earnings, meanwhile, due to increasing subcontractor costs, its impact might not be as big as expected. Rafako still intends to make three acquisitions (targets include foreign companies) with capital raised through an “I” stock offering, on which it is prepared to spend PLN 50.0m to PLN 92.0m. We are reiterating a negative rating on Rafako even despite lucrative contract opportunities (in particular for supra-critical boilers for the energy industry), due to a lack of material contracts so far, lingering acquisitions, and lower-than-expected profits from the Bełchatów contract.

Analysts: Krzysztof Radojewski Samer MasriLast Recommendation: 2007-10-03



Ulma Construccion Polska (Accumulate)Current price: PLN 293.9 Target price: PLN 320.8

Ulma is capitalizing on a strong upward momentum in the building industry, with revenues and profits displaying steady growth since 2005. Demand for formwork leases is driven by the building boom, and by midsize construction companies increasingly opting for leases rather than purchases (the large players made that choice a long time ago). Ulma is preparing to open three new logistics centers in Warsaw, Jaworzno, and Poznań. The Poznań project is the most advanced (a building permit is in place, and a contractor tender is scheduled for October). Start of construction in Jaworzno is set for 2008. The centers will sharpen Ulma’s competitive edge relative to such players as PERI, Hünnebeck, Doka, and Layher. Furthermore, the company is expanding operations in Kazakhstan, Russia, Ukraine, and Romania. We are reiterating our PLN 320.8 price target on Ulma, and upgrading the stock from Hold to ACCUMULATE.

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Real Estate Developers New laws named biggest obstacle to growth The research agency SMG/KRC carried out a survey among real-estate developers, asking them about what they considered the biggest obstacles to construction growth. Almost one in every three respondents indicated the lack of zoning plans as the main obstacle, and one in four pointed to the tenuous legal status of Polish properties. The lack of zoning plans is especially bothersome for commercial developers. Residential developers have it a bit easier as they can operate under a “good neighbor” policy and erect buildings whose height is similar to other buildings in their vicinity. Developers complain that gmina authorities make arbitrary decisions when issuing land development decisions. The Sejm has made the first reading recently of a new construction bill aimed at simplifying administrative procedures (e.g. by eliminating wait for gmina decisions, and automatically excluding farm land situated within city limits from the national agricultural reserve). Home loan accessibility. Bank record steady margins, relax borrower requirements Banks have stopped the practice of aggressively reducing margins and fees on mortgage loans. Only a few banks did minor margin trimming last month, with GE Money Bank making the deepest cuts. But there is a general trend of relaxing requirements for new borrowers (for instance, banks look at the three-month salary averages instead of six-month averages when calculating credit scores, are more willing to lend to men who have not completed the mandatory military training, and do not demand that borrowers present a statement no-default from tax offices). Moreover, banks are expanding the range of mortgage loan applications from just homes to farmland, etc. It looks like banks are handling well the increasing cost of money. Even though interest rate hikes dampen potential loan demand, the decreasingly strict lending requirements offset this impact. The National Bank of Poland might decide at some point that there is too much lending, and that clients are unknowingly jeopardizing their own financial security and the solvency of the bank system, and put a curb on borrowings. Warnings to this effect have been coming from the NBP for the past few months. Falling margins According to CEE Property Group, profit margins earned by real estate developers fell to 8-16% from their recent highs which, in some cases, reached 70-90%. The downturn probably affected mostly developers operating in small towns. The margin figures reported by large publicly held developers such as Dom Development and JW. Construction contradict this trend. These developers earn margins in the vicinity of 35%, and through they do expect them to decrease, the fall should be much more gentle. CEE Property’s margin data is probably true for small developers with project backlogs constituting only a fraction of the portfolios of listed tycoons. JWC and Dom Development are known to have achieved over-50% margins, but only on individual projects carried out on land bought at low prices a few years ago. JWC and DD’s large land reserves built up to date will keep margins around a steady 25% in the next 3-4 years. Properties bought more recently at higher prices will earn lower, ca. 15% margins. Summing up, publicly-traded developers should earn average 20% profit margins in the next few years. Developers without land banks could find themselves in a financial pickle, depending on leverage, the standard of the homes they build, and geographic coverage. No change in VAT on homes The Sejm passed the definition of “social housing” which, according to EU laws, is subject to a 7% VAT rate. The definition covers apartments with usable space up to 150 sqm and houses up to 300 sqm. If there had been a delay, all homebuyers would have to pay 22% VAT as of the new year. This is great news for the real-estate industry, even if it was expected. Homebuilding is an industry with the deepest reach into household pockets, so, politicians could not afford to dilly dally any longer, and lose voter support before the October elections. The fact that eligible dwellings are larger than the market’s expected 120 sqm for apartments and 220 sqm for houses is a nice surprise, even if the difference only concerns a small percentage of homes: the average size of an apartment in Poland is 65 sqm, and the average home is 145 sqm. Land exclusions from agricultural reserve not helpful The Sejm is working on new building laws. One proposal is that, in cities with a population over 200,000, a request by a farm land owner to convert to a building site would be granted automatically. According to some experts, this will not lead to an increase in land supply because most of such land is rectangular in shape, which means that it is not fit to build houses on, plus, there are no utilities. We think that the Sejm is doing a good thing. Conversion of farm land might not boost supply overnight, but it will shape future supply. We agree that re-zoning fees are not good for the real estate market just as high taxes are not good for the economy. Still, the fee is only charged on land for which the gminas have yet to develop zoning maps. The question is, therefore, whether the gminas find the time to prepare such maps.

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Home prices expected to slow down Analysts surveyed by Reuters forecast that home prices will increase 10% this year and 8% next year. Two months ago, these expectations were 13% and 10% respectively. Home prices are not growing as fast any more, and analysts are revising their expectations. Homes will continue to be increasingly expenses due to high labor and land costs, but stronger supply, set against insufficient creditworthiness among Poles, is cooling sentiment down. Polnord: Prokom Investments swaps land for shares PI contributed one-third of its ownership interest in a 103-hectare parcel near Poznań to Polnord. The zoning map for the land provides for single-family houses occupying 360 sqm of space. Polnord estimated the value of the contribution at PLN 24m, to be paid for with 169,000 shares of its stock issued at PLN 141.90/share. Polnord estimates the selling price of the single-family houses that will be built on this land at PLN 4,500-5,500 per square meter of living space. The cost per sqm is PLN 2,700-3,700. Polnord is working to rebuild the land reserves it had lost after two investment funds backed out of a partnership deal. The land-for-stock deal took place between Polnord and its main owner. Both companies stressed that the exchange ratio was set based on market rates. Polnord: Residential projects in Russia Polnord is a 50% partner to two housing projects in Russia which will yield a combined 34.1 thousand sqm of living space, expected to bring PLN 244m in revenues. The project have deadlines in 2009/10. Polnord: PLN 1.5bn commercial complex Polnord has plans to build a commercial/residential complex at the heart of the “Miasteczko Wilanów” development. The project will consist of ca. 1000 apartments and 50,000 sqm of commercial space (reduced from 70,000), and is set to start this year and end in 4 years. Polnord has been considering different ideas on how to use the property. Miasteczko Wilanów is the company’s second billion-zloty project reported in September. The two developments require huge amounts of cash. Polnord angers “Miasteczko Wilanów” community Some of the future residents of the “Miasteczko Wilanów” residential complex are protesting against Polnord’s plans to build a shopping mall at the heart of their “town.” They prefer the original concept of a shopping center with a promenade and a large garden. Polnord has not issued an official response so far. There are no legal measures that the community could use to block the project. Polnord: Housing development Fadesa Prokom Polska, (49% owned by Polnord), is going to build a housing estate in Warsaw’s district of Powsin on 30,000 sqm of usable space. The expected revenue is EUR 150-200m. Polnord buys land in Szczecin Polnord signed an agreement to purchase 3.7 hectares of land for development in Szczecin. The development will be 40,000 sqm of usable space (homes and stores). The value of the property is PLN 35m. The purchase is in line with the company's strategy to invest in “second-string” cities. Polnord: Financial forecasts Polnord released a new net profit guidance, with FY2007 target at PLN 120m, and double that in FY2008. The company plans to take over an undisclosed real-estate developer which owns 0.4m sqm of residential, office, and hotel space. Polnord’s sales target is 3.5-4 thousand homes a year, generating 65% of revenues. This is the first time that Polnord reported such concrete forecasts. It has a short track record as developer, and the real-estate business is such that it takes two years to see measurable effects. If Polnord delivers the targets, it will become the leading Polish developer. LC Corp OK to build SkyTower LC Corp was given official clearance to build the SkyTower building (270,000 sqm of usable space) which is expected to cost about 1 billion zlotys. When the SkyTower got the green light a few months ago, investors went wild and sent LC Corp’s stock soaring almost 20%. There were concerns that archaeological works near the SkyTower site would postpone the project, so, investors were be relieved to know that SkyTower is now OK to go.

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Dom Development WIG

Analyst: Kacper ŻakLast Recommendation: 2007-09-25

(PLN m) 2006 2007F change 2008F change 2009F change Basic data (PLN m)Revenues 729.8 894.3 22.5% 1 269.9 42.0% 1 955.3 54.0% Number of shares (m) 24.6EBITDA 127.7 237.3 85.9% 268.1 13.0% 346.4 29.2% MC (current price) 3 568.6EBITDA margin 17.5% 26.5% 21.1% 17.7% EV (current price) 3 568.6EBIT 126.1 234.8 86.2% 266.2 13.4% 344.3 29.3% Free float 20.0%Net profit 115.9 185.9 60.4% 211.4 13.8% 278.1 31.5%

P/E 30.8 19.2 16.9 12.8 Price change: 1 month -5.1%P/CE 30.4 18.9 16.7 12.7 Price change: 6 month -15.9%P/BV 3.9 3.3 2.8 2.4 Price change: 12 monthEV/EBITDA 27.7 14.9 13.1 9.6 Max (52 w eek) 185.9Dyield (%) 0.0 0.0 1.7 2.0 Min (52 w eek) 85.0

Dom Development (Hold)Current price: PLN 145.3 Target price: PLN 149.9

DD has a land bank with a capacity of over 8,000 homes. In September, the company bought land in the Praga Południe district of Warsaw which can accommodate ca. 700 apartments. In 1H, DD generated profit margins exceeding 30%, but we expect a downward trend in profitability in the coming years, with margins shedding as much as 10%-15%. Still, earnings will rise on increasing volumes (sales are expected to double in 2-3 years). We give a HOLD rating on DD. DD buys land in Warsaw Dom Development bought a 3.25 ha property in Warsaw’s Praga Południe district for PLN 70.8m, where it plans to build ca. 700 apartments expected to bring PLN 300m in revenues. The project is set to start in the first half of 2009.

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J.W. Construction WIG

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Analyst: Kacper ŻakLast Recommendation: 2007-09-25

(PLN m) 2006 2007F change 2008F change 2009F change Basic data (PLN m)Revenues 726.3 816.4 12.4% 1 110.4 36.0% 1 508.0 35.8% Number of shares (m) 54.7EBITDA 190.8 200.0 4.8% 255.8 27.8% 294.0 15.0% MC (current price) 2 631.1EBITDA margin 26.3% 24.5% 23.0% 19.5% EV (current price) 2 631.1EBIT 180.1 190.1 5.5% 246.6 29.8% 285.7 15.8% Free float 20.0%Net profit 132.0 146.3 10.8% 192.8 31.8% 227.8 18.1%

P/E 19.9 18.0 13.6 11.6 Price change: 1 month -8.1%P/CE 18.4 16.8 13.0 11.1 Price change: 6 monthP/BV 13.6 4.6 3.6 3.0 Price change: 12 monthEV/EBITDA 15.3 13.8 10.6 8.8 Max (52 w eek) 80.0Dyield (%) 0.0 0.0 1.7 2.2 Min (52 w eek) 48.3

J.W. Construction (Accumulate)Current price: PLN 48.1 Target price: PLN 56.9

J.W. Construction is an affordable-home provider with a core market in Warsaw, and expanding in international markets including Russia, where it plans to establish a stronger presence, and ultimately develop as many homes as in Poland. Like its main rival Dom Development, JWC has a land bank with a capacity of over 7,000 homes. With similar scales of operation, and with DD moving into JWC’s segment of the home market, JWC will generate similar profitability as DD on expanding volumes. We advise to ACCUMULATE J.W. Construction. Earnings guidance maintained, expansion in Russia. JWC’s owner Józef Wojciechowski revealed plans for the coming years. JWC is going to expand in Russia, to achieve a similar scale of operations as in Poland. The company is also considering investing in Bulgaria. Mr. Wojciechowski reiterated the financial targets for this year: PLN 813m revenues, PLN 146m net profit. An improvement is expected in FY2008. JWC has almost finished a project with over 1.2 thousand apartments near Moscow. Russia is a very promising market, where five times more homes are built than in Poland. On the one hand, running a real-estate development business is more risky (red tape), but, on the other hand, it is also more profitable (Russians pay similar prices as Poles, but they are used to lower standards, meaning that developers incur lower costs. Plus, developers do not pay for land in cash, but give their local authorities ca. 3% of the homes they build). Two divisions JWC created two separate business units within its organization: a Design Division, and a Building Division, with plans to spin them off as independent companies, and dismissed a management board member. The company aims to streamline its organizational structure.

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Pharmaceutical Manufacturers and Distributors Pharmaceutical market up 9% in July, August According to research by PharmaExpert, pharmaceutical sales rose 8% y/y in July and 10% y/y in August. OTC drugs are still the main driving force behind this growth, with sales up 17% y/y in July and 18% in August. Reimbursable drug sales rebounded from a 12% plunge in June, rising 4% and 6% y/y respectively in July and August.

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Farmacol (Accumulate)Current price: PLN 50 Target price: PLN 62.9

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Farmacol WIG

Farmacol did not report any developments in September that would change our outlook. Farmacol focuses on improving profitability at the expense of sales. Parallel to the core business, the company is carrying out real-estate projects on the land taken over from Cefarm, which are sure to bring added value. We are reiterating a positive rating on Farmacol.


(PLN m) 2006 2007F change 2008F change 2009F change Basic data (PLN m)Revenues 4 006.0 4 204.7 5.0% 4 412.2 4.9% 4 631.9 5.0% Number of shares (m) 12.2EBITDA 108.1 104.4 -3.4% 114.4 9.5% 123.4 7.9% MC (current price) 1 136.7EBITDA margin 2.7% 2.5% 2.6% 2.7% EV (current price) 1 406.3EBIT 87.0 84.3 -3.1% 95.4 13.1% 105.3 10.4% Free float 47.9%Net profit 62.5 70.3 12.5% 80.0 13.8% 88.8 11.0%


PGF (Under Review)Current price: PLN 92.9 Target price: -

PGF did not report any developments in September that would change our outlook. PGF is the most dynamic, and the largest Polish pharmaceutical wholesaler. We like the company’s international expansion plans. We consider PGF to offer the broadest exposure to the pharmaceutical wholesale market of all Polish stocks, due to the fact that it runs the country’s largest pharmacy chain.

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(PLN m) 2006 2007F change 2008F change 2009F change Basic data (PLN m)Revenues 1 817.2 1 944.4 7.0% 2 041.6 5.0% 2 143.7 5.0% Number of shares (m) 6.9EBITDA 23.2 26.2 12.9% 27.1 3.5% 28.0 3.5% MC (current price) 134.6EBITDA margin 1.3% 1.3% 1.3% 1.3% EV (current price) 190.7EBIT 17.7 20.4 15.1% 21.4 5.0% 22.5 5.0% Free f loat 58.1%Net profit 11.9 13.8 15.8% 14.8 7.0% 15.9 7.5%


Prosper (Hold)Current price: PLN 19.5 Target price: PLN 27

Prosper did not report any developments in September that would change our outlook. Prosper is the smallest pharmaceutical wholesaler listed on the WSE, and trades at a discount to the others. It is working to improve operating profitability while increasing sales.

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(PLN m) 2006 2007F change 2008F change 2009F change Basic data (PLN m)Revenues 1 700.9 2 720.9 60.0% 2 993.0 10.0% 3 172.6 6.0% Number of shares (m) 2.7EBITDA 18.4 33.8 83.5% 45.3 34.0% 51.5 13.5% MC (current price) 235.1EBITDA margin 1.1% 1.2% 1.5% 1.6% EV (current price) 303.5EBIT 13.7 25.1 83.1% 36.5 45.3% 42.4 16.4% Free f loat 49.0%Net profit 11.3 15.8 40.3% 26.1 64.7% 32.4 24.2%


Torfarm (Hold)Current price: PLN 87 Target price: PLN 95.3

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Torfarm WIG

Torfarm took over the pharmaceutical wholesaler “Hurtowna Leków Panaceum” for PLN 1.95m in September, in keeping with its strategy of growth through acquisitions. Acquisitions are a good way for Torfarm to boost sales and negotiate better prices from producers. In the next few months, the company will be consolidating and restructuring the new acquisitions. We are reiterating a HOLD rating. Acquisition of “Hurtownia Leków Panaceum” for PLN 1.95m Torfarm took over a 100% stake in "Hurtownia Leków Panaceum" based in Nowy Sącz for PLN 1.95m, subject to approval by Poland’s competition watchdog UOKiK. Panaceum has a 0.4% share in the Polish pharmaceutical wholesale market, and its coverage is limited mainly to the małopolskie and podkarpackie voivodships. Through the acquisition, Torfarm increased its market share to nearly 19%.

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(PLN m) 2006 2007F change 2008F change 2009F change Basic data (PLN m)Revenues 4 064.2 4 590.2 12.9% 5 153.3 12.3% 5 732.1 11.2% Number of shares (m) * 13.3EBITDA 110.5 145.5 31.6% 182.1 25.2% 203.5 11.8% MC (current price) * 1 941.4EBITDA margin 2.7% 3.2% 3.5% 3.6% EV (current price) * 2 168.9EBIT 79.0 107.2 35.6% 135.3 26.3% 147.3 8.9% Free f loat 33.1%Net profit 57.1 78.4 37.3% 102.2 30.3% 113.2 10.8%


Emperia Holding (Hold)Current price: PLN 146.3 Target price: PLN 134.17

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Emperia Holding WIG

Emperia’s performance in October will be shaped by the success of its secondary public offering consisting of 1.5 million new shares and 0.4 million shares owned by BOS’s shareholders, with a total value of PLN 300m. The PLN 158 offer price is much higher than the current trading price. One potential downside factor could be the size of the “old” share supply worth PLN 63m, much more than originally planned. Because Emperia has still not revealed any financial information about the acquisitions (most notably intercompany eliminations), we cannot factor them in our valuation. After a recent downslide, the price of the company’s stock has almost reached our target, promoting an upgrade from Reduce to HOLD.

* incl. stock issue to BOS sharehodlers

Retail




Eurocash (Sell)Current price: PLN 9.7 Target price: PLN 7.38

Nothing has happened that could make us change our financial forecasts for Eurocash. Like most investors, we are waiting for acquisition information.

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Eurocash WIG

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(PLN m) 2006 2007F change 2008F change 2009F change Basic data (PLN m)Revenues 851.2 812.5 -4.5% 829.0 2.0% 845.8 2.0% Number of shares (m) 14.9EBITDA 180.4 178.8 -0.9% 184.5 3.2% 183.3 -0.6% MC (current price) 976.0EBITDA margin 21.2% 22.0% 22.3% 21.7% EV (current price) 1 328.2EBIT 86.2 88.0 2.0% 96.9 10.1% 98.8 2.0% Free floatNet profit 50.8 53.7 5.7% 62.1 15.7% 65.7 5.8%


Kogeneracja (Under Review)Current price: PLN 65.5 Target price: -

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Kogenerac ja WIG

Kogeneracja did not report any developments in September that could change our outlook. We still see Kogeneracja as a good defensive stock and a play on earnings growth when electricity prices go up.

Others


(PLN m) 2006 2007F change 2008F change 2009F change Basic data (PLN m)Revenues 1 443.9 1 603.4 11.0% 1 673.1 4.3% 1 695.4 1.3% Number of shares (m) 50.0EBITDA 434.9 466.5 7.3% 480.9 3.1% 476.7 -0.9% MC (current price) 4 250.0EBITDA margin 30.1% 29.1% 28.7% 28.1% EV (current price) 4 249.7EBIT 326.4 368.9 13.0% 380.9 3.2% 366.6 -3.7% Free f loat 19.0%Net profit 270.0 303.3 12.3% 313.2 3.3% 301.4 -3.8%


Mondi (Reduce)Current price: PLN 85 Target price: PLN 80

The dollar’s depreciation against the euro, paired with a general economic slowdown both in the USA and in Europe, are putting pressure on the old continent’s paper market. Going forward, prices will decline even further on an expected increase in imports from the dollar zone. Mondi’s earnings are further hurt by a strong zloty and growing prices of wood and scrap paper. We are reiterating a negative rating on Mondi. Mondi still not decided on paper machine location Mondi is still considering whether to install a new paper machine in the Świecie factory, or in Slovakia. A decision is expected by the end of the year. Mondi’s Slovakian factory has a competitive machine. The machine is used to produce lightweight corrugated paper, and has a capacity of up to 470,000 tons a year. Its cost is estimated at 350m euros. Installation is expected to be completed in June 2009. Public aid is one of the deciding factors, and, given that Mondi will be making its decision during a parliamentary election in Poland, our public administration might not be fit to deliver.

70

80

90

100

110

120

130

2006-09-26 2007-01-18 2007-05-14 2007-09-03

Mondi WIG

BRE Bank Securities

3 October 2007 63


Michał Marczak tel. (+48 22) 697 47 38 Managing Director

Head of Research [email protected] Strategy, telco, mining, metals, media

Research Department: Marta Jeżewska tel. (+48 22) 697 47 37 Deputy Director [email protected] Banks

Analysts: Krzysztof Radojewski tel. (+48 22) 697 47 01 [email protected] Pharmaceuticals, construction, utilities Kamil Kliszcz tel. (+48 22) 697 47 06 [email protected] Retail, materials, other Piotr Janik tel. (+48 22) 697 47 40, [email protected] IT, other

Kacper Żak tel. (+48 22) 697 47 41 [email protected] Real-estate developers, other Samer Masri tel. (+48 22) 697 47 36 [email protected] Construction Piotr Grzybowski tel. (+48 22) 697 47 17 [email protected] Other

Sales and Trading:

Piotr Dudziński tel. (+48 22) 697 48 22 Director [email protected] Grzegorz Domagała tel. (+48 22) 697 48 03 Deputy Director [email protected] Marzena Łempicka-Wilim tel. (+48 22) 697 48 95 Deputy Director [email protected] Traders: Emil Onyszczuk tel. (+48 22) 697 49 63 [email protected] Grzegorz Stępien tel. (+48 22) 697 48 62 [email protected] Tomasz Dudź tel. (+48 22) 697 49 68 [email protected] Michał Jakubowski tel. (+48 22) 697 47 44 [email protected] Tomasz Jakubiec tel. (+48 22) 697 48 48 [email protected] Grzegorz Strublewski tel. (+48 22) 697 48 76 [email protected] Dom Inwestycyjny BRE Banku S.A. ul. Wspólna 47/49 00-950 Warszawa www.dibre.com.pl

BRE Bank Securities

3 October 2007 64


Ratings changed as of the date of this Monthly Report:

rating Reduce

date issued 2007-06-06

price at rating date 313.00 WIG at rating date 6449916

Hold

2007-07-05

292.60 66951.73

Reduce Hold

2007-04-05 2007-04-26

280.00 285.30 57981.75 59535.37

Reduce Accumulate

2007-02-05 2007-03-05

266.50 228.10 55314.03 51917.31

BZ WBK

rating Accumulate


price at rating date 55.00 WIG at rating date 66077.69

Accumulate

2007-08-16

54.35 59123.73

Buy

2007-03-05

42.80 51917.31

PKN ORLEN

EMPERIA HOLDING

rating Hold Hold

date issued 2007-05-29 2007-07-26

price at rating date 313.00 348.10 WIG at rating date 62779.18 64842.32

ULMA CONSTRUCCION POLSKA

PEKAO rating Hold Accumulate Hold Accumulate date issued 2007-02-05 2007-03-05 2007-06-06 2007-09-04

price at rating date 260.00 231.60 268.10 241.60 WIG at rating date 55314.03 51917.31 64499.16 61010.54

Hold Accumulate 2007-04-05 2007-05-31

264.10 250.00 57981.75 62779.18

rating Hold


price at rating date 275.00 WIG at rating date 62426.43

Buy

2007-09-04

257.20 61010.54

BZ WBK cont.

rating Sell Reduce Hold Reduce

date issued 2007-04-05 2007-05-21 2007-08-01 2007-09-06

price at rating date 115.00 149.50 139.50 157.60 WIG at rating date 57981.75 59667.38 63670.52 60397.88

Reduce

2007-02-05

96.00 55314.03

BRE Bank Securities

3 October 2007 65


List of abbreviations and ratios contained in the report. EV – net debt + market value (EV – economic value) EBIT – Earnings Before Interest and Taxes EBITDA – EBIT + Depreciation and Amortisation PBA – Profit on Banking Activity P/CE – price to earnings with amortisation MC/S – market capitalisation to sales EBIT/EV – operating profit to economic value P/E – (Price/Earnings) – price divided by annual net profit per share ROE – (Return on Equity) – annual net profit divided by average equity P/BV – (Price/Book Value) – price divided by book value per share Net debt – credits + debt papers + interest bearing loans – cash and cash equivalents EBITDA margin – EBITDA/Sales Recommendations of BRE Bank Securities S.A. A recommendation is valid for a period of 6-9 months, unless a subsequent recommendation is issued within this period. Expected returns from individual recommendations are as follows: BUY – we expect that the rate of return from an investment will be at least 15% ACCUMULATE – we expect that the rate of return from an investment will range from 5% to 15% HOLD – we expect that the rate of return from an investment will range from –5% to +5% REDUCE – we expect that the rate of return from an investment will range from -5% to -15% SELL – we expect that an investment will bear a loss greater than 15% Recommendations are updated at least once every nine months. The present report expresses the knowledge as well as opinions of the authors on day the report was prepared. The present report was prepared with due care and attention, observing principles of methodological correctness and objectivity, on the basis of sources available to the public, which BRE Bank Securities S.A. considers reliable, including information published by issuers, shares of which are subject to recommendations. However, BRE Bank Securities S.A., in no case, guarantees the accuracy and completeness of the report, in particular should sources on the basis of which the report was prepared prove to be inaccurate, incomplete or not fully consistent with the facts. This document does not constitute an offer or invitation to subscribe for or purchase any financial instruments and neither this docu-ment nor anything contained herein shall form the basis of any contract or commitment whatsoever. It is being furnished to you solely for your information and may not be reproduced or redistributed to any other person. This document nor any copy hereof is not to be distributed directly or indirectly in the United States, Australia, Canada or Japan. Recommendations are based on essential data from the entire history of a company being the subject of a recommendation, with particular emphasis on the period since the previous recommendation. Investing in shares is connected with a number of risks including, but not limited to, the macroeconomic situation of the country, changes in legal regulations as well as changes on commodity markets. Full elimination of these risks is virtually impossible. BRE Bank Securities S.A. bears no responsibility for investment decisions taken on the basis of the present report or for any dam-ages incurred as a result of investment decisions taken on the basis of the present report. It is possible that BRE Bank Securities S.A. renders, will render or in the past has rendered services for companies and other enti-ties mentioned in the present report. BRE Bank Securities S.A., its shareholders and employees may hold long or short positions in the issuers’ shares or other financial instruments related to the issuers’ shares. BRE Bank Securities S.A., its affiliates and/or clients may conduct or may have con-ducted transactions for their own account or for account of another with respect to the financial instruments mentioned in this report or related investments before the recipient has received this report. Copying or publishing the present report, in full or in part, or disseminating in any way information contained in the present report requires the prior written agreement of BRE Bank Securities S.A. Recommendations are addressed to all Clients of BRE Bank Securities S.A. The activity of BRE Bank Securities S.A. is subject to the supervision of the Polish Financial Supervision Commission. BRE Bank Securities S.A. serves as animator in relation to the shares of the following companies: , Es-System, Komputronik, Mieszko, Mondi, Opera za 3 Grosze FIZ, Pemug, Polimex-Mostostal, Torfarm, Ulma Construccion Polska, Certyfikaty Skarbiec Nieruchomości. BRE Bank Securities S.A. receives remuneration from issuers for services rendered to the following companies: ABG Ster-Projekt, Ambra, Amerbank, Agora, Bakalland, CSS Suport, Elektrobudowa, Enap, Erbud, Elzab, ES –System, Huta Ferrum, Inter Groclin, Kęty, Koelner, Mennica Polska, Mieszko, Mondi, Neonet, Odratrans, Paged, Polnord, PGNiG, Polimex - Mostostal Siedlce, Pro-chem, Prokom Software, Provimi - Rolimpex, Sanwil, Skarbiec Lokacyjny, Skarbiec Nieruchomości, Sygnity, Techmex, Torfarm, Zelmer. In the last 12 months BRE Bank Securities S.A. has been an offering agent of the issuer’s shares in a public offering for the follow-ing companies: ATM, Erbud, Es-System, Fortis Bank Polska, Komputronik, Polimex-Mostostal, MNI, Torfarm, Ulma Construccion Polska. The information, including recommendations, contained in the Monthly Report has been published in separate reports, the publica-tion dates of which are can be found on page 5 of the full version of the Monthly Report. The list of recommendations that have been changed in the Monthy Report is on page 6. The present report was not transferred to the issuer prior to its publication. Individuals who did not participate in the preparation of recommendations, but had or could have had access to recommendations prior to their publication, are employees of BRE Bank Securities S.A. authorised to access the premises in which recommendations are prepared, other than the analysts mentioned as the authors of the present recommendations. Strong and weak points of valuation methods used in recommendations: DCF – acknowledged as the most methodologically correct method of valuation; it consists in discounting financial flows generated by a company; its weak point is the significant susceptibility to a change of forecast assumptions in the model. Comparative – based on a comparison of valuation multipliers of companies from a given sector; simple in construction, reflects the current state of the market better than DCF; weak points include substantial variability (fluctuations together with market indices) as well as difficulty in the selection of the group of comparable companies.

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